Bell Operating Company Provision of Out-of-Region Interstate, Interexchange Services

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Chapter I

[CC Docket No. 96-21, FCC 96-288]

Bell Operating Company Provision of Out-of-Region Interstate,

Interexchange Services

AGENCY: Federal Communications Commission.

ACTION: Interim rule.

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SUMMARY: In this Report and Order, the Commission facilitates the

efficient and rapid provision of out-of-region, domestic, interstate,

interexchange services by the BOCs, as contemplated by the

Telecommunications Act of 1996 (1996 Act), while still protecting

ratepayers and competition in the interexchange market, by removing

dominant regulation for BOCs that provide such services through an

affiliate that complies with certain safeguards. These safeguards are

the same as those that have applied for more than ten years to

affiliates of independent local exchange companies (LECs) (i.e.,

exchange telephone companies, including GTE, other than the BOCs) that

are regulated as non-dominant interexchange carriers under the rules

established in the Competitive Carrier proceeding. These rules will

permit the rapid entry by the BOCs into the provision of out-of-region

interstate, interexchange services while providing protection against

anticompetitive conduct.

EFFECTIVE DATE: August 8, 1996.

FOR FURTHER INFORMATION CONTACT: Michael Pryor (202) 418-0495 or

Melissa Waksman (202) 418-0913, Common Carrier Bureau, Policy and

Program Planning Division.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's

Report and Order adopted on June 28, 1996, and released on July 1,

1996, FCC 96-288. The full text of this Report and Order is available

for inspection and copying during normal business hours in the FCC

Reference Center (Room

[[Page 35965]]

239), 1919 M St., N.W., Washington, DC. The complete text also may be

purchased from the Commission's copy contractor, International

Transcription Service, Inc., (202) 857-3800, 2100 M St., NW., Suite

140, Washington, DC 20037.

Paperwork Reduction: Public burden for this recordkeeping

requirement is estimated to average 6056 hours per response, including

the time for reviewing instructions, searching existing data sources,

gathering and maintaining the data needed, and completing and reviewing

the collection of information. Send comments regarding this burden

estimate or any other aspect of this recordkeeping requirement,

including suggestions for reducing the burden, to the Federal

Communications Commission, Records Management Branch, Paperwork

Reduction Project, Washington, D.C. 20554 and to the Office of

Management and Budget, Paperwork Reduction Project, Washington, D.C.

20503.

Synopsis of Notice of Proposed Rulemaking

I. Introduction

1. In enacting the Telecommunications Act of 1996 (1996 Act), Pub.

L. No. 104-104, 110 Stat. 56 (1996) codified at 47 U.S.C. Secs. 151 et

seq, Congress sought to establish ``a pro-competitive, de-regulatory

national policy framework'' for the United States telecommunications

industry. The 1996 Act, among other things, provided that upon

enactment the Bell Operating Companies (BOCs) could provide interLATA

telecommunications services originating outside of their in-region

states. In response to the new legislation, the Commission released, on

February 14, 1996, a Notice of Proposed Rulemaking, 61 FR 6607 (Feb.

21, 1996), in which the Commission proposed an interim regime to govern

the BOCs' provision of out-of-region domestic, interstate,

interexchange service. The Notice addressed all ``out-of-region''

interstate, interexchange services (including interLATA and intraLATA

services). Eighteen parties filed comments and thirteen parties filed

reply comments.

2. Under our existing rules, BOC provision of out-of-region,

interstate, interexchange services is subject to dominant carrier

regulation. In order to facilitate the efficient and rapid provision of

out-of-region, domestic, interstate, interexchange services by the

BOCs, as contemplated by the 1996 Act, while still protecting

ratepayers and competition in the interexchange market, we remove

dominant regulation for BOCs that provide out-of-region, interstate,

interexchange services through an affiliate that complies with certain

safeguards. These safeguards are the same as those that have applied

for more than ten years to affiliates of independent local exchange

companies (LECs) that are regulated as non-dominant interexchange

carriers under the rules established in the Competitive Carrier

proceeding. The safeguards require that the affiliate: (1) maintain

separate books of account from the LEC; (2) not jointly own

transmission or switching facilities with the LEC; and (3) take any

tariffed services from the affiliated LEC pursuant to the terms and

conditions of the LEC's generally applicable tariff. We also conclude

that a BOC affiliate providing out-of-region, domestic, interstate,

interexchange services should be treated, for purposes of the BOCs'

accounting, as a nonregulated affiliate under the Commission's joint

cost and affiliate transactions rules, just as independent LEC

affiliates are now treated.

3. The regime adopted in this Report and Order is expressly

designed as an interim measure to facilitate the BOCs' prompt provision

of out-of-region, domestic, interstate, interexchange services. In

March 1996, the Commission sought comment in the Interexchange NPRM, on

whether to modify or eliminate these affiliate requirements as a

condition for non-dominant treatment of independent LEC provision of

out-of-region, interstate, interexchange services. We also sought

comment on whether, if we modify or eliminate these requirements for

independent LECs, we should also eliminate or modify our treatment of

BOC out-of-region, interstate, interexchange services. We will

establish final rules for BOC out-of-region, interstate, interexchange

services in that proceeding.

II. Background

A. The Competitive Carrier Proceeding

4. Between 1979 and 1985, the Commission conducted the Competitive

Carrier proceeding, in which it examined how its regulations should be

adapted to reflect and facilitate the increasing competition in

telecommunications markets. In a series of orders, the Commission

distinguished between carriers with market power (dominant carriers)

and those without market power (non-dominant carriers). The Commission

gradually relaxed its regulation of non-dominant carriers because it

concluded that non-dominant carriers lacked the incentive and ability

to engage in conduct that might be anticompetitive or otherwise

inconsistent with the public interest.

5. In its First Report and Order, 45 FR 52453, November 18, 1980,

the Commission classified AT&T and its then-affiliated local exchange

companies as well as independent local exchange companies as dominant

carriers and concluded that these dominant carriers should be subject

to the ``full panoply'' of Title II regulation. Recently, in light of

increasing competition in the interstate, domestic, interexchange

telecommunications market, and evidence that AT&T no longer possesses

the ability to control prices unilaterally, the Commission reclassified

AT&T as a non-dominant carrier in that market.

6. In its Fourth Report and Order, 48 FR 52452, November 1983, the

Commission considered how it should regulate the provision of

interstate, interexchange services by independent LECs. Because the

Modification of Final Judgment, United States v. Western Elec. Co., 552

F. Supp. 131 (D.D.C. 1982), aff'd. sub nom., Maryland v. United States,

460 U.S. 1001 (1983), prohibited BOCs from offering interLATA services,

the Fourth Report and Order addressed only the interstate,

interexchange offerings of independent LECs. The Commission determined

that interexchange carriers affiliated with independent LECs would be

regulated as non-dominant carriers. In the Fifth Report and Order, 49

FR 34824, September 4, 1984, the Commission explained its definition of

the term ``affiliate'' as ``a carrier that is owned (in whole or in

part) or controlled by, or under common ownership (in whole or in part)

or control with, an exchange telephone company,'' and identified three

separation requirements that the affiliate must meet in order to

qualify for non-dominant treatment. These requirements are that the

affiliate: (1) maintain separate books of account; (2) not jointly own

transmission or switching facilities with the LEC; and (3) if it uses

the LEC's services, it should acquire them via the LEC's tariffs. The

Commission further concluded that, if the LEC provided interstate,

interexchange services directly, rather than through an affiliate,

those services would be subject to dominant carrier regulation.

7. The Fifth Report and Order also addressed the regulation of the

BOCs' provision of interLATA services:

The BOCs currently are barred by the [Modification of Final

Judgment] from providing interLATA services. . . . If this bar is

lifted in the future, we would regulate the BOCs' interstate,

interLATA services as dominant until we determined what degree

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of separation, if any, would be necessary for the BOCs or their

affiliates to qualify for nondominant regulation.

B. The 1996 Act and the BOC Out-of-Region Notice of Proposed Rulemaking

10. Section 271(b)(2), added by the 1996 Act, provides:

A Bell operating company, or any affiliate of that Bell

operating company, may provide interLATA services originating

outside its in-region States after the date of enactment of the

Telecommunications Act of 1996, subject to subsection (j).

Thus, the 1996 Act does not require a BOC to obtain Commission

authorization prior to offering out-of-region, interstate, interLATA

services. The 1996 Act, however, does not modify the Commission's

determination in the Fifth Report and Order that BOC provision of

interstate, interLATA services initially would be subject to dominant

carrier regulation.

11. Immediately after the 1996 Act became law, we issued the BOC

Out-of-Region NPRM, in which we proposed, under certain conditions, to

remove dominant carrier regulation of the BOCs' provision of out-of-

region, interstate, interexchange services. In our Notice, we

tentatively concluded that, as an interim measure, if a BOC creates an

affiliate to provide out-of-region, interstate, interexchange services

(including interLATA and intraLATA services), and if the affiliate

satisfies the minimal separation requirements set forth in the Fifth

Report and Order that apply to the interexchange affiliates of

independent LECs, then the BOC affiliate's provision of those

interexchange services would be regulated on a non-dominant basis. We

also noted that LECs providing interexchange services through

affiliates pursuant to the Fifth Report and Order treat those

affiliates as nonregulated affiliates under the Commission's joint cost

rules and affiliate transactions rules for exchange carrier accounting

purposes. In our Notice, we sought comment on whether a BOC affiliate

providing out-of-region, interstate, interexchange services also should

be treated as a nonregulated affiliate for BOC accounting purposes.

Finally, we tentatively concluded that, at least for now, if a BOC

provides out-of-region, interstate, interexchange services directly, or

through an affiliate that fails to comply with these minimal separation

requirements, then dominant carrier regulation would be retained for

those services.

III. Discussion

A. The Purpose of the Interim Rules

12. This proceeding is necessary to enable the BOCs to begin

competing in an out-of-region area in the interexchange market on a

non-dominant basis. Currently, BOC provision of interstate,

interexchange service is subject to dominant carrier regulation until

we determine the degree of separation, if any, necessary for non-

dominant treatment. Thus, BOC out-of-region services would be subject

to dominant regulation, whether those services were offered directly by

the BOC or through another entity, no matter how structurally separate

from the BOC. We take no position in this proceeding on whether the

structural separation requirements, other safeguards established by the

1996 Act, and our existing regulations that would apply to BOC

provision of in-region services are sufficient to allow us to relax

dominant carrier regulation for the separate subsidiaries through which

the BOCs must provide in-region, interLATA services. See 47 U.S.C.

Sec. 272. We will address that issue in a separate proceeding.

13. In our Notice, we tentatively concluded that we could remove

dominant carrier regulation of BOC out-of-region, interstate,

interexchange services by applying to the BOCs the same rules that have

worked well for independent LECs. These rules were specifically

designed to impose minimal burdens on the smaller, independent LECs,

and thus are less stringent than the structural separation required

under our Computer II regime, and contain fewer restrictions than

imposed by the 1996 Act for BOC provision of in-region, interLATA

services. At the same time, the Commission found in the Fifth Report

and Order that these separation requirements provided some protection

against anticompetitive abuses that could arise from the LECs' control

over local bottleneck facilities.

14. Because we believe that we should move expeditiously in order

to advance the goals of the 1996 Act, we specifically stated in the

Notice that the actions we take in this proceeding would be interim. By

applying the well-established rules applicable to independent LECs as

an interim measure, we are able to: remove dominant carrier regulation

for BOC out-of-region, interstate, interexchange services, thereby

facilitating prompt and competitive entry by the BOCs into those

services; have the same level of assurance of protecting competition

and ratepayers as we have with independent LECs and their interexchange

affiliates; and avoid engaging in a protracted proceeding. We have

already issued a Notice in which we initiate a more comprehensive

review of the rules that are applicable to both independent LECs and

the BOCs in the provision of out-of-region, interstate, interexchange

services. In the Interexchange NPRM, we sought comment on whether it

may be appropriate to modify or eliminate the minimal separation

requirements applied to independent LEC affiliates providing

interstate, interexchange services originating outside of their local

exchange areas. We also sought comment on whether, if we do modify or

eliminate such requirements for independent LECs, we should apply the

same requirements to BOC provision of out-of-region, interstate,

interexchange services. We will finalize our rules governing both BOC

and independent LEC provision of out-of-region, interstate,

interexchange services in that proceeding.

B. Non-dominant Classification for BOC Affiliates

15. The record does not dissuade us from proceeding on an interim

basis as proposed in the Notice. NYNEX and Pactel support, as an

interim measure, adoption of the BOC Out-of-Region NPRM's tentative

conclusions, including use of the Commission's joint cost and affiliate

transactions rules. NYNEX contends that the proposed rules are ``an

excellent first regulatory step that the Commission can take promptly

to enable BOC entry into the long distance service markets.'' Pactel

supports the rules as a method of ensuring regulatory parity among all

exchange companies, BOCs and independent LECs, even though Pactel

disputes that the BOCs have market power in the interexchange market.

16. The remaining BOCs object to removing dominant regulation only

for affiliates meeting the Fifth Report and Order requirements and

contend that out-of-region, interstate, interexchange services should

be regulated as non-dominant even if provided on an unseparated basis.

These commenters raise essentially three arguments: (1) BOCs do not

have market power in the interexchange market under the criteria, such

as market share, established in the Competitive Carrier proceeding and

those applied in reclassifying AT&T as a non-dominant interexchange

carrier; (2) BOCs have neither the ability nor the incentive to

leverage their control over local facilities to impede competition in

the interexchange market, especially given current regulations and the

provisions of the 1996 Act that are designed to open the local market

to

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competition; and (3) the proposed separation requirements for out-of-

region interexchange services are inconsistent with the 1996 Act.

17. BellSouth additionally argues that, by proposing to regulate

BOCs as dominant if they directly provide out-of-region, interexchange

services based on their market power in the provision of local

services, we are resurrecting the ``all services'' approach. BellSouth

states that, in the Competitive Carrier orders, the Commission adopted

an ``all services'' approach under which a finding that a carrier was

dominant in the provision of one service subjected a carrier to

dominant regulation of all services. BellSouth argues that, under this

``all services'' approach, the Commission ruled that bottleneck

facilities were prima facie evidence of dominance in all markets.

BellSouth maintains that the Commission rejected this approach in the

AT&T Reclassification Order. We reject this analysis. The ``all

services'' question addressed in the AT&T Reclassification Order was

whether the Commission could find AT&T non-dominant only if ``AT&T

lacks the ability to control the price of every tariffed service in the

relevant market.'' A very different question is posed by the BOCs entry

into out-of-region, interstate, interexchange services: whether a firm

with market power in one relevant market (the local exchange and

exchange access market) can leverage that power to gain market power or

an unfair advantage in another, related market (the interexchange

market).

18. As for the non-BOC commenters, MCI and TRA argue that, given

the potential for the BOCs to engage in anticompetitive conduct, the

BOC affiliate should be regulated as dominant. Almost all of the other

non-BOC commenters support non-dominant regulation of BOC out-of-region

services if provided through a separate affiliate, but contend that the

safeguards proposed in the Notice are insufficient to protect against

abuses by the BOCs. Specifically, these parties claim that without

these additional safeguards the BOCs could use their control over local

exchange facilities to unfairly discriminate in pricing or service

quality against competing interexchange carriers or could cross-

subsidize their long distance operations by shifting costs to the local

exchange and exchange access operations. They urge the Commission,

therefore, to impose full structural separation on the out-of-region

affiliate, including the separations imposed by section 272 on the in-

region interexchange affiliate. They also seek to bar joint marketing

of local and out-of-region services or, at least, require that

marketing personnel and operations be separated. Some ask the

Commission to require that the BOC provide all Title II services to its

affiliate at the generally applicable tariffed rates and that all non-

Title II services and access to information obtained by the BOC by

virtue of its provision of local exchange service be provided on a non-

discriminatory basis or that such information not be shared at all.

Finally, non-BOC commenters dispute claims that the Notice's proposals

are inconsistent with the 1996 Act.

19. We adopt here the interim rules proposed in the Notice, at

least until completion of our broader rulemaking proceeding, the

Interexchange NPRM. The Fifth Report and Order safeguards we adopt

herein on an interim basis have worked relatively well since 1984 to

protect against potential abuses by the independent LECs in their

provision of interexchange services and we believe that they will

provide adequate interim protection as the BOCs begin providing out-of-

region interexchange services. As the Commission noted in the Fifth

Report and Order, these safeguards provide some protection against

``cost-shifting and anticompetitive conduct.'' These safeguards have

been applied to independent LEC provision of interexchange services

originating in and out of their regions and should provide sufficient

interim safeguards for BOC provision of solely out-of-region services.

Additionally, these safeguards will be supplemented with the

application of our cost allocation and affiliate transaction rules, as

explained below, which provide further protection against cost

misallocations. Moreover, no party has presented persuasive evidence to

show that, at this time, these rules will not be effective interim

measures.

20. At the same time, we believe that these minimal requirements

should be in place pending further analysis of these issues. Not only

has the Commission adopted an NPRM to address these specific issues,

but we also have launched various proceedings, and are in the process

of issuing further rulemakings, relating to the implementation of

various aspects of the 1996 Act. These proceedings touch upon issues

raised in this proceeding, such as the proper market definition and the

scope of various safeguards. We believe it is prudent to assess the

record in those proceedings in order to assist us in adopting a

comprehensive and cohesive framework that addresses the myriad issues

involving BOC provision of services that the BOCs previously have been

barred from offering.

21. Thus we reject AT&T's argument that the proposed rules should

not be adopted because, AT&T contends, they improperly depart from the

use of a single, nationwide, interexchange market without submarkets

without providing a reasoned explanation. The Notice proposed to apply,

on an interim basis, the same rules to BOC out-of-region services that

we apply to independent LECs. We do not find that AT&T has presented

persuasive reasons to depart from this prior precedent for purposes of

these interim rules. Moreover, in the Notice, we explicitly proposed to

address only BOC provision of out-of-region, interstate, interexchange

services. At the same time, we made clear that we were planning to

adopt these rules on an interim basis, pending a future proceeding to

consider more fully the long-term issues raised by BOC entry into out-

of-region, interstate, interexchange services. We note that on March

25, 1996, we released the Interexchange NPRM initiating that

proceeding. In proposing to look only at BOC provision of out-of-

region, interstate, interexchange service here, we sought to balance

the goal of the 1996 Act to allow swift BOC entry into the

interexchange market, subject to interim safeguards, with the need for

a comprehensive review of our rules. We believe it is within our

discretion to conduct our proceedings in such a manner as to

accommodate these twin purposes.

22. We find that our interim plan of removing dominant carrier

regulation for BOC affiliates meeting the Fifth Report and Order

separation requirements and retaining dominant regulation for BOCs that

provide out-of-region services directly will not impose an unreasonable

burden on the BOCs. Initially, we believe it is important to clarify

the scope of the Fifth Report and Order separation requirements. Most

commenters refer to the Fifth Report and Order requirements as

structural separation. This is true only in the sense that the BOC or

LEC non-dominant interexchange affiliate is a separate legal entity. In

no other sense do we require ``structural separation.'' Indeed, in the

Fifth Report and Order, the Commission specifically rejected arguments

that structural separation requirements should be imposed between an

independent LEC and its interexchange affiliate because the Commission

found that structural separation would impose unreasonable burdens on

smaller, independent LECs. The Commission specifically sought to avoid

imposing

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excessive burdens and noted that the LEC affiliate qualifying for non-

dominant treatment ``is not necessarily structurally separated from the

exchange telephone company in the sense ordered in the Second Computer

Inquiry * * * (e.g., fully-separated personnel and marketing are not

necessary for nondominant treatment).'' Thus, except for the ban on

joint ownership of transmission and switching facilities, a restriction

which we believe should pose little, if any, burden on the provision of

out-of-region, interstate, interexchange services, the BOC and the

interexchange affiliate will be able to share personnel and other

resources or assets. The affiliate may be staffed by BOC personnel,

housed in existing BOC offices, and use BOC marketing or other

services. Providing interexchange services through such an affiliate

will not impede the BOCs' ability to realize efficiencies gained

through the use of joint resources. To help ensure that the BOCs

properly allocate the costs of any services provided to the

interexchange affiliate, however, we require that the BOC treat this

affiliate for accounting purposes as a nonregulated affiliate and

therefore subject to our cost allocation and affiliate transactions

rules.

23. Additionally, we clarify the separate books of account

requirement and the requirement that to the extent the affiliate

obtains BOC services it do so under the terms of the BOC's tariff. We

do not require that the interexchange affiliate maintain separate books

of account that comply with our Part 32 rules. Instead, the separate

books of account requirement refers to the fact that, as a separate

legal entity, the affiliate must maintain its own books of account as a

matter of course. This is consistent with the current accounting

treatment of the interexchange affiliates of independent LECs. Books of

account refer to the financial accounting system a company uses to

record, in monetary terms, the basic transactions of a company. These

books of account reflect the company's assets, liabilities, and equity,

and the revenues and expenses from operations. Each company has its own

separate books of account. The Commission's Part 32 rules, the Uniform

System of Accounts (USOA), prescribe the books of account for the

telephone companies. The Part 32 USOA, however, is not required to be

kept by affiliates of a telephone company. These affiliates maintain

their own separate books of account. We note that, if a telephone

company decides to conduct out-of-region, interstate, interexchange

service within the telephone company without using a separate

affiliate, this activity would be reflected in the telephone company's

USOA accounts, because the USOA reflects the telephone company's total

operations. As to the tariff requirement, we clarify that this

provision applies only to services for which the BOC is required to

file a tariff, not to detariffed services such as billing and

collection. The provision also only applies when the affiliate obtains

tariffed services from its affiliated BOC.

24. Parties have offered no credible evidence to support

contentions that the Fifth Report and Order separation requirements

constitute burdensome regulation. Indeed, the entry of interexchange

carriers affiliated with independent LECs over the past decade serves

as evidence that these conditions will not prevent the BOCs from

competing effectively. Moreover, we note that several BOCs have already

established, or plan to establish, subsidiaries through which they will

provide interexchange services that meet or exceed these separation

requirements. We believe that separation requirements designed to

accommodate the resources of small independent LECs will not impose an

unreasonable burden on the much larger regional Bell companies,

particularly on an interim basis.

25. Finally, we conclude, as an interim measure, that if a BOC

chooses to offer out-of-region interstate interexchange services

directly, it will be subject to dominant carrier regulation and to

price cap regulation. Specifically, we require that the BOCs include

such services in the price cap Basket for interexchange services. See

47 CFR Sec. 61.42(d)(4).

C. Consistency With the 1996 Act

26. Several BOC commenters argue that the separate affiliate

requirement, even as an interim measure, is inconsistent with the

provisions of the 1996 Act. They contend that the 1996 Act specifically

excluded out-of-region services from the separate affiliate requirement

contained in new section 272. Some further argue that, because dominant

regulation is so onerous, conditioning non-dominant treatment on

complying with the separation requirements effectively requires BOCs to

establish a separate affiliate to provide out-of-region interstate,

interexchange services in contravention of the 1996 Act. They also

argue, more generally, that the proposed rules are inconsistent with

the overall deregulatory emphasis of the new legislation.

27. Bell Atlantic contends that the proposed separation

requirements are inconsistent with the 1996 Act for two reasons: (1)

section 272(f) contains a sunset provision for the in-region affiliate

whereas the proposed separation requirements are open-ended; and (2) a

BOC interexchange affiliate providing out-of-region services would be

barred from jointly owning transmission and switching facilities with

its operating company affiliate, whereas Section 272 contains no such

restriction for the in-region separate affiliate. Bell Atlantic

concludes that it would have to establish two subsidiaries, one for in-

region and one for out-of-region services.

28. Non-BOC commenters dispute these arguments. Some argue that,

because the 1996 Act is silent as to the type of regulatory regime that

the Commission should impose on the BOCs' provision of out-of-region

interexchange services, the statute contemplates that the Commission

may apply its existing dominant/nondominant regulatory regime. These

parties further point out that the separate subsidiary provisions of

the 1996 Act contain a savings clause which states that ``[n]othing in

this subsection shall be construed to limit the authority of the

Commission under any other section of this Act to prescribe safeguards

consistent with the public interest, convenience and necessity.''

Vanguard contends that the BOCs are essentially arguing that the 1996

Act repealed the Commission's existing statutory authority to apply its

dominant carrier rules to BOC interexchange affiliates by implication.

Vanguard asserts that a statutory construction that would repeal an

agency's authority by implication is ``highly disfavored'' by the

courts except where there is an irreconcilable conflict between the two

statutes or where there is compelling evidence that Congress intended

to repeal the prior statute. Sprint and others contend that the

proposed safeguards are less burdensome than the statutory separate

subsidiary requirement and note that, while the 1996 Act mandates a

separate subsidiary to provide in-region services, the Commission's

proposal permits the BOCs to offer out-of-region services through an

affiliate or directly.

29. We reject the contention that section 272(a)(2) prohibits us

from retaining the dominant/non-dominant regulatory framework which the

Commission has applied to interexchange carriers prior to passage of

the 1996 Act for BOC provision of out-of-region, interstate,

interexchange services. More specifically, we do not

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agree that, by excluding out-of-region services from those services

that a BOC must provide through a structurally separate affiliate,

section 272(a)(2) bars the Commission from according non-dominant

regulation of BOC out-of-region, interstate, interexchange services

only to BOC affiliates that comply with the separation requirements we

adopt in this Order. Section 272(a)(2), relied upon by the BOC

commenters, provides in pertinent part that:

The services for which a separate affiliate is required by

paragraph (1) are:

* * * * *

(B) Origination of interLATA telecommunications services, other

than--

* * * * *

(ii) out-of-region services described in section 271(b)(2).

As noted by MCI, the legislation is silent on the issue of dominant/

non-dominant regulation of BOC interLATA services. We conclude that

Congress did not intend by implication to repeal our authority to

impose dominant or non-dominant regulatory treatment as we deem

necessary to protect the public interest consistent with our statutory

mandates. To the contrary, Section 601(c) of the 1996 Act provides that

we are not to presume that Congress intended to supersede our existing

regulations unless expressly so provided.

30. Nor is there any inconsistency between the separation

requirements we adopt by this Order as an interim measure and the 1996

Act. We do not mandate that the BOCs provide out-of-region, interstate,

interexchange services through a separate affiliate. Instead, this

Order concludes that, on an interim basis, BOCs will continue to be

subject to dominant carrier treatment if they offer out-of-region

interstate, interexchange services directly. The same requirement has

applied to all independent LECs since 1984. This order, in effect,

offers the BOCs a choice of providing out-of-region, interstate,

interexchange services under dominant regulation if they wish to

furnish those services directly or under non-dominant regulation if

they wish to offer those services through a separate affiliate that

meets the separation requirements.

31. We also note that the 1996 Act's provisions for the

structurally separate in-region subsidiary contain more restrictions

than those that will apply to the BOC affiliates' provision of out-of-

region, interstate, interexchange services as a non-dominant carrier.

For example, the 1996 Act requires that the separate subsidiary that

must be established to provide in-region interLATA services must have

separate officers, directors, and employees, and may not obtain credit

under any arrangement that would permit recourse to the BOC. See 47

U.S.C. Sec. 272(b). None of these requirements applies to the BOCs'

out-of-region affiliate.

32. Bell Atlantic contends, however, that our proposed separation

conditions are, in fact, more rigorous than those established by the

1996 Act for in-region services because we have not suggested a sunset

date and have barred joint ownership of transmission and switching

facilities. We are seeking comment in the Interexchange NPRM on whether

to modify or eliminate the separation requirements for independent LECs

in their provision of out-of-region, interstate, interexchange service

as a condition for non-dominant treatment. We are also seeking comments

on whether, if we modify or eliminate these separation requirements for

independent LECs, we should apply the same treatment to BOC provision

of out-of-region, interstate, interexchange service. Bell Atlantic's

argument is more appropriately addressed in that proceeding. During the

interim period that will be covered by the rules we promulgate today, a

prohibition on joint ownership of switching and transmission facilities

should cause no hardship on the BOC provision of out-of-region services

because, as the BOCs maintain, they initially will be using other

carriers' facilities and because of the geographic separation of in-

region facilities and out-of-region services. Additionally, the fact

that the 1996 Act contains a sunset provision for certain restrictions

is not a basis for concluding that our interim rules for BOC out-of-

region, interstate, interexchange services are inconsistent with the

1996 Act.

D. Proposed Mergers

33. After the record in this proceeding closed, SBC Communications

Inc., and Pacific Telesis Group announced, on April 1, 1996, an

agreement to merge their operations. Three weeks later, on April 21,

1996, Bell Atlantic and NYNEX announced that they had reached an

agreement to merge. We believe that mergers such as these raise

concerns with respect to the provision of out-of-region services during

the pendency of the merger. Specifically, they raise the concern that,

in the period prior to a merger's consummation, one partner to the

merger may act in ways to favor those out-of-region services of its

merger partner that originate in the first partner's service territory.

For example, BOC A may favor BOC B's long distance services originating

in BOC A's territory because BOC A may eventually share in BOC B's

profits. We do not believe that the record in this proceeding provides

an adequate basis on which to address the specific concerns raised by

such pending mergers. Accordingly, we exclude from the services covered

by this Order, those out-of-region services that originate in the in-

region states of a merger partner during the period prior to the

consummation of the merger. Given the interim nature of the rules we

are establishing in this Order, and the fact that we are not aware of

plans by any of the potential merger partners to provide out-of-region

services originating in their respective partners' service territories,

we believe that this approach likely will not impose any burdens on the

affected parties. Should such parties determine, however, to provide

such services, those parties should request the Commission, on an

individual case basis, for a determination of whether such services can

be provided on a non-dominant basis. Because our concern relates to the

incentives of one party to favor the operations of the other party

during the pendency of the merger, should an announced merger not be

consummated, the interim rules established in this Order for out-of-

region services shall apply to all out-of-region services provided by

the parties to the proposed merger.

34. Nothing in this section on proposed mergers should be construed

as indicating the Commission's position with respect to mergers in

other sectors of the telecommunications industry or outside of this

particular and unusual context. A unique confluence of circumstances

lead us to conclude that it is both reasonable and prudent to postpone

our determination of the appropriate regulatory treatment for BOC out-

of-region services originating in a potential merger partner's

territory. These unique circumstances include: (1) The announcement of

mergers, following the closure of the record in this proceeding,

involving four of the seven regional Bell companies that would be

subject to the rules established in this proceeding; (2) the concern

that a BOC, through its position in the local telephone exchange market

and its bottleneck control over inputs into the interexchange market,

may have the ability, along with the incentive, to favor the out-of-

region interexchange services operations of a potential merger partner;

(3) the interim nature of these rules; and (4) the 1996 Act's

authorization for BOCs to begin providing out-of-region services upon

enactment. Given these unique circumstances, we emphasize that this

[[Page 35970]]

action is limited to the facts and circumstances set forth in this

discussion of proposed mergers.

E. Joint Cost and Affiliate Transactions Rules

35. In the BOC Out-of-Region NPRM, we stated that independent LECs

providing interexchange services through affiliates pursuant to the

Fifth Report and Order treat those affiliates as nonregulated

affiliates under the Commission's joint cost and affiliate transactions

rules for exchange carrier accounting purposes. The BOC Out-of-Region

NPRM sought comment on whether BOC out-of-region, interstate,

interexchange services should be treated as nonregulated services for

BOC accounting purposes.

36. AT&T, Pactel, NYNEX, Comptel and Vanguard support the treatment

of BOC out-of-region affiliates as non-regulated for accounting

purposes. AT&T and Comptel believe such rules are necessary to

constrain the BOCs' ability to cross-subsidize and to ensure that local

monopoly assets are not used unfairly to advantage long distance

operations. Vanguard asserts that the rules would not impose a burden

because BOCs account for certain services on this basis already and

because such treatment would merely entail setting up the initial

account for service, not changing existing procedures. NYNEX states

that these rules have been effective as applied to independent LECs,

and thus would not be unreasonable to apply to BOCs providing similar

services. AT&T and Comptel also contend that some type of independent

audit should be performed periodically to certify that long distance

affiliates retain their financial independence. Pactel supports

application of the affiliate transaction rules as an interim measure.

37. Ameritech opposes application of the affiliate transactions

rules to BOC interexchange affiliates. It contends that the joint cost

and affiliate transactions rules are designed to allocate costs between

regulated and nonregulated activities, not between two regulated

services and that, in any event, application of those rules would be

unnecessary because the Part 69 rules already require BOCs to identify

separately interexchange costs. At a minimum, Ameritech argues that the

rules should not apply to any BOC subject to pure price cap regulation

at the state and federal level. The Public Utilities Commission of Ohio

(PUCO) also opposes treating the affiliate as nonregulated because they

contend that accounting abuses are better detected by treating the

affiliate's services as regulated.

38. Our existing accounting safeguards for affiliate transactions

were developed in the Joint Cost Order and are codified in Parts 32 and

64 of our Rules. The Part 64 cost allocation rules prescribe how

carriers separate the costs of regulated activities from the costs of

nonregulated activities, where the nonregulated activities are

performed directly by the carrier rather than through an affiliate. The

Part 32 affiliate transactions rules prescribe the way costs are

recorded, for Title II accounting purposes, when a regulated carrier

does business with its nonregulated affiliates. These rules are

designed to prevent local exchange carriers from imposing the costs and

risks of their competitive ventures on local telephone ratepayers.

These rules do not require carriers or their affiliates to charge any

particular prices for assets transferred or services provided; rather,

they require carriers to use certain specified valuation methods in

determining the amounts to record in their Part 32 accounts, regardless

of the prices charged.

39. Because the cost allocation and affiliate transactions rules

are an important component of our accounting safeguards, we find that

these rules should apply to BOCs providing out-of-region, interstate,

interexchange services through a separate affiliate. Even though

interLATA services are regulated services under Title II, under the

rules we adopt herein, the BOCs, for accounting purposes, will treat

the services as nonregulated, so as to make applicable our cost

allocation and affiliate transaction rules. The fact that interLATA

services are regulated services in and of itself does not eliminate the

potential for cost misallocation between the BOCs competitive

(interLATA) and noncompetitive (local exchange and exchange access)

services. Thus, we believe that application of our cost allocation and

affiliate transaction rules is necessary to minimize the possibility

that a BOC could improperly shift the costs of its interstate,

interexchange operations to its regulated local exchange and exchange

access ratepayers. We also note that this requirement is consistent

with the current practice of independent LECs that treat their

affiliates providing interexchange services as nonregulated for

exchange carrier accounting purposes.

40. We find that requiring BOCs to treat affiliates providing out-

of-region services as nonregulated will not be unduly burdensome. BOCs

currently have systems in place to account for transactions between

their nonregulated affiliates (i.e., for transactions between a BOC and

any of its information services which are not regulated under Title

II). Such a requirement will not entail extensive modification of

existing company procedures for the provision of interexchange services

because, prior to the passage of the 1996 Act, BOCs were prohibited

from providing interstate, interexchange services.

IV. Additional Issues

A. Regulation of CMRS-Related InterLATA Services

41. The BOC Out-of-Region NPRM stated that ``BOC provision to

commercial mobile radio service customers, of interstate, interLATA

services originating outside any of the BOC's in-region states, is

included in the out-of-region services addressed in this proceeding.''

42. BellSouth argues that the language in the Notice is susceptible

to two interpretations. According to BellSouth, it may apply to: (1)

The sale of out-of-region, interexchange service by a BOC to

unaffiliated commercial mobile radio service (CMRS) customers; or (2)

the provision of out-of-region, interexchange CMRS service by a BOC.

BellSouth believes that the Commission intended the first of these

interpretations--BOCs offering out-of-region long distance to

unaffiliated CMRS customers on a stand alone basis, not in conjunction

with the BOC's provision of CMRS--and BellSouth opposes applying the

Notice's proposed rules to this service for all of the same reasons it

opposes any separation requirements for out-of-region services.

BellSouth contends that the other interpretation--BOC's offering

interexchange, CMRS--constitutes ``incidental'' CMRS interLATA services

and is beyond the scope of this proceeding. To the extent that a CMRS

provider offers interexchange services in conjunction with its

provision of CMRS, the interexchange service is itself incidental CMRS,

and thus exempted from section 272 separate affiliate requirements,

according to BellSouth. Bell Atlantic and SBC also oppose any

restrictions on BOC provision of incidental interLATA services,

including CMRS, because most of these services were excluded from the

separate subsidiary requirement of 272.

43. MCI contends that the scope of Section 272 is irrelevant

because the 1996 Act does not prevent the Commission from imposing its

own separation requirements. Vanguard supports the proposed separation

[[Page 35971]]

requirements on the assumption that they will be applied to BOC

provision of interLATA services to the customers of its affiliated

cellular companies. Vanguard argues that the interest that a BOC has in

its cellular operations increases the incentives to engage in

anticompetitive conduct because such conduct can benefit both its long

distance operations and its cellular operations. Comptel urges the

Commission to apply to all incidental interLATA services the same rules

applied to out-of-region interexchange services because they raise the

same concerns about discrimination and cross-subsidization.

44. BellSouth's interpretation of our reference to CMRS in footnote

two of the BOC Out-of-Region NPRM is correct. Our statement in the BOC

Out-of-Region NPRM was intended to clarify that a BOC offering out-of-

region long distance service to unaffiliated CMRS customers on a stand

alone basis would be considered ``out-of-region'' services for purposes

of this rulemaking. BOC provision of interexchange services to its

affiliated CMRS customers is beyond the scope of this proceeding. We

also reject as beyond the scope of this proceeding Comptel's request to

apply the separation requirements to all ``incidental'' services

established under section 272(g).

B. Definition of Certain Services as In-Region Services

45. Section 271(j) provides that certain calls that originate out-

of-region will be deemed in-region traffic. Specifically, this section

provides that ``a [BOC] application to provide 800 service, private

line service, or their equivalents that terminate in an in-region State

of that [BOC], and allow the called party to determine the interLATA

carrier, shall be considered an in-region service subject to the

requirements of subsection (b)(1).''

46. Comptel argues that the Commission should declare collect and

third party billed calls to numbers terminating in the BOC's region and

BOC calling card calls to in-region numbers as ``equivalent'' services

and thus be deemed in-region services. Comptel's rationale is that,

like 800 number and private line services, the party paying for the

call selects the interLATA carrier and thus is subject to the BOCs'

local power. Comptel states that the Commission should therefore

prohibit the BOC out-of-region affiliate from completing collect calls,

third-party billed calls, or BOC calling card calls to terminating

numbers located within the BOC's region. Ameritech opposes Comptel's

interpretation, and asserts that calling card, collect and third party

calls that are placed from out-of-region do not fall within 271(j)

because the calling party, not the called party, determines the long

distance carrier. Ameritech states that the calling party decides

whether to complete the call on a 0+ basis or use access codes, and if

access codes are used, the calling party decides which carrier to use.

47. The key factor in determining whether a service falls within

the scope of section 271(j) as ``equivalent'' to 800 or private line

service is whether the called party determines the interLATA carrier

that is used. As Ameritech notes, calling card, collect and third party

billed calls that originate out-of-region and terminate in-region do

not fall within the scope of section 271(j) because it is the calling

party, not the called party, that determines the interLATA carrier.

Because the called party does not determine the interLATA carrier that

is used, there is no justification for treating such calls as in-region

services. Thus, we reject Comptel's proposal that we add calling card,

collect and third party calls to those services classified as ``in-

region'' under section 271(j).

V. Procedural Issues

A. Regulatory Flexibility Act Analysis

48. We certify that the Regulatory Flexibility Act is not

applicable to the interim rules we are adopting in this proceeding.

These interim rules will not result in a significant economic impact on

a substantial number of small business entities, as defined by Section

601(3) of the Regulatory Flexibility Act. Entities subject to the rule

changes are generally large corporations, affiliates of large

corporations, or are dominant in their fields of operation, and, thus,

are not ``small entities'' as defined by the Act. See 15 U.S.C.

Sec. 632(a)(1). We are nevertheless committed to reducing the

regulatory burdens on small communications services companies whenever

possible, consistent with our other public interest responsibilities.

The Secretary shall send a copy of this Report and Order to the Chief

Counsel for Advocacy of the Small Business Administration in accordance

with Section 605(b) of the Regulatory Flexibility Act, 5 U.S.C.

Secs. 601, et seq. (1981).

B. Paperwork Reduction Act

49. The recordkeeping requirements in this item are contingent upon

approval of the Office of Management and Budget.

VI. Ordering Clause

50. Accordingly, it is ordered that, pursuant to Sections 1, 4,

201-205, 215, 218, 220, and 271 of the Communications Act of 1934, as

amended, 47 U.S.C. Secs. 151, 154, 201-205, 215, 218 and 220, the

REPORT AND ORDER is hereby ADOPTED. The requirements adopted in this

Report and Order shall be effective 30 days after publication in the

Federal Register.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 96-17404 Filed 7-8-96; 8:45 am]

BILLING CODE 6712-01-P