Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended; and Regulatory Treatment of LEC Provision of Interexchange Services Originating in the LEC's Local Exchange Area

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Chapter I

[CC Docket No. 96-149, FCC 96-308]

Implementation of the Non-Accounting Safeguards of Sections 271

and 272 of the Communications Act of 1934, as Amended; and Regulatory

Treatment of LEC Provision of Interexchange Services Originating in the

LEC's Local Exchange Area

AGENCY: Federal Communications Commission.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Commission is issuing this Notice of Proposed Rulemaking

seeking comment on proposed regulations to implement, and, where

necessary, to clarify the non-accounting separate affiliate and

nondiscrimination safeguards prescribed by Congress in section 272 of

the Telecommunications Act of 1996. Congress enacted these safeguards

to help prevent Bell Operating Companies (BOCs) from improperly using

their market power in the local telephone market to gain an unfair

advantage over their rivals in the in-region interLATA service markets

and certain other businesses, such as the manufacturing of

telecommunications equipment. These safeguards are intended to

encourage the development of robust competition in all

telecommunications markets. The Commission also seeks comment on

whether to relax the dominant carrier classification that currently

applies to the (BOCs) provision of in-region, interstate, domestic

interLATA services, as well as whether it should modify its existing

rules for regulating independent local exchange carriers' (LECs)

provision of interstate, interexchange services in areas where those

LECs provide local telephone service. The Commission also considers

whether to apply the same regulatory classification to BOC and

independent LEC provision of in-region international service as the

Commission adopts for their provision of in-region, interstate,

domestic, interLATA services and in-region, interstate, domestic,

interexchange services, respectively.

DATES: Comments are due on or before August 15, 1996 and Reply Comments

are due on or before August 30, 1996. Written comments by the public on

the proposed and/or modified information collections are due August 15,

1996. Written comments must be submitted by the Office of Management

and Budget (OMB) on the proposed and/or modified information

collections on or before September 27, 1996.

ADDRESSES: Comments and reply comments should be sent to Office of the

Secretary, Federal Communications Commission, 1919 M Street, NW., Room

222, Washington, DC 20554, with a copy to Janice Myles of the Common

Carrier Bureau, 1919 M Street, NW., Room 544, Washington, DC 20554.

Parties should also file one copy of any documents filed in this docket

with the Commission's copy contractor, International Transcription

Services, Inc., 2100 M Street, NW., Suite 140, Washington, DC 20037. In

addition to filing comments with the Secretary, a copy of any comments

on the information collections contained herein should be submitted to

Dorothy Conway, Federal Communications

[[Page 39398]]

Commission, Room 234, 1919 M Street, NW., Washington, DC 20554, or via

the Internet to [email protected], and to Timothy Fain, OMB Desk Officer,

10236 NEOB, 725-17th Street, NW., Washington, DC 20503 or via the

Internet to [email protected].

FOR FURTHER INFORMATION CONTACT: Melissa Waksman, Attorney, Common

Carrier Bureau, Policy and Program Planning Division, (202) 418-1580,

or Radhika Karmarkar, Attorney, Common Carrier Bureau, Policy and

Program Planning Division, (202) 418-1580. For additional information

concerning the information collections contained in this NPRM contact

Dorothy Conway at 202-418-0217, or via the Internet at [email protected].

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Notice

of Proposed Rulemaking adopted July 17, 1996 and released July 18, 1996

(FCC 96-308). This NPRM contains proposed or modified information

collections subject to the Paperwork Reduction Act of 1995 (PRA). It

has been submitted to the Office of Management and Budget (OMB) for

review under the PRA. OMB, the general public, and other Federal

agencies are invited to comment on the proposed or modified information

collections contained in this proceeding. The full text of this Notice

of Proposed Rulemaking is available for inspection and copying during

normal business hours in the FCC Reference Center (Room 239), 1919 M

St., NW., Washington, 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 Act

This NPRM contains either a proposed or modified information

collection. The Commission, as part of its continuing effort to reduce

paperwork burdens, invites the general public and the Office of

Management and Budget (OMB) to comment on the information collections

contained in this NPRM, as required by the Paperwork Reduction Act of

1995, Public Law No. 104-13. Public and agency comments are due at the

same time as other comments on this NPRM; OMB notification of action is

due September 27, 1996. Comments should address: (a) Whether the

proposed collection of information is necessary for the proper

performance of the functions of the Commission, including whether the

information shall have practical utility; (b) the accuracy of the

Commission's burden estimates; (c) ways to enhance the quality,

utility, and clarity of the information collected; and (d) ways to

minimize the burden of the collection of information on the

respondents, including the use of automated collection techniques or

other forms of information technology.

OMB Approval Number: None.

Title: Implementation of the Non-Accounting Safeguards of Sections

271 and 272 of the Communications Act of 1934, as amended; and

Regulatory Treatment of LEC Provision of Interexchange Services

Originating in the LEC's Local Exchange Area.

Form No.: N/A.

Type of Review: New collection.

----------------------------------------------------------------------------------------------------------------

Number of Estimated time

Information collection respondents per response Total annual

(approx.) (hours) burden (hours)

----------------------------------------------------------------------------------------------------------------

Network disclosure.............................................. 5 48 240

Installation and maintenance reporting--timeliness.............. 5 8 40

Installation and maintenance reporting--quality................. 5 1 5

Procurement procedure........................................... 5 2 10

Nondiscriminatory information provision......................... 5 36 180

Third party reporting, compliance monitoring, and other

information collection......................................... 5 16 80

----------------------------------------------------------------------------------------------------------------

Total Annual Burden: 555 hours.

Respondents: Bell Operating Companies.

Estimated costs per respondent: $0.

Needs and Uses: The NPRM seeks comment on a number of issues, the

result of which could lead to the imposition of information

collections. The NPRM seeks comment on certain reporting requirements

to implement the non-accounting nondiscrimination requirements of the

1996 Act.

SYNOPSIS OF NOTICE OF PROPOSED RULEMAKING

I. Introduction

1. In February 1996, Congress passed and the President signed the

``Telecommunications Act of 1996.'' This legislation makes sweeping

changes affecting all consumers and telecommunications service

providers. The intent of this legislation is ``to provide for a pro-

competitive, de-regulatory national policy framework designed to

accelerate rapidly private sector deployment of advanced

telecommunications and information technologies and services to all

Americans by opening all telecommunications markets to competition.''

Upon enactment, the 1996 Act permitted the Bell Operating Companies

(BOCs) to provide interLATA services that originate outside of their

in-region states. The 1996 Act permits the BOCs to provide in-region

interLATA services upon our finding that they have met the requirements

of new section 271 of the Communications Act. Under section 271, we

must determine, among other things, whether a BOC seeking to provide

in-region interLATA services has complied with the safeguards imposed

by new section 272 of the Communications Act and the rules that we

adopt to implement the provisions of that section.

Under the 1996 Act, a ``local access and transport area'' (LATA) is

``a contiguous geographic area (A) established before the date of

enactment of the [1996 Act] by a [BOC] 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 AT&T Consent Decree; or (B) established

or modified by a [BOC] after such date of enactment and approved by the

Commission.'' 47 U.S.C. Sec. 153(25). LATAs were created as part of the

Modification of Final Judgment's (MFJ) ``plan of reorganization'' by

which the BOCs were divested from AT&T. Pursuant to the MFJ, ``all BOC

territory in the continental United States [was] divided into LATAs,

generally centering upon a city or other identifiable community of

interest.'' United States v. Western Elec. Co., 569 F. Supp. 990, 993

(D.D.C. 1983). The purpose of establishing the LATAs was only to

delineate the areas within which the respective BOCs would be permitted

to provide telecommunications services (i.e., intraLATA services); it

was ``not to distinguish the area in which a telephone call [would] be

`local' from

[[Page 39399]]

that in which it [would] become a `toll' or long distance call.'' Id.

at 995. LATAs are comprised of combinations of local exchanges, and are

generally much larger than the traditional local exchange areas and

local calling areas defined by local regulators. While AT&T proposed to

create 161 LATAs to cover the BOCs' territory, there were, at the time

of the plan of reorganization, approximately 7,000 local exchanges

within that territory. Id. at 993 n.9. There are currently 182 BOC

LATAs. Bell Communications Research, Local Exchange Routing Guide,

Sec. 1, at 1-2 (Mar. 1, 1996) (Local Exchange Routing Guide).

3. In this Notice of Proposed Rulemaking (NPRM), we consider rules

to implement, and, where necessary, to clarify the non-accounting

separate affiliate and nondiscrimination safeguards prescribed by

Congress in section 272. That section 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. The MFJ

prohibited the BOCs from providing information services, providing

interLATA services, or manufacturing and selling telecommunications

equipment or manufacturing customer premises equipment (CPE). This

prohibition was based on the theory that the BOCs could leverage their

market power in the local market to impede competition in the interLATA

services, manufacturing and information services markets. The

information services restriction was modified in 1987 to allow BOCs to

provide voice messaging services and to transmit information services

generated by others. We also seek in this proceeding to determine

whether to relax the dominant carrier classification that currently

applies to the BOCs' provision of in-region, interstate, domestic

interLATA services, and whether to apply the same regulatory

classification to the BOCs' provision of in-region, international

services.

4. This proceeding is one of a series of interrelated rulemakings

that collectively will implement the 1996 Act. Certain of these

proceedings focus on opening markets to entry by new competitors. Other

proceedings will establish fair rules for competition in these markets

that are opened to competitive entry, and yet other proceedings will

focus on lifting outmoded legal and regulatory constraints. We seek in

the instant rulemaking to adopt safeguards to govern the BOCs' entry

into certain new markets. Specifically, this proceeding focuses on the

non-accounting BOC separate affiliate and nondiscrimination safeguards

that Congress adopted in the 1996 Act to foster the development of

robust competition in all telecommunications markets. As discussed more

fully below, these safeguards are intended both to protect subscribers

to BOC monopoly services, such as local telephony, against the

potential risk of having to pay costs incurred by the BOCs to enter

competitive services, 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.

5. This proceeding also examines whether the potential risks of

BOCs' using market power in local exchange and exchange access services

to obtain an advantage in the markets for BOC affiliates that provide

in-region, interstate, domestic, interLATA services will be

sufficiently limited such that we can relax the dominant carrier

classification that under our current rules would apply to such

interLATA services provided by a BOC affiliate. We also consider

whether we should modify our existing rules for regulating the

provision of in-region, interstate, interexchange services by an

independent LEC (an exchange telephone company other than a BOC).

Finally, we consider whether to apply the same regulatory treatment to

the BOC affiliates' and independent LECs' provision of in-region,

international services, as we adopt for their provision of in-region,

interstate, domestic, interLATA and in-region, interstate, domestic,

interexchange services, respectively.

6. We use the term ``independent LECs'' to refer to both the

independent LECs and their affiliates. For purposes of this proceeding,

we define an independent LEC's ``in-region services'' as

telecommunications services originating in the independent LEC's local

exchange areas or 800 service, private line service, or their

equivalents that: (1) terminate in the independent LEC's local exchange

areas, and (2) allow the called party to determine the interexchange

carrier, even if the service originates outside the independent LEC's

local exchange areas.

A. Background

The 1996 Act seeks to eliminate artificial legal and regulatory

barriers, as well as economic impediments, to entry into

telecommunications markets. This new scheme permits the BOCs to engage

in the activities from which they were barred by the MFJ if they

satisfy certain statutory conditions that are intended to prevent them

from improperly using their market power in the local exchange market

against their competitors in the interLATA telecommunications services,

interLATA information services, and manufacturing markets, and from

improperly allocating the costs of their new ventures to subscribers to

local exchange access services, and if they have taken sufficient steps

to open their local exchange networks to competition.

8. Enactment of the 1996 Act opens the way for BOCs to provide

interLATA services in states in which they currently provide local

exchange and exchange access services. Their provision of such

interLATA services offers the prospect of increasing competition among

providers of such services. BOCs can offer a widely recognized brand

name that is associated with telecommunications services, the ability

for consumers to purchase local, intraLATA and interLATA

telecommunications services from a single provider (i.e., ``one-stop

shopping''), and other advantages of vertical integration. Similar

benefits could follow from BOC provision of interLATA information

services and BOC manufacturing activities.

9. In lifting or modifying the restrictions on the BOCs, the new

regulatory scheme established by the 1996 Act indicates that 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)(A) and (C). BOCs currently provide an overwhelming share of

local exchange and exchange access services in areas where they provide

such services--approximately 99.5 percent of the market as measured by

revenues. If it 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 its entitlement to any

revenues is based on costs recorded in regulated books of account, a

BOC may have an incentive to improperly allocate to its regulated core

business costs that would be properly attributable to its competitive

ventures.

10. 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 and

interLATA information services

[[Page 39400]]

markets. For example, a BOC could seek to grant undue preferences to

its interLATA affiliate in furnishing such services and facilities, in

order to gain a competitive advantage for its interLATA affiliate.

Moreover, to the extent carriers offer both local and interLATA

services as a bundled offering, if a BOC were to discriminate, it could

entrench its position in local markets by making its rivals' offerings

less attractive alternatives for local and access services. With

respect to BOC manufacturing activities, a BOC may have an incentive to

purchase only its own equipment, even if such equipment is more

expensive or of lower quality than that available from other

manufacturers. Although the 1996 Act permits the BOCs to engage in

previously restricted activities, it imposes a mix of structural and

non-structural safeguards that are intended to protect subscribers to

BOC monopoly services and competitors against potential improper cost

allocation and discrimination. Our goal in this proceeding is to

establish non-accounting separate affiliate and nondiscrimination

safeguards to implement Congress's objectives.

11. The emergence of efficient, facilities-based alternatives to

the local exchange and exchange access services offered by the BOCs

will, over time, eliminate the need for safeguards that Congress

prescribed in the 1996 Act and the implementing rules that we will

adopt in this proceeding. We began the movement toward that ultimate

goal when we adopted our NPRM to implement new section 251 of the

Communications Act. Other proceedings, such as our upcoming access

reform rulemaking and the jurisdictional separations reform proceeding,

also will contribute to achieving our goal of fostering efficient

competition in local telecommunications markets. Until we reach that

goal, we seek to minimize the burden on the BOCs of the rules that we

adopt in this proceeding, but at the same time we seek to avoid the

potential exposure of both ratepayers in local markets controlled by

the BOCs and competitors of the new BOC service providers to the

potential risk of improper cost allocations and unlawful

discrimination.

B. Overview of Sections 271 and 272

12. The 1996 Act conditions BOC entry into in-region interLATA

service on compliance with certain provisions of sections 271 and 272.

Section 271 sets forth prerequisites, including a competitive checklist

requiring compliance with certain provisions in sections 251 and 252,

for approval of a BOC's application to provide in-region interLATA

service. Section 271(b)(1) conditions a BOC's ability to provide

interLATA service originating in its region upon receipt of Commission

approval under section 271(d)(3). Section 271(d)(3), in turn, requires

the Commission to make three findings before approving BOC entry.

First, the Commission must find that the interconnection agreements or

statements approved at the state level under section 252 satisfy the

competitive checklist contained in section 271(c)(2)(B). Second, the

Commission must ensure that the structural and nondiscrimination

safeguards mandated in section 272 will be met. Finally, the Commission

must find that BOC entry into the in-region interLATA market is

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

acting on a BOC's application for authority to provide in-region

interLATA services, the Commission must consult with the Attorney

General and give substantial weight to the Attorney General's

evaluation of the BOC's application. In addition, the Commission must

consult with the applicable state commission to verify that the BOC

complies with the requirements in subsection (c).

13. Section 272 establishes separate affiliate requirements that

apply to BOC provision of manufacturing of telecommunications equipment

and CPE, interLATA telecommunications services that originate in-region

(other than certain previously authorized activities and certain

incidental interLATA services), and interLATA information services (in-

region and out-of-region). The statutory separate affiliate

requirements for manufacturing and in-region 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 four years after enactment of the 1996 Act. The statute gives

the Commission the discretion to extend either of these periods by rule

or order. This NPRM concerns the non-accounting separate affiliate and

nondiscrimination requirements of sections 271 and 272.

14. The structural separation requirements of section 272 are

intended to prevent potential improper cost allocations by the BOCs in

two principal ways. First, by requiring the BOCs and their separate

affiliates to use different employees for their respective activities,

section 272 allows the cost of each employee to be assigned directly to

the appropriate entity thereby reducing the joint and common costs that

require allocation between the telephone operating companies and the

affiliates engaged in competitive businesses. Second, by requiring a

BOC to maintain appropriate records documenting transactions between

the BOC and its affiliate, section 272 discourages the improper

allocation of costs between the two entities by making detection of

such practices easier.

15. The structural separation requirements of section 272, in

conjunction with the affirmative nondiscrimination obligations imposed

by that section, are intended to address concerns that the BOCs could

potentially use local exchange and exchange access facilities to

discriminate unlawfully against competitors in order to gain a

competitive advantage for their affiliates that engage in competitive

activities. These safeguards seek to prevent a BOC from discriminating

in favor of its affiliates by, for example: 1) providing exchange

access services to its interLATA service affiliate at a lower rate than

the rate offered to competing interLATA service providers; 2) providing

a higher quality service to its interLATA service affiliate than the

service it provides to competing interLATA service providers at the

same price; 3) purchasing products needed for its local exchange

network that are manufactured by its affiliate even when the

affiliate's competitors offer the same or higher quality product at a

lower price, or a higher quality product at the same price charged by

the affiliate; or 4) providing advance information about network

changes to its competitive affiliates.

16. If a BOC charges its competitors prices for inputs that are

higher than the prices charged, or effectively charged, to the BOC's

affiliate, then the BOC can 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

reductions in their market shares. If the price squeeze was severe

enough and continued long enough, the BOC affiliate's market share

could become so large, and the competitors so weakened, that the

affiliate could unilaterally raise and sustain a price above

competitive levels by restricting its output. Alternatively, the BOC

affiliate could simply match its competitors' prices and extract

supracompetitive profits.

[[Page 39401]]

Unlawful discriminatory preferences in the quality of the service or

preferential dissemination of information provided by BOCs to their

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

non-affiliates for a lower quality service, or disclosed information

concerning future changes in network architecture to its manufacturing

affiliate before the BOC disclosed it to others, the BOC could

effectively create the same ``price squeeze'' discussed above.

C. Classification of Carriers as Dominant or Non-Dominant

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

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

adapted to reflect and promote increasing competition in

telecommunications markets. In a series of orders, the Commission

distinguished two kinds of carriers--those with market power (dominant

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

the Competitive Carrier Fourth Report and Order (48 FR 52452 (November

18, 1983)), the Commission defined market power alternatively as ``the

ability to raise prices by restricting output'' and as ``the ability to

raise and maintain price above the competitive level without driving

away so many customers as to make the increase unprofitable.'' The

Commission recognized that, in order to assess whether a carrier

possesses market power, one must first define the relevant product and

geographic markets. Throughout the Competitive Carrier proceeding, the

Commission relaxed its tariff filing and facilities authorization

requirements for non-dominant carriers and focused its regulatory

efforts on constraining the ability of dominant carriers to exercise

market power.

18. This proceeding considers whether we should relax the dominant

carrier regulation that under our current rules would apply to in-

region, interstate, domestic, interLATA services provided by the BOCs'

interLATA affiliates. As a preliminary matter, we note that there are

two ways in which a carrier can profitably raise and sustain prices

above competitive levels and thereby exercise market power. First, a

carrier may be able to raise and sustain prices by restricting its own

output (which usually requires a large market share); second, a carrier

may be able to raise and sustain prices by increasing its rivals' costs

or by restricting its rivals' output through the carrier's control of

an essential input, such as access to bottleneck facilities, that its

rivals need to offer their services. We seek comment on whether the BOC

affiliates should be classified as dominant carriers under our rules

only if we find that they have the ability profitably to raise and

sustain prices of in-region, interstate, domestic, interLATA services

significantly above competitive levels by restricting their own output,

or whether the affiliates should be classified as dominant if the BOCs

have the ability to raise and sustain prices of such interLATA services

significantly above competitive levels by raising the costs of their

affiliates' interLATA rivals.

19. We then seek comment, with respect to both types of market

power, on whether the BOC affiliates should be classified as dominant

or non-dominant. In considering whether a BOC affiliate could raise its

prices by restricting its own output, we seek comment on whether, in

light of the requirements established by, and pursuant to, sections 271

and 272, together with other existing Commission rules, the BOCs will

be able to use, or leverage, their market power in the local exchange

and exchange access markets to such an extent that their interLATA

affiliates could profitably raise and sustain prices of in-region,

interstate, domestic, interLATA services significantly above

competitive levels by restricting their own output. In considering

whether a BOC affiliate could cause increases in prices for in-region,

interstate, domestic, interLATA services by raising the costs of its

affiliate's interLATA rivals, we seek comment whether the statutory and

regulatory safeguards will prevent a BOC from engaging in unlawful

discrimination or other anticompetitive conduct that will raise its

affiliate's rivals' costs. We also seek comment on whether regulating

BOC in-region interLATA affiliates as dominant would help to prevent

improper allocations of costs or discrimination by the BOCs in favor of

their interLATA affiliates, or would at least mitigate the effects of

such activities. We also consider whether we should modify our existing

rules for regulating independent LECs' provision of in-region,

interstate, interexchange services.

20. In our recent order addressing BOC provision of interLATA

services originating out-of-region, we considered whether, on an

interim basis, BOC provision of out-of-region services should remain

subject to dominant carrier regulation. Interim BOC Out-of-Region Order

(61 FR 35964 (July 9, 1996)) at para. 2. We found, inter alia, that, on

an interim basis, if a BOC provides out-of-region domestic, interstate,

interexchange services offered through an affiliate that satisfies the

separation requirements imposed on independent LECs in the Competitive

Carrier Fifth Report and Order (49 FR 34824 (September 4, 1984)), we

would remove dominant carrier regulation for such services. Id. In the

Interexchange NPRM (61 FR 14717 (April 3, 1996)), we asked whether we

should modify or eliminate the separation requirements imposed as a

condition for non-dominant treatment of independent LEC provision of

interstate, interexchange services originating outside their local

exchange areas. Interexchange NPRM at para. 61. We also sought comment

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

independent LECs, we should apply the same requirements to BOC

provision of out-of-region interstate, interexchange services. Id.

21. Finally, we consider whether to apply the same regulatory

classification to the BOC affiliates' and independent LECs' provision

of in-region, international services as we adopt for their provision of

in-region, interstate, domestic, interLATA services and in-region,

interstate, domestic, interexchange services, respectively. In doing

so, we emphasize that there is more than one basis for finding a United

States (U.S.) carrier dominant in the provision of international

services. The issue we address in this NPRM is whether a BOC affiliate

or independent LEC should be regulated as dominant in the provision of

in-region, international services because of the BOC or independent

LEC's current retention of bottleneck facilities on the U.S. end of an

international link. The separate issue of whether a BOC, an independent

LEC, or any other U.S. carrier should be regulated as dominant in the

provision of international services because of the market power of an

affiliated foreign carrier in a foreign destination market was

addressed by the Commission last year in the Foreign Carrier Entry

Order (61 FR 4937 (February 9, 1996)). That decision adopted a separate

framework for regulating U.S. international carriers (including BOCs or

independent LECs ultimately authorized to provide in-region

international services) as dominant on routes where an affiliated

foreign carrier has the ability to discriminate in favor of its U.S.

affiliate through control of bottleneck services or facilities in the

foreign destination market. No carriers are exempt from this policy to

the extent they have foreign affiliations.

II. Scope of the Commission's Authority

22. As a preliminary matter, we address the scope of the

Commission's

[[Page 39402]]

authority to adopt rules implementing the non-accounting provisions of

sections 271 and 272 of the Communications Act, as amended. In the

following subsections, we address the scope of the Commission's

authority over interLATA services and interLATA information services

and its authority over manufacturing activities.

A. InterLATA Services and InterLATA Information Services

23. Sections 271 and 272 by their terms address BOC provision of

``interLATA'' services and ``interLATA'' information services. Many

states contain more than one LATA, and thus, interLATA traffic may be

either interstate or intrastate. Accordingly, we must determine whether

sections 271 and 272, and our authority pursuant to those sections,

apply only to interstate interLATA services and interstate interLATA

information services, or to interstate and intrastate interLATA

services and interstate and intrastate interLATA information services.

24. The MFJ, when it was in effect, governed BOC provision of both

interstate and intrastate services. The 1996 Act provides:

Any conduct or activity that was, before the date of enactment

of this Act, subject to any restriction or obligation imposed by the

[MFJ] shall, on and after such date, be subject to the restrictions

and obligations imposed by the Communications Act of 1934 as amended

by this Act and shall not be subject to the restrictions and the

obligations imposed by [the MFJ].

This section supersedes the MFJ, and explains that the

Communications Act is to serve as its replacement. As set forth below,

we believe that section 271 and 272 of the Act were intended to replace

the MFJ as to both interstate and intrastate interLATA services and

interLATA information services. Thus, we propose that our rules

implementing these sections apply to both interstate and intrastate

services. We seek comment on this tentative conclusion, on our

analysis, and on any alternative views that commenters may propose.

25. Sections 271 and 272 make no explicit reference to interstate

and intrastate services, but they do make reference to a different

geographic boundary--the LATA, as originally defined by the MFJ and now

by the 1996 Act. The interLATA/intraLATA distinction appears to some

extent to have supplanted the traditional interstate/intrastate

distinction for purposes of these sections.

26. As to interLATA services, the MFJ prohibited the BOCs and their

affiliates from providing any interLATA services, interstate or

intrastate, unless specifically authorized by the MFJ or a waiver

thereunder. Reading sections 271 and 272 as applying to all interLATA

services fits well with the structure of the statute as a whole.

Sections 251 and 252 of the Act establish rules and procedures for

competitive entry into local exchange markets. In the Interconnection

NPRM (61 FR 18311 (April 25, 1996)), we tentatively concluded that

Congress intended these sections to apply to both interstate and

intrastate aspects of interconnection. These new obligations imposed on

BOCs (as well as other LECs), enacted at the same time as sections 271

and 272, clearly are part of the process for entry into the interLATA

marketplace. Indeed, BOCs are permitted to provide in-region interLATA

services only after they have met the requirements of section 271,

including a competitive checklist requiring compliance with certain

provisions in sections 251 and 252.

27. We note also that the structure of sections 271 and 272

themselves indicates that these sections were intended to address both

interstate and intrastate services. For instance, BOCs are directed to

apply for interLATA entry on a state-by-state basis, and the Commission

is directed to consult with the relevant State Commission before making

any determination with respect to an application in order to verify the

BOC's compliance with the requirements for providing in-region

interLATA services. As we believe it did in sections 251 and 252,

Congress appears to have put in place rules to govern both interstate

and intrastate services, and provided a role for both the Commission

and the states in implementing those rules.

28. By contrast, reading sections 271 and 272 as limited to the

provision of interstate services would mean that the BOCs would have

been permitted to provide in-region, intrastate, interLATA services

upon enactment and without any guidance from Congress as to entry

requirements or safeguards, subject only to any pre-existing state

rules on interexchange entry. Any such rules, presumably, would not

have been directed at BOC entry, which had for many years been

prohibited. Concerns about BOC control of bottleneck facilities over

the provision of in-region interLATA services are equally important for

both interstate and intrastate services. Thus, the reasons for imposing

the procedures and safeguards of sections 271 and 272 apply equally to

the BOCs' provision of both intrastate and interstate, in-region,

interLATA services. We find it implausible that Congress could have

intended to lift the MFJ's ban on BOC provision of interLATA services

without making any provision for orderly entry into intrastate

interLATA services, which constitute approximately 30 percent of

interLATA traffic. Based on the preceding analysis, we tentatively

conclude that our authority under sections 271 and 272 applies to

intrastate and interstate interLATA services and intrastate and

interstate interLATA information services provided by the BOCs or their

affiliates.

29. We believe that section 2(b) of the Communications Act does not

require a contrary result. Section 2(b) provides that, except as

provided in certain enumerated sections not including sections 271 and

272, ``nothing in [the Communications Act] shall be construed to apply

or to give the Commission jurisdiction with respect to * * * charges,

classifications, practices, services, facilities, or regulations for or

in connection with intrastate communications service by wire or radio

of any carrier * * *.'' In enacting sections 271 and 272 after section

2(b) and squarely addressing therein the issues before us, we

tentatively conclude that Congress intended for sections 271 and 272 to

take precedence over any contrary implications based on section 2(b).

We note also, that in enacting the 1996 Act, there are instances where

Congress indisputably gave the Commission intrastate jurisdiction

without amending section 2(b). Thus, we believe that the lack of an

explicit exception in section 2(b) should in this instance create less

of a presumption that the Commission's jurisdiction under sections 271

and 272 is limited to interstate services than would ordinarily be the

case.

30. We seek comment on the jurisdictional analysis set forth above.

In particular, we ask that parties disagreeing with this analysis set

forth their own alternative analysis of how sections 271 and 272 apply

to interstate and intrastate interLATA services and interLATA

information services.

31. To the extent that commenters disagree with the analysis set

forth above, we also seek 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.

The Commission has authority to preempt state regulation of intrastate

communications services where such state regulation would thwart or

impede the Commission's exercise of its lawful authority over

interstate communications services, such as when it is not ``possible

to separate the

[[Page 39403]]

interstate and intrastate portions of the asserted FCC regulation.''

Thus, we seek specific comment on (1) the extent to which it may not be

possible to separate the interstate and intrastate portions of the

regulations we propose here to implement sections 271 and 272, and (2)

the extent to which state regulation inconsistent with our regulations

may thwart or impede the Commission's exercise of lawful authority over

interstate interLATA services. We seek comment, for example, on

potentially inconsistent state regulations regarding: (1) a BOC

affiliate's ability to use, co-use, or co-own facilities with the BOC;

(2) a BOC affiliate's ability to share personnel with the BOC; and (3)

a BOC's ability to discriminate in favor of its affiliate.

32. We note that when the Commission adopted rules to govern the

BOCs' provision of enhanced services rules prior to the enactment of

the 1996 Act, it preempted certain inconsistent state structural

separation requirements dealing with the intrastate portion of

jurisdictionally mixed enhanced services. The U.S. Court of Appeals for

the Ninth Circuit upheld this exercise of our preemption authority,

agreeing that the state separation requirements would essentially

negate the Commission's goal of allowing BOC provision of interstate

enhanced services on a non-separated basis. Along the same lines, it is

conceivable that a state may try to impose separate affiliate or

nondiscrimination requirements on the intrastate portion of

jurisdictionally mixed services that are inconsistent with the

requirements in section

33. We believe that California III may provide support for

Commission preemption of such inconsistent state regulations, to the

extent that the regulations would thwart or impede the Commission's

exercise of its authority over interstate interLATA services or

interstate interLATA information services pursuant to sections 271 and

272. We seek comment on this analysis. We also seek comment on whether

state regulation of intrastate services that is less stringent than the

Commission's regulation of interstate services could thwart or impede

the Commission's exercise of its authority over interstate, interLATA,

information services.

B. Manufacturing Activities

34. To the extent that sections 271 and 272 address BOC

manufacturing activities, we believe that the same statutory analysis

set forth above 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.'' We believe that the manufacturing activities addressed by

sections 271 and 272, however, are not within the scope of section

2(b). Alternatively, if section 2(b) applies with respect to BOC

manufacturing, we believe 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. We tentatively conclude, therefore,

that our authority under section 272 extends to all BOC manufacturing

of telecommunications equipment and CPE. We seek comment on this

tentative conclusion.

III. Activities Subject to Section 272 Requirements

35. Section 272 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 each of these activities separately below and seek

comment where necessary about which activities are subject to the

section 272 separate affiliate requirements. Section 272(a)(2)(B)

exempts from the separate affiliate requirement for interLATA

telecommunications services certain incidental interLATA services (as

described in sections 271(g)(1), (2), (3), (5), and (6)), out-of-region

services (as described in section 271(b)(2)), and previously authorized

activities (as described in section 271(f)). Although they are

information services, electronic publishing (as defined in section

274(h)) and alarm monitoring services (as defined in section 275(e))

are exempted from the section 272 separate affiliate requirements, and

are subject to their own specific statutory separate affiliate and/or

nondiscrimination requirements.

36. We tentatively conclude that the separate affiliate and

nondiscrimination safeguards adopted in this proceeding pursuant to

section 272 will apply to a BOC's provision of both domestic and

international interLATA telecommunications services that originate in a

BOC's in-region states. The 1996 Act defines ``interLATA services'' as

``telecommunications between a point located in a local access and

transport area and a point located outside such area.'' Because this

definition does not distinguish between domestic and international

calls, we tentatively conclude that Congress intended to apply the same

safeguards to BOC provision of domestic and international interLATA

services that originate in-region. Similarly, in the provisions

concerning interLATA information services, Congress has not

distinguished between domestic and international provision of these

services. The 1996 Act does not specify a definition for ``interLATA

information services.'' Consequently, we tentatively conclude that the

safeguards adopted in this proceeding will apply to BOC provision of

both domestic and international interLATA information services. We seek

comment on these tentative conclusions.

37. As a threshold matter, we note that section 272(a)(1) requires

a BOC to provide services subject to the section 272 separate affiliate

requirements through ``one or more affiliates.'' Based on this

statutory language, we tentatively conclude that a BOC may, if it

chooses, conduct all, or some combination, of its manufacturing

activities, interLATA telecommunications services, and interLATA

information services in a single separate affiliate, as long as all the

requirements imposed pursuant to the statute and our regulations are

otherwise met. We seek comment on this tentative conclusion. If a BOC

places its local exchange operations in a separate affiliate, pursuant

to section 272(a)(1), the local exchange affiliate must be separate

from the BOC affiliate or affiliates engaged in covered competitive

activities.

38. Section 272(h) provides that ``[w]ith respect to any activity

in which a Bell operating company is engaged on the date of enactment

of the Telecommunications Act of 1996, such company shall have one year

from such date of enactment to comply with the requirements of this

section.'' Section 271(f) states ``[n]either [section 271(a)] nor

section 273 shall prohibit a [BOC] from engaging, at any time after the

date of enactment of the [1996 Act], in any activity to the extent

authorized by, and subject to the terms and conditions contained in''

an order of the MFJ Court. As further discussed below, section

[[Page 39404]]

272(h) appears to cover activities included in the definition of

``previously authorized activities'' described in section 271(f). We

therefore seek comment on whether, subject to the exceptions discussed

below, section 272(h) applies to the activities listed in section

272(a)(2)(A)-(C) that the BOCs were providing on the date the 1996 Act

was passed. Parties contending that section 271(f) bars the Commission

from applying section 272(h) to such activities should explain their

interpretation of the requirements of section 272(h).

A. Manufacturing

39. Section 273(a) allows a BOC to manufacture and provide

telecommunications equipment, and to manufacture CPE, if the Commission

has authorized that BOC or any BOC affiliate to provide in-region

interLATA services under section 271(d). BOCs may only engage in

manufacturing activities through a separate affiliate that meets the

requirements of section 272. Section 273 sets out certain additional

safeguards and nondiscrimination requirements applicable to BOC entry

into manufacturing activities, including separate affiliate

requirements applicable to entities that certify either

telecommunications equipment or CPE manufactured by unaffiliated

entities. As noted above, in this NPRM we address the non-accounting

separate affiliate and nondiscrimination requirements of sections 271

and 272; we will address the additional safeguards established in

section 273 in a separate proceeding.

B. InterLATA Telecommunications Services

40. Section 271 addresses the entry of the BOCs into the provision

of three categories of interLATA telecommunications services: services

that originate in-region, services that originate out-of-region, and

incidental interLATA services. Section 272, in turn, requires a BOC to

establish a separate affiliate for:

(B) Origination of interLATA telecommunications services, other

than-

(i) incidental interLATA services described in paragraphs (1),

(2), (3), (5), and (6) of section 271(g);

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

(iii) previously authorized activities described in section 271(f).

Id. Sec. 272(a)(2)(B).

The 1996 Act defines ``telecommunications'' as ``the transmission,

between or among points specified by the user of information of the

user's choosing without change in the form or content of the

information as sent and received.'' ``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 facilities used.''

41. Section 271(g) provides:

For purposes of this section, the term ``incidental interLATA

services'' means the interLATA provision by a Bell operating company

or its affiliate--

(1)(A) of audio programming, video programming, or other

programming services to subscribers to such services of such company

or affiliate;

(B) of the capability for interaction by such subscribers to

select or respond to such audio programming, video programming, or

other programming services;

(C) to distributors of audio programming or video programming

that such company or affiliate owns or controls, or is licensed by

the copyright owner of such programming (or by an assignee of such

owner) to distribute; or

(D) of alarm monitoring services;

(2) of two-way interactive video services or Internet services

over dedicated facilities to or for elementary and secondary schools

as defined in section 254(h)(5);

(3) of commercial mobile services in accordance with section

332(c) of this Act and with the regulations prescribed by the

Commission pursuant to paragraph (8) of such section;

(4) of a service that permits a customer that is located in one

LATA to retrieve stored information from, or file information for

storage in, information storage facilities of such company that are

located in another LATA;

(5) of signaling information used in connection with the

provision of telephone exchange services or exchange access by a

local exchange carrier; or

(6) of network control signaling information to, and receipt of

such signaling information from, common carriers offering interLATA

services at any location within the area in which such Bell

operating company provides telephone exchange services or exchange

access.

42. Under the 1996 Act, BOC provision of ``incidental interLATA

services'' is treated differently than BOC provision of other in-region

interLATA telecommunications services in two respects. First, section

271(b)(3) specifies that a BOC, or any BOC affiliate, may provide

incidental interLATA services originating in any state immediately

after the date of enactment of the 1996 Act, while section 271(b)(1)

conditions BOC provision of other in-region interLATA services upon

prior approval by the Commission. Second, section 272(a)(2)(B)(i)

exempts from the section 272 separate affiliate requirement all of the

incidental interLATA telecommunications services listed in subsection

271(g), except a BOC's provision 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.'' Section 271(h) requires

that the Commission ensure that the provision of incidental services by

a BOC or its affiliate ``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 seek comment on what, if any, non-accounting

structural or nonstructural safeguards the Commission should establish

to implement the requirements of section 271(h). We seek 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.'' Parties proposing that the Commission adopt specific

safeguards to implement section 271(h) should explain how these

safeguards would be consistent with section 272(a)(2)(B)(i), which

exempts incidental interLATA services from the section 272 separate

affiliate requirements.

43. Section 272(a)(2)(B)(iii) exempts from ``origination of

interLATA telecommunications services'' for which a separate affiliate

is required ``previously authorized activities described in section

271(f).'' We seek comment on whether, in light of section 272(h),

Congress intended section 272(a)(2)(B)(iii) to grant a permanent

exemption for previously authorized activities from the separate

affiliate requirements of section 272.

44. We note that section 272(a)(2)(B)(iii) refers to ``previously

authorized activities'' as defined in section 271(f), which includes

manufacturing activities and interLATA information services. We also

note that section 272(a)(2)(A) and (C) expressly require the BOCs to

engage in manufacturing activities and the provision of interLATA

information services in accordance with section 272. Therefore, we seek

comment on whether sections 272(a)(2)(A) and (C), in combination with

section 272(h), require that BOCs come into compliance with section

272, within one year of the date of passage of the 1996 Act, with

respect to any manufacturing activities or interLATA information

services in which they were engaged on the date of passage. We seek

comment, in particular, on whether Congress

[[Page 39405]]

intended to treat previously authorized manufacturing and interLATA

information services differently from previously authorized interLATA

telecommunications services.

45. Subject to the exceptions discussed in the preceding

paragraphs, section 272 safeguards apply to interLATA

telecommunications services which originate within a BOC's region.

Section 271(i)(1) defines an in-region state as ``a State in which a

Bell operating company 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 the day before the date of enactment of the

Telecommunications Act of 1996.'' Section 153(4)(B) indicates that the

definition of a BOC includes ``any successor or assign of any such

company that provides wireline telephone exchange service.'' We note

that two pairs of BOCs have proposed to merge their operations (through

both mergers and acquisitions). If these or other mergers among the

BOCs are completed, we believe, pursuant to section 153(4)(B), that 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 seek

comment on this interpretation. We are concerned, however, that our

existing and proposed safeguards may not be sufficient to address

potential concerns about the practices of proposed merger partners

during the pendency of the merger. Specifically, a BOC could

potentially discriminate, during this period, in favor of the interLATA

affiliate of the BOC's future merger partner that is offering service

in the BOC's in-region area. Therefore, we seek comment on what effect,

if any, the entry into a merger agreement by two or more of the BOCs

has upon the application of the section 271 and 272 non-accounting

separate affiliate and nondiscrimination requirements to the BOCs that

are parties to the agreement, and what, if any, 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. We note also the possibility that

the BOCs may enter into joint ventures for the provision of interLATA

services. We seek comment regarding what effect, if any, joint venture

arrangements involving two or more of the BOCs have upon the

application of the section 271 and 272 requirements to those BOCs.

C. InterLATA Information Services

46. The MFJ originally barred the BOCs from providing information

services. This restriction was subsequently narrowed, and then

eliminated entirely in 1991. As a consequence, the BOCs were providing

information services at the time the 1996 Act became law. We note that,

although the 1996 Act distinguishes between in-region interLATA

telecommunications services and out-of-region interLATA

telecommunications services, no such distinction is made with respect

to interLATA information services. The 1996 Act defines ``interLATA

service'' as referring to telecommunications service. Thus, where the

1996 Act draws distinctions between in-region and out-of-region

``interLATA services,'' as it does in section 271(b), these

distinctions do not apply to information services. Specifically,

section 272(a)(2)(B) excepts out-of-region interLATA telecommunications

services described in section 271(b)(2) from the section 272 separate

affiliate requirements. By contrast, section 272(a)(2)(C) states that a

separate affiliate is required to provide ``[i]nterLATA information

services, other than electronic publishing (as defined in section

274(h)) and alarm monitoring services (as defined in section 275(e)).''

Based on the statutory language, we tentatively conclude 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 seek comment on this tentative conclusion.

1. Definition of ``Information Services''

47. The 1996 Act defines ``information service'' as ``the offering

of a capability for generating, acquiring, storing, transforming,

processing, retrieving, utilizing, or making available information via

telecommunications, and includes electronic publishing, but does not

include any use of any such capability for the management, control, or

operation of a telecommunications system or the management of a

telecommunications service.'' We seek comment on what services are

included in the statutory definition of information services. In this

regard, we note that in the Computer III proceeding, the Commission

established rules for BOC provision of ``enhanced services,'' pursuant

to which the BOCs were permitted to provide certain enhanced services

prior to the passage of the 1996 Act.

48. The Commission's existing regulatory framework distinguishes

between ``basic'' services and ``enhanced'' services. Basic services

are common carrier transmission services, and are subject to Title II

regulation. Enhanced services, which combine common carrier services

with non-common carrier services, are not subject to Title II

regulation. Under the Commission's rules, the term ``enhanced

services'' refers to ``services, offered over common carrier

transmission facilities used in interstate communications, which employ

computer processing applications that act on the format, content, code,

protocol or similar aspects of the subscriber's transmitted

information; provide the subscriber additional, different, or

restructured information; or involve subscriber interaction with stored

information.''

49. We seek comment on whether all activities that the Commission

classifies as ``enhanced services'' fall within the statutory

definition of ``information service.'' Prior to passage of the 1996

Act, neither the Commission nor the MFJ court resolved the question of

whether enhanced services were equivalent to information services under

the MFJ. We note that the Joint Explanatory Statement states that the

definition of ``information services'' used in the 1996 Act was based

on the definition used in the MFJ. If parties contend that

``information services'' differ from ``enhanced services'' in any

regard, they should identify the distinctions that should be drawn

between the two categories, describe any overlap between the two

categories, and delineate the particular services that would come

within one category and not the other.

2. InterLATA Nature of Information Services

50. Section 272(a)(2)(C) requires that a BOC provide interLATA

information services only through a separate affiliate. In contrast,

the 1996 Act does not establish any separate affiliate requirement for

the provision of intraLATA information services. Under the Commission's

existing regulatory scheme, enhanced services have not been regulated

under Title II. Thus, the Commission previously has not made a

regulatory distinction between intraLATA and interLATA information

services, as the 1996 Act now does.

51. In order to determine which activities are subject to the

separate affiliate requirement, we invite parties to comment on how we

should distinguish between an interLATA information service and an

intraLATA information service. In general, BOC provision of information

services

[[Page 39406]]

involves both basic underlying transmission components, which transmit

end-user information without change in the form or content of the

information, and enhanced or information service functionality, which

generates, acquires, stores, transforms, processes, retrieves, utilizes

or makes available end-user information. We seek comment regarding

whether an information service (such as voicemail) should be considered

an interLATA service only when the service actually involves an

interLATA telecommunications transmission component. In the

alternative, should we classify as an interLATA information service any

information service that potentially involves an interLATA

telecommunications transmission component (e.g., the service can be

accessed across LATA boundaries)? We ask parties to comment with

specificity upon the types of services that should be classified as

interLATA or intraLATA information services.

52. We further request comment regarding whether and how the manner

in which a BOC structures its provision of an information service

affects whether the service is classified as interLATA, and thus

subject to the separate affiliate and nondiscrimination requirements of

the Communications Act. For example, if the non-transmission computer

facilities that a BOC uses to provide an information service are

located in a different LATA from the end-user, should that service be

classified as an interLATA information service? Alternatively, must an

interLATA information service incorporate non-transmission components

or functionalities that are located in different LATAs?

53. We seek comment on the relevance of what BOCs have done in the

past in determining now what activities may only be offered through a

separate affiliate. We note that, prior to the 1996 Act, some BOCs

received MFJ waivers in order to employ transmission services that

crossed LATA boundaries for the provision of certain enhanced services.

We seek comment regarding whether the fact that a BOC in the past

applied for or received an MFJ waiver for the provision of a particular

enhanced service presumptively renders that service an interLATA

information service subject to the separate affiliate requirements of

section 272.

54. All of the BOCs currently are providing enhanced services in

some or all of their in-region states, pursuant to comparably efficient

interconnection (CEI) plans approved by the Commission's Common Carrier

Bureau. Because the MFJ barred BOC provision of interLATA services, we

seek comment regarding whether, when a BOC has not applied for or

received an MFJ waiver to provide a particular enhanced service, but

instead is providing that enhanced service pursuant to a CEI plan

approved prior to the enactment of the 1996 Act, we should presume that

enhanced service to be an intraLATA information service that is not

subject to the separate affiliate requirements of section 272. To the

extent that existing services offered pursuant to approved CEI plans

are not subject to section 272, we seek comment regarding whether

passage of the 1996 Act directly or indirectly affects how we should

treat such services.

3. Impact of the 1996 Act on Existing Commission Requirements for

Information Services

55. Because the 1996 Act does not establish regulatory requirements

for BOC provision of intraLATA information services, we conclude that,

with respect to these services, our existing Computer II, Computer III,

and ONA requirements remain in place to the extent that they are

consistent with the 1996 Act. The Commission developed those

requirements to address the same concerns that Congress sought to

address through the establishment of separate affiliate and

nondiscrimination requirements in sections 271 and 272. We note that

the combination of our Computer II, Computer III, and ONA proceedings

established various unbundling and interconnection requirements for BOC

provision of enhanced services. Under Computer II, the BOCs and other

facilities-based carriers must unbundle their basic services from their

enhanced services. Under Computer III and ONA, the BOCs must further

unbundle the manner in which they provide basic services and make these

unbundled basic services available to competing ESPs. Under our rules,

these interconnection and unbundling requirements associated with the

provision of enhanced services continue to apply to the BOCs regardless

of whether they provide enhanced services on an integrated or a

separated basis.

56. We conclude that we should continue to enforce those existing

Computer II, Computer III, and ONA requirements that are consistent

with the 1996 Act, and we ask commenters to specify whether, and to

what extent, the existing requirements are inconsistent with the 1996

Act. If parties contend that the statute supersedes our Computer II,

Computer III, and ONA unbundling and interconnection requirements for

BOC provision of intraLATA information services, they should identify

the specific provisions of section 271 and 272 that they believe

supersede our requirements, as well as the specific unbundling and

interconnection requirements they believe these provisions impose upon

the BOCs.

57. We recognize that some of the anticompetitive concerns we

sought to address through the establishment of the Computer II,

Computer III, and ONA requirements may now be addressed by new

statutory provisions or by the anticipated competition that

implementation of the statute should foster. We consequently seek

comment on which, if any, of our Computer II, Computer III, and ONA

rules may have been rendered unnecessary by the 1996 Act. Parties

should also address the possible impact of the statutory requirements

on our pending Computer III Further Remand Proceedings.

D. Overlap Between InterLATA Information Services and Services Subject

to Other Statutory Requirements

58. Under the 1996 Act, electronic publishing is specifically

included within the category of information services. InterLATA

provision of electronic publishing, however, is specifically exempted

from the separate affiliate requirements of section 272. Instead,

section 274 establishes specific separate affiliate and

nondiscrimination requirements which apply to the provision of

electronic publishing services by the BOCs.

59. The 1996 Act defines ``electronic publishing'' to mean:

the dissemination, provision, publication, or sale to an

unaffiliated entity or person, of any one or more of the following:

news (including sports); entertainment (other than interactive

games); business, financial, legal, consumer, or credit materials;

editorials, columns, or features; advertising; photos or images;

archival or research material; legal notices or public records;

scientific, educational, instructional, technical, professional,

trade, or other literary materials; or other like or similar

information.

The 1996 Act lists specific services that do not fall within the

definition of electronic publishing. These excepted services include,

among other things: common carrier provision of telecommunications

service, information access service, information gateway service, voice

storage and retrieval, electronic mail, certain data and transaction

processing services, electronic billing or advertising of a BOC's

regulated telecommunications services, language translation or data

format conversion, ``white pages''

[[Page 39407]]

directory assistance, caller identification services, repair and

provisioning databases, credit card and billing validation for

telephone company operations, 911-E and other emergency assistance

databases, video programming and full motion video entertainment on

demand.

60. We will examine the meaning of the phrase ``electronic

publishing'' in greater depth in a separate proceeding on the section

274 separate affiliate and nondiscrimination requirements. For the

purposes of this proceeding, we seek comment in order to distinguish

information services that are subject to the section 272 requirements

from electronic publishing services that are subject to the section 274

requirements. We anticipate that this issue will arise with respect to

services that are neither clearly encompassed by the statutory

definition of ``electronic publishing'' nor specifically listed in the

delineated exceptions to that definition. We seek comment on whether,

where such classification questions arise, we should classify as

``electronic publishing'' services those services for which the carrier

controls, or has a financial interest in, the content of information

transmitted by the service. We note that under the MFJ, ``electronic

publishing'' was defined as ``the provision of any information which a

provider or publisher has, or has caused to be originated, authored,

compiled, collected, or edited, or in which he has a direct or indirect

financial or proprietary interest, and which is disseminated to an

unaffiliated person through some electronic means.'' United States v.

Western Elec. Co., 552 F. Supp. 131, 178, 181 (D.D.C. 1982).

61. The 1996 Act defines ``telemessaging'' as ``voice mail and

voice storage and retrieval services, any live operator services used

to record, transcribe, or relay messages (other than telecommunications

relay services), and any ancillary services offered in combination with

these services.'' We tentatively conclude that telemessaging is an

information service. Unlike electronic publishing and alarm monitoring

services, which are information services that are specifically exempted

from the section 272(a) separate affiliate requirements, BOC provision

of telemessaging services is not specifically exempted from these

requirements. Therefore, we tentatively conclude that BOC provision of

telemessaging on an interLATA basis is subject to the section 272(a)

separate affiliate requirements, in addition to the section 260

safeguards, which apply to all incumbent LECs, including the BOCs. We

seek comment on this tentative conclusion.

IV. Structural Separation Requirements of Section 272

62. Section 272(b) of the Communications Act establishes five

structural and transactional requirements for the separate affiliate

(or affiliates) established pursuant to section 272(a). Specifically,

the 1996 Act requires that the separate affiliate:

(1) shall operate independently from the [BOC];

(2) shall maintain books, records, and accounts in the manner

prescribed by the Commission which shall be separate from the books,

records, and accounts maintained by the [BOC] of which it is an

affiliate;

(3) shall have separate officers, directors, and employees from

the [BOC] of which it is an affiliate;

(4) may not obtain credit under any arrangement that would

permit a creditor, upon default, to have recourse to the assets of

the [BOC]; and

(5) 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.

We discuss each of these requirements below.

63. We note that section 272(a)(1) requires a BOC to provide

services subject to the section 272 separate affiliate requirements

through ``one or more affiliates.'' As we tentatively concluded above,

a BOC may, if it chooses, conduct all, or some combination, of its

manufacturing activities, interLATA telecommunications services, and

interLATA information services in a single separate affiliate. A BOC's

potential incentive and ability to favor its affiliate and to

improperly allocate costs may vary, however, depending on the activity

involved. For this reason, the structural and transactional

requirements of section 272(b) may need to be implemented differently

with respect to the three activities enumerated in the statute. We seek

comment on whether the 1996 Act permits us to, and if so, whether we

should, interpret or apply any of the section 272(b) requirements

differently with respect to BOC provision of services regulated under

Title II (namely, provision of interLATA telecommunications services)

as opposed to nonregulated activities (namely, manufacturing and

interLATA information services). In addition, we seek comment on how

such different regulatory requirements could be imposed on the three

activities if all three are provided through one affiliate.

A. Section 272(b)(1)

64. Section 272(b)(1) states that the separate affiliate ``shall

operate independently from the [BOC].'' The 1996 Act does not elaborate

on the meaning of the phrase ``operate independently.'' Under

principles of statutory construction, a statute should be interpreted

so as to give effect to each of its provisions. Accordingly, we

tentatively conclude that we should interpret the ``operate

independently'' requirement in section 272(b)(1) as imposing

requirements beyond those listed in subsections 272(b)(2)-(5). We seek

comment on this tentative conclusion. We also seek comment on what

requirements the Commission should adopt to implement the statutory

requirement that affiliates operate independently.

65. In the Computer II proceeding, the Commission required AT&T to

provide CPE and enhanced services through separate subsidiaries. The

Commission extended the Computer II requirements to the BOCs after

divestiture. Computer II mandated ``maximum separation,'' based on a

determination that structural separation was an effective means of

ensuring that the BOCs treated unaffiliated ESPs and CPE vendors

identically to their own affiliated enhanced service and CPE

operations. Under Computer II, the BOC's enhanced services subsidiary

could not construct, own, or operate its own transmission facilities,

and was required to obtain basic transmission capacity from the

regulated carrier pursuant to tariff. In addition, the Commission

prohibited the regulated entity and unregulated subsidiaries from using

in common any leased or owned physical space or property on which was

located transmission equipment or facilities used to provide basic

transmission services. In Computer II, the Commission also required the

BOC to provide unregulated services through computer facilities that

were separate from those used to provide regulated services. In

addition, the Commission prohibited the regulated entity and the

unregulated subsidiaries from developing software for each other. In

Computer II, the Commission also prohibited a subsidiary that provided

both CPE and enhanced services from marketing any other equipment to

affiliated entities--e.g., transmission or other network equipment. We

noted, however, that BOC manufacturing affiliates could continue to

sell directly to affiliated carriers.

66. In the Competitive Carrier proceeding, the Commission also

established certain separation

[[Page 39408]]

requirements that independent LECs need to meet in order to be

regulated as non-dominant in the provision of interstate interexchange

services. These requirements are less stringent than the Computer II

separate subsidiary requirements. In Competitive Carrier, the

Commission required, in order for independent LECs to be non-dominant,

that they provide interstate interexchange services through an

affiliate and that the affiliate: 1) maintain separate books of

account; 2) not jointly own transmission or switching facilities with

the exchange telephone company; and 3) obtain any exchange telephone

company services at tariffed rates and conditions. We seek comment on

whether the ``operate independently'' requirement in section 272(b)(1)

should be interpreted as imposing one or more of the separation

requirements established in Computer II or Competitive Carrier.

67. We note that section 274(b) states that ``[a] separated

affiliate or electronic publishing joint venture shall be operated

independently from the [BOC],'' and then prescribes specific activities

that the electronic publishing affiliate can and cannot perform. We

seek comment on the relevance of the ``operated independently''

requirement in section 274(b) when construing what Congress intended in

section 272(b)(1). For example, among other restrictions, section

274(b) prohibits a BOC from ``perform[ing] hiring or training of

personnel on behalf of a separated affiliate,'' as well as

``perform[ing] research and development on behalf of a separated

affiliate.''

B. Section 272(b)(2)

68. Section 272(b)(2) states that the affiliate shall maintain

separate books, records, and accounts in the manner prescribed by the

Commission. As noted above, we will address the implementation issues

associated with this section in a separate rulemaking.

C. Section 272(b)(3)

69. Section 272(b)(3) states that the affiliate ``shall have

separate officers, directors, and employees from the [BOC] of which it

is an affiliate.'' In Computer II, the Commission required the separate

subsidiary to have its own operating, marketing, installation, and

maintenance personnel for the services and equipment it offered./ Under

Computer II, however, the Commission permitted certain administrative

services to be shared on a cost reimbursable basis. Specifically, the

Commission permitted the sharing of the following administrative

services: accounting, auditing, legal services, personnel recruitment

and management, finance, tax, insurance, and pension services. We

tentatively conclude that section 272(b)(3) prohibits the sharing of

in-house functions such as operating, installation, and maintenance

personnel, including the sharing of administrative services that are

permitted under Computer II if those services are performed in-house.

We seek comment on whether section 272(b)(3) prohibits the BOC and an

affiliate from sharing the same outside services, such as insurance or

pension services. We also seek comment on what other types of personnel

sharing may be prohibited by section 272(b)(3).

D. Section 272(b)(4)

70. Section 272(b)(4) states that the affiliate ``may not obtain

credit under any arrangement that would permit a creditor, upon

default, to have recourse to the assets of the [BOC].'' This

restriction appears to be designed to protect subscribers to a BOC's

exchange and exchange access services from bearing the cost of default

by BOC affiliates. We tentatively conclude 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 section

272(b)(4). We seek comment on this tentative conclusion and on what

other types of activities are prohibited by this provision. Parties are

invited to comment on whether we should establish specific requirements

regarding the types of activities that are contemplated by arrangements

that are consistent with the requirements of section 272(b)(4). To the

extent that there are a range of options, we seek comment on the

relative costs and benefits of each.

E. Section 272(b)(5)

71. Section 272(b)(5) states that the 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.'' As previously noted, we will address

the implementation issues associated with this accounting requirement

in a separate rulemaking. We seek comment, however, in this NPRM about

whether implementation of the ``arm's length'' requirement specified in

section 272(b)(5) necessitates any non-accounting safeguards.

V. Nondiscrimination Safeguards

A. Nondiscrimination Provisions of Section 272

72. After a BOC affiliate enters competitive markets, that BOC will

become subject to the economic incentives of the marketplace and

therefore may have an incentive to favor its competitive affiliate or

to take actions that could weaken the affiliate's rivals. As previously

noted, a BOC's control of essential local exchange facilities provides

a BOC with the opportunity to take these actions. In brief, a BOC could

provide inferior service to, charge higher prices to, withhold

cooperation from, or fail to share information with its rivals in

competitive markets. If a BOC were to provide inferior service to a

rival, the quality of the rival's interLATA telecommunications service

or information service would be degraded, making the rival less

attractive to customers and lowering the prices the rival could charge.

If a BOC were to charge higher prices to the rival, the rival would

have to charge higher prices to customers and consequently lose market

share or accept lower profits. In another example, a BOC could possibly

withhold cooperation from an interexchange carrier that needs the BOC's

assistance to introduce an innovative new service, until the BOC's

affiliate is ready to initiate the same innovative service. A BOC could

also share information with its manufacturing affiliate or set

standards that enable its manufacturing affiliate to produce equipment

at a lower cost or with superior compatibility with the BOC's network

as compared to that of competing manufacturers. A BOC's behavior in one

area could affect a rival in its provision of multiple services. For

example, a BOC's provision of degraded local service could affect the

rival's provision of telecommunications and information services.

73. Sections 272(c)(1) and (e) set forth nondiscrimination

safeguards that apply to BOC provision of manufacturing, interLATA

telecommunications services, and interLATA information services.

Section 272(c)(1) sets forth broad nondiscrimination safeguards that

govern a BOC's dealings with its section 271(a) affiliate and is

subject to the sunset provisions set forth in section 272(f). Section

272(e), on the other hand, establishes more specific duties that must

be fulfilled by the BOC and its affiliates that are subject to section

251(c), and is specifically excepted from the sunset provisions that

apply to the other requirements in section 272. We seek comment on

whether, before

[[Page 39409]]

sunset, the non-accounting requirements of section 272(e) are subsumed

completely within the requirements of section 272(c)(1). In addition,

we invite parties to comment on any additional interplay between

sections 272(c)(1) and 272(e) that are not specifically addressed

below.

74. A number of terms and requirements in section 272(c)(1) overlap

with the terms and requirements of section 272(e)(1)-(4). In addition,

some of these terms appear in other sections of the 1996 Act, in

particular, section 251. We seek comment on the interplay between the

definitions of the terms ``services,'' ``facilities,'' and

``information'' in various subsections of 272, and between section 272

and section 251(c). We seek 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) and

(e) in light of section 251(c). In particular, we seek comment on

whether Congress meant something different by the terms ``services''

and ``facilities'' as used in section 271(c)(1) and (e). Additionally,

variations on some of these terms appear in the four subsections of

section 272(e), and we seek comment on the significance of these

differences. We seek comment on whether further defining these terms,

and the term ``goods,'' would enable competing providers to detect

violations of this section by enabling them to compare more accurately

a BOC's treatment of its affiliates with a BOC's treatment of

unaffiliated competing providers. We note that, for example, a

requesting entity may have equipment with different technical

specifications from a BOC affiliate's equipment. Therefore, we further

seek comment on whether the terms of sections 272(c)(1) and (e) 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 the requesting entity that are

different from those provided to the BOC affiliate.

75. The 1996 Act allows certain entities to interconnect with the

local exchange carrier's network and to ``acquire access to network

elements on an unbundled basis'' under just, reasonable, and

nondiscriminatory terms and conditions.'' In Computer III, the

Commission imposed unbundling and interconnection requirements which

allowed ESPs to acquire unbundled basic services from the BOCs, AT&T,

and GTE in order to provide enhanced services. Sections 272(c)(1) and

272(e) require that varying categories of entities receive

nondiscriminatory treatment from the BOCs. The unbundling required by

our Computer III and ONA rules, and the provisions of sections 251,

272(c)(1), and 272(e) are all available to different categories of

entities. We seek comment on the impact of the variations between these

categories of entities when implementing sections 272(c)(1) and (e),

and the applicability of these sections to ESPs that are currently able

to obtain unbundled network services under Computer III and ONA.

B. Applicability of Pre-Existing Nondiscrimination Requirements

76. Although the 1996 Act imposes specific nondiscrimination

requirements on BOCs and their section 272(a) affiliates, we note that

certain statutory provisions that predate the 1996 Act also impose

nondiscrimination requirements on all common carriers. Under section

201, all common carriers have a duty ``to establish physical

connections with other carriers,'' and to furnish telecommunications

services ``upon reasonable request therefor.'' Section 201 also

requires that ``[a]ll charges, practices, classifications, and

regulations . . . shall be just and reasonable.'' In addition, section

202 makes it unlawful for any common carrier ``to make any unjust or

unreasonable discrimination in charges, practices, classifications,

regulations, facilities, or services,'' or ``to make or give any

unreasonable preference or advantage to any particular person, class of

persons, or locality.'' Pursuant to these statutory provisions, the

Commission established requirements for interconnection between local

exchange carriers and interexchange telecommunications service

providers, and for interconnection between BOCs and ESPs. We seek

comment on the relationship between the nondiscrimination obligations

imposed by sections 272(c)(1) and 272(e) and the Commission's pre-

existing nondiscrimination provisions. In particular, we seek to

determine what non-accounting nondiscrimination rules, if any, are

necessary to implement the section 272(c)(1) and 272(e)

nondiscrimination requirements.

77. The nondiscrimination provisions of sections 272(c)(1) do not

apply to the conduct of BOC affiliates, and the nondiscrimination

provisions of section 272(e) do not apply to BOC affiliates that are

not subject to section 251(c). By its terms, section 272(c) applies to

the conduct of a BOC alone. Section 272(e) applies to the conduct of a

BOC or a BOC affiliate that is subject to section 251(c) (i.e. an

affiliate that is an incumbent LEC). For this reason, a BOC might have

the incentive and ability to transfer network capabilities of its local

exchange company to the operations of its competitive affiliates to

avoid the nondiscriminatory provision of these capabilities as required

by sections 272(c)(1) and (e). Section 272(a), however, requires any

BOC affiliate that is a local exchange carrier subject to section

251(c) to be separate from the section 272(a) affiliates required for

the provision of competitive activities. We tentatively conclude,

therefore, that any transfer by a BOC of existing network capabilities

of its local exchange entity to its affiliates is prohibited by section

272(a), and we seek comment on this tentative conclusion. In addition,

section 153(4)(B) states that the definition of a BOC includes ``any

successor or assign of any such company that provides wireline

telephone exchange service.'' Thus, we seek comment regarding whether,

in the alternative, a transfer by a BOC of network capabilities to a

competitive affiliate would qualify that affiliate as a successor or

assign of the BOC under section 153(4)(B), thus subjecting the

competitive affiliate to the nondiscrimination requirements of sections

272(c)(1) and 272(e).

78. If parties do not believe that section 272(a) and section

153(4)(B) prevent such transfers of local exchange network

capabilities, we seek comment on whether additional regulations are

necessary to prevent discriminatory practices in the provision of these

capabilities by BOC affiliates. Because a BOC affiliate's provision of

interLATA telecommunications services is subject to sections 201 and

202 of the Communications Act, we seek comment as to whether those

nondiscrimination obligations would provide sufficient protection

against discriminatory practices by a BOC interLATA telecommunications

affiliate, or whether we should impose additional non-accounting

safeguards to prevent a BOC from discriminatorily providing these

network capabilities through its interLATA telecommunications

affiliate. In contrast, information services affiliates and

manufacturing affiliates, because they are not ``common carriers''

under the Communications Act, are not subject to sections 201 and 202.

Therefore, we seek comment as to whether other provisions of the

Communications Act permit us to, and if so whether we should, place any

additional nondiscrimination requirements on affiliates that engage in

[[Page 39410]]

these activities. We also seek comment on whether nondiscrimination

provisions that are established in other sections of the Communications

Act, for example the restrictions on manufacturing affiliates in

section 273 or those on electronic publishing affiliates in section

274, affect our treatment of other services under sections 272(c)(1)

and 272(e), particularly when one affiliate engages in multiple

activities.

C. Section 272(c)(1)

79. Section 272(c)(1) provides that, in its dealings with its

affiliate, a BOC ``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.'' As noted above, section 202 of the Communications Act

makes it unlawful for any common carrier ``to make any unjust or

unreasonable discrimination in charges, practices, classifications,

regulations, facilities, or services.'' We seek comment, therefore, on

whether Congress intended to impose a stricter standard for compliance

with section 272(c)(1) by enacting this flat prohibition on

discrimination.

80. We tentatively conclude that the prohibition against

discrimination in section 272(c)(1) means, at minimum, that BOCs must

treat all other entities in the same manner as they treat their

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 seek comment on this tentative conclusion, as

well as on what regulations, if any, are necessary to implement this

provision. Comments should be specific in terms of needed regulations,

the problem they would address, and how they would address the

identified problem. We also seek comment on whether a BOC can treat

unaffiliated entities differently with respect to the activities at

issue in section 272(c)(1), as long as such disparate treatment is

justified upon an appropriate showing of differences between the

unaffiliated entities (e.g., such as differences in the unaffiliated

entities' network architecture). We also seek comment on whether the

nondiscrimination safeguards should vary based on whether the affiliate

is providing interLATA telecommunications services, interLATA

information services, or manufacturing. In particular, we seek comment

on whether, in addition to any tariffing or structural separation

requirements proposed in this NPRM, any specific non-accounting

safeguards are needed to enforce the nondiscriminatory pricing

requirement of section 272(c)(1).

81. Section 272(c)(1) states, inter alia, that a BOC may not

discriminate in the provision of goods, services, facilities, and

information. As BOCs enter competitive markets, they may have

additional incentives and opportunities to discriminate in favor of

their affiliates in violation of section 272. As indicated above, a BOC

could provide unaffiliated telecommunications carriers or information

service providers with inferior connections, or could disclose

information to its affiliates before disclosing this information to

unaffiliated carriers, providers, or manufacturers.

82. The Commission has 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 believe that the existing Computer III regulatory scheme contains

non-accounting safeguards that provide protection against the type of

BOC behavior that section 272(c)(1) seeks to curtail. The Computer III

requirements provide for nondiscriminatory access to unbundled network

services as well as nondiscriminatory access to the same quality of

service, installation, and maintenance. In addition, BOCs are required

to provide information to third parties regarding information on

changes to the network and new network services. BOCs are also required

to report on the quality and timeliness of installation and

maintenance. We seek comment on whether any of the nondiscrimination

safeguards 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).

83. We further seek comment on the scope of the term ``goods,

services, facilities and information'' for which the 1996 Act prohibits

discrimination. We note that our Computer III requirements do not

specifically address ``goods,'' and therefore seek comment on what

regulations, if any, would be necessary to define that term. We also

seek comment on whether the separate customer proprietary network

information (CPNI) provisions of the 1996 Act affect the requirement to

provide information on a nondiscriminatory basis in this section.

84. Section 272(c)(1) requires, inter alia, that the BOCs not

discriminate with regard to their procurement of goods, services,

facilities, and information. We note that this provision prohibits, for

example, 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 and undermining competition. We seek 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 in the procurement of

goods, services, facilities, and information. We also seek comment on

the nature and extent of rules necessary to ensure that such procedures

are implemented.

85. Section 272(c)(1) also prohibits a BOC from discriminating in

the establishment of standards. We seek comment on what ``standards''

are encompassed by this provision. We also seek comment on what

procedures, if any, we should implement to ensure that the BOC does not

discriminate between its affiliate and other entities in setting

standards. For instance, should BOCs be required to participate in

standard-setting bodies in the development of standards covered by this

section? We note that, for example, a BOC could act anticompetitively

by creating standards that require or favor equipment designs which are

proprietary to its affiliate. A BOC's knowledge of both its affiliate's

and its competitors' networks might also allow a BOC to adopt or modify

equipment standards that its affiliates would be able to comply with

more easily, or at less cost, than could unaffiliated carriers. We seek

comment on what regulations, if any, are necessary to implement this

nondiscrimination safeguard.

86. We note that the difference in language between section 272(c)

and sections 272(a) and (e) might appear to allow a BOC affiliate that

provides local exchange services to avoid compliance with section

272(c). Although sections 272(a) and 272(e) apply to a BOC and an

affiliate subject to 251(c), section 272(c) refers only to the

``dealings'' by a ``Bell operating company'' with its section 272(a)

affiliates. Section 153(4), however, states that a ``Bell operating

company'' includes ``any successor or assign [of a BOC] * * * that

provides wireline telephone exchange service.'' Reading these sections

together, we

[[Page 39411]]

tentatively conclude that Congress did not intend for a BOC to be able

to move its incumbent local exchange operations to an affiliate in

order to avoid complying with section 272(c). Thus, we tentatively

conclude that, if a BOC affiliate is engaged in local exchange

activities and is therefore subject to section 251(c), then the local

exchange affiliate would be subject to 272(c) requirements when dealing

with BOC affiliates engaged in competitive activities.

D. Section 272(e)

87. Section 272(e) of the Communications Act places several

additional obligations on BOCs and BOC affiliates that are subject to

the requirements of section 251(c). Sections 272(f)(1) and 272(f)(2)

provide that the requirements of section 272(e) do not sunset. Some of

the provisions in section 272(e), however, could be interpreted as

subject to sunset because their requirements are contingent on the

existence of a separate affiliate. Section 272(e)(2) states that the

BOC ``shall not provide any facilities, services, or information

concerning its provision of exchange access to the affiliate described

in subsection (a) unless such facilities, services, or information are

made available to other providers of interLATA services in that market

on the same terms and conditions.'' Similarly, section 272(e)(4) states

that the BOC ``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.''

If the BOCs did not maintain section 272(a) separate affiliates after

that requirement expired, it is unclear whether the nondiscrimination

requirements of sections 272(e) (2) and (4) would be maintained. We

seek comment on whether Congress intended to sunset the requirements in

sections 272(e) (2) and (4) if the BOCs eliminated their section 272(a)

separate affiliates. Commenters claiming that the requirements of those

sections survive the elimination of the section 272(a) separate

affiliates should explain in detail how these requirements should be

applied in those circumstances.

1. Section 272(e)(1)

88. Pursuant to section 272(e)(1), ``[a BOC] and an affiliate that

is subject to the requirements of 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.''

89. In the 1996 Act, ``affiliate'' is defined as:

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 paragraph, the term 'own' means to own

an equity interest (or the equivalent thereof) of more than 10

percent.

We tentatively conclude we should interpret ``an unaffiliated entity''

to include any entity, regardless of line of business, that is not

affiliated with a BOC under the foregoing statutory definition. We seek

comment on this tentative conclusion.

90. We seek comment on the scope of the term ``requests'' under

this subsection. We seek comment on whether these requests should

include, inter alia, initial installation requests, as well as any

subsequent requests for improvement, upgrades or modifications of

service, or repair and maintenance of these services.

91. We tentatively conclude that section 272(e)(1) requires BOCs to

treat unaffiliated entities nondiscriminatorily in the provision of

exchange services or exchange access in terms of timing, but does not

create any additional rights beyond those granted to unaffiliated

entities through the 1996 Act, pre-existing provisions of the

Communications Act, or other Commission rules. We seek comment on this

tentative conclusion.

92. We additionally seek comment on how to implement the phrase ``a

period no longer than the period in which it provides such * * *

service to itself or to its affiliates'' and whether rules are needed

to enforce this requirement. We note that, in offering new and advanced

services, slow provision of telephone exchange service or access

service may delay the offering of services by unaffiliated entities and

thus reduce their ability to compete. We seek comment on what

mechanisms, if any, we should establish in order to ensure that a BOC

fulfills service requests in compliance with this section. We further

seek comment on whether reporting requirements for service intervals

analogous to those imposed by Computer III and ONA would be sufficient

to implement this provision.

2. Section 272(e)(2)

93. Section 272(e)(2) states that a BOC and an affiliate that is

subject to the requirements of 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.''

We seek comment on what regulations, if any, we should adopt to

implement this statutory requirement.

94. We seek comment on the scope of the term ``facilities, services

or information concerning [the] provision of exchange access.'' We also

seek comment on how to interpret the phrase ``other providers of

interLATA services in that market.'' We further seek comment on the

relevance of previous Commission proceedings or provisions of the MFJ

governing BOC provision of facilities, services or information when

implementing this section.

3. Section 272(e)(3)

95. Section 272(e)(3) provides that a BOC and an 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 carrier for such services.''

We tentatively conclude that the BOCs' provision of telephone exchange

and exchange access services under tariffed rates, including their

affiliates' purchase at these rates pursuant to tariff or imputation of

these rates to the BOCs, is sufficient to implement this provision. We

also seek comment on the appropriate mechanism to enforce this

provision in the absence of tariffed rates for the specified services.

We seek comment on what additional regulations, if any, are necessary

to implement this statutory provision.

4. Section 272(e)(4)

96. Section 272(e)(4) states that a BOC and an affiliate that is

subject to the requirements of section 251(c) ``may provide any

interLATA or intraLATA facilities or services to its interLATA

affiliate if such services or facilities are made available to all

carriers at the same rates and on the same terms and conditions, and so

long as the costs are appropriately allocated.'' We seek comment

regarding the scope of the term ``interLATA or intraLATA facilities or

services.'' For example, does it include information services and all

facilities used in the delivery of such services? We seek comment on

what additional regulations, if any, are necessary to implement this

statutory provision.

[[Page 39412]]

VI. Marketing Provisions of Sections 271 and 272

97. Section 272(g)(1) provides that ``[a] Bell operating company

affiliate required by this section may not market or sell telephone

exchange services provided by the Bell operating company unless that

company permits other entities offering the same or similar service to

market and sell its telephone exchange services.'' We seek comment on

what regulations, if any, are necessary to implement this provision.

98. Section 271(e) restricts joint marketing by certain large

telecommunications carriers:

Until a Bell operating company is authorized pursuant to

subsection (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.

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).''

Sections 271(e) and 272(g)(2) appear to be parallel provisions that are

intended to prevent BOCs and the largest interexchange carriers from

marketing local and long distance services jointly prior to the BOCs'

entry into in-region interLATA service, if the interexchange carrier is

purchasing incumbent LEC services pursuant to section 251(c)(4) for

resale. We note that, on its face, this provision does not preclude a

covered interexchange carrier from jointly marketing local exchange

services provided through interconnection of the interexchange

carrier's facilities with an incumbent LEC pursuant to section

251(c)(2), or through purchase of unbundled network elements pursuant

to section 251(c)(3). We tentatively conclude that the term ``market or

sell'' in section 272(g)(2) should be construed similarly to the term

``jointly market'' in section 271(e). We seek comment on this tentative

conclusion. We also seek comment on whether these sections encompass

such prohibitions as, for example, advertising the availability of

interLATA services combined with local exchange services, making these

services available from a single source, or providing bundling

discounts for the purchase of both services.

99. Section 272(g)(2) allows the BOC to market and sell the

interLATA services of its affiliate after the BOC enters the interLATA

market pursuant to section 271(d). Section 272(g)(3) provides that

``[t]he joint marketing and sale of services permitted under this

subsection shall not be considered to violate the nondiscrimination

provisions of subsection (c).'' Section 272(b)(3) requires the BOC and

its affiliate to maintain separate officers, directors, and employees,

and section 272(b)(5) requires a section 272(a) affiliate to conduct

``all transactions with the [BOC] * * * on an arm's length basis with

any such transactions reduced to writing and available for public

inspection.'' We invite 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). We seek comment on whether the

affiliate must purchase marketing services from the BOC on an arm's

length basis pursuant to section 272(b)(5). We further seek comment on

whether, instead of allowing BOC personnel to market its affiliate's

services at arm's length, it is necessary to require a BOC and its

affiliate to jointly contract to an outside marketing entity for joint

marketing of interLATA and local exchange service in order to comply

with the provisions of section 272(b)(3).

100. We seek comment on additional issues raised by the marketing

provisions of the 1996 Act. We seek comment on the interplay between

the joint marketing provisions in sections 271 and 272 and the CPNI

provisions set forth in section 222 that are the subject of a separate

proceeding. We also seek comment on whether the joint marketing

provision in section 274(c) has any indirect bearing on how we should

apply the joint marketing provisions in sections 271 and 272.

VII. Enforcement of Sections 271 and 272

A. Mechanisms to Facilitate Enforcement of the Separate Affiliate and

Nondiscrimination Safeguards of Sections 271 and 272

101. Enforcement of the statutory separate affiliate and

nondiscrimination safeguards established by sections 271 and 272 and

the rules that we may adopt to implement those provisions will be

critical to ensuring the full development of competition in the local

and interexchange telecommunications markets. We seek comment generally

on the mechanisms necessary to facilitate the detection and

adjudication of violations of these safeguards and, specifically, on

how the Commission should exercise its enforcement powers under section

271(d)(6).

102. We seek comment on what requirements or mechanisms are

necessary to facilitate detection and adjudication of violations of the

separate affiliate and nondiscrimination requirements discussed above.

For instance, should we impose reporting requirements on BOCs analogous

to those requirements imposed by our CEI plans and ONA plans under

Computer III? We recognize, however, that this will impose burdens on

the BOCs as well as the Commission. Alternatively, would a third party

compliance monitoring or reporting system be a more effective method of

detecting violations of these provisions?

103. We seek comment on what mechanisms, other than reporting

requirements imposed on BOCs or their affiliates, would facilitate

detection and adjudication of violations of sections 271 and 272, by

both the Commission and third parties. In particular, we seek comment

on mechanisms that would allow third parties to identify the goods,

services, facilities, or information that have been provided to BOC

affiliates or other parties. For example, are the disclosure

requirements under section 272(b)(5) a sufficient means of detecting

violations? We seek comment on whether we should determine that a BOC

or its affiliate would be in violation of sections 272(c)(1) and (e) if

a BOC provides varying levels of service between its affiliate and

third parties as well as between third parties themselves. We also seek

comment on whether there are reasonable grounds by which a BOC or its

affiliate could justify deviation from a rate, term or condition

established under sections 272(c)(1) and (e). In proposing regulations

for this section, commenting parties should state specifically what

regulations or procedures should be required and how a specific

provision of sections 272(c)(1) or (e) make them necessary.

B. Section 271 Enforcement Provisions

104. 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 for the Commission to grant the BOC

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

[[Page 39413]]

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.

We seek to clarify the relationship between this section and the

Commission's existing enforcement authority under sections 206-209 of

the Communications Act. Section 206 provides that, ``any common

carrier'' found to be in violation of the Communications Act shall ``be

liable to the person or persons injured thereby for the full amount of

damages sustained in consequence of any such violation.'' Section 207

of the Communications Act permits any person ``damaged'' by the actions

of any common carrier to bring suit for the recovery of these damages.

Section 208(a) authorizes complaints by any person ``complaining of

anything done or omitted to be done by any common carrier'' subject to

the Communications Act or its provisions. Section 209 specifies that

the Commission will ``make an order directing the carrier to pay to the

complainant'' any damages amount a complainant successfully

establishes. We tentatively conclude 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. For

example, we believe that, in a situation where a complainant

successfully establishes conduct (such as a failure to provide

nondiscriminatory access to operator call completion services) that

would constitute both a failure by the BOC to meet the conditions of

its approval, as well as the basis for financial harm, the Commission

could impose any of the sanctions specified in section 271(d)(6)(A),

and could also award damages pursuant to its preexisting authority

under section 209. We seek comment on this tentative conclusion. We

also seek 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 violative 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.''

105. 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 (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. We believe that there

are two ways in which the Commission may determine that a BOC has

ceased to meet the conditions of its approval. First, the Commission

could make such a determination via the resolution of an expedited

complaint proceeding pursuant to section 271(d)(6)(B). Second, the

Commission could make such a determination on its own motion. We seek

comment on this interpretation.

106. In addition, we seek comment on what legal and evidentiary

standards are necessary to establish that a BOC has ceased to meet the

conditions required for its approval to provide in-region interLATA

service. As noted above, in order to establish a violation of section

201, a complainant must show that the defendant's terms of service and

charges are ``unjust and unreasonable.'' Similarly, in order to

establish a violation of section 202(a), a complainant must demonstrate

``unjust and unreasonable discrimination.'' Sections 271(c)(1),

(c)(2)(B), and 272, in contrast, set forth no such standards that we

must apply to complaints arising under these sections. We seek comment,

therefore, on the types of showings that should be required of a

complainant and a defendant BOC in order to ensure a full and fair

resolution, within the 90-day statutory window, of a complaint alleging

that a BOC has ceased to meet the conditions required for approval to

provide in-region interLATA services.

107. In the context of a complaint proceeding, we seek comment on

what constitutes a prima facie showing that a BOC has ceased to meet

any or all of the conditions for interLATA entry. Is it 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)? Is such a broad, generally applicable, standard more

likely to engender frivolous complaints, or is it more likely to

facilitate a complainant's ability to bring anti-competitive behavior

by a BOC to the attention of the Commission? In the alternative, should

the prima facie showing required be specific to the particular

condition at issue, i.e., the requirements of section 271(c)(1), the

conditions set forth in the competitive checklist of section

271(c)(2)(B), and the requirements of section 272? If so, commenters

should describe what specific acts or omissions are sufficient to

establish a prima facie showing that each of these conditions is no

longer met.

108. Currently, in a typical complaint proceeding, the complainant

generally has the burden of establishing that a common carrier has

violated the Communications Act or a Commission rule or order.

Ordinarily, this burden of proof does not, at any time in the

proceeding, shift to the defendant carrier. In the case of section

202(a) complaints, however, once a complainant alleging a violation

establishes that the services are like and that discrimination exists

between them, the burden shifts to the defendant carrier to show that

the discrimination is justified and, therefore, not unreasonable within

the meaning of section 202(a). In some instances, parties who have

initiated formal complaint proceedings with the Commission have

expressed concern that defendant carriers, in particular the BOCs, have

an inherent advantage in the proceedings because of their control over

the information regarding their service offerings and related practices

necessary for a full and fair resolution of the disputed issues. These

parties have further complained that the discovery mechanism contained

in the Commission's formal complaint rules of practice and procedure is

cumbersome and seldom produces on a timely basis information of

decisional significance. We, therefore, seek to assist parties in their

pursuit of complaints before the Commission that BOCs have ceased to

meet the conditions for interLATA entry, by ensuring the prompt and

fair resolutions these complaints within the statutory 90-day period.

[[Page 39414]]

109.With this objective in mind, we believe it appropriate to

inquire into whether the pro-competitive goals of the 1996 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). Because the defendant BOC

is likely to be in sole possession of information relevant to the

complainant's case, and because the complaint must be acted upon in 90

days, we believe that shifting the burden may be an efficient way of

resolving complaints invoking the expedited procedures of section

271(d)(6). We also find that by alleviating the burden on the

complainant, burden-shifting may be a means of facilitating the

detection of alleged anti-competitive behavior by the BOCs. We,

therefore, seek comment 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), as it does

when a complainant makes a prima facie showing of discrimination under

section 202(a). If the burden should not shift upon a prima facie

showing, we seek comment on what particular facts or circumstances

established by the complainant, if any, would warrant shifting the

burden of proof to a defendant BOC.

110. If we were to establish a rebuttable presumption, i.e., a

shift in the burden of proof to the BOC upon a particular showing by

the complainant, we seek comment on the type of evidentiary showing the

defendant BOC must make in order to rebut the presumption that it has

ceased to meet the conditions for approval. For example, is it enough

for the BOC to establish the propriety of its conduct? Further, we

invite parties to comment on whether the burden should shift to the

defendant for any and all alleged violations of sections 271 or 272.

Or, should rebuttable presumptions exist only for some of the

requirements of 271 and 272, such as the competitive checklist

requirements of section 271 and the nondiscrimination provisions of

section 272? If commenters believe that a rebuttable presumption should

exist for certain requirements but not others, they should explain with

specificity why violations of some requirements warrant a rebuttable

presumption and violations of others do not. In addition, we ask

parties to comment on whether there are other mechanisms, instead of

burden-shifting, that will facilitate the ability of a complainant to

obtain a full and fair resolution of its complaint within the 90-day

statutory window.

111. The Commission has effectively established a rebuttable

presumption under sections 201(b) and 202(a) whereby the rates and

practices of non-dominant carriers are presumed to be lawful. A

complainant challenging a non-dominant carrier's rates or practices

under these sections, therefore, must overcome this presumption of

lawfulness in order to bring a successful action. A dominant carrier,

on the other hand, is afforded no such presumption of lawfulness. We

tentatively conclude 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. We seek comment on this tentative conclusion.

112. 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.

Pursuant to section 503(b)(1)(B), a person who ``willfully or

repeatedly'' fails to comply with any of the provisions of the

Communications Act or any rule, regulation, or order issued by the

Commission under the Communications Act, is liable to the United States

for a forfeiture penalty. Section 503(b)(2)(B) authorizes the

Commission to assess forfeitures against common carriers of up to one

hundred thousand dollars for each violation, or each day of a

continuing violation, up to a statutory maximum of one million dollars

for a single act or failure to act. In exercising such authority, the

Commission is required to take into account ``the nature,

circumstances, extent, and gravity of the violation and, with the

respect to the violator, the degree of culpability, any history of

prior offenses, ability to pay, and such other matters as justice may

require.''

113. We tentatively conclude that we will follow the procedures set

forth in Title V to impose Title V penalties, including forfeitures,

under this section. As to the non-forfeiture sanctions, we seek 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 seek 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 interpret ``opportunity for hearing'' not

to require a trial-type hearing before an Administrative Law Judge

(ALJ) (an APA hearing), and invite comment on this interpretation. In

coming to this view, we note that section 271(d)(6)(A) does not require

a ``hearing on the record,'' which would trigger these extensive

procedural requirements under the APA. Moreover, although proceedings

under sections 204 and 205 of the Communications Act are generally

conducted as rulemakings, these sections use similar language with

respect to hearing requirements, and proceedings pursuant to sections

204 and 205 generally occur through written responses. In addition, we

note that, in allowing for forfeitures, section 271(d)(6)(A)

specifically requires the Commission to impose forfeitures pursuant to

Title V of the Communications Act. Section 503(b) of the Communications

Act, the general forfeiture provision, although leaving the choice to

Commission discretion, allows for either an adjudicatory proceeding

before an ALJ (an APA hearing) or a paper hearing before the Commission

pursuant to notice of apparent liability procedures. We also

tentatively conclude that Congress, by imposing a 90-day deadline for

complaints, did not intend to afford the BOCs trial-type hearings in

enforcement proceedings pursuant to section 271(d). Finally, we also

tentatively conclude that the filing of a complaint invoking the

expedited procedures of section 271(d)(6)(B) may trigger a hearing

under section 271(d)(6)(A) and that the written response by a BOC will

generally afford the BOC sufficient hearing rights to allow the

Commission to impose non-forfeiture sanctions. We invite comment on

these tentative conclusions.

114. We seek comment broadly on whether there are other ways, in

addition to the sanctions listed in section 271(d)(6)(A), by which the

Commission can create incentives for the BOCs to ensure that they

continue to meet the conditions required for approval under section

271(d)(3). For

[[Page 39415]]

example, would the adoption of alternative dispute resolution

procedures, analogous to those mandated under section 273(d)(5) of the

Communications Act, facilitate resolution of complaints alleging a

violation of any of these conditions? As we note above, section

271(d)(6)(B) of the Communications Act prescribes expedited procedures

for the review of complaints alleging that a BOC has ceased to meet the

conditions required for approval to provide in-region interLATA

services. Are there other ways to expedite the resolution of such

complaints? We seek comment on what else the Commission can do to

facilitate the ability of a complainant to obtain a determination that

a BOC has ceased to meet the conditions, which can then provide a basis

for pursuing a private right of action for the recovery of damages in

federal district court under section 207 of the Communications Act.

VIII. Classification of LECS and Their Affiliates as Dominant or Non-

Dominant Carriers

115. In this section, we seek comment on whether we should regulate

the BOC affiliates as non-dominant carriers in the provision of in-

region, interstate, domestic, interLATA services. We also seek comment

on whether we should continue to apply to independent LECs (i.e., LECs,

other than the BOCs) the existing separation requirements established

in the Competitive Carrier Fifth Report and Order, which are a

prerequisite for independent LECs to qualify as non-dominant carriers

in the provision of interstate, domestic, interexchange services

originating in their local exchange areas. Finally, we consider whether

to apply the same regulatory classification to the BOC affiliates' and

independent LECs' provision of in-region, international services as we

adopt in this proceeding for their provision of in-region, interstate,

domestic, interLATA services and in-region, interstate, domestic,

interexchange services, respectively.

A. Background

116. Under our rules, non-dominant carriers are not subject to rate

regulation, and may file tariffs that are presumed lawful on one day's

notice and without cost support. Non-dominant carriers are also subject

to streamlined section 214 requirements. In contrast, dominant carriers

are subject to price cap regulation, as specified by Commission order,

and must file tariffs on 14, 45, or 120 days' notice, with cost support

data for above-cap and out-of-band tariff filings, and with additional

information for new service offerings. Dominant domestic carriers must

also obtain specific prior Commission approval to construct a new line,

to extend a line or to acquire, lease or operate any line, as well as

to discontinue, reduce, or impair service.

117.In the Competitive Carrier First Report and Order (45 FR 76148

(November 18, 1980)), the Commission classified LECs and pre-

divestiture AT&T as dominant, with respect to both local exchange and

interstate long distance services, and therefore subject to the ``full

panoply'' of then-existing Title II regulation. In contrast, the

Commission classified MCI, Sprint, and other ``miscellaneous common

carriers'' as non-dominant carriers.

118. Later in the Competitive Carrier proceeding, the Commission

reconsidered how it should regulate the provision of interstate,

interexchange services by independent LECs. In the Competitive Carrier

Fourth Report and Order, the Commission determined that interexchange

carriers affiliated with independent LECs would be regulated as non-

dominant interexchange carriers. In the Competitive Carrier Fifth

Report and Order, the Commission clarified that an ``affiliate'' of an

independent LEC was ``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.'' The Commission further

clarified that, in order to qualify for non-dominant treatment, the

affiliate providing interstate, interexchange services must: (1)

maintain separate books of account; (2) not jointly own transmission or

switching facilities with its affiliated exchange telephone company;

and (3) acquire any services from its affiliated exchange telephone

company at tariffed rates, terms and conditions. The Commission added

that any interstate, interexchange services offered directly by an

independent LEC (rather than through a separate affiliate) or through

an affiliate that did not satisfy the specified conditions would be

subject to dominant carrier regulation. The Commission observed that

these separation requirements would provide some ``protection against

cost-shifting and anticompetitive conduct'' by an independent LEC that

could result from its control of local bottleneck facilities.

119. In the Competitive Carrier Fifth Report and Order, the

Commission also addressed the possible entry of the BOCs into

interstate, interLATA services in the future:

The BOCs currently are barred by the [MFJ] 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 of separation, if any, would be

necessary for the BOCs or their affiliates to qualify for

nondominant regulation.

120.Because the 1996 Act has superseded the MFJ's prohibition

against the BOCs' provision of interLATA services, we determine in this

proceeding whether we should regulate the BOCs or their affiliates as

dominant in the provision of in-region, interstate, domestic, interLATA

services. We also consider in this section whether we should modify our

existing rules that require independent LECs to comply with the

separation requirements described above in order to qualify for non-

dominant regulatory treatment in the provision of interstate, domestic

interexchange services that originate in their local exchange areas.

121. Our rules define a dominant carrier as one that possesses

market power, and a non-dominant carrier as a carrier not found to be

dominant (i.e., one that does not possess market power). As noted, in

the Competitive Carrier Fourth Report and Order, the Commission defined

market power alternatively as ``the ability to raise prices by

restricting output'' and ``the ability to raise and maintain price

above the competitive level without driving away so many customers as

to make the increase unprofitable.'' In determining whether the BOC

affiliates or independent LECs should be classified as dominant or non-

dominant, it is first necessary to define the appropriate product and

geographic markets for assessing the market power of BOC affiliates in

the provision of in-region, interstate, domestic, interLATA services

and the market power of independent LECs in the provision of

interstate, domestic, interexchange services originating in areas where

they control local exchange facilities. We also address the relevant

product and geographic market definitions for assessing the market

power of BOC affiliates and independent LECs in their provision of in-

region, international services.

B. Definition of the Relevant Product and Geographic Markets

122. In the Interexchange NPRM, we sought comment on whether we

should retain the relevant product and geographic market definitions

adopted in the Competitive Carrier proceeding with respect to the

provision of domestic interexchange services. Based on the analysis set

forth in the 1992 Merger Guidelines, we tentatively concluded that,

under certain circumstances, we should use narrower market definitions

than those adopted

[[Page 39416]]

in the Competitive Carrier proceeding. In this NPRM, we seek comment on

how we should apply in this proceeding the market definition approaches

that we proposed in the Interexchange NPRM, assuming they are adopted.

We also seek comment on how, if we do not adopt the approach proposed

in the Interexchange NPRM, we should define the relevant product and

geographic markets for purposes of this proceeding.

1. Relevant Product Markets

123. In the Competitive Carrier proceeding, the Commission defined

the relevant product market, for purposes of assessing the market power

of domestic interexchange carriers covered by that proceeding, as ``all

interstate, domestic, interexchange telecommunications services'' and

concluded that there were no relevant submarkets. In the Interexchange

NPRM, we questioned whether a narrower product market definition might

provide a ``more refined analytical tool'' for evaluating whether a

carrier or group of carriers together possess market power.

124. Under the 1992 Merger Guidelines, ``[m]arket definition

focuses solely on demand substitution factors--i.e., possible consumer

responses.'' 1992 Merger Guidelines at 20,571. However, ``[s]upply

substitution factors--i.e., possible production responses--are

considered . . . in the identification of firms that participate in the

relevant market and the analysis of entry.'' Id. In the Interexchange

NPRM, we noted that consideration of substitutability of demand

supports the use of a narrower relevant product market than that

defined in the Competitive Carrier proceeding. Based on this analysis,

we stated that ``we believe that we should define as a relevant product

market an interstate, interexchange service for which there are no

close substitutes or a group of services that are close substitutes for

each other, but for which there are no other close substitutes.''

125. We acknowledged, however, that it might be impracticable to

delineate all relevant product markets for interstate, domestic,

interexchange services. We also stated our belief that we need not do

so, in light of our previous finding that substantial competition

exists with respect to most interstate, domestic, interexchange service

offerings. We tentatively concluded that we should address the question

of whether a specific interstate, domestic, interexchange service (or

group of services) constitutes a separate relevant product market

``only if there is credible evidence suggesting that there is or could

be a lack of competitive performance with respect to that service (or

group of services).'' We sought comment on this tentative conclusion in

the Interexchange NPRM.

126. Applying the approach proposed in the Interexchange NPRM, we

note that, at this time, we are not aware of any evidence suggesting

that there is a particular interLATA service or group of services that

is or will be provided by the BOC affiliates or the independent LECs

with respect to which ``there is or could be a lack of competitive

performance.'' We therefore tentatively conclude that, if we adopt the

approach to product market definition outlined above (and proposed in

the Interexchange NPRM), we should treat all interstate, domestic,

interLATA telecommunications services as the relevant product market

for purposes of determining whether the BOC affiliates have market

power in the provision of interstate, domestic, interLATA services; for

independent LECs, we likewise tentatively conclude that we should treat

all interstate, domestic, interexchange telecommunications services as

the relevant product market. We seek comment on this tentative

conclusion. We also seek comment on whether credible evidence exists

that suggests that there is a particular interexchange service or group

of services that is or will be provided by the BOC affiliates or the

independent LECs with respect to which ``there is or could be a lack of

competitive performance.'' Parties recommending that particular

services be grouped in narrower relevant product markets should

substantiate this contention with relevant evidence. Specifically, in

order to make such a showing, in this proceeding or in the future, a

party must present pricing or performance data or an analysis of

structural factors that, in either case, show that the service or group

of services is not competitive.

127. We also seek comment on alternative approaches to product

market definition (including the product market definition established

in the Competitive Carrier proceeding) that we should adopt in this

proceeding if we decide not to adopt the approach proposed in the

Interexchange NPRM. Parties should also discuss how these alternative

approaches to product market definition should be applied in this

proceeding.

128. In the International Competitive Carrier Order (50 FR 48191

(November 22, 1985)), the Commission determined that, for international

service, demand and supply elasticity revealed distinct product

markets, international message telephone service (IMTS) and non-IMTS.

The Commission concluded that (a) AT&T was dominant in the provision of

IMTS, and (b) all other IMTS providers (e.g., Sprint and MCI), except

the non-contiguous domestic carriers, were not dominant. No carrier,

the Commission found, was dominant in the provision of non-IMTS

service. The Commission subsequently found AT&T to be non-dominant in

the provision of IMTS. We tentatively conclude that we should retain

the same product definition for the provision of international services

by the BOCs' affiliates and the independent LECs. We seek comment on

this tentative conclusion.

2. Relevant Geographic Markets

129. In the Competitive Carrier proceeding, the Commission

concluded that there was ``a single national relevant geographic market

(including Alaska, Hawaii, Puerto Rico, U.S. Virgin Islands, and other

U.S. offshore points) for interstate, domestic, interexchange

telecommunications services, with no relevant submarkets.'' In the

Interexchange NPRM, we observed that ``more sharply focused market

definitions will aid us in evaluating whether the BOCs possess market

power with respect to the provision of interLATA services in areas

where they provide local access service.''

130. As previously noted, the 1992 Merger Guidelines focus on

demand substitution factors for purposes of market definition. In

considering these factors in the Interexchange NPRM, we noted that, at

its most fundamental level, interexchange calling involves a customer

making a connection from a specific location to another specific

location. We also expressed the view that most telephone customers do

not view interexchange calls originating in different locations to be

substitutes for each other. Accordingly, we tentatively concluded that

``the relevant geographic market for interstate, interexchange services

should be defined as all calls from one particular location to another

particular location.'' We sought comment on this tentative conclusion

in the Interexchange NPRM.

131. We recognized, however, that it would be impracticable to

conduct a market power analysis in each geographic market implied by

this point-to-point market definition. We also stated our belief that,

in the majority of cases, economic factors and the realities of the

marketplace should cause point-to-point markets to behave in a

sufficiently similar manner to allow us to evaluate broader, more

manageable groups of markets for purposes of market power analysis. We

tentatively concluded that we should generally continue to treat

interstate,

[[Page 39417]]

interexchange services as a single national market when examining

whether a carrier or group of carriers acting together has market

power. We expressed the belief, however, that there may be special

circumstances that require us to examine an area smaller than the

entire nation, for purposes of market power analysis. We therefore

proposed ``to examine a particular point-to-point market (or group of

markets) for the presence of market power if there is credible evidence

suggesting that there is or could be a lack of competition in that

market (or group of markets) and there is a showing that geographic

rate averaging will not sufficiently mitigate the exercise of market

power (if it exists) in that market (or group of markets).''

132. In applying that approach, we believe that there are special

circumstances that make it appropriate for us to examine an area

smaller than the entire nation for purposes of assessing the market

power of a BOC affiliate or independent LEC. As discussed above, it is

possible that a BOC, through cost misallocation or discrimination, may

be able to use its market power in local exchange and exchange access

services to disadvantage the BOC affiliate's interexchange competitors.

Such cost misallocation or discrimination conceivably could enable the

BOC affiliate eventually to obtain the ability to raise unilaterally

its price for in-region, interstate, domestic, interLATA services above

competitive levels by restricting its output. With respect to each

originating in-region location, the determination of whether a BOC

affiliate or independent LEC possesses market power in that market will

turn on the same issue--whether the BOC or independent LEC can leverage

the market power arising from its control of access facilities

sufficiently to give the BOC affiliate or independent LEC affiliate,

respectively, market power in that point-to-point market in the

provision of interstate, domestic, interLATA services or interstate,

domestic, interexchange services, respectively. We believe that, given

the BOCs' and independent LECs' current retention of monopoly control

over bottleneck facilities, a BOC or independent LEC can exercise

market power in either all or none of these point-to-point markets

originating in the areas where the BOC or independent LEC controls

local exchange facilities. We also recognize that geographic rate

averaging of interstate long distance services alone may not be

sufficient to offset the anticompetitive effects of a BOC's or

independent LEC's use of the market power resulting from its control

over local access facilities.

133. We tentatively conclude, therefore, that, at this stage, the

BOCs' current monopoly control of bottleneck facilities constitutes

``credible evidence suggesting that there is or could be a lack of

competition'' with respect to interstate, domestic, interLATA services

originating in a BOC's in-region area. Consequently, we tentatively

conclude that we should evaluate a BOC's point-to-point markets in

which calls originate in-region separately from its point-to-point

markets in which calls originate out-of-region, for the purpose of

determining whether a BOC interLATA affiliate possesses market power in

the provision of in-region, interstate, domestic, interLATA services.

Similarly, we tentatively conclude that we should evaluate an

independent LEC's point-to-point markets in which calls originate in

its local exchange areas separately from its markets in which calls

originate outside those areas, for the purpose of determining whether

an independent LEC possesses market power in the provision of in-

region, interstate, domestic, interexchange services.

134. We seek comment on this proposed approach. We invite parties

to discuss why they believe we should examine smaller or larger areas

for purposes of determining whether a BOC affiliate or independent LEC

possesses market power in the provision of interstate, domestic,

interLATA services or interstate, domestic, interexchange services,

respectively.

135. We seek comment on alternative approaches to geographic market

definition that we should adopt in this proceeding (including the

geographic market definition established in the Competitive Carrier

proceeding) if we decide not to adopt the approach proposed in the

Interexchange NPRM. Parties should also discuss how these alternative

approaches to geographic market definition should be applied in this

proceeding.

136. In the International Competitive Carrier Order, the Commission

determined that, for international service, every destination country

constituted a separate geographic market based ``primarily on the need

for a carrier to obtain an operating agreement prior to providing

service to a given country.'' With the possible exception of routes

where a BOC affiliate or independent LEC is affiliated with one or more

foreign carriers, we believe that there are no critical distinctions on

the basis of a BOC affiliate's or independent LEC's market shares,

their respective sizes and resources, demand and supply elasticities,

or conditions of entry from one destination country to another which

would require a route-by-route analysis of these carriers' market

positions. Further, the Commission recently determined that there is no

evidence to ``suggest[ ] that entry barriers vary substantially among

geographic markets.'' Thus, we tentatively conclude that, for purposes

of this proceeding, we can analyze the market power of the BOC

affiliates and independent LECs on a worldwide basis, and need not

generally make route-by-route findings, with the exception of routes in

which the carriers are affiliated with foreign carriers in the

destination market. We seek comment on this tentative conclusion. We

also invite parties to discuss why they believe we should examine

smaller areas for purposes of determining whether a BOC affiliate or

independent LEC possesses market power in the provision of in-region,

international services.

C. Classification of BOC Affiliates

137. In this section, we consider whether we should relax the

dominant carrier regulation that under our current rules would apply to

in-region, interstate, domestic, interLATA services provided by BOC

affiliates. In order to do so, our rules require us to determine that

the BOC affiliates will not possess market power in the provision of

those services in the relevant product and geographic markets. We also

consider whether to apply the same regulatory classification to the BOC

affiliates' provision of in-region, international services as we impose

on their provision of in-region, interstate, domestic, interLATA

services.

138. As a preliminary matter, we note that there are two ways in

which a carrier can profitably raise and sustain prices above

competitive levels and thereby exercise market power. For convenience,

we refer in the following discussion to a carrier's ability to engage

in such a strategy as the ability to ``raise prices.'' First, a carrier

may be able to raise prices by restricting its own output (which

usually requires a large market share); second, a carrier may be able

to raise prices by increasing its rivals' costs or by restricting its

rivals' output through the carrier's control of an essential input,

such as access to bottleneck facilities, that its rivals need to offer

their services.

139. Courts, applying the Sherman Act, have long distinguished

between the ability of a firm to restrict output and raise its price

above the competitive

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level and the ability of a firm to leverage its market power in one

market to gain a competitive advantage in a second market. See, e.g.,

United States v. Griffith, 334 U.S. 100, 107-08 (1948) (holding that

monopoly power had been illegally used ``to beget monopoly''); Berkey

Photo, Inc.v. Eastman Kodak Co., 603 F.2d 263, 275-76 (2d Cir. 1979),

cert. denied, 444 U.S. 1093 (1980); Viacom Intern'l Inc. v. Time Inc.,

785 F. Supp. 371 (S.D.N.Y. 1992). Although a number of courts have

disagreed with Berkey's conclusion that ``the use of monopoly power

attained in one market to gain a competitive advantage in another is a

violation of section 2 [of the Sherman Act], even if there has not been

an attempt to monopolize the second market,'' Berkey, 603 F.2d at 276

(emphasis added), these courts have not questioned the distinction

described above. See, e.g., Alaska Airlines, Inc. v. United Airlines,

Inc., 948 F.2d 536, 547 (9th Cir. 1991); Fineman v. Armstrong World

Indus., Inc., 980 F.2d 171, 206 (3d Cir. 1992). Economists likewise

have recognized such a distinction by distinguishing between

``Stiglerian'' market power, which is the ability of a firm profitably

to raise and sustain its price significantly above the competitive

level by restricting its output, and ``Bainian'' market power, which is

the ability of a firm profitably to raise and sustain its price

significantly above the competitive level by raising its rivals' costs

and thereby causing the rivals to restrain their output. T.G.

Krattenmaker, R.H. Lande, and S.C. Salop, Monopoly Power and Market

Power in Antitrust Law, 76 Geo. L.J. 241, 249-253 (1987). We note that

raising rivals' costs does not necessarily result in an increase in

prices. If a BOC raises the costs of its affiliate's rivals so that the

rivals raise their prices, the affiliate could choose not to raise its

prices, in order to increase its market share. The exercise of this

type of market power could also delay the introduction of new

technologies or degrade the quality of service that a BOC affiliate's

interLATA competitors would otherwise provide.

140. We seek comment on whether the BOC affiliates should be

classified as dominant carriers in the provision of in-region,

interstate, domestic, interLATA services under our rules only if we

find that they have the ability to raise prices of those services by

restricting their own output, or whether the affiliates should be

classified as dominant if the BOCs have the ability to raise prices by

raising the costs of their affiliates' interLATA rivals. We believe

that our regulations associated with the classification of a carrier as

dominant generally are designed to prevent a BOC affiliate from raising

price by restricting its output rather than to prevent a BOC from

raising price by raising its rivals' costs. For example, price cap

regulation of a BOC affiliate's retail rates for in-region, interLATA

services should prevent the affiliate from achieving higher retail

interLATA prices, but generally would not prevent the BOC from raising

its affiliate's rivals' costs through discrimination or other

anticompetitive conduct. Although price cap regulation could limit a

BOC affiliate's ability to raise its interLATA rates if the BOC caused

the affiliate's rivals to raise their prices by increasing their costs,

price regulation would not prevent the affiliate from profiting from

the BOC's raising of rivals' costs through increased market share. Such

behavior would be profitable if the BOC were thereby able to retard a

rival's innovation or cause its affiliate's rivals to lose market share

to the affiliate. We note that this form of anticompetitive conduct

might well involve increasing the affiliate's own output. We also note

that the definitions of market power cited by the Commission in the

Competitive Carrier Fourth Report and Order referred to the concept of

a carrier raising price by restricting its own output.

141. In determining whether a firm possesses market power, the

Commission previously has focused on certain well-established market

features, including market share, supply and demand substitutability,

the cost structure, size, or resources of the firm, and control of

bottleneck facilities. All but the last of these features, bottleneck

control, appear to focus exclusively on whether the carrier has the

ability to raise price by restricting its own output. With respect to

the first index, market share, we believe that the fact that each BOC

affiliate initially will have zero market share in the provision of in-

region, interstate, domestic, interLATA services suggests that the

affiliate initially will not be able profitably to raise and sustain

its price by restricting its output. Because, however, the affiliate's

zero market share results from its exclusion from the market until now,

it says little about whether the affiliate would quickly achieve the

ability to raise price by restricting output. Although our analysis

below focuses on the possibility that a BOC affiliate would gain such

ability through anticompetitive activity by the BOC, we recognize and

seek comment on the possibility that an affiliate could gain such

ability through means other than anticompetitive conduct. For example,

the strength of a BOC's brand identity in its region alone might enable

its affiliate to gain substantial market share quickly, thereby giving

it the ability to raise price by restricting its output. As to supply

substitutability, since all interLATA customers currently are served by

the affiliates' competitors and could continue to be served by them

after BOC affiliates enter the domestic interLATA market, we believe

that the availability of this transmission capacity will constrain the

BOC affiliates' ability to raise its domestic interLATA prices.

Moreover, we recently found that the purchasing decisions of most

customers of domestic interexchange services are sensitive to changes

in price and would be willing to shift their traffic to an

interexchange carrier's rival if the carrier raises its prices. We also

believe that the cost structure, size, and resources of the BOC

affiliates are not likely to enable them to raise prices for their

domestic interLATA services. In the AT&T Reclassification Order, the

Commission noted that the issue is whether a carrier's ``lower costs,

sheer size, superior resources, financial strength, and technical

capabilities'' ` ``are so great to preclude the effective functioning

of a competitive market.' '' We seek comment on this analysis.

142. As noted above, in assessing whether a BOC affiliate would

quickly achieve market power in the provision of in-region, interstate,

domestic, interLATA services, we must also consider the significance of

the BOCs' current control of bottleneck access facilities. We noted

earlier that a BOC's control of access facilities poses two principal

problems as the BOC enters markets from which it has previously been

prohibited--improper allocation of costs and unlawful discrimination.

The BOCs' control of access facilities is a factor in both types of

market power discussed above. In a

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