[Federal Register Volume 61, Number 149 (Thursday, August 1, 1996)]
[Proposed Rules]
[Pages 40161-40181]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19563]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Parts 32 and 64
[CC Docket No. 96-150, FCC 96-309]
Implementation of the Telecommunications Act of 1996: Accounting
Safeguards Under the Telecommunications Act of 1996
AGENCY: Federal Communications Commission.
ACTION: Proposed rule.
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SUMMARY: The Commission is issuing this Notice of Proposed Rulemaking
which seeks comment on proposed measures to satisfy the accounting
safeguards requirements, including those for affiliate transactions, of
Sections 260 and 271 through 276 of the Telecommunications Act of 1996
(``1996 Act''). These sections outline the conditions under which
incumbent local exchange carriers may offer telemessaging and alarm
monitoring services and under which the Bell Operating Companies
(``BOCs'') may manufacture and sell telecommunications equipment,
manufacture customer premises equipment, offer interLATA
telecommunications, information, electronic publishing and payphone
services. Sections 271 through 274 and 276 of the 1996 Act generally
prohibit the BOCs from subsidizing services permitted under those
sections with revenues from regulated telecommunications services.
Sections 260 and 275 generally prohibit incumbent local exchange
carriers, including the BOCs, from subsidizing their telemessaging and
alarm monitoring services with revenues from regulated
telecommunications services. This action was intended to implement the
accounting safeguards provision of the 1996 Act.
DATES: Comments are due on or before August 26, 1996 and Reply Comments
are due on or before September 10, 1996. Written comments must be
submitted by the Office of Management and Budget (OMB) on the proposed
and/or modified information collections on or before September 30,
1996.
ADDRESSES: Comments and Reply Comments should be sent to Office of the
Secretary, Federal Communications Commission, 1919 M Street, N.W., Room
222, Washington, D.C. 20554, with a copy to Ernestine Creech of the
Common Carrier Bureau's Accounting and Audits Division, 2000 L Street,
N.W., Suite 257, Washington, D.C. 20554. Parties should also file one
copy of any documents filed in this docket with the Commission's copy
contractor, International Transcription Services, Inc., 2100 M Street,
N.W., Suite 140, Washington, D.C. 20037. In addition to filing comments
with the Secretary, a copy of any comments on the information
collections contained herein should be submitted to Dorothy Conway,
Federal Communications Commission, Room 234, 1919 M Street, N.W.,
Washington, D.C. 20554, or via the Internet to dconway@fcc.gov, and to
Timothy Fain, OMB Desk Officer, 10236 NEOB, 725-17th Street, N.W.,
Washington, D.C. 20503 or via the Internet to fain__t@al.eop.gov.
FOR FURTHER INFORMATION CONTACT:
John V. Giusti, Attorney, Common Carrier Bureau, Accounting and Audits
Division, (202) 418-0850, or Mark B.
[[Page 40162]]
Ehrlich, Attorney, Common Carrier Bureau, Accounting and Audits
Division, (202) 418-0850. For additional information concerning the
information collections contained in this NPRM contact Dorothy Conway
at 202-418-0217, or via the Internet at dconway@fcc.gov.
SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Notice
of Proposed Rulemaking adopted July 17, 1996 and released July 18,
1996, 1996 (FCC 96-309). This NPRM contains proposed or modified
information collections subject to the Paperwork Reduction Act of 1995
(PRA). It has been submitted to the Office of Management and Budget
(OMB) for review under the PRA. OMB, the general public, and other
Federal agencies are invited to comment on the proposed or modified
information collections contained in this proceeding. The full text of
this Notice of Proposed Rulemaking is available for inspection and
copying during normal business hours in the FCC Reference Center (Room
239), 1919 M St., NW., Washington, D.C. The complete text also may be
purchased from the Commission's copy contractor, International
Transcription Service, Inc., (202) 857-3800, 2100 M St., NW., Suite
140, Washington D.C. 20037.
Paperwork Reduction Act
This NPRM contains either a proposed or modified information
collection. The Commission, as part of its continuing effort to reduce
paperwork burdens, invites the general public and the Office of
Management and Budget (OMB) to comment on the information collections
contained in this NPRM, as required by the Paperwork Reduction Act of
1995, Public Law No. 104-13. Public and agency comments are due at the
same time as other comments on this NPRM; OMB notification of action is
due September 30, 1996. Comments should address: (a) whether the
proposed collection of information is necessary for the proper
performance of the functions of the Commission, including whether the
information shall have practical utility; (b) the accuracy of the
Commission's burden estimates; (c) ways to enhance the quality,
utility, and clarity of the information collected; and (d) ways to
minimize the burden of the collection of information on the
respondents, including the use of automated collection techniques or
other forms of information technology.
OMB Approval Number: None.
Title: Implementation of the Telecommunications Act of 1996:
Accounting Safeguards Under the Telecommunications Act of 1996.
Form No.: N/A.
Type of Review: New collection.
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Estimated
No. of time per Total
Information collection respondents response annual
(approx.) (hours/ burden
hour) (hours)
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Affiliate Company Books, Records
and Accounts.................... 20 6,056.25 121,125
Biennial Federal/State Audit..... 20 250.00 5,000
Filing Written Contract.......... \1\ 7 1.00 7
Compliance Audit................. \1\ 7 250.00 1,750
Report of Exceptions............. \1\ 7 80.00 560
10-K Requirement................. \1\ 7 1,711.00 11,977
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\1\ BOCS.
Total Annual Burden: 140,419 hours.
Respondents: Bell Operating Companies and/or incumbent local
exchange carriers and/or affiliated companies.
Estimated cost per respondent: $632,500. This cost represents the
total annual/startup costs associated with the annual and biennial
audits and does not include the burden hour cost of the information
collection. Of the $632,500, $316,250 represents our estimate of the
biennial Federal/State audit. By definition, this cost will only be
incurred once every two years. The total cost also includes a cost of
$316,250 which represents our estimate of the annual compliance audit
requirement. The $316,250 figure was derived by averaging the range of
audit costs ($32,500--$600,000). We expect the actual cost of the
audits to vary considerably.
Needs and Uses: The NPRM seeks comments on a number of issues, the
resolution of which may lead to the imposition of information
collections subject to the Paperwork Reduction Act. the NPRM seeks
comment on certain reporting requirements to implement the accounting
safeguards provisions of Sections 260 and 271 through 276 of the 1996
Act.
SYNOPSIS OF NOTICE OF PROPOSED RULEMAKING
I. Introduction
1. In February 1996, Congress passed and the President signed the
``Telecommunications Act of 1996.'' This legislation makes sweeping
changes affecting all consumers and telecommunications service
providers. The intent of this legislation is ``to provide for a pro-
competitive, de-regulatory national policy framework designed to
accelerate rapidly private sector deployment of advanced
telecommunications and information technologies and services to all
Americans by opening all telecommunications markets to competition.''
2. In this Notice of Proposed Rulemaking (``NPRM''), we consider
rules to implement the accounting safeguards provisions of Sections 260
and 271 through 276 of the 1996 Act. Those sections address Bell
Operating Company (``BOC'') and, in some cases, incumbent local
exchange carrier provision of particular telecommunications and
information services.
3. This proceeding is one of a series of interrelated rulemakings
that collectively will implement the 1996 Act. Certain of these
proceedings focus on opening markets to entry by new competitors. Other
proceedings will establish rules for fair competition in the markets
that are opened to competitive entry by the 1996 Act.
4. This NPRM focuses on the accounting safeguards that Congress
adopted in the 1996 Act to foster the development of robust competition
in all telecommunications markets. As discussed more fully below, these
safeguards are intended both to protect subscribers to regulated
monopoly services provided by the BOCs and, in some cases, other
incumbent local exchange carriers against the risk of being forced to
``foot the bill'' for the carriers' entry into, or continued
participation in, competitive services, and to promote competition in
new markets by preventing carriers from using their existing market
power in
[[Page 40163]]
local exchange services to obtain an anticompetive advantage in those
new markets the carriers seek to enter.
A. Background
5. the 1996 Act permits the BOCs to engage in previously proscribed
activities if the BOCs satisfy certain conditions that are intended to
prevent them from misallocating costs of their new ventures to
subscribers to local exchange access services and from discriminating
against their competitors in these new markets. Other incumbent local
exchange carriers are subject to similar conditions if they elect to
enter or continue to participate in certain markets.
6. In lifting or modifying the restrictions on the BOCs, we believe
Congress also recognized that BOC entry into in-region interLATA
services, manufacturing and other areas raises serious concerns for
consumers and competition, even after a BOC has satisfied the
requirements for entry. BOCs currently possess market share for local
exchange and exchange access in areas where they provide such services
of approximately 99.5 percent as measured by revenues. Other incumbent
local exchange carriers have similar market shares within their local
exchange and exchange access service areas. Under rate-of-return
regulation, price caps with sharing (either for interstate or
intrastate services), or price caps that may be adjusted in the future,
or if its entitlement to any revenues may be affected by the costs that
it classifies as regulated, an incumbent local exchange carrier may
have an incentive to misallocate to its regulated core business costs
that would be properly allocated to its competitive ventures. While the
1996 Act promotes competition and encourages BOC entry, it also
prescribes a judicious mix of structural and non-structural safeguards
that are intended to protect ratepayers, consumers and competitors
against potential cost misallocation and discrimination. Where BOCs
already participate in a market, as with alarm monitoring services and
payphone services, or where the Act addresses services other incumbent
local exchange carriers may provide, the Act requires compliance with
similar safeguards. The purpose of this proceeding is to establish
accounting safeguards to constrain potential cost misallocation and
discrimination against competitors.
7. Although we could prescribe rules that would completely prevent
improper cost allocations by enforcing complete separation between
regulated telecommunications operations and new activities, we
recognize that it would be difficult, if not impossible, to enforce
such rules. Moreover, our success might destroy the potential
competitive benefits of the economies of scope that BOCs and other
incumbent local exchange carriers could realize, benefits that
constitute a major incentive for the BOCs and other incumbent local
exchange carriers to enter or continue to participate in these markets.
Our task in this proceeding is to protect against improper cost
allocations, while allowing the BOCs and other incumbent local exchange
carriers to realize their reasonable competitive advantages and
ensuring that the consumers of those carriers' regulated
telecommunications services are able to share in the carriers'
economies of scope.
8. We expect that once competition exists in the local exchange and
exchange access services markets and incumbent local exchange carrier
revenues are not dependent on costs, the need for the accounting
safeguards proposed in this NPRM may vanish. With the advent of
competition, we can and will act to eliminate any unnecessary rules.
With our adoption of the Notice of Proposed Rulemaking to implement
Section 251, 61 FR 18311 (April 25, 1996), we have taken a major step
to achieve that goal. Reform of other regulations, like price cap
rules, jurisdictional separations rules, and the access charge regime,
will also move us more quickly toward that goal. In the meantime, while
we continue to seek to minimize the burden our rules impose those
subject to them, we also will ensure that ratepayers and competition
remain protected from cost misallocation and anticompetitive
discrimination.
B. Specific Considerations
9. The challenge in setting cost allocation rules that prevent
subsidization without eliminating legitimate economies of scope arises
because there are some costs that cannot be allocated based on economic
cost-causation principles. The greater the economies of scope between
or among services, the greater the share of costs that cannot be
allocated among them on economic cost-causation principles. Given these
circumstances, we believe that the rules we develop for allocating
these costs should be clear, consistent, and predictable. They should
also assure that subscribers to the BOCs' and other incumbent local
exchange carriers' core services share in any economies of scope
realized when entering those markets from which they were previously
barred or continuing to participate in other markets addressed in the
1996 Act. We believe, for example, that a policy that would permit the
BOCs to allocate all common costs of shared facilities to regulated
services would pose a risk that subscribers to the BOCs' regulated
telecommunications services would pay more than the stand-alone costs
of the services they receive, and would thus be subsidizing the BOCs'
competitive activities rather than sharing the economies of scope
realized because of the BOCs' diversification.
10. It is also essential that the affiliate transactions rules
discourage, and facilitate detection of, cost misallocations. Statutory
structural separation requirements, like the prohibition on sharing
employees or the obligation that all affiliate transactions be ``on an
arm's length basis,'' reduce the risk that cost misallocations will
accompany BOC entry into manufacturing and interLATA service markets.
This protection of ratepayer interests, however, is not cost free.
Structural separation restrictions that protect ratepayers also make it
more difficult for a BOC or other incumbent local exchange carrier to
capture the economies of scope that benefit both regulated and
nonregulated service subscribers. Only our success in removing barriers
to competition in the BOCs' and other incumbent local exchange
carriers' regulated services markets will enable us to remove these
restrictions.
11. A threshold question is to what extent, if any, we should rely
upon our existing accounting safeguards to achieve our twin goals of
protecting subscribers to BOCs' and other incumbent local exchange
carriers' regulated telecommunications services against improper cost
allocations and competitors against unreasonable discrimination. Those
safeguards are found in Parts 32 and 64 of our rules. They consist of
cost allocation and affiliate transactions rules that were designed to
keep incumbent local exchange carriers from imposing the costs and
risks of their competitive ventures on interstate telephone ratepayers,
and to ensure that interstate ratepayers share in the economies of
scope incumbent local exchange carriers realize when they expand into
additional enterprises. As we implement the accounting safeguards
provisions of Sections 260 and 271 through 276 of the 1996 Act, for
each of these sections, we seek comment on whether our current rules
can or should be applied as they are, with some modification, or
eliminated. We tentatively conclude that our rules, with the
modifications we describe below, will best meet the statutory
[[Page 40164]]
requirements of these sections and their underlying goals. We invite
comment on this tentative conclusion.
12. In reaching this tentative conclusion, we note our belief that
the accounting safeguards this NPRM proposes are no more detailed than
those in our current rules except where the 1996 Act requires more
detailed safeguards or where our experience with current rules has made
clear that more detailed safeguards are necessary to prevent improper
subsidization. We invite comment on whether less detailed accounting
safeguards would suffice to achieve the aims of Sections 260 and 271
through 276 of the 1996 Act. We note that those urging that we adopt
more detailed accounting safeguards than those in our current rules or
those specifically mandated by the 1996 Act bear a heavy burden of
persuading us to adopt such safeguards.
13. The 1996 Act creates opportunities for competitive entry in the
local exchange, exchange access, and interLATA telecommunications
markets, among others. These opportunities may affect which accounting
safeguards we adopt in two apparently countervailing ways. The
incumbent local exchange carrier may be reluctant to increase rates for
local exchange and exchange access service if the increases would
induce competitive entry in the markets in which it would otherwise
continue to have market power. This would militate against the adoption
of stringent accounting safeguards. On the other hand, a carrier
entering or continuing to participate in a nonregulated market will
have an increased incentive to shift the costs and risks of its
competitive activities to these regulated services if such shifting
permits the carrier to increase the rates for these regulated services.
The increased rates would not reduce substantially the carrier's market
share for local exchange and exchange access service.
14. Several provisions of the 1996 Act prohibit BOCs, or, in some
cases, all incumbent local exchange carriers from using their telephone
exchange service and exchange access operations to subsidize their
competitive ventures. We believe that Congress's primary intent in
prohibiting this subsidization was to protect subscribers to these
services from increased rates, and seek commenters' help in determining
how best to fulfill that intent. We propose that the accounting
safeguards we adopt in this proceeding apply to all services for which
Section 260 and 271 through 276 require accounting safeguards.
15. Control over the bottleneck facility may enable a BOC or other
incumbent local exchange carrier to engage in predatory behavior. For
example, the ability to discriminate in favor of its interexchange
affiliate with respect to the price of access (i.e.,) charging the
affiliate a lower access rate than it charges competing IXCs) could
facilitate an incumbent local exchange carrier's engaging in a ``price
squeeze,'' In such a situation if the incumbent local exchange
carrier's interexchange affiliate lowers its retail rate to reflect its
unfair cost advantage, competing IXCs would be forced either to match
the price reduction and decrease their profit margins, or to maintain
their retail prices at preexisting levels and lose market share (and
therefore profits). As a practical matter, an incumbent local exchange
carrier can achieve the same result by charging the same price for
access to all interexchange providers, while providing a higher quality
of service to its affiliate than to competing IXCs. In this case, an
IXC that attempted to match the incumbent local exchange carrier
affiliate's retail price would lose market share since its lower
quality of access would mean that it would be offering a lower quality
of interexchange service. A third type of potentially anticompetitive,
discriminatory behavior occurs when an incumbent local exchange carrier
discriminates in favor of its affiliates when purchasing goods or
services. For example, to the extent that the incumbent local exchange
carrier is the predominant purchaser of telecommunications equipment
that is used in the local exchange network, purchasing such equipment
only from its affiliate manufacturing entity could adversely effect the
ability of a competitor to operate profitably.
16. We also note that a carrier subject to rate-of-return
regulation may have an incentive to engage in predatory pricing, if
losses from below-cost pricing in the competitive market can be shifted
to its regulated cost of service. We expect, however, that such
predatory pricing by a BOC or other incumbent local exchange carrier is
unlikely to occur. First, while an incumbent local exchange carrier may
possess the legal ability to raise rates in the regulated market to
subsidize its competitive activities, the threat of entry into the
regulated market may prevent it from doing so. Even if such
subsidization were to allow a BOC or other incumbent local exchange
carrier to sustain prices below cost for a period of time sufficient to
drive out competing IXCs, the local exchange carrier would be unlikely
to raise prices above the competitive level, since each IXC's network
represents an embedded facility which could be purchased in a
bankruptcy proceeding and used if the local exchange carrier affiliates
subsequently attempted to raise prices above the competitive level. We
invite comment on the extent to which the opportunities to engage in
predatory behavior should affect our decisions in this proceeding.
C. Overview of Sections 260 and 271 Through 276
17. In Section 260 and 271 through 276, Congress delineated the
conditions under which incumbent local exchange carriers would be
permitted to offer telemessaging and alarm monitoring services and
under which BOCs would be permitted to manufacture and sell
telecommunications equipment, to manufacture customer premises
equipment, and to offer interLATA telecommunications, information,
alarm monitoring and payphone services. In some cases, separate
affiliates are required. In other cases, integrated operation is
permitted.
18. Section 260 provides that an incumbent local exchange carrier,
including a BOC, the provides telemessaging service ``shall not
subsidize its telemessaging service directly or indirectly from its
telephone exchange service or its exchange access,'' but does not
require a separate affiliate.
19. Section 271(b) authorizes the BOCs to provide ``out-of-region''
interLATA services as of February 8, 1996, even if the services
terminate within the BOC's region, and ``in-region'' interLATA services
upon Commission approval. Section 271(g) lists specific ``incidental
interLATA services'' that BOCs and their affiliates may provide after
February 8, 1996. Section 271(h) states that ``[t]he Commission shall
ensure that the provision of services authorized under [Section 271(g)]
by a Bell operating company or its affiliate will not adversely affect
telephone exchange service ratepayers or competition in any
telecommunications market.''
20. Section 272 permits a BOC (including any affiliate) that is an
incumbent local exchange carrier to manufacture equipment (as defined
in the AT&T consent decree), originate in-region interLATA
telecommunications services, other than incidental and previously
authorized interLATA services, and provide certain interLATA
information services only if it does so through one or more separate
affiliates. Each of the separate affiliates must ``maintain [separate]
books, records, and accounts in the manner prescribed by the
Commission'' and ``shall conduct all
[[Page 40165]]
transactions with the Bell operating company of which it is an
affiliate on an arm's length basis.'' In its dealings with the separate
affiliate, each BOC must ``account for all transactions * * * in
accordance with accounting principles designated or approved by the
Commission.''
21. Section 273(d)(3) sets forth an additional separate affiliate
requirement for manufacturing of telecommunications equipment and
customer premises equipment by entities that certify the same class of
telecommunication equipment and customer premises equipment produced by
unaffiliated entities.
22. Section 274(a) prohibits any ``Bell operating Company or any
affiliate [from] engag[ing] in the provision of electronic publishing
that is disseminated by means of such Bell operating company's or any
of its affiliates' basic telephone service,''other than through ``a
separated affiliate or electronic publishing joint venture.'' This
separated affiliate or electronic publishing joint venture must, among
other requirements, ``maintain separate book, records, and accounts and
prepare separate financial statements.''
23. Section 275(b)(2) bars an incumbent local exchange carrier that
provides alarm monitoring services from ``subsidiz[ing] its alarm
monitoring services either directly or indirectly from telephone
exchange service operations,'' but does not require a separate
affiliate.
24. Section 276(b)(1)(C) directs the Commission to prescribe rules
for BOC payphone service that, ``at a minimum, include the
nonstructural safeguards equal to those adopted in the Computer
Inquiry-III (CC Docket No. 90-623) proceeding.'' Section 276(a)(1)
provides that, after the effective date of those rules, any BOC that
provides payphone service ``shall not subsidize its payphone service
directly or indirectly from its telephone exchange service operations
or its exchange access operations.''
25. Section 254(k) prohibits a telecommunications carrier from
``us[ing] services that are not competitive to subsidize services that
are subject to competition.'' Section 254(k) further states that ``
[t]he Commission, with respect to interstate services, and the States,
with respect to intrastate services, shall establish any necessary cost
allocation rules, accounting safeguards, and guidelines to ensure that
services included in the definition of universal service bear no more
than a reasonable share of the joint and common costs of facilities
used to provide those services.''
D. Structure of This NPRM
26. Section II of this NPRM discusses accounting safeguards that
would apply when an incumbent local exchange carrier, including a BOC,
provides a service addressed in Sections 260 and 271 through 276 of the
1996 Act on an integrated, or in-house, basis. For the provision of
services on an integrated basis, we tentatively conclude in Section II
that our existing Part 64 cost allocation rules generally satisfy the
1996 Act's accounting safeguards requirements. Section III discusses
accounting safeguards that would apply when an incumbent local exchange
carrier, including a BOC, uses an affiliate to provide a service
addressed in Sections 260 and 271 through 276 of the 1996. In Section
III, we tentatively conclude that, except where the 1996 Act imposes
specific additional requirements, our current affiliate transactions
rules generally satisfy the statue's requirement of accounting
safeguards when an incumbent local exchange carrier conducts
transactions with its affiliate. In that section, we do propose several
modifications to the affiliate transactions rules to provide greater
protection against improper subsidization. Within Sections II and III,
subsections discuss issues related to the application of the individual
statutory sections. In Section IV of this NPRM, we seek comment on
whether and, if so, how price cap regulation alters the need for
accounting safeguards to ensure against the subsidization of services
permitted under Sections 260 and 271 through 276 of the 1996 Act with
revenues from regulated telecommunications services to subsidize other
services. In that same section, we seek comment on whether our
proposals in this NPRM satisfy the requirements of Section 254(k).
II. Safeguards For Integrated Operations
A. General
27. In this section, we discuss the provisions in Sections 260,
271, 275, and 276 of the 1996 Act relating to accounting safeguards for
telemessaging, certain interLATA telecommunications and information,
alarm monitoring, and payphone services that the BOCs and other
incumbent local exchange carriers might be permitted to provide on an
integrated basis (i.e., within the telephone operating companies). We
tentatively conclude that our existing Part 64 cost allocation rules
generally satisfy the statute's requirement of safeguards to ensure
that these services are not subsidized by subscribers to regulated
telecommunications services. We invite comment on this tentative
conclusion.
28. We developed the cost allocation rules in our Joint Cost and
Computer II Proceedings to help ensure that interstate ratepayers do
not bear the costs and risks of the telephone companies' nonregulated
activities. These rules prescribe how carriers separate the costs of
activities regulated under Title II of the Communications Act of 1934,
as amended, from the costs of nonregulated activities, where the
nonregulated activities are performed directly by the carrier rather
than through an affiliate. Under these rules, incumbent local exchange
carriers may not assign the costs of nonregulated activities to
regulated products and services. Incumbent local exchange carriers have
implemented internal cost allocation systems to help ensure their
compliance with these rules. Redesigning these internal systems to
accommodate a fundamentally different cost allocation approach might
impose substantial administrative and financial costs on the carriers.
We seek comment on whether the benefits of a fundamentally different
approach to cost allocation would be outweighed by the costs that
implementation of such a system would entail. Alternatively, we invite
comment on whether, and how, we might adapt the existing cost
allocation system to accommodate any or all of the services we address
in Section II.B, below.
B. Specific Services
1. Section 260--Telemessaging Service
a. Statutory Language
29. Section 260(a)(1) of the 1996 Act prohibits each ``local
exchange carrier subject to the requirements of section 251(c) that
provides telemessaging service [from] subsidiz[ing] its telemessaging
service directly or indirectly from its telephone exchange service or
its exchange access.'' Section 251(c), in turn, applies to every
``incumbent local exchange carrier.'' Section 260(c) defines
``telemessaging service'' as ``voice mail and voice storage and
retrieval services, any live operator services used to record,
transcribe, or relay messages (other than telecommunications relay
services), and any ancillary services offered in combination with these
services.'' The principal goal of the prohibition against subsidization
in Section 260(a)(1) appears to be to ensure that the telemessaging
service operations of incumbent local exchange carriers do not result
in increased rates for telephone exchange service and exchange access.
Section 260(b) also
[[Page 40166]]
requires the Commission to establish procedures for expedited
consideration of any complaint alleging ``material financial harm to a
provider of telemessaging service.'' In providing for this expedited
consideration, Congress intended to protect providers of telemessaging
service that are not themselves, or affiliated with, incumbent local
exchange carriers against subsidization.
30. Our present Part 64 rules classify telemessaging service as a
nonregulated activity for Title II accounting purposes. Consequently,
provision of telemessaging services is already governed by our Part 64
rules and, to the extent telemessaging is provided through affiliates,
our affiliate transactions rules also apply. Our Part 64 rules require
carriers to use a cost allocation methodology based on fully
distributed costs (``FDC''). This methodology establishes a hierarchy
of cost apportionment rules designed to prevent subsidies. These rules
are applied to costs recorded in the accounts specified in the Uniform
System of Accounts (``USOA'') set out in Part 32 of our rules. The
methodology requires carriers to assign costs directly, wherever
possible, to regulated or nonregulated activities. If costs cannot be
directly assigned, they are considered ``common costs'' and must be
placed in homogeneous cost pools. The carrier must then divide the
costs in each pool between regulated and nonregulated activities using
formulas or factors known as ``allocators.'' Depending upon the
information available, carriers must apply these allocators in the
following order. Whenever possible, common costs must be directly
attributed based upon a direct analysis of the origins of those costs.
Common costs that cannot be directly attributed must be indirectly
attributed based on an indirect, but cost-causative, linkage to another
cost pool or pools for which a direct assignment or attribution is
possible. Only if direct or indirect attribution factors are not
available may the carrier allocate a pool of common costs using what is
known as a ``general allocator.'' For regulated activities, the general
allocator is expressed as the ratio of all expenses directly assigned
or attributed to regulated activities (numerator) to all expenses
directly assigned or attributed to both regulated and nonregulated
activities (denominator).
31. Our Part 64 cost allocation rules also require incumbent local
exchange carriers to allocate their network investment plant between
activities that we regulate under Title II and nonregulated activities.
This allocation must be based on the peak ``relative regulated and
nonregulated usage'' projected for the network plant over a three-year
period. BOC provision of telemessaging service may result in the
reallocation of this plant from regulated to nonregulated activities.
In the Joint Cost Proceeding, we determined that, absent waiver, any
such reallocation ``must be made at undepreciated baseline cost and
must include interest calculated at the authorized interstate rate of
return.''
32. Section 64.901(b)(4) of our rules requires a carrier at the
beginning of each calendar year to forecast peak relative nonregulated
use of jointly-used network plant over a three-year period. The
relative split between usage for activities regulated under Title II
and nonregulated usage at the point in time when nonregulated usage is
greatest in comparison to regulated defines the allocation factor to be
applied. If application of this method would increase the allocation to
nonregulated activities for any account from the previous year, the
carrier must make the reallocation. If application of this method would
decrease the allocation to nonregulated activities for that account
from the previous year, the carrier must obtain a waiver to make the
reallocation. At the end of the year, the carriers compare their
forecasts with actual usage. If the actual usage of nonregulated
activities is greater, they must adjust the allocation to nonregulated
services based on that actual usage.
33. We tentatively conclude that applying our Part 64 rules to
telemessaging will safeguard against the subsidies prohibited by
Section 260(a)(1). Section 260 appears to allow telemessaging service
to be provided on an integrated basis, at least for most incumbent
local exchange carriers. However, we tentatively conclude, as we do in
our companion item, BOC In-Region NPRM, that telemessaging is an
information service. We also tentatively conclude in that NPRM, that
our authority under Sections 271 and 272 over interLATA information
services applies to intrastate, interLATA information services provided
by BOCs or their affiliates. BOC provision of telemessaging service on
an interLATA basis would therefore be subject to the separate affiliate
and other requirements of Section 272. We invite comment on these
tentative conclusions.
b. Scope of Commission's Authority
34. Section 260 of the Act imposes additional safeguards regarding
the provision of telemessaging services, not only on the BOCs, but on
all incumbent on whether, in light of our tentatilocal exchange
carriers. We seek commenve conclusion that Sections 271 and 272 give
the Commission jurisdiction over intrastate interLATA information
services including telemessaging, Section 260 should also be read to
give us jurisdiction over intrastate information services in
implementing and enforcing Section 260. We note, however, that unlike
Sections 271 and 272, the scope of Section 260 is not limited to
interLATA services, nor is it limited to the BOCs. We seek comment,
therefore, on whether any such intrastate jurisdiction would extend
only to the BOCs, as only BOCs are covered by Sections 271 and 272, or
to all incumbent local exchange carriers.
35. We further seek comment on what role States might have in
implementing Section 260(a)(1)'s prohibition against subsidization of
``telemessaging service directly or indirectly from * * * telephone
exchange service or * * * exchange access.'' Prior to the enactment of
the 1996 Act, we did not preempt States from using their own cost
allocation procedures for intrastate purposes. We ask commenters to
address whether we must change this policy in order to effectuate
Section 260.
36. To ensure a complete record, if Section 260 does not itself
apply to intrastate services, we also seek comment on whether we have
authority to preempt State regulation with respect to the accounting
matters addressed by Section 260 pursuant to Louisiana PSC and, if so,
whether we should exercise that authority. We tentatively conclude that
if Section 260 does not apply to intrastate services and if we have
authority to preempt pursuant to Louisiana PSC, we should refrain from
exercising that authority in this area and instead retain our prior
policy of not preempting States from using their own cost allocation
procedures for intrastate purposes. We invite comment on this tentative
conclusion. We ask the commenters to address, in particular whether
preemption pursuant to Louisiana PSC in this area would be necessary to
achieve the intent behind Section 260(a)(1) or whether less intrusive
measures would be sufficient.
2. Section 271--InterLATA Telecommunications Services
a. Incidental InterLATA Services
37. Section 271(h) states that ``[t]he Commission shall ensure that
the provision of services authorized under [Section 271(g)] by a Bell
operating company or its affiliate will not adversely affect telephone
exchange service ratepayers or competition in any telecommunications
market.'' Section
[[Page 40167]]
271(g) lists specific incidental interLATA services that he BOCs and
their affiliates may provide after the date of enactment of the 1996
Act. Those services are:
The interLATA provision by a Bell operating company or its
affiliate--
(1)(A) of audio programming, video programming, or other
programming services to subscribers to such services of such company
or affiliate;
(B) of the capability for interaction by such subscribers to
select or respond to such audio programming, video programming, or
other programming services;
(C) to distributors of audio programming or video programming that
such company or affiliate owns or controls, or is licensed by the
copyright owner of such programming (or by an assignee of such owner)
to distribute; or
(D) of alarm monitoring services;
(2) of two-way interactive video services or Internet services over
dedicated facilities to or for elementary and secondary schools as
defined in section 254(h)(5);
(3) of commercial mobile services in accordance with section 332(c)
of this Act and with the regulations prescribed by the Commission
pursuant to paragraph (8) of such section;
(4) of a service that permits a customer that is located in one
LATA to retrieve stored information from, or file information for
storage in, information storage facilities of such company that are
located in another LATA;
(5) of signaling information used in connection with the provision
of telephone exchange services or exchange access by a local exchange
carrier; or
(6) of network control signaling information to, and receipt of
such signaling information from, common carriers offering interLATA
services at any location within the area in which such Bell operating
company provides telephone exchange services or exchange access.
Section 271(h) states that ``[t]he provision of [Section 271(g)] are to
be narrowly construed. The interLATA services provided under
subparagraph (A), (B), or (C) of [Section 271(g)(1)] are limited to
those interLATA transmissions incidental to the provision by a Bell
operating company or its affiliate of video, audio, and other
programming services that the company or its affiliate is engaged in
providing to the public.''
38. Section 271(h) states that ``[t]he Commission shall ensure that
the provision of services authorized under [Section 271(g)] by a Bell
operating company or its affiliate will not adversely affect telephone
exchange service ratepayers or competition in any telecommunications
market.'' We invite comment on whether our present cost allocation
rules in Part 64 are adequate to prevent the adverse effects proscribed
by Section 271(h) or whether alternative solutions, if any, would be
more appropriate. We ask commenters asserting that the rules require
modifications to describe in detail the modifications they believe
necessary, to explain how these modifications or additions to our Part
64 rules would better enable the Commission to fulfill its obligations
under Section 271(h), and to identify the category of ratepayers or
competitive markets the proposed modifications or additions would
protect.
b. Integrated Provision of InterLATA Services
39. We note that BOCs are permitted to provide certain regulated,
interLATA telecommunications services on an integrated basis, including
out-of-region services and certain types of incidental services. In our
BOC Out-of-Region Order, 61 FR 35964 (July 9, 1996), we determined that
the BOCs must provide out-of-region interstate, interexchange services
(including interLATA and intraLATA services) through separate
affiliates, at least on an interim basis, in order to qualify for
nondominant regulatory treatment in the provision of those services.
Under that Order, however, a BOC could still choose to provide these
services on an integrated basis, subject to dominant carrier
regulation. To ensure against improper subsidization in the event of
such operations, we tentatively conclude that we should apply our cost
allocation rules to regulated services other than local exchange and
exchange access services provided on an integrated basis. We seek
comment on this tentative conclusion and on whether we should develop
modified cost allocation rules for these other regulated services that
the BOCs may provide on an integrated basis to prevent allocation of
the costs of these other regulated services to local exchange and
exchange access customers and, if so, what these modifications should
be. One possible solution would be to require BOCs to create a separate
category for regulated services other than local exchange and exchange
access services within their internal cost allocation systems. This
category would be in addition to the regulated and nonregulated
categories our existing rules require and would parallel the approach
we took with respect to video dialtone. Alternatively, we could require
BOCs to classify any regulated services other than local exchange and
exchange access services they provide on an integrated basis as
nonregulated activities for Title II accounting purposes. This would
parallel the approach we took in the BOC out-of-Region Order and would
result in the carriers' allocating the costs of these services to the
nonregulated category. We invite comment on the relative costs and
benefits of these approaches.
40. In our Interexchange Notice, 61 FR 14717 (April 3, 1996), we
addressed whether we should modify or eliminate the separation
requirements independent local exchange carriers must currently meet in
order to qualify for non-dominant treatment when they offer interstate,
interexchange services originating outside the areas in which they
control local access facilities. We also sought comment on whether, if
we modified or eliminated these separation requirements for non-
dominant treatment of independent local exchange carriers, we should
apply the same requirements to BOC provision of out-of-region
interstate, interexchange services. If independent local exchange
carriers are allowed to, and choose to, provide out-of-region
interstate interexchange services on an integrated basis, we seek
comment on whether our regulatory treatment for such incumbent local
exchange carriers should be similar to the regulatory treatment we
adopt for the BOCs.
c. Other Matters
41. Section 272(e)(3) requires that ``[a] Bell operating company *
* * impute to itself (if using [exchange] access for its provision of
its own services), an amount for access that is no less than the amount
charged to any unaffiliated interexchange carriers for such service.''
In our BOC In-Region NPRM, we seek comment on how to determine the
imputed exchange access charges under Section 272(e)(3). We now invite
comment on how the BOCs should account for these imputed access
charges. One possible approach would be for the BOCs to record these
imputed exchange access charges as an expense that would be directly
assigned to nonregulated activities with a credit to the regulated
exchange access revenue account. We seek comment on this approach as
well as suggested alternatives.
42. Section 272(e)(4) states that ``[a] Bell operating company and
an affiliate that is subject to the requirements of section 251(c) * *
* may provide any interLATA or intraLATA facilities or services to its
interLATA affiliate if such services or facilities are made available
to all carriers at the same rates and on
[[Page 40168]]
the same terms and conditions, and so long as the costs are
appropriately allocated.'' Although Sections 272(e)(3) and (e)(4) do
not address activities performed on an integrated basis, we invite
comment on whether and, if so, how these requirements should affect our
rules for allocating costs between activities regulated under Title II
and nonregulated activities for those BOCs that provide interLATA
services on an integrated basis. We request comment on whether, in view
of Section 272(e)(4), we may require BOCs that provide interLATA or
intraLATA facilities or services on an integrated basis to provide them
to their own internal operation only at the same rates as those
facilities or services are made available to all carriers. When those
rates differ for different carriers, we seek comment on which rate
should be the one that applies to BOC affiliate transactions. We also
invite comment on whether we should adopt specific accounting
procedures to address the difference, if any, between those rates and
``the costs [that would be] appropriately allocated'' for the
underlying facilities or services.
d. Scope of Commission's Authority
43. In the BOC In-Region NPRM, we tentatively conclude that this
Commission has jurisdiction under Sections 271 and 272 over both
interstate and intrastate interLATA services and interLATA information
services. That tentative conclusion leads us also to conclude
tentatively that we have jurisdiction with respect to accounting
matters under those same sections of the 1996 Act. We base our
tentative conclusions in the BOC In-Region NPRM and in this Notice on
the following analysis. Sections 271 and 272 by their terms address BOC
provision of ``interLATA'' services and information services. Many
States contain more than one LATA, and thus, interLATA traffic may be
either interstate or intrastate. Accordingly, we must determine whether
Sections 271 and 272, and our authority pursuant to those sections,
apply only to interstate interLATA services and interLATA information
services, or to both interstate and intrastate interLATA services and
interLATA information services.
44.The MFJ, when it was in effect, governed BOC provision of both
interstate and intrastate services. The 1996 Act provides:
Any conduct or activity that was, before the date of enactment
of this Act, subject to any restriction or obligation imposed by the
[MFJ] shall, on and after such date, be subject to the restrictions
and obligations imposed by the Communications Act of 1934 as amended
by this Act and shall not be subject to the restrictions and the
obligations imposed by [the MFJ].
This section supersedes the MFJ, and explains that the Communications
Act is to serve as its replacement. In the BOC In-Region NPRM, we find
that Sections 271 and 272 of the Act were intended to replace the MFJ
as to both interstate and intrastate interLATA services and interLATA
information services.
45. Although Sections 271 and 272 make no explicit reference to
interstate and intrastate services, they do refer to a different
geographic boundary--the LATA, as originally defined by the MFJ and now
by the 1996 Act. In the BOC In-Region NPRM, we tentatively conclude
that the interLATA/intraLATA distinction appears to have supplanted the
traditional interstate/intrastate distinction for purposes of these
sections.
46. As to interLATA services, the MFJ prohibited the BOCs and their
affiliates from providing any interLATA services, interstate or
intrastate, unless specifically authorized by the MFJ or a waiver
thereunder. Reading Sections 271 and 272 as applying to all interLATA
services fits well with the structure of the statute as a whole.
Sections 251 and 252 of the Act establish rules and procedures for
competitive entry into local exchange markets. In the Interconnection
NPRM, 61 FR 18311, we tentatively concluded that Congress intended
these sections to apply to both interstate and intrastate aspects of
interconnection. These new obligations imposed on BOCs (as well as
other incumbent local exchange carriers), and enacted at the same time
as Sections 271 and 272, clearly are part of the process for entry into
the interLATA marketplace. Indeed, BOCs are permitted to provide in-
region interLATA services only after they have met the requirements of
Section 271, including a competitive checklist requiring compliance
with certain provisions in Sections 251 and 252.
47. In the BOC In-Region NPRM, we note also that the structure of
Sections 271 and 272 themselves indicates that these sections were
intended to address both interstate and intrastate interLATA services.
For instance, BOCs are directed to apply for interLATA entry on a
state-by-state basis, and the Commission is directed to consult with
the relevant State Commission before making any determination with
respect to an application in order to verify the BOC's compliance with
the requirements for providing in-region interLATA services. As we
believe it did in Sections 251 and 252, Congress appears to have put in
place rules to govern both interstate and intrastate services, and to
have provided a role for both the Commission and the States in
implementing those rules.
48. We also note in the BOC In-Region NPRM that, by contrast,
reading Sections 271 and 272 as limited to the provision of interstate
services would mean that the BOCs would have been permitted to provide
in-region, intrastate, interLATA services upon enactment and without
any guidance from Congress as to entry requirements or safeguards,
subject only to any pre-existing State rules on interexchange entry.
Any such rules, presumably, would not have been directed at BOC entry,
which had for many years been prohibited. Concerns about BOC control of
bottleneck facilities over the provision of in-region interLATA
services are equally important for both interstate and intrastate
services. Thus, the reasons for imposing the procedures and safeguards
of Sections 271 and 272 apply equally to the BOCs' provision of both
intrastate and interstate, in-region, interLATA services. We found it
implausible that Congress could have intended to lift the MFJ's ban on
BOC provision of interLATA services without making any provision for
orderly entry into intrastate interLATA services, which constitute
approximately 30 percent of interLATA traffic. Based on the preceding
analysis, we tentatively conclude that our authority under Sections 271
and 272 applies to both intrastate and interstate interLATA services
and interstate and intrastate interLATA information services provided
by the BOCs or their affiliates. We also stated our belief that Section
2(b) of the Communications Act did not require a contrary result
because Congress enacted Sections 271 and 272 after Section 2(b) and
squarely addressed the issues presented here. We reach the same
tentative conclusion here as to accounting safeguards and seek comment
on it.
49. We also invite comment on what role States might play in
implementing the accounting safeguards provisions of Sections 271 and
272, given this tentative conclusion. We ask commenters to address
whether we must change our policy, adopted prior to the enactment of
the 1996 Act, of not preempting States from using their own cost
allocation procedures for intrastate purposes. We also invite comment
on whether, in enacting the accounting safeguards provisions of
Sections 271 and 272, Congress intended to eliminate our ability to
allow the States to depart from the federal cost allocation
[[Page 40169]]
procedures in their regulation of ``charges . . . for or in connection
with intrastate communications service[s].''
50. To the extent commenters disagree with the above analysis, we
also seek comment on whether we have authority to preempt state
regulation with respect to the accounting matters addressed by Sections
271 and 272 pursuant to Louisiana PSC and, if so, whether we should
exercise that authority. We tentatively conclude that if Sections 271
and 272 do not provide authority over intrastate interLATA services and
intrastate interLATA information services and if we have authority to
preempt pursuant to Louisiana PSC, we should refrain from exercising it
in this area and instead retain our prior policy of not preempting
States from using their own cost allocation procedures for intrastate
purposes. We invite comment on this tentative conclusion. We ask the
commenters to address, in particular, whether preemption in this area
would be necessary to achieve the intent behind the accounting
safeguards provisions of Sections 271 and 272, or whether less
intrusive measures would be sufficient.
3. Section 275--Alarm Monitoring Services
51. Section 275(e) defines ``alarm monitoring service'' as ``a
service that uses a device located at a residence, place of business,
or other fixed premises (1) to receive signals from other devices
located at or about such premises regarding a possible threat at such
premises to life, safety, or property, from burglary, fire, vandalism,
bodily injury, or other emergency, and (2) to transmit a signal
regarding such threat by means of transmission facilities of a local
exchange carrier or one of its affiliates to a remote monitoring center
to alert a person . . .'' about the emergency. Section 275(a)(1) delays
entry by the BOCs not already providing alarm monitoring services until
five years from the date of enactment of the 1996 Act. If a BOC or BOC
affiliate provided alarm monitoring services as of November 30, 1995,
it may continue to do so, but cannot expand its alarm monitoring
business by acquiring ``any equity interest in, or obtain financial
control of, any unaffiliated alarm monitoring service entity'' during
the five-year period.
52. Section 275(b)(2) specifies that an incumbent local exchange
carrier engaged in the provision of alarm monitoring services ``not
subsidize its alarm monitoring services either directly or indirectly
from telephone exchange service operations.'' As with the prohibition
against subsidizing telemessaging services, this prohibition against
subsidizing alarm monitoring services specifically applies to incumbent
local exchange carriers.
53. We currently require carriers to treat alarm monitoring
services as nonregulated activities for Title II accounting purposes.
Accordingly, the Part 64 cost allocation rules require incumbent local
exchange carriers to allocate the costs of those services to
nonregulated activities. We invite comment on whether our present rules
are necessary or sufficient to prevent subsidization of alarm
monitoring services as defined in Section 275(e). Commenters asserting
that our existing rules would not meet this objective should identify
with specificity any deficiency in our rules, explain the nature of the
deficiency, and describe, in detail, how the rules can be modified to
remove that deficiency. We ask commenters asserting that rules are not
necessary to identify which rules are not necessary and why they are
not necessary.
54. Alarm monitoring, as defined in Section 275(e), appears to fall
within the definition of ``information service'' in Section 3(20) of
the Act. Alarm monitoring services, however, are specifically exempted
from the separate affiliate and nondiscrimination requirements of
Section 272. We seek comment on the extent of our authority, if any,
under Section 275 over intrastate alarm monitoring services.
55. We further seek comment on what role States might have in
implementing Section 275(b)(2)'s prohibition against subsidization of
``alarm monitoring services either directly or indirectly from . . .
telephone exchange service operations.'' We ask commenters to address
whether we must change our policy, adopted prior to the enactment of
the 1996 Act, of not preempting States from using their own cost
allocation procedures for intrastate purposes. We also invite comment
on whether, in enacting Section 275(b)(2), Congress intended to
eliminate our ability to allow the States to depart from the federal
cost allocation procedures for alarm monitoring services in the States'
regulation of ``charges . . . for or in connection with intrastate
communications service[s].''
56. We also seek comment on whether, if Section 275 does not itself
preempt, we have authority to preempt State regulation with respect to
the accounting matters addressed by Section 275(b)(2) pursuant to
Louisiana PSC and, if so, whether we should exercise that authority. We
tentatively conclude that even if Section 275 does not itself preempt
and if we have that authority pursuant to Louisiana PSC, we should
refrain from exercising it in this area and instead retain our prior
policy of not preempting States from using their own cost allocation
procedures for intrastate purposes. We invite comment on this tentative
conclusion. We ask the commenters to address, in particular, whether
preemption in this area would be necessary to achieve the intent behind
Section 275(b)(2) or whether less intrusive measures would be
sufficient.
4. Section 276--Payphone Services
57. Section 276(a)(1) states that ``any Bell operating company that
provides payphone service shall not subsidize its payphone service
directly or indirectly from its telephone exchange service operations
or its exchange access operations.'' This prohibition against
subsidization is an integral part of Congress's plan ``to promote
competition among payphone providers and promote the widespread
deployment of payphone services to the benefit of the general public.''
To implement the prohibition, Section 276(b)(1)(C) directs the
Commission to prescribe nonstructural safeguards for BOC payphone
service that, ``at a minimum, include the nonstructural safeguards
equal to those adopted in the Computer Inquiry-III (CC Docket No. 90-
623) proceeding.'' The Act defines the term ``payphone service'' as
``the provision of public or semi-public pay telephones, the provision
of inmate telephone service in correctional institutions, and any
ancillary services.''
58. We tentatively conclude that we should apply accounting
safeguards identical to those safeguards adopted in Computer Inquiry-
III to prevent the subsidization of payphone services by BOC telephone
exchange service or exchange access operations. We seek comment on this
tentative conclusion. Commenters asserting that additional accounting
safeguards are necessary to fulfill our responsibilities under Sections
276(a)(1) and (b)(1)(C) should identify the alternative safeguards and
explain why they would better prevent the subsidies referred to in
Section 276(a)(1).
59. All of the BOCs provide payphone service. In the past, we have
treated payphone service as a regulated activity with applicable Part
32 plant, expense, and revenue accounts. This classification appears
inconsistent with the mandate in Section 276(b)(1)(C) that we prescribe
nonstructural safeguards for payphone service because this past
treatment allows payphone investment and expenses to be recorded as
costs of the regulated service. We tentatively conclude that the new
rules required by
[[Page 40170]]
that section should reclassify payphone service as a nonregulated
activity so that its costs should be separated from the telephone
exchange service and exchange access operations that would continue to
be regulated activities. Under this approach, the BOCs would continue
to use the Commission's Part 32 accounts to record their payphone
service activities, but would classify their payphone investment,
expenses and revenues as nonregulated for Title II accounting purposes.
We seek comment on this tentative conclusion and overall approach and,
in particular, ask whether this proposal would comply with the 1996
Act's mandate to prescribe nonstructural accounting safeguards for the
BOCs' payphone services at least equal to those adopted in the Computer
Inquire-III proceeding. We also invite comment on whether this approach
would prevent the subsidization of ``payphone service'' as defined in
Section 276(d) by BOC telephone exchange service or exchange access
operations.
60. Section 276 does not prescribe or direct the Commission to
prescribe accounting safeguards to govern the provision of payphone
service by incumbent local exchange carriers other than the BOCs. We
seek comment on whether we can and should require these other incumbent
local exchange carriers to reclassify their payphone service operations
as a nonregulated activity for Title II accounting purposes.
61. Section 276(c) states that ``[t]o the extend that any State
requirements are inconsistent with the Commission's regulations, the
Commission's regulations on such matters shall preempt such State
requirements.'' Thus, it is clear that the statute itself preempts any
State regulations that may be inconsistent with our own. We invite
comment on what role States might have in implementing Section
276(a)(1)'s prohibition against subsidization of ``payphone service
directly or indirectly from * * * telephone exchange service operations
or * * * exchange access operations,'' given this clear statutory
language and, in particular, whether in enacting Section 276(c),
Congress intended to eliminate our ability to allow the States to
depart from the Federal cost allocation procedures in their regulation
of ``charges * * * for or in connection with intrastate communications
service[s].''
III. Safeguards For Separated Operations
A. General
62. Section 272(a)(2) of the 1996 Act allows BOCs to provide the
following services only through a separate subsidiary: manufacturing of
telecommunications equipment and customer premises equipment;
origination of interLATA telecommunications services, other than
incidental, out-of-region, and previously authorized services; and
interLATA information services other than electronic publishing and
alarm monitoring services. Section 273(d)(3) requires ``any entity
which certifies telecommunications equipment or customer premises
equipment manufactured by an unaffiliated entity * * * only [to]
manufacture a particular class of telecommunications equipment or
customer premises equipment for which it is undertaking or has
undertaken, during the previous eighteen months, certification activity
for such class of equipment through a separate affiliate.'' Section
274(a) requires that BOCs providing electronic publishing must do so
only through a ``separated affiliate'' or electronic publishing joint
venture. These requirements for ``separate'' or ``separated''
affiliates or joint ventures implicitly assume that structural
safeguards limit the carrier's ability to engage in subsidization.
63. In this section, we discuss the accounting safeguards needed to
prevent subsidization where telephone operating companies do business
with their nonregulated and regulated affiliates. In the Joint Cost
Order, 52 FR 6557, we adopted rules to govern the way costs are
recorded, for Title II accounting purposes, when a regulated carrier
does business with nonregulated affiliates. The affiliate transactions
rules are designed to protect interstate ratepayers from subsidizing
the competitive ventures of incumbent local exchange carrier
affiliates. The affiliate transactions rules do not require carriers or
their affiliates to charge any particular prices for assets transferred
or services provided; rather, the rules require carriers to use certain
specified valuation methods in determining the amounts to record in
their Part 32 accounts, regardless of the prices charged.
64. We tentatively conclude that, except where the 1996 Act imposes
specific additional requirements, our current affiliate transactions
rules generally satisfy the statute's requirement of safeguards to
ensure that these services are not subsidized by subscribers to
regulated telecommunications services. We invite comment on this
tentative conclusion. We have previously concluded that these rules
provide effective safeguards against subsidization. Incumbent local
exchange carriers have implemented internal accounting systems for
affiliate transactions to help ensure their compliance with these
rules. Redesigning these internal systems to accommodate a
fundamentally different approach to affiliate transactions accounting
systems would impose substantial costs on the carriers. We seek comment
on these matters and, in particular, on whether the benefits of any
fundamentally different approach to affiliate transactions would be
outweighed by the costs that implementation of such a system might
entail.
65. Although we do not propose an approach for affiliate
transactions that is fundamentally different from our existing rules,
we seek comment on whether we should modify our affiliate transactions
rules in certain respects. The Commission and the telephone industry
have had more than eight years experience with the cost allocation
regime created by the Joint Cost Order, 52 FR 6557 (March 4, 1987).
This experience has made us aware that amending certain aspects of the
affiliate transactions rules might provide more optimal protection
against subsidization. In 1993, we released an Affiliate Transactions
Notice, 58 FR 62080 (November 24, 1993), proposing such rule changes,
including changes in how subject carriers would value for Title II
accounting purposes services they provide, or receive from,
nonregulated affiliates. We invite comment on whether, in implementing
the 1996 Act's provisions regarding subsidization, we should amend the
current affiliate transactions rules to incorporate certain of the
modifications proposed in the Affiliate Transactions Notice. We discuss
these modifications below. We also invite comment on whether any
additional changes to those rules might be necessary or appropriate to
implement the requirements of the 1996 Act.
66. As a general matter, we solicit comment on how and to whom the
affiliate transactions rules should be applied. For example, we could
apply the accounting safeguards for affiliate transactions discussed in
this NPRM only to those entities that engage in activities for which
the 1996 Act requires the use of a separate or separated subsidiary. We
could also extend application of these safeguards to those incumbent
local exchange
[[Page 40171]]
carriers that engage in activities for which the 1996 Act allows, but
does not require, the use of a separate subsidiary. We discuss these
approaches below. Finally, we invite comment on whether we should also
apply any modifications to our affiliate transactions rules that we
make in this proceeding to all transactions between incumbent local
exchange carriers and their affiliates.
B. Specific Services
1. Section 272--Manufacturing and InterLATA Services
a. Statutory Language
67. Section 272(a) prohibits a ``Bell operating company (including
any affiliate) which is a local exchange carrier that is subject to the
requirements of section 251(c)'' from ``provid[ing] any service
described in [Section 272(a)(2)] unless it provides that service
through one or more affiliates that (A) are separate from any operating
company entity that is subject to the requirements of section 251(c);
and (B) meet the requirements of [Section 272(b)].'' Section 272(a)(2)
states that:
[T]he services for which a separate affiliate is required by
[Section 272(a)(1)] are: (A) [m]anufacturing activities (as defined
in section 273(h); (B) [o]rigination of interLATA telecommunications
services, other than (i) incidental interLATA services described in
[Section 271(g)(1)-(3) and (5)-(6)]; (ii) out-of-region services
described in section 271(b)(2); or (iii) previously authorized
activities described in section 271(f); [and] (C) [i]nterLATA
information services, other than electronic publishing (as defined
in section 274(h)) and alarm monitoring services (as defined in
section 275(e)).
Section 272(b)(2) requires each of these separate affiliates to
``maintain books, records, and accounts in the manner prescribed by the
Commission which shall be separate from the books, records, and
accounts maintained by the [BOC] of which it is an affiliate.'' Under
Section 272(b)(5), each of these separate affiliates must ``conduct all
transactions with the [BOC] of which it is an affiliate on an arm's
length basis with any such transactions reduced to writing and
available for public inspection.'' Pursuant to Section 272(c)(2), BOCs
must account for all transactions with these affiliates ``in accordance
with accounting principles designated or approved by the Commission.''
b. Accounting Requirements of Sections 272 (b)(2) and (c)(2)
68. Section 272(b)(2) requires the separate affiliates prescribed
under Section 272(a)(2) to ``maintain books, records, and accounts in
the manner prescribed by the Commission which shall be separate from
the books, records, and accounts maintained by the [BOC] of which it is
an affiliate.'' We invite comment on the steps we should take to
implement this provision and, in particular, whether we should mandate
that the separate affiliates required under Section 272(a)(2) maintain
their books, records, and accounts in accordance with generally
accepted accounting principles (``GAAP''). We ask the commenters to
address whether it is necessary to adopt any additional accounting,
bookkeeping, or record keeping requirements for these affiliates and,
if so, what those additional requirements should be.
69. Pursuant to Section 272(c)(2), BOCs must account for all
transactions with their separate affiliates required under Section
272(a)(2) ``in accordance with accounting principles designated or
approved by the Commission.'' We invite comment on how we should
implement this provision. To ensure that the amounts recorded in Part
32 accounts are based on reliable financial data, the Affilitate
Transactions Notice proposed that, except as otherwise ordered by this
Commission, all accounting related to affiliate transactions must
comply with GAAP. We invite comment on whether requiring such
accounting would assist us in fulfilling our statutory obligation to
ensure that each affiliate required under Section 272(a)(2) will
``conduct all transactions with the [BOC] of which it is an affiliate
on an arm's length basis'' and, if so, whether we should adopt such a
requirement.
c. ``Arm's Length'' Requirement of Section 272(b)(5)
70. Section 272(b)(5) of the 1996 Act requires that transactions
between the BOC and its affiliate engaged in the manufacturing
activities, origination of interLATA telecommunications services, and
interLATA information services described in Section 272(a)(2) be
conducted on ``an arm's length'' basis. In the Computer II Final
Decision, 45 FR 24694, we required AT&T to provide enhanced services
and customer premises equipment only through a ``separate corporate
entity'' that would ``deal with any affiliated manufacturing entity
only on an arm's length'' basis. We stated that ``the transfer of any
products'' between this separate corporate entity and ``any affiliated
equipment manufacturer must be done at a price that is compensatory.''
We also stated that, ``[t]o police this requirement, we [would] require
that any transaction between the enhanced services subsidiary and any
other affiliate which involves the transfer (either directly or by
accounting or other record entries) of money, personnel, resources or
other assets be recorded in auditable form.'' We invite comment on
whether we should adopt similar requirements to implement Section
272(b)(5). We also invite comment on whether a requirement that prices
be compensatory would be consistent with the Congressional intent
behind Section 272(b)(5) and, in particular, any intent that ratepayers
of regulated services benefit from the economies of scope from BOC
manufacturing, origination of interLATA telecommunications services,
and interLATA information services activities.
71. In Computer III, we reexamined our regulatory regime for the
provision of enhanced services and replaced the Computer II
requirements with a series of nonstructural safeguards. These
safeguards included the Part 64 cost allocation rules and the affiliate
transactions rules that we developed in the Joint Cost Order. The
latter prescribe how incumbent local exchange carriers other than
average schedule companies must value their affiliate transactions for
Title II accounting purposes. These rules direct subject carriers to
use different methods for valuing assets transferred and services
provided. For asset transfers, the rules require that they us one of
four methods: (1) tariffed rates; (2) prevailing company prices; (3)
net book cost; and (4) estimated fair market value. Carriers must
record each asset transferred to an affiliate pursuant to tariff at the
tariffed rate. If an affiliate that sells a non-tariffed asset to its
regulated carrier also sells the same kind of asset to third parties at
a generally available price, the carrier must record the asset transfer
at that prevailing company price. All other asset transfers must be
recorded at the higher of net book cost and estimated fair market value
when the carrier is the buyer (i.e., from the affiliate). The United
States Court of Appeals for the District of Columbia Circuit affirmed
the valuation methods for asset transfers, finding them ``reasonably
designed to prevent systematic abuse of ratepayers.''
72. The affiliate transactions rules authorize three valuation
methods for determining the amounts carriers should record in their
Part 32 accounts for services they provide to or obtain from
affiliates: (1) tariffed rates; (2) prevailing company prices; and (3)
fully distributed costs. Carriers must record services provided to an
affiliate pursuant to tariff at the tariffed rate. If an affiliate
provides a non-tariffed service to its regulated carrier that it also
provides to third parties, the carrier
[[Page 40172]]
must record the transaction at the prevailing company price. All other
affiliate services must be recorded at the service provider's fully
distributed costs.
73. As stated above, the Commission has released an Affiliate
Transactions Notice that proposes certain rule changes to provide
greater protection against subsidization. We discuss certain of these
proposed changes below. We solicit comment concerning whether our
affiliate transactions rules, with the proposed changes, would be
necessary or sufficient to ensure compliance with the ``arm's length''
requirement of Section 272(b)(5).
74. We also seek comment on whether and, if so, how we should amend
our rules to address Section 272(b)(5)'s requirement that all
transactions be ``reduced to writing and available for public
inspection.'' We ask the commenters to address in particular whether
Internet access to information about these transactions would be
sufficient to comply with this requirement ``for public inspection.''
We also invite commenters to suggest any other methods we could
implement to comply with Section 272(b)(5). We seek further comment
about whether we need to adopt safeguards to protect any sensitive or
confidential information that these publicly available documents may
contain.
75. We note that Section 272(e)(1) requires a ``Bell operating
company and an affiliate that is subject to the requirements of section
251(c)'' to ``fulfill any requests from an unaffiliated entity for
telephone exchange service and exchange access service within a period
no longer than the period in which it provides such telephone exchange
service and exchange access to itself or to its affiliates.'' We
interpret ``transactions'' under Section 272(b)(5) to include requests
by an affiliate to its BOC for telephone exchange service or exchange
access. We seek comment on this interpretation. We also seek comment on
whether we should require information about such transactions to be
made publicly available and, if so, whether we need to adopt safeguards
to protect any sensitive or confidential information related to such
transactions.
i. Identical Valuation Methods for Assets and Services
76. In the Joint Cost Order, we did not prescribe uniform valuation
methods for all affiliate transactions. In particular, if an asset
transfer was neither tariffed nor subject to prevailing company prices,
we required carriers to record the transfer at the higher of net book
cost and estimated fair market value when it is the seller, and at the
lower of net book cost and estimated fair market value when the carrier
is the purchaser. In contrast, the Commission required carriers to
record all non-tariffed services other than those having prevailing
company prices at the providers' fully distributed costs.
77. If we apply our affiliate transactions rules, with the changes
proposed in this Notice, to transactions between the BOC and its
affiliates engaged in the manufacturing, origination of interLATA
telecommunications services and interLATA information services
described in Section 272(a)(2) of the 1996 Act, we believe we should
consider prescribing uniform valuation methods for all affiliate
transactions. In the Affiliate Transactions Notice, we tentatively
concluded that our treatment of the provision of services that are
neither tariffed nor subject to prevailing company prices may reward a
carrier's imprudent acts of buying services for more than, and selling
services for less than, fair market value. By requiring carriers to
record services they sell to nonregulated affiliates at the carriers'
fully distributed costs even when those costs are less than what non-
affiliates would pay the carriers, the rules motivate carriers to sell
services for less than fair market value. Similarly, by permitting
carriers to record services purchased from nonregulated affiliates at
the affiliates' fully distributed costs, even when those costs exceed
what the carriers would pay non-affiliates, the rules motivate carriers
to pay more than fair market value for services. If these increased
costs are reflected in rates for regulated telecommunications services,
ratepayers may be harmed. Ratepayers and service providers not
affiliated with carriers may also be harmed if the valuation methods
for affiliate transactions induce carriers and their affiliates to
``use services that are not competitive to subsidize services that are
subject to competition,'' thereby putting service providers not
affiliated with the carrier at a competitive disadvantage.
78. Because of the concerns identified in the preceding paragraph,
we believe that the current rules regarding the valuation of affiliate
services may not be consistent with the requirement of Section
272(b)(5) for ``transactions * * * on an arm's length basis.''
Requiring that affiliate transactions that do not involve tariffed
assets or services be recorded at the higher of cost and estimated fair
market value when the carrier is the seller or transferor, and at the
lower of cost and estimated fair market value when the carrier is the
buyer or transferee appears more likely to achieve these statutory
objectives. We propose to continue to define the applicable cost
benchmarks as net book cost for asset transfers and fully distributed
costs for service transfers. Our proposed rule, viewed in light of
other changes detailed below, would form part of a rational and
streamlined approach to affiliate transactions. This proposed rule
would also reduce the incentive to record an affiliate transaction as a
provision of a service, rather than an asset transfer, especially in
the context of procurement activities. We seek comment on whether these
modifications would better meet the objectives of Section 272. We also
ask commenters to discuss whether, and under what circumstances, we
should allow carriers and their affiliates to use any alternative
valuation methods. We also seek comment on how the elimination of a
sharing obligation from our price cap rules would affect the validity
of our tentative conclusion in the Affiliate Transactions Notice that
our treatment of the provision of services that are neither tariffed
nor subject to prevailing company prices may reward a carrier's
imprudent acts of buying services for more than, and selling services
for less than, fair market value.
79. Section 272(e)(3) requires that ``[a] Bell operating company
and an affiliate that is subject to the requirements of section 251(c)
* * * shall charge the affiliate described in subsection (a) or impute
to itself (if using the access for its provision of its own services),
an amount for access that is no less than the amount charged to any
unaffiliated interexchange carriers for such service.'' Section
272(e)(4) states that ``[a] Bell operating company and an affiliate
that is subject to the requirements of section 251(c) * * * may provide
any interLATA or intraLATA facilities or services to its interLATA
affiliate if such services or facilities are made available to all
carriers at the same rates and on the same terms and conditions, and so
long as the costs are appropriately allocated.'' We invite comment on
how these requirements should affect our rules for implementing the
``arm's length'' requirement of Section 272(b)(5). We also invite
comment on whether we should adopt specific accounting procedures to
address the difference, if any, between the rates charged by BOCs when
they provide interLATA or intraLATA facilities or services on a
separated basis and ``the costs [that would be] appropriately
allocated'' for the underlying facilities or services.
[[Page 40173]]
ii. Prevailing Company Prices
80. The prevailing price method describes the use of the price at
which a company offers an asset or service to the general public to
establish the value of the affiliate transaction. Generally, when a
carrier transfers assets or provides services to an affiliate or the
affiliate transfers assets or provides services to the carrier and
either the carrier or affiliate conducts similar transactions with the
non-affiliates, the transfer or service price with non-affiliates
should become the benchmark price for defining the value of the
transaction. Although the prevailing price appears to represent the
price that would be paid in an arm's length transaction, prevailing
price in affiliate transactions may not reflect fair market value
primarily because of the different nature of affiliate and non-
affiliate transactions. In competitive markets, companies devote
significant resources to retaining and attracting customers including
sales presentations, advertising campaigns, discounts for volume
purchases, or long-term commitments. Most affiliate transactions,
however, take place in an entirely different environment. Sales between
affiliates generally do not require extensive marketing efforts and
involve lower transactional costs than sales to non-affiliates. We
invite comment on whether affiliate transactions conducted ``on an
arms's length basis'' will necessarily entail the same marketing
efforts and transactional costs as sales to non-affiliates. We also
invite comment on what, if any, effect any differences in those efforts
and costs should have on our decision regarding the use of the
prevailing price method for recording affiliate transactions between
BOCs and their affiliates engaged in manufacturing, interLATA
telecommunications origination and interLATA information services as
described in Section 272(a)(2).
81. Our experience with the prevailing price method has revealed
the difficulty of defining what constitutes a prevailing price. When a
nonregulated affiliate transfers assets or provides services to the
carrier and non-affiliates, the question becomes what percentage of an
affiliate's overall business must be provided to non-affiliates in
order to establish a prevailing company price. If the percentage of
third-party business is small, there may not be enough participants in
the market to ensure that the price equals the price the carrier and
the affiliate would have negotiated ``on an arm's length basis.'' In
such situations, using prevailing prices to value asset transfers could
permit affiliates to charge inflated prices to the BOC. This would
allow nonregulated affiliates to receive added revenue that could
permit the nonregulated affiliate to price other competitive assets and
services lower to the detriment of fair competition. An additional
problem in determining a prevailing price arises because of the nature
of the products and services that an affiliate may transfer.
``[R]egulatory requirements that [BOCs] buy equipment competitively
crumble quickly when the product being purchased is technically complex
and readily differentiated.''
82. We, therefore, seek comment on the benefits of our proposal to
amend our affiliate transactions rules to eliminate the valuation of
affiliate transactions based on prevailing prices for transactions
between a BOC and its affiliates engaged in the manufacturing,
interLATA telecommunications origination and interLATA information
services described in Section 272(a)(2). Under this proposal,
transactions from the carrier to the nonregulated affiliate would be
recorded at tariffed rates, if applicable, or at the higher of fair
market value or fully distributed cost. Transactions from the
nonregulated affiliate to the carrier would be recorded at the lower of
fully distributed cost or fair market value.
iii. Estimates of Fair Market Value
83. In prior portions of this NPRM, we propose to adopt identical
valuation methodologies for assets and services which would require the
carrier to record most affiliate transactions at the higher of net book
cost and estimated fair market value when the carrier is the seller,
and at the lower of net book cost and estimated fair market value when
the carrier is the buyer. These proposals implicitly assume that there
is an observable fair market value for any assets and services that a
carrier and its nonregulated affiliates might provide each other, and
that reasonable efforts will enable the carrier to discover that value.
We believe that the procedures carriers use in estimating fair market
value should vary with the circumstances of the transaction and
consequently that we should not specify the methodologies that carriers
must follow to estimate fair market value. We instead propose to
require carriers to make good faith determinations of the fair market
value, where such a valuation is required under the affiliate
transactions rules. While this methodology will limit appraisals to
transactions, such as building sales and other transfers of major
assets, for which nonregulated companies obtain appraisals in the
normal course of business, we believe a more stringent approach would
impose unnecessary burdens and costs on the BOCs and other incumbent
local exchange carriers. We believe that a good faith requirement would
help ensure that affiliates covered by Section 272 ``conduct all
transactions with the [BOC] of which it is an affiliate on an arm's
length basis.''
84. While we propose not to prescribe methodologies for estimating
fair market value, we seek comment on whether we should set criteria
for determining what constitutes a good faith estimate of fair market
value. For example, if a transaction is subject to reasonable
independent valuation methods, we believe that carriers should continue
to ascertain fair market value by applying these methods to demonstrate
their good faith. If companies making certain purchases routinely
solicit competitive bids, survey potential suppliers, or obtain
independent appraisals, companies should continue to employ these
methods to determine fair market value. Thus, carriers could support
affiliate transactions involving real estate transfers by means of
independent appraisals.
85. In situations involving transactions that are not easily
valued, we seek comment on whether we should still require carriers to
support their valuations by reasonable and appropriate methods. For
example, for some assets or services a carrier might determine that an
independent appraisal would be difficult, if not impossible, to obtain
or be prohibitively expensive. In this case, a good faith attempt to
ascertain fair market value might include supporting the transaction
with computations or studies that utilize methods and principles that
an independent appraiser would apply. This could mean, if possible,
obtaining comparable sales information, computing values by applying a
responsible capitalization rate on cash flow, or determining
replacement value. We note that nothing discussed in this Notice would
exempt carriers from their statutory obligation under Section 220(c) to
justify their accounting entries. We invite comment on our proposal to
allow good faith attempts to determine fair market value in affiliate
transactions.
iv. Tariffed-based Valuation
86. Finally, we seek comment about the status of tariff-based
valuation if incumbent local exchange carriers are not required to
provide interconnection and collocation services and network elements
pursuant to tariffs. Under Section 252, it may be that the BOC
[[Page 40174]]
would submit agreements adopted by negotiations or arbitration to State
commissions for approval or rejection without ever filing a tariff.
Alternatively, the BOCs may file statements of generally available
terms pursuant to Section 252(f) that would state the terms on which
these LECs would provide services to all customers who desire them. We
seek comment on whether, and the extent to which, our affiliate
transactions rules should be amended to substitute rates appearing in
such publicly filed agreements and statements for tariffed rates where
affiliates could subscribe to services under such generally available
terms. We also seek comment on whether such amendments would be
consistent with, or required by, Sections 272(e)(3) and 272(e)(4).
v. Return Component for Allowable Costs
87. In the Joint Cost Proceeding, the Commission determined that
fully distributed costs should include a return on investment, but no
``profit'' in excess of the return then prescribed for the carrier's
interstate regulated activities. Consequently, carriers that utilize
fully distributed cost to value affiliate transactions include in their
cost computations a component for rate of return. We believe we should
consider allowing all carriers providing directly, or indirectly
through an affiliate, the services that are the subject of Section 272
to use a uniform rate of return to value affiliate transactions.
Adopting numerous rates of return would impose a significant compliance
burden on the industry. In addition, the use of various rates of return
could favor certain telecommunications service providers and
disadvantage others. Moreover, allowing carriers to determine their own
rate of return would increase the likelihood that an affiliate will
fail to ``conduct all transactions with the [BOC] of which it is an
affiliate an arm's length basis[,]'' as required by Section 272(b)(5).
From a regulatory standpoint, the Commission would have a difficult, if
not impossible, burden if it had to engage in numerous prescription
proceedings and then monitor compliance with each.
88. The Commission has prescribed a unitary, overall rate of return
for those incumbent local exchange carriers still subject to rate-of-
return regulation to use in computing interstate revenue requirements,
unless a carrier can show that such use would be confiscatory. The
current prescribed rate of return on interstate services is 11.25
percent. Because the rate-of-return represcription will not affect
either the price cap indices or the sharing zones for carriers subject
to price cap regulation, the impact of any represcription of this rate
of return on price cap LECs would be limited. In addition to affecting
cost calculations for affiliate transactions, as we propose above, a
represcription may change the amounts that price cap LECs receive from
the universal service fund or pay for long-term support of NECA's
common line pool and the amounts those LECs pay the telecommunications
relay services fund to give persons with hearing or speech impairments
full access to the voice communications network. We seek comment on
whether we should require the BOCs to use the prescribed interstate
rate of return for valuing their transactions with their affiliates
engaged in the manufacturing activities, in-region telecommunications
services origination and interLATA information services described in
Section 272(a)(2).
d. Application to InterLATA Telecommunications Affiliates
89. We propose to apply our affiliate transactions rules to
transactions between a BOC and any affiliates it establishes under
Section 272(a) Under that provision, a BOC, including any affiliate,
``which is a local exchange carrier that is subject to the requirements
of section 251(c)'' may not provide in-region interLATA
telecommunications services, interLATA information services, or
manufacturing unless it provides those services through one or more
affiliate. Any transactions between a BOC and its interLATA information
services or manufacturing affiliates would be subject to our existing
affiliate transactions rules, because neither interLATA information
services nor manufacturing are regulated activities under Title II.
InterLATA telecommunications services, however, are regulated under
Title II, and, absent a Commission requirement to the contrary, the
affiliates that offer those services would therefore classify interLATA
telecommunications services as regulated for Title II accounting
purposes. Our existing affiliate transactions rules are solely designed
for transactions between regulated carriers and their nonregulated
affiliates. To help protect against improper subsidization, we have
already determined that out-of-region interstate, interexchange
services provided by BOC affiliates should be treated as nonregulated
for accounting purposes. Thus, our affiliate transactions rules apply
to transactions between the BOCs and those affiliates. Because BOC in-
region interLATA telecommunications services also present a potential
for improper subsidization, we tentatively conclude that we should
apply our affiliate transactions rules to transactions between each BOC
and any interLATA telecommunications services affiliate it establishes
under Section 272(a). We invite comment on this tentative conclusion.
We also invite comment on whether and how we should adapt our affiliate
transactions rules if applied to such transactions and, in particular,
whether we should adopt special valuation methodologies for these
transactions to recognize the regulated status of the affiliates on
both sides of the transactions.
90. Section 272 does not prohibit a BOC from providing
manufacturing and interLATA information services described in Section
272(a)(2) through the same affiliate by which it provides origination
of interLATA telecommunications services described in the same section.
It also does not prohibit that affiliate from engaging in other
activities not regulated under Title II. We seek comment on whether in
this context we should apply our cost allocation rules to prevent
subsidization of nonregulated activities, including manufacturing and
interLATA information services, by subscribers to interLATA
telecommunication services. In particular, we seek comment on what, if
any, authority Section 254(k) extends to our application of our cost
allocation rules to affiliates engaged in regulated and nonregulated
activities.
e. Application to Joint Marketing
91. Although Section 272(b)(3) requires [the affiliate] to ``have
separate officers, directors, and employees from the Bell operating
company of which it is an affiliate,'' Section 272(g)(2) allows the BOC
to ``market or sell interLATA service provided by an affiliate required
by [Section 272] . . . [after] such company is authorized to provide
interLATA services in such State under section 271(d).'' In our
companion BOC In-Region NPRM, we seek comment on whether an affiliate
may share marketing personnel with a BOC, and if so, what corporate and
financial arrangements are necessary to comply with sections 272(b)(3),
272(b)(5) and 272(g)(2). If an affiliate may share marketing personnel
with a BOC, we tentatively conclude that we should apply our cost
allocation and affiliate transactions rules, as we propose to modify
them in this Notice, to any joint marketing on interLATA and local
exchange services. We seek comment whether and the extent to which any
[[Page 40175]]
additional accounting safeguards may be necessary.
f. Audit Requirements
92. Section 272(d) states that companies required to maintain a
separate affiliate under Section 272 ``shall obtain and pay for a
Federal/State audit every 2 years conducted by an independent auditor
to determine whether such company complied with this section and the
regulations promulgated under this section, and particularly whether
such company has complied with the separate accounting requirements
under [Section 272(b)].'' The independent auditor ``shall submit the
results of the audit to the Commission and to the State commission of
each State in which the company audited provides service, which shall
make such results available for public inspection.'' Interested persons
may then submit comment on the final audit report.
93. We tentatively conclude that the independent auditor's report
should be filed with the Commission and each relevant State commission
and should include a discussion of: (1) the scope of the work
conducted, with a description of how the affiliate's or joint venture's
books were examined and the extent of the examination; (2) the
auditor's conclusion whether examination of the books has revealed
compliance or non-compliance with the affiliate transactions rules and
any non-discrimination requirements in the Commission rules; (3) any
limitations imposed on the auditor in the course of its review by the
affiliate or joint venture or other circumstances that might affect the
auditor's opinion; and (4) a statement by the auditor that the
carrier's cost allocation methodologies conform to the Communications
Act of 1934, as amended, and the Commission's rules and that the
carrier has accurately applied the methodologies described in those
rules. We seek comment on the necessity or desirability of using such
an approach to satisfy the requirements of Section 272(d). We also seek
comment on whether the independent auditor's report should address
whether the carrier has complied with Sections 272(e)(3) and 272(e)(4).
g. Scope of Commission's Authority
94. Section 272 of the 1996 Act, by its terms, covers transactions
between a BOC and its affiliates engaged in the manufacturing
activities, origination of interLATA telecommunications services, and
interLATA information services described in Section 272(a)(2). As we
have done in the BOC In-Region NPRM, we believe that each of these
activities requires a different analysis. We state elsewhere in this
Notice our tentative conclusions and analysis regarding telemessaging,
interLATA telecommunications services, and manufacturing activities. We
also tentatively conclude that we should apply our analysis for
telemessaging to other interLATA information services covered by
Section 272. We seek comment on this tentative conclusion.
2. Section 273--Manufacturing by Certifying Entities
a. Statutory Language
95. Section 273(d) of the 1996 Act requires certain standard-
setting organizations to maintain separate affiliates in order to
engage in certain types of manufacturing. Under Section 273(d)(3), when
such a standard-setting organization certifies telecommunications
equipment or customer premises equipment manufactured by an
unaffiliated entity, the certifying entity ``shall only manufacture a
particular class of telecommunications equipment or customer premises
equipment for which it is undertaking or has undertaken, during the
previous eighteen months, certification activity * * * through a
separate affiliate.'' [N]otwithstanding [Section 273(d)(3)],'' Section
273(d)(1)(B) prohibits ``Bell Communications Research, Inc., or any
successor entity or affiliate'' from ``engag[ing] in manufacturing
telecommunications equipment or customer premises equipment as long as
it is an affiliate of more than 1 otherwise unaffiliated [BOC] or
successor or assign of any such company.''
96. Section 273(d)(3)(B) requires the separate affiliate to
``maintain books, records, and accounts separate from those of the
entity that certifies such equipment, consistent with generally
acceptable accounting principles[,]'' and to ``have segregated
facilities and separate employees'' from the certifying entity. Section
273(g) permits ``[t]he Commission [to] prescribe such additional rules
and regulations as the Commission determines necessary to carry out the
provisions of this section, and otherwise to prevent discrimination and
cross-subsidization in a [BOC's] dealings with its affiliates and with
third parties.''
b. Comparison of Sections 273 and 272
97. Both Sections 272 and 273 require the use of a separate
affiliate to engage in different specified activities. We have already
proposed accounting safeguards to govern transactions between a BOC and
its affiliate engaged in the manufacturing, origination of interLATA
telecommunications services and interLATA information services
described in Section 272(a)(2). Section 273 requires a standard-setting
organization that certifies telecommunications equipment or customer
premises equipment manufactured by an unaffiliated entity to ``only
manufacture a particular class of telecommunications equipment or
customer premises equipment for which it is undertaking or has
undertaken, during the previous eighteen months, certification activity
* * * through a separate affiliate.'' Section 273(d)(3)(B) requires
that the separate affiliate of the standard-setting organization
``maintain books, records, and accounts separate from those of the
entity that certifies such equipment, consistent with generally
acceptable accounting principles[,]'' and to ``have segregated
facilities and separate employees'' from the certifying entity. As a
threshold question, we seek comment on whether and, if so, how Section
273's different statutory language requires or permits different
accounting treatment from that required or permitted for BOCs under
Section 272. Specifically, we seek comment whether we should apply our
affiliate transactions rules, as we propose to modify them, to
transactions between a certifying entity and the affiliate it must
maintain under Section 273(d). We note that our existing rules would
not cover transactions between a certifying entity and its affiliate
where that certifying entity is not also a regulated carrier. We,
therefore, seek comment on whether, and to what extent, we should
modify our affiliate transactions rules to govern such transactions.
98. In addition to the accounting safeguards for BOC entry into
manufacturing set forth in Section 272 as discussed above, we note that
Section 273(g) specifically authorizes ``[t]he Commission [to]
prescribe such additional rules and regulations as the Commission
determines necessary * * * to prevent cross-subsidization in a [BOC's]
dealings with its affiliates and with third parties.'' We tentatively
conclude that application of our affiliate transactions rules, as we
propose to modify them, to BOCs engaged in activities under Section 273
would be sufficient to satisfy this provision of the 1996 Act. We seek
comment on this tentative conclusion.
c. Scope of Commission's Authority
99. Section 273 provides that a BOC may manufacture and provide
telecommunications equipment and
[[Page 40176]]
customer premises equipment if the Commission authorizes that BOC to
provide interLATA services under Section 271(d). Section 273 also sets
out safeguards for BOC manufacturing activities. We tentatively
conclude that the provisions of this section apply to all BOC
manufacturing activities, irrespective of any jurisdictional
distinction. First, much like Sections 271 and 272, Section 273 sets
the conditions for BOC entry into manufacturing. Thus, as with Sections
271 and 272, we believe that Section 273 was meant to supersede the
MFJ, and to replace it for both interstate and intrastate activities,
to the extent that such a jurisdiction division makes sense in the
context of manufacturing. Section 273 conditions entry into
manufacturing on the BOC's obtaining Commission approval for interLATA
entry under Section 272. This relationship between Sections 272 and 273
further suggests that they should both be read to have the same
jurisdictional reach.
100. Moreover, we tentatively conclude that although Section 2(b)
of the Communication Acts limits the Commission's authority over
``charges, classifications, practices, services, facilities, or
regulation for or in connection with intrastate communications
service,'' we tentatively conclude the manufacturing activities
addressed by Section 273 are not within the scope of Section 2(b). Even
if Section 2(b) applies with respect to BOC manufacturing under Section
273, we tentatively find that such manufacturing activities plainly
cannot be segregated into interstate and intrastate portions. We invite
comment on what role States might have in implementing Section 273's
accounting safeguards provisions, assuming the correctness of these
beliefs, and, in particular, whether in enacting Section 273, Congress
intended to eliminate our ability to allow the States to depart from
the federal cost allocation procedures in their regulation of ``charges
* * * for or in connection with intrastate communications service[s].''
We ask the commenters also to address whether preemption in this area
would be necessary to achieve the intent behind Section 273 or whether
less intrusive measures would be sufficient.
3. Section 274--Electronic Publishing
101. Section 274 of the 1996 Act prescribes the terms under which a
BOC may offer electronic publishing. Section 274(a) permits a BOC or
its affiliate to provide electronic publishing over its or its
affiliate's basic telephone service only through a ``separated
affiliate'' or an ``electronic publishing joint venture.'' Section
274(i)(9) defines ``separated affiliate'' as ``a corporation under
common ownership or control with a Bell operating company that does not
own or control a Bell operating company and is not owned or controlled
by a Bell operating company and that engages in the provision of
electronic publishing which is disseminated by means of such Bell
operating company's or any of its affiliate's basic telephone
service.'' Section 274(i)(8), in turn defines ``own'' as having ``a
direct or indirect equity interest (or the equivalent thereof) of more
than 10 percent of an entity, or the right to more than 10 percent of
the gross revenues of an entity under a revenue sharing or royalty
agreement.'' Section 274(i)(4) states that ``control'' has the meaning
that it has in 17 CFR 240.12b-2, the regulations promulgated by the
Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934 (15 U.S.C. 78a et seq.) or any successor provision to such
section.'' Section 274(i)(5) defines an ``electronic publishing joint
venture'' as `` a joint venture owned by a Bell operating company or
affiliate that engages in the provision of electronic publishing which
is disseminated by means of such Bell operating company's or any of its
affiliates' basic telephone service.''
102. Under Section 274(b), the ``separated affiliate'' or joint
venture ``shall be operated independently from the [BOC].'' The
``separated affiliate'' or joint venture and the BOC with which it is
affiliated must ``carry out transactions (i) in a manner consistent
with such independence, (ii) pursuant to written contracts or tariffs
that are filed with the Commission and made publicly available, and
(iii) in a manner that is auditable in accordance with generally
accepted auditing standards.'' The ``separated affiliate'' or joint
venture must also ``value any assets that are transferred directly or
indirectly from the [BOC] to a separated affiliate or joint venture,
and record any transactions by which such assets are transferred, in
accordance with such regulations as may be prescribed by the Commission
or a State commission to prevent improper cross-subsidies.''
103. Section 274(c)(2) discusses the joint activities permitted
under Section 274. Section 274(c)(2)(A) provides that ``[a] Bell
operating company may provide inbound telemarketing or referral
services related to the provision of electronic publishing for a
separated affiliate, electronic publishing joint venture, affiliate, or
unaffiliated electronic publisher, provided that if such services are
provided to a separated affiliate, electronic publishing joint venture,
or affiliate, such services shall be made available to all electronic
publishers on request, on nondiscriminatory terms.'' Section
274(c)(2)(B) states that ``[a] Bell operating company may engage in
nondiscriminatory teaming or business arrangements to engage in
electronic publishing with any separated affiliate or with any other
electronic publisher if (i) the Bell operating company only provides
facilities, services, and basic telephone service information as
authorized by [Section 274], and (ii) the Bell operating company does
not own such teaming or business arrangement.'' Lastly, Section
274(c)(2)(C) permits ``[a] Bell operating company or affiliate [to]
participat[e] on a nonexclusive basis in electronic publishing joint
ventures with entities that are not a Bell operating company,
affiliate, or separated affiliate to provide electronic publishing
services, if the Bell operating company or affiliate has not more than
a 50 percent direct or indirect equity interest (or the equivalent
thereof) or the right to more than 50 percent of the gross revenues
under a revenue sharing arrangement or royalty agreement in any
electronic publishing joint venture.'' Under Section 274(c)(2)(C),
``[o]fficers and employees of a Bell operating company or affiliate
participating in an electronic publishing joint venture may not have
more than 50 percent of the voting control over the electronic
publishing joint venture.'' ``In the case of joint ventures with small,
local electronic publishers, the Commission for good cause shown may
authorize the Bell operating company or affiliate to have a larger
equity interest, revenue share, or voting control but not to exceed 80
percent.'' A BOC participating in an electronic publishing joint
venture ``may provide promotion, marketing, sales, or advertising
personnel and services to such joint venture.''
104. Section 274(d) requires a ``Bell operating company under
common ownership or control with a separated affiliate or electronic
publishing joint * * * [to] provide network access and interconnections
for basic telephone service to electronic publishers at just and
reasonable rates that are tariffed (so long as rates for such services
are subject to regulation).'' Those rates cannot be ``higher on a per-
unit basis than those charges for such services to any other electronic
publisher or any separated affiliate engaged in electronic
publishing.''
a. Comparison of Sections 274 and 272
105. The language of Section 274's structural and transactional
[[Page 40177]]
requirements differs from the structural and transactional requirements
of Section 272. We invite comment on whether the distinction between a
``separated affiliate'' under Section 274 and a ``separate affiliate''
under Section 272 requires or permits different accounting treatment
for affiliate transactions pursuant to Sections 272 and 274.
Specifically, we seek comment whether we should apply our affiliate
transactions rules, as we propose to modify them, to transactions
between a BOC and its electronic publishing joint venture or
``separated affiliate.'' We seek comment on whether application of
these rules would provide adequate accounting safeguards for the joint
activities permitted under Section 274(c)(2). Because Section 274
allows a BOC to provide electronic publishing through either a
``separated affiliate'' or a joint venture, we also seek comment on
whether we should distinguish, for Title II accounting purposes,
between transactions involving a BOC and its ``separated affiliate''
and those involving a BOC and its electronic publishing joint venture.
b. Audit Requirements
106. Section 274(b)(8) requires electronic publishing ``separated
affiliates'' or joint ventures and the BOC with which they are
affiliated to have performed an annual compliance review ``conducted by
an independent entity for the purpose of determining compliance during
the preceding calendar year with any provision of [Section 274].'' The
results of such a review must be maintained by the ``separated
affiliate'' or the joint venture for a five-year period. We seek
comment regarding how such compliance reviews should be conducted. We
ask commenters to address specifically what matters the annual
compliance review should encompass. We propose to require the
independent entity to prepare and file with the Commission reports
describing: (1) the scope of its compliance review, with a description
of how the affiliate's or joint venture's books were examined and the
extent of the examination; (2) the independent entity's conclusion
whether examination of the books has revealed compliance or non-
compliance with the affiliate transactions rules and any other non-
discrimination requirements imposed by Commission rules; (3) any
limitations imposed on the independent entity in the course of its
review by the affiliate or joint venture or other circumstances that
might affect the entity's opinion; and (4) statements by the
independent entity as to whether the carrier's accounting and affiliate
transactions methodologies conform to the Communications Act of 1934,
as amended, and the Commission's rules and whether the carrier has
accurately applied the methodologies. We seek comment on the necessity
or desirability of this approach.
107. Section 274(b)(9) states a separated affiliate or joint
venture and the BOC with which it is affiliated shall ``within 90 days
of receiving a review described in [Section 274(b)(8)], file a report
of any exceptions and corrective action with the Commission and allow
any person to inspect and copy such review subject to reasonable
safeguards to protect any proprietary information contained in such
report from being used for purposes other than to enforce or pursue
remedies under [Section 274].'' We seek comment regarding what
``reasonable safeguards'' may be necessary to protect proprietary
information in the compliance review report ``from being used for
purposes other than to enforce or pursue remedies under [Section
274].''
c. Section 274(f)'s Reporting Requirement
108. Section 274(f) requires ``[a]ny separated affiliate under
[Section 274 to] file with the Commission annual reports in a form
substantially equivalent to the Form 10-K required by regulations of
the Securities and Exchange Commission.'' The Form 10-K contains a
description of the company filing the report and its operations,
financial statements with supporting financial data, and major legal
and financial disclosures concerning the company. We tentatively
conclude that, to minimize burdens on the filing companies, we should
require the separated affiliate to file the Form 10-K with us as well
as the Securities and Exchange Commission. We recognize, however, that
not all separated affiliates providing electronic publishing services
would be subject to the Security and Exchange Commission's Form 10-K
requirement. With regard to these separated affiliates, we seek comment
on what ``substantially equivalent to the Form 10-K'' means under
Section 274(f).
d. Section 274 Transactional Requirements
109. Section 274(b)(1) requires the ``separated affiliate'' or
joint venture to ``maintain books, records, and accounts and prepare
separate financial statements.'' We invite comment on the steps we
should take to implement this provision. We ask the commenters to
address whether it is necessary for the Commission to adopt any
additional accounting, bookkeeping, or record keeping requirements for
these affiliates and joint ventures, and, if so, what those additional
requirements should be.
110. Under Section 274(b), the ``separated affiliate'' or joint
venture ``shall be operated independently from the [BOC].'' The
``separated affiliate'' or joint venture and the BOC with which it is
affiliated must ``carry out transactions (i) in a manner consistent
with such independence, (ii) pursuant to written contracts or tariffs
that are filed with the Commission and made publicly available, and
(iii) in a manner that is auditable in accordance with generally
accepted auditing standards.'' We seek comment on the meaning of ``in a
manner consistent with such independence.'' We also seek comment as to
whether any regulations are necessary to implement Sections 274
(b)(3)(A) and (b)(3)(B).
111. We further seek comment on whether and, if so, how we should
amend our rules to implement the requirement that transactions under
Section 274(b)(3)(C) be ``auditable in accordance with generally
accepted auditing standards.'' Generally accepted auditing standards
refer to standards and guidelines promulgated by the American Institute
of Certified Public Accountants that an independent auditor must follow
when preparing for and conducting an audit of a company's financial
statements. These standards generally require that the auditor review a
company's internal controls and determine whether adequate
documentation exists to verify that the company has recorded
transactions on its books in a manner consistent with generally
accepted accounting principles.
112. According to Section 274(b)(4), the ``separated affiliate'' or
joint venture must also ``value any assets that are transferred
directly or indirectly from the [BOC] to a separated affiliate or joint
venture, and record any transactions by which such assets are
transferred, in accordance with such regulations as may be prescribed
by the Commission or a State commission to prevent improper cross-
subsidies.'' We have proposed in this Notice to conform our valuation
methods under the affiliate transactions rules for the provision of
services to those governing asset transfers. Regardless of how we
resolve that issue, because Section 274 specifically addresses asset
transfers between a BOC and its ``separated affiliate'' or joint
venture, we seek comment on whether in this case we should distinguish
between the asset transfers and the provision of services in
[[Page 40178]]
the context of electronic publishing affiliate transactions.
e. Scope of Commission's Authority
113. Although electronic publishing is specifically included within
the definition of information service in Section 3(20), it is
specifically exempted from the separate affiliate and nondiscrimination
requirements of Section 272. Section 274,which applies only to BOCs,
requires the use of a ``separated affiliate'' or ``electronic
publishing joint venture'' in order for a BOC to engage in the
provision of electronic publishing services via basic telephone
services.
114. Section 274 imposes a number of safeguards on the provision by
BOCs of electronic publishing through a separated affiliate or
electronic publishing joint venture. Unlike Sections 260 and 275,
however, Section 274 specifically refers to State commission
jurisdiction regarding one of these safeguards. Section 274(b)(4)
provides that a separated affiliate or joint venture and the BOC with
which it is affiliated shall:
value any assets that are transferred directly or indirectly from
the Bell operating company to a separated affiliate or joint
venture, and record any transactions by which such assets are
transferred, in accordance with such regulations as may be
prescribed by the Commission or a State commission to prevent
improper cross subsidies.
This explicit reference to State commission regulations indicates that
the requirements of this section apply to both interstate and
intrastate electronic publishing services, and at the same time
suggests that the Commission may not have exclusive jurisdiction over
all aspects of intrastate services pursuant to Section 274. In light of
this subsection, we seek comment on the extent of our authority, if
any, under Section 274 over intrastate electronic publishing services.
115. Section 274(e) also provides that any person claiming a
violation of this section may file a complaint with the Commission, or
may bring suit pursuant to Section 207. It also provides that an
application for a cease and desist order may be made to the Commission,
or in any district court. No reference is made to complaints being
filed with State commissions. We seek comment on the extent to which
the Commission has jurisdiction under Section 274 over intrastate
electronic publishing, particularly in light of the specific provisions
of Sections 274(b)(4) and 274(e). We ask that commenters clearly
identify whether specific subsections of Section 274 confer intrastate
authority with respect to accounting matters addressed by Section 274
on the Commission.
116. To ensure a complete record, we also seek comment on whether,
apart from any intrastate jurisdiction conferred by Section 274 itself,
we have authority to preempt State regulation with respect to the
accounting matters addressed by Section 260 pursuant to Louisiana PSC
and, if so, whether we should exercise that authority. We tentatively
conclude that if Section 274 does not apply to intrastate services and
if we have authority to preempt pursuant to Louisiana PSC, we should
refrain from exercising it in this area and instead retain our prior
policy of not preempting States from using their own cost allocation
procedures for intrastate purposes. We invite comment on this tentative
conclusion. We also invite comment on what role states might have in
implementing Section 274's accounting safeguards provisions, given the
above analysis. We ask commenters to address whether in enacting
Section 274, Congress intended to foreclose the states from departing
from the federal cost allocation procedures for electronic publishing
in their regulation of ``charges . . . for or in connection with
intrastate communications service[s].'' We also ask the commenters also
to address whether preemption in this area would be necessary to
achieve the intent behind Section 274 or whether less intrusive
measures would be sufficient.
f. Miscellaneous
117. Section 274(d) also requires a ``Bell operating company under
common ownership or control with a separated affiliate or electronic
publishing joint venture . . . [to] provide network access and
interconnections for basic telephone service to electronic publishers
at just and reasonable rates that are tariffed (so long as rates for
such services are subject to regulation) and that are not higher on a
per-unit basis than those charges for such services to any other
electronic publisher or any separated affiliate engaged in electronic
publishing.'' We tentatively conclude that we should apply our
affiliate transactions rules, as we propose to modify them, to the
provision of ``network access and interconnections for basic telephone
service'' by a BOC under common ownership or control to ensure
compliance with Section 274(d). We seek comment on this tentative
conclusion.
4. Separated Operations Under Sections 260, 271, 275 and 276
118. While Sections 260, 271, 275 and 276 of the 1996 Act define
categories of services that BOCs and, in some cases, incumbent local
exchange carriers may not necessarily have to offer through a separate
affiliate, a BOC or other incumbent local exchange carrier might, even
if not required to do so, choose to perform these activities through an
affiliate. We note that these sections do not explicitly impose
regulatory requirements for transactions between a regulated company
and its nonregulated affiliate. Sections 260, 275 and 276 bar the
subsidization of the competitive businesses permitted under those
sections by subscribers of either exchange access services. Section
260(a)(1) states that ``[a]ny local exchange carrier subject to the
requirements of section 251(c) . . . shall not subsidize its
telemessaging service directly or indirectly from its telephone
exchange service or its exchange access.'' Section 275(b)(2) prohibits
the subsidization of alarm monitoring services ``either directly or
indirectly from telephone exchange service operations.'' Section
276(a)(1) bars any BOC that provides payphone service from
``subsidiz[ing] its payphone service directly or indirectly from its
telephone exchange service operations or its exchange access
operations.'' We believe that application of our affiliate transactions
rules, as we propose to modify them, to transactions between an
incumbent local exchange carrier and any of its affiliates engaged in
activities that Sections 260, 275 and 276 of the 1996 Act might permit
or require the carrier to offer through a separate affiliate would be
consistent with these statutory mandates. We therefore seek comment on
whether we should apply the affiliate transactions rules, with the
proposed modifications, to transactions between an incumbent local
exchange carrier and any of its affiliates engaged in activities that
Sections 260, 275 and 276 might permit or require the carrier to offer
through a separate affiliate. It is important to note, that we
tentatively conclude in a companion item, BOC In-Region NPRM, that
telemessaging, as defined in Section 260, is an information service.
BOC provision of telemessaging on an interLATA basis would therefore be
subject to the separate affiliate and other requirements of Section
272.
119. We also ask commenters to identify any interLATA
telecommunications services, other than the interLATA
telecommunications services that Section 272 requires BOCs
[[Page 40179]]
to provide through a separate affiliate, that the BOCs may choose to
provide on a separated basis and for which we should develop
appropriate affiliate transactions rules. In the case of such services,
the 1996 Act does not explicitly impose or require specific regulatory
safeguards to prevent subsidies. All of these interLATA
telecommunications services would currently be considered regulated
services for Title II accounting purposes, and, absent a Commission
requirement to the contrary, the affiliates that offer these services
would therefore classify them as regulated for Title II accounting
purposes. Our existing affiliate transactions rules are solely designed
to govern transactions between regulated carriers and their
nonregulated affiliates. Because interLATA telecommunications services
present a potential for improper subsidization, we tentatively conclude
that we should apply our affiliate transactions rules to transactions
between each BOC and any interLATA telecommunications services
affiliate it establishes. We invite comment on this tentative
conclusion. We also invite comment on whether and how we should adapt
our affiliate transactions rules if applied to such transactions and,
in particular, whether we should adopt special valuation methodologies
for these transactions to recognize the regulated status of the
affiliates on both sides of the transactions.
IV. Other Matters
A. Price Caps
1. General
120. Our existing Part 64 cost allocation rules were developed when
all local exchange carriers were subject to cost-based, rate-of-return
regulation. Today, we rely upon price cap, rather than rate-of-return,
regulation to ensure that rates for the interstate services of the
largest incumbent local exchange carriers, including the BOCs, are
reasonable. Many States also have moved away from the traditional rate-
of-return regulation by establishing temporary rate freezes or other
price cap-like plans. Several State plans that were implemented before
the Commission adopted price caps helped to guide us in developing the
federal plan. Under the Commission's plan, price cap indices limit the
prices that incumbent local exchange carriers may charge for their
regulated interstate services. The indices are adjusted each year in
accordance with a formula that accounts for changes in inflation and
industry-wide changes in productivity.
121. The rules we adopt to prevent the subsidies prohibited by
Sections 260 and 271 through 276 of the 1996 will shaped by our price
cap regulations. A ``pure'' price cap system would permanently
eliminate sharing, claims for exogenous treatment, and the need for the
Commission to consider adjustments to productivity factors. Under pure
price cap regulation, there would be few incentives to subsidize
nonregulated services with revenues from regulated telecommunications
services and the need for accounting safeguards to ensure against
subsidies would be greatly diminished, unless, of course, there are
other ways in which the carrier's entitlement to any revenues is
dependent upon the costs the carrier classifies as regulated.
2. Exogenous Costs and Part 64
122. Under our price cap rules for incumbent local exchange
carriers, most changes in a carrier's costs of providing regulated
services are treated as ``endogenous,'' which means they do not result
in adjustments to the carrier's price cap indices. Certain cost
changes, however, triggered by administrative, legislative, or judicial
action that are beyond the control of the carriers may result in
adjustments to those indices. The Commission concluded that failing to
recognize these cost changes by adjusting price cap indices would
either unjustly punish or reward the carrier. Price cap carriers may
claim adjustments to their indices based on costs that are beyond the
carriers' control if they are not otherwise accounted for in the price
cap formula. Such costs are defined as ``exogenous.'' Accordingly, the
Commission has found that those types of cost changes should be treated
``exogenously'' to ensure that price cap regulation does not lead to
unreasonably high or unreasonably low rates.
123. Our price cap rules for incumbent local exchange carriers
specify that ``[s]ubject to further order of the Commission, those
exogenous cost changes shall include cost changes caused by * * * [t]he
reallocation of investment from regulated to nonregulated activities
pursuant to [Section 64.901 of the Commission's rules].'' Under a
strict reading of this rule, cost reallocations due to changes in the
Part 64 cost allocation process would result in exogenous treatment
only to the extent amounts are reallocated ``from regulated to
nonregulated activities.'' We seek comment on this interpretation and
whether all such reallocations to nonregulated activities that may
result from the provision of telemessaging service should trigger an
adjustment to lower price cap indices. We also seek comment on the
potential exogenous treatment of new investment in network plant, some
of which will be used for telemessaging service. As noted above, this
investment may later require reallocation under part 64 if the
proportion of regulated usage to nonregulatred usage changes over time.
3. Part 64 and Sharing
124. Under our price cap rules, incumbent local exchange carriers
can select the productivity factor they will use to determine annual
adjustments to their price cap indices. If they choose not to select
the highest productivity factor permitted under our rules, they are
required to ``share.'' Under sharing, incumbent local exchange carriers
earning in excess of prescribed earnings levels must refund a portion
of the excess earnings in subsequent rate periods by reducing their
price cap indices. Those earnings are equal to the incumbent local
exchange carrier's interstate revenues less the regulated interstate
costs. Improper cost allocation can increase the incumbent local
exchange carrier's regulated interstate costs and, therefore, can
reduce the carrier's sharing obligations. We note, however, that in
their most recent annual tariff filings all but four price cap local
exchange carriers elected the highest interim productivity factor we
had prescribed,which exempts them from sharing obligations for the
1995-96 access year. We seek comment on whether our eliminating sharing
obligations permanently for price cap carriers would eliminate the need
for Part 64 processes in our regulation of these companies. We also
seek comment on how the relationship of our cost allocation rules to
price cap local exchange carriers should influence the outcome of this
proceeding.
B. Section 254(k)
125. Section 254(k) prohibits a telecommunications carrier from
``us[ing] services that are not competitive to subsidize services that
are subject to competition.'' Section 254(k) further states that
``[t]he Commission, with respect to interstate services, and the
States, with respect to intrastate services, shall establish any
necessary cost allocation rules, accounting safeguards, and guidelines
to ensure that services included in the definition of universal service
bear no more than a reasonable share of the joint and common costs of
facilities used to provide those services.'' We seek comment on whether
our proposals related to Sections 260 and 271 through
[[Page 40180]]
276 of the 1996 Act are sufficient to implement Section 254(k)'s
requirements that carriers not ``use services that are not competitive
to subsidize services that are subject to competition'' and that the
Commission, ``with respect to interstate services,'' establish rules
necessary to ensure that regulated universal services ``bear no more
than a reasonable share of the joint and common costs of facilities
used to provide those services.''
V. Procedural Issues
A. Ex Parte Presentations
126. This is a non-restricted notice-and-comment rulemaking
proceeding. Ex parte presentations are permitted, except during the
Sunshine Agenda period, provided that they are disclosed as provided in
the Commission's rules.
B. Regulatory Flexibility Analysis
127. Section 603 of the Regulatory Flexibility Act, as amended,
requires an initial regulatory flexibility analysis in notice and
comment rulemaking proceedings, unless we certify that ``the rule will
not, if promulgated, have a significant economic impact on a
significant number of small entities.'' The Regulatory Flexibility Act
generally defines the term ``small entity'' as having the same meaning
as ``small-business concern'' under the Small Business Act, which
defines ``small-business concern'' as ``one which is independently
owned and operated and which is not dominant in its field of operation
* * *.'' This proceeding pertains to the Bell Operating Companies and
other incumbent local exchange carriers which, because they are
dominant in their field of operations, are by definition not small
entities under the Regulatory Flexibility Act. We therefore certify,
pursuant to Section 605(b) of the Regulatory Flexibility act, that the
rules will not, if promulgated, have a significant economic impact on a
substantial number of small entities. The Secretary shall send a copy
of this NPRM, including this certification and statement, to the Chief
Counsel for Advocacy of the Small Business Administration. A copy of
this certification will also be published in the Federal Register
notice.
C. Paperwork Reduction Act
128. This NPRM contains either a proposed or modified information
collection. The Commission, as part of its continuing effort to reduce
paperwork burdens, invites the general public and the Office of
Management and Budget (OMB) to comment on the information collections
contained in this NPRM, as required by the Paperwork Reduction Act of
1995, Public Law No. 104-13. Public and agency comments are due on
August 26, 1996 and reply comments are due on September 10, 1996; OMB
comments are due September 30, 1996. Comments should address: (a)
whether the proposed collection of information is necessary for the
proper performance of the functions of the Commission, including
whether the information shall have practical utility; (b) the accuracy
of the Commission's burden estimates; (c) ways to enhance the quality,
utility, and clarity of the information collected; and (d) ways to
minimize the burden of the collection of information on the
respondents, including the use of automated collection techniques or
other forms of information technology.
129. Written comments by the public on the proposed or modified
information collection are due on or before August 26, 1996 and reply
comments on or before September 10, 1996. Written comments must be
submitted by the Office of Management and Budget (OMB) on the proposed
or modified information collections on or before [insert date 60 days
after publication in the Federal Register.] In addition to filing
comments with the Secretary, a copy of any comments on the information
collection contained herein should be submitted to Dorothy Conway,
Federal Communications Commission, Room 234, 1919 M Street, N.W.,
Washington, DC 20554, or via the Internet to dconway@fcc.gov and to
Timothy Fain, OMB Desk Officer, 10236 NEOB, 725 17th Street, N.W.,
Washington, DC 20503 or via the Internet to fain__t@al.eop.gov.
D. Comment Filing Procedures
130. Pursuant to applicable procedures set forth Sections 1.415 and
1.419 of the Commission's rules, 47 CFR Secs. 1.415 and 1.419,
interested parties may file comments on or before August 26, 1996, and
reply comments on or before September 10, 1996. To file formally in
this proceeding, you must file an original and six copies of all
comments, reply comments, and supporting comments. If you want each
Commissioner to receive a personal copy of your comments, you must file
an original and eleven copies. Comments and reply comments should be
sent to Office of the Secretary, Federal Communications Commission,
1919 M Street, N.W., Room 222, Washington, D.C. 20554, with a copy to
Ernestine Creech of the Common Carrier Bureau's Accounting and Audits
Division, 2000 L Street, N.W., Suite 257, Washington, D.C. 20554.
Parties should also file one copy of any documents filed in this docket
with the Commission's copy contractor, International Transcription
Services, Inc. (``ITS''), 2100 M Street, N.W., Suite 140, Washington,
D.C. 20037. Interested parties can reach ITS by telephone at (202) 857-
3800. Comments and reply comments will be available for public
inspection during regular business hours in the FCC Reference Center,
1919 M Street, N.W., Room 239, Washington, D.C. 20554.
131. In order to facilitate review of comments and reply comments,
both by parties and by Commission staff, we require that comments and
reply comments include a short and concise summary of the substantive
arguments raised in the pleading. Comments, exclusive of appendices and
summaries of substantive arguments, shall be no longer than sixty (60)
pages and reply comments no longer than thirty (30) pages.
132. Parties are also asked to submit comments and reply comments
on diskette. Such diskette submissions would be in addition to and not
a substitute for the formal filing requirements addressed above.
Parties submitting diskettes should submit them to Ernestine Creech of
the Common Carrier Bureau's Accounting and Audits Division, 2000 L
Street, N.W., Suite 257, Washington, D.C. 20554. Such a submission
should be on a 3.5 inch diskette formatted in a IBM compatible form
using WordPerfect 5.1 for Windows software. The diskette should be
submitted in ``read only'' mode. The diskette should be clearly
labelled with the party's name, proceeding, type of pleading (comment
or reply comments) and date of submission. The diskette should be
accompanied by a cover letter.
E. Additional Information
133. For further information concerning this proceeding, contact
John V. Giusti or Mark B. Ehrlich, Accounting and Audits Division,
Common Carrier Bureau at (202) 418-0850.
VI. Ordering Clauses
134. Accordingly, it is ordered that, pursuant to Sections 260 and
271-276 of the 1996 Act and Sections 1, 2, 4, 201-205, 215, 218, 220 of
the Communications Act of 1934, as amended, 47 U.S.C. Secs. 151(a),
152(b), 154, 201-205, 215, 218, 220, 260 and 271-276, that Notice is
hereby given of proposed amendments to Parts 32 and
[[Page 40181]]
64 of the Commission's rules, 47 CFR Part 32 and 64, as described in
this Notice of proposed rulemaking.
135. It is further ordered that, the Secretary shall send a copy of
this Notice of proposed rulemaking, including the regulatory
flexibility certification, to the Chief Counsel for Advocacy of the
Small Business Administration, in accordance with Section 603(a) of the
Regulatory Flexibility Act, 5 U.S.C. Secs. 601 et seq. (1981).
List of Subjects
47 CFR Part 32
Transactions with affiliates, Regulated accounts.
47 CFR Part 64
Allocation of costs, transactions with affiliates, cost allocation
manuals, Independent audits.
Federal Communications Commission
William F. Caton,
Acting Secretary.
[FR Doc. 96-19563 Filed 7-31-96; 8:45 am]
BILLING CODE 6712-01-M
