Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended
Federal RegisterJan 21, 1997
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 53
[CC Docket No. 96-149; FCC 96-489]
Implementation of the Non-Accounting Safeguards of Sections 271
and 272 of the Communications Act of 1934, as Amended
AGENCY: Federal Communications Commission.
ACTION: Final rule.
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SUMMARY: The First Report and Order (Order) released December 24, 1996
clarifies certain provisions of sections 271 and 272 of the
Communications Act of 1934, as amended, and promulgates regulations to
implement other provisions. The intended effect of this Order is to
further the Commission's goal of fostering competition in the
telecommunications market.
EFFECTIVE DATE: February 20, 1997. The collections of information
contained within sections 53.203(b) and (e) of these Rules are
contingent upon approval by the Office of Management and Budget. The
Commission will publish a document at a later date establishing the
effective date.
FOR FURTHER INFORMATION CONTACT: Radhika Karmarkar, Attorney, Common
Carrier Bureau, Policy and Program Planning Division, (202) 418-1580.
For additional information concerning the information collections
contained in this Report and Order contact Dorothy Conway at 202-418-
0217, or via the Internet at [email protected].
SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Order
adopted December 23, 1996, and released December 24, 1996. This Order
contains new or modified information collections subject to the
Paperwork Reduction Act of 1995 (PRA). It has been submitted to the
Office of Management and Budget (OMB) for review under the PRA. OMB,
the general public, and other federal agencies are invited to comment
on the proposed or modified information collections contained in this
proceeding. This is a synopsis, the full text of this Order is
available for inspection and copying during normal business hours in
the FCC Reference Center (Room 239), 1919 M St., NW., Washington, DC.
The complete text also may be obtained through the World Wide Web, at
http://www.fcc.gov/Bureaus/Common Carrier/Orders/fcc96489.wp, or may be
purchased from the Commission's copy contractor, International
Transcription Service, Inc., (202) 857-3800, 2100 M St., NW., Suite
140, Washington, DC 20037.
Regulatory Flexibility Analysis
We determined that section 605(b) of the Regulatory Flexibility Act
of 1980, 5 U.S.C. 605(b), does not apply to the rules adopted in this
Order because they do not have a significant economic impact on a
substantial number of small entities, as defined by section 301(3) of
the Regulatory Flexibility Act.
Paperwork Reduction Act
Some of the rules adopted in this Order impose information
collection requirements that are explained in a companion order,
entitled Implementation of the Telecommunications Act of 1996:
Accounting Safeguards Under the Telecommunications Act of 1996, CC
Docket No. 96-150, FCC 96-490. The paperwork reduction estimates
associated with these rules are contained in this section. The
Commission, as part of its continuing effort to reduce paperwork
burdens, invites the general public and the Office of Management and
Budget (OMB) to comment on the information collections contained in
this Order, as required by the Paperwork Reduction Act of 1995, Public
Law No. 104-12. Written comments by the public on the information
collections are due 30 days after date of publication in the Federal
Register. OMB notification of action is due (60 days from date of
publication in the Federal Register.) Comments should address: (a)
whether the new or modified collection of information is necessary for
the proper performance of the functions of the Commission, including
whether the information shall have practical utility; (b) the accuracy
of the Commission's burden estimates; (c) ways to enhance the quality,
utility, and clarity of the information collected; and (d) ways to
minimize the burden of the collection of information on the respondents
including the use of automated collection techniques or other forms of
information technology.
OMB Approval Number: 3060-0734.
Title: Implementation of the Telecommunications Act of 1996:
Accounting Safeguards Under the Telecommunications Act of 1996.
Form No.: N/A.
Type of review: Revision.
Respondents: Businesses or other for profit.
[[Page 2928]]
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No. of
Section/title respondents Est. time per response Total annual burden
----------------------------------------------------------------------------------------------------------------
Affiliate Company, Books, Records 20 6,056.25 hrs..................... 121,125 hrs.
and Accounts, Section 272.
Arms' Length Requirement........... 7 72 hrs........................... 504 hrs.
----------------------------------------------------------------------------------------------------------------
Total Annual Burden: 121,629 total hours in this Report and Order
(Total Annual Burden hours for OMB control number 3060-0734--
180,536.75).
Estimated Costs Per Respondents: $0.
Needs and Uses: The attached item adopts safeguards to govern the
Bell Operating Companies' (BOCs) entry into certain new markets. It
promulgates rules and policies implementing and, where necessary,
clarifying the non-accounting separate affiliate and nondiscrimination
safeguards prescribed by Congress in sections 271 and 272 of the
Communications Act of 1934, as amended. These safeguards are intended
both to protect subscribers to BOC monopoly services, such as local
telephony, against the potential risk of having to pay costs incurred
by the BOCs to enter competitive markets, such as interLATA services
and equipment manufacturing, and to protect competition in those
markets from the BOCs' ability to use their existing market power in
local exchange services to obtain an anticompetitive advantage in those
new markets the BOCs seek to enter.
Synopsis of First Report and Order
I. Introduction
In February 1996, the Telecommunications Act of 1996 became law.
Telecommunications Act of 1996, Public Law No. 104-104, 110 Stat. 56
(1996 Act), to be codified at 47 U.S.C. Secs. 151 et seq. The intent of
the 1996 Act is ``to provide for a pro-competitive, de-regulatory
national policy framework designed to accelerate rapidly private sector
deployment of advanced telecommunications and information technologies
and services to all Americans by opening all telecommunications markets
to competition.''
In this proceeding, we adopt non-accounting safeguards, pursuant to
section 272 of the Communications Act, to govern entry by the Bell
Operating Companies (BOCs) into certain new markets. This proceeding is
one of a series of interrelated rulemakings that collectively will
implement the telephony provisions of the 1996 Act. Other proceedings
under the 1996 Act have focused on opening markets to entry by new
competitors, establishing rules to preserve and advance universal
service, establishing rules for competition in those markets that are
opened to competitive entry, and on lifting legal and regulatory
barriers to competition.
Upon enactment, the 1996 Act permitted the BOCs immediately to
provide interLATA services that originate outside of their in-region
states. The 1996 Act conditions the BOCs' entry into in-region
interLATA services on their compliance with certain provisions of
section 271. Under section 271, we must determine, among other things,
whether the BOC has complied with the safeguards imposed by section 272
and the rules adopted herein. Section 272 addresses the BOCs' provision
of interLATA telecommunications services originating in states in which
they provide local exchange and exchange access services, interLATA
information services, and BOC manufacturing activities.
On July 18, 1996, we initiated this proceeding by releasing a
Notice of Proposed Rulemaking (NPRM) 61 FR 39397 (July 29, 1996) that
sought comment on the non-accounting separate affiliate and
nondiscrimination safeguards of the 1996 Act. These provisions govern
the BOCs' entry into certain new markets. We initiated a separate
proceeding to address the accounting safeguards required to implement
sections 260 and 272 through 276 of the Communications Act. Comments on
the non-accounting separate affiliate and nondiscrimination safeguards
were filed on August 15, 1996, and reply comments were filed on August
30, 1996.
The NPRM also sought comment on whether we should relax the
dominant carrier classification that under our current rules would
apply to in-region, interstate, domestic, interLATA services provided
by the BOCs' interLATA affiliates. Further, the NPRM sought comment on
whether we should modify our existing rules for regulating the
provision of in-region, interstate, interexchange services by
independent local exchange carriers (LECs) (namely, carriers not
affiliated with a BOC). Finally, the NPRM considered whether to apply
the same regulatory treatment to the BOC affiliates' and independent
LECs' provision of in-region, international services, as would apply to
the provision of in-region, interstate, domestic, interLATA services
and in-region, interstate, domestic interexchange services,
respectively. This order addresses only the non-accounting separate
affiliate and nondiscrimination safeguards in sections 271 and 272. The
classification of BOC affiliates or independent LECs (and their
affiliates) as dominant or non-dominant will be addressed in a separate
Report and Order in this docket.
In this order, we promulgate rules and policies implementing, and,
where necessary, clarifying the non-accounting separate affiliate and
nondiscrimination safeguards prescribed by Congress in sections 271 and
272. These safeguards are intended both to protect subscribers to BOC
monopoly services, such as local telephony, against the potential risk
of having to pay costs incurred by the BOCs to enter competitive
markets, such as interLATA services and equipment manufacturing, and to
protect competition in those markets from the BOCs' ability to use
their existing market power in local exchange services to obtain an
anticompetitive advantage in those new markets the BOCs seek to enter.
Our action today continues the process of enhancing competition in all
telecommunications markets as envisioned by the 1996 Act.
A. Background
The fundamental objective of the 1996 Act is to bring to consumers
of telecommunications services in all markets the full benefits of
vigorous competition. As we recognized in the First Interconnection
Order, 61 FR 45476 (August 29, 1996), ``[t]he opening of all
telecommunications markets to all providers will blur traditional
industry distinctions and bring new packages of services, lower prices,
and increased innovation to American consumers.'' With the removal of
legal, economic, and regulatory impediments to entry, providers of
various telecommunications services will be able to enter each other's
markets and provide various services in competition with one another.
Both the BOCs and other firms, most notably existing interexchange
carriers, will be able to offer a widely recognized brand name that is
associated with telecommunications services. As firms expand the scope
of their existing operations to new product lines, they will
increasingly offer consumers the ability to purchase local, intraLATA,
[[Page 2929]]
and interLATA telecommunications services, as well as wireless,
information, and other services, from a single provider (i.e., ``one
stop shopping''), and other advantages of vertical integration.
The 1996 Act opens local markets to competing providers by imposing
new interconnection and unbundling obligations on existing providers of
local exchange service, including the BOCs. The 1996 Act also allows
the BOCs to provide interLATA services in the states where they
currently provide local exchange and exchange access services once they
satisfy the requirements of section 271. Moreover, by requiring
compliance with the competitive checklist set out in section
271(c)(2)(B) as a prerequisite to BOC provision of in-region interLATA
service, the statute links the effective opening of competition in the
local market with the timing of BOC entry into the long distance
market, so as to ensure that neither the BOCs nor the existing
interexchange carriers could enjoy an advantage from being the first to
enter the other's market.
In enacting section 272, Congress recognized that the local
exchange market will not be fully competitive immediately upon its
opening. Congress, therefore, imposed in section 272 a series of
separate affiliate requirements applicable to the BOC's provision of
certain new services and their engagement in certain new activities.
These requirements are designed, in the absence of full competition in
the local exchange marketplace, to prohibit anticompetitive
discrimination and cost-shifting, while still giving consumers the
benefit of competition.
As we observed in the NPRM, BOC entry into in-region interLATA
services raises issues for competition and consumers, even after a BOC
has satisfied the requirements of section 271(d)(3). BOCs currently are
the dominant providers of local exchange and exchange access services
in their in-region states, accounting for approximately 99.1 percent of
the local service revenues in those markets. If a BOC is regulated
under rate-of-return regulation, a price caps structure with sharing
(either for interstate or intrastate services), a price caps scheme
that adjusts the X-factor periodically based on changes in industry
productivity, or if any revenues it is allowed to recover are based on
costs recorded in regulated books of account, it may have an incentive
to allocate improperly to its regulated core business costs that would
be properly attributable to its competitive ventures.
In addition, a BOC may have an incentive to discriminate in
providing exchange access services and facilities that its affiliate's
rivals need to compete in the interLATA telecommunications services and
information services markets. For example, a BOC may have an incentive
to degrade services and facilities furnished to its affiliate's rivals,
in order to deprive those rivals of efficiencies that its affiliate
enjoys. Moreover, to the extent carriers offer both local and interLATA
services as a bundled offering, a BOC that discriminates against the
rivals of its affiliates could entrench its position in local markets
by making these rivals' offerings less attractive. With respect to BOC
manufacturing activities, a BOC may have an incentive to purchase only
equipment manufactured by its section 272 affiliate, even if such
equipment is more expensive or of lower quality than that available
from other manufacturers.
Moreover, if a BOC charges other firms prices for inputs that are
higher than the prices charged, or effectively charged, to the BOC's
section 272 affiliate, then the BOC could create a ``price squeeze.''
In that circumstance, the BOC affiliate could lower its retail price to
reflect its unfair cost advantage, and competing providers would be
forced either to match the price reduction and absorb profit margin
reductions or maintain their retail prices at existing levels and
accept market share reductions. This artificial advantage may allow the
BOC affiliate to win customers even though a competing carrier may be a
more efficient provider in serving the customer. Unlawful
discriminatory preferences in the quality of the service or
preferential dissemination of information provided by BOCs to their
section 272 affiliates, as a practical matter, can have the same effect
as charging unlawfully discriminatory prices. If a BOC charged the same
rate to its affiliate for a higher quality access service than the BOC
charged to unaffiliated entities for a lower quality service, or
disclosed information concerning future changes in network architecture
to its manufacturing affiliate before disclosing it to others, the BOC
could effectively create the same ``price squeeze'' discussed above.
The structural and nondiscrimination safeguards contained in
section 272 ensure that competitors of the BOC's section 272 affiliate
have access to essential inputs, namely, the provision of local
exchange and exchange access services, on terms that do not
discriminate against the competitors and in favor of the BOC's
affiliate. Because the BOC has the incentive to provide its affiliate
with the most efficient access, the statute requires the BOC to provide
competitors the same access. Access to such inputs on nondiscriminatory
terms will enable a new entrant to compete effectively, assuming it is
at least as efficient as the BOC and/or its section 272 affiliate. At
the same time, Congress also was sensitive to the value to the BOCs of
potential efficiencies stemming from economies of scale. Our task is to
implement section 272 in a manner that ensures that the fundamental
goal of the 1996 Act is attained--to open all telecommunications
markets to robust competition--but at the same time does not impose
requirements on the BOCs that will unfairly handicap them in their
ability to compete. The rules and policies adopted in this order seek
to preserve the carefully crafted statutory balance to the extent
possible until facilities-based alternatives to the local exchange and
exchange access services of the BOCs make those safeguards no longer
necessary.
B. Overview and Summary
Section 272 allows a BOC to engage in the manufacturing of
telecommunications equipment and CPE, the origination of certain
interLATA telecommunications services, and the provision of interLATA
information services, as long as the BOC provides these activities
through a separate affiliate. Unless extended by the Commission, the
statutory separate affiliate requirements for manufacturing and
interLATA telecommunications services expire three years after a BOC or
any BOC affiliate is authorized to provide in-region interLATA
services. The statutory interLATA information services separate
affiliate requirement expires on February 8, 2000, four years after
enactment of the 1996 Act, unless extended by the Commission.
This order implements the structural separation requirements
mandated by section 272 in a manner that is designed to prevent
improper cost allocation between the BOC and its section 272 affiliate
and discrimination by the BOC in favor of its section 272 affiliate. In
particular, we construe the section 272(b)(1) ``operate independently''
requirement to prohibit the BOC and its section 272 affiliate from
jointly owning transmission and switching facilities or the land and
buildings on which such facilities are located. Moreover, we prohibit a
BOC and its affiliates, other than the section 272 affiliate itself,
from providing operating, installation, and maintenance services
associated with the facilities owned by the section 272
[[Page 2930]]
affiliate. Similarly, a section 272 affiliate may not provide such
services associated with the BOC's facilities. These requirements
should reduce the potential for the improper allocation of costs to the
BOC that should be allocated to the section 272 affiliate. In addition,
they should ensure that a section 272 affiliate must follow the same
procedures as its competitors in order to gain access to a BOC's
facilities. Consistent with these requirements and those established
pursuant to sections 272(b)(5) and 272(c)(1), however, a section 272
affiliate may negotiate with an affiliated BOC on an arm's length basis
to obtain transmission and switching facilities, to arrange for
collocation of facilities, and to provide or obtain services other than
those expressly prohibited herein.
The structural separation requirements of section 272, in
conjunction with the affirmative nondiscrimination obligations imposed
by that section, also are intended to address concerns that the BOCs
could potentially use local exchange and exchange access facilities to
discriminate against competitors in order to gain an anticompetitive
advantage for their affiliates that engage in competitive activities.
We interpret section 272(c)(1) as imposing a flat prohibition against
discrimination more stringent than the bar on ``unjust and
unreasonable'' discrimination contained in section 202 of the Act. In
short, the BOCs must treat all other entities in the same manner in
which they treat their section 272 affiliates. We conclude that a BOC
may not discriminate in favor of its section 272 affiliate by: (1)
Providing exchange access services to competing interLATA service
providers at a higher rate than the rate offered to its section 272
affiliate; (2) providing a lower quality service to competing interLATA
service providers than the service it provides to its section 272
affiliate at a given price; (3) giving preference to its affiliate's
equipment in the procurement process; or (4) failing to provide advance
information about network changes to its competitors. We seek comment
in a Further Notice of Proposed Rulemaking on specific disclosure
requirements to implement section 272(e)(1).
In this order, we also seek to ensure that BOC section 272
affiliates have the same opportunity to compete for customers as other
long distance service providers. The joint marketing rules we have
established limit the ability of the largest interexchange carriers to
market jointly their interLATA service with resold BOC local exchange
service, until the BOC receives in-region, interLATA authority under
section 271 or until 36 months after enactment of the 1996 Act. Once
the BOC receives interLATA authority, the restrictions on interexchange
carrier joint marketing expire, and the interexchange carriers and the
BOCs and their section 272 affiliates may engage in the same types of
marketing activities.
In addition, we clarify that the Communications Act allows a
section 272 affiliate to purchase unbundled elements pursuant to
section 251(c)(3) and telecommunications services at wholesale rates
under section 251(c)(4). Thus, the section 272 affiliate may provide
integrated services in the same manner as other competitors. Such an
approach is consistent with the objectives of the 1996 Act, which are
to give service providers the freedom to develop a wide array of
service packages and allow consumers to select what best suits their
needs. We note, however, that the BOC may not transfer local exchange
and exchange access facilities and capabilities to the section 272
affiliate, or another affiliate, in order to evade regulatory
requirements.
We recognize that no regulatory scheme can completely prevent or
deter discrimination, particularly in its more subtle forms. In this
order, we shift the burden of production to the BOCs in the context of
section 271(d)(6) enforcement proceedings in order to alleviate the
burden on the complainant and facilitate the detection of
anticompetitive behavior. Because the BOC is likely to be in sole
possession of most of the relevant information necessary to establish
the complainant's case, shifting the burden is the most efficient way
of resolving complaints alleging violations of the conditions of in-
region interLATA entry under section 271(d)(3). The goal of this
proceeding and others is to establish a regulatory framework that
enables service providers to enter each other's markets and compete on
an equal footing by not allowing one service provider to game
regulatory requirements in such a way as to hinder competition.
II. Scope of Commission Authority
A. Rulemaking Authority
1. Background
In the NPRM, we addressed the scope of the Commission's authority,
pursuant to sections 271 and 272, over interLATA services, interLATA
information services and manufacturing activities. Although we did not
seek comment on whether the Commission has authority to adopt rules
implementing section 272, several commenters addressed this issue.
2. Discussion
We reject as unfounded the assertion that the Commission lacks
authority to adopt regulations implementing section 272. Sections 4(i),
201(b), and 303(r) of the Act authorize the Commission to adopt any
rules it deems necessary or appropriate in order to carry out its
responsibilities under the Act, so long as those rules are not
otherwise inconsistent with the Act. Nothing in section 272 bars the
Commission from exercising the rulemaking authority granted by these
sections of the Act to clarify and implement the requirements of
section 272. Moreover, courts repeatedly have held that the
Commission's general rulemaking authority is ``expansive'' rather than
limited. In addition, as AT&T notes, it is well-established that an
agency has the authority to adopt rules to administer congressionally
mandated requirements. Contrary to those parties that argue that
section 272 is self-executing, we find that Congress enacted in section
272 broad principles that require interpretation and implementation in
order to ensure an efficient, orderly, and uniform regime governing BOC
entry into in-region interLATA telecommunications and other markets
covered by section 272. In the NPRM, we identified areas of ambiguity
in the requirements of section 272 with the specific goal of clarifying
and implementing Congress' intent in that provision. That remains our
goal in this Order. Due to the importance of the introduction of
competition to the local exchange market, we believe this Order to be
both important and necessary to protect BOC customers and new entrants.
Further, we agree with PacTel that it serves the interests of justice
for us to clarify in advance the section 272 requirements so that BOCs
and other parties may be advised of what is required to meet the
condition for 271 authorization that in-region interLATA services be
provided in compliance with section 272.
We are not persuaded by the argument that the removal of the Senate
bill's provision regarding implementing regulations from the 1996 Act
indicates Congress' intent that section 272 be self-executing. Parties
advancing this argument rely on a rule of statutory construction
providing that, when a provision in a prior draft is altered in the
final legislation, Congress intended a change from the prior version.
The courts have rejected this rule of statutory construction, however,
when changes from one draft to another are not explained. In this
instance, the only statement from Congress regarding the
[[Page 2931]]
meaning of the omission of the Senate provision appears in the Joint
Explanatory Statement. According to that Statement, all differences
between the Senate Bill, the House Amendment, and the substitute
reached in conference are noted therein ``except for clerical
corrections, conforming changes made necessary by agreements reached by
the conferees, and minor drafting and clerical changes.'' Because the
Joint Explanatory Statement did not address the removal of the Senate
bill provision, the logical inference is that Congress regarded the
change as an inconsequential modification, rather than a significant
alteration. Moreover, it seems implausible that, in enacting the final
version of section 272, Congress intended a radical alteration of the
Commission's general rulemaking authority. We therefore conclude that
elimination of the proposed provision was a nonsubstantive change.
Based on the foregoing, we find, pursuant to the general rulemaking
authority vested in the Commission by sections 4(i), 201(b), and 303(r)
of the Act, and consistent with fundamental principles of
administrative law, that the Commission has the requisite authority to
promulgate rules implementing section 272 of the Act.
B. Scope of Commission's Authority Regarding InterLATA Services
1. Background
In the NPRM, we tentatively concluded that the Commission's
authority under sections 271 and 272 applies to intrastate and
interstate interLATA services provided by BOCs or their affiliates. We
based this tentative conclusion in part on our analysis that Congress
intended sections 271 and 272 to replace the pre-Act restrictions on
the BOCs contained in the MFJ, which barred their provision of both
intrastate and interstate interLATA services. We also observed that the
interLATA/intraLATA distinction appears to some extent to have
supplanted the traditional interstate/intrastate distinction for
purposes of sections 271 and 272. We further noted that reading
sections 271 and 272 as applying to all interLATA services fits well
with the structure of the statute as a whole, and that reading the
sections as limited to interstate services would lead to implausible
results. We also indicated that we do not believe that section 2(b) of
the Act precludes the conclusion that our authority under sections 271
and 272 applies to intrastate as well as interstate interLATA services.
Finally, we asked parties that disagreed with the foregoing analysis to
comment on the extent to which the Commission may have authority to
preempt state regulation with respect to some or all of the non-
accounting matters addressed by sections 271 and 272.
2. Discussion
For the reasons set forth below, we conclude that sections 271 and
272, and the Commission's authority thereunder, apply to intrastate as
well as interstate interLATA services provided by the BOCs or their
affiliates. We base this conclusion on the scope of the pre-1996 Act
MFJ restrictions on the BOCs' provision of interLATA services, as well
as on the plain language of sections 271 and 272, and the requirements
of those sections. In addition, we find that section 2(b) does not bar
the Commission from establishing regulations to clarify and implement
the requirements of section 272 that apply to intrastate interLATA
services and other intrastate matters that are within the scope of
section 272. We hold, therefore, that the rules we establish to
implement section 272 are binding on the states, and the states may not
impose regulations with respect to BOC provision of intrastate
interLATA service that are inconsistent with section 272 and the
Commission's rules under section 272. We emphasize, however, that the
scope of the Commission's authority under sections 271 and 272 extends
only to matters covered by those sections. Those sections do not alter
the jurisdictional division of authority with respect to matters
falling outside their scope. For example, rates charged to end users
for intrastate interLATA service have traditionally been subject to
state authority, and will continue to be.
We stated in the NPRM, and several parties agree, that section
601(a) of the 1996 Act indicates that Congress intended the provisions
of the Act to supplant the MFJ. That section provides:
Any conduct or activity that was, before the date of enactment
of this Act, subject to any restriction or obligation imposed by the
[MFJ] shall, on and after such date, be subject to the restrictions
and obligations imposed by the Communications Act of 1934 as amended
by this Act and shall not be subject to the restrictions and the
obligations imposed by [the MFJ].
No party challenges the fact that the MFJ generally prohibited the
BOCs and their affiliates from providing any interLATA services--
interstate or intrastate. Moreover, no party challenges the fact that
the term ``interLATA services'' as used in the MFJ referred to both
intrastate and interstate services.
Similarly, with respect to the term ``interLATA services'' as used
in sections 271 and 272, the DOJ, AT&T, and BellSouth maintain that,
because the Act defines the term ``interLATA'' to include intrastate
services, references in sections 271 and 272 to interLATA services
apply to both intrastate and interstate services. We agree.
The Act defines ``interLATA service'' as ``telecommunications
between a point in a local access and transport area and a point
located outside such area.'' The Act further defines the term ``LATA''
as ``a contiguous geographic area * * * established before the date of
enactment of the [1996 Act] by a Bell operating company such that no
exchange area includes points within more than 1 metropolitan
statistical area, consolidated metropolitan statistical area, or State,
except as expressly permitted under the [MFJ]'' or subsequently
modified with approval of the Commission. This definition expressly
recognizes that a LATA may comprise an area, such as a metropolitan
statistical area, that is smaller than a state. Indeed, the DOJ notes
that most LATAs established by the MFJ consist of only parts of
individual states; only nine LATAs out of a total of 158 encompass an
entire state. Thus, by defining an interLATA service as
telecommunications from a point inside a LATA to a point outside a
LATA, the Act expressly recognizes that interLATA services may include
telecommunications between two LATAs within a single state.
Accordingly, we find that the term ``interLATA services,'' as used in
sections 271 and 272, expressly refers to both intrastate and
interstate services.
Although the term ``interLATA services'' as used in the MFJ and in
sections 271 and 272 refers to both interstate and intrastate interLATA
services, the New York Commission and others assert that, when Congress
transferred responsibility for enforcing the prohibition on the BOCs'
provision of interLATA services from the U.S. District Court to the
Commission, it intended to limit our authority only to interstate
interLATA services. To the contrary, we find that reading sections 271
and 272 as granting the Commission authority over intrastate as well as
interstate interLATA services is consistent with, and indeed necessary
to effectuate, Congress' intent that sections 271 and 272 replace the
restrictions of the MFJ with respect to BOC provision of interLATA
services.
The jurisdictional limitation that the New York Commission and
others seek
[[Page 2932]]
to read into sections 271 and 272 would lead to implausible results.
Specifically, under that statutory interpretation, the BOCs would have
been permitted to provide in-region, intrastate, interLATA services
upon enactment, without complying with the section 271 entry
requirements or the section 272 safeguards, and subject only to any
existing, generally applicable state rules on interexchange entry. Any
such rules, presumably, would not have been specifically directed at
BOC entry, because of the long-standing MFJ prohibition on entry.
Because concerns about BOC control of bottleneck facilities needed for
the provision of in-region interLATA services are applicable to both
interstate and intrastate services, it seems clear that sections 271
and 272 apply equally to the BOCs' provision of both intrastate and
interstate, in-region, interLATA services. We find no reasonable basis
for concluding that Congress intended to lift the MFJ's ban on BOC
provision of intrastate interLATA services, which constitute
approximately 30 percent of interLATA traffic, and permit the BOCs to
offer such services before satisfying the requirements of sections 271
and 272. As the DOJ notes, ``Congress could not have intended, for
example, to open up the intrastate interLATA market immediately for BOC
entry, without the carefully-devised entry requirements of Section 271,
while at the same time establishing those requirements with respect to
interstate interLATA entry. Nor could Congress have meant to defeat the
safeguards carefully imposed under Section 272 by permitting the BOCs
to engage in the behavior which Section 272 prohibits, as long as they
do it within the individual states.'' Indeed, we find it significant
that neither the states nor the BOCs have argued that such a result was
intended. In light of this analysis, we find that the Commission's
authority under sections 271 and 272 extends to both intrastate and
interstate interLATA services.
Similarly, several parties support the conclusion that our
authority to consider the applications of BOCs seeking to provide in-
region interLATA service pursuant to section 271(d) applies to both
interstate and intrastate services. None of the state representatives
and BOCs commenting on this issue claims that the Commission's
authority under section 271(d) does not apply to a BOC's provision of
intrastate interLATA services. Despite the lack of controversy on this
point, several commenters claim that rules adopted under section 272
apply only to interstate services. We believe that the requirements of
sections 271 and 272 repudiate this argument. In granting an
application under section 271(d), the Commission must determine, among
other things, that the BOC meets the requirements of section
271(d)(3)(B). Under this provision, the Commission must find that the
requested authorization ``will be carried out in accordance with the
requirements of section 272.'' In light of the Commission's authority
to approve entry into both intrastate and interstate in-region
interLATA service, pursuant to section 271, it seems logical and
necessary that the Commission's authority to impose safeguards
established by section 272, should similarly extend to both intrastate
and interstate interLATA service.
Several parties have argued that, although the MFJ restrictions on
the BOCs applied to both interstate and intrastate interLATA services,
the states retained authority to regulate a BOC's intrastate interLATA
services when such services were authorized by the MFJ court. They
assert, therefore, that, even if sections 271 and 272 apply to
intrastate services, those provisions would not divest the states of
authority over intrastate services. As we stated at the outset of this
discussion, the scope of the Commission's authority under sections 271
and 272 extends only to matters covered by those sections, i.e.,
authorization for BOC entry into in-region interLATA service and the
safeguards imposed in section 272. We do not dispute that the states
retain their authority to regulate intrastate services in other
contexts.
We further find that the requirements of sections 271 and 272
buttress our conclusions regarding the scope of the Commission's
jurisdiction. For example, we find it significant that section 271(h)
directs the Commission to address intrastate matters relating to BOC
provision of incidental interLATA services. That section states that
``[t]he Commission shall ensure that the provision of [incidental
interLATA services] by a Bell operating company or its affiliate will
not adversely affect telephone exchange service ratepayers or
competition in any telecommunications market.'' Telephone exchange
service is primarily an intrastate service. This reference to a plainly
intrastate service indicates that the scope of section 271 encompasses
intrastate matters, and thus the Commission's authority thereunder
applies to both intrastate and interstate interLATA services.
State representatives and some BOCs argue that sections 2(b) and
601(c) of the Act preserve the states' authority to adopt rules
regarding BOC provision of intrastate interLATA services. They argue
that section 2(b) bars the Commission from exercising authority under
sections 271 and 272 to establish rules applicable to intrastate
interLATA services. For the reasons set forth below, we find that
section 2(b) does not preclude us from finding that sections 271 and
272, and our authority to promulgate rules thereunder, apply to BOC
provision of intrastate interLATA services.
In Louisiana Public Service Commission v. Federal Communications
Commission, 476 U.S. 355, 377 (1986), the Supreme Court determined
that, in order to overcome section 2(b)'s limits on the Commission's
jurisdiction with respect to intrastate communications service,
Congress must either modify section 2(b) or grant the Commission
additional authority. As explained above, we find that the term
``interLATA services,'' by the Act's own definition, includes
intrastate services, and that Congress, in sections 271 and 272,
expressly granted the Commission authority over intrastate interLATA
services for purposes of those sections. Accordingly, consistent with
the Court's statement in Louisiana, we find that section 2(b) does not
limit our authority over intrastate interLATA services under sections
271 and 272.
In addition, we find that, in enacting sections 271 and 272 after
section 2(b), and squarely addressing therein the issues before us,
Congress intended for sections 271 and 272 to take precedence over any
contrary implications based on section 2(b). In construing these
provisions, we are mindful that ``it is a commonplace of statutory
construction that the specific governs the general.'' Moreover, where
amended and original sections of a statute cannot be harmonized, the
new provisions should be construed to prevail as the latest declaration
of legislative will. We find also that, in enacting the 1996 Act, there
are other instances where Congress indisputably gave the Commission
intrastate jurisdiction without amending section 2(b). For instance,
section 251(e)(1) provides that ``[t]he Commission shall have exclusive
jurisdiction over those portions of the North American Numbering Plan
that pertain to the United States.'' Section 253 directs the Commission
to preempt state regulations that prohibit the ability to provide
intrastate services. Section 276(b) directs the Commission to
``establish a per call compensation plan to ensure that payphone
service providers are fairly compensated for each and every completed
intrastate and interstate call.'' Section 276(c) provides
[[Page 2933]]
that, ``[t]o the extent that any State [payphone] requirements are
inconsistent with the Commission's regulations, the Commission's
regulations on such matters shall preempt such State requirements.''
None of these provisions is specifically excepted from section 2(b),
yet all of them explicitly give the Commission jurisdiction over
intrastate matters. Thus, we find that the lack of an explicit
exception in section 2(b) does not require us to conclude that the
Commission's jurisdiction under sections 271 and 272 is limited to
interstate services. A contrary holding would nullify several explicit
grants of authority to the Commission, noted above, and would render
substantial parts of the statute meaningless. Thus, in this instance,
we believe that the lack of an explicit exception in section 2(b) is
not dispositive of the scope of the Commission's jurisdiction.
Moreover, as stated above, with the exception of the New York
Commission, the parties challenging the Commission's authority to
preempt state regulation under sections 272 do not address the issue of
whether ``interLATA services'' are defined by the Act to include
intrastate services. The New York Commission agrees with us that it
does. These parties (including the New York Commission) also do not
challenge the proposition that Congress vested in the Commission
authority over BOC entry into all in-region interLATA services--
intrastate and interstate. We find it difficult to reconcile these
parties' silence on these issues, as well as the New York Commission's
agreement that ``interLATA services'' includes intrastate services,
with their position that section 2(b) limits the application of the
Commission's implementing rules under section 272 to interstate
interLATA services. If, as it remains undisputed in the record, the
Commission would necessarily determine, in assessing whether to allow
BOC entry into in-region interLATA services, whether a BOC's provision
of intrastate as well as interstate interLATA services complies with
section 272, we can find no basis to maintain that the Commission's
authority under sections 271 and 272 does not include authority to
apply its interpretation of section 272 to all of the interLATA
services--intrastate and interstate--at issue in the BOC's 271 in-
region interLATA services application.
NARUC and the Missouri Commission stress that earlier drafts of the
legislation would have amended section 2(b) to make an exception for
certain sections of Title II, including sections 271 and 272, but the
enacted version did not include that exception. They argue that this
change demonstrates that Congress intended that section 2(b)'s
limitations remain fully in force with regard to sections 271 and 272.
We find this argument unpersuasive.
As noted above, parties that attach significance to the omission of
the proposed amendment of section 2(b) rely on a rule of statutory
construction providing that, when a provision in a prior draft is
altered in the final legislation, Congress intended a change from the
prior version. This rule of statutory construction has been rejected,
however, when changes from one draft to another are not explained. In
this instance, the only statement from Congress regarding the meaning
of the omission of the section 2(b) amendment appears in the Joint
Explanatory Statement. According to the Joint Explanatory Statement,
all differences between the Senate Bill, the House Amendment, and the
substitute reached in conference are noted therein ``except for
clerical corrections, conforming changes made necessary by agreements
reached by the conferees, and minor drafting and clerical changes.''
Because the Joint Explanatory Statement did not address the removal of
the section 2(b) amendment from the final bill, the logical inference
is that Congress regarded the change as an inconsequential modification
rather than a significant alteration. It seems implausible that, by
enacting the final version, Congress intended a radical alteration of
the Commission's authority under sections 271 and 272, given the total
lack of legislative history to that effect. Based on the foregoing, we
conclude that elimination of the proposed amendment of section 2(b) was
a nonsubstantive change.
Moreover, even if it were appropriate to speculate as to the
meaning of the omission of the section 2(b) exception, we disagree with
the argument that the omission necessarily indicates that Congress
intended not to provide the Commission authority over intrastate
services in sections 271 and 272. We find it is equally possible that
Congress omitted the exception based on an understanding that the use
of the term interLATA in sections 271 and 272 established a clear grant
of authority over intrastate services and therefore that such an
exception was unnecessary.
We similarly are not persuaded that section 601(c) of the 1996 Act
evinces an intent by Congress to preserve states' authority over
intrastate matters. Section 601(c) of the 1996 Act provides that the
Act and its amendments ``shall not be construed to modify, impair, or
supersede Federal, State, or local law unless expressly so provided in
such Act or amendments.'' As explained above, we conclude that sections
271 and 272, which apply to interLATA services, were expressly intended
to modify federal and state law and jurisdictional authority.
For all of the reasons discussed above, we conclude that sections
271 and 272, and the Commission's authority thereunder, apply to
intrastate and interstate interLATA services provided by the BOCs or
their affiliates. We hold, therefore, that the rules we establish to
implement section 272 are binding on the states, and the states may not
impose, with respect to BOC provision of intrastate interLATA service,
requirements inconsistent with sections 271 and 272 and the
Commission's rules under those provisions. In this regard, based on
what we find is clear congressional intent that the Commission is
authorized to make determinations regarding BOC entry into interLATA
services, we reject the suggestion by the Wisconsin Commission that,
after the Commission has granted a BOC application for authority under
section 271, a state nonetheless may condition or delay BOC entry into
intrastate interLATA services.
C. Scope of Commission's Authority Regarding Manufacturing Services
In the NPRM, we tentatively concluded that the Commission's
authority under section 272 extends to all BOC manufacturing of
telecommunications equipment and CPE. Only two parties, Sprint and TIA,
commented on this issue, and both agreed with our tentative conclusion.
We adopt our tentative conclusion that our authority under section
272 extends to all BOC manufacturing of telecommunications equipment
and CPE. As we stated in the NPRM, to the extent that sections 271 and
272 address BOC manufacturing activities, we believe that the same
statutory analysis set forth above with respect to interLATA services
would apply. We see no basis for distinguishing among the various
subsections of sections 271 and 272. Even apart from that analysis,
however, we believe that the provisions concerning manufacturing
clearly apply to all manufacturing activities. Section 2(b) of the
Communications Act limits the Commission's authority over ``charges,
classifications, practices, services, facilities, or regulation for or
in connection with intrastate communications service.'' Even though,
for the reasons stated above, we find section 2(b) not to be relevant
to
[[Page 2934]]
sections 271 and 272, we find that the manufacturing activities
addressed by sections 271 and 272 are not, in any event, within the
scope of section 2(b). Alternatively, even if section 2(b) were deemed
to apply with respect to BOC manufacturing, we find that such
manufacturing activities plainly cannot be segregated into interstate
and intrastate portions. Thus, any state regulation inconsistent with
sections 271 and 272 or our implementing regulations would necessarily
thwart and impede federal policies, and should be preempted.
III. Activities Subject to Section 272 Requirements
Section 272(a) provides that a BOC (including any affiliate) that
is a LEC subject to the requirements of section 251(c) may provide
certain services only through a separate affiliate. Under section 272,
BOCs (or BOC affiliates) may engage in the following activities only
through one or more affiliates that are separate from the incumbent LEC
entity: (A) Manufacturing activities; (B) interLATA telecommunications
services that originate in-region; and (C) interLATA information
services. We discuss below both the activities subject to the section
272 separate affiliate requirements and the activities that are exempt
from these requirements.
A. General Issues
1. Definition of ``InterLATA services''
a. Background. In the NPRM, we indicated that the 1996 Act defines
``interLATA service'' as a telecommunications service. We further
stated that, where the 1996 Act draws distinctions between in-region
and out-of-region ``interLATA services,'' these distinctions do not
apply to interLATA information services.
b. Discussion. Upon consideration of the arguments raised in the
record, we modify our interpretation of the scope of the term
``interLATA service.'' Consistent with the views of the commenters that
addressed this point, we conclude that the term ``interLATA services''
encompasses both interLATA information services and interLATA
telecommunications services.
We are persuaded that the definition of ``interLATA service,''
which is ``telecommunications between a point located in a [LATA] and a
point located outside such area,'' does not limit the scope of the term
to telecommunications services because, as MFS and BellSouth point out,
information services are also provided via telecommunications.
Elsewhere in this Report and Order, we conclude that ``interLATA
information services'' must include a bundled, interLATA transmission
component. Thus, interLATA information services are provided via
interLATA telecommunications transmissions and, accordingly, fall
within the definition of ``interLATA service.'' Moreover, we believe
that it is a more natural, common-sense reading of ``interLATA
services'' to interpret it to include both telecommunications services
and information services. In addition, as MFS argues, in section
272(a)(2), Congress uses and distinguishes between ``interLATA
telecommunications services'' and ``interLATA information services,''
demonstrating that it limited the term ``interLATA services'' to
transmission services when it wished to. Further, if Congress had
intended the term ``interLATA services'' to include only interLATA
telecommunications services, its use of the term ``interLATA
telecommunications services'' in section 272(a)(2) would have been
unnecessary and redundant.
As MCI points out, interpreting the term ``interLATA services'' to
include both interLATA telecommunications and interLATA information
services means that a BOC may not provide in-region interLATA
information services until it obtains section 271 authorization. As a
practical matter, we believe that interpreting ``interLATA services''
to include interLATA information services will not alter the
application of section 271. As noted above, and discussed in greater
detail below, we conclude that the term ``interLATA information
service'' refers to an information service that incorporates as a
necessary, bundled element an interLATA telecommunications transmission
component provided to the customer for a single charge. Thus,
regardless of whether we interpret ``interLATA service'' to include
interLATA information services, a BOC would be required to obtain
section 271 authorization prior to providing, in region, the interLATA
telecommunications transmission component of an interLATA information
service.
2. Application of Section 272 Safeguards to International InterLATA
Services
In the NPRM, we tentatively concluded that Congress intended the
section 272 safeguards to apply to all domestic and international
interLATA services. All of the parties that commented on this point
supported this tentative conclusion. As noted above, the 1996 Act
defines ``interLATA services'' as ``telecommunications between a point
located in a [LATA] and a point located outside such area.'' The
definition does not distinguish between domestic and international
interLATA services. Further, international telecommunications services,
which originate in a LATA and terminate in a country other than the
United States, or vice versa, fit within the statutory definition of
interLATA services. Thus, we hereby adopt our tentative conclusion.
3. Provision of Services Through a Single Affiliate
a. Background. In the NPRM, we tentatively concluded that BOCs may
conduct all, or some combination of, manufacturing activities,
interLATA telecommunications services, and interLATA information
services through a single separate affiliate, so long as the affiliate
satisfies all statutory and regulatory requirements imposed on the
provision of each type of service. Elsewhere in the NPRM, we sought
comment on whether the 1996 Act permits us to, and if so, whether we
should, interpret or apply any of the requirements of section 272(b)
differently with respect to a BOC's provision of interLATA
telecommunications services, which are regulated under Title II, as
opposed to a BOC's engagement in manufacturing and provision of
interLATA information services, which are unregulated activities. In
addition, we sought comment on how we could impose different regulatory
requirements if a BOC provides both regulated and unregulated services
through a single affiliate.
b. Discussion. Based on the comments submitted in the record and
our analysis of the 1996 Act, we adopt our tentative conclusion that
BOCs may conduct all, or some combination, of manufacturing activities,
interLATA telecommunications services, and interLATA information
services through a single separate affiliate. Section 272(a) requires a
BOC to provide these services through ``one or more affiliates'' that
are ``separate from any operating company entity that is subject to the
requirements of section 251(c).'' We conclude that this language is
intended to allow the BOCs flexibility in structuring their provision
of competitive services, so long as those services are separated from
the BOCs' provision of any local exchange services that are subject to
the requirements of section 251(c).
We further conclude, as a policy matter, that it is not necessary
to require the BOCs to separate their manufacturing activities from
their
[[Page 2935]]
provision of interLATA telecommunications services and interLATA
information services, as suggested by VoiceTel. First, a BOC's
manufacturing activities do not entail control over bottleneck local
exchange facilities. Second, during the period that the MFJ prohibited
the BOCs from engaging in manufacturing activities, a competitive
market for these activities developed. The market for information
services is fully competitive; the market for interLATA
telecommunications services is also substantially competitive. Thus,
while a BOC may achieve certain efficiencies and economies of scope by
conducting all three categories of activity through the same section
272 affiliate, it cannot thereby increase its ability to exercise
market power in either the manufacturing, interLATA telecommunications
services, or interLATA information services markets. Further, we note
that section 273, which is the subject of a separate proceeding,
establishes additional safeguards applicable to BOC manufacturing
activities, which are intended to promote competition and prevent
discrimination. For these reasons, we conclude that BOCs may conduct
all, or some combination of, manufacturing activities, interLATA
telecommunications services, and interLATA information services through
the same section 272 affiliate.
Further, we decline to adopt different requirements pursuant to
section 272(b) for regulated and unregulated activities. The safeguards
of section 272(b) apply to any ``separate affiliate required by''
section 272(a). Thus, the section 272(b) safeguards address the BOCs'
potential to allocate costs improperly and to discriminate in favor of
their section 272 affiliates, irrespective of the activities in which
those affiliates engage.
4. Manufacturing Activities
In the NPRM, we stated that BOCs may only engage in manufacturing
activities through a separate affiliate that meets the requirements of
section 272, and noted that section 273 sets forth additional
safeguards applicable to BOC entry into manufacturing activities.
Subsequent to the closing of the record in this proceeding, the
Commission released a Notice of Proposed Rulemaking to clarify and
implement the provisions of section 273. Several parties have raised
arguments relating to the section 273 provisions on the record in this
proceeding. Because this proceeding implements the non-accounting
safeguards provisions of sections 271 and 272, arguments relating to
the specific provisions of section 273 are more appropriately addressed
in the section 273 proceeding. We note that BOCs must conduct their
manufacturing activities through a section 272 separate affiliate,
manufacture and provide telecommunications equipment and CPE in
accordance with section 273, and comply with the regulations that the
Commission promulgates to implement both sections 272 and 273.
B. Mergers/Joint Ventures of Two or More BOCs
1. Background
In the NPRM, we tentatively concluded that, pursuant to sections
271(i)(1) and 153(4)(B), if two or more of the BOCs combine their
operations through merger or acquisition, the in-region states of the
resultant entity shall include all of the in-region states of each of
the BOCs involved in the merger/acquisition. We sought comment on
whether the entry into a merger agreement or a joint venture
arrangement by two or more BOCs affects the application of the section
271 and 272 non-accounting separate affiliate and nondiscrimination
requirements to those BOCs. We further sought comment on whether
additional safeguards are required to ensure that these BOCs do not
provide the affiliates of their merger partners with an unfair
competitive advantage during the pendency of their merger agreement.
2. Discussion
We note the unanimous support among parties that commented on the
issue, and hereby affirm our tentative conclusion that, upon completion
of a merger between or among BOCs, the in-region states of the merged
entity shall include all of the in-region states of each of the BOCs
involved in the merger. We decline, however, to adopt a general rule
that would treat the regions of merging BOCs as combined prior to
completion of the merger, for the purposes of applying the section 272
separate affiliate and nondiscrimination safeguards. Section 272
requires a BOC to provide certain services (interLATA
telecommunications and information services and manufacturing
activities) through one or more separate affiliates, and establishes
nondiscrimination requirements that apply to the BOC's conduct and its
relationship with these affiliates. Section 3(1), in turn, defines an
``affiliate'' as ``a person that (directly or indirectly) owns or
controls, is owned or controlled by, or is under common ownership and
control with, another person.'' Prior to completion of a merger, the
merging BOCs are neither affiliates, nor successors or assigns, of one
another. Thus, entry into a merger agreement does not render the
section 272 safeguards applicable to a BOC's relationship with its
merger partner, nor to its relationship with its merger partner's
affiliates. Moreover, treating the regions of merging BOCs as combined
from the inception of a merger agreement might create considerable
problems in applying the section 271 and 272 safeguards. For example,
if BOC A were offering out-of-region interLATA services in BOC B's
region at the time the two entered a merger agreement, BOC A might be
required immediately to cease the provision of such services until it
had received approval under section 271 to offer in-region interLATA
services. That result would be both disruptive and confusing to
customers.
We further decline to adopt any additional regulations applicable
to pending mergers or joint ventures between or among BOCs. We are
persuaded that adequate protections against discriminatory and
anticompetitive conduct already apply to mergers, acquisitions, and
joint ventures among BOCs. As the DOJ and other commenters point out,
these protections include the nondiscrimination obligations of sections
201 and 202 of the Communications Act, which, among other things,
prevent the BOCs from unjustly or unreasonably discriminating in
providing facilities or services to interexchange carriers, and would
thus govern a BOC's relationship with the long-distance affiliate of
its merger partner. Continuing enforcement of the MFJ equal access
requirements and pre-existing Commission-prescribed interconnection
requirements, pursuant to section 251(g), also safeguards against BOC
discrimination in favor of the affiliates of their merger partners.
Further, as USTA notes, BOCs will be subject to the pre-merger review
process under the Hart-Scott-Rodino amendment to the Clayton Act. See
15 U.S.C. Sec. 18a. Moreover, as MCI suggests, we retain our authority
to impose additional safeguards in the context of particular mergers,
should circumstances demonstrate the need for such safeguards, on a
case-by-case basis.
C. Previously Authorized Activities
1. Background
In the NPRM, we sought comment on the meaning of and interaction
between sections 271(f), 272(a)(2)(B)(iii), and 272(h). Specifically,
we sought comment on whether, subject to the
[[Page 2936]]
exception established by section 272(a)(2)(B)(iii), section 272(h)
requires the BOCs to come into compliance with the section 272
safeguards with respect to all of the activities listed in section
272(a)(2) (A)-(C) that they were providing on the date of enactment of
the 1996 Act. We observed that section 272(a)(2)(B)(iii) establishes an
exemption for ``previously authorized activities described in section
271(f)'' from the separate affiliate requirement for ``origination of
interLATA telecommunications services.'' We sought comment on whether
Congress intended, through section 272(h), to require BOCs engaged in
previously authorized manufacturing activities and interLATA
information services to come into compliance with the section 272
requirements.
2. Discussion
Based on the record before us and our analysis of the relevant
statutory terms, we conclude that BOCs may continue to provide all
previously authorized services without interruption, pursuant to the
terms and conditions set forth in the MFJ court orders that authorize
those services. Previously authorized interLATA information services
and manufacturing activities must come into compliance with the section
272 separate affiliate requirements within one year. Previously
authorized interLATA telecommunications services, which do not have to
comply with the section 272 separate affiliate requirements, must
continue to be provided pursuant to the terms and conditions of the MFJ
court orders that authorize them.
Section 271(f). As a general matter, section 271 addresses the
timing and requirements for BOC entry into the interLATA market.
Section 271(f) specifies that neither section 271(a) nor section 273
``prohibits'' a BOC or its affiliate from engaging, at any time after
enactment, in any activity previously authorized by an order of the MFJ
court, subject to the terms and conditions imposed by the court. We
conclude that the purpose of Section 271(f) is to preserve the BOCs'
ability to engage in previously authorized activities, without first
having to obtain section 271 authorization from the Commission. Section
271(f) by its terms does not address, and thus does not preclude,
application of the section 272 separate affiliate requirements to
previously authorized services. Except for specifying that BOCs may
continue to provide previously authorized services pursuant to the
terms and conditions contained within the MFJ court order authorizing
the service, section 271(f) does not address the manner in which BOCs
must structure their provision of previously authorized services, or
whether they must provide these services through a separate affiliate.
These issues are addressed in section 272.
Section 272(a)(2)(B)(iii). Section 272 sets forth separate
affiliate and nondiscrimination requirements with which the BOC must
comply in order to provide certain services. Separate subsections of
section 272(a)(2) establish separate affiliate requirements for BOC
provision of manufacturing activities (section 272(a)(2)(A)),
origination of interLATA telecommunications services (section
272(a)(2)(B)), and interLATA information services (section
272(a)(2)(C)). Section 272(a)(2)(B)(iii) exempts ``previously
authorized activities described in section 271(f)'' from the separate
affiliate requirement for ``origination of interLATA telecommunications
services.'' We conclude that, because this exemption appears in section
272(a)(2)(B), it applies by its terms only to previously authorized
activities that involve the origination of interLATA telecommunications
services.
Previously authorized activities described in section 271(f) may
include both manufacturing activities and interLATA information
services. Neither of these types of previously authorized activities,
however, is exempt from the section 272 separate affiliate
requirements, because neither section 272(a)(2)(A) nor section
272(a)(2)(C) contains an exemption for previously authorized activities
similar to the explicit exemption set forth in section
272(a)(2)(B)(iii). We reject Ameritech's argument that section
272(a)(2)(B)(iii) exempts previously authorized interLATA information
services from the section 272 separate affiliate requirements, because
section 272(a)(2)(B) applies only to origination of interLATA
telecommunications services. Section 272(a)(2)(C) establishes the
separate affiliate requirement for BOC provision of interLATA
information services; there are exceptions to this requirement for
electronic publishing services and alarm monitoring services, but there
is no exception specified for previously authorized activities.
Section 272(h). As the majority of commenters agree, section 272(h)
establishes a one-year transition period for BOCs to comply with the
separate affiliate requirements of section 272 for all services they
were providing on the date of enactment of the 1996 Act that are not
exempt from these requirements. Because we concluded in the preceding
paragraphs that previously authorized interLATA information services
and manufacturing activities are not exempt from the section 272
separate affiliate requirements, BOCs providing these services must
comply with those requirements within one year of enactment. We reject
PacTel's argument that section 272(h) gives the BOCs one year to comply
with the various requirements imposed by section 272 on their provision
of exchange and exchange access services, because we find these
requirements are effective immediately upon a BOC's entry into the in-
region interLATA market pursuant to section 271.
Differential Treatment. We conclude that, with respect to requiring
compliance with the section 272 separate affiliate requirements,
Congress intended to treat previously authorized interLATA
telecommunications services differently from previously authorized
interLATA information services and manufacturing activities. Certain of
the BOCs argue that such a distinction is justified because it would be
more difficult to provide previously authorized interLATA
telecommunications services on a separated basis. Ameritech, however,
argues that certain previously authorized interLATA information
services, such as TDDS, would be equally difficult to provide on a
separated basis. Section 10 of the Communications Act requires us to
forbear from applying any provision of the Act that is not necessary to
ensure just and reasonable charges and practices in the
telecommunications marketplace, or to protect consumers, if we find
that such forbearance would promote competition and is consistent with
the public interest. Thus, to the extent a BOC demonstrates, with
respect to a particular previously authorized interLATA information
service, that forbearance from the section 272 separate affiliate
requirement fully satisfies the section 10 test, we must forbear from
requiring the BOC to provide that service through a section 272
affiliate.
D. Out-of-Region InterLATA Information Services
1. Background
In the NPRM, we tentatively concluded that the BOCs must provide
interLATA information services through a separate affiliate, regardless
of whether these services are provided in-region or out-of-region. We
observed that section 272(a)(2)(B)(ii) exempts out-of-region interLATA
services from the
[[Page 2937]]
separate affiliate requirement for ``origination of interLATA
telecommunications services,'' but there is no analogous exemption from
the section 272(a)(2)(C) separate affiliate required for interLATA
information services (other than electronic publishing and alarm
monitoring services).
2. Discussion
Based on the record before us and our own statutory analysis, we
hereby adopt our tentative conclusion that BOCs must provide out-of-
region interLATA information services through a section 272 separate
affiliate. Although we concluded above that ``interLATA information
services'' are included within the term ``interLATA services'' as used
in section 271(b), that determination does not alter the conclusion
that BOCs must provide out-of-region interLATA information services
through a section 272 separate affiliate. Section 271(b)(2) permits a
BOC or its affiliate to provide interLATA services, including interLATA
information services, that originate outside its in-region states,
immediately upon enactment of the 1996 Act. Section 271, however, does
not address whether such services must be provided through a separate
affiliate; that issue is addressed in section 272(a).
Section 272(a)(2)(B) requires a separate affiliate for the
``origination of interLATA telecommunications services,'' but exempts
from that requirement ``out-of-region services described in section
271(b)(2).'' We conclude that the exception created by section
272(a)(2)(B)(ii) extends only to out-of-region interLATA services that
are telecommunications services. Section 272(a)(2)(C) requires a
separate affiliate for ``interLATA information services,'' and exempts
electronic publishing and alarm monitoring services from that
requirement. There are no other exceptions to the requirements of
section 272(a)(2)(C). As several commenters noted, section 272(a)(2)(B)
explicitly excludes out-of-region services, but section 272(a)(2)(C)
does not. We agree with MCI that the explicit exclusion of out-of-
region interLATA telecommunications services in one subsection of the
statute, and the absence of such an express exclusion of out-of-region
interLATA information services in another subsection of the same
provision, suggests that Congress intended not to exclude the latter
from the separate affiliate requirement. Therefore, we find that out-
of-region interLATA information services are not excluded from the
separate affiliate requirement for interLATA information services.
BellSouth has argued that requiring BOCs to provide out-of-region
interLATA information services through a section 272 separate affiliate
violates the First Amendment. As noted above, we find that this result
is required by the statute. Although the courts have ultimate authority
to determine the constitutionality of this and other statutes, we find
it appropriate to state that we find BellSouth's argument to be without
merit. BellSouth bases its argument on an assertion that as ``content-
related'' services, information services are commercial speech entitled
to First Amendment protections. We conclude, first, that with respect
to certain information services, a BOC neither provides, nor exercises
editorial discretion over, the content of the information associated
with those particular services, and therefore provision of those
information services does not constitute speech subject to First
Amendment protections. Second, to the extent that BOC provision of
other interLATA information services constitutes speech for First
Amendment purposes, the section 272 separate affiliate requirement
neither prohibits the BOCs from providing such services, nor places any
restrictions on the content of the information the BOCs may provide.
Instead, the section 272 separate affiliate requirement is a content-
neutral restriction on the manner in which BOCs may provide interLATA
information services, intended by Congress to protect against improper
cost allocation and discrimination concerns. Thus, we conclude that the
separate affiliate requirement imposed by section 272 of the
Communications Act on BOC provision of interLATA information services
does not violate the First Amendment.
E. Incidental InterLATA Services
1. Background
In the NPRM, we sought comment on whether we should establish any
non-accounting structural or nonstructural safeguards for BOC provision
of the ``incidental interLATA services'' set forth in section 271(g),
in light of section 271(h). Section 271(h) directs the Commission to
ensure that the provision of incidental interLATA services ``will not
adversely affect telephone exchange service ratepayers or competition
in any telecommunications market,'' and states that the provisions of
section 271(g) ``are intended to be narrowly construed.'' We also
sought comment regarding the interplay between section 271(h) and
section 254(k), which prohibits telecommunications carriers from
``us[ing] services that are not competitive to subsidize services that
are subject to competition.''
2. Discussion
Section 271(b)(3) permits the BOCs to provide incidental interLATA
services described in section 271(g) immediately after the date of
enactment of the 1996 Act. Thus, unlike other in-region interLATA
services, BOCs may provide incidental interLATA services originating in
their own in-region states without receiving prior authorization from
the Commission pursuant to section 271(d). Neither section 271(b) nor
section 271(g) addresses whether BOCs must provide incidental interLATA
services through a section 272 separate affiliate; this issue is
addressed by section 272 itself.
Scope of the section 272(a)(2)(B)(i) exemption. Section
272(a)(2)(B)(i) sets forth an exception to the separate affiliate
requirement imposed on ``origination of interLATA telecommunications
services.'' Congress specifically limited this exception to the
``incidental interLATA services described in paragraphs (1), (2), (3),
(5), and (6) of section 271(g).'' Consistent with the analysis set
forth in the two immediately preceding sections of this Order, we
conclude that the section 272(a)(2)(B)(i) exception applies, by its
terms, to the origination of incidental interLATA services that are
telecommunications services.
For the most part, the incidental interLATA services enumerated
within the section 272(a)(2)(B)(i) exception are telecommunications
services. (Congress deliberately excluded remote data storage and
retrieval services that fall within section 271(g)(4) from the section
272(a)(2)(B)(i) exception.) Although the incidental interLATA services
set forth in sections 271(g)(1)(A), (B), and (C) include audio, video,
and other programming services that do not appear to be solely
telecommunications services, section 271(h) specifies that these
incidental interLATA services ``are limited to those interLATA
transmissions incidental to the provision by a [BOC] or its affiliate
of video, audio, and other programming services that the company or its
affiliate is engaged in providing to the public.'' We therefore
conclude that, pursuant to section 272(a)(2)(B)(i), BOCs are not
required to provide the interLATA telecommunications transmission
incidental to provision of the programming services listed in sections
271(g)(1)(A), (B), and (C) through a
[[Page 2938]]
section 272 separate affiliate. Moreover, alarm monitoring services,
listed as incidental interLATA services under section 271(g)(1)(D), are
explicitly excepted from the section 272 separate affiliate
requirements under section 272(a)(2)(C).
In addition, section 271(g)(2), which designates as ``incidental
interLATA services'' the interLATA provision of ``two-way interactive
video services or Internet services over dedicated facilities to or for
elementary and secondary schools as defined in section 254(h)(5),'' may
encompass services that are not solely telecommunications services. The
statute does not classify educational interactive interLATA services as
either telecommunications services or information services. We
conclude, however, that the explicit inclusion of section 271(g)(2) in
the list of services subject to the section 272(a)(2)(B)(i) exception
exempts educational interactive interLATA services from the section 272
separate affiliate requirements. This interpretation is consistent with
Congress' clear intent, expressed in other provisions of the 1996 Act,
to promote the provision of advanced telecommunications and information
services, of which educational interactive interLATA services are
examples, to eligible public and non-profit elementary and secondary
schools. The inclusion of educational interactive interLATA services
among the list of ``incidental interLATA services'' that BOCs could
provide immediately upon enactment of the 1996 Act without prior
Commission authorization promotes the congressional goal of rapidly
deploying advanced telecommunications by permitting the BOCs to offer
such services. Thus, we further find it reasonable to conclude that
Congress did not wish to impose a significant regulatory barrier, in
the form of a separate affiliate requirement, on BOC provision of these
services.
Additional regulation of incidental interLATA services. We decline
to impose the section 272 separate affiliate requirements on incidental
interLATA services that, as discussed above, are exempt from those
requirements under section 272(a)(2)(B)(i). Section 272 itself does not
require the BOCs to provide these services through a separate
affiliate. Further, we conclude as a legal matter that neither section
271(h) nor section 254(k) requires us to impose the section 272
separate affiliate requirements on exempt incidental interLATA services
in order to protect telephone exchange ratepayers or competition in the
telecommunications market. Moreover, we decline to do so as a matter of
policy, because we see no present need to impose structural separation
requirements beyond those mandated by Congress in order to protect
against improper cost allocation and access discrimination. We likewise
decline to impose any other structural separation requirements on BOC
provision of these services, as suggested by certain commenters. This
decision comports with the Commission's prior determinations not to
impose structural separation requirements in contexts in which it found
that nonstructural safeguards provide sufficient protection against
improper cost allocation and access discrimination (e.g., BOC provision
of enhanced services).
Under our rules, the BOCs are subject to existing nonstructural
safeguards in their provision of incidental interLATA services, and we
conclude that these safeguards are sufficient to protect telephone
exchange ratepayers and competition in telecommunications markets, in
accordance with section 271(h). For accounting purposes, incidental
interLATA services will be treated as non-regulated services under our
Part 32 affiliate transaction rules and Part 64 cost allocation rules,
and accordingly costs associated with provision of those services may
not be allocated to regulated services accounts. Further, at the
federal level and in many states, the BOCs are subject to price cap
regulation, which reduces their incentive to engage in strategic cost-
shifting behavior. The BOCs are also subject to the section 251
interconnection and unbundling requirements, which compel them to make
available to other telecommunications carriers the local network
elements and local exchange facilities that such carriers may require
to provide services comparable to the incidental interLATA services
listed in section 271(g). Further, the BOCs are subject to network
disclosure requirements imposed by section 251(c)(5), which require
them to give timely information about network changes to their
affiliates' competitors.
Given the complement of nonstructural safeguards to which the BOCs
are subject in their provision of incidental interLATA services, we
find that the record in this proceeding does not justify the imposition
of additional nonstructural safeguards on these services. We decline to
extend to the integrated provision of incidental interLATA services any
of the section 272(c) and 272(e) nondiscrimination requirements that
depend on the existence of a section 272 affiliate, as suggested by
AT&T. Further, we decline to adopt any additional unbundling
requirements applicable to BOC provision of incidental interLATA
services, as suggested by MCI. We agree with BellSouth that it would be
inconsistent with the 1996 Act for us to require the BOCs to unbundle
and make available interLATA transmission services that they are not
authorized to provide except as components of an incidental interLATA
service (i.e., without obtaining prior authorization under section 271
or complying with the section 272 separation requirements). For the
foregoing reasons, we decline to adopt any additional structural or
nonstructural safeguards applicable specifically to BOC provision of
incidental interLATA services.
F. InterLATA Information Services
1. Relationship Between Enhanced Services and Information Services
a. Background. In the NPRM, we sought comment on the services that
are included in the statutory definition of ``information service,''
and whether that term encompasses all activities that the Commission
classifies as ``enhanced services.'' We noted that the statutory
definition of ``information service'' is based on the definition used
in the MFJ, and that prior to passage of the 1996 Act, neither the
Commission nor the MFJ court resolved the question of whether the
definition of enhanced services under the Commission's rules was
synonymous with the definition of information services under the MFJ.
b. Discussion. We conclude that all of the services that the
Commission has previously considered to be ``enhanced services'' are
``information services.'' We are persuaded by the arguments advanced by
ITAA, CIX, and others, that the differently-worded definitions of
``information services'' and ``enhanced services'' can and should be
interpreted to extend to the same functions. We believe that
interpreting ``information services'' to include all ``enhanced
services'' provides a measure of regulatory stability for
telecommunications carriers and ISPs alike, by preserving the
definitional scheme under which the Commission exempted certain
services from Title II regulation. We agree with ISPs that regulatory
certainty and continuity benefits both large and small service
providers. In sum, we find no basis to conclude that by using the MFJ
term ``information services'' Congress intended a significant departure
from the Commission's usage of ``enhanced services.''
[[Page 2939]]
We also find, however, that the term ``information services''
includes services that are not classified as ``enhanced services''
under the Commission's current rules. Stated differently, we conclude
that, while all enhanced services are information services, not all
information services are enhanced services. As noted by U S West,
``enhanced services'' under Commission precedent are limited to
services ``offered over common carrier transmission facilities used in
interstate communications,'' whereas ``information services'' may be
provided, more broadly, ``via telecommunications.'' Further, we agree
with BellSouth and AT&T that live operator telemessaging services that
do not involve ``computer processing applications'' are information
services, even though they do not fall within the definition of
``enhanced services.''
We further conclude that, subject to the exceptions discussed
below, protocol processing services constitute information services
under the 1996 Act. We reject Bell Atlantic's argument that
``information services'' only refers to services that transform or
process the content of information transmitted by an end-user, because
we agree with Sprint that the statutory definition makes no reference
to the term ``content,'' but requires only that an information service
transform or process ``information.'' We also agree with ITI and ITAA
that an end-to-end protocol conversion service that enables an end-user
to send information into a network in one protocol and have it exit the
network in a different protocol clearly ``transforms'' user
information. We further find that other types of protocol processing
services that interpret and react to protocol information associated
with the transmission of end-user content clearly ``process'' such
information. Therefore, we conclude that both protocol conversion and
protocol processing services are information services under the 1996
Act.
This interpretation is consistent with the Commission's existing
practice of treating end-to-end protocol processing services as
enhanced services. We find no reason to depart from this practice,
particularly in light of Congress' deregulatory intent in enacting the
1996 Act. Treating protocol processing services as telecommunications
services might make them subject to Title II regulation. Because the
market for protocol processing services is highly competitive, such
regulation is unnecessary to promote competition, and would likely
result in a significant burden to small independent ISPs that provide
protocol processing services. Thus, policy considerations support our
conclusion that end-to-end protocol processing services are information
services.
We note that, under Computer II and Computer III, we have treated
three categories of protocol processing services as basic services,
rather than enhanced services, because they result in no net protocol
conversion to the end-user. These categories include protocol
processing: (1) involving communications between an end-user and the
network itself (e.g., for initiation, routing, and termination of
calls) rather than between or among users; (2) in connection with the
introduction of a new basic network technology (which requires protocol
conversion to maintain compatibility with existing CPE); and (3)
involving internetworking (conversions taking place solely within the
carrier's network to facilitate provision of a basic network service,
that result in no net conversion to the end-user). We agree with PacTel
that analogous treatment should be extended to these categories of ``no
net'' protocol processing services under the statutory regime. Because
``no net'' protocol processing services are information service
capabilities used ``for the management, control, or operation of a
telecommunications system or the management of a telecommunications
service,'' they are excepted from the statutory definition of
information service. Thus, ``no net'' protocol conversion services
constitute telecommunications services, rather than information
services, under the 1996 Act.
We further find, as suggested by PacTel, that services that the
Commission has classified as ``adjunct-to-basic'' should be classified
as telecommunications services, rather than information services. In
the NATA Centrex order, the Commission held that the enhanced services
definition did not encompass adjunct-to-basic services. See 101 FCC 2d
349, 359-361, Paras. 24-28 (1985). Although the latter services may
fall within the literal reading of the enhanced service definition,
they facilitate establishment of a basic transmission path over which a
telephone call may be completed, without altering the fundamental
character of the telephone service. Similarly, we conclude that
``adjunct-to-basic'' services are also covered by the
``telecommunications management exception'' to the statutory definition
of information services, and therefore are treated as
telecommunications services under the 1996 Act.
2. Distinguishing InterLATA Information Services Subject to Section 272
From IntraLATA Information Services
a. Background. In the NPRM, we sought comment on how to distinguish
between interLATA information services, which are subject to the
section 272 separate affiliate requirements, and intraLATA information
services, which are not. In particular, we asked whether an information
service should be considered an interLATA service only when the service
actually involves an interLATA telecommunications transmission
component, or, alternatively, when it potentially involves interLATA
telecommunications transmissions (e.g., the service can be accessed
across LATA boundaries). We further sought comment regarding how the
manner in which a BOC structures its provision of an information
service may affect whether the service is classified as interLATA.
We also invited comment on whether a particular service for which a
BOC had applied for or received an MFJ waiver should presumptively be
treated as an interLATA information service subject to the separate
affiliate requirements of section 272. In addition, we sought comment
on whether we should presume that services provided by BOCs pursuant to
CEI plans approved by the Commission prior to the enactment of the 1996
Act are intraLATA information services.
b. Discussion. InterLATA Transmission/Resale. We conclude that, as
used in section 272, the term ``interLATA information service'' refers
to an information service that incorporates as a necessary, bundled
element an interLATA telecommunications transmission component,
provided to the customer for a single charge. We find, as noted in the
comments of AT&T, MCI, and the BOCs, that this definition of interLATA
information service conforms to the MFJ precedent in this area. See
United States v. Western Electric, 907 F.2d 160, 163 (D.C. Cir. 1990).
We further conclude that a BOC provides an interLATA information
service when it provides the interLATA telecommunications transmission
component of the service either over its own facilities, or by
reselling the interLATA telecommunications services of an interexchange
provider. This conclusion also comports with MFJ precedent.
USTA contends that BOC provision of interLATA transmission through
resale should be permitted because it does not
[[Page 2940]]
raise improper cost allocation and discrimination concerns. This
argument, however, does not address the key issue of what is required
by the statute. As discussed above, we find that section 601(a) of the
1996 Act indicates that Congress intended the provisions of the 1996
Act to supplant the MFJ. Therefore, we conclude that the restrictions
imposed by the 1996 Act on BOC provision of interLATA services, like
the interLATA restrictions imposed under the MFJ, apply to services
provided through resale, as well as to services provided through the
BOC's own transmission facilities. Moreover, we decline to adopt
PacTel's suggestion that end-user receipt of an ``interLATA benefit''
should be the test for determining whether an information service is
interLATA. PacTel's proposed test is inconsistent with MFJ precedent
and would be very difficult to administer. Finally, we reject the
arguments raised by Sprint and MFS that we should classify all
information services as interLATA services because of the difficulties
inherent in distinguishing between interLATA and intraLATA information
services. We conclude that it is possible to distinguish between
interLATA and intraLATA information services by applying the rule
established by this Order.
InterLATA Access. We agree with AT&T and the BOCs that an
information service may not be considered interLATA merely because it
may be accessed on an interLATA basis by means independently chosen by
the customer, such as a presubscribed interexchange carrier. In
interpreting the statutory restrictions on BOC provision of interLATA
information services, we are concerned not with the manner in which an
information service is used, but rather with the components of the
service that are provided by the BOC. When a BOC is neither providing
nor reselling the interLATA transmission component of an information
service that may be accessed across LATA boundaries, the statute does
not require that service to be provided through a section 272 separate
affiliate. We reject MFS's contention that, where an interLATA
transmission service is necessary for a customer to obtain access to a
particular BOC-provided information service, that information service
should be considered interLATA, even if the necessary interLATA
transmission component is separately provided by another carrier. In
such circumstances, the BOC is not providing any interLATA services,
and therefore is not required by section 272 to provide the information
service in question through a separate affiliate.
Moreover, as the BOCs point out, if we were to determine that the
mere possibility of interLATA access was sufficient to classify an
information service as an interLATA service, that rule would render any
telecommunications service that carries traffic that originates in one
LATA and terminates in another, including local exchange service and
exchange access service, an interLATA service. Congress clearly did not
intend that result.
In addition, we agree with the BOCs that classifying information
services as interLATA solely because end-users may obtain access to the
service across LATA boundaries would represent a significant departure
from Commission precedent, as well as from MFJ precedent. BOCs are
currently providing a number of information services on an integrated
basis pursuant to the Commission's Computer III regulations, and users
may obtain access to some, if not all, of these services on an
interLATA basis. If we were to determine that these services were
interLATA services simply because end-users may obtain access across
LATA boundaries, BOCs would have to change the manner in which they are
providing many of these services, which would likely result in lost
efficiency and disruption of services to customers. We see no basis in
the statute to adopt such an interpretation, as sections 271 and 272
are intended to govern the BOCs' provision of services that they were
previously prohibited from providing under the MFJ, not services that
they were previously authorized to provide under the MFJ.
Bundling. As we concluded above, an interLATA information service
incorporates a bundled interLATA telecommunications transmission
component. When a customer obtains interLATA transmission service from
an interexchange provider that is not affiliated with a BOC, the use of
that transmission service in conjunction with an information service
provided by a BOC or its affiliate does not make the information
service a BOC interLATA service offering. A customer also may obtain an
in-region interLATA telecommunications service from a BOC section 272
affiliate that the customer uses in conjunction with an intraLATA
information service provided by that affiliate or by the BOC itself.
When such telecommunications and information services are provided,
purchased, and priced separately, we conclude that they do not
collectively constitute an interLATA information service offering by
the BOC. (We note that even when an information service and interLATA
transmission service are ostensibly separately priced, if the BOC
offers special discounts or incentives to customers that take both
services, this would constitute sufficient evidence of bundling to
render the information service an interLATA information service.) In
such a situation, the BOC would, of course, be required to provide the
in-region interLATA transmission service pursuant to section 271
authorization and the section 272 separate affiliate and
nondiscrimination requirements. The BOC could choose to provide the
separate, intraLATA information service either on an integrated basis,
in compliance with the Commission's CEI and ONA requirements, or
through a separate affiliate.
Remote Databases/Network Efficiency. BOCs may not provide interLATA
services in their own regions, either over their own facilities or
through resale, before receiving authorization from the Commission
under section 271(d). Therefore, we conclude that BOCs may not provide
interLATA information services, except for information services covered
by section 271(g)(4), in any of their in-region states prior to
obtaining section 271 authorization. Section 271(g)(4) designates as an
incidental interLATA service the interLATA provision by a BOC or its
affiliate of ``a service that permits a customer that is located in one
LATA to retrieve stored information from, or file information for
storage in, information storage facilities of such company that are
located in another LATA.'' Because BOCs were able to provide incidental
interLATA services immediately upon enactment of the 1996 Act, they may
provide interLATA information services that fall within the scope of
section 271(g)(4) without receiving section 271(d) authorization from
the Commission. Since section 271(g)(4) services are not among the
incidental interLATA services exempted from section 272 separate
affiliate requirements, however, they must be provided in compliance
with those requirements. To the extent that parties have argued in the
record that centralized data storage and retrieval services that fall
within section 271(g)(4) either are not interLATA information services,
or are not subject to the section 272 separate affiliate requirements,
we specifically reject these arguments.
We also reject the BOCs' argument that their use of interLATA
transmission, outside the control of the end-user and solely to
maximize network efficiencies, in connection with
[[Page 2941]]
the provision of an information service, does not render that
information service interLATA in nature. Whenever interLATA
transmission is a component of an information service, that service is
an interLATA information service, unless the end-user obtains that
interLATA transmission service separately, e.g., from its presubscribed
interexchange provider. To the extent that BOCs are allowed to perform
certain interLATA call processing functions associated with their
provision of telephone exchange service or exchange access service in
connection with an intraLATA information service, however, they may
continue to do so without transforming that information service into an
interLATA information service.
We also reject PacTel's claim that a BOC's use of interLATA
transmission solely for its own business convenience in providing an
information service falls within the ``telecommunications management
exception'' to ``information service.'' We disagree with PacTel's
assertion that this practice is covered by the ``technical management
exception,'' because the BOC would be providing interLATA transmission
in connection with the management of an information service, not ``the
management of a telecommunications service,'' as specified by section
3(20). Further, as noted above, we believe that the
``telecommunications management exception'' is analogous to the
Commission's classification of certain services as ``adjunct-to-
basic;'' that is, it covers services that may fit within the literal
reading of the information services definition, but that are used to
facilitate the provision of a basic telecommunications transmission
service, without altering the character of that service. In other
words, the ``technical management exception'' relates to the
classification of services as either telecommunications services or
information services; it has no bearing upon the classification of
either of these types of services as intraLATA or interLATA. As such,
the ``telecommunications management exception'' provides no safe harbor
for interLATA transmission services employed by BOCs in connection with
the provision of information services.
Presumptions Regarding Previously Authorized Information Services.
With respect to information services that the BOCs were authorized to
provide prior to passage of the 1996 Act, we conclude that as a matter
of administrative convenience it is helpful to establish several
rebuttable presumptions regarding intraLATA or interLATA
classification. Thus, we will presume that information services that
BOCs were authorized to provide pursuant to CEI plans, without MFJ
waivers, are intraLATA information services. Similarly, we will presume
that information services for which BOCs were required to obtain MFJ
waivers are interLATA information services. We conclude that these
presumptions are rebuttable, rather than conclusive, because the BOCs
have noted that, for expediency purposes, they sometimes requested and
obtained MFJ waivers in order to provide services that were not clearly
interLATA in nature. Thus, a BOC would be able to rebut the presumption
that an information service provided pursuant to an MFJ waiver is an
interLATA information service by showing that it had obtained a waiver
to provide the service on an intraLATA basis prior to 1991. Similarly,
the presumption that an information service provided pursuant to a CEI
plan is an intraLATA information service may be rebutted by a showing
that the information service incorporates a bundled, interLATA
telecommunications transmission component, as specified in this Order.
3. BOC-provided Internet Access Services
a. Background. On June 6, 1996, the Common Carrier Bureau (Bureau)
released an order approving a CEI plan filed by Bell Atlantic for the
provision of Internet Access Service. MFS had filed comments opposing
Bell Atlantic's plan, arguing, inter alia, that Bell Atlantic's
Internet access service offering is an interLATA service that Bell
Atlantic may only provide through a section 272 affiliate after
obtaining section 271 authorization from the Commission. Following
release of the Bell Atlantic CEI Plan Order, MFS filed a petition for
reconsideration of that Order, raising similar arguments. At about the
same time, Southwestern Bell Telephone Company (SWBT) filed a CEI plan
for Internet Support Services. On July 25, 1996, one week after the
Commission released the NPRM in this proceeding, MFS filed with the
Commission a petition seeking to consolidate proceedings related to the
Bell Atlantic CEI Plan Order reconsideration and the SWBT Internet
support CEI plan with the instant proceeding, on the grounds that the
three proceedings raise similar novel, policy, factual, and legal
arguments. Although the NPRM in the instant proceeding did not
specifically seek comment on the proper classification or regulatory
treatment of BOC-provided Internet services and Internet access
services under the 1996 Act, several parties discussed these matters in
their comments, in the course of addressing how we should define
``interLATA information services.''
b. Discussion. The preceding sections of this Order establish a
definition of ``interLATA information service'' that should assist the
BOCs and other interested parties in determining the types of
information services that the BOCs are statutorily-required to provide
through section 272 affiliates. If a BOC's provision of an Internet or
Internet access service (or for that matter, any information service)
incorporates a bundled, in-region, interLATA transmission component
provided by the BOC over its own facilities or through resale, that
service may only be provided through a section 272 affiliate, after the
BOC has received in-region interLATA authority under section 271. We
believe that this is not the appropriate forum for considering whether
the various specific Internet services provided by the BOCs are
``interLATA information services'' because such determinations must be
made on a case-by-case basis. We believe that the lawfulness of the
specific Internet services provided by Bell Atlantic and SWBT is more
appropriately analyzed in the context of the separate CEI plan
proceedings regarding each service that are currently pending before
the Bureau, consistent with the rules and policies enunciated in this
rulemaking proceeding. Therefore, we deny MFS's request to consolidate
proceedings related to the provision of Internet and Internet access
services by Bell Atlantic and SWBT with the instant proceeding.
4. Impact of the 1996 Act on the Computer II, Computer III, and ONA
requirements
a. Background. In the NPRM, we concluded that, because the 1996 Act
does not establish regulatory requirements for BOC provision of
intraLATA information services, Computer II, Computer III, and ONA
requirements continue to govern BOC provision of these services, to the
extent that these requirements are consistent with the 1996 Act. We
sought comment on which of the Commission's existing requirements were
inconsistent with, or had been rendered unnecessary by, the 1996 Act,
as well as on the specific provisions of the 1996 Act that supersede
the existing requirements. We also sought comment on the impact of the
statute on our pending Computer III Further Remand Proceedings.
b. Discussion. Consistency of Commission's Computer II, Computer
III, and ONA Rules with the 1996 Act.
[[Page 2942]]
We conclude that the Computer II, Computer III, and ONA requirements
are consistent with the 1996 Act, and continue to govern BOC provision
of intraLATA information services. By its terms, the 1996 Act imposes
separate affiliate and nondiscrimination requirements on BOC provision
of ``interLATA information services,'' but does not address BOC
provision of intraLATA information services. We concluded above that,
for the purposes of applying sections 271 and 272, interLATA
information services must include a bundled interLATA transmission
component. We further conclude, in light of our definition of interLATA
information services, that BOCs are currently providing a number of
information services on an intraLATA basis. We find that the BOCs may
continue to provide such intraLATA information services on an
integrated basis, in compliance with the nonstructural safeguards
established in Computer III and ONA.
We reject Bell Atlantic's conclusory assertions that the 1996 Act's
customer proprietary network information (CPNI), network disclosure,
nondiscrimination, and accounting provisions supersede various of the
Commission's Computer III nonstructural safeguards. We also reject
NYNEX's claim that the section 251 interconnection and unbundling
requirements render the Commission's Computer III and ONA requirements
unnecessary. Based on our review of the record in this proceeding, we
conclude that the pending Computer III Further Remand Proceedings are
the appropriate forum in which to examine the necessity of retaining
any or all of these individual Computer III and ONA requirements. We
therefore plan to issue a Further NPRM in that proceeding to determine
how to regulate BOC provision of intraLATA information services in
light of the 1996 Act.
In the interim, the Commission's Computer II, Computer III, and ONA
rules are the only regulatory means by which certain independent ISPs
are guaranteed nondiscriminatory access to BOC local exchange services
used in the provision of intraLATA information services. As noted
above, the section 272 nondiscrimination requirements do not apply to
BOC provision of intraLATA information services, and ISPs that are not
telecommunications carriers cannot obtain interconnection or access to
unbundled elements under section 251. Thus, we believe that continued
enforcement of these safeguards is necessary pending the conclusion of
the Computer III Further Remand Proceedings and establishes important
protections for small ISPs that are not provided elsewhere in the Act.
Requiring section 272 affiliates for intraLATA information
services. We decline to require the BOCs to provide intraLATA
information services through section 272 affiliates. It is clear that
section 272 does not require the BOCs to offer intraLATA information
services through a separate affiliate. We further decline to exercise
our general rulemaking authority to impose such a requirement. We
conclude that the record in this proceeding does not justify a
departure from our determination, in Computer III, to allow BOCs to
provide intraLATA information services on an integrated basis, subject
to appropriate nonstructural safeguards. Some parties in this
proceeding argue that we should harmonize our regulatory treatment of
intraLATA information services provided by the BOCs with the section
272 requirements imposed by Congress on interLATA information services.
We invite these parties to comment on these matters in response to the
Further NPRM we intend to issue in the Computer III Further Remand
Proceedings.
Application of Computer II, Computer III, and ONA requirements to
section 272 affiliate activities. We conclude that a BOC that provides
interLATA telecommunications services and information services through
the same section 272 affiliate may bundle such services without
providing comparably efficient interconnection to the basic underlying
interLATA telecommunications services. Under our definition of
``interLATA information service,'' as explained above, such service
must include a bundled interLATA telecommunications element. Hence, to
prohibit a BOC affiliate from bundling interLATA telecommunications and
information services would effectively prevent the BOCs from offering
any interLATA information services, a result clearly not contemplated
by the statute. Further, we note that the market for information
services is fully competitive, and the market for interLATA
telecommunications services is substantially competitive. Thus, we see
no basis for concern that a section 272 affiliate providing an
information service bundled with an interLATA telecommunications
service would be able to exercise market power. If, however, a BOC's
section 272 affiliate were classified as a facilities-based
telecommunications carrier (i.e., it did not provide interLATA
telecommunications services solely through resale), the affiliate would
be subject to a Computer II obligation to unbundle and tariff the
underlying telecommunications services used to furnish any bundled
service offering.
Under our current regulatory regime, a BOC must comply fully with
the Computer II separate subsidiary requirements in providing an
information service in order to be relieved of the obligation to file a
CEI plan for that service. We decline to adopt NYNEX's proposal that we
find that all BOC information services provided through a section 272
separate affiliate satisfy the Computer II separate subsidiary
requirements, because we conclude that the record in this proceeding is
insufficient to support such a conclusion. Instead, we intend to
examine this issue further in the context of the Computer III Further
Remand Proceedings. Further, we reject USTA's argument that ONA
reporting requirements do not extend to intraLATA information services
provided through a section 272 separate affiliate. BOCs must comply
with the ONA requirements regardless of whether they provide
information services on a separated or integrated basis.
G. Information Services Subject to Other Statutory Requirements
1. Electronic Publishing (section 274)
a. Background. In the NPRM, we observed that, although electronic
publishing is specifically identified as an information service,
interLATA provision of electronic publishing is exempt from section
272, and is instead subject to section 274. Noting that we had
initiated a separate proceeding to clarify and implement, inter alia,
the requirements of section 274, we sought comment on how to
distinguish information services subject to the section 272
requirements from electronic publishing services subject to the section
274 requirements. We also invited parties to comment on whether, in
situations involving services that do not clearly fall within either
the definition of ``electronic publishing'' (section 274(h)(1)) or the
enumerated exceptions thereto (section 274(h)(2)), we should identify
as ``electronic publishing'' those services for which the carrier
controls, or has a financial interest in, the content of information
transmitted by the service.
b. Discussion. Upon review of the record and further consideration,
we conclude that it is not necessary to adopt the ``financial interest
or control'' test in determining whether a particular BOC service
involves the provision of electronic publishing, in addition to the
definitions set forth in sections
[[Page 2943]]
274(h)(1) and 274(h)(2). Generally speaking, if a particular service
does not appear to fit clearly within either the definition of
``electronic publishing,'' set forth in section 274(h)(1), or the
exceptions thereto listed in section 274(h)(2), determining the
appropriate classification of that service will involve a highly fact-
specific analysis that is better performed on a case-by-case basis. In
the context of such a case-by-case determination, the Commission may
consider a number of factors, including whether the BOC controls, or
has a financial interest in, the content of information transmitted to
end-users. We also note that the definition of electronic publishing,
as well as specific services encompassed by that definition, may be
further refined in the Electronic Publishing proceeding.
We also decline to adopt ITAA's suggestion that, because of
potential difficulties in distinguishing between information services
and electronic publishing services, we should impose substantially the
same separate affiliate requirements on both. Such an approach would be
directly contrary to the statute. Congress set forth distinct separate
affiliate and nondiscrimination requirements in sections 272 and 274,
and specified that the former apply to interLATA information services,
while the latter apply to all BOC-provided electronic publishing
services. To impose the section 272 requirements on electronic
publishing services, or to impose the section 274 requirements on
interLATA information services, would be inconsistent with the clear
statutory scheme.
Moreover, we specifically reject AT&T's contention that electronic
publishing services are subject to the section 272 separate affiliate
requirements, pursuant to section 272(a)(2)(B), which imposes a
separate affiliate requirement on interLATA telecommunications
services. Electronic publishing services, however, are specifically
included within the statutory definition of information services.
Accordingly, electronic publishing services would be subject to section
272(a)(2)(C), which imposes a separate affiliate requirement on
interLATA information services, except that section 272(a)(2)(C)
specifically exempts ``electronic publishing (as defined in section
274(h)).''
2. Telemessaging (section 260)
a. Background. In the NPRM, we tentatively concluded that
``telemessaging'' is an information service. We further tentatively
concluded that BOC provision of telemessaging on an interLATA basis is
subject to the section 272 separate affiliate requirements, in addition
to the section 260 safeguards.
b. Discussion. Based on our review of the comments and analysis of
the statute, we hereby adopt our tentative conclusion that
telemessaging is an information service. We reject PacTel's contention
that live operator services do not constitute information services.
Under the statute, live operator services ``used to record, transcribe,
or relay messages'' are telemessaging services. Because these functions
plainly provide ``the capability for * * * storing * * * or making
available information'' via telecommunications, we conclude that live
operator telemessaging services fall within the statutory definition of
information services. We also adopt our tentative conclusion that BOCs
that provide telemessaging services that meet the definition of
interLATA information services must do so in accordance with the
section 272 requirements, in addition to the section 260 requirements.
IV. Structural Separation Requirements of Section 272
A. Application of the Section 272(b) Requirements
Section 272(b) of the Communications Act establishes five
structural and transactional requirements for separate affiliate(s)
established pursuant to section 272(a). We address each of the
requirements below, with the exception of section 272(b)(2), which we
discuss in the Accounting Safeguards Order.
B. The ``Operate Independently'' Requirement
1. Background
Section 272(b)(1) states that a separate affiliate ``shall operate
independently from the BOC.'' The Act does not elaborate on the meaning
of the phrase ``operate independently.'' We stated in the NPRM that
under principles of statutory construction, a statute should be
interpreted so as to give effect to each of its provisions. We
therefore tentatively concluded that the section 272(b)(1) ``operate
independently'' provision imposes requirements beyond those contained
in subsections 272(b)(2)-(5).
As we observed in the NPRM, section 274(b) contains similar
language to section 272(b)(1). It states that ``[a] separated affiliate
or electronic publishing joint venture shall be operated independently
from the [BOC].'' Subsections 274(b)(1)-(9) list several requirements
that govern the relationship of an electronic publishing entity and the
BOC with which it is affiliated. We sought comment on the relevance of
the ``operated independently'' language of section 274(b) when
construing the ``operate independently'' requirement of section
272(b)(1).
In addition, we sought comment on what rules, if any, we should
adopt to implement the requirements of section 272(b)(1). Moreover, we
asked whether we should impose one or more of the separation
requirements established in the Computer II or Competitive Carrier
proceedings.
In the Computer II proceeding, the Commission required AT&T to
provide enhanced services through a separate affiliate, a requirement
that the Commission extended to the BOCs following divestiture. The
Commission required the enhanced services subsidiary to ``have its own
operating, marketing, installation and maintenance personnel for the
services and equipment it offer[ed],'' to comply with information
disclosure requirements, and to maintain its own books of account. The
Commission prohibited the regulated entity and its enhanced services
subsidiary from using in common any leased or owned physical space or
property on which transmission equipment or facilities used in basic
transmission services were located, barred them from sharing computer
capacity, and limited the regulated entity's ability to provide
software to the affiliate. Moreover, the Commission barred the enhanced
services subsidiary from constructing, owning, or operating its own
transmission facilities, thereby requiring it to obtain such facilities
from a local exchange carrier pursuant to tariff.
In the Competitive Carrier proceeding, the Commission prescribed
the separation requirements to which independent LECs must conform to
be regulated as nondominant in the provision of domestic, interstate,
interexchange services. Specifically, an independent LEC must provide
interstate interexchange services through an affiliate that:
(1) maintains separate books of account; (2) does not jointly own
transmission or switching facilities with its affiliated exchange
telephone company; and (3) acquires that exchange telephone company's
services at tariffed rates and conditions.
2. Discussion
We adopt our tentative conclusion that the ``operate
independently'' requirement of section 272(b)(1) imposes requirements
beyond those listed in sections 272(b)(2)-(5). This conclusion is based
on the principle of
[[Page 2944]]
statutory construction that a statute should be construed so as to give
effect to each of its provisions.
Relationship of Section 272(b)(1) to Section 274(b). Section 274(b)
mandates that a separated affiliate or electronic publishing joint
venture be ``operated independently'' and then lists nine specific
requirements governing the relationship between a BOC and a separated
affiliate. In contrast, section 272(b) imposes five structural and
transactional requirements governing the relationship between a BOC and
a section 272 affiliate, one of which is that the affiliate ``shall
operate independently from the [BOC].'' The structural differences in
the organization of the two sections suggest that the term ``operate
independently'' in section 272(b)(1) should not be interpreted to
impose the same obligations on a BOC as section 274(b). In particular,
while the enumerated requirements of section 274(b) may be interpreted
to define the term ``operated independently'' in that context, they do
not define the term ``operate independently'' as used in section
272(b). We agree with SBC that, because the requirements listed in
sections 274(b)(1)-(9) of the Act overlap with the requirements of
sections 272(b), (c), and (e), it would be redundant to incorporate all
of the section 274(b) requirements into the ``operate independently''
requirement of section 272(b)(1).
Defining ``Operate Independently.'' The requirements that we adopt
to implement section 272(b)(1) are intended to prevent a BOC from
integrating its local exchange and exchange access operations with its
section 272 affiliate's activities to such an extent that the affiliate
could not reasonably be found to be operating independently, as
required by the statute. In order to protect against the potential for
a BOC to discriminate in favor of a section 272 affiliate in a manner
that results in the affiliate's competitors operating less efficiently,
we seek to ensure that a section 272 affiliate and its competitors
enjoy the same level of access to the BOC's transmission and switching
facilities. Accordingly, we conclude that operational independence
precludes the joint ownership of transmission and switching facilities
by a BOC and its section 272 affiliate, as well as the joint ownership
of the land and buildings where those facilities are located.
Furthermore, operational independence precludes a section 272 affiliate
from performing operating, installation, and maintenance functions
associated with the BOC's facilities. Likewise, it bars a BOC or any
BOC affiliate, other than the section 272 affiliate itself, from
performing operating, installation, or maintenance functions associated
with the facilities that the section 272 affiliate owns or leases from
a provider other than the BOC with which it is affiliated. Consistent
with these requirements and those established pursuant to sections
272(b)(5) and 272(c)(1), a section 272 affiliate may negotiate with an
affiliated BOC on an arm's length and nondiscriminatory basis to obtain
transmission and switching facilities, to arrange for collocation of
facilities, and to provide or to obtain services other than those
expressly prohibited herein.
We agree with several commenters that joint ownership of
transmission and switching facilities and the property on which they
are located would permit such substantial integration of the BOCs'
local operations with their interLATA activities as to preclude
independent operation, in violation of section 272(b)(1). Imposing a
prohibition on such joint ownership also avoids the need to allocate
the costs of such transmission and switching facilities between BOC
activities and the competitive activities in which a section 272
affiliate may be involved. We agree with the claims of some commenters
that, because the costs of wired telephony networks and network
premises are largely fixed and largely shared among local, access, and
other services, sharing of switching and transmission facilities may
provide a significant opportunity for improper allocation of costs
between the BOC and its section 272 affiliate.
By prohibiting joint ownership of transmission and switching
facilities, we also reduce the potential for a BOC to discriminate in
favor of its section 272 affiliate. Consistent with this purpose, we
define transmission and switching facilities broadly to include the
facilities used to provide local exchange and exchange access service.
The prohibition ensures that a section 272 affiliate must obtain any
such facilities pursuant to section 272(b)(5), which requires all
transactions between a BOC and its section 272 affiliate to be on an
arm's length basis and reduced to writing. Requiring section 272
affiliates to obtain transmission and switching facilities from a BOC
on an arm's length basis will increase the transparency of such
transactions, thereby facilitating monitoring and enforcement of the
section 272 requirements. Moreover, a section 272 affiliate and its
interLATA competitors will have to follow the same procedures when
obtaining services and facilities from a BOC. As described below,
sections 272(c) (1) and (e) require a section 272 affiliate to obtain
services and facilities on the same rates, terms, and conditions
available to unaffiliated entities. Contrary to the suggestion of some
commenters, those nondiscrimination safeguards would offer little
protection if a BOC and its section 272 affiliate were permitted to own
transmission and switching facilities jointly. To the extent that a
section 272 affiliate jointly owned transmission and switching
facilities with a BOC, the affiliate would not have to contract with
the BOC to obtain such facilities, thereby precluding a comparison of
the terms of transactions between a BOC and a section 272 affiliate
with the terms of transactions between a BOC and a competitor of the
section 272 affiliate. Together, the prohibition on joint ownership of
facilities and the nondiscrimination requirements should ensure that
competitors can obtain access to transmission and switching facilities
equivalent to that which section 272 affiliates receive.
The requirement that a BOC and its section 272 affiliate not
commonly own the land and buildings where their transmission and
switching facilities are located, like the prohibition on joint
ownership of facilities, should ensure that a section 272 affiliate and
its competitors both receive the best available access to transmission
and switching facilities. It does not, however, preclude a section 272
affiliate from collocating its equipment in end offices or on other
property owned or controlled by its affiliated BOC. Rather, as IDCMA
recognizes, the requirement should ensure that collocation agreements
between a BOC and its section 272 affiliate are reached pursuant to
arm's length negotiations and that the same collocation opportunities
are available to similarly situated non-affiliated entities. Moreover,
the ban on joint ownership of facilities should protect local exchange
competitors that request physical collocation by ensuring that a BOC's
section 272 affiliate does not obtain preferential access to the
limited available space in the BOC's central office.
We decline to read the ``operate independently'' requirement to
impose a blanket prohibition on joint ownership of property by a BOC
and a section 272 affiliate. Rather, we limit the restriction to joint
ownership of transmission and switching facilities and the land and
buildings where those facilities are located. We conclude that the
prohibition we have adopted should ensure that the section 272
affiliate's
[[Page 2945]]
competitors gain nondiscriminatory access to those transmission and
switching facilities that both section 272 affiliates and their
competitors may be unable to obtain from other sources. We find that
joint ownership of other property, such as office space and equipment
used for marketing or the provision of administrative services, may
provide economies of scale and scope without creating the same
potential for discrimination by the BOCs. Moreover, we believe that the
Commission's accounting rules; the separate books, records, and
accounts requirement of section 272(b); and the audit requirement of
section 272(d) provide adequate protection against the potential for
improper cost allocation.
We further conclude that allowing the same personnel to perform the
operating, installation, and maintenance services associated with a
BOC's network and the facilities that a section 272 affiliate owns or
leases from a provider other than the BOC would create the opportunity
for such substantial integration of operating functions as to preclude
independent operation, in violation of section 272(b)(1). Regardless of
whether the BOC or the section 272 affiliate were to provide such
services, we agree with AT&T that allowing the same individuals to
perform such core functions on the facilities of both entities would
create substantial opportunities for improper cost allocation, in terms
of both the personnel time spent in performing such functions and the
equipment utilized. We conclude, as we did in the BOC Separations
Order, 49 FR 1190 (January 10, 1984), that allowing the sharing of such
services would require ``excessive, costly and burdensome regulatory
involvement in the operation, plans and day-to-day activities of the
carrier * * * to audit and monitor the accounting plans necessary for
such sharing to take place.'' Accordingly, we read section 272(b)(1) to
bar a section 272 affiliate from contracting with a BOC or another
entity affiliated with the BOC to obtain operating, installation, and
maintenance functions associated with the section 272 affiliate's
facilities. As stated above, we believe that a prohibition on joint
ownership of transmission and switching facilities is necessary to
ensure that a BOC complies with the nondiscrimination requirements of
section 272. Consistent with that approach, we further interpret the
term ``operate independently'' to bar a BOC from contracting with a
section 272 affiliate to obtain operating, installation, or maintenance
functions associated with the BOC's facilities. Allowing a BOC to
contract with the section 272 affiliate for operating, installation,
and maintenance services would inevitably afford the affiliate access
to the BOC's facilities that is superior to that granted to the
affiliate's competitors.
We clarify that section 272(b)(1) does not preclude a BOC or a
section 272 affiliate from providing telecommunications services to one
another, so long as each entity performs itself, or obtains from an
unaffiliated third party, the operating, installation, and maintenance
functions associated with the facilities that it owns or leases from an
entity unaffiliated with the BOC. In particular, if a section 272
affiliate obtains unbundled elements from a BOC, that BOC can perform
the operating, installation, and maintenance functions associated with
those facilities. Moreover, we recognize the need for an exception to
the prohibition on shared operating, installation, and maintenance
services to allow the BOC to obtain support services for sophisticated
equipment purchased from the affiliate on a compensatory basis. For
instance, the BOC could contract with the section 272 affiliate for the
installation, maintenance, or repair of equipment, or the affiliate
could train the BOC's personnel to perform such functions. We further
note that the limited prohibition on shared services that we adopt is
consistent with section 272(e)(4), which states that a BOC or BOC
affiliate that is subject to section 251(c) ``may provide any interLATA
or intraLATA facilities or services to its interLATA affiliate if such
services or facilities are made available to all carriers at the same
rates and on the same terms and conditions.'' As we discuss below,
section 272(e)(4) does not grant a BOC the authority to provide
particular services to its affiliate, but rather prescribes the manner
in which a BOC must provide those services that it is otherwise
authorized to provide. Thus, section 272(e)(4) does not grant a BOC the
authority to provide operating, installation, and maintenance services
associated with the facilities that a section 272 affiliate owns or
leases from a provider other than the BOC.
In imposing these requirements, we reject the contention of some
commenters that Congress considered and rejected a prohibition on the
joint ownership of telecommunications transmission or switching
equipment or other property. Although the House bill contained such a
prohibition, the Senate bill did not. The Joint Explanatory Statement
indicates merely that the conference committee adopted the Senate
version of this provision with several modifications and does not offer
any specific explanation for the exclusion of the joint ownership
restriction. In these circumstances, our obligation is to interpret the
language of section 272(b)(1) in a manner consistent with its purpose,
which is to ensure the operational independence of a section 272
affiliate from its affiliated BOC.
The limited prohibition on shared services that we impose rests on
the ``operate independently'' requirement of section 272(b)(1), rather
than the requirement of section 272(b)(3) that a BOC and its section
272 affiliate have ``separate officers, directors, and employees.''
Accordingly, we reject the statutory construction argument advanced by
several BOCs, which is predicated on the text of the latter provision.
Those BOCs argue that, if a rule against separate employees were
sufficient to prevent the sharing of in-house services, Congress would
not have prohibited a BOC from engaging in purchasing, installation,
maintenance, hiring, training, and research and development for the
separated affiliate, in addition to forbidding the BOC and its
separated affiliate from having common officers, directors, and
employees, in section 274(b).
We believe it is consistent with both the letter and purposes of
section 272 to strike an appropriate balance between allowing the BOCs
to achieve efficiencies within their corporate structures and
protecting ratepayers against improper cost allocation and competitors
against discrimination. We decline to impose additional structural
separation requirements given the nondiscrimination safeguards, the
biennial audit requirement, and other public disclosure requirements
imposed by section 272. In combination with the accounting protections
established in the Accounting Safeguards Order, we believe the
requirements set forth herein will protect against potential
anticompetitive behavior.
In particular, we decline to read the ``operate independently''
requirement to impose a prohibition on all shared services. We
recognize the inherent tension between the ``operate independently''
requirement and allowing the integration of services. As we discuss
further below, however, we believe the economic benefits to consumers
from allowing a BOC and its section 272 affiliate to derive the
economies of scale and scope inherent in the integration of some
services outweigh any potential for competitive harm created thereby.
Therefore, we permit the sharing of administrative and other services.
For example, we read
[[Page 2946]]
section 272(b)(1) not to preclude a BOC and a section 272 affiliate
from contracting with one another to provide marketing services.
In construing other provisions of section 272, we address the
concerns of those commenters who urge us to interpret section 272(b)(1)
to prohibit a BOC and a section 272 affiliate from engaging in various
forms of joint research and development. As a preliminary matter, we
note that the MFJ Court considered equipment design and development to
be an integral part of ``manufacturing,'' as the term was used in the
MFJ. We emphasize that to the extent that research and development is a
part of manufacturing, it must be conducted through a section 272
affiliate, pursuant to section 272(a). To the extent that a BOC seeks
to develop services for or with its section 272 affiliate, the BOC must
develop services on a nondiscriminatory basis for or with other
entities, pursuant to section 272(c)(1).
Finally, although a number of commenters support a Computer II-type
prohibition on a section 272 affiliate's ability to construct, own, or
operate its own local exchange facilities, we conclude that such a
prohibition is not required by the language of section 272(b)(1). As
several BOCs suggest, limiting a section 272 affiliate to resale would
not necessarily increase the affiliate's operational independence,
particularly if the affiliate had to acquire facilities from its
affiliated BOC as a result of the requirement.
C. Section 272(b)(3) and Shared Services
1. Background
In the NPRM, we tentatively concluded that the section 272(b)(3)
requirement that a BOC and its section 272 affiliate have ``separate
officers, directors, and employees'' prohibits the sharing of in-house
functions, including operating, installation, and maintenance, as well
as administrative services. We noted that, pursuant to the Computer II
proceeding, the Commission allowed AT&T and its enhanced services
subsidiaries to share certain administrative services--accounting,
auditing, legal services, personnel recruitment and management,
finance, tax, insurance, and pension services--on a cost reimbursable
basis, but required the subsidiary to have its own operating,
marketing, installation, and maintenance personnel for the services and
equipment it offered. We sought comment on whether section 272(b)(3)
forbids the sharing of outside services or other types of personnel
sharing.
In the context of our discussion of section 272(g), we sought
comment on the related question of whether a section 272 affiliate must
purchase marketing services from an affiliated BOC on an arm's length
basis, pursuant to section 272(b)(5). Moreover, we sought comment on
whether it is necessary to require a BOC and its section 272 affiliate
to contract jointly with an outside marketing entity for joint
marketing of interLATA and local exchange services in order to comply
with section 272(b)(3). Finally, we invited parties to comment on the
corporate and financial arrangements that are necessary to comply with
sections 272(g)(2), 272(b)(3), and 272(b)(5).
2. Discussion
Sharing of Services. Based on the record before us, we decline to
prohibit the sharing of services other than operating, installation,
and maintenance services, as described above. We clarify that ``sharing
of services'' means the provision of services by the BOC to its section
272 affiliate, or vice versa. In response to our tentative conclusion
on this issue in the NPRM, the BOCs have argued persuasively that such
a prohibition is neither required as a matter of law, nor desirable as
a matter of policy. We note that section 272(b)(3) on its face is
silent on the issue of shared services. We are persuaded by the
arguments of the BOCs that the section 272(b)(3) requirement that a BOC
and a section 272 affiliate have separate officers, directors, and
employees simply dictates that the same person may not simultaneously
serve as an officer, director, or employee of both a BOC and its
section 272 affiliate. Thus, as MFS asserts, an individual may not be
on the payroll of both a BOC and a section 272 affiliate. As discussed
below, to the extent that a BOC provides services to its section 272
affiliate, it must provide them to other entities on the same rates,
terms, and conditions, pursuant to section 272(c)(1).
We also decline to impose a prohibition on the sharing of services
other than operating, installation, and maintenance services, on policy
grounds. We find that, if we were to prohibit the sharing of services,
other than those restricted pursuant to section 272(b)(1), a BOC and a
section 272 affiliate would be unable to achieve the economies of scale
and scope inherent in offering an array of services. We do not believe
that the competitive benefits of allowing a BOC and a section 272
affiliate to achieve such efficiencies are outweighed by a BOC's
potential to engage in discrimination or improper cost allocation. As
we have noted, the Commission permitted the sharing of administrative
services in the Computer II Final Order, 45 FR 31319 (May 13, 1980), on
the grounds that ``[w]ith an appropriate accounting system, whatever
administrative efficiencies may exist are preserved.'' We reject the
arguments of some parties that, because of changes in the
telecommunications marketplace and the language of the 1996 Act, a
different outcome is warranted in this case.
We recognize that allowing the sharing of in-house services will
require a BOC to allocate the costs of such services between the
operating company and its section 272 affiliate and provide
opportunities for improper cost allocation, exchanges of information,
and discriminatory treatment that may not be revealed in a subsequent
audit. Indeed, in the Computer II proceeding, the Commission indicated
that a major reason for prohibiting the sharing of particular services,
such as marketing services, was its desire to eliminate ``the inherent
difficulties in allocating joint and common costs.'' For these reasons,
we conclude that a BOC and a section 272 affiliate may share in-house
services with each other only to the extent that such sharing is
consistent with sections 272(b)(1), 272(b)(5), and 272(c)(1) of the
Act.
Consistent with section 272(b)(1), a BOC and its section 272
affiliate may not share operating, installation, and maintenance
services, as discussed above. In addition, as we conclude in the
Accounting Safeguards Order, an agreement to provide in-house services
by a BOC to its section 272 affiliate (or vice versa) constitutes a
transaction between that BOC and its section 272 affiliate, so that the
requirements of section 272(b)(5) govern. Accordingly, such
transactions must be conducted on an arm's length basis, reduced to
writing, and made available for public inspection. Moreover, such
transactions must be consistent with the affiliate transaction rules,
as modified in the Accounting Safeguards Order. In addition, the
section 272 requirements that a BOC and its section 272 affiliate
maintain separate books, records, and accounts, and be subject to an
audit every two years should strengthen the ability of competitors and
regulators to detect any inequities in cost allocation for shared
services. We agree with commenters who contend that, in any event,
federal price cap regulation reduces a BOC's incentives to allocate
costs improperly. Finally, section 272(c)(1) ensures that to the extent
that
[[Page 2947]]
a BOC provides services to its section 272 affiliate, it must make them
available to the affiliate's competitors on the same rates, terms, and
conditions.
We further conclude that section 272(b)(3) does not preclude the
parent company of the BOC and the section 272 affiliate from performing
functions for both the BOC and the section 272 affiliate, subject to
the requirements of section 272(b)(1). Similarly, an affiliate of the
BOC, such as a services affiliate, could provide services to both a BOC
and a section 272 affiliate. We are not persuaded by claims that the
sharing of services provided to a BOC and its section 272 affiliate by
a parent company or another BOC affiliate would allow the BOC and the
section 272 affiliate to achieve an unacceptable level of integration.
Instead, we agree with the view that the section 272(b)(3) separate
employees requirement extends only to the relationship between a BOC
and its section 272 affiliate. To the extent that the BOC contracts
with an unregulated affiliate, it is subject to the affiliate
transaction rules. Moreover, a parent company or a BOC affiliate that
performs services for both a BOC and its section 272 affiliate must
fully document and properly apportion the costs incurred in furnishing
such services.
Consistent with our conclusions, we decline to read section
272(b)(3) to preclude the sharing of marketing services. Given that
section 272(g) expressly contemplates that the each entity may market
or sell the services of the other, we conclude that a BOC and its
section 272 affiliate may provide marketing services for each other. We
agree with those commenters that assert that the entities must provide
such services pursuant to arm's length transactions, consistent with
the requirements of section 272(b)(5). Moreover, the parent of a BOC
and its section 272 affiliate or another BOC affiliate may perform
marketing functions for both entities.
Services Provided by an Outside Entity. We further conclude that
section 272(b)(3) does not prohibit a BOC and its section 272 affiliate
from obtaining services from the same outside supplier. Indeed, we find
no statutory support for limiting permissible outsourcing, as proposed
by MCI or Time Warner.
Nor do we construe section 272(b)(3), when read in light of section
272(b)(1), to require a BOC and a section 272 affiliate to contract
with outside entities to perform their joint marketing services. We
agree with the Citizens for a Sound Economy Foundation that such a
requirement would reduce the BOCs' ability to serve consumers without
providing additional protection against anticompetitive behavior. Each
entity, however, must pay its full share of any outsourced services
that it receives.
Other activities. We reject AT&T's request that we interpret
section 272(b)(3) to prohibit compensation schemes that base the level
of remuneration of BOC officers, directors, and employees on the
performance of the section 272 affiliate, or vice versa. We conclude
that tying the compensation of an employee of a section 272 affiliate
to the performance of a Regional Holding Company and all of its
enterprises as a whole, including the performance of the BOC, does not
make that individual an employee of the BOC. Similarly, tying the
compensation of a BOC employee to the performance of a Regional Holding
Company and all of its enterprises as a whole, including the
performance of the section 272 affiliate, does not make that individual
an employee of the section 272 affiliate.
E. Section 272(b)(4)
1. Background
Section 272(b)(4) states that a section 272 affiliate ``may not
obtain credit under any arrangement that would permit a creditor, upon
default, to have recourse to the assets of the [BOC].'' In the NPRM, we
tentatively concluded ``that a BOC may not co-sign a contract or any
other instrument with a separate affiliate that would allow the
affiliate to obtain credit in a manner that violates'' this section. We
sought comment on what other types of activities section 272(b)(4)
prohibits, whether the Commission should establish specific
requirements regarding those activities, and the relative costs and
benefits of such regulation.
2. Discussion
As we stated in the NPRM, the intent of this provision is to
protect ratepayers from shouldering the cost of a default by a section
272 affiliate. We adopt our tentative conclusion that section 272(b)(4)
prohibits a BOC from co-signing a contract or any other instrument with
a section 272 affiliate that would allow the affiliate to obtain credit
in a manner that grants the creditor recourse to the BOC's assets in
the event of default by the section 272 affiliate. Moreover, because
the provision precludes the section 272 affiliate from obtaining credit
under ``any arrangement that would permit a creditor, upon default, to
have recourse to the assets of the [BOC],'' we find that section
272(b)(4) likewise prohibits the parent of a BOC or any non-272
affiliate from co-signing a contract or any other arrangement with the
BOC's section 272 affiliate that would allow the creditor to obtain
such recourse to the BOC's assets in the event of default by the
section 272 affiliate. Indeed, we conclude that section 272(b)(4)
prohibits a section 272 affiliate from entering into any arrangement to
obtain credit that permits the lender recourse to the BOC in the event
of default.
While preventing the affiliate from jeopardizing ratepayer assets,
we conclude that section 272(b)(4) does not forbid a section 272
affiliate from using assets other than its own as collateral when
seeking credit. To impose such a restriction where, as here, it is not
needed to protect ratepayer assets, would force section 272 affiliates
to operate inefficiently, to the detriment of consumers and
competition. In particular, we agree with MCI and Sprint that a BOC's
parent could secure credit, whether through the issuance of bonds or
otherwise, for the benefit of the section 272 affiliate, provided that
BOC assets are not at risk.
F. Section 272(b)(5)
1. Background
Section 272(b)(5) states that an affiliate ``shall conduct all
transactions with the [BOC] of which it is an affiliate on an arm's
length basis with any such transactions reduced to writing and
available for public inspection.'' In the NPRM, we sought comment on
whether this provision necessitates the adoption of any non-accounting
safeguards.
2. Discussion
We conclude that we need not adopt additional non-accounting
safeguards to implement section 272(b)(5). In the Accounting Safeguards
Order, we address the definition of ``transactions'' and consider the
provision's requirement that all transactions be ``reduced to writing
and available for public inspection.'' Moreover, in our discussion of
sections 272(b)(1) and (b)(3), we make clear that ``transactions''
include the provision of services and transmission and switching
facilities by the BOC and its affiliate to one another. We reject
CompTel's proposal to adopt additional requirements, which are
addressed generally in other parts of this Order and the companion
Accounting Safeguards Order.
V. Nondiscrimination Safeguards
As we observed in the NPRM, after a BOC enters a competitive
market, such as long distance, it may have an incentive to use its
control of local exchange facilities to discriminate against its
affiliate's rivals. Section
[[Page 2948]]
272(c) of the Act responds to these competitive concerns by
establishing nondiscrimination safeguards that apply to the BOCs'
provision of manufacturing, interLATA telecommunications, and interLATA
information services. We address the requirements of this section
below.
A. Relationship of Section 272(c)(1) and Pre-existing Nondiscrimination
Requirements
1. Background
Section 272(c)(1) states that ``[i]n its dealings with its
affiliate described in subsection (a), a [BOC] (1) may not discriminate
between that company or affiliate and any other entity in the provision
or procurement of goods, services, facilities, and information, or in
the establishment of standards.'' In the NPRM, we sought comment on the
relationship between the nondiscrimination obligations imposed by
sections 272(c)(1) and the Commission's pre-existing nondiscrimination
obligations in sections 201 and 202. In particular, we sought comment
on whether the flat prohibition against discrimination in section
272(c)(1) imposes a stricter standard for compliance than the ``unjust
and unreasonable'' standard in section 202.
2. Discussion
We find that section 272(c)(1) establishes an unqualified
prohibition against discrimination by a BOC in its dealings with its
section 272 affiliate and unaffiliated entities. Section 202(a), by
contrast, prohibits ``any unjust or unreasonable discrimination * * *,
or * * * any undue or unreasonable preference or advantage.'' Because
the text of the section 272(c)(1) nondiscrimination bar differs from
the section 202(a) prohibition, we conclude that Congress did not
intend section 272's prohibition against discrimination in the 1996 Act
to be synonymous with the ``unjust and unreasonable'' discrimination
language used in the 1934 Act, but rather, intended a more stringent
standard. We therefore reject the arguments of those who argue that the
section 272(c)(1) standard is not materially different from the
standard in section 202.
B. Meaning of Discrimination in Section 272(c)(1)
1. Background
We tentatively concluded in the NPRM that the prohibition against
discrimination in section 272(c)(1) means, at a minimum, that BOCs must
treat all other entities in the same manner as they treat their section
272 affiliates, and must provide and procure goods, services,
facilities, and information to and from these other entities under the
same terms, conditions, and rates. We noted, however, that a requesting
entity may have equipment with different technical specifications than
the equipment of the BOC section 272 affiliate. We sought comment,
therefore, on whether the terms of section 272(c)(1) could be construed
to require a BOC to provide a requesting entity with a quality of
service or ``functional outcome'' identical to that provided to its
affiliate even if this would require the BOC to provide goods,
facilities, services, or information to a requesting entity that are
different from those provided to the affiliate.
2. Discussion
We affirm our tentative conclusion that BOCs must treat all other
entities in the same manner as they treat their section 272 affiliates.
We conclude therefore that, pursuant to section 272(c)(1), a BOC must
provide to unaffiliated entities the same goods, services, facilities,
and information that it provides to its section 272 affiliate at the
same rates, terms, and conditions. We decline, as some commenters
suggest, to interpret section 272(c)(1) more broadly to conclude that a
BOC must provide unaffiliated entities different goods, services,
facilities, and information than it provides to its section 272
affiliate in order to ensure that it is providing the same quality of
service or functional outcome to both its affiliate and unaffiliated
entities. To do so would, in effect, be interpreting this section the
same way we interpreted section 251(c)(2) in the First Interconnection
Order, 61 FR 45476 (August 29, 1996). We believe that to interpret the
nondiscrimination requirement of section 272(c)(1) in this manner would
be inappropriate as a matter of statutory construction, inconsistent
with its legislative purpose, and unenforceable.
As a matter of statutory construction, we find that the
nondiscrimination provision of section 272(c)(1), by its terms, is much
narrower in scope than the requirement in section 251(c)(2). Section
251(c)(2) imposes on incumbent LECs ``the duty to provide, for the
facilities and equipment of any requesting telecommunications carrier,
interconnection with the local exchange carrier's network * * * that is
at least equal in quality to that provided by the [LEC] to itself or to
any subsidiary, affiliate, or any other party to which the carrier
provides interconnection.'' In the First Interconnection Order, we
interpreted the term ``equal in quality'' as requiring an incumbent LEC
to provide interconnection to its network at a level of quality that is
at least indistinguishable from that which the incumbent LEC provides
itself. Further, we found that, to the extent a carrier requests
interconnection that is of a superior or lesser quality than the
incumbent LEC currently provides, the incumbent LEC is obligated to
provide the requested interconnection to the extent technically
feasible.
The language of section 272(c)(1), in contrast, contains no such
``equal in quality'' requirement; it simply requires that unaffiliated
entities receive the same treatment as the BOC gives to its section 272
affiliate. Unlike section 251, therefore, section 272(c) is not a
vehicle by which requesting entities can require a BOC to provide
goods, facilities, services, or information that are different from
those that the BOC provides to itself or to its affiliates. Nor is it,
as some commenters suggest, designed to prevent a BOC from
discriminating between unaffiliated competitors.
Our reading of the statutory language of sections 251 and 272 is
consistent with the differing underlying purposes of those provisions.
The section 251 requirements are designed to ensure that incumbent LECs
do not discriminate in opening their bottleneck facilities to
competitors. As we stated in the First Interconnection Order, ``[u]nder
section 251, incumbent [LECs], including [BOCs], are mandated to take
several steps to open their network to competition, including providing
interconnection, offering access to unbundled elements to their
networks, and making their retail services available at wholesale rates
so that they can be resold.'' In implementing section 251, therefore,
we adopted rules to open one of the last monopoly bottleneck
strongholds in telecommunications--the local exchange and exchange
access market.
In adopting rules in this proceeding, however, our goal is to
ensure that BOCs do not use their co
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