[Federal Register Volume 62, Number 13 (Tuesday, January 21, 1997)]
[Rules and Regulations]
[Pages 2927-2969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1390]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 53
[CC Docket No. 96-149; FCC 96-489]
Implementation of the Non-Accounting Safeguards of Sections 271
and 272 of the Communications Act of 1934, as Amended
AGENCY: Federal Communications Commission.
ACTION: Final rule.
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SUMMARY: The First Report and Order (Order) released December 24, 1996
clarifies certain provisions of sections 271 and 272 of the
Communications Act of 1934, as amended, and promulgates regulations to
implement other provisions. The intended effect of this Order is to
further the Commission's goal of fostering competition in the
telecommunications market.
EFFECTIVE DATE: February 20, 1997. The collections of information
contained within sections 53.203(b) and (e) of these Rules are
contingent upon approval by the Office of Management and Budget. The
Commission will publish a document at a later date establishing the
effective date.
FOR FURTHER INFORMATION CONTACT: Radhika Karmarkar, Attorney, Common
Carrier Bureau, Policy and Program Planning Division, (202) 418-1580.
For additional information concerning the information collections
contained in this Report and Order contact Dorothy Conway at 202-418-
0217, or via the Internet at [email protected].
SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Order
adopted December 23, 1996, and released December 24, 1996. This Order
contains new 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. This is a synopsis, the full text of this Order is
available for inspection and copying during normal business hours in
the FCC Reference Center (Room 239), 1919 M St., NW., Washington, DC.
The complete text also may be obtained through the World Wide Web, at
http://www.fcc.gov/Bureaus/Common Carrier/Orders/fcc96489.wp, or may be
purchased from the Commission's copy contractor, International
Transcription Service, Inc., (202) 857-3800, 2100 M St., NW., Suite
140, Washington, DC 20037.
Regulatory Flexibility Analysis
We determined that section 605(b) of the Regulatory Flexibility Act
of 1980, 5 U.S.C. 605(b), does not apply to the rules adopted in this
Order because they do not have a significant economic impact on a
substantial number of small entities, as defined by section 301(3) of
the Regulatory Flexibility Act.
Paperwork Reduction Act
Some of the rules adopted in this Order impose information
collection requirements that are explained in a companion order,
entitled Implementation of the Telecommunications Act of 1996:
Accounting Safeguards Under the Telecommunications Act of 1996, CC
Docket No. 96-150, FCC 96-490. The paperwork reduction estimates
associated with these rules are contained in this section. 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 Order, as required by the Paperwork Reduction Act of 1995, Public
Law No. 104-12. Written comments by the public on the information
collections are due 30 days after date of publication in the Federal
Register. OMB notification of action is due (60 days from date of
publication in the Federal Register.) Comments should address: (a)
whether the new or modified 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: 3060-0734.
Title: Implementation of the Telecommunications Act of 1996:
Accounting Safeguards Under the Telecommunications Act of 1996.
Form No.: N/A.
Type of review: Revision.
Respondents: Businesses or other for profit.
[[Page 2928]]
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No. of
Section/title respondents Est. time per response Total annual burden
----------------------------------------------------------------------------------------------------------------
Affiliate Company, Books, Records 20 6,056.25 hrs..................... 121,125 hrs.
and Accounts, Section 272.
Arms' Length Requirement........... 7 72 hrs........................... 504 hrs.
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Total Annual Burden: 121,629 total hours in this Report and Order
(Total Annual Burden hours for OMB control number 3060-0734--
180,536.75).
Estimated Costs Per Respondents: $0.
Needs and Uses: The attached item adopts safeguards to govern the
Bell Operating Companies' (BOCs) entry into certain new markets. It
promulgates rules and policies implementing and, where necessary,
clarifying the non-accounting separate affiliate and nondiscrimination
safeguards prescribed by Congress in sections 271 and 272 of the
Communications Act of 1934, as amended. These safeguards are intended
both to protect subscribers to BOC monopoly services, such as local
telephony, against the potential risk of having to pay costs incurred
by the BOCs to enter competitive markets, such as interLATA services
and equipment manufacturing, and to protect competition in those
markets from the BOCs' ability to use their existing market power in
local exchange services to obtain an anticompetitive advantage in those
new markets the BOCs seek to enter.
Synopsis of First Report and Order
I. Introduction
In February 1996, the Telecommunications Act of 1996 became law.
Telecommunications Act of 1996, Public Law No. 104-104, 110 Stat. 56
(1996 Act), to be codified at 47 U.S.C. Secs. 151 et seq. The intent of
the 1996 Act 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.''
In this proceeding, we adopt non-accounting safeguards, pursuant to
section 272 of the Communications Act, to govern entry by the Bell
Operating Companies (BOCs) into certain new markets. This proceeding is
one of a series of interrelated rulemakings that collectively will
implement the telephony provisions of the 1996 Act. Other proceedings
under the 1996 Act have focused on opening markets to entry by new
competitors, establishing rules to preserve and advance universal
service, establishing rules for competition in those markets that are
opened to competitive entry, and on lifting legal and regulatory
barriers to competition.
Upon enactment, the 1996 Act permitted the BOCs immediately to
provide interLATA services that originate outside of their in-region
states. The 1996 Act conditions the BOCs' entry into in-region
interLATA services on their compliance with certain provisions of
section 271. Under section 271, we must determine, among other things,
whether the BOC has complied with the safeguards imposed by section 272
and the rules adopted herein. Section 272 addresses the BOCs' provision
of interLATA telecommunications services originating in states in which
they provide local exchange and exchange access services, interLATA
information services, and BOC manufacturing activities.
On July 18, 1996, we initiated this proceeding by releasing a
Notice of Proposed Rulemaking (NPRM) 61 FR 39397 (July 29, 1996) that
sought comment on the non-accounting separate affiliate and
nondiscrimination safeguards of the 1996 Act. These provisions govern
the BOCs' entry into certain new markets. We initiated a separate
proceeding to address the accounting safeguards required to implement
sections 260 and 272 through 276 of the Communications Act. Comments on
the non-accounting separate affiliate and nondiscrimination safeguards
were filed on August 15, 1996, and reply comments were filed on August
30, 1996.
The NPRM also sought comment on whether we should relax the
dominant carrier classification that under our current rules would
apply to in-region, interstate, domestic, interLATA services provided
by the BOCs' interLATA affiliates. Further, the NPRM sought comment on
whether we should modify our existing rules for regulating the
provision of in-region, interstate, interexchange services by
independent local exchange carriers (LECs) (namely, carriers not
affiliated with a BOC). Finally, the NPRM considered whether to apply
the same regulatory treatment to the BOC affiliates' and independent
LECs' provision of in-region, international services, as would apply to
the provision of in-region, interstate, domestic, interLATA services
and in-region, interstate, domestic interexchange services,
respectively. This order addresses only the non-accounting separate
affiliate and nondiscrimination safeguards in sections 271 and 272. The
classification of BOC affiliates or independent LECs (and their
affiliates) as dominant or non-dominant will be addressed in a separate
Report and Order in this docket.
In this order, we promulgate rules and policies implementing, and,
where necessary, clarifying the non-accounting separate affiliate and
nondiscrimination safeguards prescribed by Congress in sections 271 and
272. These safeguards are intended both to protect subscribers to BOC
monopoly services, such as local telephony, against the potential risk
of having to pay costs incurred by the BOCs to enter competitive
markets, such as interLATA services and equipment manufacturing, and to
protect competition in those markets from the BOCs' ability to use
their existing market power in local exchange services to obtain an
anticompetitive advantage in those new markets the BOCs seek to enter.
Our action today continues the process of enhancing competition in all
telecommunications markets as envisioned by the 1996 Act.
A. Background
The fundamental objective of the 1996 Act is to bring to consumers
of telecommunications services in all markets the full benefits of
vigorous competition. As we recognized in the First Interconnection
Order, 61 FR 45476 (August 29, 1996), ``[t]he opening of all
telecommunications markets to all providers will blur traditional
industry distinctions and bring new packages of services, lower prices,
and increased innovation to American consumers.'' With the removal of
legal, economic, and regulatory impediments to entry, providers of
various telecommunications services will be able to enter each other's
markets and provide various services in competition with one another.
Both the BOCs and other firms, most notably existing interexchange
carriers, will be able to offer a widely recognized brand name that is
associated with telecommunications services. As firms expand the scope
of their existing operations to new product lines, they will
increasingly offer consumers the ability to purchase local, intraLATA,
[[Page 2929]]
and interLATA telecommunications services, as well as wireless,
information, and other services, from a single provider (i.e., ``one
stop shopping''), and other advantages of vertical integration.
The 1996 Act opens local markets to competing providers by imposing
new interconnection and unbundling obligations on existing providers of
local exchange service, including the BOCs. The 1996 Act also allows
the BOCs to provide interLATA services in the states where they
currently provide local exchange and exchange access services once they
satisfy the requirements of section 271. Moreover, by requiring
compliance with the competitive checklist set out in section
271(c)(2)(B) as a prerequisite to BOC provision of in-region interLATA
service, the statute links the effective opening of competition in the
local market with the timing of BOC entry into the long distance
market, so as to ensure that neither the BOCs nor the existing
interexchange carriers could enjoy an advantage from being the first to
enter the other's market.
In enacting section 272, Congress recognized that the local
exchange market will not be fully competitive immediately upon its
opening. Congress, therefore, imposed in section 272 a series of
separate affiliate requirements applicable to the BOC's provision of
certain new services and their engagement in certain new activities.
These requirements are designed, in the absence of full competition in
the local exchange marketplace, to prohibit anticompetitive
discrimination and cost-shifting, while still giving consumers the
benefit of competition.
As we observed in the NPRM, BOC entry into in-region interLATA
services raises issues for competition and consumers, even after a BOC
has satisfied the requirements of section 271(d)(3). BOCs currently are
the dominant providers of local exchange and exchange access services
in their in-region states, accounting for approximately 99.1 percent of
the local service revenues in those markets. If a BOC is regulated
under rate-of-return regulation, a price caps structure with sharing
(either for interstate or intrastate services), a price caps scheme
that adjusts the X-factor periodically based on changes in industry
productivity, or if any revenues it is allowed to recover are based on
costs recorded in regulated books of account, it may have an incentive
to allocate improperly to its regulated core business costs that would
be properly attributable to its competitive ventures.
In addition, a BOC may have an incentive to discriminate in
providing exchange access services and facilities that its affiliate's
rivals need to compete in the interLATA telecommunications services and
information services markets. For example, a BOC may have an incentive
to degrade services and facilities furnished to its affiliate's rivals,
in order to deprive those rivals of efficiencies that its affiliate
enjoys. Moreover, to the extent carriers offer both local and interLATA
services as a bundled offering, a BOC that discriminates against the
rivals of its affiliates could entrench its position in local markets
by making these rivals' offerings less attractive. With respect to BOC
manufacturing activities, a BOC may have an incentive to purchase only
equipment manufactured by its section 272 affiliate, even if such
equipment is more expensive or of lower quality than that available
from other manufacturers.
Moreover, if a BOC charges other firms prices for inputs that are
higher than the prices charged, or effectively charged, to the BOC's
section 272 affiliate, then the BOC could create a ``price squeeze.''
In that circumstance, the BOC affiliate could lower its retail price to
reflect its unfair cost advantage, and competing providers would be
forced either to match the price reduction and absorb profit margin
reductions or maintain their retail prices at existing levels and
accept market share reductions. This artificial advantage may allow the
BOC affiliate to win customers even though a competing carrier may be a
more efficient provider in serving the customer. Unlawful
discriminatory preferences in the quality of the service or
preferential dissemination of information provided by BOCs to their
section 272 affiliates, as a practical matter, can have the same effect
as charging unlawfully discriminatory prices. If a BOC charged the same
rate to its affiliate for a higher quality access service than the BOC
charged to unaffiliated entities for a lower quality service, or
disclosed information concerning future changes in network architecture
to its manufacturing affiliate before disclosing it to others, the BOC
could effectively create the same ``price squeeze'' discussed above.
The structural and nondiscrimination safeguards contained in
section 272 ensure that competitors of the BOC's section 272 affiliate
have access to essential inputs, namely, the provision of local
exchange and exchange access services, on terms that do not
discriminate against the competitors and in favor of the BOC's
affiliate. Because the BOC has the incentive to provide its affiliate
with the most efficient access, the statute requires the BOC to provide
competitors the same access. Access to such inputs on nondiscriminatory
terms will enable a new entrant to compete effectively, assuming it is
at least as efficient as the BOC and/or its section 272 affiliate. At
the same time, Congress also was sensitive to the value to the BOCs of
potential efficiencies stemming from economies of scale. Our task is to
implement section 272 in a manner that ensures that the fundamental
goal of the 1996 Act is attained--to open all telecommunications
markets to robust competition--but at the same time does not impose
requirements on the BOCs that will unfairly handicap them in their
ability to compete. The rules and policies adopted in this order seek
to preserve the carefully crafted statutory balance to the extent
possible until facilities-based alternatives to the local exchange and
exchange access services of the BOCs make those safeguards no longer
necessary.
B. Overview and Summary
Section 272 allows a BOC to engage in the manufacturing of
telecommunications equipment and CPE, the origination of certain
interLATA telecommunications services, and the provision of interLATA
information services, as long as the BOC provides these activities
through a separate affiliate. Unless extended by the Commission, the
statutory separate affiliate requirements for manufacturing and
interLATA telecommunications services expire three years after a BOC or
any BOC affiliate is authorized to provide in-region interLATA
services. The statutory interLATA information services separate
affiliate requirement expires on February 8, 2000, four years after
enactment of the 1996 Act, unless extended by the Commission.
This order implements the structural separation requirements
mandated by section 272 in a manner that is designed to prevent
improper cost allocation between the BOC and its section 272 affiliate
and discrimination by the BOC in favor of its section 272 affiliate. In
particular, we construe the section 272(b)(1) ``operate independently''
requirement to prohibit the BOC and its section 272 affiliate from
jointly owning transmission and switching facilities or the land and
buildings on which such facilities are located. Moreover, we prohibit a
BOC and its affiliates, other than the section 272 affiliate itself,
from providing operating, installation, and maintenance services
associated with the facilities owned by the section 272
[[Page 2930]]
affiliate. Similarly, a section 272 affiliate may not provide such
services associated with the BOC's facilities. These requirements
should reduce the potential for the improper allocation of costs to the
BOC that should be allocated to the section 272 affiliate. In addition,
they should ensure that a section 272 affiliate must follow the same
procedures as its competitors in order to gain access to a BOC's
facilities. Consistent with these requirements and those established
pursuant to sections 272(b)(5) and 272(c)(1), however, a section 272
affiliate may negotiate with an affiliated BOC on an arm's length basis
to obtain transmission and switching facilities, to arrange for
collocation of facilities, and to provide or obtain services other than
those expressly prohibited herein.
The structural separation requirements of section 272, in
conjunction with the affirmative nondiscrimination obligations imposed
by that section, also are intended to address concerns that the BOCs
could potentially use local exchange and exchange access facilities to
discriminate against competitors in order to gain an anticompetitive
advantage for their affiliates that engage in competitive activities.
We interpret section 272(c)(1) as imposing a flat prohibition against
discrimination more stringent than the bar on ``unjust and
unreasonable'' discrimination contained in section 202 of the Act. In
short, the BOCs must treat all other entities in the same manner in
which they treat their section 272 affiliates. We conclude that a BOC
may not discriminate in favor of its section 272 affiliate by: (1)
Providing exchange access services to competing interLATA service
providers at a higher rate than the rate offered to its section 272
affiliate; (2) providing a lower quality service to competing interLATA
service providers than the service it provides to its section 272
affiliate at a given price; (3) giving preference to its affiliate's
equipment in the procurement process; or (4) failing to provide advance
information about network changes to its competitors. We seek comment
in a Further Notice of Proposed Rulemaking on specific disclosure
requirements to implement section 272(e)(1).
In this order, we also seek to ensure that BOC section 272
affiliates have the same opportunity to compete for customers as other
long distance service providers. The joint marketing rules we have
established limit the ability of the largest interexchange carriers to
market jointly their interLATA service with resold BOC local exchange
service, until the BOC receives in-region, interLATA authority under
section 271 or until 36 months after enactment of the 1996 Act. Once
the BOC receives interLATA authority, the restrictions on interexchange
carrier joint marketing expire, and the interexchange carriers and the
BOCs and their section 272 affiliates may engage in the same types of
marketing activities.
In addition, we clarify that the Communications Act allows a
section 272 affiliate to purchase unbundled elements pursuant to
section 251(c)(3) and telecommunications services at wholesale rates
under section 251(c)(4). Thus, the section 272 affiliate may provide
integrated services in the same manner as other competitors. Such an
approach is consistent with the objectives of the 1996 Act, which are
to give service providers the freedom to develop a wide array of
service packages and allow consumers to select what best suits their
needs. We note, however, that the BOC may not transfer local exchange
and exchange access facilities and capabilities to the section 272
affiliate, or another affiliate, in order to evade regulatory
requirements.
We recognize that no regulatory scheme can completely prevent or
deter discrimination, particularly in its more subtle forms. In this
order, we shift the burden of production to the BOCs in the context of
section 271(d)(6) enforcement proceedings in order to alleviate the
burden on the complainant and facilitate the detection of
anticompetitive behavior. Because the BOC is likely to be in sole
possession of most of the relevant information necessary to establish
the complainant's case, shifting the burden is the most efficient way
of resolving complaints alleging violations of the conditions of in-
region interLATA entry under section 271(d)(3). The goal of this
proceeding and others is to establish a regulatory framework that
enables service providers to enter each other's markets and compete on
an equal footing by not allowing one service provider to game
regulatory requirements in such a way as to hinder competition.
II. Scope of Commission Authority
A. Rulemaking Authority
1. Background
In the NPRM, we addressed the scope of the Commission's authority,
pursuant to sections 271 and 272, over interLATA services, interLATA
information services and manufacturing activities. Although we did not
seek comment on whether the Commission has authority to adopt rules
implementing section 272, several commenters addressed this issue.
2. Discussion
We reject as unfounded the assertion that the Commission lacks
authority to adopt regulations implementing section 272. Sections 4(i),
201(b), and 303(r) of the Act authorize the Commission to adopt any
rules it deems necessary or appropriate in order to carry out its
responsibilities under the Act, so long as those rules are not
otherwise inconsistent with the Act. Nothing in section 272 bars the
Commission from exercising the rulemaking authority granted by these
sections of the Act to clarify and implement the requirements of
section 272. Moreover, courts repeatedly have held that the
Commission's general rulemaking authority is ``expansive'' rather than
limited. In addition, as AT&T notes, it is well-established that an
agency has the authority to adopt rules to administer congressionally
mandated requirements. Contrary to those parties that argue that
section 272 is self-executing, we find that Congress enacted in section
272 broad principles that require interpretation and implementation in
order to ensure an efficient, orderly, and uniform regime governing BOC
entry into in-region interLATA telecommunications and other markets
covered by section 272. In the NPRM, we identified areas of ambiguity
in the requirements of section 272 with the specific goal of clarifying
and implementing Congress' intent in that provision. That remains our
goal in this Order. Due to the importance of the introduction of
competition to the local exchange market, we believe this Order to be
both important and necessary to protect BOC customers and new entrants.
Further, we agree with PacTel that it serves the interests of justice
for us to clarify in advance the section 272 requirements so that BOCs
and other parties may be advised of what is required to meet the
condition for 271 authorization that in-region interLATA services be
provided in compliance with section 272.
We are not persuaded by the argument that the removal of the Senate
bill's provision regarding implementing regulations from the 1996 Act
indicates Congress' intent that section 272 be self-executing. Parties
advancing this argument rely on a rule of statutory construction
providing that, when a provision in a prior draft is altered in the
final legislation, Congress intended a change from the prior version.
The courts have rejected this rule of statutory construction, however,
when changes from one draft to another are not explained. In this
instance, the only statement from Congress regarding the
[[Page 2931]]
meaning of the omission of the Senate provision appears in the Joint
Explanatory Statement. According to that Statement, all differences
between the Senate Bill, the House Amendment, and the substitute
reached in conference are noted therein ``except for clerical
corrections, conforming changes made necessary by agreements reached by
the conferees, and minor drafting and clerical changes.'' Because the
Joint Explanatory Statement did not address the removal of the Senate
bill provision, the logical inference is that Congress regarded the
change as an inconsequential modification, rather than a significant
alteration. Moreover, it seems implausible that, in enacting the final
version of section 272, Congress intended a radical alteration of the
Commission's general rulemaking authority. We therefore conclude that
elimination of the proposed provision was a nonsubstantive change.
Based on the foregoing, we find, pursuant to the general rulemaking
authority vested in the Commission by sections 4(i), 201(b), and 303(r)
of the Act, and consistent with fundamental principles of
administrative law, that the Commission has the requisite authority to
promulgate rules implementing section 272 of the Act.
B. Scope of Commission's Authority Regarding InterLATA Services
1. Background
In the NPRM, we tentatively concluded that the Commission's
authority under sections 271 and 272 applies to intrastate and
interstate interLATA services provided by BOCs or their affiliates. We
based this tentative conclusion in part on our analysis that Congress
intended sections 271 and 272 to replace the pre-Act restrictions on
the BOCs contained in the MFJ, which barred their provision of both
intrastate and interstate interLATA services. We also observed that the
interLATA/intraLATA distinction appears to some extent to have
supplanted the traditional interstate/intrastate distinction for
purposes of sections 271 and 272. We further noted that reading
sections 271 and 272 as applying to all interLATA services fits well
with the structure of the statute as a whole, and that reading the
sections as limited to interstate services would lead to implausible
results. We also indicated that we do not believe that section 2(b) of
the Act precludes the conclusion that our authority under sections 271
and 272 applies to intrastate as well as interstate interLATA services.
Finally, we asked parties that disagreed with the foregoing analysis to
comment on the extent to which the Commission may have authority to
preempt state regulation with respect to some or all of the non-
accounting matters addressed by sections 271 and 272.
2. Discussion
For the reasons set forth below, we conclude that sections 271 and
272, and the Commission's authority thereunder, apply to intrastate as
well as interstate interLATA services provided by the BOCs or their
affiliates. We base this conclusion on the scope of the pre-1996 Act
MFJ restrictions on the BOCs' provision of interLATA services, as well
as on the plain language of sections 271 and 272, and the requirements
of those sections. In addition, we find that section 2(b) does not bar
the Commission from establishing regulations to clarify and implement
the requirements of section 272 that apply to intrastate interLATA
services and other intrastate matters that are within the scope of
section 272. We hold, therefore, that the rules we establish to
implement section 272 are binding on the states, and the states may not
impose regulations with respect to BOC provision of intrastate
interLATA service that are inconsistent with section 272 and the
Commission's rules under section 272. We emphasize, however, that the
scope of the Commission's authority under sections 271 and 272 extends
only to matters covered by those sections. Those sections do not alter
the jurisdictional division of authority with respect to matters
falling outside their scope. For example, rates charged to end users
for intrastate interLATA service have traditionally been subject to
state authority, and will continue to be.
We stated in the NPRM, and several parties agree, that section
601(a) of the 1996 Act indicates that Congress intended the provisions
of the Act to supplant the MFJ. That section 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].
No party challenges the fact that the MFJ generally prohibited the
BOCs and their affiliates from providing any interLATA services--
interstate or intrastate. Moreover, no party challenges the fact that
the term ``interLATA services'' as used in the MFJ referred to both
intrastate and interstate services.
Similarly, with respect to the term ``interLATA services'' as used
in sections 271 and 272, the DOJ, AT&T, and BellSouth maintain that,
because the Act defines the term ``interLATA'' to include intrastate
services, references in sections 271 and 272 to interLATA services
apply to both intrastate and interstate services. We agree.
The Act defines ``interLATA service'' as ``telecommunications
between a point in a local access and transport area and a point
located outside such area.'' The Act further defines the term ``LATA''
as ``a contiguous geographic area * * * established before the date of
enactment of the [1996 Act] by a Bell operating company such that no
exchange area includes points within more than 1 metropolitan
statistical area, consolidated metropolitan statistical area, or State,
except as expressly permitted under the [MFJ]'' or subsequently
modified with approval of the Commission. This definition expressly
recognizes that a LATA may comprise an area, such as a metropolitan
statistical area, that is smaller than a state. Indeed, the DOJ notes
that most LATAs established by the MFJ consist of only parts of
individual states; only nine LATAs out of a total of 158 encompass an
entire state. Thus, by defining an interLATA service as
telecommunications from a point inside a LATA to a point outside a
LATA, the Act expressly recognizes that interLATA services may include
telecommunications between two LATAs within a single state.
Accordingly, we find that the term ``interLATA services,'' as used in
sections 271 and 272, expressly refers to both intrastate and
interstate services.
Although the term ``interLATA services'' as used in the MFJ and in
sections 271 and 272 refers to both interstate and intrastate interLATA
services, the New York Commission and others assert that, when Congress
transferred responsibility for enforcing the prohibition on the BOCs'
provision of interLATA services from the U.S. District Court to the
Commission, it intended to limit our authority only to interstate
interLATA services. To the contrary, we find that reading sections 271
and 272 as granting the Commission authority over intrastate as well as
interstate interLATA services is consistent with, and indeed necessary
to effectuate, Congress' intent that sections 271 and 272 replace the
restrictions of the MFJ with respect to BOC provision of interLATA
services.
The jurisdictional limitation that the New York Commission and
others seek
[[Page 2932]]
to read into sections 271 and 272 would lead to implausible results.
Specifically, under that statutory interpretation, the BOCs would have
been permitted to provide in-region, intrastate, interLATA services
upon enactment, without complying with the section 271 entry
requirements or the section 272 safeguards, and subject only to any
existing, generally applicable state rules on interexchange entry. Any
such rules, presumably, would not have been specifically directed at
BOC entry, because of the long-standing MFJ prohibition on entry.
Because concerns about BOC control of bottleneck facilities needed for
the provision of in-region interLATA services are applicable to both
interstate and intrastate services, it seems clear that sections 271
and 272 apply equally to the BOCs' provision of both intrastate and
interstate, in-region, interLATA services. We find no reasonable basis
for concluding that Congress intended to lift the MFJ's ban on BOC
provision of intrastate interLATA services, which constitute
approximately 30 percent of interLATA traffic, and permit the BOCs to
offer such services before satisfying the requirements of sections 271
and 272. As the DOJ notes, ``Congress could not have intended, for
example, to open up the intrastate interLATA market immediately for BOC
entry, without the carefully-devised entry requirements of Section 271,
while at the same time establishing those requirements with respect to
interstate interLATA entry. Nor could Congress have meant to defeat the
safeguards carefully imposed under Section 272 by permitting the BOCs
to engage in the behavior which Section 272 prohibits, as long as they
do it within the individual states.'' Indeed, we find it significant
that neither the states nor the BOCs have argued that such a result was
intended. In light of this analysis, we find that the Commission's
authority under sections 271 and 272 extends to both intrastate and
interstate interLATA services.
Similarly, several parties support the conclusion that our
authority to consider the applications of BOCs seeking to provide in-
region interLATA service pursuant to section 271(d) applies to both
interstate and intrastate services. None of the state representatives
and BOCs commenting on this issue claims that the Commission's
authority under section 271(d) does not apply to a BOC's provision of
intrastate interLATA services. Despite the lack of controversy on this
point, several commenters claim that rules adopted under section 272
apply only to interstate services. We believe that the requirements of
sections 271 and 272 repudiate this argument. In granting an
application under section 271(d), the Commission must determine, among
other things, that the BOC meets the requirements of section
271(d)(3)(B). Under this provision, the Commission must find that the
requested authorization ``will be carried out in accordance with the
requirements of section 272.'' In light of the Commission's authority
to approve entry into both intrastate and interstate in-region
interLATA service, pursuant to section 271, it seems logical and
necessary that the Commission's authority to impose safeguards
established by section 272, should similarly extend to both intrastate
and interstate interLATA service.
Several parties have argued that, although the MFJ restrictions on
the BOCs applied to both interstate and intrastate interLATA services,
the states retained authority to regulate a BOC's intrastate interLATA
services when such services were authorized by the MFJ court. They
assert, therefore, that, even if sections 271 and 272 apply to
intrastate services, those provisions would not divest the states of
authority over intrastate services. As we stated at the outset of this
discussion, the scope of the Commission's authority under sections 271
and 272 extends only to matters covered by those sections, i.e.,
authorization for BOC entry into in-region interLATA service and the
safeguards imposed in section 272. We do not dispute that the states
retain their authority to regulate intrastate services in other
contexts.
We further find that the requirements of sections 271 and 272
buttress our conclusions regarding the scope of the Commission's
jurisdiction. For example, we find it significant that section 271(h)
directs the Commission to address intrastate matters relating to BOC
provision of incidental interLATA services. That section states that
``[t]he Commission shall ensure that the provision of [incidental
interLATA services] by a Bell operating company or its affiliate will
not adversely affect telephone exchange service ratepayers or
competition in any telecommunications market.'' Telephone exchange
service is primarily an intrastate service. This reference to a plainly
intrastate service indicates that the scope of section 271 encompasses
intrastate matters, and thus the Commission's authority thereunder
applies to both intrastate and interstate interLATA services.
State representatives and some BOCs argue that sections 2(b) and
601(c) of the Act preserve the states' authority to adopt rules
regarding BOC provision of intrastate interLATA services. They argue
that section 2(b) bars the Commission from exercising authority under
sections 271 and 272 to establish rules applicable to intrastate
interLATA services. For the reasons set forth below, we find that
section 2(b) does not preclude us from finding that sections 271 and
272, and our authority to promulgate rules thereunder, apply to BOC
provision of intrastate interLATA services.
In Louisiana Public Service Commission v. Federal Communications
Commission, 476 U.S. 355, 377 (1986), the Supreme Court determined
that, in order to overcome section 2(b)'s limits on the Commission's
jurisdiction with respect to intrastate communications service,
Congress must either modify section 2(b) or grant the Commission
additional authority. As explained above, we find that the term
``interLATA services,'' by the Act's own definition, includes
intrastate services, and that Congress, in sections 271 and 272,
expressly granted the Commission authority over intrastate interLATA
services for purposes of those sections. Accordingly, consistent with
the Court's statement in Louisiana, we find that section 2(b) does not
limit our authority over intrastate interLATA services under sections
271 and 272.
In addition, we find that, in enacting sections 271 and 272 after
section 2(b), and squarely addressing therein the issues before us,
Congress intended for sections 271 and 272 to take precedence over any
contrary implications based on section 2(b). In construing these
provisions, we are mindful that ``it is a commonplace of statutory
construction that the specific governs the general.'' Moreover, where
amended and original sections of a statute cannot be harmonized, the
new provisions should be construed to prevail as the latest declaration
of legislative will. We find also that, in enacting the 1996 Act, there
are other instances where Congress indisputably gave the Commission
intrastate jurisdiction without amending section 2(b). For instance,
section 251(e)(1) provides that ``[t]he Commission shall have exclusive
jurisdiction over those portions of the North American Numbering Plan
that pertain to the United States.'' Section 253 directs the Commission
to preempt state regulations that prohibit the ability to provide
intrastate services. Section 276(b) directs the Commission to
``establish a per call compensation plan to ensure that payphone
service providers are fairly compensated for each and every completed
intrastate and interstate call.'' Section 276(c) provides
[[Page 2933]]
that, ``[t]o the extent that any State [payphone] requirements are
inconsistent with the Commission's regulations, the Commission's
regulations on such matters shall preempt such State requirements.''
None of these provisions is specifically excepted from section 2(b),
yet all of them explicitly give the Commission jurisdiction over
intrastate matters. Thus, we find that the lack of an explicit
exception in section 2(b) does not require us to conclude that the
Commission's jurisdiction under sections 271 and 272 is limited to
interstate services. A contrary holding would nullify several explicit
grants of authority to the Commission, noted above, and would render
substantial parts of the statute meaningless. Thus, in this instance,
we believe that the lack of an explicit exception in section 2(b) is
not dispositive of the scope of the Commission's jurisdiction.
Moreover, as stated above, with the exception of the New York
Commission, the parties challenging the Commission's authority to
preempt state regulation under sections 272 do not address the issue of
whether ``interLATA services'' are defined by the Act to include
intrastate services. The New York Commission agrees with us that it
does. These parties (including the New York Commission) also do not
challenge the proposition that Congress vested in the Commission
authority over BOC entry into all in-region interLATA services--
intrastate and interstate. We find it difficult to reconcile these
parties' silence on these issues, as well as the New York Commission's
agreement that ``interLATA services'' includes intrastate services,
with their position that section 2(b) limits the application of the
Commission's implementing rules under section 272 to interstate
interLATA services. If, as it remains undisputed in the record, the
Commission would necessarily determine, in assessing whether to allow
BOC entry into in-region interLATA services, whether a BOC's provision
of intrastate as well as interstate interLATA services complies with
section 272, we can find no basis to maintain that the Commission's
authority under sections 271 and 272 does not include authority to
apply its interpretation of section 272 to all of the interLATA
services--intrastate and interstate--at issue in the BOC's 271 in-
region interLATA services application.
NARUC and the Missouri Commission stress that earlier drafts of the
legislation would have amended section 2(b) to make an exception for
certain sections of Title II, including sections 271 and 272, but the
enacted version did not include that exception. They argue that this
change demonstrates that Congress intended that section 2(b)'s
limitations remain fully in force with regard to sections 271 and 272.
We find this argument unpersuasive.
As noted above, parties that attach significance to the omission of
the proposed amendment of section 2(b) rely on a rule of statutory
construction providing that, when a provision in a prior draft is
altered in the final legislation, Congress intended a change from the
prior version. This rule of statutory construction has been rejected,
however, when changes from one draft to another are not explained. In
this instance, the only statement from Congress regarding the meaning
of the omission of the section 2(b) amendment appears in the Joint
Explanatory Statement. According to the Joint Explanatory Statement,
all differences between the Senate Bill, the House Amendment, and the
substitute reached in conference are noted therein ``except for
clerical corrections, conforming changes made necessary by agreements
reached by the conferees, and minor drafting and clerical changes.''
Because the Joint Explanatory Statement did not address the removal of
the section 2(b) amendment from the final bill, the logical inference
is that Congress regarded the change as an inconsequential modification
rather than a significant alteration. It seems implausible that, by
enacting the final version, Congress intended a radical alteration of
the Commission's authority under sections 271 and 272, given the total
lack of legislative history to that effect. Based on the foregoing, we
conclude that elimination of the proposed amendment of section 2(b) was
a nonsubstantive change.
Moreover, even if it were appropriate to speculate as to the
meaning of the omission of the section 2(b) exception, we disagree with
the argument that the omission necessarily indicates that Congress
intended not to provide the Commission authority over intrastate
services in sections 271 and 272. We find it is equally possible that
Congress omitted the exception based on an understanding that the use
of the term interLATA in sections 271 and 272 established a clear grant
of authority over intrastate services and therefore that such an
exception was unnecessary.
We similarly are not persuaded that section 601(c) of the 1996 Act
evinces an intent by Congress to preserve states' authority over
intrastate matters. Section 601(c) of the 1996 Act provides that the
Act and its amendments ``shall not be construed to modify, impair, or
supersede Federal, State, or local law unless expressly so provided in
such Act or amendments.'' As explained above, we conclude that sections
271 and 272, which apply to interLATA services, were expressly intended
to modify federal and state law and jurisdictional authority.
For all of the reasons discussed above, we conclude that sections
271 and 272, and the Commission's authority thereunder, apply to
intrastate and interstate interLATA services provided by the BOCs or
their affiliates. We hold, therefore, that the rules we establish to
implement section 272 are binding on the states, and the states may not
impose, with respect to BOC provision of intrastate interLATA service,
requirements inconsistent with sections 271 and 272 and the
Commission's rules under those provisions. In this regard, based on
what we find is clear congressional intent that the Commission is
authorized to make determinations regarding BOC entry into interLATA
services, we reject the suggestion by the Wisconsin Commission that,
after the Commission has granted a BOC application for authority under
section 271, a state nonetheless may condition or delay BOC entry into
intrastate interLATA services.
C. Scope of Commission's Authority Regarding Manufacturing Services
In the NPRM, we tentatively concluded that the Commission's
authority under section 272 extends to all BOC manufacturing of
telecommunications equipment and CPE. Only two parties, Sprint and TIA,
commented on this issue, and both agreed with our tentative conclusion.
We adopt our tentative conclusion that our authority under section
272 extends to all BOC manufacturing of telecommunications equipment
and CPE. As we stated in the NPRM, to the extent that sections 271 and
272 address BOC manufacturing activities, we believe that the same
statutory analysis set forth above with respect to interLATA services
would apply. We see no basis for distinguishing among the various
subsections of sections 271 and 272. Even apart from that analysis,
however, we believe that the provisions concerning manufacturing
clearly apply to all manufacturing activities. Section 2(b) of the
Communications Act limits the Commission's authority over ``charges,
classifications, practices, services, facilities, or regulation for or
in connection with intrastate communications service.'' Even though,
for the reasons stated above, we find section 2(b) not to be relevant
to
[[Page 2934]]
sections 271 and 272, we find that the manufacturing activities
addressed by sections 271 and 272 are not, in any event, within the
scope of section 2(b). Alternatively, even if section 2(b) were deemed
to apply with respect to BOC manufacturing, we find that such
manufacturing activities plainly cannot be segregated into interstate
and intrastate portions. Thus, any state regulation inconsistent with
sections 271 and 272 or our implementing regulations would necessarily
thwart and impede federal policies, and should be preempted.
III. Activities Subject to Section 272 Requirements
Section 272(a) provides that a BOC (including any affiliate) that
is a LEC subject to the requirements of section 251(c) may provide
certain services only through a separate affiliate. Under section 272,
BOCs (or BOC affiliates) may engage in the following activities only
through one or more affiliates that are separate from the incumbent LEC
entity: (A) Manufacturing activities; (B) interLATA telecommunications
services that originate in-region; and (C) interLATA information
services. We discuss below both the activities subject to the section
272 separate affiliate requirements and the activities that are exempt
from these requirements.
A. General Issues
1. Definition of ``InterLATA services''
a. Background. In the NPRM, we indicated that the 1996 Act defines
``interLATA service'' as a telecommunications service. We further
stated that, where the 1996 Act draws distinctions between in-region
and out-of-region ``interLATA services,'' these distinctions do not
apply to interLATA information services.
b. Discussion. Upon consideration of the arguments raised in the
record, we modify our interpretation of the scope of the term
``interLATA service.'' Consistent with the views of the commenters that
addressed this point, we conclude that the term ``interLATA services''
encompasses both interLATA information services and interLATA
telecommunications services.
We are persuaded that the definition of ``interLATA service,''
which is ``telecommunications between a point located in a [LATA] and a
point located outside such area,'' does not limit the scope of the term
to telecommunications services because, as MFS and BellSouth point out,
information services are also provided via telecommunications.
Elsewhere in this Report and Order, we conclude that ``interLATA
information services'' must include a bundled, interLATA transmission
component. Thus, interLATA information services are provided via
interLATA telecommunications transmissions and, accordingly, fall
within the definition of ``interLATA service.'' Moreover, we believe
that it is a more natural, common-sense reading of ``interLATA
services'' to interpret it to include both telecommunications services
and information services. In addition, as MFS argues, in section
272(a)(2), Congress uses and distinguishes between ``interLATA
telecommunications services'' and ``interLATA information services,''
demonstrating that it limited the term ``interLATA services'' to
transmission services when it wished to. Further, if Congress had
intended the term ``interLATA services'' to include only interLATA
telecommunications services, its use of the term ``interLATA
telecommunications services'' in section 272(a)(2) would have been
unnecessary and redundant.
As MCI points out, interpreting the term ``interLATA services'' to
include both interLATA telecommunications and interLATA information
services means that a BOC may not provide in-region interLATA
information services until it obtains section 271 authorization. As a
practical matter, we believe that interpreting ``interLATA services''
to include interLATA information services will not alter the
application of section 271. As noted above, and discussed in greater
detail below, we conclude that the term ``interLATA information
service'' refers to an information service that incorporates as a
necessary, bundled element an interLATA telecommunications transmission
component provided to the customer for a single charge. Thus,
regardless of whether we interpret ``interLATA service'' to include
interLATA information services, a BOC would be required to obtain
section 271 authorization prior to providing, in region, the interLATA
telecommunications transmission component of an interLATA information
service.
2. Application of Section 272 Safeguards to International InterLATA
Services
In the NPRM, we tentatively concluded that Congress intended the
section 272 safeguards to apply to all domestic and international
interLATA services. All of the parties that commented on this point
supported this tentative conclusion. As noted above, the 1996 Act
defines ``interLATA services'' as ``telecommunications between a point
located in a [LATA] and a point located outside such area.'' The
definition does not distinguish between domestic and international
interLATA services. Further, international telecommunications services,
which originate in a LATA and terminate in a country other than the
United States, or vice versa, fit within the statutory definition of
interLATA services. Thus, we hereby adopt our tentative conclusion.
3. Provision of Services Through a Single Affiliate
a. Background. In the NPRM, we tentatively concluded that BOCs may
conduct all, or some combination of, manufacturing activities,
interLATA telecommunications services, and interLATA information
services through a single separate affiliate, so long as the affiliate
satisfies all statutory and regulatory requirements imposed on the
provision of each type of service. Elsewhere in the NPRM, we sought
comment on whether the 1996 Act permits us to, and if so, whether we
should, interpret or apply any of the requirements of section 272(b)
differently with respect to a BOC's provision of interLATA
telecommunications services, which are regulated under Title II, as
opposed to a BOC's engagement in manufacturing and provision of
interLATA information services, which are unregulated activities. In
addition, we sought comment on how we could impose different regulatory
requirements if a BOC provides both regulated and unregulated services
through a single affiliate.
b. Discussion. Based on the comments submitted in the record and
our analysis of the 1996 Act, we adopt our tentative conclusion that
BOCs may conduct all, or some combination, of manufacturing activities,
interLATA telecommunications services, and interLATA information
services through a single separate affiliate. Section 272(a) requires a
BOC to provide these services through ``one or more affiliates'' that
are ``separate from any operating company entity that is subject to the
requirements of section 251(c).'' We conclude that this language is
intended to allow the BOCs flexibility in structuring their provision
of competitive services, so long as those services are separated from
the BOCs' provision of any local exchange services that are subject to
the requirements of section 251(c).
We further conclude, as a policy matter, that it is not necessary
to require the BOCs to separate their manufacturing activities from
their
[[Page 2935]]
provision of interLATA telecommunications services and interLATA
information services, as suggested by VoiceTel. First, a BOC's
manufacturing activities do not entail control over bottleneck local
exchange facilities. Second, during the period that the MFJ prohibited
the BOCs from engaging in manufacturing activities, a competitive
market for these activities developed. The market for information
services is fully competitive; the market for interLATA
telecommunications services is also substantially competitive. Thus,
while a BOC may achieve certain efficiencies and economies of scope by
conducting all three categories of activity through the same section
272 affiliate, it cannot thereby increase its ability to exercise
market power in either the manufacturing, interLATA telecommunications
services, or interLATA information services markets. Further, we note
that section 273, which is the subject of a separate proceeding,
establishes additional safeguards applicable to BOC manufacturing
activities, which are intended to promote competition and prevent
discrimination. For these reasons, we conclude that BOCs may conduct
all, or some combination of, manufacturing activities, interLATA
telecommunications services, and interLATA information services through
the same section 272 affiliate.
Further, we decline to adopt different requirements pursuant to
section 272(b) for regulated and unregulated activities. The safeguards
of section 272(b) apply to any ``separate affiliate required by''
section 272(a). Thus, the section 272(b) safeguards address the BOCs'
potential to allocate costs improperly and to discriminate in favor of
their section 272 affiliates, irrespective of the activities in which
those affiliates engage.
4. Manufacturing Activities
In the NPRM, we stated that BOCs may only engage in manufacturing
activities through a separate affiliate that meets the requirements of
section 272, and noted that section 273 sets forth additional
safeguards applicable to BOC entry into manufacturing activities.
Subsequent to the closing of the record in this proceeding, the
Commission released a Notice of Proposed Rulemaking to clarify and
implement the provisions of section 273. Several parties have raised
arguments relating to the section 273 provisions on the record in this
proceeding. Because this proceeding implements the non-accounting
safeguards provisions of sections 271 and 272, arguments relating to
the specific provisions of section 273 are more appropriately addressed
in the section 273 proceeding. We note that BOCs must conduct their
manufacturing activities through a section 272 separate affiliate,
manufacture and provide telecommunications equipment and CPE in
accordance with section 273, and comply with the regulations that the
Commission promulgates to implement both sections 272 and 273.
B. Mergers/Joint Ventures of Two or More BOCs
1. Background
In the NPRM, we tentatively concluded that, pursuant to sections
271(i)(1) and 153(4)(B), if two or more of the BOCs combine their
operations through merger or acquisition, the in-region states of the
resultant entity shall include all of the in-region states of each of
the BOCs involved in the merger/acquisition. We sought comment on
whether the entry into a merger agreement or a joint venture
arrangement by two or more BOCs affects the application of the section
271 and 272 non-accounting separate affiliate and nondiscrimination
requirements to those BOCs. We further sought comment on whether
additional safeguards are required to ensure that these BOCs do not
provide the affiliates of their merger partners with an unfair
competitive advantage during the pendency of their merger agreement.
2. Discussion
We note the unanimous support among parties that commented on the
issue, and hereby affirm our tentative conclusion that, upon completion
of a merger between or among BOCs, the in-region states of the merged
entity shall include all of the in-region states of each of the BOCs
involved in the merger. We decline, however, to adopt a general rule
that would treat the regions of merging BOCs as combined prior to
completion of the merger, for the purposes of applying the section 272
separate affiliate and nondiscrimination safeguards. Section 272
requires a BOC to provide certain services (interLATA
telecommunications and information services and manufacturing
activities) through one or more separate affiliates, and establishes
nondiscrimination requirements that apply to the BOC's conduct and its
relationship with these affiliates. Section 3(1), in turn, defines an
``affiliate'' as ``a person that (directly or indirectly) owns or
controls, is owned or controlled by, or is under common ownership and
control with, another person.'' Prior to completion of a merger, the
merging BOCs are neither affiliates, nor successors or assigns, of one
another. Thus, entry into a merger agreement does not render the
section 272 safeguards applicable to a BOC's relationship with its
merger partner, nor to its relationship with its merger partner's
affiliates. Moreover, treating the regions of merging BOCs as combined
from the inception of a merger agreement might create considerable
problems in applying the section 271 and 272 safeguards. For example,
if BOC A were offering out-of-region interLATA services in BOC B's
region at the time the two entered a merger agreement, BOC A might be
required immediately to cease the provision of such services until it
had received approval under section 271 to offer in-region interLATA
services. That result would be both disruptive and confusing to
customers.
We further decline to adopt any additional regulations applicable
to pending mergers or joint ventures between or among BOCs. We are
persuaded that adequate protections against discriminatory and
anticompetitive conduct already apply to mergers, acquisitions, and
joint ventures among BOCs. As the DOJ and other commenters point out,
these protections include the nondiscrimination obligations of sections
201 and 202 of the Communications Act, which, among other things,
prevent the BOCs from unjustly or unreasonably discriminating in
providing facilities or services to interexchange carriers, and would
thus govern a BOC's relationship with the long-distance affiliate of
its merger partner. Continuing enforcement of the MFJ equal access
requirements and pre-existing Commission-prescribed interconnection
requirements, pursuant to section 251(g), also safeguards against BOC
discrimination in favor of the affiliates of their merger partners.
Further, as USTA notes, BOCs will be subject to the pre-merger review
process under the Hart-Scott-Rodino amendment to the Clayton Act. See
15 U.S.C. Sec. 18a. Moreover, as MCI suggests, we retain our authority
to impose additional safeguards in the context of particular mergers,
should circumstances demonstrate the need for such safeguards, on a
case-by-case basis.
C. Previously Authorized Activities
1. Background
In the NPRM, we sought comment on the meaning of and interaction
between sections 271(f), 272(a)(2)(B)(iii), and 272(h). Specifically,
we sought comment on whether, subject to the
[[Page 2936]]
exception established by section 272(a)(2)(B)(iii), section 272(h)
requires the BOCs to come into compliance with the section 272
safeguards with respect to all of the activities listed in section
272(a)(2) (A)-(C) that they were providing on the date of enactment of
the 1996 Act. We observed that section 272(a)(2)(B)(iii) establishes an
exemption for ``previously authorized activities described in section
271(f)'' from the separate affiliate requirement for ``origination of
interLATA telecommunications services.'' We sought comment on whether
Congress intended, through section 272(h), to require BOCs engaged in
previously authorized manufacturing activities and interLATA
information services to come into compliance with the section 272
requirements.
2. Discussion
Based on the record before us and our analysis of the relevant
statutory terms, we conclude that BOCs may continue to provide all
previously authorized services without interruption, pursuant to the
terms and conditions set forth in the MFJ court orders that authorize
those services. Previously authorized interLATA information services
and manufacturing activities must come into compliance with the section
272 separate affiliate requirements within one year. Previously
authorized interLATA telecommunications services, which do not have to
comply with the section 272 separate affiliate requirements, must
continue to be provided pursuant to the terms and conditions of the MFJ
court orders that authorize them.
Section 271(f). As a general matter, section 271 addresses the
timing and requirements for BOC entry into the interLATA market.
Section 271(f) specifies that neither section 271(a) nor section 273
``prohibits'' a BOC or its affiliate from engaging, at any time after
enactment, in any activity previously authorized by an order of the MFJ
court, subject to the terms and conditions imposed by the court. We
conclude that the purpose of Section 271(f) is to preserve the BOCs'
ability to engage in previously authorized activities, without first
having to obtain section 271 authorization from the Commission. Section
271(f) by its terms does not address, and thus does not preclude,
application of the section 272 separate affiliate requirements to
previously authorized services. Except for specifying that BOCs may
continue to provide previously authorized services pursuant to the
terms and conditions contained within the MFJ court order authorizing
the service, section 271(f) does not address the manner in which BOCs
must structure their provision of previously authorized services, or
whether they must provide these services through a separate affiliate.
These issues are addressed in section 272.
Section 272(a)(2)(B)(iii). Section 272 sets forth separate
affiliate and nondiscrimination requirements with which the BOC must
comply in order to provide certain services. Separate subsections of
section 272(a)(2) establish separate affiliate requirements for BOC
provision of manufacturing activities (section 272(a)(2)(A)),
origination of interLATA telecommunications services (section
272(a)(2)(B)), and interLATA information services (section
272(a)(2)(C)). Section 272(a)(2)(B)(iii) exempts ``previously
authorized activities described in section 271(f)'' from the separate
affiliate requirement for ``origination of interLATA telecommunications
services.'' We conclude that, because this exemption appears in section
272(a)(2)(B), it applies by its terms only to previously authorized
activities that involve the origination of interLATA telecommunications
services.
Previously authorized activities described in section 271(f) may
include both manufacturing activities and interLATA information
services. Neither of these types of previously authorized activities,
however, is exempt from the section 272 separate affiliate
requirements, because neither section 272(a)(2)(A) nor section
272(a)(2)(C) contains an exemption for previously authorized activities
similar to the explicit exemption set forth in section
272(a)(2)(B)(iii). We reject Ameritech's argument that section
272(a)(2)(B)(iii) exempts previously authorized interLATA information
services from the section 272 separate affiliate requirements, because
section 272(a)(2)(B) applies only to origination of interLATA
telecommunications services. Section 272(a)(2)(C) establishes the
separate affiliate requirement for BOC provision of interLATA
information services; there are exceptions to this requirement for
electronic publishing services and alarm monitoring services, but there
is no exception specified for previously authorized activities.
Section 272(h). As the majority of commenters agree, section 272(h)
establishes a one-year transition period for BOCs to comply with the
separate affiliate requirements of section 272 for all services they
were providing on the date of enactment of the 1996 Act that are not
exempt from these requirements. Because we concluded in the preceding
paragraphs that previously authorized interLATA information services
and manufacturing activities are not exempt from the section 272
separate affiliate requirements, BOCs providing these services must
comply with those requirements within one year of enactment. We reject
PacTel's argument that section 272(h) gives the BOCs one year to comply
with the various requirements imposed by section 272 on their provision
of exchange and exchange access services, because we find these
requirements are effective immediately upon a BOC's entry into the in-
region interLATA market pursuant to section 271.
Differential Treatment. We conclude that, with respect to requiring
compliance with the section 272 separate affiliate requirements,
Congress intended to treat previously authorized interLATA
telecommunications services differently from previously authorized
interLATA information services and manufacturing activities. Certain of
the BOCs argue that such a distinction is justified because it would be
more difficult to provide previously authorized interLATA
telecommunications services on a separated basis. Ameritech, however,
argues that certain previously authorized interLATA information
services, such as TDDS, would be equally difficult to provide on a
separated basis. Section 10 of the Communications Act requires us to
forbear from applying any provision of the Act that is not necessary to
ensure just and reasonable charges and practices in the
telecommunications marketplace, or to protect consumers, if we find
that such forbearance would promote competition and is consistent with
the public interest. Thus, to the extent a BOC demonstrates, with
respect to a particular previously authorized interLATA information
service, that forbearance from the section 272 separate affiliate
requirement fully satisfies the section 10 test, we must forbear from
requiring the BOC to provide that service through a section 272
affiliate.
D. Out-of-Region InterLATA Information Services
1. Background
In the NPRM, we tentatively concluded that the BOCs must provide
interLATA information services through a separate affiliate, regardless
of whether these services are provided in-region or out-of-region. We
observed that section 272(a)(2)(B)(ii) exempts out-of-region interLATA
services from the
[[Page 2937]]
separate affiliate requirement for ``origination of interLATA
telecommunications services,'' but there is no analogous exemption from
the section 272(a)(2)(C) separate affiliate required for interLATA
information services (other than electronic publishing and alarm
monitoring services).
2. Discussion
Based on the record before us and our own statutory analysis, we
hereby adopt our tentative conclusion that BOCs must provide out-of-
region interLATA information services through a section 272 separate
affiliate. Although we concluded above that ``interLATA information
services'' are included within the term ``interLATA services'' as used
in section 271(b), that determination does not alter the conclusion
that BOCs must provide out-of-region interLATA information services
through a section 272 separate affiliate. Section 271(b)(2) permits a
BOC or its affiliate to provide interLATA services, including interLATA
information services, that originate outside its in-region states,
immediately upon enactment of the 1996 Act. Section 271, however, does
not address whether such services must be provided through a separate
affiliate; that issue is addressed in section 272(a).
Section 272(a)(2)(B) requires a separate affiliate for the
``origination of interLATA telecommunications services,'' but exempts
from that requirement ``out-of-region services described in section
271(b)(2).'' We conclude that the exception created by section
272(a)(2)(B)(ii) extends only to out-of-region interLATA services that
are telecommunications services. Section 272(a)(2)(C) requires a
separate affiliate for ``interLATA information services,'' and exempts
electronic publishing and alarm monitoring services from that
requirement. There are no other exceptions to the requirements of
section 272(a)(2)(C). As several commenters noted, section 272(a)(2)(B)
explicitly excludes out-of-region services, but section 272(a)(2)(C)
does not. We agree with MCI that the explicit exclusion of out-of-
region interLATA telecommunications services in one subsection of the
statute, and the absence of such an express exclusion of out-of-region
interLATA information services in another subsection of the same
provision, suggests that Congress intended not to exclude the latter
from the separate affiliate requirement. Therefore, we find that out-
of-region interLATA information services are not excluded from the
separate affiliate requirement for interLATA information services.
BellSouth has argued that requiring BOCs to provide out-of-region
interLATA information services through a section 272 separate affiliate
violates the First Amendment. As noted above, we find that this result
is required by the statute. Although the courts have ultimate authority
to determine the constitutionality of this and other statutes, we find
it appropriate to state that we find BellSouth's argument to be without
merit. BellSouth bases its argument on an assertion that as ``content-
related'' services, information services are commercial speech entitled
to First Amendment protections. We conclude, first, that with respect
to certain information services, a BOC neither provides, nor exercises
editorial discretion over, the content of the information associated
with those particular services, and therefore provision of those
information services does not constitute speech subject to First
Amendment protections. Second, to the extent that BOC provision of
other interLATA information services constitutes speech for First
Amendment purposes, the section 272 separate affiliate requirement
neither prohibits the BOCs from providing such services, nor places any
restrictions on the content of the information the BOCs may provide.
Instead, the section 272 separate affiliate requirement is a content-
neutral restriction on the manner in which BOCs may provide interLATA
information services, intended by Congress to protect against improper
cost allocation and discrimination concerns. Thus, we conclude that the
separate affiliate requirement imposed by section 272 of the
Communications Act on BOC provision of interLATA information services
does not violate the First Amendment.
E. Incidental InterLATA Services
1. Background
In the NPRM, we sought comment on whether we should establish any
non-accounting structural or nonstructural safeguards for BOC provision
of the ``incidental interLATA services'' set forth in section 271(g),
in light of section 271(h). Section 271(h) directs the Commission to
ensure that the provision of incidental interLATA services ``will not
adversely affect telephone exchange service ratepayers or competition
in any telecommunications market,'' and states that the provisions of
section 271(g) ``are intended to be narrowly construed.'' We also
sought comment regarding the interplay between section 271(h) and
section 254(k), which prohibits telecommunications carriers from
``us[ing] services that are not competitive to subsidize services that
are subject to competition.''
2. Discussion
Section 271(b)(3) permits the BOCs to provide incidental interLATA
services described in section 271(g) immediately after the date of
enactment of the 1996 Act. Thus, unlike other in-region interLATA
services, BOCs may provide incidental interLATA services originating in
their own in-region states without receiving prior authorization from
the Commission pursuant to section 271(d). Neither section 271(b) nor
section 271(g) addresses whether BOCs must provide incidental interLATA
services through a section 272 separate affiliate; this issue is
addressed by section 272 itself.
Scope of the section 272(a)(2)(B)(i) exemption. Section
272(a)(2)(B)(i) sets forth an exception to the separate affiliate
requirement imposed on ``origination of interLATA telecommunications
services.'' Congress specifically limited this exception to the
``incidental interLATA services described in paragraphs (1), (2), (3),
(5), and (6) of section 271(g).'' Consistent with the analysis set
forth in the two immediately preceding sections of this Order, we
conclude that the section 272(a)(2)(B)(i) exception applies, by its
terms, to the origination of incidental interLATA services that are
telecommunications services.
For the most part, the incidental interLATA services enumerated
within the section 272(a)(2)(B)(i) exception are telecommunications
services. (Congress deliberately excluded remote data storage and
retrieval services that fall within section 271(g)(4) from the section
272(a)(2)(B)(i) exception.) Although the incidental interLATA services
set forth in sections 271(g)(1)(A), (B), and (C) include audio, video,
and other programming services that do not appear to be solely
telecommunications services, section 271(h) specifies that these
incidental interLATA services ``are limited to those interLATA
transmissions incidental to the provision by a [BOC] or its affiliate
of video, audio, and other programming services that the company or its
affiliate is engaged in providing to the public.'' We therefore
conclude that, pursuant to section 272(a)(2)(B)(i), BOCs are not
required to provide the interLATA telecommunications transmission
incidental to provision of the programming services listed in sections
271(g)(1)(A), (B), and (C) through a
[[Page 2938]]
section 272 separate affiliate. Moreover, alarm monitoring services,
listed as incidental interLATA services under section 271(g)(1)(D), are
explicitly excepted from the section 272 separate affiliate
requirements under section 272(a)(2)(C).
In addition, section 271(g)(2), which designates as ``incidental
interLATA services'' the interLATA provision 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),'' may
encompass services that are not solely telecommunications services. The
statute does not classify educational interactive interLATA services as
either telecommunications services or information services. We
conclude, however, that the explicit inclusion of section 271(g)(2) in
the list of services subject to the section 272(a)(2)(B)(i) exception
exempts educational interactive interLATA services from the section 272
separate affiliate requirements. This interpretation is consistent with
Congress' clear intent, expressed in other provisions of the 1996 Act,
to promote the provision of advanced telecommunications and information
services, of which educational interactive interLATA services are
examples, to eligible public and non-profit elementary and secondary
schools. The inclusion of educational interactive interLATA services
among the list of ``incidental interLATA services'' that BOCs could
provide immediately upon enactment of the 1996 Act without prior
Commission authorization promotes the congressional goal of rapidly
deploying advanced telecommunications by permitting the BOCs to offer
such services. Thus, we further find it reasonable to conclude that
Congress did not wish to impose a significant regulatory barrier, in
the form of a separate affiliate requirement, on BOC provision of these
services.
Additional regulation of incidental interLATA services. We decline
to impose the section 272 separate affiliate requirements on incidental
interLATA services that, as discussed above, are exempt from those
requirements under section 272(a)(2)(B)(i). Section 272 itself does not
require the BOCs to provide these services through a separate
affiliate. Further, we conclude as a legal matter that neither section
271(h) nor section 254(k) requires us to impose the section 272
separate affiliate requirements on exempt incidental interLATA services
in order to protect telephone exchange ratepayers or competition in the
telecommunications market. Moreover, we decline to do so as a matter of
policy, because we see no present need to impose structural separation
requirements beyond those mandated by Congress in order to protect
against improper cost allocation and access discrimination. We likewise
decline to impose any other structural separation requirements on BOC
provision of these services, as suggested by certain commenters. This
decision comports with the Commission's prior determinations not to
impose structural separation requirements in contexts in which it found
that nonstructural safeguards provide sufficient protection against
improper cost allocation and access discrimination (e.g., BOC provision
of enhanced services).
Under our rules, the BOCs are subject to existing nonstructural
safeguards in their provision of incidental interLATA services, and we
conclude that these safeguards are sufficient to protect telephone
exchange ratepayers and competition in telecommunications markets, in
accordance with section 271(h). For accounting purposes, incidental
interLATA services will be treated as non-regulated services under our
Part 32 affiliate transaction rules and Part 64 cost allocation rules,
and accordingly costs associated with provision of those services may
not be allocated to regulated services accounts. Further, at the
federal level and in many states, the BOCs are subject to price cap
regulation, which reduces their incentive to engage in strategic cost-
shifting behavior. The BOCs are also subject to the section 251
interconnection and unbundling requirements, which compel them to make
available to other telecommunications carriers the local network
elements and local exchange facilities that such carriers may require
to provide services comparable to the incidental interLATA services
listed in section 271(g). Further, the BOCs are subject to network
disclosure requirements imposed by section 251(c)(5), which require
them to give timely information about network changes to their
affiliates' competitors.
Given the complement of nonstructural safeguards to which the BOCs
are subject in their provision of incidental interLATA services, we
find that the record in this proceeding does not justify the imposition
of additional nonstructural safeguards on these services. We decline to
extend to the integrated provision of incidental interLATA services any
of the section 272(c) and 272(e) nondiscrimination requirements that
depend on the existence of a section 272 affiliate, as suggested by
AT&T. Further, we decline to adopt any additional unbundling
requirements applicable to BOC provision of incidental interLATA
services, as suggested by MCI. We agree with BellSouth that it would be
inconsistent with the 1996 Act for us to require the BOCs to unbundle
and make available interLATA transmission services that they are not
authorized to provide except as components of an incidental interLATA
service (i.e., without obtaining prior authorization under section 271
or complying with the section 272 separation requirements). For the
foregoing reasons, we decline to adopt any additional structural or
nonstructural safeguards applicable specifically to BOC provision of
incidental interLATA services.
F. InterLATA Information Services
1. Relationship Between Enhanced Services and Information Services
a. Background. In the NPRM, we sought comment on the services that
are included in the statutory definition of ``information service,''
and whether that term encompasses all activities that the Commission
classifies as ``enhanced services.'' We noted that the statutory
definition of ``information service'' is based on the definition used
in the MFJ, and that prior to passage of the 1996 Act, neither the
Commission nor the MFJ court resolved the question of whether the
definition of enhanced services under the Commission's rules was
synonymous with the definition of information services under the MFJ.
b. Discussion. We conclude that all of the services that the
Commission has previously considered to be ``enhanced services'' are
``information services.'' We are persuaded by the arguments advanced by
ITAA, CIX, and others, that the differently-worded definitions of
``information services'' and ``enhanced services'' can and should be
interpreted to extend to the same functions. We believe that
interpreting ``information services'' to include all ``enhanced
services'' provides a measure of regulatory stability for
telecommunications carriers and ISPs alike, by preserving the
definitional scheme under which the Commission exempted certain
services from Title II regulation. We agree with ISPs that regulatory
certainty and continuity benefits both large and small service
providers. In sum, we find no basis to conclude that by using the MFJ
term ``information services'' Congress intended a significant departure
from the Commission's usage of ``enhanced services.''
[[Page 2939]]
We also find, however, that the term ``information services''
includes services that are not classified as ``enhanced services''
under the Commission's current rules. Stated differently, we conclude
that, while all enhanced services are information services, not all
information services are enhanced services. As noted by U S West,
``enhanced services'' under Commission precedent are limited to
services ``offered over common carrier transmission facilities used in
interstate communications,'' whereas ``information services'' may be
provided, more broadly, ``via telecommunications.'' Further, we agree
with BellSouth and AT&T that live operator telemessaging services that
do not involve ``computer processing applications'' are information
services, even though they do not fall within the definition of
``enhanced services.''
We further conclude that, subject to the exceptions discussed
below, protocol processing services constitute information services
under the 1996 Act. We reject Bell Atlantic's argument that
``information services'' only refers to services that transform or
process the content of information transmitted by an end-user, because
we agree with Sprint that the statutory definition makes no reference
to the term ``content,'' but requires only that an information service
transform or process ``information.'' We also agree with ITI and ITAA
that an end-to-end protocol conversion service that enables an end-user
to send information into a network in one protocol and have it exit the
network in a different protocol clearly ``transforms'' user
information. We further find that other types of protocol processing
services that interpret and react to protocol information associated
with the transmission of end-user content clearly ``process'' such
information. Therefore, we conclude that both protocol conversion and
protocol processing services are information services under the 1996
Act.
This interpretation is consistent with the Commission's existing
practice of treating end-to-end protocol processing services as
enhanced services. We find no reason to depart from this practice,
particularly in light of Congress' deregulatory intent in enacting the
1996 Act. Treating protocol processing services as telecommunications
services might make them subject to Title II regulation. Because the
market for protocol processing services is highly competitive, such
regulation is unnecessary to promote competition, and would likely
result in a significant burden to small independent ISPs that provide
protocol processing services. Thus, policy considerations support our
conclusion that end-to-end protocol processing services are information
services.
We note that, under Computer II and Computer III, we have treated
three categories of protocol processing services as basic services,
rather than enhanced services, because they result in no net protocol
conversion to the end-user. These categories include protocol
processing: (1) involving communications between an end-user and the
network itself (e.g., for initiation, routing, and termination of
calls) rather than between or among users; (2) in connection with the
introduction of a new basic network technology (which requires protocol
conversion to maintain compatibility with existing CPE); and (3)
involving internetworking (conversions taking place solely within the
carrier's network to facilitate provision of a basic network service,
that result in no net conversion to the end-user). We agree with PacTel
that analogous treatment should be extended to these categories of ``no
net'' protocol processing services under the statutory regime. Because
``no net'' protocol processing services are information service
capabilities used ``for the management, control, or operation of a
telecommunications system or the management of a telecommunications
service,'' they are excepted from the statutory definition of
information service. Thus, ``no net'' protocol conversion services
constitute telecommunications services, rather than information
services, under the 1996 Act.
We further find, as suggested by PacTel, that services that the
Commission has classified as ``adjunct-to-basic'' should be classified
as telecommunications services, rather than information services. In
the NATA Centrex order, the Commission held that the enhanced services
definition did not encompass adjunct-to-basic services. See 101 FCC 2d
349, 359-361, Paras. 24-28 (1985). Although the latter services may
fall within the literal reading of the enhanced service definition,
they facilitate establishment of a basic transmission path over which a
telephone call may be completed, without altering the fundamental
character of the telephone service. Similarly, we conclude that
``adjunct-to-basic'' services are also covered by the
``telecommunications management exception'' to the statutory definition
of information services, and therefore are treated as
telecommunications services under the 1996 Act.
2. Distinguishing InterLATA Information Services Subject to Section 272
From IntraLATA Information Services
a. Background. In the NPRM, we sought comment on how to distinguish
between interLATA information services, which are subject to the
section 272 separate affiliate requirements, and intraLATA information
services, which are not. In particular, we asked whether an information
service should be considered an interLATA service only when the service
actually involves an interLATA telecommunications transmission
component, or, alternatively, when it potentially involves interLATA
telecommunications transmissions (e.g., the service can be accessed
across LATA boundaries). We further sought comment regarding how the
manner in which a BOC structures its provision of an information
service may affect whether the service is classified as interLATA.
We also invited comment on whether a particular service for which a
BOC had applied for or received an MFJ waiver should presumptively be
treated as an interLATA information service subject to the separate
affiliate requirements of section 272. In addition, we sought comment
on whether we should presume that services provided by BOCs pursuant to
CEI plans approved by the Commission prior to the enactment of the 1996
Act are intraLATA information services.
b. Discussion. InterLATA Transmission/Resale. We conclude that, as
used in section 272, the term ``interLATA information service'' refers
to an information service that incorporates as a necessary, bundled
element an interLATA telecommunications transmission component,
provided to the customer for a single charge. We find, as noted in the
comments of AT&T, MCI, and the BOCs, that this definition of interLATA
information service conforms to the MFJ precedent in this area. See
United States v. Western Electric, 907 F.2d 160, 163 (D.C. Cir. 1990).
We further conclude that a BOC provides an interLATA information
service when it provides the interLATA telecommunications transmission
component of the service either over its own facilities, or by
reselling the interLATA telecommunications services of an interexchange
provider. This conclusion also comports with MFJ precedent.
USTA contends that BOC provision of interLATA transmission through
resale should be permitted because it does not
[[Page 2940]]
raise improper cost allocation and discrimination concerns. This
argument, however, does not address the key issue of what is required
by the statute. As discussed above, we find that section 601(a) of the
1996 Act indicates that Congress intended the provisions of the 1996
Act to supplant the MFJ. Therefore, we conclude that the restrictions
imposed by the 1996 Act on BOC provision of interLATA services, like
the interLATA restrictions imposed under the MFJ, apply to services
provided through resale, as well as to services provided through the
BOC's own transmission facilities. Moreover, we decline to adopt
PacTel's suggestion that end-user receipt of an ``interLATA benefit''
should be the test for determining whether an information service is
interLATA. PacTel's proposed test is inconsistent with MFJ precedent
and would be very difficult to administer. Finally, we reject the
arguments raised by Sprint and MFS that we should classify all
information services as interLATA services because of the difficulties
inherent in distinguishing between interLATA and intraLATA information
services. We conclude that it is possible to distinguish between
interLATA and intraLATA information services by applying the rule
established by this Order.
InterLATA Access. We agree with AT&T and the BOCs that an
information service may not be considered interLATA merely because it
may be accessed on an interLATA basis by means independently chosen by
the customer, such as a presubscribed interexchange carrier. In
interpreting the statutory restrictions on BOC provision of interLATA
information services, we are concerned not with the manner in which an
information service is used, but rather with the components of the
service that are provided by the BOC. When a BOC is neither providing
nor reselling the interLATA transmission component of an information
service that may be accessed across LATA boundaries, the statute does
not require that service to be provided through a section 272 separate
affiliate. We reject MFS's contention that, where an interLATA
transmission service is necessary for a customer to obtain access to a
particular BOC-provided information service, that information service
should be considered interLATA, even if the necessary interLATA
transmission component is separately provided by another carrier. In
such circumstances, the BOC is not providing any interLATA services,
and therefore is not required by section 272 to provide the information
service in question through a separate affiliate.
Moreover, as the BOCs point out, if we were to determine that the
mere possibility of interLATA access was sufficient to classify an
information service as an interLATA service, that rule would render any
telecommunications service that carries traffic that originates in one
LATA and terminates in another, including local exchange service and
exchange access service, an interLATA service. Congress clearly did not
intend that result.
In addition, we agree with the BOCs that classifying information
services as interLATA solely because end-users may obtain access to the
service across LATA boundaries would represent a significant departure
from Commission precedent, as well as from MFJ precedent. BOCs are
currently providing a number of information services on an integrated
basis pursuant to the Commission's Computer III regulations, and users
may obtain access to some, if not all, of these services on an
interLATA basis. If we were to determine that these services were
interLATA services simply because end-users may obtain access across
LATA boundaries, BOCs would have to change the manner in which they are
providing many of these services, which would likely result in lost
efficiency and disruption of services to customers. We see no basis in
the statute to adopt such an interpretation, as sections 271 and 272
are intended to govern the BOCs' provision of services that they were
previously prohibited from providing under the MFJ, not services that
they were previously authorized to provide under the MFJ.
Bundling. As we concluded above, an interLATA information service
incorporates a bundled interLATA telecommunications transmission
component. When a customer obtains interLATA transmission service from
an interexchange provider that is not affiliated with a BOC, the use of
that transmission service in conjunction with an information service
provided by a BOC or its affiliate does not make the information
service a BOC interLATA service offering. A customer also may obtain an
in-region interLATA telecommunications service from a BOC section 272
affiliate that the customer uses in conjunction with an intraLATA
information service provided by that affiliate or by the BOC itself.
When such telecommunications and information services are provided,
purchased, and priced separately, we conclude that they do not
collectively constitute an interLATA information service offering by
the BOC. (We note that even when an information service and interLATA
transmission service are ostensibly separately priced, if the BOC
offers special discounts or incentives to customers that take both
services, this would constitute sufficient evidence of bundling to
render the information service an interLATA information service.) In
such a situation, the BOC would, of course, be required to provide the
in-region interLATA transmission service pursuant to section 271
authorization and the section 272 separate affiliate and
nondiscrimination requirements. The BOC could choose to provide the
separate, intraLATA information service either on an integrated basis,
in compliance with the Commission's CEI and ONA requirements, or
through a separate affiliate.
Remote Databases/Network Efficiency. BOCs may not provide interLATA
services in their own regions, either over their own facilities or
through resale, before receiving authorization from the Commission
under section 271(d). Therefore, we conclude that BOCs may not provide
interLATA information services, except for information services covered
by section 271(g)(4), in any of their in-region states prior to
obtaining section 271 authorization. Section 271(g)(4) designates as an
incidental interLATA service the interLATA provision by a BOC or its
affiliate 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.'' Because BOCs were able to provide incidental
interLATA services immediately upon enactment of the 1996 Act, they may
provide interLATA information services that fall within the scope of
section 271(g)(4) without receiving section 271(d) authorization from
the Commission. Since section 271(g)(4) services are not among the
incidental interLATA services exempted from section 272 separate
affiliate requirements, however, they must be provided in compliance
with those requirements. To the extent that parties have argued in the
record that centralized data storage and retrieval services that fall
within section 271(g)(4) either are not interLATA information services,
or are not subject to the section 272 separate affiliate requirements,
we specifically reject these arguments.
We also reject the BOCs' argument that their use of interLATA
transmission, outside the control of the end-user and solely to
maximize network efficiencies, in connection with
[[Page 2941]]
the provision of an information service, does not render that
information service interLATA in nature. Whenever interLATA
transmission is a component of an information service, that service is
an interLATA information service, unless the end-user obtains that
interLATA transmission service separately, e.g., from its presubscribed
interexchange provider. To the extent that BOCs are allowed to perform
certain interLATA call processing functions associated with their
provision of telephone exchange service or exchange access service in
connection with an intraLATA information service, however, they may
continue to do so without transforming that information service into an
interLATA information service.
We also reject PacTel's claim that a BOC's use of interLATA
transmission solely for its own business convenience in providing an
information service falls within the ``telecommunications management
exception'' to ``information service.'' We disagree with PacTel's
assertion that this practice is covered by the ``technical management
exception,'' because the BOC would be providing interLATA transmission
in connection with the management of an information service, not ``the
management of a telecommunications service,'' as specified by section
3(20). Further, as noted above, we believe that the
``telecommunications management exception'' is analogous to the
Commission's classification of certain services as ``adjunct-to-
basic;'' that is, it covers services that may fit within the literal
reading of the information services definition, but that are used to
facilitate the provision of a basic telecommunications transmission
service, without altering the character of that service. In other
words, the ``technical management exception'' relates to the
classification of services as either telecommunications services or
information services; it has no bearing upon the classification of
either of these types of services as intraLATA or interLATA. As such,
the ``telecommunications management exception'' provides no safe harbor
for interLATA transmission services employed by BOCs in connection with
the provision of information services.
Presumptions Regarding Previously Authorized Information Services.
With respect to information services that the BOCs were authorized to
provide prior to passage of the 1996 Act, we conclude that as a matter
of administrative convenience it is helpful to establish several
rebuttable presumptions regarding intraLATA or interLATA
classification. Thus, we will presume that information services that
BOCs were authorized to provide pursuant to CEI plans, without MFJ
waivers, are intraLATA information services. Similarly, we will presume
that information services for which BOCs were required to obtain MFJ
waivers are interLATA information services. We conclude that these
presumptions are rebuttable, rather than conclusive, because the BOCs
have noted that, for expediency purposes, they sometimes requested and
obtained MFJ waivers in order to provide services that were not clearly
interLATA in nature. Thus, a BOC would be able to rebut the presumption
that an information service provided pursuant to an MFJ waiver is an
interLATA information service by showing that it had obtained a waiver
to provide the service on an intraLATA basis prior to 1991. Similarly,
the presumption that an information service provided pursuant to a CEI
plan is an intraLATA information service may be rebutted by a showing
that the information service incorporates a bundled, interLATA
telecommunications transmission component, as specified in this Order.
3. BOC-provided Internet Access Services
a. Background. On June 6, 1996, the Common Carrier Bureau (Bureau)
released an order approving a CEI plan filed by Bell Atlantic for the
provision of Internet Access Service. MFS had filed comments opposing
Bell Atlantic's plan, arguing, inter alia, that Bell Atlantic's
Internet access service offering is an interLATA service that Bell
Atlantic may only provide through a section 272 affiliate after
obtaining section 271 authorization from the Commission. Following
release of the Bell Atlantic CEI Plan Order, MFS filed a petition for
reconsideration of that Order, raising similar arguments. At about the
same time, Southwestern Bell Telephone Company (SWBT) filed a CEI plan
for Internet Support Services. On July 25, 1996, one week after the
Commission released the NPRM in this proceeding, MFS filed with the
Commission a petition seeking to consolidate proceedings related to the
Bell Atlantic CEI Plan Order reconsideration and the SWBT Internet
support CEI plan with the instant proceeding, on the grounds that the
three proceedings raise similar novel, policy, factual, and legal
arguments. Although the NPRM in the instant proceeding did not
specifically seek comment on the proper classification or regulatory
treatment of BOC-provided Internet services and Internet access
services under the 1996 Act, several parties discussed these matters in
their comments, in the course of addressing how we should define
``interLATA information services.''
b. Discussion. The preceding sections of this Order establish a
definition of ``interLATA information service'' that should assist the
BOCs and other interested parties in determining the types of
information services that the BOCs are statutorily-required to provide
through section 272 affiliates. If a BOC's provision of an Internet or
Internet access service (or for that matter, any information service)
incorporates a bundled, in-region, interLATA transmission component
provided by the BOC over its own facilities or through resale, that
service may only be provided through a section 272 affiliate, after the
BOC has received in-region interLATA authority under section 271. We
believe that this is not the appropriate forum for considering whether
the various specific Internet services provided by the BOCs are
``interLATA information services'' because such determinations must be
made on a case-by-case basis. We believe that the lawfulness of the
specific Internet services provided by Bell Atlantic and SWBT is more
appropriately analyzed in the context of the separate CEI plan
proceedings regarding each service that are currently pending before
the Bureau, consistent with the rules and policies enunciated in this
rulemaking proceeding. Therefore, we deny MFS's request to consolidate
proceedings related to the provision of Internet and Internet access
services by Bell Atlantic and SWBT with the instant proceeding.
4. Impact of the 1996 Act on the Computer II, Computer III, and ONA
requirements
a. Background. In the NPRM, we concluded that, because the 1996 Act
does not establish regulatory requirements for BOC provision of
intraLATA information services, Computer II, Computer III, and ONA
requirements continue to govern BOC provision of these services, to the
extent that these requirements are consistent with the 1996 Act. We
sought comment on which of the Commission's existing requirements were
inconsistent with, or had been rendered unnecessary by, the 1996 Act,
as well as on the specific provisions of the 1996 Act that supersede
the existing requirements. We also sought comment on the impact of the
statute on our pending Computer III Further Remand Proceedings.
b. Discussion. Consistency of Commission's Computer II, Computer
III, and ONA Rules with the 1996 Act.
[[Page 2942]]
We conclude that the Computer II, Computer III, and ONA requirements
are consistent with the 1996 Act, and continue to govern BOC provision
of intraLATA information services. By its terms, the 1996 Act imposes
separate affiliate and nondiscrimination requirements on BOC provision
of ``interLATA information services,'' but does not address BOC
provision of intraLATA information services. We concluded above that,
for the purposes of applying sections 271 and 272, interLATA
information services must include a bundled interLATA transmission
component. We further conclude, in light of our definition of interLATA
information services, that BOCs are currently providing a number of
information services on an intraLATA basis. We find that the BOCs may
continue to provide such intraLATA information services on an
integrated basis, in compliance with the nonstructural safeguards
established in Computer III and ONA.
We reject Bell Atlantic's conclusory assertions that the 1996 Act's
customer proprietary network information (CPNI), network disclosure,
nondiscrimination, and accounting provisions supersede various of the
Commission's Computer III nonstructural safeguards. We also reject
NYNEX's claim that the section 251 interconnection and unbundling
requirements render the Commission's Computer III and ONA requirements
unnecessary. Based on our review of the record in this proceeding, we
conclude that the pending Computer III Further Remand Proceedings are
the appropriate forum in which to examine the necessity of retaining
any or all of these individual Computer III and ONA requirements. We
therefore plan to issue a Further NPRM in that proceeding to determine
how to regulate BOC provision of intraLATA information services in
light of the 1996 Act.
In the interim, the Commission's Computer II, Computer III, and ONA
rules are the only regulatory means by which certain independent ISPs
are guaranteed nondiscriminatory access to BOC local exchange services
used in the provision of intraLATA information services. As noted
above, the section 272 nondiscrimination requirements do not apply to
BOC provision of intraLATA information services, and ISPs that are not
telecommunications carriers cannot obtain interconnection or access to
unbundled elements under section 251. Thus, we believe that continued
enforcement of these safeguards is necessary pending the conclusion of
the Computer III Further Remand Proceedings and establishes important
protections for small ISPs that are not provided elsewhere in the Act.
Requiring section 272 affiliates for intraLATA information
services. We decline to require the BOCs to provide intraLATA
information services through section 272 affiliates. It is clear that
section 272 does not require the BOCs to offer intraLATA information
services through a separate affiliate. We further decline to exercise
our general rulemaking authority to impose such a requirement. We
conclude that the record in this proceeding does not justify a
departure from our determination, in Computer III, to allow BOCs to
provide intraLATA information services on an integrated basis, subject
to appropriate nonstructural safeguards. Some parties in this
proceeding argue that we should harmonize our regulatory treatment of
intraLATA information services provided by the BOCs with the section
272 requirements imposed by Congress on interLATA information services.
We invite these parties to comment on these matters in response to the
Further NPRM we intend to issue in the Computer III Further Remand
Proceedings.
Application of Computer II, Computer III, and ONA requirements to
section 272 affiliate activities. We conclude that a BOC that provides
interLATA telecommunications services and information services through
the same section 272 affiliate may bundle such services without
providing comparably efficient interconnection to the basic underlying
interLATA telecommunications services. Under our definition of
``interLATA information service,'' as explained above, such service
must include a bundled interLATA telecommunications element. Hence, to
prohibit a BOC affiliate from bundling interLATA telecommunications and
information services would effectively prevent the BOCs from offering
any interLATA information services, a result clearly not contemplated
by the statute. Further, we note that the market for information
services is fully competitive, and the market for interLATA
telecommunications services is substantially competitive. Thus, we see
no basis for concern that a section 272 affiliate providing an
information service bundled with an interLATA telecommunications
service would be able to exercise market power. If, however, a BOC's
section 272 affiliate were classified as a facilities-based
telecommunications carrier (i.e., it did not provide interLATA
telecommunications services solely through resale), the affiliate would
be subject to a Computer II obligation to unbundle and tariff the
underlying telecommunications services used to furnish any bundled
service offering.
Under our current regulatory regime, a BOC must comply fully with
the Computer II separate subsidiary requirements in providing an
information service in order to be relieved of the obligation to file a
CEI plan for that service. We decline to adopt NYNEX's proposal that we
find that all BOC information services provided through a section 272
separate affiliate satisfy the Computer II separate subsidiary
requirements, because we conclude that the record in this proceeding is
insufficient to support such a conclusion. Instead, we intend to
examine this issue further in the context of the Computer III Further
Remand Proceedings. Further, we reject USTA's argument that ONA
reporting requirements do not extend to intraLATA information services
provided through a section 272 separate affiliate. BOCs must comply
with the ONA requirements regardless of whether they provide
information services on a separated or integrated basis.
G. Information Services Subject to Other Statutory Requirements
1. Electronic Publishing (section 274)
a. Background. In the NPRM, we observed that, although electronic
publishing is specifically identified as an information service,
interLATA provision of electronic publishing is exempt from section
272, and is instead subject to section 274. Noting that we had
initiated a separate proceeding to clarify and implement, inter alia,
the requirements of section 274, we sought comment on how to
distinguish information services subject to the section 272
requirements from electronic publishing services subject to the section
274 requirements. We also invited parties to comment on whether, in
situations involving services that do not clearly fall within either
the definition of ``electronic publishing'' (section 274(h)(1)) or the
enumerated exceptions thereto (section 274(h)(2)), we should identify
as ``electronic publishing'' those services for which the carrier
controls, or has a financial interest in, the content of information
transmitted by the service.
b. Discussion. Upon review of the record and further consideration,
we conclude that it is not necessary to adopt the ``financial interest
or control'' test in determining whether a particular BOC service
involves the provision of electronic publishing, in addition to the
definitions set forth in sections
[[Page 2943]]
274(h)(1) and 274(h)(2). Generally speaking, if a particular service
does not appear to fit clearly within either the definition of
``electronic publishing,'' set forth in section 274(h)(1), or the
exceptions thereto listed in section 274(h)(2), determining the
appropriate classification of that service will involve a highly fact-
specific analysis that is better performed on a case-by-case basis. In
the context of such a case-by-case determination, the Commission may
consider a number of factors, including whether the BOC controls, or
has a financial interest in, the content of information transmitted to
end-users. We also note that the definition of electronic publishing,
as well as specific services encompassed by that definition, may be
further refined in the Electronic Publishing proceeding.
We also decline to adopt ITAA's suggestion that, because of
potential difficulties in distinguishing between information services
and electronic publishing services, we should impose substantially the
same separate affiliate requirements on both. Such an approach would be
directly contrary to the statute. Congress set forth distinct separate
affiliate and nondiscrimination requirements in sections 272 and 274,
and specified that the former apply to interLATA information services,
while the latter apply to all BOC-provided electronic publishing
services. To impose the section 272 requirements on electronic
publishing services, or to impose the section 274 requirements on
interLATA information services, would be inconsistent with the clear
statutory scheme.
Moreover, we specifically reject AT&T's contention that electronic
publishing services are subject to the section 272 separate affiliate
requirements, pursuant to section 272(a)(2)(B), which imposes a
separate affiliate requirement on interLATA telecommunications
services. Electronic publishing services, however, are specifically
included within the statutory definition of information services.
Accordingly, electronic publishing services would be subject to section
272(a)(2)(C), which imposes a separate affiliate requirement on
interLATA information services, except that section 272(a)(2)(C)
specifically exempts ``electronic publishing (as defined in section
274(h)).''
2. Telemessaging (section 260)
a. Background. In the NPRM, we tentatively concluded that
``telemessaging'' is an information service. We further tentatively
concluded that BOC provision of telemessaging on an interLATA basis is
subject to the section 272 separate affiliate requirements, in addition
to the section 260 safeguards.
b. Discussion. Based on our review of the comments and analysis of
the statute, we hereby adopt our tentative conclusion that
telemessaging is an information service. We reject PacTel's contention
that live operator services do not constitute information services.
Under the statute, live operator services ``used to record, transcribe,
or relay messages'' are telemessaging services. Because these functions
plainly provide ``the capability for * * * storing * * * or making
available information'' via telecommunications, we conclude that live
operator telemessaging services fall within the statutory definition of
information services. We also adopt our tentative conclusion that BOCs
that provide telemessaging services that meet the definition of
interLATA information services must do so in accordance with the
section 272 requirements, in addition to the section 260 requirements.
IV. Structural Separation Requirements of Section 272
A. Application of the Section 272(b) Requirements
Section 272(b) of the Communications Act establishes five
structural and transactional requirements for separate affiliate(s)
established pursuant to section 272(a). We address each of the
requirements below, with the exception of section 272(b)(2), which we
discuss in the Accounting Safeguards Order.
B. The ``Operate Independently'' Requirement
1. Background
Section 272(b)(1) states that a separate affiliate ``shall operate
independently from the BOC.'' The Act does not elaborate on the meaning
of the phrase ``operate independently.'' We stated in the NPRM that
under principles of statutory construction, a statute should be
interpreted so as to give effect to each of its provisions. We
therefore tentatively concluded that the section 272(b)(1) ``operate
independently'' provision imposes requirements beyond those contained
in subsections 272(b)(2)-(5).
As we observed in the NPRM, section 274(b) contains similar
language to section 272(b)(1). It states that ``[a] separated affiliate
or electronic publishing joint venture shall be operated independently
from the [BOC].'' Subsections 274(b)(1)-(9) list several requirements
that govern the relationship of an electronic publishing entity and the
BOC with which it is affiliated. We sought comment on the relevance of
the ``operated independently'' language of section 274(b) when
construing the ``operate independently'' requirement of section
272(b)(1).
In addition, we sought comment on what rules, if any, we should
adopt to implement the requirements of section 272(b)(1). Moreover, we
asked whether we should impose one or more of the separation
requirements established in the Computer II or Competitive Carrier
proceedings.
In the Computer II proceeding, the Commission required AT&T to
provide enhanced services through a separate affiliate, a requirement
that the Commission extended to the BOCs following divestiture. The
Commission required the enhanced services subsidiary to ``have its own
operating, marketing, installation and maintenance personnel for the
services and equipment it offer[ed],'' to comply with information
disclosure requirements, and to maintain its own books of account. The
Commission prohibited the regulated entity and its enhanced services
subsidiary from using in common any leased or owned physical space or
property on which transmission equipment or facilities used in basic
transmission services were located, barred them from sharing computer
capacity, and limited the regulated entity's ability to provide
software to the affiliate. Moreover, the Commission barred the enhanced
services subsidiary from constructing, owning, or operating its own
transmission facilities, thereby requiring it to obtain such facilities
from a local exchange carrier pursuant to tariff.
In the Competitive Carrier proceeding, the Commission prescribed
the separation requirements to which independent LECs must conform to
be regulated as nondominant in the provision of domestic, interstate,
interexchange services. Specifically, an independent LEC must provide
interstate interexchange services through an affiliate that:
(1) maintains separate books of account; (2) does not jointly own
transmission or switching facilities with its affiliated exchange
telephone company; and (3) acquires that exchange telephone company's
services at tariffed rates and conditions.
2. Discussion
We adopt our tentative conclusion that the ``operate
independently'' requirement of section 272(b)(1) imposes requirements
beyond those listed in sections 272(b)(2)-(5). This conclusion is based
on the principle of
[[Page 2944]]
statutory construction that a statute should be construed so as to give
effect to each of its provisions.
Relationship of Section 272(b)(1) to Section 274(b). Section 274(b)
mandates that a separated affiliate or electronic publishing joint
venture be ``operated independently'' and then lists nine specific
requirements governing the relationship between a BOC and a separated
affiliate. In contrast, section 272(b) imposes five structural and
transactional requirements governing the relationship between a BOC and
a section 272 affiliate, one of which is that the affiliate ``shall
operate independently from the [BOC].'' The structural differences in
the organization of the two sections suggest that the term ``operate
independently'' in section 272(b)(1) should not be interpreted to
impose the same obligations on a BOC as section 274(b). In particular,
while the enumerated requirements of section 274(b) may be interpreted
to define the term ``operated independently'' in that context, they do
not define the term ``operate independently'' as used in section
272(b). We agree with SBC that, because the requirements listed in
sections 274(b)(1)-(9) of the Act overlap with the requirements of
sections 272(b), (c), and (e), it would be redundant to incorporate all
of the section 274(b) requirements into the ``operate independently''
requirement of section 272(b)(1).
Defining ``Operate Independently.'' The requirements that we adopt
to implement section 272(b)(1) are intended to prevent a BOC from
integrating its local exchange and exchange access operations with its
section 272 affiliate's activities to such an extent that the affiliate
could not reasonably be found to be operating independently, as
required by the statute. In order to protect against the potential for
a BOC to discriminate in favor of a section 272 affiliate in a manner
that results in the affiliate's competitors operating less efficiently,
we seek to ensure that a section 272 affiliate and its competitors
enjoy the same level of access to the BOC's transmission and switching
facilities. Accordingly, we conclude that operational independence
precludes the joint ownership of transmission and switching facilities
by a BOC and its section 272 affiliate, as well as the joint ownership
of the land and buildings where those facilities are located.
Furthermore, operational independence precludes a section 272 affiliate
from performing operating, installation, and maintenance functions
associated with the BOC's facilities. Likewise, it bars a BOC or any
BOC affiliate, other than the section 272 affiliate itself, from
performing operating, installation, or maintenance functions associated
with the facilities that the section 272 affiliate owns or leases from
a provider other than the BOC with which it is affiliated. Consistent
with these requirements and those established pursuant to sections
272(b)(5) and 272(c)(1), a section 272 affiliate may negotiate with an
affiliated BOC on an arm's length and nondiscriminatory basis to obtain
transmission and switching facilities, to arrange for collocation of
facilities, and to provide or to obtain services other than those
expressly prohibited herein.
We agree with several commenters that joint ownership of
transmission and switching facilities and the property on which they
are located would permit such substantial integration of the BOCs'
local operations with their interLATA activities as to preclude
independent operation, in violation of section 272(b)(1). Imposing a
prohibition on such joint ownership also avoids the need to allocate
the costs of such transmission and switching facilities between BOC
activities and the competitive activities in which a section 272
affiliate may be involved. We agree with the claims of some commenters
that, because the costs of wired telephony networks and network
premises are largely fixed and largely shared among local, access, and
other services, sharing of switching and transmission facilities may
provide a significant opportunity for improper allocation of costs
between the BOC and its section 272 affiliate.
By prohibiting joint ownership of transmission and switching
facilities, we also reduce the potential for a BOC to discriminate in
favor of its section 272 affiliate. Consistent with this purpose, we
define transmission and switching facilities broadly to include the
facilities used to provide local exchange and exchange access service.
The prohibition ensures that a section 272 affiliate must obtain any
such facilities pursuant to section 272(b)(5), which requires all
transactions between a BOC and its section 272 affiliate to be on an
arm's length basis and reduced to writing. Requiring section 272
affiliates to obtain transmission and switching facilities from a BOC
on an arm's length basis will increase the transparency of such
transactions, thereby facilitating monitoring and enforcement of the
section 272 requirements. Moreover, a section 272 affiliate and its
interLATA competitors will have to follow the same procedures when
obtaining services and facilities from a BOC. As described below,
sections 272(c) (1) and (e) require a section 272 affiliate to obtain
services and facilities on the same rates, terms, and conditions
available to unaffiliated entities. Contrary to the suggestion of some
commenters, those nondiscrimination safeguards would offer little
protection if a BOC and its section 272 affiliate were permitted to own
transmission and switching facilities jointly. To the extent that a
section 272 affiliate jointly owned transmission and switching
facilities with a BOC, the affiliate would not have to contract with
the BOC to obtain such facilities, thereby precluding a comparison of
the terms of transactions between a BOC and a section 272 affiliate
with the terms of transactions between a BOC and a competitor of the
section 272 affiliate. Together, the prohibition on joint ownership of
facilities and the nondiscrimination requirements should ensure that
competitors can obtain access to transmission and switching facilities
equivalent to that which section 272 affiliates receive.
The requirement that a BOC and its section 272 affiliate not
commonly own the land and buildings where their transmission and
switching facilities are located, like the prohibition on joint
ownership of facilities, should ensure that a section 272 affiliate and
its competitors both receive the best available access to transmission
and switching facilities. It does not, however, preclude a section 272
affiliate from collocating its equipment in end offices or on other
property owned or controlled by its affiliated BOC. Rather, as IDCMA
recognizes, the requirement should ensure that collocation agreements
between a BOC and its section 272 affiliate are reached pursuant to
arm's length negotiations and that the same collocation opportunities
are available to similarly situated non-affiliated entities. Moreover,
the ban on joint ownership of facilities should protect local exchange
competitors that request physical collocation by ensuring that a BOC's
section 272 affiliate does not obtain preferential access to the
limited available space in the BOC's central office.
We decline to read the ``operate independently'' requirement to
impose a blanket prohibition on joint ownership of property by a BOC
and a section 272 affiliate. Rather, we limit the restriction to joint
ownership of transmission and switching facilities and the land and
buildings where those facilities are located. We conclude that the
prohibition we have adopted should ensure that the section 272
affiliate's
[[Page 2945]]
competitors gain nondiscriminatory access to those transmission and
switching facilities that both section 272 affiliates and their
competitors may be unable to obtain from other sources. We find that
joint ownership of other property, such as office space and equipment
used for marketing or the provision of administrative services, may
provide economies of scale and scope without creating the same
potential for discrimination by the BOCs. Moreover, we believe that the
Commission's accounting rules; the separate books, records, and
accounts requirement of section 272(b); and the audit requirement of
section 272(d) provide adequate protection against the potential for
improper cost allocation.
We further conclude that allowing the same personnel to perform the
operating, installation, and maintenance services associated with a
BOC's network and the facilities that a section 272 affiliate owns or
leases from a provider other than the BOC would create the opportunity
for such substantial integration of operating functions as to preclude
independent operation, in violation of section 272(b)(1). Regardless of
whether the BOC or the section 272 affiliate were to provide such
services, we agree with AT&T that allowing the same individuals to
perform such core functions on the facilities of both entities would
create substantial opportunities for improper cost allocation, in terms
of both the personnel time spent in performing such functions and the
equipment utilized. We conclude, as we did in the BOC Separations
Order, 49 FR 1190 (January 10, 1984), that allowing the sharing of such
services would require ``excessive, costly and burdensome regulatory
involvement in the operation, plans and day-to-day activities of the
carrier * * * to audit and monitor the accounting plans necessary for
such sharing to take place.'' Accordingly, we read section 272(b)(1) to
bar a section 272 affiliate from contracting with a BOC or another
entity affiliated with the BOC to obtain operating, installation, and
maintenance functions associated with the section 272 affiliate's
facilities. As stated above, we believe that a prohibition on joint
ownership of transmission and switching facilities is necessary to
ensure that a BOC complies with the nondiscrimination requirements of
section 272. Consistent with that approach, we further interpret the
term ``operate independently'' to bar a BOC from contracting with a
section 272 affiliate to obtain operating, installation, or maintenance
functions associated with the BOC's facilities. Allowing a BOC to
contract with the section 272 affiliate for operating, installation,
and maintenance services would inevitably afford the affiliate access
to the BOC's facilities that is superior to that granted to the
affiliate's competitors.
We clarify that section 272(b)(1) does not preclude a BOC or a
section 272 affiliate from providing telecommunications services to one
another, so long as each entity performs itself, or obtains from an
unaffiliated third party, the operating, installation, and maintenance
functions associated with the facilities that it owns or leases from an
entity unaffiliated with the BOC. In particular, if a section 272
affiliate obtains unbundled elements from a BOC, that BOC can perform
the operating, installation, and maintenance functions associated with
those facilities. Moreover, we recognize the need for an exception to
the prohibition on shared operating, installation, and maintenance
services to allow the BOC to obtain support services for sophisticated
equipment purchased from the affiliate on a compensatory basis. For
instance, the BOC could contract with the section 272 affiliate for the
installation, maintenance, or repair of equipment, or the affiliate
could train the BOC's personnel to perform such functions. We further
note that the limited prohibition on shared services that we adopt is
consistent with section 272(e)(4), which states that a BOC or BOC
affiliate that is subject to 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.'' As we discuss below,
section 272(e)(4) does not grant a BOC the authority to provide
particular services to its affiliate, but rather prescribes the manner
in which a BOC must provide those services that it is otherwise
authorized to provide. Thus, section 272(e)(4) does not grant a BOC the
authority to provide operating, installation, and maintenance services
associated with the facilities that a section 272 affiliate owns or
leases from a provider other than the BOC.
In imposing these requirements, we reject the contention of some
commenters that Congress considered and rejected a prohibition on the
joint ownership of telecommunications transmission or switching
equipment or other property. Although the House bill contained such a
prohibition, the Senate bill did not. The Joint Explanatory Statement
indicates merely that the conference committee adopted the Senate
version of this provision with several modifications and does not offer
any specific explanation for the exclusion of the joint ownership
restriction. In these circumstances, our obligation is to interpret the
language of section 272(b)(1) in a manner consistent with its purpose,
which is to ensure the operational independence of a section 272
affiliate from its affiliated BOC.
The limited prohibition on shared services that we impose rests on
the ``operate independently'' requirement of section 272(b)(1), rather
than the requirement of section 272(b)(3) that a BOC and its section
272 affiliate have ``separate officers, directors, and employees.''
Accordingly, we reject the statutory construction argument advanced by
several BOCs, which is predicated on the text of the latter provision.
Those BOCs argue that, if a rule against separate employees were
sufficient to prevent the sharing of in-house services, Congress would
not have prohibited a BOC from engaging in purchasing, installation,
maintenance, hiring, training, and research and development for the
separated affiliate, in addition to forbidding the BOC and its
separated affiliate from having common officers, directors, and
employees, in section 274(b).
We believe it is consistent with both the letter and purposes of
section 272 to strike an appropriate balance between allowing the BOCs
to achieve efficiencies within their corporate structures and
protecting ratepayers against improper cost allocation and competitors
against discrimination. We decline to impose additional structural
separation requirements given the nondiscrimination safeguards, the
biennial audit requirement, and other public disclosure requirements
imposed by section 272. In combination with the accounting protections
established in the Accounting Safeguards Order, we believe the
requirements set forth herein will protect against potential
anticompetitive behavior.
In particular, we decline to read the ``operate independently''
requirement to impose a prohibition on all shared services. We
recognize the inherent tension between the ``operate independently''
requirement and allowing the integration of services. As we discuss
further below, however, we believe the economic benefits to consumers
from allowing a BOC and its section 272 affiliate to derive the
economies of scale and scope inherent in the integration of some
services outweigh any potential for competitive harm created thereby.
Therefore, we permit the sharing of administrative and other services.
For example, we read
[[Page 2946]]
section 272(b)(1) not to preclude a BOC and a section 272 affiliate
from contracting with one another to provide marketing services.
In construing other provisions of section 272, we address the
concerns of those commenters who urge us to interpret section 272(b)(1)
to prohibit a BOC and a section 272 affiliate from engaging in various
forms of joint research and development. As a preliminary matter, we
note that the MFJ Court considered equipment design and development to
be an integral part of ``manufacturing,'' as the term was used in the
MFJ. We emphasize that to the extent that research and development is a
part of manufacturing, it must be conducted through a section 272
affiliate, pursuant to section 272(a). To the extent that a BOC seeks
to develop services for or with its section 272 affiliate, the BOC must
develop services on a nondiscriminatory basis for or with other
entities, pursuant to section 272(c)(1).
Finally, although a number of commenters support a Computer II-type
prohibition on a section 272 affiliate's ability to construct, own, or
operate its own local exchange facilities, we conclude that such a
prohibition is not required by the language of section 272(b)(1). As
several BOCs suggest, limiting a section 272 affiliate to resale would
not necessarily increase the affiliate's operational independence,
particularly if the affiliate had to acquire facilities from its
affiliated BOC as a result of the requirement.
C. Section 272(b)(3) and Shared Services
1. Background
In the NPRM, we tentatively concluded that the section 272(b)(3)
requirement that a BOC and its section 272 affiliate have ``separate
officers, directors, and employees'' prohibits the sharing of in-house
functions, including operating, installation, and maintenance, as well
as administrative services. We noted that, pursuant to the Computer II
proceeding, the Commission allowed AT&T and its enhanced services
subsidiaries to share certain administrative services--accounting,
auditing, legal services, personnel recruitment and management,
finance, tax, insurance, and pension services--on a cost reimbursable
basis, but required the subsidiary to have its own operating,
marketing, installation, and maintenance personnel for the services and
equipment it offered. We sought comment on whether section 272(b)(3)
forbids the sharing of outside services or other types of personnel
sharing.
In the context of our discussion of section 272(g), we sought
comment on the related question of whether a section 272 affiliate must
purchase marketing services from an affiliated BOC on an arm's length
basis, pursuant to section 272(b)(5). Moreover, we sought comment on
whether it is necessary to require a BOC and its section 272 affiliate
to contract jointly with an outside marketing entity for joint
marketing of interLATA and local exchange services in order to comply
with section 272(b)(3). Finally, we invited parties to comment on the
corporate and financial arrangements that are necessary to comply with
sections 272(g)(2), 272(b)(3), and 272(b)(5).
2. Discussion
Sharing of Services. Based on the record before us, we decline to
prohibit the sharing of services other than operating, installation,
and maintenance services, as described above. We clarify that ``sharing
of services'' means the provision of services by the BOC to its section
272 affiliate, or vice versa. In response to our tentative conclusion
on this issue in the NPRM, the BOCs have argued persuasively that such
a prohibition is neither required as a matter of law, nor desirable as
a matter of policy. We note that section 272(b)(3) on its face is
silent on the issue of shared services. We are persuaded by the
arguments of the BOCs that the section 272(b)(3) requirement that a BOC
and a section 272 affiliate have separate officers, directors, and
employees simply dictates that the same person may not simultaneously
serve as an officer, director, or employee of both a BOC and its
section 272 affiliate. Thus, as MFS asserts, an individual may not be
on the payroll of both a BOC and a section 272 affiliate. As discussed
below, to the extent that a BOC provides services to its section 272
affiliate, it must provide them to other entities on the same rates,
terms, and conditions, pursuant to section 272(c)(1).
We also decline to impose a prohibition on the sharing of services
other than operating, installation, and maintenance services, on policy
grounds. We find that, if we were to prohibit the sharing of services,
other than those restricted pursuant to section 272(b)(1), a BOC and a
section 272 affiliate would be unable to achieve the economies of scale
and scope inherent in offering an array of services. We do not believe
that the competitive benefits of allowing a BOC and a section 272
affiliate to achieve such efficiencies are outweighed by a BOC's
potential to engage in discrimination or improper cost allocation. As
we have noted, the Commission permitted the sharing of administrative
services in the Computer II Final Order, 45 FR 31319 (May 13, 1980), on
the grounds that ``[w]ith an appropriate accounting system, whatever
administrative efficiencies may exist are preserved.'' We reject the
arguments of some parties that, because of changes in the
telecommunications marketplace and the language of the 1996 Act, a
different outcome is warranted in this case.
We recognize that allowing the sharing of in-house services will
require a BOC to allocate the costs of such services between the
operating company and its section 272 affiliate and provide
opportunities for improper cost allocation, exchanges of information,
and discriminatory treatment that may not be revealed in a subsequent
audit. Indeed, in the Computer II proceeding, the Commission indicated
that a major reason for prohibiting the sharing of particular services,
such as marketing services, was its desire to eliminate ``the inherent
difficulties in allocating joint and common costs.'' For these reasons,
we conclude that a BOC and a section 272 affiliate may share in-house
services with each other only to the extent that such sharing is
consistent with sections 272(b)(1), 272(b)(5), and 272(c)(1) of the
Act.
Consistent with section 272(b)(1), a BOC and its section 272
affiliate may not share operating, installation, and maintenance
services, as discussed above. In addition, as we conclude in the
Accounting Safeguards Order, an agreement to provide in-house services
by a BOC to its section 272 affiliate (or vice versa) constitutes a
transaction between that BOC and its section 272 affiliate, so that the
requirements of section 272(b)(5) govern. Accordingly, such
transactions must be conducted on an arm's length basis, reduced to
writing, and made available for public inspection. Moreover, such
transactions must be consistent with the affiliate transaction rules,
as modified in the Accounting Safeguards Order. In addition, the
section 272 requirements that a BOC and its section 272 affiliate
maintain separate books, records, and accounts, and be subject to an
audit every two years should strengthen the ability of competitors and
regulators to detect any inequities in cost allocation for shared
services. We agree with commenters who contend that, in any event,
federal price cap regulation reduces a BOC's incentives to allocate
costs improperly. Finally, section 272(c)(1) ensures that to the extent
that
[[Page 2947]]
a BOC provides services to its section 272 affiliate, it must make them
available to the affiliate's competitors on the same rates, terms, and
conditions.
We further conclude that section 272(b)(3) does not preclude the
parent company of the BOC and the section 272 affiliate from performing
functions for both the BOC and the section 272 affiliate, subject to
the requirements of section 272(b)(1). Similarly, an affiliate of the
BOC, such as a services affiliate, could provide services to both a BOC
and a section 272 affiliate. We are not persuaded by claims that the
sharing of services provided to a BOC and its section 272 affiliate by
a parent company or another BOC affiliate would allow the BOC and the
section 272 affiliate to achieve an unacceptable level of integration.
Instead, we agree with the view that the section 272(b)(3) separate
employees requirement extends only to the relationship between a BOC
and its section 272 affiliate. To the extent that the BOC contracts
with an unregulated affiliate, it is subject to the affiliate
transaction rules. Moreover, a parent company or a BOC affiliate that
performs services for both a BOC and its section 272 affiliate must
fully document and properly apportion the costs incurred in furnishing
such services.
Consistent with our conclusions, we decline to read section
272(b)(3) to preclude the sharing of marketing services. Given that
section 272(g) expressly contemplates that the each entity may market
or sell the services of the other, we conclude that a BOC and its
section 272 affiliate may provide marketing services for each other. We
agree with those commenters that assert that the entities must provide
such services pursuant to arm's length transactions, consistent with
the requirements of section 272(b)(5). Moreover, the parent of a BOC
and its section 272 affiliate or another BOC affiliate may perform
marketing functions for both entities.
Services Provided by an Outside Entity. We further conclude that
section 272(b)(3) does not prohibit a BOC and its section 272 affiliate
from obtaining services from the same outside supplier. Indeed, we find
no statutory support for limiting permissible outsourcing, as proposed
by MCI or Time Warner.
Nor do we construe section 272(b)(3), when read in light of section
272(b)(1), to require a BOC and a section 272 affiliate to contract
with outside entities to perform their joint marketing services. We
agree with the Citizens for a Sound Economy Foundation that such a
requirement would reduce the BOCs' ability to serve consumers without
providing additional protection against anticompetitive behavior. Each
entity, however, must pay its full share of any outsourced services
that it receives.
Other activities. We reject AT&T's request that we interpret
section 272(b)(3) to prohibit compensation schemes that base the level
of remuneration of BOC officers, directors, and employees on the
performance of the section 272 affiliate, or vice versa. We conclude
that tying the compensation of an employee of a section 272 affiliate
to the performance of a Regional Holding Company and all of its
enterprises as a whole, including the performance of the BOC, does not
make that individual an employee of the BOC. Similarly, tying the
compensation of a BOC employee to the performance of a Regional Holding
Company and all of its enterprises as a whole, including the
performance of the section 272 affiliate, does not make that individual
an employee of the section 272 affiliate.
E. Section 272(b)(4)
1. Background
Section 272(b)(4) states that a section 272 affiliate ``may not
obtain credit under any arrangement that would permit a creditor, upon
default, to have recourse to the assets of the [BOC].'' In the NPRM, we
tentatively concluded ``that a BOC may not co-sign a contract or any
other instrument with a separate affiliate that would allow the
affiliate to obtain credit in a manner that violates'' this section. We
sought comment on what other types of activities section 272(b)(4)
prohibits, whether the Commission should establish specific
requirements regarding those activities, and the relative costs and
benefits of such regulation.
2. Discussion
As we stated in the NPRM, the intent of this provision is to
protect ratepayers from shouldering the cost of a default by a section
272 affiliate. We adopt our tentative conclusion that section 272(b)(4)
prohibits a BOC from co-signing a contract or any other instrument with
a section 272 affiliate that would allow the affiliate to obtain credit
in a manner that grants the creditor recourse to the BOC's assets in
the event of default by the section 272 affiliate. Moreover, because
the provision precludes the section 272 affiliate from obtaining credit
under ``any arrangement that would permit a creditor, upon default, to
have recourse to the assets of the [BOC],'' we find that section
272(b)(4) likewise prohibits the parent of a BOC or any non-272
affiliate from co-signing a contract or any other arrangement with the
BOC's section 272 affiliate that would allow the creditor to obtain
such recourse to the BOC's assets in the event of default by the
section 272 affiliate. Indeed, we conclude that section 272(b)(4)
prohibits a section 272 affiliate from entering into any arrangement to
obtain credit that permits the lender recourse to the BOC in the event
of default.
While preventing the affiliate from jeopardizing ratepayer assets,
we conclude that section 272(b)(4) does not forbid a section 272
affiliate from using assets other than its own as collateral when
seeking credit. To impose such a restriction where, as here, it is not
needed to protect ratepayer assets, would force section 272 affiliates
to operate inefficiently, to the detriment of consumers and
competition. In particular, we agree with MCI and Sprint that a BOC's
parent could secure credit, whether through the issuance of bonds or
otherwise, for the benefit of the section 272 affiliate, provided that
BOC assets are not at risk.
F. Section 272(b)(5)
1. Background
Section 272(b)(5) states that an affiliate ``shall 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.'' In the NPRM, we sought comment on
whether this provision necessitates the adoption of any non-accounting
safeguards.
2. Discussion
We conclude that we need not adopt additional non-accounting
safeguards to implement section 272(b)(5). In the Accounting Safeguards
Order, we address the definition of ``transactions'' and consider the
provision's requirement that all transactions be ``reduced to writing
and available for public inspection.'' Moreover, in our discussion of
sections 272(b)(1) and (b)(3), we make clear that ``transactions''
include the provision of services and transmission and switching
facilities by the BOC and its affiliate to one another. We reject
CompTel's proposal to adopt additional requirements, which are
addressed generally in other parts of this Order and the companion
Accounting Safeguards Order.
V. Nondiscrimination Safeguards
As we observed in the NPRM, after a BOC enters a competitive
market, such as long distance, it may have an incentive to use its
control of local exchange facilities to discriminate against its
affiliate's rivals. Section
[[Page 2948]]
272(c) of the Act responds to these competitive concerns by
establishing nondiscrimination safeguards that apply to the BOCs'
provision of manufacturing, interLATA telecommunications, and interLATA
information services. We address the requirements of this section
below.
A. Relationship of Section 272(c)(1) and Pre-existing Nondiscrimination
Requirements
1. Background
Section 272(c)(1) states that ``[i]n its dealings with its
affiliate described in subsection (a), a [BOC] (1) may not discriminate
between that company or affiliate and any other entity in the provision
or procurement of goods, services, facilities, and information, or in
the establishment of standards.'' In the NPRM, we sought comment on the
relationship between the nondiscrimination obligations imposed by
sections 272(c)(1) and the Commission's pre-existing nondiscrimination
obligations in sections 201 and 202. In particular, we sought comment
on whether the flat prohibition against discrimination in section
272(c)(1) imposes a stricter standard for compliance than the ``unjust
and unreasonable'' standard in section 202.
2. Discussion
We find that section 272(c)(1) establishes an unqualified
prohibition against discrimination by a BOC in its dealings with its
section 272 affiliate and unaffiliated entities. Section 202(a), by
contrast, prohibits ``any unjust or unreasonable discrimination * * *,
or * * * any undue or unreasonable preference or advantage.'' Because
the text of the section 272(c)(1) nondiscrimination bar differs from
the section 202(a) prohibition, we conclude that Congress did not
intend section 272's prohibition against discrimination in the 1996 Act
to be synonymous with the ``unjust and unreasonable'' discrimination
language used in the 1934 Act, but rather, intended a more stringent
standard. We therefore reject the arguments of those who argue that the
section 272(c)(1) standard is not materially different from the
standard in section 202.
B. Meaning of Discrimination in Section 272(c)(1)
1. Background
We tentatively concluded in the NPRM that the prohibition against
discrimination in section 272(c)(1) means, at a minimum, that BOCs must
treat all other entities in the same manner as they treat their section
272 affiliates, and must provide and procure goods, services,
facilities, and information to and from these other entities under the
same terms, conditions, and rates. We noted, however, that a requesting
entity may have equipment with different technical specifications than
the equipment of the BOC section 272 affiliate. We sought comment,
therefore, on whether the terms of section 272(c)(1) could be construed
to require a BOC to provide a requesting entity with a quality of
service or ``functional outcome'' identical to that provided to its
affiliate even if this would require the BOC to provide goods,
facilities, services, or information to a requesting entity that are
different from those provided to the affiliate.
2. Discussion
We affirm our tentative conclusion that BOCs must treat all other
entities in the same manner as they treat their section 272 affiliates.
We conclude therefore that, pursuant to section 272(c)(1), a BOC must
provide to unaffiliated entities the same goods, services, facilities,
and information that it provides to its section 272 affiliate at the
same rates, terms, and conditions. We decline, as some commenters
suggest, to interpret section 272(c)(1) more broadly to conclude that a
BOC must provide unaffiliated entities different goods, services,
facilities, and information than it provides to its section 272
affiliate in order to ensure that it is providing the same quality of
service or functional outcome to both its affiliate and unaffiliated
entities. To do so would, in effect, be interpreting this section the
same way we interpreted section 251(c)(2) in the First Interconnection
Order, 61 FR 45476 (August 29, 1996). We believe that to interpret the
nondiscrimination requirement of section 272(c)(1) in this manner would
be inappropriate as a matter of statutory construction, inconsistent
with its legislative purpose, and unenforceable.
As a matter of statutory construction, we find that the
nondiscrimination provision of section 272(c)(1), by its terms, is much
narrower in scope than the requirement in section 251(c)(2). Section
251(c)(2) imposes on incumbent LECs ``the duty to provide, for the
facilities and equipment of any requesting telecommunications carrier,
interconnection with the local exchange carrier's network * * * that is
at least equal in quality to that provided by the [LEC] to itself or to
any subsidiary, affiliate, or any other party to which the carrier
provides interconnection.'' In the First Interconnection Order, we
interpreted the term ``equal in quality'' as requiring an incumbent LEC
to provide interconnection to its network at a level of quality that is
at least indistinguishable from that which the incumbent LEC provides
itself. Further, we found that, to the extent a carrier requests
interconnection that is of a superior or lesser quality than the
incumbent LEC currently provides, the incumbent LEC is obligated to
provide the requested interconnection to the extent technically
feasible.
The language of section 272(c)(1), in contrast, contains no such
``equal in quality'' requirement; it simply requires that unaffiliated
entities receive the same treatment as the BOC gives to its section 272
affiliate. Unlike section 251, therefore, section 272(c) is not a
vehicle by which requesting entities can require a BOC to provide
goods, facilities, services, or information that are different from
those that the BOC provides to itself or to its affiliates. Nor is it,
as some commenters suggest, designed to prevent a BOC from
discriminating between unaffiliated competitors.
Our reading of the statutory language of sections 251 and 272 is
consistent with the differing underlying purposes of those provisions.
The section 251 requirements are designed to ensure that incumbent LECs
do not discriminate in opening their bottleneck facilities to
competitors. As we stated in the First Interconnection Order, ``[u]nder
section 251, incumbent [LECs], including [BOCs], are mandated to take
several steps to open their network to competition, including providing
interconnection, offering access to unbundled elements to their
networks, and making their retail services available at wholesale rates
so that they can be resold.'' In implementing section 251, therefore,
we adopted rules to open one of the last monopoly bottleneck
strongholds in telecommunications--the local exchange and exchange
access market.
In adopting rules in this proceeding, however, our goal is to
ensure that BOCs do not use their control over local exchange
bottlenecks to undermine competition in the new markets they are
entering--interLATA services and manufacturing. The section 272
safeguards, among other things, are intended to protect competition in
these markets from the BOCs' ability to use their existing market power
in local exchange services to obtain an anticompetitive advantage. We
find that when viewed in this context, the section 272(c)(1)
nondiscrimination provision is designed to provide the BOC an
[[Page 2949]]
incentive to provide efficient service to rivals of its section 272
affiliate, by requiring that potential competitors do not receive less
favorable prices or terms, or less advantageous services from the BOC
than its separate affiliate receives.
We find that interpreting section 272 to require ``functional
equality'' between a BOC section 272 affiliate and any unaffiliated
entity would not only be impractical, but unenforceable. The
``functional equality'' standard would require a BOC to provide
additional services or functions to other entities that it does not
provide to its own affiliate. Because section 272, unlike section 251,
contains no requirement that a BOC must provide goods, services,
facilities, and information to the extent ``technically feasible,'' it
would be extremely difficult, as a practical matter, to limit the types
of goods, services, and facilities that a BOC would be obligated to
provide to requesting entities. Further, the terms ``functional
outcome'' or ``functional equality'' are likely to mean different
things to different entities. Because the meaning of these terms is
likely to depend on the particular characteristics of each requesting
entity, the Commission would be required to apply this standard to a
myriad of factual circumstances on a case-by-case basis. As one
commenter observes, ensuring this type of equality would be impossible
to do, as well as impossible to enforce.
We reject the argument that, because our interpretation of section
272(c)(1) effectively limits competitors to those options that the BOC
affiliate finds ``useful,'' a BOC will be able to design network
interfaces that work optimally only with its section 272 affiliate's
specifications and not with the specifications of other entities.
Section 272(c)(1) prohibits a BOC from discriminating in the
establishment of standards. As we conclude below, a BOC's adoption of a
network interface that favors its section 272 affiliate and
disadvantages an unaffiliated entity will establish a prima facie case
of discrimination under section 272(c)(1). Further, section 272(c)(1)
prohibits a BOC from discriminating in the provision of facilities or
information, and section 251(c)(5) imposes upon BOCs certain network
disclosure requirements. As mentioned above, section 251(c)(5) requires
incumbent LECs to provide reasonable public notice of network changes
affecting competing service providers' performance or ability to
provide telecommunications services, as well as changes that would
affect the incumbent LEC's interoperability with other service
providers. In the Second Interconnection Order, 61 FR 47284 (September
6, 1996), we interpreted this provision to require incumbent LECs to
disclose changes subject to this requirement at the ``make/buy'' point.
In light of the requirements of sections 272(c)(1) and 251(c)(5), we
decline at this time to impose additional obligations on the BOCs to
ensure that they structure their own networks to achieve the same level
of interoperability that the section 272 affiliate receives from the
BOC.
We also decline to adopt MCI's suggested presumption that the
specifications requested by an unaffiliated entity are the appropriate
ones for a truly separate and independent affiliate and that any
different specifications needed by the BOC's section 272 affiliate
reflect a lack of proper physical and operational separation from the
BOC. We recognize that there may be circumstances, such as the adoption
of a new and innovative technology by the BOC section 272 affiliate,
where differences in technical specifications between a section 272
affiliate and an unaffiliated entity do not evidence a lack of
structural separation between the BOC and its section 272 affiliate.
As discussed below, we conclude that the protection of section
272(c)(1) extends to any good, service, facility, or information that a
BOC provides to its section 272 affiliate. We therefore agree with AT&T
that to the extent a BOC develops new services for or with its section
272 affiliate, it must develop new services for or with unaffiliated
entities in the same manner. That is, we find that the development of
new services, including the development of new transmission offerings,
is the provision of service under section 272(c)(1) that, once provided
by the BOC to its section 272 affiliate, must be provided to
unaffiliated entities in a nondiscriminatory manner. In the NPRM, we
recognized the potential for competitive harm in a situation in which a
BOC failed to cooperate with an interLATA carrier that is introducing
an innovative new service until the BOC's section 272 affiliate is
ready to initiate the same service. Similarly, AT&T asserts that the
section 272(c)(1) nondiscrimination requirement should be interpreted
to prevent BOCs from denying a competitor's request for a new or more
cost effective access arrangement on the ground that all entities,
including its section 272 affiliate, are receiving the same access
service at the same price. We find that the BOC, under section
272(c)(1), is obligated to work with competitors to develop new
services if it cooperates in such a manner with its section 272
affiliate.
We agree with AT&T therefore that if, as we outlined in our NPRM, a
BOC purposely delayed the implementation of an innovative new service
by denying a competitor's reasonable request for interstate exchange
access until the BOC section 272 affiliate was ready to provide
competing service, such conduct may constitute unlawful discrimination
under the Act. Moreover, as we observed in the NPRM, although the 1996
Act imposes specific nondiscrimination obligations on the BOCs and
their section 272 affiliates, the Communications Act imposed certain
pre-existing nondiscrimination requirements on common carriers
providing interstate communications service. Among them, section 201
provides that all common carriers have a duty ``to establish physical
connections with other carriers,'' and to furnish telecommunications
services ``upon reasonable request therefor.'' We conclude, therefore,
that if a BOC were to engage in strategic behavior to benefit its
section 272 affiliate, in the manner suggested by AT&T, such action may
not only violate section 272(c)(1), but would also violate sections
201(a) of the Act.
Finally, we conclude that a complainant will be found to have
established a prima facie case of unlawful discrimination under section
272(c)(1) if it can demonstrate that a BOC has not provided
unaffiliated entities the same goods, services, facilities, and
information that it provides to its section 272 affiliate at the same
rates, terms, and conditions. To rebut the complainant's case, the BOC
may demonstrate, among other things, that rate differentials between
the section 272 affiliate and unaffiliated entity reflect differences
in cost or that the unaffiliated entity expressly requested superior or
less favorable treatment in exchange for paying a higher or lower price
to the BOC. We recognize, as Sprint and Time Warner suggest, there will
be some instances where the costs of providing certain goods, services,
or facilities to its affiliate and to an unaffiliated entity differ. As
we stated in the First Interconnection Order, where costs differ, rate
differences that accurately reflect those differences are not
unlawfully discriminatory. Strict application of the section 272(c)(1)
prohibition on discrimination would itself be discriminatory if the
costs of supplying customers are different. Similarly, we also
conclude, as we did
[[Page 2950]]
in the First Interconnection Order, that ``price differences, such as
volume and term discounts, when based upon legitimate variations in
costs, are permissible under the 1996 Act when justified.''
C. Definition of ``Goods, Services, Facilities and Information'' in
Section 272(c)(1)
1. Background
In the NPRM we sought comment on the interplay among the
definitions of the terms ``services,'' ``facilities,'' and
``information'' in various subsections of 272, and between section 272
and section 251(c). We also sought comment on what regulations, if any,
are necessary to clarify the types or categories of services,
facilities, or information that must be made available under section
272(c)(1). We asked parties to comment on whether further defining the
terms ``goods,'' ``services,'' ``facilities,'' and ``information''
would enable competing providers to detect violations of this section
by enabling them to compare more accurately a BOC's treatment of its
affiliate with a BOC's treatment of unaffiliated competing providers.
2. Discussion
We conclude that any attempt to define exhaustively the terms
``goods, services, facilities, and information'' in section 272(c)(1)
may unnecessarily limit the scope of this section's otherwise
unqualified nondiscrimination requirement. At the same time, however,
we disagree with ITAA that the Commission should refrain from
attempting to clarify the meaning of these terms. We find instead that
clarifying the types of activities these terms encompass will provide
useful guidance to potential competitors that seek to avail themselves
of the protections of section 272(c)(1). In enforcing the
nondiscrimination requirement of section 272(c)(1), we intend to
construe these terms broadly to prevent BOCs from discriminating
unlawfully in favor of their section 272 affiliates.
We find that neither the terms of section 272(c)(1), nor the
legislative history of this provision, indicates that the terms
``goods, services, facilities, and information'' should be limited in
the manner suggested by some commenters. We therefore decline to
interpret the terms in section 272(c)(1) as including only
telecommunications-related or, even more specifically, common carrier-
related ``goods, services, facilities, and information.'' Similarly, we
reject arguments set forth by NYNEX, PacTel, and U S West that the term
``services'' should exclude administrative and support services.
Although NYNEX contends that, as a practical matter, unaffiliated
entities are unlikely to avail themselves of such services, we find
that there are certain administrative services, such as billing and
collection services, that unaffiliated entities may find useful.
Further, as discussed above, we construe the term ``services'' to
encompass any service the BOC provides to its section 272 affiliate,
including the development of new service offerings.
We conclude therefore that the protection of section 272(c)(1)
extends to any good, service, facility, or information that a BOC
provides to its section 272 affiliate. For example, we find that if a
BOC were to decide to transfer ownership of a unique facility, such as
its Official Services network, to its section 272 affiliate, it must
ensure that the transfer takes place in an open and nondiscriminatory
manner. That is, pursuant to the nondiscrimination requirement of
section 272(c)(1), the BOC must ensure that the section 272 affiliate
and unaffiliated entities have an equal opportunity to obtain ownership
of this facility.
We also conclude that the terms ``services,'' ``facilities,'' and
``information'' in section 272 should be interpreted to include, among
other things, the meaning of these terms under section 251(c). The term
``facilities,'' therefore, includes but is not limited to the seven
unbundled network elements described in the First Interconnection
Order. We decline to limit the scope of these terms to their meaning in
section 251 because section 272 encompasses a broader range of
activities than does section 251. We also emphasize that in contrast to
section 251, where an incumbent LEC is prohibited from discriminating
against any requesting telecommunications carrier, section 272(c)(1)
prohibits BOCs from discriminating against ``any other entity.''
Because section 272 does not define the term ``entity,'' we interpret
this unqualified term broadly to ensure that all competitors may
benefit from the protections of section 272(c)(1). Thus, we agree with
Sprint that this term should include the definition of the term
``entity'' as set forth in the electronic publishing section of the
Act; however, we also find it appropriate to include within the meaning
of ``entity'' the providers of the activities encompassed by section
272. We conclude, therefore, that the term ``entity'' includes
telecommunications carriers, ISPs, and manufacturers.
We disagree with ATSI and CIX, however, that by interpreting ``any
other entity'' to include information service providers and by
concluding that the term ``facilities'' in section 272(c)(1)
encompasses the meaning of that term as it is used in section 251(c),
ISPs acquire the right to obtain unbundled access to the local loop and
other network elements whenever BOCs provide their section 272
affiliates with such access. Pursuant to section 251(c)(3), only
telecommunications carriers providing a telecommunications service are
entitled to obtain access to unbundled network elements. Because ISPs
may only obtain access to unbundled elements pursuant to section 251 to
the extent they are providing telecommunications services, we conclude
that they may not attempt to circumvent the limitations of section 251
by virtue of their rights under section 272(c)(1). This conclusion is
consistent with our finding in the Second Interconnection Order that
the inclusion of information services in the definition of ``services''
under section 251(c)(5) ``does not vest information service providers
with substantive rights under other provisions of section 251, except
to the extent that they are also operating as telecommunications
carriers.'' To the extent, however, that a BOC chooses voluntarily to
provide facilities, including network elements, to a section 272
affiliate that is solely providing information services (and thus does
not qualify as a telecommunications carrier under section 251), we
conclude that a BOC must, pursuant to section 272(c)(1), provide such
facilities to other requesting ISPs.
We therefore agree with MFS that, if a BOC chooses to allow its
information service affiliate to collocate routers, servers, or other
equipment, section 272(c)(1) requires that the same accommodations be
extended, on a nondiscriminatory basis, to competing ISPs. Collocation
is a means of achieving interconnection and access to unbundled network
elements that incumbent LECs, including BOCs, must provide to
requesting carriers under section 251. Although section 251 does not
require incumbent LECs to permit entities other than telecommunications
carriers to collocate equipment on an incumbent LEC's premises,
sections 251 and 272 do not prohibit BOCs from voluntarily allowing
ISPs to collocate equipment on their premises. Thus, we find that, if a
BOC permits its section 272 affiliate to collocate facilities used to
provide information services, the BOC must permit collocation, under
[[Page 2951]]
section 272(c)(1), by similarly situated entities. If the BOC's section
272 affiliate qualifies as a ``telecommunications carrier,'' the BOC
need only permit other telecommunications carriers to collocate their
equipment. If, however, the BOC's section 272 affiliate only provides
information services, the BOC must permit similarly situated ISPs to
collocate equipment at the BOCs premises, even if such entities do not
qualify as telecommunications carriers.
As Sprint points out, the term ``information'' in section 272(c)(1)
is not limited as it is in section 272(e)(2) to information
``concerning [the BOC's] provision of exchange access.'' In fact, as
noted above, we find no limitation in the statutory language on the
type of information that is subject to the section 272(c)(1)
nondiscrimination requirement. For this reason, we reject U S West's
assertion that section 272(c)(1) only governs that information which
may give a separate affiliate an ``unfair advantage.'' We conclude,
however, that the term ``information'' includes, but is not limited to,
CPNI and network disclosure information. We therefore reject arguments
made by some BOCs that the nondiscrimination provision of section
272(c)(1) does not govern the BOCs use of CPNI. With respect to CPNI,
we conclude that BOCs must comply with the requirements of both
sections 222 and 272(c)(1). We decline to address parties' arguments
raised in this proceeding regarding the interplay between section
272(c)(1) and section 222 to avoid prejudging CPNI issues that will be
addressed in a separate proceeding.
D. Establishment of Standards
1. Background
Section 272(c)(1) prohibits a BOC from discriminating between its
section 272 affiliate and other entities in the ``establishment of
standards.'' In the NPRM we sought comment on what ``standards'' are
encompassed by this provision. We observed that a BOC may act
anticompetitively by creating standards that require or favor equipment
designs that are proprietary to its section 272 affiliate. We sought
comment on what procedures, if any, we should implement to ensure that
a BOC does not discriminate between its affiliate and other entities in
setting standards. We asked parties to comment, for example, on whether
BOCs should be required to participate in standard-setting bodies in
the development of standards covered by section 272(c)(1).
2. Discussion
We conclude that the term ``standards'' in section 272(c)(1)
includes the meaning of this term as it is used in section 273. In the
Manufacturing NPRM, we sought comment on how the term ``standards''
should be defined ``for purposes of implementation of the 1996 Act to
ensure that standards processes are open and accessible to the
public.'' We note, however, that unlike the use of the term
``standards'' in sections 273(d)(4) and 273(d)(5), the term
``standards'' in section 272(c)(1) is not limited by the term
``industry-wide.'' We conclude, therefore, that section 272(c)(1)
prohibits discrimination in the establishment of any standard, not only
those that are ``industry-wide.''
As we observed in the Manufacturing NPRM, the process by which
standards are established may present opportunities for anticompetitive
behavior by the BOCs. We decline, however, to implement additional
procedures, beyond those outlined in section 273, to ensure that BOCs
do not discriminate between their section 272 affiliates and other
entities in establishing industry-wide standards. Rather, we agree with
Bellcore and PacTel that the procedures for the establishment of
industry-wide standards and generic requirements for telecommunications
equipment and CPE appear at this time to be adequately addressed by the
requirements contained in section 273(d)(4). For example, in response
to MCI, we note that section 273(d)(4) already provides for an open
standards-setting process whereby all interested parties have the
opportunity to fund and participate in the development of industry-wide
standards or generic requirements on a ``reasonable and
nondiscriminatory basis.'' We find no basis in the record for
concluding that the requirements established by section 273, and any
regulations adopted thereunder, will not be sufficient to deter
discrimination in the establishment of industry-wide standards.
Although we decline at this time to establish additional procedures
beyond those required in section 273(d)(4), we recognize that there is
a distinct potential competitive danger that a BOC will use standards
in its own and its section 272 affiliate's network that are not
``industry-wide'' (that is, not employed by ``at least 30 percent of
all access lines'') or established by an accredited standards
development organization, but rather specifically tailored to meet its
own needs or those of its section 272 affiliate. Because such standards
may not be developed in an open and nondiscriminatory process, such as
the one required for the establishment of industry-wide standards in
section 273(d)(4), we find that those standards may place unaffiliated
entities at a competitive disadvantage. For example, if a BOC adopts a
particular non-accredited or non-industry-wide protocol or network
interface, it may, by virtue of its substantial size and market share,
effectively force competing entities to alter their specifications in
order to maintain the same level of interoperability with the BOC or
the BOC affiliate. We conclude, therefore, that the adoption of any
standard that has the effect of favoring the BOC's section 272
affiliate and disadvantaging an unaffiliated entity will establish a
prima facie violation of section 272(c)(1).
We also conclude, on the basis of the record before us, that it is
not necessary as a matter of law, nor desirable as a matter of policy,
to require BOC participation in the standards-setting process. The
language of section 272(c)(1) cannot be read as requiring such
participation; moreover, BOCs have an interest in participating
voluntarily in standard-setting organizations because standards that
are ultimately adopted may materially impact the BOCs' competitive
position. Further, we decline to become involved at this time in the
standard-setting process, as suggested by AT&T, in order to accomplish
the purposes of section 272(c)(1). Unlike section 256, which, among
other things, permits the Commission to participate in the development
of public telecommunications network interconnectivity standards that
promote access, section 272(c)(1) does not contemplate Commission
involvement. Moreover, we reject MCI's proposal that we insert
ourselves into the dispute resolution process to accomplish the
purposes of section 272(c)(1). Section 273(d)(5) requires the
Commission to prescribe a dispute resolution process to address the
anticompetitive harms that may result from the establishment of
industry-wide standards under section 273(d)(4) and expressly prohibits
the Commission from becoming a party to this process. As to disputes
that may arise in the context of other public standard-setting
processes, we find, on the basis of the record before us, that
Commission involvement beyond its existing role in the section 208
complaint process is unnecessary.
[[Page 2952]]
E. Procurement Procedures
1. Background
Section 272(c)(1) also prohibits the BOCs from discriminating
between their section 272 affiliates and other entities in their
procurement of goods, services, facilities, and information. In the
NPRM, we observed that this provision prohibits a BOC from purchasing
manufactured network equipment solely from its affiliate, purchasing
the equipment from the affiliate at inflated prices, or giving any
preference to the affiliate's equipment in the procurement process and
thereby excluding rivals from the market in the BOC's service area. We
sought comment on how the BOCs could establish nondiscriminatory
procurement procedures designed to ensure that other entities are
treated on the same terms and conditions as a BOC affiliate. We invited
comment, specifically, on the nature and extent of rules necessary to
ensure that such procedures are implemented.
2. Discussion
As stated above, we find that section 272(c)(1) establishes an
unqualified prohibition against discrimination by a BOC in its dealings
with its section 272 affiliate and unaffiliated entities. We conclude,
therefore, that any discrimination with respect to a BOC's procurement
of goods, services, facilities, or information between its section 272
affiliate and an unaffiliated entity establishes a prima facie case of
discrimination under section 272(c)(1). For example, consistent with
our observations in the NPRM, we find that a prima facie case of
discrimination under section 272(c)(1) may be established if a BOC
purchases manufactured network equipment solely from its section 272
affiliate, purchases such equipment from its affiliate at inflated
prices, or gives any preference to the affiliate's equipment in the
procurement process, thereby excluding rivals from the market in the
BOC's service area.
Insofar as section 272(c)(1) governs a BOC's procurement of
manufacturing services, we find that BOC procurement of
telecommunications equipment should be performed in a manner consistent
with the manufacturing requirements of section 273. We conclude,
therefore, that section 272(c)(1) requires a BOC to adhere to the
nondiscrimination and procurement standards governing the procurement
of telecommunications equipment set forth in sections 273(e)(1) and
273(e)(2) of the Act. We therefore defer consideration of detailed
procurement procedures with respect to telecommunications equipment to
the Manufacturing NPRM, which specifically addresses the requirements
of these sections. We conclude, however, that the BOCs must, at a
minimum, comply with any and all regulations adopted to implement the
standards of sections 273(e)(1) and 273(e)(2); failure to do so may be
evidence of discrimination under section 272(c)(1).
We recognize, however, that the nondiscrimination requirement of
section 272(c)(1) encompasses a broader range of activities than those
described in sections 273(e)(1) and 273(e)(2). Nevertheless, because
the record is largely silent on the nature and extent of rules
necessary to ensure that BOCs do not discriminate in their procurement
of goods, services, facilities, and information under section
272(c)(1), we decline, at this time, to adopt rules to implement this
requirement. In response to TIA's concerns, therefore, we conclude that
the record in this proceeding does not support adoption of any concrete
procurement procedures beyond those already mandated by sections
273(e)(1) and 273(e)(2). Although we decline to issue rules, we caution
BOCs that allegations of discrimination in their procurement of goods,
services, facilities, and information under section 272(c)(1) will be
evaluated in light of that section's unqualified prohibition on
discrimination. Further, we note that allegations of discrimination may
more easily be rebutted by demonstrated compliance with pre-existing,
publicly available procedures for procurement.
F. Enforcement of Section 272(c)(1)
In the NPRM, we observed that the Commission previously adopted a
regulatory scheme to ensure that the BOCs do not discriminate in the
provision of basic services used to provide enhanced services or in
disclosing changes in the network that are relevant for the competitive
manufacture of CPE. We sought comment on whether any of the reporting
and other requirements that the Commission applied to the BOCs in the
Computer III and ONA proceedings, which were adopted in lieu of the
structural separation requirements of Computer II, are sufficient to
implement section 272(c)(1) and provide protection against the type of
BOC behavior that section 272(c)(1) seeks to curtail. We address this
issue, as well as the requirements and mechanisms necessary to
facilitate the detection and adjudications of section 272 violations,
below in part IX.
VI. Fulfillment of Certain Requests Pursuant to Section 272(e)
A. Section 272(e)(1)
1. Background
Section 272(e)(1) states that a BOC and a BOC affiliate subject to
section 251(c) ``shall fulfill any requests from an unaffiliated entity
for telephone exchange service and exchange access 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.'' In the
NPRM, we tentatively concluded that the term ``unaffiliated entity''
includes ``any entity, regardless of line of business, that is not
affiliated with a BOC'' as defined under section 153(1) of the Act. We
sought comment on the scope of the term ``requests'' and on whether it
included, inter alia, ``initial installation requests, as well as any
subsequent requests for improvement, upgrades or modifications of
service, or repair and maintenance of * * * services.'' We tentatively
concluded that section 272(e)(1) requires the BOCs to treat
unaffiliated entities on a nondiscriminatory basis in completing orders
for telephone exchange service and exchange access, but does not grant
unaffiliated entities any additional rights beyond those otherwise
granted by the Communications Act or Commission rules. We also sought
comment regarding how to implement section 272(e)(1) and specifically
inquired whether reporting requirements for service intervals analogous
to those imposed by Computer III and ONA would be sufficient.
2. Discussion
Based on our analysis of the record, we adopt our tentative
conclusion that the term ``unaffiliated entity'' includes ``any entity,
regardless of line of business, that is not affiliated with a BOC'' as
defined under section 153(1) of the Act. Also based on the record, we
conclude that section 272(e)(1) requires the BOCs to treat unaffiliated
entities on a nondiscriminatory basis in completing orders for
telephone exchange service and exchange access, but does not grant
unaffiliated entities any additional rights to make requests beyond
those granted by the Communications Act or Commission rules. We
conclude that the term ``requests'' should be interpreted broadly, and
that it includes, but is not limited to, initial installation requests,
subsequent requests for improvement, upgrades or modifications of
service, or
[[Page 2953]]
repair and maintenance of these services.
Section 272(e)(1) unambiguously states that a BOC must fulfill
requests from unaffiliated entities at least as quickly as it fulfills
its own or its affiliates' requests. To implement this statutory
directive, we conclude that, for equivalent requests, the response time
a BOC provides to unaffiliated entities should be no greater than the
response time it provides to itself or its affiliates. We are not
persuaded by the BOC's argument that variations among individual
requests make any comparison between requests meaningless, and thus
make such a standard unachievable. The BOC must fulfill equivalent
requests within equivalent intervals. Thus, for example, an
unaffiliated entity's request of a certain size, level of complexity,
or in a specific geographic location must be fulfilled within a period
of time that is no longer than the period of time in which a BOC
responds to an equivalent request from itself or its affiliates.
Because we anticipate that the facts relating to each request will
vary, we believe it is appropriate to determine whether requests are
equivalent on a case-by-case basis.
Section 272(e)(1) requires a BOC to fulfill the requests of
unaffiliated entities within a period no longer than the period in
which it fulfills its own or its affiliates requests. Because the
statute does not mandate that a BOC follow a particular procedure in
meeting this requirement, we decline to adopt the proposals of AT&T and
Teleport to require the BOCs to use electronic order processing systems
or to use the identical systems that the BOCs use to process their own
service requests. We emphasize, however, regardless of the procedures
that a BOC employs to process service orders from unaffiliated
entities, it must be able to demonstrate that those procedures meet the
statutory standard. Under current industry practice, BOCs and
interexchange carriers use electronic mechanisms to implement PIC
changes; exchange billing information; and, in some instances, provide
ordering, repair, and trouble administration information. We believe
that these current mechanisms, and the requirement that incumbent LECs
provide nondiscriminatory access to operation support systems functions
pursuant to sections 251(c)(3) and 251(c)(4) of the Act, will promote
the use of electronic interfaces between unaffiliated entities and the
BOCs.
We also conclude that the BOCs must make available to unaffiliated
entities information regarding the service intervals in which the BOCs
provide service to themselves or their affiliates. The statute imposes
a specific performance standard on the BOCs in section 272(e)(1), and
we conclude that, absent Commission action, the information necessary
to detect violations of this requirement will be unavailable to
unaffiliated entities. Unlike the information necessary to ensure
compliance with other subsections of section 272, there is no
requirement that the information necessary to verify compliance with
section 272(e)(1) must be disclosed under other provisions of the Act
or Commission rules. Without the disclosure requirements imposed here,
parties will be unable readily to ascertain how long it takes a BOC to
fulfill its own or its affiliates' requests for service. Section
272(b)(5), which requires that all transactions between a BOC and its
section 272 affiliate be reduced to writing and made available for
public inspection, does not provide parties an adequate mechanism to
obtain information necessary to evaluate compliance with section
272(e)(1) because section 272(b)(5) is necessarily prospective in
nature. The information disclosed pursuant to section 272(b)(5) will
allow unaffiliated entities to determine that a BOC and its section 272
affiliate have reached an agreement and the relevant terms and
conditions of that agreement, but the document produced to satisfy
section 272(b)(5) will not allow parties to determine the time it
actually takes for a BOC to fulfill its own or its affiliates'
requests. Section 272(e)(1) governs actual BOC performance, not
contractual arrangements. Moreover, section 272(b)(5) by itself is
insufficient to implement section 272(e)(1) because it will only make
information available about transactions between a BOC and its section
272 affiliate; section 272(e)(1), in contrast, governs requests by the
BOC itself and all of the BOC's affiliates. We also conclude that, in
order to provide meaningful enforcement of section 272(e)(1), interval
response times must be disclosed more frequently than the biennial
audit required by section 272(d). Finally, a disclosure obligation will
allow all entities to compare, in a timely fashion, their own service
intervals with those provided to the BOC or its affiliates. Contrary to
the contentions of some BOCs, vendor management programs similar to the
one utilized by AT&T would not provide this information. These vendor
management programs provide information to a BOC customer about the
service intervals the BOC provides to that customer, but do not provide
comparative data about the service intervals provided to other
entities, such as BOC affiliates.
We do not agree with PacTel that the absence of discrimination
found in ONA reports indicates that disclosure requirements are of
little value in enforcing section 272(e)(1). Disclosure requirements
are valuable because they promote compliance and give aggrieved
competitors a basis for seeking a remedy directly from a BOC. If
competitors can easily obtain data about a BOC's compliance with
section 272(e)(1), this increases the likelihood that potential
discrimination can be detected and penalized; this, in turn, decreases
the danger that discrimination will occur in the first place.
Disclosure requirements also minimize the burden on the Commission's
enforcement process because entities will have the information needed
to resolve disputes informally prior to submitting a complaint to the
Commission. We also are not persuaded by NYNEX and Ameritech that the
automation and nondiscriminatory design of their provisioning and
maintenance procedures obviate the need for disclosure requirements.
Although the BOCs' use of nondiscriminatory, automated order processing
systems is important for meeting the requirements of section 272(e)(1),
the existence of these systems does not guarantee that requests placed
via these systems are actually completed within the requisite period of
time. Finally, we are not persuaded by the arguments of U S West and
PacTel that, because parties are able to incorporate information
disclosure requirements into agreements negotiated under sections 251
and 252 of the Act, a separate information disclosure requirement is
unnecessary. Section 272(e)(1) and section 251 do not govern similar
activities. Section 251 provides a framework that requires incumbent
LECs to provide, inter alia, interconnection, unbundled network
elements, and wholesale services to requesting telecommunications
carriers. In contrast, section 272(e)(1) requires BOCs to fulfill
requests for telephone exchange service and exchange access from
unaffiliated entities on a nondiscriminatory basis. To link compliance
with section 272(e)(1) to the outcome of individual negotiations would
not adequately implement section 272(e)(1), particularly because the
class of entities entitled to nondiscriminatory treatment under section
272(e)(1) is much broader than the class of entities who may make
requests under section 251.
[[Page 2954]]
In response to the comments raised in the record, we conclude that
we should seek further comment on the specific information disclosure
requirements proposed by AT&T in an ex parte letter filed after the
official pleading cycle closed. In the NPRM, we sought comment on
whether reporting requirements analogous to the Computer III and ONA
reporting requirements would be sufficient to implement section
272(e)(1). The parties are divided about the usefulness of service
interval reporting similar to ONA reporting for implementing section
272(e)(1) and on the merits of AT&T's proposal. We agree with NYNEX
that we should provide an additional opportunity for parties to comment
on the specific aspects of the disclosure requirements needed to
implement section 272(e)(1); therefore, we are separately issuing a
Further Notice of Proposed Rulemaking regarding these matters.
We reject at this time, however, AT&T's more expansive proposal to
require BOCs to submit to the Commission the underlying data for the
information they must make publicly available. The submission of data
necessary to meet this requirement--including, for example, every
trouble report submitted to a BOC for a given period--would impose a
substantial administrative burden on the BOCs, and possibly on the
Commission as well, and is unnecessary to enforce section 272(e)(1). We
also decline to order the BOCs to publicize the response times for all
entities, as suggested by AT&T and Teleport, because the standard
established by section 272(e)(1) is the response time given to the BOC
itself and its affiliates.
B. Section 272(e)(2)
1. Background
Section 272(e)(2) states that a BOC and a BOC affiliate that is
subject to section 251(c) ``shall not provide any facilities, services,
or information concerning its provision of exchange access to [a
section 272(a) affiliate] unless such facilities, services, or
information are made available to other providers of interLATA services
in that market on the same terms and conditions.'' In the NPRM, we
sought comment on the scope of the term ``facilities, services, or
information concerning its provision of exchange access'' and the term
``other providers of interLATA services in that market.'' We also
sought comment on the relevance of the MFJ and prior Commission
proceedings, including our equal access rules, in implementing this
provision.
2. Discussion
Definitional issues. We conclude that section 272(e)(2) does not
require a BOC to provide facilities, services, or information
concerning its provision of exchange access to ISPs, as suggested by
ITAA and MFS. Although ISPs are included within the term ``other
providers of interLATA services,'' ISPs do not use exchange access as
it is defined by the Act, and, therefore, section 272(e)(2)'s
requirement that BOCs provide exchange access on a nondiscriminatory
basis is not applicable to ISPs. ``Exchange access'' is defined as
``the offering of access to telephone exchange services or facilities
for the purpose of the origination or termination of telephone toll
services.'' ``Telephone toll service'' is defined, in turn, as
``telephone service between stations in different exchange areas for
which there is made a separate charge not included in contracts with
subscribers for exchange service.'' This definition makes clear that
``telephone toll service'' is a ``telecommunications service.''
Therefore, by definition, an entity that uses ``exchange access'' is a
telecommunications carrier. Because ISPs do not provide telephone toll
services, and therefore are not telecommunications carriers, they are
not eligible to obtain exchange access pursuant to section 272(e)(2).
We are not persuaded by ITAA's argument that, because section
272(f)(2) states that the requirements of section 272 cease to apply
with respect to interLATA information services at sunset, but exempts
section 272(e) from the sunset requirement, section 272(e), including
section 272(e)(2), must apply to ISPs. Section 272(f)(2) cannot be read
to extend the application of section 272(e)(2) beyond its express
terms. Similarly, we reject MFS's argument that we should use section
272(e)(2) to grant ISPs rights under section 251 because, as we
articulated above, this would expand the scope of section 251 beyond
its express limitations.
We agree with U S West that the term ``in that market'' is intended
to ensure that, to benefit from section 272(e)(2), an interLATA
provider must be operating in the same geographic area as the relevant
BOC affiliate. Therefore, we conclude that the term ``providers of
interLATA services in that market'' means any interLATA services
provider authorized to provide interLATA service in the same state
where the relevant section 272 affiliate is providing service. We have
designated a state as the relevant geographic area for purposes of
section 272(e)(2) because the BOCs will obtain authorization to provide
interLATA services on a state-by-state basis.
Implementation of section 272(e)(2). In light of the protections
imposed in other portions of the Act and our rules, we conclude that we
do not need to adopt rules to implement section 272(e)(2) at this time.
In our First Interconnection Order and Second Interconnection Order, we
adopted rules implementing section 251 of the Act, which address, inter
alia, the provision of exchange access and network disclosure
requirements under the Act. In addition, section 251(g) of the Act
preserves the equal access requirements in place prior to the passage
of the 1996 Act, including obligations imposed by the MFJ and any
Commission rules. If, in the future, it appears that additional rules
are necessary to enforce the requirements of section 272(e)(2), we will
take action at that time.
We conclude that a separate disclosure requirement under section
272(e)(2) is not warranted. Section 272(b)(5) requires that all
transactions between a BOC and its section 272 affiliate be reduced to
writing and made available for public inspection. Parties will be able
to determine the specific services and facilities that a BOC provides
to its section 272 affiliate by inspecting the documentation that must
be maintained pursuant to section 272(b)(5). In addition, information
about a BOC's provision of exchange access to itself or to its
affiliates will be available through the information disclosure
requirement we are imposing pursuant to section 272(e)(1). Accordingly,
we reject AT&T's suggestion that the Commission require the BOCs to
disclose publicly all exchange access services and facilities used by
their interLATA affiliates and to update these disclosures whenever
upgrades are made.
We conclude that our current network disclosure rules are
sufficient to meet the requirement of section 272(e)(2) that BOCs
disclose any ``information concerning * * * exchange access'' on a
nondiscriminatory basis. Therefore, we conclude that AT&T's suggestion
that the Commission mandate additional technical disclosure
requirements is unnecessary. Section 251(c)(5) imposes on incumbent
LECs ``[t]he duty to provide reasonable public notice of changes in the
information necessary for the transmission and routing of services
using that local exchange carrier's facilities or networks, as well as
of any other changes that would affect the interoperability of those
facilities and networks.'' We have adopted detailed rules specifying
how this requirement is to be implemented.
[[Page 2955]]
Further, the Commission's prior network disclosure requirements are
still in place, including the Computer II ``all carrier rule'' and the
Computer III network disclosure requirements. We emphasize that if a
BOC preferentially disclosed information to its section 272 affiliate
or withheld information from competing providers of interLATA services,
that BOC would be in violation of section 272(e)(2). Our rules
implementing section 251(c)(5) explicitly prohibit this behavior: they
require LECs to make network disclosures according to a specific
timetable, and prohibit preferential disclosures in advance of that
timetable. We do not address IDCMA's concerns regarding information
disclosures for manufacturers because section 273 addresses the needs
of manufacturers in detail, and we are addressing the implementation of
section 273 in a separate proceeding.
C. Section 272(e)(3)
1. Background
Section 272(e)(3) provides that a BOC and a BOC affiliate that is
subject to the requirements of section 251(c) ``shall charge [a section
272(a) affiliate], or impute to itself (if using the access for its
provision of its own services), an amount for access to its telephone
exchange service and exchange access that is no less than the amount
charged to any unaffiliated interexchange carriers for such service.''
In the NPRM, we tentatively concluded that a section 272 affiliate's
purchase of telephone exchange service and exchange access at tariffed
rates, or imputation of tariffed rates to the BOC, would be sufficient
to implement section 272(e)(3). We additionally sought comment
regarding the appropriate mechanism to enforce this provision in the
absence of tariffed rates.
2. Discussion
We adopt our tentative conclusion that a section 272 affiliate's
purchase of telephone exchange service and exchange access at tariffed
rates, or a BOC's imputation of tariffed rates, will ensure compliance
with section 272(e)(3). If a section 272 affiliate purchases telephone
exchange service or exchange access at the highest price that is
available on a nondiscriminatory basis under tariff, section
272(e)(3)'s requirement that a BOC must charge its section 272
affiliate an amount for access to its telephone exchange service and
exchange access that is no less than the amount charged to any
unaffiliated interexchange carrier will be fulfilled. In addition, we
conclude that other mechanisms are available under the Act to ensure
that BOCs charge nondiscriminatory prices in accordance with section
272(e)(3). If a section 272 affiliate were to acquire services or
unbundled elements from a BOC at prices that are available on a
nondiscriminatory basis under section 251, the terms of section
272(e)(3) would be met. To the extent that a statement of generally
available terms filed pursuant to section 271(c)(1)(B) would include
prices that are available on a nondiscriminatory basis in a manner
similar to tariffing, and a BOC's section 272 affiliate obtains access
or interconnection at a price set forth in the statement, this would
also demonstrate compliance with section 272(e)(3). We address the
appropriate allocation and valuation of these transactions for
accounting purposes in our companion Accounting Safeguards Order.
We further conclude that section 272(e)(3) requires that a BOC must
make volume and term discounts available on a nondiscriminatory basis
to all unaffiliated interexchange carriers. We do not agree, however,
with those parties that suggest that additional requirements are
necessary to implement section 272(e)(3). AT&T, for example, proposes
that a BOC or section 272 affiliate pay ``a price per unit of traffic
that reflects the highest unit price that any interexchange carrier
pays for a like exchange or exchange access service.'' We agree with
the BOCs that AT&T's suggested rule would unfairly disadvantage BOC
affiliates by preventing them from receiving volume discounts that
other interexchange carriers with similar access traffic volumes would
receive. We agree with Ameritech that, because the provision of
services that fall under section 272(e)(3) must either be tariffed or
made publicly available under section 252(h), unaffiliated
interexchange carriers will be able to detect discriminatory
arrangements. We recognize that a BOC may have an incentive to offer
tariffs that, while available on a nondiscriminatory basis, are in fact
tailored to its affiliate's specific size, expansion plans, or other
needs. Our enforcement authority under section 271(d)(6) and section
208 are available to address this and other forms of potential
discrimination by a BOC.
We reject MCI's proposal that the Commission review the BOC section
272 affiliates' prices, or profits, or both, to ensure that the section
272 affiliates' prices cover their access charges and all other costs.
MCI's contention that access charges are excessive is more
appropriately addressed in the Commission's forthcoming proceeding on
access charge reform. We also note that the ability of competing
carriers to acquire access through the purchase of unbundled elements
(if those unbundled elements are properly priced) will increase
pressure on the BOCs to decrease access charges, and will give
competing carriers the opportunity to charge retail prices that reflect
the lower cost of unbundled elements. We interpret section 272(e)(3) to
require the BOCs to charge nondiscriminatory prices, as indicated
above, and to allocate properly the costs of exchange access according
to our affiliate transaction and joint cost rules, as modified by our
companion Accounting Safeguards Order. We conclude that further rules
addressing predatory pricing by BOC section 272 affiliates are not
necessary because adequate mechanisms are available to address this
potential problem. A BOC section 272 affiliate that charges a rate for
interstate services below its incremental cost of providing such
services would be in violation of sections 201 and 202 of the Act.
Federal antitrust law also would apply to the predatory pricing of
interstate and intrastate services; and the pricing of intrastate
services can also be addressed at the state level. Further, as we
indicated in the NPRM, the danger of successful predation by BOCs in
the interexchange market is small. We also reject MCI's proposal
because, as the BOCs argue and MCI concedes, Commission review of
affiliates' retail prices would place an enormous administrative burden
on the Commission. Such a review would also discourage BOC section 272
affiliates from competing on the basis of service prices. Because we
find that adequate remedies exist to address anticompetitive pricing by
BOC section 272 affiliates, we believe that regulation of these new
interLATA providers' retail prices pursuant to section 272(e)(3) would
not conform with the deregulatory, pro-competitive goals of the 1996
Act.
D. Section 272(e)(4)
1. Background
Section 272(e)(4) states that a BOC and a BOC affiliate that is
subject to 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.'' In the NPRM, we sought comment regarding the
scope of the
[[Page 2956]]
term ``interLATA or intraLATA facilities or services'' including, for
example, whether it included ``information services and all facilities
used in the delivery of such services.''
2. Discussion
We conclude that section 272(e)(4) does not alter the requirements
of sections 271 and 272(a). Section 272(e)(4) is not a grant of
authority for BOCs to provide ``interLATA or intraLATA facilities or
services'' in contravention of the scheme governing BOC provision of
in-region interLATA services in section 271 or the requirement that
these services must be provided through a separate affiliate in section
272(a). Section 272(e)(4) is intended to ensure the nondiscriminatory
provision of services that the BOCs are authorized to offer directly,
and not through an affiliate, such as those services exempted from
section 271 prior to the sunset of the separate affiliate requirement.
Like the other subsections of section 272, section 272(e)(4) prescribes
the manner in which a BOC must offer services and facilities it is
authorized to provide.
We find no basis in the 1996 Act for the BOCs' argument that
section 272(e)(4) is a grant of authority for the BOCs to provide
interLATA services and facilities. By its terms, section 272(e)(4)
contains no reference to the provisions of section 271 governing BOC
entry into in-region interLATA services. Therefore, interpreting
section 272(e)(4) as an immediate and independent grant of authority
that allows BOCs to provide ``interLATA or intraLATA facilities or
services,'' even where such provision is prohibited by other sections
of the statute, would contravene the requirement of section 271 that
BOCs receive Commission approval prior to providing these services.
We are also unpersuaded by PacTel's alternative argument that
section 272(e)(4) is not a grant of authority, but that section 272
allows the BOCs to provide wholesale, ``carrier to carrier'' interLATA
services directly, rather than through the section 272 affiliate.
PacTel states that section 271 requires BOCs to obtain authorization
from the Commission before providing ``interLATA services,'' but, in
contrast, section 272(a)(2)(B) only requires BOCs to offer interLATA
``telecommunications service'' through a separate affiliate. PacTel
also states that the definition of ``interLATA service'' is broad and
makes no distinction between retail and wholesale offerings, but that
``telecommunications service'' is defined as ``the offering of
telecommunications for a fee directly to the public, or to such classes
of users as to be effectively available directly to the public,
regardless of the facilities used.'' PacTel therefore argues that only
interLATA telecommunications services offered ``directly to the
public'' must be offered through a separate affiliate. PacTel contends
that retail services are services offered ``directly to the public''
that must be offered through a section 272 affiliate, but that
wholesale services may be offered from the BOC because they are not
``telecommunications services.'' We reject PacTel's argument because it
is inconsistent with language of section 251(c)(4) and because the
legislative history indicates that the definition of telecommunications
services is intended to clarify that telecommunications services are
common carrier services, which include wholesale services to other
carriers.
A comparison between the definitions relied upon by PacTel and the
language of section 251(c)(4) leads us to conclude that wholesale
services are not excluded from the definition of ``telecommunications
service.'' Unlike the definition of telecommunications service, section
251(c)(4) explicitly uses the terms ``retail'' and ``wholesale.''
Section 251(c)(4) states that incumbent LECs must offer, ``at wholesale
rates any telecommunications service that the carrier provides at
retail to subscribers who are not telecommunications carriers * * *''
This language implicitly recognizes that some telecommunications
services are wholesale services. If this were not the case, the
qualifying phrase ``that the carrier provides at retail'' would be
superfluous.
The legislative history and the definition of common carriage
further support this conclusion. The Joint Explanatory Statement states
that the definition of telecommunications service ``recognize[s] the
distinction between common carrier offerings that are provided to the
public * * * and private services.'' Therefore, the term
``telecommunications service'' was not intended to create a retail/
wholesale distinction, but rather a distinction between common and
private carriage. Common carrier services include services offered to
other carriers. For example, exchange access service is offered on a
common carrier basis, but is offered primarily to other carriers. In
addition, both the Commission's rules and the common law have held that
offering a service to the public is an element of common carriage. The
Commission's rules define a ``communication common carrier'' as ``any
person engaged in rendering communication for hire to the public,'' and
the courts have held that the indiscriminate offering of a service to
the public is an essential element of common carriage. Neither the
Commission nor the courts, however, has construed ``the public'' as
limited to end-users of a service. In NARUC I, the Court of Appeals for
the D.C. Circuit held that an entity may qualify as a common carrier
even if ``the nature of the service rendered is sufficiently
specialized as to be of possible use to only a fraction of the total
population.'' See NARUC v. FCC, 525 F.2d 630, 641 (D.C. Cir. 1976). In
light of the statutory language of section 251(c)(4), legislative
history, Commission precedent, and the common law, we decline to limit
the definition of telecommunications services to retail services.
If a BOC wishes to utilize the capacity on its Official Services
network to provide interLATA services to other carriers or to end-
users, it must do so in accordance with the requirements of the 1996
Act and our rules. Specifically, the BOC must provide in-region,
interLATA services through a section 272 affiliate as required by
section 272(a). If a BOC, therefore, seeks to transfer ownership of its
Official Services network to its section 272 affiliate, it must ensure
that the transfer takes place in a nondiscriminatory manner, as
explained supra in part V.C, and must comport with our affiliate
transaction rules.
Finally, although the term ``interLATA services'' includes both
interLATA information services and interLATA telecommunications
services, we conclude that ISPs are not entitled to nondiscriminatory
treatment under section 272(e)(4). The definitional sections of the Act
make clear that the term ``carriers'' is synonymous with the term
``common carriers,'' which does not include ISPs. Therefore, the
requirement that the BOCs provide interLATA or intraLATA facilities or
services to ``all carriers'' on a nondiscriminatory basis does not
extend to ISPs under section 272(e)(4).
[[Page 2957]]
E. Sunset of Subsections 272(e) (2) and (4)
1. Background
The NPRM sought comment regarding how to reconcile an apparent conflict
between sections 272(e) and 272(f). We noted that subsections 272(e)(2)
and (e)(4) establish standards that refer to BOC affiliates. On the one
hand, those sections could be interpreted as subject to sunset because
they depend on the existence of a separate affiliate. On the other
hand, section 272(f) specifically exempts section 272(e) from the
sunset requirements. We sought comment regarding whether Congress
intended to eliminate the requirements of sections 272(e)(2) and (e)(4)
once the BOCs were no longer required to maintain separate affiliates
under section 272(a).
2. Discussion
We find that the plain language of the statute compels us to
conclude that sections 272(e)(2) and 272(e)(4) can be applied to a BOC
after sunset only if that BOC retains a separate affiliate. The
nondiscrimination obligations imposed by subsections (e)(2) and (e)(4)
are framed in reference to a BOC's treatment of its affiliates. In
contrast, the nondiscrimination obligations imposed by subsections
(e)(1) and (e)(3) are framed in reference to the BOC ``itself'' as well
as the BOC affiliate. If a BOC does not maintain a separate affiliate,
subsections (e)(2) and (e)(4) cannot be applied because there will be
no frame of reference for the BOC's conduct. Section 272(f), however,
exempts section 272(e) from sunset without qualification. In order to
give meaning to section 272(f), we conclude that subsections (e)(2) and
(e)(4) will apply to a BOC's conduct so long as that BOC maintains a
separate affiliate. Subsections (e)(1) and (e)(3) will continue to
apply in all events.
A number of safeguards will be available to prevent discriminatory
behavior by BOCs after the separate affiliate requirements of section
272 cease to apply. As we explain in detail above, section 251(c)(5),
section 251(g), and the Commission's rules imposing network disclosure
and equal access requirements oblige BOCs to provide exchange access on
a nondiscriminatory basis. In addition, intraLATA services and
facilities must be provided on a nondiscriminatory basis under section
251(c)(3), and the provision of interLATA services and facilities will
continue to be governed by the nondiscrimination provisions of sections
201 and 202 of the Act. In addition, once local competition develops,
it will provide a check on the BOCs' discriminatory behavior because
competitors of the BOC affiliates will be able to turn to other
carriers for local exchange service and exchange access.
VII. Joint Marketing
A. Joint Marketing Under Section 271(e)
1. Background
Section 271(e)(1) limits the ability of certain interexchange
carriers to market interLATA services jointly with BOC local services
purchased for resale. Specifically, the statute states that:
Until a Bell operating company is authorized pursuant to [section
271(d)] to provide interLATA services in an in-region State, or until
36 months have passed since the date of enactment of the
Telecommunications Act of 1996, whichever is earlier, a
telecommunications carrier that serves greater than 5 percent of the
Nation's presubscribed access lines may not jointly market in such
State telephone exchange service obtained from such company pursuant to
section 251(c)(4) with interLATA services offered by that
telecommunications carrier.
In the NPRM, we sought comment on whether we should interpret
section 271(e) to prohibit, for example, promoting the availability of
interLATA services and local exchange services in the same
advertisement, making these services available from a single source, or
providing bundling discounts for the purchase of both services. We also
observed that the clear language of the statute only restricts covered
interexchange carriers (i.e., those carriers that fall within the scope
of section 271(e) of the Act) from joint marketing interLATA services
and BOC local services purchased for resale. Thus, section 271(e) does
not preclude these interexchange carriers from jointly marketing local
exchange services provided over their own facilities, or through the
purchase of unbundled network elements pursuant to section 251(c)(3).
Nor does section 271(e) prohibit those interexchange carriers from
``marketing'' BOC resold local exchange services. Rather, the
prohibition is limited to ``jointly marketing'' BOC resold local
services with interLATA services.
2. Discussion
Scope of section 271(e). We agree with the consensus of the
commenters that the language in section 271(e) is clear--the joint
marketing prohibition applies only to the marketing of interLATA
services together with BOC local exchange services purchased for resale
pursuant to section 251(c)(4). We refer to the latter services in the
balance of this discussion as ``BOC resold local services.'' In the
First Interconnection Order, we stated that the terms of section 271(e)
do not prevent affected interexchange carriers from marketing interLATA
services jointly with local exchange services provided through the use
of unbundled network elements obtained pursuant to section 251(c)(3).
We affirm that conclusion and, accordingly, reject USTA's suggestion
that we extend the section 271(e) restriction to apply to the joint
marketing of such services. We find that the express text of the
statute limits the prohibition to BOC resold local services obtained
pursuant to section 251(c)(4) and we decline to extend the restriction
beyond the limits mandated by Congress. We further conclude, for the
same reason, that the joint marketing restriction does not apply if the
covered interexchange carrier provides local service over its own
facilities, or by reselling local exchange services purchased from a
local exchange carrier that is not a BOC.
Specific Joint Marketing Restrictions. We conclude that Congress
adopted the joint marketing restriction in section 271(e) in order to
limit the ability of covered interexchange carriers to provide ``one-
stop-shopping'' of certain services until the BOC is authorized to
provide interLATA service in the same territory. We agree with the
majority of commenters that bundling BOC resold local services and
interLATA services (including interLATA telecommunications and
interLATA information services) into a package that can be sold in a
single transaction constitutes the type of joint marketing that
Congress intended to restrict by enacting section 271(e). We define
``bundling'' to mean offering BOC resold local exchange services and
interLATA services as a package under an integrated pricing schedule.
Thus, we find that section 271(e) restricts covered interexchange
carriers from, among other things, providing a discount if a customer
purchases both interLATA services and BOC resold local services,
conditioning the purchase of one type of service on the purchase of the
other, and offering both interLATA services and BOC resold local
services as a single combined product. This restriction applies until
the BOC receives authorization under section 271 to offer interLATA
service in an in-region state, or February 8, 1999, whichever comes
first.
We also conclude that section 271(e) bars covered interexchange
carriers from marketing interLATA services and BOC resold local
services to consumers through a single transaction. We define
[[Page 2958]]
a ``single transaction'' to include, at a minimum, the use of the same
sales agent to market both products to the same customer during a
single communication. Although requiring separate transactions for
different types of services might preclude interexchange carriers from
taking advantage of economies of scale, we agree with those commenters
who argue that such a restriction is an essential element of the joint
marketing prohibition in section 271(e) during the period the
limitation remains in effect. We reject the suggestion of some BOCs
that the section 271(e) restriction requires covered interexchange
carriers to establish separate sales forces for marketing interLATA
services and BOC resold local services. We agree with the commenting
parties that claim neither the statute nor the legislative history
indicates that Congress intended to impose such a requirement.
Moreover, in our view, requiring a separate sales force is not
necessary to accomplish the primary congressional objective of barring
the affected interexchange carrier from offering ``one-stop shopping''
for interLATA and BOC resold local services. Thus, a single agent is
permitted to market interLATA services in the context of one
communication, and to market BOC resold local services to the same
potential customer in the context of a separate communication.
The application of the section 271(e) joint marketing restriction
to advertising implicates constitutional issues. We are aware of our
obligation under Supreme Court precedent to construe the statute
``where fairly possible so as to avoid substantial constitutional
questions.'' See United States v. X-Citement Video, 115 S.Ct. 464, 467,
469 (1994). In the advertising context, the Supreme Court has held that
the First Amendment protects ``the dissemination of truthful and
nonmisleading commercial messages about lawful products and services.''
See 44 Liquormart, Inc. v. Rhode Island, 116 S.Ct. 1495, 1504 (1996)
(44 Liquormart). We must be careful, therefore, not to construe section
271(e) as imposing an advertising restriction that is overly broad. The
fact that section 271(e) permits a covered interexchange carrier to
offer and market separately both interLATA services and BOC resold
services and also permits such carriers to offer and market jointly
interLATA services and local services provided through means other than
BOC resold local services (e.g., through the use of unbundled network
elements, over its own facilities, or by reselling local exchange
services purchased from a local exchange carrier that is not a BOC)
makes the task of crafting an effective advertising restriction
particularly difficult. For example, we see no lawful basis for
restricting a covered interexchange carrier's right to advertise a
combined offering of local and long distance services, if it provides
local service through means other than reselling BOC local exchange
service. In addition, we cannot adopt a blanket rule that prohibits
interexchange carriers from publicizing in one advertisement that they
offer interLATA services and publicizing in a separate advertisement
that they offer BOC resold local services. As MCI points out, the
statute permits interexchange carriers to offer both types of services
through the same corporate entity and under the same brand name. Thus,
such advertisements would be truthful statements about lawful
activities.
A closer question is whether we may ban a covered interexchange
carrier from claiming in a single advertisement that it offers both
interLATA services and local services in instances where the carrier
intends to furnish the latter through BOC resold local services, which
it is authorized to market only on a stand-alone basis. On the one
hand, such an advertisement would contain truthful statements about
services that the interexchange carrier is authorized to provide. On
the other hand, such an advertisement may be inconsistent with the
section 271(e) prohibition against jointly marketing the two types of
services. As some BOCs appear to recognize, however, the principal
concern with the promotion of both services in a single advertisement
is that it may suggest ``to consumers that the services are available
jointly as a package when in fact they are not.'' We agree with these
commenters that the First Amendment does not confer the right to
deceive the public. Indeed, the Supreme Court has emphasized that the
First Amendment does not prevent the government from regulating
commercial speech to avoid such deceptions. Further, the Court has held
that the government ``may require commercial messages to appear in such
a form, or include such additional information, warnings and
disclaimers, as are necessary to prevent its being deceptive.'' See 44
Liquormart, 116 S.Ct. at 1506 (internal quotation marks omitted).
Consistent with this precedent, we conclude that a covered
interexchange carrier may advertise the availability of interLATA
services and BOC resold local services in a single advertisement, but
such carrier may not mislead the public by stating or implying that it
may offer bundled packages of interLATA service and BOC resold service,
or that it can provide ``one-stop shopping'' of both services through a
single transaction. As discussed above, both activities are prohibited
under section 271(e).
We further conclude that the joint marketing restriction in section
271(e) applies only to activities that take place prior to the
customer's decision to subscribe. We agree with AT&T that, after a
potential customer subscribes to both interLATA and BOC resold local
services from a covered interexchange carrier, that carrier should be
permitted to provide joint ``customer care'' (i.e., a single bill for
both BOC resold local services and interLATA services, and a single
point-of-contact for maintenance and repairs). Such activities are
post-marketing activities. To impose additional prohibitions on post-
marketing activities would add additional burdens not required by the
statute. Furthermore, a rule that would require a customer to send
separate payments to the same corporate entity would be confusing and
burdensome, and therefore would not serve the public interest.
Customers should also be permitted to make a single phone call for
complaints and repairs about both local and long distance services once
they have ordered both services. Because we interpret section 271(e) to
apply only to activities that take place prior to a customer's decision
to subscribe, we conclude that, once a customer subscribes to both
local exchange and interLATA services from a carrier that is subject to
the restrictions of 271(e), that carrier may market new services to an
existing subscriber.
We recognize that the principles we have adopted to implement the
requirements of section 271(e) may not address all of the possible
marketing strategies that a covered interexchange carrier might
initiate to sell BOC resold local services and interLATA services to
the public. We emphasize, however, that in enforcing this statutory
section, we intend to examine the specific facts closely to ensure that
covered interexchange carriers are not contravening the letter and
spirit of the congressional prohibition on joint marketing by conveying
the appearance of ``one-stop shopping'' BOC resold local services and
interLATA services to potential customers.
[[Page 2959]]
B. Section 272(g)
1. Marketing Restrictions on BOC Section 272 Affiliates
a. Background. Section 272(g)(1) provides that a BOC affiliate may
not market or sell telephone exchange services provided by the BOC
``unless that company permits other entities offering the same or
similar service to market and sell its telephone exchange services.''
In the NPRM, we requested comment on what regulations, if any, are
necessary to implement this provision.
b. Discussion. We agree with the BOCs that no regulations are
necessary to implement section 272(g)(1). We do not adopt the three-
month advance notice period proposed by AT&T, because it is not
required by the statute. Nor do we believe that such a notice period is
necessary in order for other carriers to receive nondiscriminatory
treatment. As PacTel notes, any agreement between a BOC and its
affiliate that enables the affiliate to market or sell BOC services
must be conducted on an arm's length basis, reduced to writing, and
made publicly available as required by section 272(b)(5). Thus, under
section 272(g)(1), other entities offering services that are the same
or similar to services offered by the BOC affiliate would have the same
opportunity to market or sell the BOC's telephone exchange service
under the same conditions as the BOC affiliate.
We also agree with Sprint that the term ``same or similar service''
in section 272(g)(1) encompasses information services. Thus, a section
272 affiliate may not market or sell information services and BOC
telephone exchange services unless the BOC permits other information
service providers to market and sell telephone exchange services.
Finally, we decline to adopt MCI's requested clarification that
272(g)(1) applies to the international sphere. MCI appears to be
concerned about a BOC's discriminatory provision of exchange access to
foreign carriers. We conclude, however, that section 272(g)(1) applies
only to the provision of ``telephone exchange'' service, not to the
provision of ``exchange access.'' Section 202 bars a BOC from
unreasonable discrimination in the provision of exchange access
services used to originate and terminate domestic interstate and
international toll traffic.
2. Marketing Restrictions on BOCs
a. Background. Section 272(g)(2) states that ``[a BOC] may not
market or sell interLATA service provided by an affiliate required by
this section within any of its in-region States until such company is
authorized to provide interLATA services in such State under section
271(d).'' In the NPRM, we sought comment on whether section 272(g)(2)
imposes the same types of restrictions on the BOCs that section 271(e)
imposes on the interexchange carriers.
b. Discussion. We agree with the BOCs that no regulations are
necessary to implement section 272(g)(2). The statute clearly states
that BOCs are prohibited from either selling or marketing in-region
interLATA services provided by a section 272 affiliate until they have
received approval from the Commission under section 271. We note,
however, that section 272 does not prohibit a BOC that provides out-of-
region interLATA services, or intraLATA toll service, from marketing or
selling those services in combination with local exchange services. If
such advertisements reach in-region customers, however, the BOC must
make it clear to those customers that the advertisements do not apply
to in-region interLATA services. This obligation is similar to the
obligation discussed above, which requires covered interexchange
carriers to disclose to consumers receiving BOC resold local service
that bundled packages are not available to them. After a BOC receives
authorization under section 271, the restriction in section 272(g)(2)
is no longer applicable, and the BOC will be permitted to engage in the
same type of marketing activities as other service providers.
Inbound Marketing. We conclude that BOCs must continue to inform
new local exchange customers of their right to select the interLATA
carrier of their choice and take the customer's order for the interLATA
carrier the customer selects. The obligation to continue to provide
such nondiscriminatory treatment stems from section 251(g) of the Act,
because we have not adopted any regulations to supersede these existing
requirements. Specifically, the BOCs must provide any customer who
orders new local exchange service with the names and, if requested, the
telephone numbers of all of the carriers offering interexchange
services in its service area. A customer orders ``new service'' when
the customer either receives service from the BOC for the first time,
or moves to another location within the BOC's in-region territory. As
part of this requirement, a BOC must ensure that the names of the
interexchange carriers are provided in random order. We decline to
adopt NCTA's request that we extend this obligation to require that
BOCs inform inbound callers of other cable operators and providers of
video services in the area, however, because no such obligation
currently exists, and no new requirement is imposed by the statute. We
further conclude that the continuing obligation to advise new customers
of other interLATA options is not incompatible with the BOCs' right to
market and sell the services of their section 272 affiliates under
section 272(g). Thus, a BOC may market its affiliate's interLATA
services to inbound callers, provided that the BOC also informs such
customers of their right to select the interLATA carrier of their
choice.
Teaming. We conclude that section 272(g) is silent with respect to
the question of whether a BOC may align itself with an unaffiliated
entity to provide interLATA services prior to receiving section 271
approval. We agree with the BOCs that the language of section 272(g)
only restricts the BOC's ability to market or sell interLATA services
``provided by an affiliate required by [section 272].'' We note,
however, that any equal access requirements pertaining to ``teaming''
activities that were imposed by the MFJ remain in effect until the BOC
receives section 271 authorization. Thus, to the extent that BOCs align
with non-affiliates, they must continue to do so on a nondiscriminatory
basis.
3. Section 272(g)(3)
a. Background. Section 272(g)(3) states that ``[t]he joint
marketing and sale of services permitted under this subsection shall
not be considered to violate the nondiscrimination provisions of
subsection [272](c).''
b. Discussion. Some of the activities identified by the parties
appear to fall clearly within the scope of section 272(g)(3) and hence
would be excluded from the section 272(c) nondiscrimination
requirements. For example, activities such as customer inquiries, sales
functions, and ordering, appear to involve only the marketing and sale
of a section 272 affiliate's services, as permitted by section 272(g).
Other activities identified by the parties, however, appear to be
beyond the scope of section 272(g), because they may involve BOC
participation in the planning, design, and development of a section 272
affiliate's offerings. In our view, such activities are not covered by
the section 272(g) exception to the BOC's nondiscrimination
obligations. We see no point to attempt at this time to compile an
exhaustive list of the specific BOC activities that would be covered by
section 272(g). We recognize
[[Page 2960]]
that such determinations are fact specific and will need to be made on
a case-by-case basis.
C. Interplay Between Sections 271(e), 272(g) and Other Provisions of
the Statute
1. Background
In the NPRM, we sought comment on whether the affiliate may
purchase marketing services from the BOC on an arm's length basis
pursuant to section 272(b)(5), or whether a BOC and its affiliate
should be required to contract jointly with an outside marketing entity
for joint marketing of interLATA and local exchange service in order to
comply with section 272(b)(3). We also sought comment on the interplay
between the marketing restrictions in sections 271 and 272 and the CPNI
provisions set forth in section 222 that are the subject of a separate
proceeding. In addition, we requested comment on whether the joint
marketing provision in section 274(c) has any bearing on how we should
apply the joint marketing provisions in sections 271 and 272.
2. Discussion
As discussed above in Part IV.C, we conclude that a BOC and its
affiliate are not required to contract jointly with an outside entity
in order to comply with section 272(b)(3). Thus, a BOC and its
affiliate may provide marketing services for each other, provided that
such services are conducted pursuant to an arm's-length transaction,
consistent with the requirements of section 272(b)(5). We decline to
address parties' arguments raised in this proceeding regarding the
interplay between section 272(g) and either section 222 or section
274(c) to avoid prejudging issues in our pending CPNI proceeding, CC
Docket No. 96-115, or our electronic publishing proceeding, CC Docket
No. 96-152. We emphasize that, if a BOC markets or sells the services
of its section 272 affiliate pursuant to section 272(g), it must comply
with the statutory requirements of section 222 and any rules
promulgated thereunder.
VIII. Provision of Local Exchange and Exchange Access by BOC Affiliates
A. Background
In the NPRM, we expressed concern that a BOC might attempt to
circumvent the section 272 safeguards by transferring local exchange
and exchange access facilities and capabilities to one of its
affiliates. We requested comment on whether we should prohibit all
transfers of network capabilities from a BOC to an affiliate.
Alternatively, we sought comment on whether a BOC transfer of network
capabilities to an affiliate would make that affiliate a successor or
assign of the BOC pursuant to section 3(4)(B) of the Act and,
consequently, subject the affiliate to the nondiscrimination
requirements of section 272(c)(1) and 272(e).
We also requested comment on whether, if a BOC were permitted to
transfer local exchange and exchange access capabilities to an
affiliate, we should exercise our general rulemaking authority to adopt
regulations to prevent such an affiliate from engaging in
discriminatory practices, or whether existing statutory prohibitions on
discrimination are sufficient. For example, we noted that BOC
affiliates that provide interstate interLATA telecommunications
services already would be subject to the requirements of sections 201
and 202, which are applicable to all common carriers. Those obligations
would not apply to information services affiliates and manufacturing
affiliates, however, because they are not ``common carriers'' under the
Act. As an additional matter, we tentatively concluded that a BOC
affiliate that is classified as an incumbent LEC would also be subject
to the nondiscrimination requirements of section 272(c).
B. Discussion
Transfer of local exchange and exchange access capabilities. We
conclude that a BOC cannot circumvent the section 272 requirements by
transferring local exchange and exchange access facilities and
capabilities to an affiliate. As we discussed above, all goods,
services, facilities, and information that the BOC provides to its
section 272 affiliate are subject to the section 272(c)(1)
nondiscrimination requirement. Application of section 272(c)(1) to the
BOC's provision of such items should address to a large extent concerns
about the BOC ``migrating'' or ``transferring'' key local exchange and
exchange access services and facilities to the 272 affiliate. We note,
however, that there are still legitimate concerns that a BOC could
potentially evade the section 272 or 251 requirements by, for example,
first transferring facilities to another affiliate or the BOC's parent
company, which would then transfer the facilities to the section 272
affiliate. To address this problem, we conclude that, if a BOC
transfers to an affiliated entity ownership of any network elements
that must be provided on an unbundled basis pursuant to section
251(c)(3), we will deem such entity to be an ``assign'' of the BOC
under section 3(4) of the Act with respect to those network elements.
Any successor or assign of the BOC is subject to the section 272
requirements in the same manner as the BOC. Thus, the interLATA and
manufacturing operations contemplated by section 272 would need to
occur in an affiliate other than the one to which the local exchange
and exchange access facilities have been transferred. We also note
that, based on the plain language of the statute, section 272(c) only
applies to the BOC or an affiliate that is a ``successor or assign'' of
the BOC. We agree with Ameritech that, unlike sections 272 (a) and (e),
section 272(c) does not apply to BOC affiliates merely because they
qualify as incumbent LECs.
We decline to adopt an absolute prohibition on a BOC's ability to
transfer local exchange and exchange access facilities and capabilities
to an affiliate, because we conclude based on the record before us that
such a restriction would be overly broad and exceed the requirements of
the Act. We note, however, that our determination does not preclude a
state from prohibiting a BOC's transfer of local exchange facilities
under its regulatory framework for incumbent LECs.
In view of our decision to treat a BOC affiliate as a ``successor
or assign'' of the BOC if the BOC transfers network elements to the
affiliate, we find it unnecessary at this time to adopt additional
nondiscrimination regulations applicable to section 272 affiliates. A
section 272 affiliate that is not deemed a ``successor or assign'' of a
BOC would nevertheless be subject to the obligations imposed by section
202--which prohibits common carriers from, among other things, engaging
in ``unjust and unreasonable'' practices with respect to the provision
of interstate services. Moreover, BOC interLATA services affiliates
that offer intrastate interLATA telecommunications services would be
subject to corresponding nondiscrimination obligations that state
statutes and regulations typically impose on common carriers. We
conclude based on the current record that these existing requirements
should be adequate to protect competition and consumers against
anticompetitive conduct by a BOC section 272 affiliate.
Integrated affiliates. Numerous commenters also request that we
address whether the separate affiliate safeguards imposed by section
272 prohibit a section 272 affiliate from offering local exchange
service through the same corporate entity. Based on our analysis of the
record and the applicable statutory provisions, we conclude that
[[Page 2961]]
section 272 does not prohibit a section 272 affiliate from providing
local exchange services in addition to interLATA services, nor can such
a prohibition be read into this section. Specifically, section
272(a)(1) states that--
A Bell operating company (including any affiliate) which is a
local exchange carrier that is subject to the requirements of
section 251(c) may not provide any service described in [section
272(a)(2)] unless it provides that service through one or more
affiliates that * * * are separate from any operating company entity
that is subject to the requirements of section 251(c) * * *
We find that the statutory language is clear on its face--a BOC
section 272 affiliate is not precluded under section 272 from providing
local exchange service, provided that the affiliate does not qualify as
an incumbent LEC subject to the requirements of section 251(c). Because
the text and the purpose of the statute are clear, there is no need, as
CCTA suggests, to resort to legislative history. We also agree with
Ameritech that a BOC affiliate should not be deemed an incumbent LEC
subject to the requirements of section 251(c) solely because it offers
local exchange services; rather, section 251(c) applies only to
entities that meet the definition of an incumbent LEC under section
251(h). Section 251(h)(1) defines an incumbent LEC as, inter alia, a
local exchange carrier that: (1) on the date of enactment of the
Telecommunications Act of 1996, provided telephone exchange service,
and (2) was a member of the National Exchange Carrier Association
(NECA) or becomes a successor or assign of such a member. Because no
BOC affiliate was a member of NECA when the 1996 Act was enacted, such
affiliates may be classified as incumbent LECs under this statutory
provision only if they are successors or assigns of their affiliated
BOCs. Alternatively, under section 251(h)(2), if the Commission
determines that a carrier occupies a position in the market for
telephone exchange service within an area that is comparable to the
position occupied by the incumbent LEC, and such carrier has
substantially replaced an incumbent LEC, such carrier may be treated by
rule as an incumbent LEC for purposes of section 251. We find no basis
in the record of this proceeding to find that a BOC affiliate must be
classified as an incumbent LEC under section 251(h)(2) merely because
it is engaged in local exchange activities. Absent such a finding, BOC
affiliates that are neither one of the Bell operating companies listed
under 153(4)(A), nor a successor or assign of any such company, are not
subject to the separation requirements of section 272.
Furthermore, we conclude that section 251 does not preclude section
272 affiliates from obtaining resold local exchange service pursuant to
section 251(c)(4) and unbundled elements pursuant to section 251(c)(3),
because the statute does not place any restrictions on the types of
telecommunications carriers that may qualify as ``requesting
carriers.'' We disagree with CCTA's assertion that section 272
affiliates cannot be treated as requesting carriers, because such
affiliates are ``part of the standard for determining nondiscriminatory
interconnection by the [incumbent LEC] for all other telecommunications
carriers.'' The fact that a determination of whether an incumbent LEC
provides nondiscriminatory access may be based on a comparison of the
access that the incumbent LEC provides itself or its affiliate does not
preclude such affiliate from being a ``requesting carrier'' under
section 251. There is nothing inconsistent with both requiring
nondiscriminatory access and at the same time allowing an affiliate to
be a requesting carrier. Moreover, we find nothing in the statute or in
the First Interconnection Order that limits the definition of
``requesting carrier'' to non-affiliates. Thus, section 272 affiliates
cannot be precluded under section 251 from qualifying as ``requesting
carriers'' that are entitled to purchase unbundled elements or retail
services at wholesale rates from the BOC.
We further conclude that section 272(g)(1) cannot be read as
imposing a limitation on the ability of section 272 affiliates to
exercise their rights under section 251(c)(3). We are not persuaded by
AT&T's argument that, because section 272(g)(1) sets forth limited
conditions under which section 272 affiliates may ``market or sell''
local exchange services, allowing those affiliates to purchase
unbundled elements is inconsistent with the Act. Rather, we agree with
CCTA that section 272(g)(1) speaks only to marketing issues, and does
not address the conditions under which a section 272 affiliate may
provide local exchange services. Furthermore, we find AT&T's claim that
allowing section 272 affiliates to provide local exchange service
through unbundled elements will ``artificially and decisively slant
[the] playing field in the BOC's favor'' unpersuasive, because other
telecommunications carriers will be able to provide local exchange
service through unbundled elements on the same terms and conditions.
AT&T's concern that the affiliate will be able to avoid access charges
by obtaining the unbundled elements appears to be premised on the view
that access charges are currently too high. The issue of reforming
access charges will, however, be addressed in a separate proceeding.
Moreover, we conclude that MCI's argument--that opportunities for
discrimination and cross-subsidy are greater when the BOC provides
network elements to its affiliate than when it provides resold
services--is speculative. To the extent that concerns over
discrimination arise, there are safeguards in sections 251 and 252 to
address such concerns. We therefore decline to distinguish between a
section 272 affiliate's ability to provide local service by reselling
BOC local exchange service and its ability to offer such service by
purchasing unbundled elements from the BOC.
We also conclude as a matter of policy that regulations prohibiting
BOC section 272 affiliates from offering local exchange service do not
serve the public interest. The goal of the 1996 Act is to encourage
competition and innovation in the telecommunications market. We agree
with the BOCs that the increased flexibility resulting from the ability
to provide both interLATA and local services from the same entity
serves the public interest, because such flexibility will encourage
section 272 affiliates to provide innovative new services. To the
extent that there are concerns that the BOCs will unlawfully subsidize
their affiliates or accord them preferential treatment, we reiterate
that improper cost allocation and discrimination are prohibited by
existing Commission rules and sections 251, 252, and 272 of the 1996
Act, and that predatory pricing is prohibited by the antitrust laws.
Our affiliate transaction rules, as modified by our companion
Accounting Safeguards Order, address the BOCs' ability to engage in
improper cost allocation. The rules in this Order and our rules in our
First Interconnection Order and our Second Interconnection Order ensure
that BOCs may not favor their affiliates. In sum, we find no basis in
the record for concluding that competition in the local market would be
harmed if a section 272 affiliate offers local exchange service to the
public that is similar to local exchange service offered by the BOC.
Although we conclude that the 1996 Act authorizes section 272
affiliates to purchase unbundled elements, we emphasize that BOC
facilities and services provided to section 272 affiliates must be made
available to others on the same terms, conditions, and prices provided
to the BOC affiliate
[[Page 2962]]
pursuant to the nondiscrimination requirements of sections 272 and
251(c)(3). Thus, if a BOC affiliate is a requesting carrier under
section 251, the BOC is required to treat unaffiliated requesting
carriers in the same manner that the BOC treats its affiliate, unless
the unaffiliated entity has requested different treatment. For example,
if a BOC were to provide its section 272 affiliate with access to
operational support systems (OSS) functions via a different method or
system than it provides to requesting carriers under section 251, we
would regard such discriminatory treatment as a violation of section
251(c)(3). We believe such nondiscrimination requirements will prevent
BOCs from providing special treatment to their affiliates.
State regulation. As mentioned above, several BOCs have already
submitted applications to state regulatory commissions seeking
authority to provide both local exchange services and interLATA
services from the same affiliate. Although we conclude that the 1996
Act permits section 272 affiliates to offer local exchange service in
addition to interLATA service, we recognize that individual states may
regulate such integrated affiliates differently than other carriers.
IX. Enforcement
A. Reporting Requirements under Section 272
1. Background
BOCs are required under Computer III to provide information to
third parties regarding changes to the network and new network services
and to report periodically on the quality and timeliness of
installation and maintenance. We sought comment in the NPRM on what
requirements or mechanisms were necessary to facilitate the detection
of violations of the separate affiliate and nondiscrimination
requirements of section 272. We asked parties to comment on whether we
should impose reporting and other requirements on BOCs analogous to
those requirements imposed in the Computer III and subsequent ONA
proceedings to ensure compliance with section 272 requirements. We
specifically requested comment on whether these requirements are
sufficient to implement the section 272(c)(1) nondiscrimination
requirement.
2. Discussion
We conclude that none of the reporting or other requirements of
Computer III/ONA is necessary to implement the requirements of section
272(c)(1) at this time. For the same reasons, we further conclude that
(with the exception of section 272(e)(1)), no reporting requirements
are needed to facilitate the detection and adjudication of violations
of the separate affiliate and nondiscrimination requirements of section
272. As many commenters observe, reporting requirements serve two
primary purposes. First, they act to deter potential anticompetitive
behavior by requiring BOCs to provide objective proof of their
compliance with the separate affiliate and nondiscrimination
requirements. Second, they enable competitors, as well as the
Commission, to detect any potential violations of these requirements.
We believe, however, that sufficient mechanisms already exist within
the 1996 Act both to deter anticompetitive behavior and to facilitate
the detection of potential violations of section 272 requirements.
Nevertheless, we intend to monitor compliance with section 272
requirements and, of course, reserve the ability to undertake
appropriate measures in the event that future developments warrant.
The requirements of section 272(b), as discussed above, discourage
anticompetitive behavior by the BOC by requiring the BOC and its
section 272 affiliate to adhere to certain structural and transactional
requirements, including the requirement to ``operate independently.''
We therefore conclude that it is unnecessary to impose the Computer
III/ONA reporting requirements in order to implement the separate
affiliate and nondiscrimination requirements of section 272. Further,
we note that even some commenters that support imposing Computer III/
ONA reporting requirements on BOCs admit that they do not seem useful
or practical.
We find, instead, that several of the disclosure requirements
established in the 1996 Act will facilitate the detection of
anticompetitive behavior. Section 272(d), for example, requires that a
BOC obtain and pay for a biennial joint federal/state audit to
determine whether it has ``complied with [section 272] and the
regulations promulgated under this section * * *.'' We conclude that
this broad audit requirement is intended to verify BOC compliance with
the accounting and non-accounting requirements of section 272, as
implemented. In addition, we note that, pursuant to section
271(d)(3)(B), a BOC may not receive authorization to provide in-region
interLATA services until it shows, among other things, that the
``requested authorization will be carried out in accordance the
requirements of section 272.'' In view of these requirements, we reject
ITAA's suggestion that BOCs should submit to the Commission section 272
compliance plans, and periodic reports regarding their implementation
of those plans, as unnecessarily burdensome.
In addition, the section 272(b)(5) requirement that all
transactions between a BOC and its section 272 affiliate be reduced to
writing and made publicly available should serve as a powerful
mechanism both to detect violations of the section 272 requirements and
to deter anticompetitive behavior. Similarly, we find that our
interpretation of section 272(c)(1) as a flat prohibition against
discrimination will work in conjunction with the section 272(b)(5)
disclosure requirement to deter anticompetitive behavior. Under section
272(c)(1), any difference between the goods, services, and facilities
given to a section 272 affiliate and those given to an unaffiliated
entity may give rise to a claim of discrimination. Some commenters
argue that the requirement of section 272(b)(5) should be extended to
encompass not only transactions between a BOC and its section 272
affiliate, but also transactions between a BOC and unaffiliated
entities. We find, however, that section 272(b)(5), by its terms,
applies only to the transactions between the BOC and its section 272
affiliate. Extending such a requirement to transactions between a BOC
and unaffiliated entities would expand the scope of this section beyond
the statutory requirements and is not necessary to detect the type of
discrimination that section 272 is intended to prevent. As discussed
below, parties may make a request for such reporting requirements in
the context of their interconnection negotiations with BOCs. Presented
with such a request, the BOC will have the obligation to negotiate this
proposal in good faith pursuant to section 251(c)(1).
In addition to the requirements of section 272, the Act also
imposes other disclosure requirements on the BOCs that, in our view,
largely address the concerns cited by parties arguing for additional
reporting requirements. For example, section 251(c)(5) requires all
incumbent LECs, including BOCs, to disclose publicly information about
network changes that will affect a competing service provider's
performance or ability to provide service or will affect the incumbent
LEC's interoperability with other service providers. In implementing
this requirement in our Second Interconnection Order, we found that
this disclosure about network changes ``promotes open and vigorous
[[Page 2963]]
competition'' and provides ``sufficient disclosure to insure against
anticompetitive acts.'' Similarly, section 273(c)(1) requires BOCs to
maintain and file with the Commission full and complete information of
the protocols and technical requirements used for network connection,
and section 273(c)(4) requires BOCs to provide ``to interconnecting
carriers providing telephone exchange service, timely information on
the planned deployment of telecommunications equipment.''
We also find that, beyond the reporting requirements mandated under
the 1996 Act, there are other avenues by which a telecommunications
carrier may obtain information relevant to detecting anticompetitive
BOC conduct. For example, competitive telecommunications carriers, on
their own initiative, could seek to incorporate certain performance and
quality standards into their negotiated or arbitrated interconnection
agreements to ensure that BOCs satisfy their obligation to provide
service in a nondiscriminatory manner. As noted above, BOCs, like any
other incumbent LEC, are obligated to negotiate such requests in good
faith pursuant to section 251(c)(1). Through this process, competitive
carriers will be able to tailor the interconnection agreement to
include only those reporting requirements that they deem necessary or
find to be most useful. Further, pursuant to section 252(a), BOCs must
file all interconnection agreements with the appropriate state
commission and under section 252(h) these agreements must be made
publicly available; the terms and conditions of these interconnection
agreements, therefore, are on public record and available to
competitors. We also note that there are several state utility
commissions that, pursuant to state administrative code, require LECs
to conform to certain service standards and make service quality
reports publicly available. New York and Virginia, for example, require
all LECs to file periodic service quality or standard of service
reports.
We believe that the reporting requirements required by the 1996
Act, those required under state law, and those that may be incorporated
into interconnection agreements negotiated in good faith between BOCs
and competing carriers will collectively minimize the potential for
anticompetitive conduct by the BOC in its interexchange operations. In
addition to deterring potential anticompetitive behavior, these
information disclosures will also facilitate detection of potential
violations of the section 272 requirements. We, therefore, agree with
those parties who argue that there is no need to impose additional
reporting requirements at this time. Further, we note that even several
parties who advocate the imposition of additional reporting
requirements recognize the inherent difficulty of identifying and
preventing every type of discrimination through regulatory measures.
Finally, we believe that the complaint process will bring
violations of section 272 to the attention of the Commission. Congress
has established a mechanism in section 271(d) to facilitate the
enforcement of the requirements of section 272. Further, as discussed
below, if the information necessary to prove a complainant's claim is
not publicly available, the complainant has the opportunity to obtain
the necessary documentation from the BOC in the context of an
enforcement proceeding. We expect that BOC competitors will be vigilant
in detecting BOC deficiencies and will avail themselves of the
expedited complaint process established by section 271(d)(6).
B. Section 271(d)(6) Enforcement Provisions
As discussed in the NPRM, section 271(d)(6) of the Communications
Act gives the Commission specific authority to enforce the conditions
that a BOC is required to meet in order to obtain Commission
authorization to provide in-region interLATA services. Specifically,
section 271(d)(6) states:
(A) Commission Authority.--If at any time after the approval of an
application under [section 271(d)(3)], the Commission determines that a
[BOC] has ceased to meet any of the conditions required for such
approval, the Commission may, after notice and opportunity for a
hearing--
(i) issue an order to such company to correct the deficiency;
(ii) impose a penalty on such company pursuant to title V; or
(iii) suspend or revoke such approval.
(B) Receipt and Review of Complaints.--The Commission shall
establish procedures for the review of complaints concerning failures
by [BOCs] to meet conditions required for approval under [section
271(d)(3)]. Unless the parties otherwise agree, the Commission shall
act on such complaint within 90 days.
1. Commission's Enforcement Authority under Section 271(d)(6)
a. Background. In the NPRM, we sought to clarify the relationship
between the Commission's authority under section 271(d)(6) and the
Commission's existing enforcement authority under sections 206-209 of
the Communications Act. We tentatively concluded that, in the context
of ``complaints concerning failures by [BOCs] to meet the conditions
required for approval under [section 271(d)(3)],'' section 271(d)(6)
generally augments the Commission's existing enforcement authority. We
sought comment on whether, in a situation where a complaint alleges
that a BOC has ceased to meet the conditions for approval to provide
in-region interLATA telecommunications services and seeks damages as a
result of the underlying alleged unlawful conduct, a Commission
determination that the BOC has ceased to meet the conditions and the
imposition of a section 271(d)(6)(A) sanction would fulfill the
Commission's duty to ``act on such complaint within 90 days.''
In order to approve a BOC's application to provide in-region
interLATA services pursuant to section 271(d)(3), the Commission must
determine that the BOC: meets the requirements of section 271(c)(1);
satisfies the competitive checklist in section 271(c)(2)(B); complies
with the requirements of section 272; and demonstrates that the
approval of its application is consistent with the public interest,
convenience, and necessity. Section 271(d)(6)(A) sets forth various
actions the Commission may take at any time after the approval of an
application, and after notice and opportunity for a hearing, if it
determines that a BOC has ceased to meet any of these conditions. In
the NPRM, we stated that the Commission may determine that a BOC has
ceased to meet the conditions of its approval under section 271(d)(3)
either via the resolution of an expedited complaint proceeding pursuant
to section 271(d)(6)(B) or in a proceeding commenced on its own motion.
b. Discussion. We affirm our tentative conclusion that section
271(d)(6) augments the Commission's existing enforcement authority. We
reject both NYNEX's contention that the specific remedies of section
271(d)(6)(A) supersede the general sanctions contained in sections 206-
209 of the Act as well as SBC's assertion that there is no statutory
basis for applying the provisions of section 206-209 when a violation
of section 271(d)(3) has been alleged. As AT&T observes, there is no
support in the statute or its legislative history for the assertion
that Congress intended to eliminate the damages remedy that applies to
all other violations of Title II for violations of sections 271 and
272, especially in light of the competitive concerns that underlie the
1996 Act. We also conclude
[[Page 2964]]
that, where a complainant seeks damages as a result of the underlying
alleged violative conduct, a Commission determination on whether the
BOC has ceased to meet the conditions and the imposition of a section
271(d)(6)(A) sanction, where appropriate, would fulfill the
Commission's statutory duty to ``act on such complaint within 90
days.'' Completion of this statutory obligation, however, would not
preclude the complainant from filing a supplemental complaint to
determine the actual amount of damages.
With respect to imposition of a Title V penalty (e.g., forfeiture
and fines) pursuant to section 271(d)(6)(A)(ii), we note that Title V
provides for a separate process that is initiated by the issuance of a
notice of apparent liability. We find, therefore, that the Commission's
obligation under section 271(d)(6) is satisfied with respect to Title V
penalties if, within 90 days (or longer if parties agree) of receiving
a complaint, the Commission, upon finding a BOC liable for unlawful
conduct, issues a notice of apparent liability pursuant to section 503.
Finally, we affirm our tentative conclusion that the Commission may
make a determination that a BOC has ceased to meet the conditions for
entry either in a proceeding commenced on its own motion or via the
resolution of a complaint proceeding. We further find, as most
commenters suggest, that the Commission is not bound by the 90-day time
constraint when it initiates a proceeding on its own motion.
2. Legal and Evidentiary Standards
a. Background. We sought comment in the NPRM on the legal and
evidentiary standards necessary to establish that a BOC has ceased to
meet the conditions required for its approval to provide in-region
interLATA service. The majority of commenters assert that prescribing
the elements of every claim that could conceivably be brought before
the Commission would, at this point, be a fruitless exercise. USTA
maintains that, in order to invoke section 271(d)(6), the complainant's
allegations and supporting proof must be of such character that, had it
been presented prior to entry, the Commission would not have approved
the BOC's application. Similarly, MCI contends that a complainant
seeking section 271(d)(6) relief should state that the defendant BOC is
no longer meeting the conditions for entry, cite the specific
requirements the BOC is violating, and describe how it is violating
them.
b. Discussion. MCI and USTA correctly point out that section
271(d)(6) cannot be invoked unless the complainant alleges that the BOC
has failed to meet the conditions of entry under section 271(d)(3). We
conclude, however, that the procedural aspects of this showing are best
addressed in our pending proceeding to adopt expedited complaint
procedures. We agree with the majority of commenters and conclude that,
beyond the duties and obligations discussed elsewhere in this Order, we
need not establish at this time substantive rules that would define the
specific legal elements of a claim that a BOC has failed or ceased to
meet the conditions for entry under section 271(d)(3). Although we
recognize that the establishment of substantive standards or ``bright
line'' tests could assist in expediting the ultimate disposition of
complaints invoking the 90-day statutory resolution deadline under
section 271(d)(6), the conditions for entry include not only compliance
with the section 272 requirements, but also satisfaction of the
requirements of the competitive checklist in section 271(c)(2)(B), as
well as a demonstration that the BOC application is consistent with the
public interest, convenience, and necessity. Given the widely varying
circumstances that may arise in the context of complaints alleging
failure to meet the conditions of entry, we conclude that it is best to
determine a BOC's compliance or noncompliance with these requirements
on the basis of concrete facts presented in particular cases, rather
than by substantive rule in this notice-and-comment proceeding.
For these same reasons, we agree with a majority of the commenters
that it would be impractical to prescribe specific evidentiary
standards for establishing violations of all of the substantive
requirements contained in the competitive checklist. Just as the
circumstances that arise in the context of 271(d)(6) complaints are
likely to vary from case to case, so too will the information necessary
to prove or disprove allegations that the BOC has ceased to meet the
conditions of entry. We note as a general matter that, consistent with
the requirements of the APA, the Commission's practice in formal
complaint proceedings pursuant to section 208 has been to determine
compliance or noncompliance with the Act or the Commission's rules and
orders according to a ``preponderance of the evidence'' standard of
proof. Neither section 271 nor its legislative history prescribe a
different standard of proof for establishing a BOC's failure to meet
the conditions required for entry; we conclude, therefore, that this
evidentiary standard applies equally to section 271(d)(6) complaints.
In the paragraphs that follow, we address related issues regarding what
constitutes a prima facie showing that a BOC has ceased to meet one or
more of the conditions for interLATA entry and whether the burden of
proof should shift to the defendant BOC once the complainant makes such
a showing. Notwithstanding the existence of a prima facie showing or
any shift in the burden of production, as discussed below, to the
extent that a complainant and defendant BOC differ over the material
facts underlying a section 271(d)(6) complaint, the preponderance of
evidence standard will guide our ultimate disposition of the complaint.
3. Prima Facie Standard
a. Background. We sought comment in the NPRM on what constitutes a
prima facie showing that a BOC has ceased to meet one or more of the
conditions for interLATA entry. We asked parties to comment on whether
it is enough for complainants invoking the expedited complaint
procedures under section 271(d)(6)(B) to plead, along with proper
supporting evidence, ``facts which, if true, are sufficient to
constitute a violation of the Act or Commission order or regulation''
in order to establish a prima facie showing that the BOC has ceased to
meet the conditions for approval in section 271(d)(3).
b. Discussion. We conclude that complainants invoking the expedited
complaint procedures of section 271(d)(6)(B) must plead, along with
proper supporting evidence, facts which, if true, are sufficient to
constitute a violation of the Act or Commission order or regulation in
order to establish a prima facie showing that a BOC has ceased to meet
the conditions for entry. Contrary to the suggestion of NYNEX and
others, we did not propose in our NPRM that it would be sufficient for
a complainant to establish a prima facie case without the submission of
``proper supporting evidence.'' Such a showing is not permissible under
either our present pleading requirements or under the rules we propose
in the Enforcement NPRM, 61 FR 67978 (December 26, 1996), on expedited
complaint procedures. Under our present rules, a formal complaint is
required to include certain categories of information, including
specific facts and legal authorities upon which the complaint is based.
In addition, a formal complaint must identify or describe specifically
and in detail the carrier conduct that forms the basis for the
complaint as well as the nature of injury sustained. Further, in our
Enforcement NPRM, we recently proposed to
[[Page 2965]]
augment these requirements by requiring that a formal complaint include
facts supported by relevant documentation or affidavits. Under our
proposed rules, a complainant that fails to meet these pleading
requirements may face either a dismissal of the complaint or a summary
denial of the relief sought. Thus, in light of the pleading
requirements that presently exist, as well as those proposed in the
Enforcement NPRM, we reject allegations by some commenters that the
prima facie standard we are adopting in this Order will violate the
defendant's procedural rights, allow a complainant to file only a
``bare notice-type complaint,'' or invite a flood of frivolous suits
designed to harass the BOCs.
We reject the recommendations of AT&T and MCI that we adopt
specific criteria the complainant must demonstrate in order to
establish a prima facie showing. As we stated above, beyond the legal
and evidentiary standards established in this proceeding, it would be
imprudent for us, at this time, to attempt to propose a comprehensive
list of the showings that complainants will be required to make in
order to demonstrate violations of the conditions of entry. Rather, we
find it more appropriate to establish a generally applicable prima
facie standard that is suitable for all complaints invoking section
271(d)(6), not just those alleging specific violations of the section
272 requirements.
4. Burden-Shifting and Presumption of Reasonableness
a. Background. In the NPRM, we sought comment on whether the pro-
competitive goals of the Act are advanced by shifting the ultimate
burden of proof from the complainant to a defendant BOC, not just in
complaints alleging discrimination under section 202(a), but in all
complaints alleging that a BOC has ceased to meet any of the conditions
for its approval to provide interLATA services under section 271(d)(3).
We sought comment specifically on whether the burden should shift to
the defendant BOC once the complainant makes a prima facie showing that
a BOC has ceased to meet the conditions of section 271(d)(3).
We also observed in the NPRM that in complaints challenging the
rates, terms, and conditions of non-dominant carrier service offerings
under sections 201(b) and 202(a), the Commission has effectively
established a rebuttable presumption that such rates and practices are
lawful. We tentatively concluded that, in the context of complaints
alleging that a BOC has ceased to meet the conditions required for the
provision of in-region interLATA services, we will not employ a
presumption of reasonableness in favor of the BOC or BOC affiliate,
regardless of whether the BOC or BOC affiliate is regulated as a
dominant or non-dominant carrier.
b. Discussion. For the reasons and in the manner discussed below,
we conclude that the burden of production with respect to an issue
should shift to the BOC after the complainant has demonstrated a prima
facie case that a defendant BOC has ceased to meet the conditions of
entry. As an initial matter, we note that the term ``burden of proof''
has historically been used to describe two separate but related
concepts. First, it has been used to describe the burden of persuasion
with respect to a particular issue which, under the traditional view,
never shifts from one party to the other at any stage in the
proceeding. Second, it has been used to describe the burden of going
forward with evidence necessary to avoid an adverse decision on that
issue. This burden may shift back and forth between the parties. Under
the approach we adopt today, the burden of production or coming forward
with evidence will shift to the defendant BOC once the complainant has
established a prima facie case that the conditions of interLATA entry
have been violated. In other words, the defendant BOC will have an
affirmative obligation to produce evidence and arguments necessary to
rebut the complainant's prima facie case or risk an adverse ruling. The
complainant, however, will have the ultimate burden of persuasion
throughout the proceeding; that is, to show that the ``preponderance of
the evidence'' produced in the proceeding weighs in its favor. As
explained more fully below, shifting the burden of production to the
defendant BOC once a prima facie case has been made will require the
party most likely to have relevant information in its possession to
produce the information at an early stage in the proceeding.
Currently, in a typical complaint proceeding, the complainant has
the burden of establishing that a common carrier has violated the
Communications Act or a Commission rule or order. This burden of
persuasion does not shift to the defendant carrier at any time in the
proceeding. As Sprint observes, however, in view of the statutory
mandate to resolve section 271(d)(3) complaints in 90 days, the
Commission must balance the need for expeditious resolution of the
complaint against the need to develop a full record. We recognize, as
do many commenters, that, even though some information may be publicly
available, in many cases the BOC will be the sole possessor of certain
information relevant to the disposition of the complainant's case. Our
primary goal, as we expressed in the NPRM, is to give full force and
effect to the pro-competitive policies underlying section 271(d)(6) by
ensuring the full and fair resolution of complaints challenging a BOC's
compliance with the conditions for interLATA entry within the statutory
90-day period. We find that shifting the burden of production to the
defendant BOC after a prima facie showing has been made by the
complainant will facilitate our ability to reach this goal.
Further, as we observed in the NPRM, effective enforcement of the
conditions of interLATA entry, including the separate affiliate and
nondiscrimination requirements of section 272, is critical to ensuring
the full development of competition in the local and interexchange
telecommunications markets. Many commenters argue that prompt
enforcement of these conditions is essential not only to ensure the
advent of true competition, but also to ensure that the BOCs take the
conditions of entry seriously, particularly after they enter the in-
region interLATA market. We conclude that shifting the burden of
production to the BOC will facilitate the detection of anticompetitive
behavior by the BOC and will enable us to adjudicate expeditiously
complaints alleging violations of section 271(d)(3). Further, as
mentioned above, in the context of a complaint proceeding, BOCs will
have an affirmative obligation to produce all relevant evidence in
their possession to rebut the complainant's claim or face an adverse
ruling. Shifting the burden of production, therefore, may ultimately
reduce the number of complaints filed against the BOCs by encouraging
them to divulge exculpatory evidence before enforcement proceedings
begin.
Many commenters that support shifting the burden of proof do not
specify whether they advocate shifting the burden of persuasion or the
burden of production. It is evident from the context of some comments,
however, that a few commenters support a shift in the burden of
persuasion, rather than a shift in the burden of production. In
response to these commenters, we find that most of the competitive
concerns they raise in support of shifting the burden of persuasion are
more than adequately addressed by shifting the burden of production.
For example, some parties that advocate shifting the burden of
persuasion argue that complainants frequently will require
[[Page 2966]]
specific information that is within the exclusive possession of the BOC
in order to substantiate their claim. These parties contend that
requiring the complainant to maintain the burden of proof would result
in needless, extensive discovery, and shifting the burden will give
BOCs the incentive to produce information necessary to resolve the
complaint. We conclude that these concerns, as well as our goal of
facilitating the full and fair resolution of claims alleging violations
of the conditions of entry within the statutory 90-day period, are
satisfied without requiring BOCs to prove a negative in order to avoid
liability, i.e., to prove, by a preponderance of the evidence, that
they did not violate the conditions of entry. Further, we find it
unnecessary to address most of the BOCs' arguments against burden-
shifting because they are directed against shifting the ultimate burden
of persuasion rather than the burden of production.
We do find it necessary, however, to respond to Ameritech's
argument that informational asymmetry between the complainant and
defendant is best addressed in the context of the discovery process.
Ameritech maintains that, if the Commission's discovery processes are
too cumbersome, they ought to be reformed rather than replaced with
burden-shifting. Similarly, other commenters propose various procedural
requirements that we might impose to enable us to resolve complaints
within the 90-day statutory window. Moreover, a few commenters suggest
that Alternative Dispute Resolution may be another mechanism by which
to facilitate resolution of complaints alleging a violation of section
271(d)(3).
In response to these arguments, we note that purpose of the
Enforcement NPRM is to streamline our current procedures and pleading
requirements so that we may expedite the processing of all formal
complaints and resolve complaints within the deadlines imposed by the
1996 Act. We therefore find that it would be inadvisable to attempt to
establish any new procedural rules in this proceeding. Moreover, as
PacTel points out, we do not have an adequate record on which to base
any such rules. In response to Ameritech, we note that in the
Enforcement NPRM we specifically proposed to reform our discovery
process. Specifically, we sought comment on a range of options to
eliminate or modify the discovery process, including prohibiting
discovery as a matter of right, limiting the amount or scope of
discovery, and allowing the state to set timetables for completion of
discovery on an individual case basis. By shifting the burden of
production to the BOC after a prima facie showing has been made by the
complainant, we are ensuring that information relevant to the
complainant's claim is disclosed early in the process, and thereby
providing the Commission a sufficient record on which to make a
decision, even in the potential absence of traditional discovery.
Finally, we affirm our tentative conclusion that, in the context
of complaints alleging that a BOC has ceased to meet the conditions
required for the provision of in-region interLATA services, we will not
employ a presumption of reasonableness in favor of the BOC or BOC
affiliate, regardless of whether the BOC or BOC affiliate is regulated
as a dominant or non-dominant carrier. The presumption of lawfulness
given to nondominant carrier rates and practices is employed in the
context of complaints alleging violations of sections 201(b) and
202(b), where the complaint must demonstrate that the defendant's rates
and practices are ``unjust and unreasonable.'' We agree with MCI that a
presumption of reasonableness is an irrelevant concept in the context
of complaints alleging violations of the conditions of interLATA
approval in section 271(d)(3), particularly given our interpretation of
section 272(c)(1) as an unqualified prohibition on discrimination.
5. Enforcement Measures under Section 271(d)(6)(A)
a. Background. Section 271(d)(6)(A) provides that if, at any time
after approval of a BOC application, the Commission determines that the
BOC has ceased to meet any of the conditions of its approval to provide
interLATA services, the Commission may, after notice and opportunity
for a hearing: (1) Issue an order to the BOC to ``correct the
deficiency;'' (2) impose a penalty pursuant to Title V; or (3) suspend
and revoke the BOC's approval to provide in-region interLATA services.
In the NPRM, we tentatively concluded that we will follow the
procedures set forth in Title V to impose Title V penalties, including
forfeitures, under section 271(d)(6)(A). As to the non-forfeiture
enforcement measures, we sought comment on whether the Commission
should exercise its enforcement discretion and impose these sanctions
on an individual case basis, or whether we should establish specific
legal and evidentiary standards for each type of sanction. Further, we
sought comment on the appropriate ``notice and opportunity for a
hearing'' for the imposition of these non-forfeiture sanctions, both in
the context of a complaint proceeding and on the Commission's own
motion. We interpreted ``opportunity for hearing'' not to require a
trial-type hearing before an Administrative Law Judge (ALJ). We also
tentatively concluded that Congress, by imposing a 90-day deadline for
complaints, did not intend to afford the BOC trial-type hearings in
enforcement proceedings pursuant to section 271(d).
b. Discussion. We affirm our tentative conclusion that we will
follow the procedures set forth in Title V to impose Title V penalties
in enforcement actions alleging violations of the conditions of entry
under section 271(d)(3). As to non-forfeiture enforcement measures, we
conclude that it is impractical, at this point in time, to prescribe
the specific elements and factors that would warrant issuance of an
order to ``correct the deficiency'' or an order suspending or revoking
a BOC's approval to provide in-region interLATA service. We agree with
AT&T that to do so would limit our remedial flexibility. Nor do we find
it appropriate to establish specific evidentiary standards; rather, our
determination of which non-forfeiture measure to impose will depend on
the specific facts and circumstances presented in a particular case. We
find, nevertheless, that a BOC will have a full and fair opportunity to
submit evidence and arguments challenging the imposition of a
prescribed sanction within the statutory 90-day period.
We conclude that the phrase ``opportunity for hearing'' in section
271(d)(6)(A) does not require a trial-type hearing before an ALJ prior
to the imposition of non-forfeiture enforcement measures. Although we
recognize, as PacTel and USTA suggest, that hearings may be necessary
to resolve material questions of fact, such as when oral testimony or
cross-examination is required, we do not agree that trial-type hearings
before an ALJ are required before the Commission imposes any non-
forfeiture sanction. We find instead that, regardless of whether the
Commission is imposing a non-forfeiture sanction in a proceeding
commenced on its own motion or in the context of a complaint
proceeding, the Commission can satisfy the hearing requirement of
section 271(d)(6)(A) through written submissions rather than oral
testimony. Finally, we affirm our tentative conclusion that Congress,
by imposing a 90-day deadline for complaints, did not intend to afford
BOCs trial-type hearings in all enforcement proceedings pursuant to
section 271(d)(6)(B).
[[Page 2967]]
X. Final Regulatory Flexibility Certification
The Commission certified in the NPRM that the proposed rules would
not have a significant economic impact on a substantial number of small
entities because the proposed rules did not pertain to small entities.
Written public comment was requested on this proposed certification,
and only one comment was received. For the reasons stated below, we
certify that the rules adopted herein will not have a significant
economic impact on a substantial number of small entities. This
certification conforms to the Regulatory Flexibility Act (RFA), as
amended by the Small Business Regulatory Enforcement Fairness Act of
1996 (SBREFA).
The RFA incorporates the definition of small business concerns set
forth in 15 U.S.C. Sec. 632 (small business concerns are independently
owned and operated, not dominant in their field of operations, and meet
any additional criteria established by the Small Business
Administration (SBA)). The rules we adopt in this Order implement the
non-accounting separate affiliate and nondiscrimination provisions of
sections 271 and 272 of the Act, and will apply to the BOCs when they
enter previously restricted markets. The NPRM stated that, because BOCs
are dominant in their field of operations, they are by definition not
small entities and therefore no regulatory flexibility analysis is
required. We now note as well that none of the BOCs is a small entity
because each BOC is an affiliate of a Regional Holding Company (RHC),
and all of the BOCs or their RHCs have more than 1,500 employees. The
order also clarifies the joint marketing restrictions that will apply
to the nation's largest interexchange carriers for an interim period
pursuant to section 271. The most recent data shows that only AT&T,
MCI, and Sprint meet the statutory threshold. Moreover, these carriers
are not small entities under the SBA definition because each has more
than 1,500 employees.
NTCA contends that small incumbent LECs should be considered small
entities under the SBA's definition, and therefore, the basis of the
proposed certification was incorrect. The certification contained in
the NPRM applied both to our proposed rules implementing sections 271
and 272 and to our proposed rules addressing LEC interexchange
services. This Order implements only sections 271 and 272, and, as we
have indicated, affects only the BOCs, AT&T, MCI and Sprint. NTCA's
arguments concerning small incumbent LECs are not relevant to this
Order, therefore, and will be addressed in a separate Order in this
docket.
We therefore certify, pursuant to section 605(b) of the RFA, that
the rules adopted in this order do not have a significant economic
impact on a substantial number of small entities. The Commission shall
provide a copy of this certification to the Chief Counsel for Advocacy
of the SBA, and include it in the report to Congress pursuant to the
SBREFA. The certification will also be published in the Federal
Register.
Report to Congress. The Commission shall send a copy of this FRFA,
along with this Order, in a report to Congress pursuant to the SBREFA,
5 U.S.C. Sec. 801(a)(1)(A). A copy of this FRFA will also be published
in the Federal Register.
XI. Ordering Clauses
Accordingly, It is Ordered that pursuant to sections 1, 2, 4, 201-
205, 215, 218, 220, 271, 272, and 303(r) of the Communications Act of
1934, as amended, 47 U.S.C. Secs. 151, 152, 154, 201-205, 215, 218,
220, 271, 272, and 303(r) the REPORT AND ORDER IS ADOPTED, effective 30
days after publication of a summary in the Federal Register. The
collections of information contained within are contingent upon
approval by the Office of Management and Budget.
It is further Ordered that the MFS Petition to Consolidate
Proceedings in CC Docket Nos. 96-149, 85-229, 90-623, 95-20, and CCBPol
96-09 filed on July 25, 1996 is DENIED.
It is further Ordered that Part 53 of the Commission's Rules, 47
CFR Sec. 53 is ADDED as set forth below.
List of Subjects in 47 CFR Part 53
Bell Operating Companies, Communications common carriers, InterLATA
services, Separate affiliate safeguards, Telephone.
Federal Communications Commission.
William F. Caton,
Acting Secretary.
Rule Changes
Part 53 of Title 47 of the Code of Federal Regulations is added to
read as follows:
PART 53--SPECIAL PROVISIONS CONCERNING BELL OPERATING COMPANIES
Subpart A--General Information
Sec.
53.1 Basis and purpose.
53.3 Terms and definitions.
Subpart B--Bell Operating Company Entry into InterLATA Services
53.101 Joint marketing of local and long distance services by
interLATA carriers.
Subpart C--Separate Affiliate; Safeguards
53.201 Services for which a section 272 affiliate is required.
53.203 Structural and transactional requirements.
53.205 Fulfillment of certain requests. [Reserved]
53.207 Successor or assign.
Subpart D--Manufacturing by Bell Operating Companies
53.301 [Reserved]
Subpart E--Electronic Publishing by Bell Operating Companies
53.401 [Reserved]
Subpart F--Alarm Monitoring Services
53.501 [Reserved]
Authority: Sections 1-5, 7, 201-05, 218, 251, 253, 271-75, 48
Stat. 1070, as amended, 1077; 47 U.S.C. 151-55, 157, 201-05, 218,
251, 253, 271-75, unless otherwise noted.
Subpart A--General Information.
Sec. 53.1 Basis and purpose.
(a) Basis. The rules in this part are issued pursuant to the
Communications Act of 1934, as amended.
(b) Purpose. The purpose of the rules in this part is to implement
sections 271 and 272 of the Communications Act of 1934, as amended, 47
U.S.C. 271 and 272.
Sec. 53.3 Terms and definitions.
Terms used in this part have the following meanings:
Act. The Act means the Communications Act of 1934, as amended.
Affiliate. An affiliate is a person that (directly or indirectly)
owns or controls, is owned or controlled by, or is under common
ownership or control with, another person. For purposes of this part,
the term ``own'' means to own an equity interest (or the equivalent
thereof) of more than 10 percent.
AT&T Consent Decree. The AT&T Consent Decree is the order entered
August 24, 1982, in the antitrust action styled United States v.
Western Electric, Civil Action No. 82-0192, in the United States
District Court for the District of Columbia, and any judgment or order
with respect to such action entered on or after August 24, 1982.
Bell Operating Company (BOC). The term Bell operating company
(1) Means any of the following companies: Bell Telephone Company of
Nevada, Illinois Bell Telephone Company, Indiana Bell Telephone
Company, Incorporated, Michigan Bell Telephone Company, New England
[[Page 2968]]
Telephone and Telegraph Company, New Jersey Bell Telephone Company, New
York Telephone Company, U S West Communications Company, South Central
Bell Telephone Company, Southern Bell Telephone and Telegraph Company,
Southwestern Bell Telephone Company, The Bell Telephone Company of
Pennsylvania, The Chesapeake and Potomac Telephone Company, The
Chesapeake and Potomac Telephone Company of Maryland, The Chesapeake
and Potomac Telephone Company of Virginia, The Chesapeake and Potomac
Telephone Company of West Virginia, The Diamond State Telephone
Company, The Ohio Bell Telephone Company, The Pacific Telephone and
Telegraph Company, or Wisconsin Telephone Company; and
(2) Includes any successor or assign of any such company that
provides wireline telephone exchange service; but
(3) Does not include an affiliate of any such company, other than
an affiliate described in paragraphs (1) or (2) of this definition.
In-Region InterLATA service. In-region interLATA service is
interLATA service that originates in any of a BOC's in-region states,
which are the states in which the BOC or any of its affiliates was
authorized to provide wireline telephone exchange service pursuant to
the reorganization plan approved under the AT&T Consent Decree, as in
effect on February 7, 1996. For the purposes of this part, 800 service,
private line service, or equivalent services that terminate in a BOC's
in-region state and allow the called party to determine the interLATA
carrier are considered to be in-region interLATA service.
InterLATA Information Service. An interLATA information service is
an information service that incorporates as a necessary, bundled
element an interLATA telecommunications transmission component,
provided to the customer for a single charge.
InterLATA Service. An interLATA service is a service that involves
telecommunications between a point located in a LATA and a point
located outside such area. The term ``interLATA service'' includes both
interLATA telecommunications services and interLATA information
services.
Local Access and Transport Area (LATA). A LATA is a contiguous
geographic area:
(1) Established before February 8, 1996 by a BOC such that no
exchange area includes points within more than one metropolitan
statistical area, consolidated metropolitan statistical area, or state,
except as expressly permitted under the AT&T Consent Decree; or
(2) Established or modified by a BOC after February 8, 1996 and
approved by the Commission.
Local Exchange Carrier (LEC). A LEC is any person that is engaged
in the provision of telephone exchange service or exchange access. Such
term does not include a person insofar as such person is engaged in the
provision of commercial mobile service under section 332(c) of the Act,
except to the extent that the Commission finds that such service should
be included in the definition of such term.
Out-of-Region InterLATA service. Out-of-region interLATA service is
interLATA service that originates outside a BOC's in-region states.
Section 272 affiliate. A section 272 affiliate is a BOC affiliate
that complies with the separate affiliate requirements of section
272(b) of the Act and the regulations contained in this part.
Subpart B--Bell Operating Company Entry Into InterLATA Services
Sec. 53.101 Joint marketing of local and long distance services by
interLATA carriers.
(a) Until a BOC is authorized pursuant to section 271(d) of the Act
to provide interLATA services in an in-region State, or until February
8, 1999, whichever is earlier, a telecommunications carrier that serves
greater than 5 percent of the Nation's presubscribed access lines may
not jointly market in such State telephone exchange service obtained
from such company pursuant to section 251(c)(4) of the Act with
interLATA services offered by that telecommunications carrier.
(b) For purposes of applying section 271(e) of the Act,
telecommunications carriers described in paragraph (a) of this section
may not:
(1) Market interLATA services and BOC resold local exchange
services through a ``single transaction.'' For purposes of this
section, we define a ``single transaction'' to include the use of the
same sales agent to market both products to the same customer during a
single communication;
(2) Offer interLATA services and BOC resold local exchange services
as a bundled package under an integrated pricing schedule.
(c) If a telecommunications carrier described in paragraph (a) of
this section advertises the availability of interLATA services and
local exchange services purchased from a BOC for resale in a single
advertisement, such telecommunications carrier shall not mislead the
public by stating or implying that such carrier may offer bundled
packages of interLATA service and BOC local exchange service purchased
for resale, or that it can provide both services through a single
transaction.
Subpart C--Separate Affiliate; Safeguards
Sec. 53.201 Services for which a section 272 affiliate is required.
For the purposes of applying section 272(a)(2) of the Act:
(a) Previously authorized activities. When providing previously
authorized activities described in section 271(f) of the Act, a BOC
shall comply with the following:
(1) A BOC shall provide previously authorized interLATA information
services and manufacturing activities through a section 272 affiliate
no later than February 8, 1997.
(2) A BOC shall provide previously authorized interLATA
telecommunications services in accordance with the terms and conditions
of the orders entered by the United States District Court for the
District of Columbia pursuant to section VII or VIII(C) of the AT&T
Consent Decree that authorized such services.
(b) InterLATA information services. A BOC shall provide an
interLATA information service through a section 272 affiliate when it
provides the interLATA telecommunications transmission component of the
service either over its own facilities, or by reselling the interLATA
telecommunications services of an interexchange provider.
(c) Out-of-region interLATA information services. A BOC shall
provide out-of-region interLATA information services through a section
272 affiliate.
Sec. 53.203 Structural and transactional requirements.
(a) Operational independence.
(1) A section 272 affiliate and the BOC of which it is an affiliate
shall not jointly own transmission and switching facilities or the land
and buildings where those facilities are located.
(2) A section 272 affiliate shall not perform any operating,
installation, or maintenance functions associated with facilities owned
by the BOC of which it is an affiliate.
(3) A BOC or BOC affiliate, other than the section 272 affiliate
itself, shall not perform any operating, installation, or maintenance
functions associated with facilities that the BOC's section 272
affiliate owns or leases from a provider other than the BOC.
[[Page 2969]]
(b) Separate books, records, and accounts. A section 272 affiliate
shall maintain books, records, and accounts, which shall be separate
from the books, records, and accounts maintained by the BOC of which it
is an affiliate.
(c) Separate officers, directors, and employees. A section 272
affiliate shall have separate officers, directors, and employees from
the BOC of which it is an affiliate.
(d) Credit arrangements. A section 272 affiliate shall not obtain
credit under any arrangement that would permit a creditor, upon
default, to have recourse to the assets of the BOC of which it is an
affiliate.
(e) Arm's-length transactions. A section 272 affiliate shall
conduct all transactions with the BOC of which it is an affiliate on an
arm's length basis, pursuant to the accounting rules described in
Sec. 32.27 of this chapter, with any such transactions reduced to
writing and available for public inspection.
Sec. 53.205 Fulfillment of certain requests. [Reserved]
Sec. 53.207 Successor or assign.
If a BOC transfers to an unaffiliated entity ownership of any
network elements that must be provided on an unbundled basis pursuant
to section 251(c)(3) of the Act, such entity will be deemed to be an
``assign'' of the BOC under section 3(4) of the Act with respect to
such transferred network elements. A BOC affiliate shall not be deemed
a ``successor or assign'' of a BOC solely because it obtains network
elements from the BOC pursuant to section 251(c)(3) of the Act.
Subpart D--Manufacturing by Bell Operating Companies
Sec. 53.301 [Reserved]
Subpart E--Electronic Publishing by Bell Operating Companies
Sec. 53.401 [Reserved]
Subpart F--Alarm Monitoring Services
Sec. 53.501 [Reserved]
[FR Doc. 97-1390 Filed 1-17-97; 8:45 am]
BILLING CODE 6712-01-P