Implementation of Section 34(a)(1) of the Public Utility Holding Company Act of 1935, as Added by the Telecommunications Act of 1996
Federal RegisterOct 9, 1996
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 1
[GC Docket No. 96-101, FCC 96-376]
Implementation of Section 34(a)(1) of the Public Utility Holding
Company Act of 1935, as Added by the Telecommunications Act of 1996
AGENCY: Federal Communications Commission.
ACTION: Final rule.
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SUMMARY: This Report & Order (R&O) adopts regulations which implement
new section 34(a)(1) of the Public Utility Holding Company Act of 1935
(PUHCA), 15 U.S.C. 79 et seq., as added by section 103 of the
Telecommunications Act of 1996. Under new section 34, registered public
utility holding companies may now enter the telecommunications industry
without prior Securities and Exchange Commission (``SEC'') approval by
acquiring or maintaining an interest in an ``exempt telecommunications
company'' (``ETC''). Moreover, exempt public utility holding companies,
by owning or acquiring an interest in an ETC, may now acquire a ``safe
harbor'' from potential SEC regulation under PUHCA section 3(a).
Section 34(a)(1) requires the Commission to promulgate rules
implementing procedures for determining ETC status within one year of
the date of enactment of the Telecommunications Act of 1996.
EFFECTIVE DATE: November 8, 1996.
FOR FURTHER INFORMATION CONTACT: Lawrence J. Spiwak, Competition
[[Page 52888]]
Division, Office of General Counsel, at (202) 418-1870.
Table of Contents
Para.
I. Introduction................................................. 1
II. Background.................................................. 2
III. Discussion................................................. 7
A. Scope of ETC Inquiry....................................... 7
B. The Application Process.................................... 16
1. General Procedures....................................... 16
2. Compliance with Statutory Definition..................... 23
3. Prior State Approval..................................... 35
4. Consolidated Applications................................ 42
5. Service on Other Agencies................................ 45
C. Public Notice and Comment.................................. 49
D. Implementation Issues...................................... 55
1. Notice to State Commissions.............................. 55
2. Change in Circumstances.................................. 58
3. Additional Reporting Requirements........................ 74
4. Effect of Filing......................................... 77
IV. Conclusion.................................................. 79
A. Legal Authority............................................ 80
B. Further Information........................................ 81
C. Regulatory Flexibility Certification....................... 82
D. Ordering Clause............................................ 86
Final Rules
List of Commenters
I. Introduction
1. In this order, we adopt regulations to implement new Section
34(a)(1) of the Public Utility Holding Company Act of 1935
(PUHCA).1 Under new Section 34, registered public utility holding
companies may enter the telecommunications industry without prior
Securities and Exchange Commission (SEC) approval by acquiring or
maintaining an interest in an ``exempt telecommunications company''
(ETC).2 Moreover, exempt public utility holding companies, by
owning or acquiring an interest in an ETC, may now acquire a ``safe
harbor'' from potential SEC regulation under PUHCA Section 3(a).3
The new law vests the Commission with jurisdiction to determine whether
a company warrants ETC status based on specific statutory criteria.
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\1\ 15 U.S.C. 79 et seq., as added by Section 103 of the
Telecommunications Act of 1996, Public Law No. 104-104, 110 Stat. 56
(1996).
\2\ See PUHCA Sec. 34(d).
\3\ See PUHCA Sec. 34(c).
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II. Background
2. As explained in the Notice of Proposed Rulemaking (NPRM),4
Congress designed PUHCA to prevent financial abuse among public utility
holding companies and their affiliates.5 PUHCA accomplished this
goal by, among other things, restricting the activities and investments
that utility holding companies are permitted to make outside of their
core public utility businesses.6 Prior to the Telecommunications
Act of 1996, the provisions of PUHCA strongly deterred entry by
registered public utility holding companies into the telecommunications
industry.7 Somewhat anomalously, however, utilities that are not
registered public utility holding companies have always been free to
enter the telecommunications industry without prior SEC approval,
regardless of their size or scope.
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\4\ In re Implementation of Section 34(a)(1) of the Public
Utility Holding Company Act of 1935, as added by the
Telecommunications Act of 1996, Notice of Proposed Rulemaking, GC
Docket No. 96-101, 61 FR 24743-01 (May 16, 1996).
\5\ Id., citing Arcadia, Ohio v. Ohio Power, 498 U.S. 73, 87
(1990) (Stevens, J. concurring) (citations omitted).
\6\ Under PUHCA, there are two types of public utility holding
companies: registered and exempt. As a presumptive matter, all
public utility holding companies are considered to be ``registered''
under the terms of PUHCA. Registered public utility holding
companies must comply with the restrictions contained in PUHCA and
are subject to regulation by the SEC. However, if a public utility
holding company satisfies one of the five statutory exemptions
contained in Section 3(a) of PUHCA, 15 U.S.C. 79(d), (as all but
fifteen utilities do), then that company is considered to be an
exempt public utility holding company, because that company is
generally exempt from the regulatory restrictions of PUHCA and
regulation by the SEC.
\7\ See PUHCA Secs. 3(a), 11(b)(1).
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3. Section 103 of the Telecommunications Act of 1996, which adds
new PUHCA Section 34(a)(1), ends this disparate treatment among
different types of utility companies by allowing previously restricted
holding companies to enter telecommunications industries without prior
SEC permission through the acquisition or maintenance of an interest in
an ``exempt telecommunications company.'' Under Section 34(a)(1), an
ETC is any person determined by the Commission to be engaged directly
or indirectly, wherever located, through one or more affiliates (as
defined in Section 2(a)(11)(B) of PUHCA 8), and exclusively in the
business of providing one or more of the following: (A)
telecommunications services; 9 (B) information services; 10
(C) other services or products subject to the jurisdiction of the
Commission; or (D) products or services that are related or incidental
to the provision of a product or service described in (A), (B), or (C).
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\8\ PUHCA Sec. 2(a)(11)(B) defines ``affiliate'' as ``any
company 5 per centum or more of whose outstanding voting securities
are owned, controlled, or held with power to vote, directly or
indirectly, by such specified company.''
\9\ See Communications Act of 1934 Sec. (3)(51), as added by the
Telecommunications Act of 1996, which provides that the term
``telecommunications service'' means the ``offering of
telecommunications for a fee directly to the public, or to such
classes of users as to be effectively available directly to the
public, regardless of the facilities used to transmit the
telecommunications service.''
\10\ See Communications Act of 1934 Sec. (3)(41), as added by
the Telecommunications Act of 1996, which provides that the term
``information service'' means 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 telephone system or the management of a
telecommunications service.''
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4. Section 34(a)(1) provides that an applicant who has applied in
good faith for a determination of ETC status is deemed an ETC until the
Commission makes its determination. Section 34(a)(1) requires the
Commission to render this determination within 60 days of the receipt
of an application. Section 34(a)(1) also requires the Commission to
notify the SEC whenever it determines that a person is an ETC. Finally,
Section 34(a)(1) requires the Commission to promulgate rules
implementing the procedure for determining ETC status within one year
of the date of enactment of the Telecommunications Act of 1996.
5. In the NPRM, the Commission proposed to implement Section
34(a)(1) by providing a simple procedure for ETC determination, under
which applicants briefly describe their planned activities and certify
that they satisfy the specific statutory requirements and any
applicable Commission regulations. The Commission stated that because
it believes that its responsibilities under Section 34(a)(1) are
limited to whether the applicant meets the express statutory criteria
for ETC status, an ETC determination ``should not involve an inquiry
into the public interest merits of entry by the applicant.'' 11
The Commission further stated that neither the public interest nor the
intent of Congress would be served if this process became a regulatory
barrier to significant new entry into the telecommunications
industry.12 Accordingly, the proposed rules were limited to the
filing requirements and procedures for persons seeking exempt
telecommunications company status. The Commission stated that it
believed this to be the best approach to expedite Congress's policy of
allowing holding companies to become vigorous competitors in the
telecommunications industry and thus promote the public
interest.13
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\11\ See NPRM at para.2 (citing Report of the Committee on
Commerce, Science and Transportation on S. 652, S. Rep. No. 23,
104th Cong., 1st Sess. at 8 (1995) (``Senate Report'')).
\12\ Id.
\13\ Id.
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[[Page 52889]]
6. The Commission solicited comment on the issues raised in the
NPRM. Eleven parties filed comments and seven parties filed reply
comments. A list of the commenters is provided in the Attachment below.
III. Discussion
A. Scope of ETC Inquiry
1. The NPRM
7. In the NPRM, the Commission cited its earlier holding that its
responsibilities under Section 34(a)(1) do not appear to extend beyond
a determination of whether an applicant complies with the limited
certification criteria enumerated above.14 The Commission reasoned
that this conclusion is evident not only from the unambiguous language
of Section 34(a)(1), but from other provisions of Section 34, which
preserve other statutory provisions where the scope of an ETC's
activities can be evaluated. For example, Section 34(n) preserves the
Commission's and affected states' authority to regulate the activities
of an ETC under provisions of the Communications Act of 1934 and any
applicable state laws. In addition, Section 34(j) retains the
jurisdiction of the Federal Energy Regulatory Commission (FERC) and
state commissions to determine whether a public utility company may
recover in its rates the costs of products or services purchased from
or sold to an associate or affiliate company that is an ETC, regardless
of whether such costs are incurred through the direct or indirect
purchase or sale of products or services from the affiliate or
associate company. Finally, Section 34(m) grants state commissions
authority to conduct independent audits of public utility holding
companies and their affiliates. The Commission requested comment on
whether its existing interpretation of the scope of its inquiry under
Section 34(a)(1) is correct.15
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\14\ See NPRM at 15 (citing Entergy Technology Company (FCC 96-
163, released April 12, 1996) (``Entergy'')).
\15\ Id.
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2. Comments
8. Several commenters support the Commission's interpretation of
its responsibilities under Section 34(a)(1).16 They agree that the
scope of public comment and this agency's review is appropriately
limited to whether an applicant meets the statutory requirements of
Section 34 of PUHCA, and that substantive issues associated with the
applicant's entry can be addressed in other proceedings.17 Other
commenters disagree, arguing that the Commission must examine the
public interest merits of holding company entry into telecommunications
markets.18
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\16\ See Southern Comments at 5-6; Entergy Comments at 5-6; New
Jersey Comments at 2 (1996 Act simply eliminates the provision in
PUHCA that registered holding company obtain SEC approval before
entering the telecommunications business).
\17\ Id.
\18\ See, e.g., CBT Comments at 2-3; ACSI Comments at 3-11 (if
Commission does not consider whether granting ETC status to a
particular utility affiliate will serve the public interest in
fostering effective local competition, Commission reduces its
function to that of a rubber stamp and renders the entire process
meaningless).
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9. Other commenters argue that before the Commission can grant an
application for ETC status, the Commission must impose safeguards to
protect against potential cross-subsidization between the ETC and its
holding company parent. For example, New Jersey argues that ETC
applicants should be required to file more information because the
initial application is the best place to collect information which
various federal and state authorities may eventually require.19
Other commenters argue that ETC applicants should simply certify that
the safeguards protecting against cross-subsidization contained in
Section 34 will be met.20
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\19\ New Jersey Comments at 2-5.
\20\ USTA Comments at 1-2; CBT at 5; see also ACSI Reply at 11.
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10. Third, two commenters argue that incumbent LECs must be treated
in the same manner as ETCs. For example, BellSouth argues that while
holding company entry will increase competition, such entry could have
the undesired effect of slowing competition if the Commission and state
commissions fail to adopt an approach of ``regulatory parity.'' 21
Similarly, CBT argues that while Section 34 includes some safeguards
against cross-subsidization, they are not the same as those currently
applicable to incumbent LECs. CBT submits that as long as incumbent
LECs must comply with the Commission's accounting safeguards, those
same rules should be made equally applicable to the holding companies
and their ETC affiliates.22
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\21\ BellSouth Comments at 3-5.
\22\ CBT Comments at 3, n.10.
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11. Finally, several commenters argue that the Commission should
not permit a utility to enter a telecommunications market until it
affirmatively demonstrates its compliance with the pole attachment
requirements contained in Section 224 of the Communications Act of
1935, as added by Section 703 of the 1996 Act.23 Other parties
reject claims that pole attachment obligations should be incorporated
into the ETC process as beyond the statutory mandate and the scope of
this proceeding.24 These parties argue that nothing in the plain
language of Section 34(a)(1) suggests that pole access should be a
factor in the determination of ETC status. Furthermore, they argue that
issues relating to pole access are addressed comprehensively in Section
224, and implementation of these provisions are the subject of other,
distinct rulemakings. Finally, these commenters contend that there are
numerous infrastructure owners not subject to PUHCA restrictions on
entry into telecommunications markets and it would be unfair and
nonsensical to single out registered holding companies for special
obligations relating to pole access in the ETC context.25
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\23\ ACSI Comments at 3-10; ALTS Comments at 1-7; see also MCI
Reply at 4; CBT Comments at 5 (public utility holding companies must
make their poles, conduits, and right-of-way available to competing
telecommunications service providers at least to the same extent and
under the same terms and conditions as is required of incumbent
LECs).
\24\ Southern Reply at 6-7; Entergy Reply at 3-4.
\25\ Id.
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3. Discussion
12. After review, we reaffirm our original conclusion that the
Section 34(a)(1) inquiry is a limited one. Contrary to some commenters'
arguments, we do not believe that it is our role to examine the public
interest merits of entry under Section 34(a)(1). Congress already
concluded in enacting Section 103 that, as a general matter,
competitive entry by public utility holding companies is in the public
interest.26 Indeed, the legislative history states that:
\26\ See Entergy Reply at 2-3; see also NEES Reply at 4.
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Allowing * * * holding companies to become vigorous competitors
in the telecommunications industry is in the public interest.
Consumers are likely to benefit when more well-capitalized and
experienced providers of telecommunications services actively
compete. Competition to offer the same services may result in lower
prices to consumers. Moreover, numerous competitors may offer
consumers a wider choice of services and options.27
\27\ Senate Report at 7 (emphasis supplied).
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Moreover, as we previously recognized, and as commenters point out, to
the extent particular transactions raise public interest concerns,
Congress preserved state and federal jurisdiction to examine these
issues in other, more appropriate, proceedings. For these reasons, we
reject commenters' arguments in opposition to this point.
[[Page 52890]]
13. We also believe that commenters' arguments regarding potential
cross-subsidization are misplaced. First, as we stated earlier, we
believe our inquiry under the statute is limited to a determination as
to whether an applicant meets the enumerated statutory criteria. In
addition, there are other provisions in Section 34 which adequately
protect against issues of cross-subsidization. For example, Section
34(j) retains the jurisdiction of FERC and state commissions to
determine whether a public utility company may recover in its rates the
costs of products or services purchased from or sold to an associate or
affiliate company that is an ETC, regardless of whether such costs are
incurred through the direct or indirect purchase or sale of products or
services from the affiliate or associate company. Moreover, Section
34(e)(4) gives the SEC jurisdiction to ensure that costs are fairly and
equitably allocated among companies that are associate companies of a
registered holding company. Finally, Section 34(m) provides state
commissions the authority to conduct independent audits of public
utility holding companies and their affiliates.
14. We also reject BellSouth's and CBT's claim that we must either:
(a) place the same regulatory restrictions on ETCs as we do on LECs;
or, in the name of regulatory parity, (b) reduce the levels of
reporting requirements currently imposed on LECs. First, generically
grouping all ETCs as potential LECs oversimplifies the process and
ignores the wide range of potential services that ETCs can provide.
Indeed, the applications received to date generally involved services
other than local exchange access services.28 Second, as several
commenters point out, to the extent that ETCs decide to compete for
local loop service, they will inevitably have to compete with an
incumbent, dominant LEC.29 Finally, as mentioned above, because
our statutory authority is limited, we do not believe that this
proceeding is the appropriate forum to impose additional conditions on
the ETC process.
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\28\ See, e.g., Entergy; Southern Information Holding Company et
al., DA 96-951 (released June 14, 1996); Allegheny Communications
Connect, Inc., DA 96-953 (released June 14, 1996).
\29\ Southern Reply at 12; Entergy Reply at 7-8.
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15. Finally, we do not agree that pole attachment obligations
should be incorporated into the ETC process. Again, this inquiry is
beyond our limited responsibility under Section 34(a)(1). Pole
attachments is an issue generic to all utilities as well as LECs, so
whether or not an entity is an ETC has no bearing on whether that
entity must make its poles available in a non-discriminatory manner.
Accordingly, we believe that this issue is better addressed in other
proceedings.30 We see no reason to visit this issue in this
proceeding.
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\30\ See, e.g., In re Implementation of the Local Competition
Provisions in the Telecommunications Act of 1996, First Report &
Order at Paras. 1119-1249 (FCC No. 96-325, released Aug. 8, 1996),
61 FR 45,476-01 (August 29, 1996).
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B. Application Process
1. General Procedures
a. The NPRM
16. In the NPRM, the Commission noted that PUHCA Section 34(a)(1)
is similar to the ``exempt wholesale generator'' provision of PUHCA
Section 32 which permits, inter alia, public utility holding companies
to enter into the independent power production business.31 FERC,
the federal agency responsible for implementing PUHCA Section 32,
interpreted that statute as intended to give it only circumscribed
authority, and therefore implemented a procedure whereby an applicant
need only briefly describe its planned activities and certify that it
satisfies the requisite statutory criteria.32 In the NPRM, the
Commission stated that it believed that similar filing requirements
should be required under Section 34(a)(1).33
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\31\ See PUHCA Section 32, as added by Section 711 of the Energy
Policy Act of 1992, 15 U.S.C. 79z-5a.
\32\ See Filing and Ministerial Procedures for Persons Seeking
Exempt Wholesale Generator Status, Order No. 550, 58 FR 8,897-01
(February 18, 1993); order on reh'g, Order No. 550-A, 58 FR 21,250
(April 20, 1993); see also 18 C.F.R. Sec. 365.1 through Sec. 365.7.
\33\ NPRM at para. 9.
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17. Accordingly, the draft rules proposed, first, that an applicant
provide a brief description of the planned activities of the eligible
company or companies owned or operated by the applicant. Second, the
rules proposed that any person seeking ETC status (applicant) must file
a sworn statement, by a representative legally authorized to bind the
applicant, attesting to any facts or representations presented to
demonstrate eligibility for ETC status, including a representation that
the applicant is engaged directly, or indirectly, wherever located,
through one or more affiliates (as defined in Section 2(a)(11)(B) of
the Public Utility Holding Company Act of 1935), and exclusively in the
business of providing: (A) telecommunications services; (B) information
services; (C) other services or products subject to the jurisdiction of
the Commission; or (D) products or services that are related or
incidental to the provision of a product or service described in (A),
(B), or (C). Finally, the draft rules proposed to require an applicant
(as all Commission applicants in all contexts) to provide a sworn
statement, by a representative legally authorized to bind the
applicant, certifying that the applicant satisfies part 1, subpart P,
of the Commission's regulations, 47 CFR Sec. 1.2001 through
Sec. 1.2003, regarding the Anti-Drug Abuse Act of 1988, 21 U.S.C. 862.
b. Comments
18. Many commenters focus on the requirement contained in the
proposed rules that applicants provide a ``brief description'' of their
planned activities.34 For example, Southwestern Bell argues that
applicants should be required to file more than a ``brief description''
of their planned activities in order to allow states to determine
whether their participation in the FCC proceedings is warranted and to
help states carry out their own responsibilities under the 1996
Act.35
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\34\ See, e.g., Southwestern Bell Comments and BellSouth
Comments.
\35\ Southwestern Bell Comments at 2-3 (ETC applications should
include a listing and description of the types of services that the
ETC applicant plans to provide, and the geographic locations where
the ETC applicant intends to provide them).
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19. BellSouth also criticizes the proposed requirement that
applicants need only provide a ``brief description'' of their planned
activities. BellSouth disputes the Commission's holding in Entergy that
there is no parallel concept to the EWG requirement that facilities
must fall within a specific definition of ``eligible facilities.''
According to BellSouth, Section 34(a)(1) does contain a parallel
concept, in that a determination of ETC status hinges on the definition
and provision of ``telecommunications services'' and other services
contemplated in the Act.36
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\36\ BellSouth Comments at 12-14 (ETC applications should
provide, at minimum: (a) a description of the facilities which will
be utilized in the provision of the described service; (b) an
indication of whether the facilities will be those of the ETC or its
affiliate; and (c) an indication of which, if any, facilities are
owned by the holding company (or its affiliates other than the
applicant) with which the applicant is affiliated).
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20. Southern opposes these suggestions and urges the Commission to
adopt the rules regarding descriptions of proposed activities in their
proposed format.37 Southern argues that the issue in the
application process is whether the ETC's business activities fall
within the scope of the categories contained in Section 34(a)(1).
According to Southern,
[[Page 52891]]
requiring extensive and extraneous detail concerning proposed
activities would unnecessarily limit the ETC's flexibility and
improperly and needlessly force the release of proprietary business
information to competitors. Such a result would, in Southern's view, be
contrary to the policies underlying the Act and should not be
adopted.38
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\37\ Southern Reply at 7-8.
\38\ Id.
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c. Discussion
21. We reject claims that we must require prospective applicants to
file more than a brief description of their planned activities in order
to demonstrate that they qualify for ETC status. Given the scope of our
ETC inquiry, it is only necessary that applicants be required to
provide information sufficient for the Commission to make an informed
decision. Our proposed rules are designed to do exactly that. Requiring
anything more would unduly place additional burdens on applicants
without providing any benefits to the public. On the other hand, we
stated that applicants must do more than recite the statutory
definition for ETC status. Rather, the ``brief description''
contemplated by our rules must contain facts that are sufficient for
the Commission to determine that the applicant meets the statutory
criteria. To the extent applications are inadequate in this respect,
the Commission may either deny the application or request that the
applicant provide additional information.
22. We also reject BellSouth's argument that additional information
is required so that affected states can determine whether they should
participate in a particular ETC proceeding. Section 1.4002 of our rules
will specifically require ETC applicants to serve a copy of their
application on affected state commissions.39 Given that public
comment in these proceedings is limited to the adequacy or accuracy of
the application, we believe that service upon state commissions should
provide sufficient notice.
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\39\ See discussion in section III.B.5 below.
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2. Compliance with the Statutory Definition
a. Comments
23. With regard to an applicant's compliance with the statutory
definition, many commenters debate what it is to be exclusively
``engaged'' in the business of providing a permitted service. For
example, BellSouth argues that the Commission should require that the
applicant be formed for the exclusive purpose of providing the relevant
services at the time it files its application with the Commission, but
that the grant of ETC status be conditioned on the entity actually
providing the service within a reasonable period of time.40
Southern, however, urges the Commission to reject such an approach,
contending that the condition urged by BellSouth would place an
unwarranted burden upon ETCs to commence activities within some
undefined ``reasonable period of time'' under peril of losing their ETC
status. Such a condition, argues Southern, is likely to chill or hinder
competition, rather than foster it, and therefore should not be
adopted.41
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\40\ BellSouth Comments at 9-12.
\41\ Southern Reply at 8-9.
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24. Second, Entergy argues that there may be appropriate
circumstances where the Commission should grant a determination of ETC
status, even though the applicant at the time of filing is not
``exclusively'' engaged in permitted ETC activities.42 Entergy
notes that some telecommunications companies may engage in non-
telecommunications activities that are not material to their overall
business and which could easily be discontinued or divested without
substantially disrupting business operations. Entergy argues that
because it may not always be practical to accomplish such a divestiture
prior to, or as a condition of, a proposed holding company investment,
the Commission's inquiry should not be rigidly confined to an
examination of the applicant's operation at the time the application is
filed.43
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\42\ Entergy Comments at 6-7.
\43\ Id.
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25. Entergy proposes that the Commission require applicants to
describe their proposed future business activities and the actions they
propose to take, if appropriate, to divest (or otherwise discontinue)
or limit their investment or participation in any non-
telecommunications related activities that would not qualify as
``related or incidental'' within the meaning of Section 34(a)(1)(D).
Moreover, Entergy argues that the terms ``related and incidental''
should receive a broad interpretation, so that entities that are
predominantly telecommunications enterprises may not be excluded from
ETC status. According to Entergy, in the event that such additional
operations are to be divested, a statement by a representative legally
authorized to bind the applicant would verify that divestiture of the
non-telecommunications business components would be accomplished within
a specified reasonable period of time and that, following such
divestiture, the applicant would be qualified as an ETC and fully
satisfy the requirements of 34(a)(1). Entergy further argues that if
the investment by a registered holding company consists of a minority
interest in a predominantly telecommunications enterprise where
divestiture of the non-telecommunications portion of the business would
not be reasonable or practicable or under the control of the registered
holding company, such circumstances should be described by the
applicant and the Commission should permit such investment without
divestiture on the theory that such an interest would represent only an
incidental activity and would be in furtherance of congressional
intent.44
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\44\ Id. at 7-8.
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26. New Orleans disagrees with Entergy's argument.45 New
Orleans contends that under the plain language of the statute, Congress
determined that an ETC must be ``exclusively'' in the business of
providing telecommunications, information, or other related or
incidental products or services.46
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\45\ New Orleans Reply at 4-5.
\46\ Id.
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27. Cinergy argues that the rules should expressly permit an
application to be filed ``by, or on behalf of,'' one or more affiliate
companies of a registered holding company, whether or not such
companies are in existence at the time of the filing.47 According
to Cinergy, this is the same approach used by the SEC in its rules
implementing the ``foreign utility company'' provisions of the Energy
Policy Act of 1992.48 BellSouth disagrees with Cinergy's proposal.
According to BellSouth, Cinergy's proposal is contrary to the clear
language of the 1996 Act. BellSouth argues that the Commission should
not grant ETC status to unformed entities for the sole purpose of
enabling a holding company to ``bank'' this status for potential future
entities.49
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\47\ Cinergy Comments at 2-3.
\48\ Id.
\49\ BellSouth Reply at 5.
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b. Discussion
28. Extent to which applicants must be currently engaged in ETC
activities. In Entergy, the Commission rejected the argument that under
Section 34(a)(1), applicants must actually be currently engaged in the
telecommunications or information business before they may apply for
ETC status. The Commission reasoned, based on the language, structure
and purpose of Section 34,
[[Page 52892]]
that an entity is ``engaged in the business of providing''
telecommunications or other covered activities if the entity is
established for the exclusive purpose of providing such services at the
time it files its application with this Commission.50 We reaffirm
our conclusion here.
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\50\ Entergy at para. 30.
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29. In Entergy, we concluded that a contrary interpretation would
be antithetic to Congress's intent in promulgating Section 34 as part
of Part II of the Telecommunications Act of 1996, entitled
``Development of Competitive Markets.'' As the Commission recognized,
prior to the Telecommunications Act of 1996, the provisions of PUHCA
strongly deterred entry by registered public utility holding companies
into the telecommunications industry by requiring stringent regulatory
oversight by the Securities and Exchange Commission.51 By
obtaining ETC status, holding companies can avoid prior SEC approval
and quickly become vigorous competitors in the telecommunications
industry, and, with such competition, bring more benefits to
consumers.52 Accordingly, the Commission concluded that adoption
of the ``actually engaged'' interpretation would defeat the core
purpose of Section 34, as such an interpretation would force registered
holding companies to begin operations before they could file for ETC
status. Under that approach, SEC pre-operations review would be
required before seeking ETC status, which would effectively vitiate in
major respects the purpose of the ETC provisions in the statute.53
---------------------------------------------------------------------------
\51\ See PUHCA Secs. 3(a); 11(b)(1).
\52\ See Senate Report at 7-8.
\53\ Entergy at para. 30. The Commission also noted that FERC
was confronted with a similar question in the EWG context. There,
parties requested a ruling that an applicant could obtain EWG status
for a facility that is not yet planned as long as the applicant
properly attests that any such future facility will be an eligible
facility. The reason behind this argument, stated the parties, was
that developers must often obtain determination of EWG status prior
to construction in order to obtain financing. In response, FERC held
that applicants may request a determination of EWG status for
facilities that have not been built. See Id. at para. 30 n.33
(citing Filing and Ministerial Procedures for Persons Seeking Exempt
Wholesale Generator Status, Order No. 550, 58 Fed. Reg. 8,897-01
(Feb. 18, 1993); order on reh'g, Order No. 550-A, 58 Fed. Reg.
21,250 (April 20, 1993)).
---------------------------------------------------------------------------
30. Section 34(a)(1) only requires that an ETC ``be engaged * * *
in the business of providing'' one or more permitted services. We
believe that a company that has been formed for the purpose of
providing such a service is engaged in that business for purposes of
Section 34(a)(1). For example, a holding company may seek to form an
ETC to participate in Commission spectrum auctions. While such a firm
is not actually providing service, the acts of incorporating, filing
short-form applications, and bidding are all activities that involve
``being engaged'' in the business of telecommunications.
31. Against this backdrop, we reject BellSouth's argument that we
condition ETC determinations to require ETCs to begin actually
providing service within a specific period of time. We have no reason
to believe that ETCs who are not yet actually providing service will
unreasonably delay doing so. We believe that the imposition of such a
requirement on an ETC--or on any other lawful business for that
matter--could have a chilling effect on entry with no countervailing
benefits. However, to the extent that parties in the future believe
that an ETC determination may be a ``sham,'' in that an ETC
unreasonably delays engaging in permitted activities, then those
parties may bring this information to the Commission's attention for
appropriate action.54
---------------------------------------------------------------------------
\54\ See discussion in section III.D.2 below.
---------------------------------------------------------------------------
32. Treatment of firms not exclusively engaged in ETC activities.
We are also confronted with the question of the appropriate treatment
of an acquisition of, or investment in, a telecommunications or
information services provider which is not exclusively engaged in the
business or providing telecommunications services, information
services, other services or products subject to the Commission's
jurisdiction, or products and services related or incidental thereto.
Consistent with the clear congressional mandate that holding company
entry into telecommunications markets promotes the public interest, in
appropriate circumstances--related to the relative size of the non-
telecommunications or information services portion of the business and
the firm's commitment to divest these assets--grant of ETC status would
likely be warranted, to the extent the firm otherwise meets the
criteria for ETC status. However, as such a determination wholly
depends on the facts of a specific case, we do not believe that it is
appropriate for us to formulate a rule of general applicability in this
proceeding. Rather, such issues will be addressed on a case-by-case
basis as they arise.
33. Similarly, we also do not believe that we should formulate a
rule of general applicability regarding Entergy's request that we grant
ETC status where a registered holding company holds a minority interest
in a predominantly telecommunications enterprise and divestiture of the
non-telecommunications portion of the business would not be reasonable
or practicable or under the control of the registered holding company.
As in the situation discussed above, applicants must demonstrate on a
case-specific basis that an activity falls within a permitted activity
or is, at a minimum, ``related or incidental thereto.'' However, unlike
the situation above, we do not presently see circumstances where grant
of ETC status would likely be appropriate in such a case.
34. Finally, we reject Cinergy's argument that the rules should
expressly permit an application to be filed ``by, or on behalf of,''
one or more affiliate companies of a registered holding company,
whether or not such companies are in existence at the time of the
filing. As BellSouth argues, Cinergy's argument runs contrary to the
clear language of the 1996 Act: Section 34(a) provides that ``No person
shall be deemed to be an exempt telecommunications company under this
Section unless such person has applied to the [Commission] for a
determination under this paragraph.'' (Emphasis supplied.) The ETC,
therefore, should, at a minimum, be in existence in order to apply. We
similarly see no reason to allow firms to apply on behalf of other
unrelated entities. It is the ETC that is required to apply.
Accordingly, regardless of the reasons supporting the SEC's rules
referred to by Cinergy,55 Cinergy has not proffered any reason
here that would lead us to a contrary conclusion.
---------------------------------------------------------------------------
\55\ Cinergy Comments at 2-3.
---------------------------------------------------------------------------
3. Prior State Approval
a. The NPRM
35. The Commission recognized in the NPRM that we held in Entergy
that our responsibilities do not extend beyond a determination of
whether an applicant complies with the relatively limited certification
criteria enumerated in Section 34(a).56 Thus, we concluded,
following our prior decision in Entergy, that under the plain language
of the statute, PUHCA Section 34 does not require prior state approval
as a condition precedent before we may make a determination of ETC
status.57
---------------------------------------------------------------------------
\56\ See NPRM at para. 4.
\57\ See Entergy at Paras. 21-28.
---------------------------------------------------------------------------
b. Comments
36. New Orleans and CBT both argue that the Commission's rejection
of calls for prior state approval in previous orders must be re-
evaluated.58 They
[[Page 52893]]
argue that state approval must be obtained before an applicant may
apply for a determination of ETC status. They recommend that
documentation indicating that applicants have obtained the appropriate
state approvals should accompany an ETC application, as this
requirement would ensure that the state regulators had the opportunity
to review the activities proposed by the applicant and decide if those
activities are in the public interest, particularly as they relate to
the ratepayers of the applicant's public utility affiliates. CBT also
contends that while Section 34 may not explicitly condition the
granting of ETC status on state approval of the proposed activity, it
does not preclude the Commission from requiring such approval.
According to CBT, requiring prior state approval would not impose a
significant barrier to entry, because the Commission could rely on the
public interest determinations of the state commissions which are
generally in a better position to assess the public interest impacts of
entry on the constituents.59
---------------------------------------------------------------------------
\58\ New Orleans Comments at 7-9; CBT Comments at 2-4. See also
MCI Reply at 4.
\59\ CBT Comments at 2-4.
---------------------------------------------------------------------------
37. Two commenters dispute these arguments.60 They argue that
the Commission has no authority under Section 34(a)(l) to make such an
inquiry, because the application review process must, in accordance
with Section 34(a)(l), be limited to a discrete inquiry by this
Commission concerning the nature of the activities in which the
applicant proposes to engage. Moreover, they argue that were it
Congress's intent that issues concerning state review should be part of
the application process, Section 34(a)(l) would have contained an
indication to that effect. To the extent that Congress intended for
there to be prior state review, these commenters contend that such
concerns are provided for elsewhere in Section 34, in the 1996 Act, in
PUHCA, or in other federal or state laws.61
---------------------------------------------------------------------------
\60\ Southern Reply at 4-5; Entergy Reply at 4-5.
\61\ Id.
---------------------------------------------------------------------------
c. Discussion
38. In Entergy, several parties argued that PUHCA requires ETC
applicants to obtain prior state approval before they may file for a
determination of ETC status. The Commission rejected this argument,
finding that this position runs counter to the plain language of
Section 34(a)(l).62 We affirm that conclusion here.
---------------------------------------------------------------------------
\62\ See Entergy at Paras. 21-28.
---------------------------------------------------------------------------
39. Commenters based their arguments on Section 32 of PUHCA,63
which permits holding companies to obtain ``exempt wholesale
generator'' (``EWG'') status. Unlike Section 34, however, Section 32
expressly makes state approval a prerequisite to the findings necessary
for an EWG determination. Under the plain language of PUHCA Section 32,
if an EWG seeks to utilize assets that are already in its holding
company parent's rate-base, Congress required state approval as a
condition precedent to a determination of EWG status.64 Because
PUHCA Section 34 differs from Section 32 in a number of material
respects, it is apparent that, in contrast to the EWG context, state
approval is not a prerequisite to a determination of ETC status. Most
significantly, under Section 32, the state approval process is an
integral part of whether a firm can be accorded EWG status. On the
other hand, the plain language of Section 34 does not condition the
grant of ETC status on the receipt of state approval in this
circumstance. Indeed, unlike the EWG provision, where EWG status is
directly linked to state-approved eligible facilities, there is no
similar link, explicit or otherwise, between the grant of ETC status
and state approval of asset sales to an ETC. Rather, our inquiry under
the statute is limited to the four enumerated criteria set forth in
Section 34(a)(l).65
---------------------------------------------------------------------------
\63\ 15 U.S.C. 79z-5a.
\64\ Entergy at Paras. 22-23.
\65\ Id. at para. 25.
---------------------------------------------------------------------------
40. Moreover, interpreting the statute to require or permit the
Commission to require prior state approval would not further, and
indeed would be inconsistent with, the purposes of Section 34. In this
regard, we noted in Entergy that assets that were previously in the
rate-base may not be the only assets by which an ETC might enter the
telecommunications business. There are undoubtedly alternative means of
entry, whether by the use of or acquisition of assets that are outside
of a particular state's jurisdiction, that do not require that state's
approval.66 Moreover, as discussed in Entergy, to the extent state
issues are raised, states' rights are well-preserved under other
provisions of Section 34.67
---------------------------------------------------------------------------
\66\ Id. at para. 26.
\67\ Id. at para. 28.
---------------------------------------------------------------------------
41. Finally, Section 34 was intended to foster holding company
entry into telecommunications markets, because such entry could
``significantly promote and accelerate competition in
telecommunications services and deployment of advanced networks'' and
could also result in lower prices and greater choice for
consumers.68 Requiring an applicant to obtain all state
approvals--including those that might only hypothetically be required--
would slow down holding company entry into telecommunications markets,
and would frustrate Section 34's central purpose of removing PUHCA as a
barrier to holding company entry into telecommunications
markets.69 Moreover, given that holding company entry as an ETC
might be accomplished independently of assets over which the states
have jurisdiction, we see no reason why state approval must be a
condition precedent to obtaining a determination of ETC status.70
Accordingly, as we recognized in Entergy, it would not be appropriate
to use the ETC approval process as a backstop to those procedural
avenues states currently have to address issues associated with utility
company entry into telecommunications markets. Indeed, the Commission
stated that to add prior state approval as a condition precedent to
``the Commission's ETC approval process would appear to be unnecessary,
redundant, and contrary to the explicit de-regulatory thrust of the
Telecommunications Act of 1996.'' 71
---------------------------------------------------------------------------
\68\ Id. at para. 27.
\69\ Id.
\70\ Id.
\71\ Id. at para. 28.
---------------------------------------------------------------------------
4. Consolidated Applications
a. The NPRM
42. The Commission also sought comment on whether it should adopt
rules governing applications seeking ETC status filed by different
entities that are or will be affiliates of a common holding company
parent.72 While the Act apparently contemplates that every entity
seeking ETC status must apply to the Commission, the Commission saw no
reason why this should require separate entities affiliated with the
same holding company parent to seek ETC status through separate
applications and proceedings. Such a process seems administratively
wasteful and duplicative. Accordingly, the Commission proposed to allow
multiple entities seeking ETC status that are affiliated with the same
public utility holding company parent to seek a determination for all
such entities through a single consolidated application. In such a
case, the NPRM proposed that any consolidated application should
contain for each affiliate sufficient information as required by our
rules to make a separate ETC determination for that affiliate.73
---------------------------------------------------------------------------
\72\ NPRM at para. 11.
\73\ Id.
---------------------------------------------------------------------------
[[Page 52894]]
b. Comments
43. Several commenters support the Commission's proposal to permit
a single, consolidated application by one or more subsidiaries
affiliated with the same holding company parent.74 However, New
Orleans argues that in instances where more than one holding company
affiliate seeks ETC status, any consolidated application must contain
adequate information regarding each affiliate, including the proposed
activities of each. According to New Orleans, comprehensive or summary
descriptions or representations would not permit the Commission to make
necessary findings regarding each of the entities seeking ETC
status.75
---------------------------------------------------------------------------
\74\ See Cinergy Comments at 2-3; Entergy Comments at 8-9.
\75\ New Orleans Comments at 9.
---------------------------------------------------------------------------
c. Discussion
44. As reflected in the support for this proposal, common sense
dictates that we should allow multiple entities seeking ETC status that
are affiliated with the same public utility holding company parent to
seek a determination for all such entities through a single
consolidated application. Nothing in the statute requires a contrary
result. On the other hand, as New Orleans points out, the statute does
require that we have sufficient information about each entity seeking
ETC status to make a determination that the statutory criteria are met.
We agree with New Orleans that comprehensive or summary descriptions or
representations would not permit the Commission to make necessary
findings regarding each of the entities seeking ETC status. Therefore,
consistent with our earlier statement in the NPRM, the Commission will
permit consolidated applications, but any such applications must
contain, for each affiliate, sufficient information as required by our
rules to make a separate ETC determination for that affiliate.
5. Service on other Agencies
a. The NPRM
45. The Commission asked parties to comment on whether the proposed
rules should require applicants to serve a copy of their ETC
application on the SEC and affected State commissions.76 The
Commission defined an affected State commission as the State commission
of each state in which the ETC will be located or do business.77
The Commission reasoned that although service of applications on the
SEC and State commissions is not required by law, Section 34 of PUHCA
specifically contemplates a role for the SEC and State commissions
insofar as certain eligible companies are concerned. It also
contemplates that the SEC be made aware of ETC determinations. The
Commission therefore found no reason not to inform these agencies of
pending ETC applications at an early stage, particularly since the
copying and mailing costs associated with serving filings on the SEC
and affected State commissions will be minimal.78
---------------------------------------------------------------------------
\76\ NPRM at para. 12.
\77\ Id.
\78\ Id.
---------------------------------------------------------------------------
b. Comments
46. New Jersey endorses the proposed requirement that ETC
applicants serve a copy of their application on the SEC and affected
State commissions.79 Entergy states that while it does not object
to the Commission's proposal that applicants be required to serve a
copy of their applications on affected State commissions, because the
SEC has no authority to review ETC applications, no purpose would be
achieved by requiring the filing of ETC applications with the
SEC.80 Entergy contends that it should be sufficient that the SEC
is notified upon grant of an application pursuant to Section 1.4005 of
the proposed rules. BellSouth disagrees with Entergy's position,
however, noting that serving the SEC with the application is entirely
appropriate given the SEC's otherwise plenary jurisdiction over holding
companies.81 Finally, CBT argues that in addition to requiring ETC
applicants to serve a copy of their application on the SEC and affected
State commissions, the Commission should also require applicants to
file a copy of their application with FERC, since FERC retains certain
rate authority under Section 34(j).82
---------------------------------------------------------------------------
\79\ New Jersey Comments at 5.
\80\ Entergy Comments at 9-10.
\81\ BellSouth Reply at 6-7.
\82\ CBT Comments at 5-6.
---------------------------------------------------------------------------
c. Discussion
47. We agree with BellSouth and reject Entergy's argument that an
ETC should not be required to file a copy of its application with the
SEC. The SEC has plenary jurisdiction over holding companies, even
though there is an increasing trend by Congress to permit holding
companies to engage in businesses other than their core utility
operations. Indeed, in this regard, we note that FERC's final rules for
EWG status--a policy designed to permit holding companies to invest in
independent power production ventures without prior SEC approval--also
require persons seeking a determination of EWG status to file a copy
with the SEC for essentially the same reasons we set forth in the
NPRM.83 Accordingly, we reject Entergy's claim that ETC applicants
should not be required to file a courtesy copy of their application
with the SEC.
---------------------------------------------------------------------------
\83\ See 18 C.F.R. Sec. 365.3(a).
---------------------------------------------------------------------------
48. On the other hand, we reject CBT's argument that we should
require ETC applicants to file a copy of their application with FERC.
First, unlike the SEC, Congress did not impose a statutory obligation
to notify FERC whenever we make a determination of ETC status. Second,
New Jersey specifically asked that it be served and one other state,
Mississippi, has actually participated in an ETC proceeding.84 In
contrast, FERC has filed no request that applicants file an additional
copy of their application with them, and, in the absence of such a
request, we decline to impose the suggested requirement.85 Thus,
we will require service of applications on relevant state commissions
but not on FERC.
---------------------------------------------------------------------------
\84\ See, e.g., New Jersey Comments at 5.
\85\ In addition, in response to an informal inquiry made to
staff in FERC's Office of General Counsel responsible for such
matters by Commission staff, FERC staff did not request that FERC be
served with copies of ETC applications. See August 8, 1996
Memorandum from Commission staff to William F. Caton, Acting
Secretary.
---------------------------------------------------------------------------
C. Public Notice and Comment
1. The NPRM
49. In the NPRM, the Commission asked whether there should be a
public notice and comment procedure for ETC applications.86 The
Commission noted that while staff had placed all of the applications
received prior to issuing the NPRM on public notice for comment, there
is no requirement in the 1996 Telecommunications Act that the
Commission do so. On the other hand, the Commission also noted that
neither is there any prohibition on the Commission's discretion to do
so. The proposed rules therefore provide for public notice and comment
on ETC applications, but limit consideration of any submissions to the
adequacy or accuracy of the certification made to satisfy the statutory
criteria. Given the limited focus of the Commission's inquiry under
Section 34(a)(1), the Commission believed that it would be
inappropriate to allow persons to raise issues that fall outside the
purview of the statutorily fixed determination, and that go to the
public interest merits of an applicant's proposed entry. Comments on
the adequacy of the representations may include whether the application
is within the scope of the ETC criteria--e.g., the extent to
[[Page 52895]]
which applicant's services constitute telecommunications services or
products, information services or products, certain services subject to
FCC jurisdiction, or services or products related or incidental to
these services or products. Applicants would then have the opportunity
to respond to any comments filed. Finally, the Commission also
requested comments on the length of the time period which should be set
for such comments.87
---------------------------------------------------------------------------
\86\ NPRM at para. 13.
\87\ Id.
---------------------------------------------------------------------------
2. Comments
50. Commenters were strongly divided on these issues. On the one
hand, several commenters disagree with the Commission's tentative
conclusion to limit comments to the adequacy or accuracy of the
representations contained in ETC applications. For example, New Orleans
argues that commenters should be able to submit additional
information--e.g., evidence of impermissible activities not referenced
in the application--related to the requirements of obtaining ETC status
and related to the Commission's regulation of these new
entities.88 Similarly, MCI argues that interested parties should
also be able to provide information indicating whether the applicant
has engaged in anticompetitive actions with regard to its ratepayers,
shareholders, or potential competitors in its preparation for entry
into the telecommunications business.89 Finally, ACSI argues that
the Commission should give ETC commenters at least 30 days from public
notice to file comments, because the 15 day interval is inadequate to
allow interested parties to investigate and comment meaningfully on ETC
applications.90
---------------------------------------------------------------------------
\88\ New Orleans Comments at 6-7. See also ACSI Comments at 10-
11.
\89\ MCI Reply at 5-6.
\90\ Id. at 11.
---------------------------------------------------------------------------
51. Entergy states that while there is value in providing for
public notice and comment, the Commission should continue to limit
comments to the adequacy and accuracy of representations used to
demonstrate that an applicant's planned activities are within the scope
of the statutory criteria.91 Entergy argues that the Commission
should not consider comments that raise issues outside the purview of
the statutorily fixed determination, such as comments relating to the
costs of the applicant's business activities, the applicant's proposed
financing arrangements, or comments raising public policy
considerations. Moreover, Entergy argues that without supporting
evidence, mere allegations challenging the information presented by an
applicant should not cause the Commission to deny an application.
Finally, Entergy argues that given the limited focus of the
Commission's review and the goal of developing a streamlined ETC
process, the Commission should limit the comment period to 25 days or
less and that the Commission should not entertain any requests for
hearing.92
---------------------------------------------------------------------------
\91\ Entergy Comments at 10-11.
\92\ Id.
---------------------------------------------------------------------------
3. Discussion
52. Upon review, we reject arguments that we should expand the
scope of comments beyond the adequacy and accuracy of the
representations contained in the application. As we have said numerous
times in evaluating ETC applications, and have reiterated above, it is
not our role to examine the public interest merits of holding company
entry. Moreover, comments on the adequacy and accuracy are not as
limited as commenters appear to believe. For example, New Orleans'
argument that commenters should be able to file additional
information--e.g., evidence of impermissible activities not referenced
in the application--related to the requirements of obtaining ETC
status, is exactly the type of information relevant to the Commission's
consideration of an ETC application.
53. On the other hand, we reject MCI's suggestion that interested
parties should also be able to provide information indicating whether
the applicant has engaged in anticompetitive actions with regard to its
ratepayers, shareholders, or potential competitors in its preparation
for entry into the telecommunications business. Such information has no
relevance to our ETC determination. The type of information that MCI
would proffer has no relationship with the ETC statutory criteria.
54. Finally, we believe that the time period proposed in the draft
rules is adequate for effective notice and comment. Indeed, given: (a)
the limited focus of the Commission's inquiry under the statute; (b)
that we only have sixty days to complete this inquiry; and (c) that the
statute does not require public comment, we believe that fifteen days
is sufficient for interested parties to file comments on the adequacy
and accuracy of the representations contained in the application. Our
experience to date indicates that entities wishing to oppose ETC
applications are able to present their arguments within this time
frame.
D. Implementation Issues
1. Notice to State Commissions
a. The NPRM
55. Proposed Section 1.4005 requires the Secretary of the
Commission to notify the SEC whenever an application for ETC status is
granted, as explicitly required by Section 34(a)(1) of PUHCA.
b. Comments
56. Southwestern Bell argues that the Commission should modify
proposed rule 1.4005 to require the Commission to also inform affected
state commissions, in addition to the SEC, whenever it determines that
an entity is an ETC. According to Southwestern Bell, this step would
serve as further notice to the states that they may need to take
additional actions to implement, in their states, the requirements of
the 1996 Act.93
---------------------------------------------------------------------------
\93\ Southwestern Bell at 1-2.
---------------------------------------------------------------------------
c. Discussion
57. We reject Southwestern Bell's argument that the Commission
should also notify affected state commissions whenever the Commission
determines that an applicant merits ETC status. We believe that
requiring applicants to serve affected state commissions with their
applications should constitute adequate notice to the states. Indeed,
our reasoning behind this requirement is that if applicants serve
affected state commissions when they file for a determination of ETC
status, then states will have an opportunity, if they so desire, to
meaningfully participate in our proceeding or monitor its status. We
believe this procedure is especially appropriate given our previous
determination that applicants are not required to obtain prior state
approval before they file with this Commission. Accordingly, we reject
Southwestern Bell's argument.
2. Change in Circumstances
a. The NPRM
58. In the NPRM, the Commission noted that an ETC determination is
based on the facts that are presented to the Commission, and therefore
any material variation from those facts may render an ETC determination
invalid.94 Accordingly, proposed Section 1.4006 requires ETCs,
within 30 days of any material change in facts that may affect an ETC's
eligibility for ETC status under Section 34(a)(1) to either: (a) apply
to the Commission for a new determination of ETC status; (b) file a
written explanation with the
[[Page 52896]]
Commission of why the material change in facts does not affect the
ETC's status; or (c) notify the Commission that it no longer seeks to
maintain ETC status. To the extent persons other than the ETC applicant
inform the Commission of a material change of circumstances, the ETC
will be given the opportunity to respond and the Commission will take
further action as appropriate.95
---------------------------------------------------------------------------
\94\ NPRM at para. 16.
\95\ Id.
---------------------------------------------------------------------------
b. Comments
59. Southern criticizes the proposed rules requiring notification
after a ``material'' change in facts.96 Southern states that while
it does not take issue with the general concept, the meaning of
``material'' is open to different interpretations. According to
Southern, this could result in unnecessary uncertainty for ETCs and
could be used by third parties to impede the creation of ETCs by the
filing of specious claims. Accordingly, Southern urges the Commission
to give more guidance on the phrase ``material change in
circumstance.'' Southern believes that an ETC should, for example, be
able to expand service offerings (e.g., adding long-haul fiber to a
wireless service it may already be providing) without this being
considered a ``material'' change in circumstances. Southern also
encourages the Commission to establish a presumption favoring ETC
status in the context of such challenges and to resolve such
contentions in the spirit of Congressional intent underlying Section
34.97
---------------------------------------------------------------------------
\96\ Southern Comments at 6-7.
\97\ Id.
---------------------------------------------------------------------------
60. Similarly, Cinergy argues that the rules should expressly
provide that notification of a material change in facts is required
only if such change calls into question the continuing validity of the
sworn statement under Section 1.4002(a)(2) of the proposed
regulations.98 Cinergy argues that this requirement does not apply
with respect to the ``brief description of planned activities,'' which
is intended for illustrative purposes only. Therefore, argues Cinergy,
the fact that an applicant may subsequently choose not to pursue the
particular activities described in response to Section 1.4002(a)(1)
should not affect its status as an ETC so long as it continues to
engage in other ETC authorized activities.99
---------------------------------------------------------------------------
\98\ Cinergy Comments at 4; see also Southern Reply at 10-11.
\99\ Id.
---------------------------------------------------------------------------
61. Entergy also does not object in principle to the proposed
notification rules regarding a material change in facts.100
However, Entergy argues that a material change in circumstances which
is only of temporary duration should not negate ETC status--i.e., an
ETC seeks to acquire other interests in other predominantly
telecommunications companies that incidentally engage in certain non-
qualifying business activities. Entergy submits that, under these
circumstances, the acquiring ETC should be permitted (in support of the
required explanation that the acquisition does not or should not affect
its ETC status) to represent that it will divest or discontinue any
non-qualifying business operations within a reasonable period of time
following completion of the proposed acquisition.101
---------------------------------------------------------------------------
\100\ Entergy Comments at 12-13.
\101\ Id.
---------------------------------------------------------------------------
62. BellSouth disputes both Cinergy's and Entergy's
arguments.102 Specifically, BellSouth contends that if an ETC
departs from the ``brief description'' of the planned activities
contained in proposed rule 1.4002, that would constitute ``a material
change in facts.'' BellSouth argues that if an applicant certifies that
it intends to undertake a certain set of permissible activities, but
nonetheless subsequently undertakes a wholly different set of
permissible activities, such actions render the ETC application process
meaningless.103
---------------------------------------------------------------------------
\102\ BellSouth Reply at 5-6.
\103\ Id.
---------------------------------------------------------------------------
63. BellSouth argues that the proposed rules should provide an
opportunity for interested persons to comment in connection with any
filing in which the ETC asserts that materially changed circumstances
do not affect its ETC status. Accordingly, BellSouth argues that the
proposed rules should be changed to provide for a reasonable period of
time (fifteen days) for interested parties to comment on the
matter.104 Southern disagrees with BellSouth's proposal. Southern
argues that the Commission has the authority to place matters on public
notice and to solicit comment thereon when, in its discretion, it is
appropriate to do so. Southern points out that there may be instances
in which changes in circumstances are so unusual or sweeping as to
warrant such an opportunity. Southern is concerned that such a
mechanism could be used as a vehicle for specious challenges to ETC
status, thereby hindering competition by ETCs. Southern therefore
argues that in light of the Commission's existing authority, there is
no need for an automatic comment provision.105
---------------------------------------------------------------------------
\104\ BellSouth Comments at 14-15.
\105\ Southern Reply at 9-10.
---------------------------------------------------------------------------
64. Finally, BellSouth argues that the Commission did not impose a
duty to inform the Commission of any material change in facts on the
applications the Commission granted before issuing its proposed rules.
BellSouth argues that the Commission must impose a similar duty on
these ETCs as well.106 Southern disputes this position, arguing
that the plain language of the statute and Commission precedent make
clear that the rules implementing Section 34(a)(1) apply only to
applications filed after the rules become effective.107
---------------------------------------------------------------------------
\106\ BellSouth Comments at 14-15.
\107\ Southern Reply at 10.
---------------------------------------------------------------------------
c. Discussion
65. Commenters raise several significant points. Accordingly, we
take this opportunity to explain what we expect from ETCs and other
interested parties in these circumstances.
66. First, we agree with Southern and Cinergy that the term
``material change in fact'' should not apply to the ``brief description
of activities'' required in rule 1.4002. Rather, we believe a material
change in fact has occurred only when, in the ETC's judgment, its
activities fall outside of the scope of the criteria for ETC status set
forth in Section 34(a)(1). We believe that, if we were to adopt
BellSouth's position that any change from the description is a material
change, we would discourage holding company diversification into
telecommunications or information businesses. In our view, the original
determination of ETC status is much like a certificate of
incorporation. In the past, states required corporations to file a new
certificate each time a corporation deviated even slightly from the
enumerated activities set forth in the original certificate. Over time,
states came to realize that this requirement was extremely burdensome
to both corporations and to state administrators, and acted as a
deterrent to economic growth and innovation.108 In our view, this
situation is analogous to a situation when, for example, an ETC states
that it will provide ``long-line'' service in its application, but
actually provides local loop functions. We note that to the extent an
ETC diversifies beyond the activities listed in its application into
non-ETC activities, it risks revocation of its ETC status as well as
adverse action by the SEC under other provisions of PUHCA.
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\108\ See generally Robert C. Clark, Corporate Law at 17-19
(1986).
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[[Page 52897]]
67. However, we reject Entergy's argument that a material change in
circumstances which is only of temporary duration should not
necessarily negate ETC status. Similar to the situations described
above in section III.B.2, we believe that we should not adopt a rule of
general applicability in this proceeding, but rather examine the merits
of particular facts on a case-by-case basis. For these reasons, our
rules specifically provide that in those situations where there is a
question as to a potential material change in circumstances, an ETC
must either: (a) apply to the Commission for a new determination of ETC
status; (b) file a written explanation with the Commission of why the
material change in facts does not affect the ETC's status; or (c)
notify the Commission that it no longer seeks to maintain ETC status.
68. Third, we reject BellSouth's argument that the proposed rules
should automatically provide for an explicit opportunity for interested
persons to comment in connection with any filing in which the ETC
asserts that the material changed circumstances do not affect its ETC
status. Southern is correct that the Commission has the authority to
place matters on public notice and to solicit comment thereon when, in
its discretion, it is appropriate to do so. Indeed, the Commission has
put out for public notice and comment all of the applications for
determination of ETC status filed to date, even though the statute did
not require us to do so. Thus, as a general matter, we expect that when
ETCs notify us of a potential material change in circumstances, we will
ask for public notice and comment. However, we do not believe that it
is necessary to require such a process in all situations. In addition,
as we stated in the NPRM, to the extent persons other than the ETC
applicant inform the Commission of a material change of circumstances,
the ETC will be given the opportunity to respond and the Commission
will take further action as appropriate.
69. Finally, we note that BellSouth argues that while the
Commission did not impose a duty to inform the Commission of any
material change in facts on the applications the Commission granted
before issuing its proposed rules, the Commission should nonetheless
impose a similar duty on these ETCs as well. Southern disputes this
position, arguing that the plain language of the statute and Commission
precedent make clear that the rules implementing Section 34(a)(1) apply
only to applications filed after the rules become effective. As
explained below, we believe that we can, and should, impose a
continuing duty on all ETCs to notify the Commission whenever there is
a material change in fact, including those parties who acquired ETC
status prior to the adoption of these rules.
70. Section 34(a)(1) states that this Commission ``shall promulgate
rules implementing the provisions of this paragraph which shall be
applicable to applications filed under this paragraph after the
effective date of such rules.'' (Emphasis supplied.) We think that the
purpose of the limitation in this provision contained in the second
part of the sentence was to prevent us from retroactively applying
application procedures to previously granted applications, and taking
actions adverse to existing ETCs based on new procedural rules.
However, we do not believe that this language curtails our authority to
act when a person ceases to be an ETC. Indeed, we do not believe that
it would be rational to interpret the statute so as to create two
classes of ETCs--those subject to our on-going rules and those not
subject, because their applications were filed before our rules were
adopted.
71. This interpretation is consistent with our intent in our
earlier holding in Entergy, where we rejected arguments, based on the
language contained in Section 34(a)(1), that we should condition any
proposed ETC determination on that applicant's compliance with the
requirements of the implementing rules, even if the determination is
made prior to the enactment of those rules.109 In that case, we
simply intended that, to the extent we promulgated final rules in the
future, we would not revisit Entergy's applications and retroactively
apply any new qualification criteria.
---------------------------------------------------------------------------
\109\ See Entergy at para. 31.
---------------------------------------------------------------------------
72. Finally, from a practical standpoint, it makes administrative
sense for ETCs to have an affirmative duty to inform the Commission of
any material change in fact. As noted above, prior to the enactment of
the Telecommunications Act of 1996, PUHCA effectively deterred many
holding companies from expanding into telecommunications markets. The
Act now permits them to do so, but makes quite clear that this is a
limited exception--i.e., they may not engage in any other unrelated
business. Accordingly, such a duty ensures that an entity's ETC
determination remains in good standing and avoids any potential adverse
actions by the SEC.
73. In light of the above, we impose a continuing duty on all
entities who have received a determination of ETC status, including
those who received such status prior to the adoption of these final
rules, to report any potential material change in fact--regardless of
when that determination of ETC status was received. In addition, to the
extent applicable, we exercise our independent authority contained in
Sections 1, 4(i) and 303(r) of the Communications Act.
3. Additional Reporting Requirements
a. Comments
74. BellSouth argues that the Commission should require ETCs to
file reports with the Commission so that the Commission will be able to
fulfill its obligations under Sections 401 and 402 of the 1996
Act.110 In this way, argues BellSouth, the Commission will be able
to make informed decisions as to when to forbear and eliminate
unnecessary regulation. According to BellSouth, these reports should
include objective information concerning the status of the development
of ETCs' businesses in order to enable a determination by the
Commission as to the state of competition in the relevant market. Such
information should include the status of facilities constructed and
utilized by the telecommunications providers (including, for example,
the number of miles of fiber laid) and information concerning the
customer base, expenses and revenues of the entity.111
---------------------------------------------------------------------------
\110\ 47 U.S.C. Secs. 160, 161.
\111\ BellSouth Comments at 8-9; see also MCI Reply at 4.
---------------------------------------------------------------------------
75. Several commenters oppose BellSouth's proposal.112 First,
they argue that BellSouth's proposal falls beyond the scope of this
proceeding, in that it consists of proposals for the imposition of on-
going obligations following a determination of ETC status, rather than
for the application process. Second, they contend that the suggested
reporting requirements are excessive and not authorized by Section 34.
According to these commenters, Section 34 provides adequate reporting
and disclosure requirements to the FCC, the SEC, and to state agencies
to protect consumer welfare.113
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\112\ Southern Reply at 11; Cinergy Reply at 6; NEES Reply at 2-
3.
\113\ Id.
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b. Discussion
76. We do not believe that we should impose any additional
reporting requirements beyond those already incorporated in our
proposed rules. Under the plain terms of the statute, we have no
authority to collect such data in the context of an ETC application
proceeding. Rather, the SEC is the agency responsible for collecting
the
[[Page 52898]]
type of data proposed by commenters.114 Moreover, upon a closer
examination, it appears that BellSouth seeks nothing more than to have
these new entrants file their business plans, a rule that, if adopted,
might inhibit potential entry. Accordingly, as we do not believe that
new entrants should be saddled with any additional burdens which could
delay entry, we will reject BellSouth's proposal for additional
reporting requirements.
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\114\ See PUHCA Section 34(f).
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4. Effect of Filing
a. The NPRM
77. The proposed rules specify that the Commission must act within
60 days of receipt of an application. Applications that do not meet the
requirements of the proposed rule set forth in proposed Section 1.4002
will be rejected. Under the proposed rules, if the Commission does not
act within 60 days, the application is deemed to have been granted.
b. Discussion
78. Under the plain terms of Section 34(a)(1), a person applying in
good faith for a determination of ETC status is ``deemed to be'' an ETC
until the Commission makes an official determination. We must make this
determination within 60 days of receipt of this application.
Accordingly, consistent with the terms of the statute, we adopt Rule
1.4004.
III. Conclusion
79. In sum, the rules we adopt today establish a simple, straight-
forward and expeditious mechanism to accelerate the entry of public
utilities into telecommunications markets. We believe that these rules
closely follow Congress's mandate, and are consistent with the pro-
competitive, de-regulatory thrust of the Telecommunications Act of
1996.
A. Legal Authority
80. Authority for issuance of this Order is contained in Section
34(a)(1) of the Public Utility Holding Company Act of 1935 (PUHCA), as
amended by Section 103 of the Telecommunications Act of 1996, Public
Law No. 104-104, 110 Stat. 56 (1996), and Sections 1, 4(i), 4(j) and
303(r) of the Communications Act of 1934, as amended, 47 U.S.C. 151,
154(i), 154(j), and 303(r).
B. Further Information
81. For further information concerning this proceeding, contact
Lawrence J. Spiwak, Competition Division, Office of General Counsel at
(202) 418-1870.
C. Regulatory Flexibility Certification
82. The NPRM incorporated an initial regulatory flexibility
analysis (IFRA) 115 of the proposed rules. No comments were
received in direct response to the IFRA. Section 604 of the Regulatory
Flexibility Act, as amended,116 requires a final regulatory
flexibility analysis in a notice and comment rulemaking proceeding
unless we certify that ``the rule will not, if promulgated, have a
significant economic impact on a substantial number of small
entities.'' 117 The Regulatory Flexibility Act generally defines
the term ``small entity'' as having the same meaning as ``small-
business concern'' under the Small Business Act,118 which defines
``small business concern'' as ``one which is independently owned and
operated and which is not dominant in its field of operation * * *''
119 and which meets any additional criteria established by the
Small Business Administration (SBA).120 We believe that the rules
we adopt today will not have a significant economic impact on a
substantial number of small entities.
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\115\ 5 U.S.C. 603.
\116\ 5 U.S.C. 604.
\117\ 5 U.S.C. 605(b).
\118\ 5 U.S.C. 601(3), adopting 15 U.S.C. 632(a)(1).
\119\ 15 U.S.C.632(a)(1).
\120\ 15 U.S.C.632(a)(2).
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83. As noted above, the primary purpose of Section 103 is to permit
registered public utility holding companies to diversify into
telecommunications industries without having to seek prior SEC approval
by acquiring or maintaining an interest in an ETC.121 By
permitting such diversification in the 1996 Act, Congress removed a
significant (and anomalous) regulatory disparity between registered
public utility holding companies (of which there are fifteen) and
utilities that are not registered public utility holding companies--who
have always been free to enter the telecommunications industry without
prior SEC approval, regardless of their size or scope.122
Accordingly, the primary reason for any entity--regardless of size--to
obtain a determination of ETC status is to facilitate a merger or
investment by a public utility holding company.
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\121\ As noted above, it is the person who seeks a determination
of ETC status--and not the utility holding company--who files an
application. These persons may include small entities. However, we
note that of the first fifteen applications for a determination of
ETC status received, fourteen were wholly-owned subsidiaries of
registered public utility holding companies. These companies are not
considered small businesses under the Small Business Act.
\122\ See supra paras. 2-4.
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84. As such, in order to facilitate Congress's clear mandate to
expedite the entry of public utility holding companies into
telecommunications and information services, the rules we adopt today
establish a simple, straight-forward and expeditious mechanism
consistent with the pro-competitive, de-regulatory thrust of the
Telecommunications Act of 1996. Accordingly, the rules adopted here
impose, at most, de minimis compliance costs on those entities seeking
a determination of ETC status. For example, in order to comply with
these final rules, prospective applicants need not hire any accountants
or engineers to facilitate the filing of an application. Rather,
applicants need only provide a brief description of their planned
activities, and certify that they satisfy the enumerated criteria and
any other applicable Commission regulation.
85. Accordingly, we therefore certify, pursuant to Section 605(b)
of the Regulatory Flexibility Act, as amended by the Contract with
America Advancement Act of 1996 (CWAAA), Public Law No. 104-121, 110
Stat. 847 (1996),123 that the rules will not have a significant
economic impact on a substantial number of small entities. 5 U.S.C.
605(b). The Secretary shall send a copy of this Notice, including this
certification and statement, to the Chief Counsel for Advocacy of the
SBA.124 A copy of this certification will also be published in the
Federal Register.125
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\123\ Subtitle II of the CWAAA is the ``Small Business
Regulatory Enforcement Fairness Act of 1996.
\124\ 5 U.S.C. 605(b).
\125\ Id.
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D. Ordering Clause
86. In light of the foregoing, the amendments to part 1 of our
rules, as set forth below, are ADOPTED, effective November 8,
1996.126
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\126\ Approval of the Office of Management and Budget pursuant
to the Paperwork Reduction Act has been obtained. (OMB Control No.
3060-0711.)
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List of Subjects in 47 CFR Part 1
Administrative practice and procedure, Telecommunications.
Federal Communications Commission.
William F. Caton,
Acting Secretary.
Rule Changes
Part I of Title 47 of the Code of Federal Regulations is amended as
follows:
[[Page 52899]]
PART I--PRACTICE AND PROCEDURE
1. The authority citation for part 1 is revised to read as follows:
Authority: 15 U.S.C. 79 et seq., and 47 U.S.C. 151, 154(i),
154(j), and 303(r).
2. A new subpart S, consisting of Sections 1.4000 through 1.4007,
is added to part 1 to read as follows:
Subpart S--Exempt Telecommunications Companies
Sec.
1.4000 Purpose.
1.4001 Definitions.
1.4002 Contents of application and procedure for filing.
1.4003 Effect of filing.
1.4004 Commission action.
1.4005 Notification of Commission action to the Securities and
Exchange Commission.
1.4006 Procedure for notifying Commission of material change in
facts.
1.4007 Comments.
Subpart S--Exempt Telecommunications Companies
Sec. 1.4000 Purpose.
The purpose of part 1, subpart S, is to implement Section 34(a) of
the Public Utility Holding Company Act of 1935, 15 U.S.C. Sec. 79 et
seq., as added by Section 103 of the Telecommunications Act of 1996,
Public Law No. 104-104, 110 Stat. 56 (1996).
Sec. 1.4001 Definitions.
(a) For the purpose of this part, the terms ``telecommunications
services'' and ``information services'' shall have the same meanings as
provided in the Communications Act of 1934, as amended;
(b) Commission shall be defined as the Federal Communications
Commission; and
(c) ``ETC'' shall be defined as an exempt telecommunications
company.
Sec. 1.4002 Contents of application and procedure for filing.
(a) A person seeking status as an exempt telecommunications company
(applicant) must file with the Commission with respect to the company
or companies which are eligible companies owned or operated by the
applicant, and serve on the Securities and Exchange Commission and any
affected State commission, the following:
(1) A brief description of the planned activities of the company or
companies which are or will be eligible companies owned and/or operated
by the applicant;
(2) A sworn statement, by a representative legally authorized to
bind the applicant, attesting to any facts or representations presented
to demonstrate eligibility for ETC status, including a representation
that the applicant is engaged directly, or indirectly, wherever
located, through one or more affiliates (as defined in Section
2(a)(11)(B) of the Public Utility Holding Company Act of 1935), and
exclusively in the business of providing:
(i) Telecommunications services;
(ii) Information services;
(iii) Other services or products subject to the jurisdiction of the
Commission; or
(iv) Products or services that are related or incidental to the
provision of a product or service described in paragraph (a)(1)(i),
(a)(1)(ii), or (a)(1)(iii); and
(3) A sworn statement, by a representative legally authorized to
bind the applicant, certifying that the applicant satisfies part 1,
subpart P, of the Commission's regulations, 47 CFR 1.2001 through
1.2003, regarding implementation of the Anti-Drug Abuse Act of 1988, 21
U.S.C. 862.
Sec. 1.4003 Effect of filing.
A person applying in good faith for a Commission determination of
exempt telecommunications company status will be deemed to be an exempt
telecommunications company from the date of receipt of the application
until the date of Commission action pursuant to Sec. 1.4004.
Sec. 1.4004 Commission action.
If the Commission has not issued an order granting or denying an
application within 60 days of receipt of the application, the
application will be deemed to have been granted as a matter of law.
Sec. 1.4005 Notification of Commission action to the Securities and
Exchange Commission.
The Secretary of the Commission will notify the Securities and
Exchange Commission whenever a person is determined to be an exempt
telecommunications company.
Sec. 1.4006 Procedure for notifying Commission of material change in
facts.
If there is any material change in facts that may affect an ETC's
eligibility for ETC status under Section 34(a)(1) of the Public Utility
Holding Company Act of 1935, the ETC must, within 30 days of the change
in fact, either:
(a) Apply to the Commission for a new determination of ETC status;
(b) File a written explanation with the Commission of why the
material change in facts does not affect the ETC's status; or
(c) Notify the Commission that it no longer seeks to maintain ETC
status.
Sec. 1.4007 Comments.
(a) Any person wishing to be heard concerning an application for
ETC status may file comments with the Commission within fifteen (15)
days from the release date of a public notice regarding the
application, or such other period of time set by the Commission. Any
comments must be limited to the adequacy or accuracy of the
application.
(b) Any person who files comments with the Commission must also
serve copies of all comments on the applicant.
(c) An applicant has seven (7) days to reply to any comments filed
regarding the adequacy and accuracy of its application, or such other
period of time as set by the Commission. Such reply shall be served on
the commenters.
This Attachment will not be published in the Code of Federal
Regulations.
Attachment--List of Commenters
Comments
United States Telephone Association (USTA)
Cinergy Corporation
City of New Orleans
Entergy Corporation
Cincinnati Bell Telephone (CBT)
Association for Local Telephone Services (ALTS)
Southwestern Bell Telephone Company
American Communications Services, Inc. (ACSI)
BellSouth Corporation
The Southern Company (Southern)
New Jersey Ratepayer Advocate
Reply Comments
MCI Telecommunications Corporation
BellSouth Corporation
City of New Orleans
The Southern Company
Entergy Corporation
American Communications Services, Inc.
Massachusetts Electric Company, et al.
[FR Doc. 96-25560 Filed 10-8-96; 8:45 am]
BILLING CODE 6712-01-P
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.