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

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Chapter I

[CC Docket No. 96-21, FCC 96-59]

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

Interexchange Services

AGENCY: Federal Communications Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: In this Notice of Proposed Rulemaking, the Commission proposes

a regulatory regime to govern the Bell operating companies (BOCs)

provision of all ``out-of-region'' interstate, interexchange services

(including interLATA and intraLATA services). Specifically, we consider

whether the BOCs should be regulated as dominant or non-dominant

carriers with respect to the provision of such out-of-region services.

We tentatively conclude that, if a BOC provides out-of-region

interstate, interexchange services through an affiliate that satisfies

the separation requirements established in the Competitive Carrier

proceeding, the BOC affiliate should be regulated as a non-dominant

carrier. This Notice does not address BOC provision of in-region,

interexchange services. These proposed rules will permit the rapid

entry by the BOCs into the provision of out-of-region interstate,

interexchange services while providing protection against

anticompetitive conduct.

DATES: Comments must be submitted on or before March 13, 1996. Reply

comments must be filed on or before March 25, 1996.

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

Secretary, Federal Communications Commission, 1919 M Street, N.W., Room

222, Washington, D.C. 20554, with a copy to Janice Myles of the Common

Carrier Bureau, 1919 M Street, N.W., Room 544, Washington, D.C.

[[Page 6608]]

20554. Parties should also file one copy of any documents filed in this

docket with the Commission's copy contractor, International

Transcription Services, Inc., 2100 M Street, N.W., Suite 140,

Washington, D.C. 20037.

FOR FURTHER INFORMATION CONTACT: Melissa Waksman (202) 418-0913 or

Michael Pryor (202) 418-0495, Common Carrier Bureau, Policy and Program

Planning Division.

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

Notice of Proposed Rulemaking released and adopted on February 14,

1996. (FCC 96-59). The full text of this Notice of Proposed Rulemaking

is available for inspection and copying during normal business hours in

the FCC Reference Center (Room 239), 1919 M St., NW., Washington, DC.

The complete text also may be purchased from the Commission's copy

contractor, International Transcription Service, Inc., (202) 857-3800,

2100 M St., NW., Suite 140, Washington, DC 20037.

Synopsis of Notice of Proposed Rulemaking

I. Introduction

1. The Telecommunications Act of 1996 (``1996 Act'') has just

authorized the Bell Operating Companies (``BOCs'') to provide interLATA

services originating outside their in-region states. Prior to enactment

of the 1996 Act, the BOCs were prohibited from providing interLATA

services by the terms of the Modification of Final Judgment (``MFJ'').

In this Notice of Proposed Rulemaking, we propose a regulatory regime

to govern the BOCs' provision of all ``out-of-region'' interstate,

interexchange services (including interLATA and intraLATA services).

Specifically, we consider whether the BOCs should be regulated as

dominant or non-dominant carriers with respect to the provision of such

out-of-region services. We tentatively conclude that, if a BOC provides

out-of-region interstate, interexchange services through an affiliate

that satisfies the separation requirements established in the

Competitive Carrier proceeding, the BOC affiliate should be regulated

as a non-dominant carrier. Under the terms of the 1996 Act, a BOC's

provision of 800 service, private line service, or their equivalents

that terminate in an in-region state of that BOC are considered in-

region services even if such service originates out-of-region. This

Notice does not address BOC provision of in-region, interexchange

services. We further note that BOC provision to commercial mobil radio

services customers, of interstate, interLATA services originating

outside any of the BOC's in-region states, is included in the out-of-

region services addressed in this proceeding.

II. Background

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

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

adapted to reflect and facilitate the increasing competition in

telecommunications markets. In a series of orders, the Commission

distinguished between carriers with market power (dominant carriers)

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

gradually relaxed its regulation of non-dominant carriers because it

concluded that non-dominant carriers could not engage in conduct that

may be anticompetitive or otherwise inconsistent with the public

interest.

3. In its First Report and Order, 45 FR 76148, November 18, 1980,

the Commission classified local exchange carriers (``LECs'') and AT&T

as dominant carriers and concluded that these dominant carriers should

be subject to the ``full panoply'' of then-existing Title II

regulation. Recently, in light of increasing competition in the

interstate, domestic, interexchange telecommunications market, and

evidence that AT&T no longer possesses the ability to control price

unilaterally, the Commission reclassified AT&T as a non-dominant

carrier in that market.

4. In its Fourth Report and Order, 48 FR 52452, November 18, 1983,

the Commission considered how it should regulate the provision of

interstate, interexchange services by independent LECs. By

``independent LECs'' we refer to exchange telephone companies other

than the BOCs. The Commission determined that interexchange carriers

affiliated with independent LECs would be regulated as non-dominant

carriers. In the Fifth Report and Order, 49 FR 34824, September 4,

1984, the Commission clarified that an ``affiliate'' of an independent

LEC for purposes of qualifying for regulation as a non-dominant carrier

is ``a carrier that is owned (in whole or part) or controlled by, or

under common ownership (in whole or part) or control with, an exchange

telephone company.'' The Commission went on to explain that in order to

qualify for non-dominant status, the affiliate must: (1) maintain

separate books of account; (2) not jointly own transmission or

switching facilities with the exchange telephone company; and (3)

obtain any exchange telephone company services at tariffed rates and

conditions. The Commission noted that these requirements would avoid

imposing excessive burdens on independent LECs. The Commission further

concluded that, if an independent LEC provided interstate,

interexchange services directly, rather than through an affiliate,

those services would be subject to dominant carrier regulation.

5. In the Fifth Report and Order, the Commission also addressed the

possible entry of the BOCs into interstate, interexchange services in

the future:

The BOCs currently are barred by the [Modification of Final

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

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

interLATA services as dominant until we determined what degree of

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

affiliates to qualify for nondominant regulation.

6. The 1996 Act authorizes the BOCs to provide out-of-region

interstate and intrastate interLATA services upon enactment. More

specifically, Section 271(b)(2) of the Communications Act provides that

a BOC of BOC affiliate may provide interLATA services originating

outside its in-region States after the date of enactment of the 1996

Act, subject to the provisions of section 271(j). The 1996 Act does not

require a BOC to obtain Commission authorization in order to begin

offering out-of-region, interstate, interLATA services.

II. Analysis

7. In order to permit efficient and rapid entry by the BOCs into

out-of-region interstate, interexchange services, as contemplated by

the 1996 Act, we seek in this proceeding to establish promptly the

regulatory framework that will govern the BOCs' provision of such

services. At the same time, we also seek to ensure that sufficient

regulatory safeguards are in place to prevent a BOC from gaining any

unfair competitive advantage, either through unreasonably

discriminatory practices or cross-subsidization, that could arise

because of its ownership and control of local exchange facilities.

8. Since divestiture, the MFJ has prohibited the BOCs from entering

the domestic, interstate, interLATA market. Therefore, they will enter

this market in out-of-region states with little or no market share.

Additionally, we have found that significant segments of the domestic,

interstate, interexchange market are characterized by substantial

competition. In our recent AT&T Order we found that there is

significant excess capacity in this market and that there are a large

number of long-distance carriers, including four nationwide,

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facilities-based competitors, AT&T, MCI, Sprint, and WorldCom; dozens

of regional facilities-based carriers; and several hundred smaller

resale carriers. We further concluded that AT&T lacked individual

market power in the overall interstate, domestic, interexchange market.

These facts suggest that, upon entry into the provision of out-of-

region interstate, interexchange services, BOC affiliates would not be

likely to possess market power.

9. The BOCs, however, continue to control bottleneck local exchange

facilities in their in-region states. The Commission has expressed

concern about possible problems arising from an interexchange carrier's

control over local exchange facilities. In its First Report and Order

in the Competitive Carrier proceeding, the Commission stated that

predivestiture AT&T's control of bottleneck facilities was ``prima

facie evidence of market power requiring detailed regulatory

scrutiny.'' The Commission reiterated its concern over potential cost-

shifting and anticompetitive conduct by exchange telephone companies in

its Fifth Report and Order. Because of such concerns, the Commission

determined that interstate, interexchange services provided directly by

independent LECs, rather than through an affiliate, should be regulated

as dominant.

10. The Commission further concluded, however, that an affiliate of

an independent LEC providing interstate, interexchange services would

qualify as a non-dominant carrier if the affiliate were sufficiently

separated from the local exchange company. The Commission specified the

separation requirements that would provide some ``protection against

cost-shifting and anticompetitive conduct'' by an independent LEC that

could result from using its control of bottleneck facilities. The

Commission concluded that the specific separation requirements would

not impose excessive burdens on independent LECs and noted that those

requirements were less stringent than those established in the Second

Computer Inquiry.

11. In seeking to facilitate timely entry by the BOCs into the

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

consistent with the 1996 Act, we tentatively conclude that the

separation requirements applied to independent LECs provide a useful

model upon which to base, on an interim basis, oversight of BOC

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

intend to consider in our upcoming interexchange proceeding, however,

whether it may be appropriate to modify or eliminate the separation

requirements in order for some or all LECs to qualify for non-dominant

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

services.

12. While we address here the BOCs' provision of interexchange

services originating outside the regions where the BOCs control local

bottleneck facilities, some of this traffic will terminate in the

regions where the BOCs retain control of local bottleneck facilities.

We tentatively conclude that the separation requirements found adequate

to permit non-dominant regulation of independent LEC provision of

interstate, interexchange services originating and often terminating in

their regions should be sufficient to allow similar treatment of BOC

provision of interexchange services that originate out of their in-

region states.

13. Thus, we tentatively conclude that, for now, if a BOC creates a

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

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

affiliate satisfies the conditions set forth in the Fifth Report and

Order, then the affiliate will be classified as a non-dominant carrier.

As previously noted, these conditions are that the affiliate must: (1)

maintain separate books of account; (2) not jointly own transmission or

switching facilities with the BOC local exchange company; and (3)

obtain any BOC exchange telephone company services at tariffed rates

and conditions. We note that independent local exchange carriers

providing interexchange services through affiliates pursuant to the

Fifth Report and Order treat those affiliates as nonregulated

affiliates under the Commission's joint cost rules and affiliate

transaction rules for exchange carrier accounting purposes. We seek

comment on whether a BOC affiliate providing out-of-region, interstate,

interexchange services should be treated as a nonregulated affiliate

for BOC accounting purposes. Finally, we tentatively conclude, at least

for the present time, that if a BOC directly, or through an affiliate

that fails to comply with these separation requirements, provides out-

of-region interstate, interexchange services, those services will be

regulated as dominant carrier offerings.

14. We invite comment on our tentative conclusions regarding BOC

provision of out-of-region interLATA and intraLATA services. Any party

disagreeing with these tentative conclusions should explain with

specificity its position and suggestions for alternative regulatory

policies. As noted, we believe that applying the well-established Fifth

Report and Order requirements will facilitate rapid entry by the BOCs

into the provision of out-of-region services, consistent with the

intent of the 1996 Act, without imposing onerous burdens on them.

IV. Procedural Issues

A. Ex Parte Presentations

This is a non-restricted notice-and-comment rulemaking proceeding.

Ex parte presentations are permitted, except during the Sunshine Agenda

period, provided that they are disclosed as provided in the

Commission's rules. See generally 47 CFR Secs. 1.1202, 1.1203, 1.1206.

B. Regulatory Flexibility Analysis

16. We certify that the Regulatory Flexibility Act is not

applicable to the rule changes we are proposing in this proceeding. If

the proposed rule changes are promulgated, there will not be a

significant economic impact on a substantial number of small business

entities, as defined by Section 601(3) of the Regulatory Flexibility

Act. Entities directly subject to the rule changes, and proposed rule

changes, are large corporations engaged in the provision of local

exchange and exchange access telecommunications services. We are

nevertheless committed to reducing the regulatory burdens on small

communications services companies whenever possible, consistent with

our other public interest responsibilities. The Secretary shall send a

copy of this Notice of Proposed Rulemaking to the Chief Counsel for

Advocacy of the Small Business Administration in accordance with

Section 603(a) of the Regulatory Flexibility Act, 5 U.S.C. Secs. 601,

et seq. (1981).

C. Comment Filing Procedures

17. Pursuant to applicable procedures set forth in Sections 1.415

and 1.419 of the Commission's rules, 47 CFR Secs. 1.415, 1.419,

interested parties may file comments on or before 21 days after

publication in the Federal Register, and reply comments on or before 10

days after the comment due date. To file formally in this proceeding,

you must file an original and four copies of all comments, reply

comments, and supporting comments. If you want each Commissioner to

receive a personal copy of your comments, you must file an original and

nine copies. Comments and reply comments should be sent to Office of

the Secretary, Federal Communications Commission, 1919 M Street, N.W.,

Room 222, Washington, D.C. 20554, with a copy to Janice Myles

[[Page 6610]]

of the Common Carrier Bureau, 1919 M Street, N.W., Room 544,

Washington, D.C. 20554. Parties should also file one copy of any

documents filed in this docket with the Commission's copy contractor,

International Transcription Services, Inc., 2100 M Street, N.W., Suite

140, Washington, D.C. 20037. Comments and reply comments will be

available for public inspection during regular business hours in the

FCC Reference Center, 1919 M Street, N.W., Room 239, Washington, D.C.

20554.

18. In order to facilitate review of comments and reply comments,

both by parties and by Commission staff, we require that comments be no

longer than twenty-five (25) pages and reply comments be no longer than

fifteen (15) pages. Comments and reply comments must include a short

and concise summary of the substantive arguments raised in the

pleading.

19. Parties are also asked to submit comments and reply comments on

diskette. Such diskette submissions would be in addition to and not a

substitute for the formal filing requirements addressed above. Parties

submitting diskettes should submit them to Janice Myles of the Common

Carrier Bureau, 1919 M Street, N.W., Room 544, Washington, D.C. 20554.

Such a submission should be on a 3.5 inch diskette formatted in an IBM

compatible form using MS DOS 5.0 and WordPerfect 5.1 software. The

diskette should be submitted in ``read only'' mode. The diskette should

be clearly labelled with the party's name, proceeding, type of pleading

(comment or reply comments) and date of submission. The diskette should

be accompanied by a cover letter.

D. Ordering Clauses

20. Accordingly, it is ordered that pursuant to Sections 1, 4, 201-

205, 215, 218, 220 of the Communications Act of 1934, as amended, 47

U.S.C. Secs. 151, 154, 201-205, 215, 218 and 220, a notice of Proposed

Rulemaking is hereby adopted.

21. It is Further Ordered that, the Secretary shall send a copy of

this notice of Proposed Rulemaking, including the regulatory

flexibility certification, to the Chief Counsel for Advocacy of the

Small Business Administration, in accordance with paragraph 603(a) of

the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (1981).

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 96-3917 Filed 2-20-96; 8:45 am]

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