Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Chapter I

[CC Docket No. 96-149; FCC 97-222]

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 Second Order on Reconsideration (Order) released June 24,

1997 examines the proper interpretation of section 272(e)(4) of the

Communications Act of 1934, as amended by the Telecommunications Act of

1996 (the Act). The Order concludes that the Commission's original

interpretation--that section 272(e)(4) imposes requirements on Bell

Operating Company (BOC) provision of interLATA services that the BOCs

are otherwise authorized to provide--is the only one that resolves an

apparent conflict with section 272(a) in a way that squares with the

considered policy choice Congress made in imposing a separate affiliate

requirement for BOC provision of in-region interLATA services.

EFFECTIVE DATE: August 6, 1997.

FOR FURTHER INFORMATION CONTACT: Lisa Choi, Attorney, Common Carrier

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

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

adopted June 20, 1997, and released June 24, 1997. The full text of

this Order is available for inspection and copying during normal

business hours in the FCC Reference Center, 1919 M St., N.W., Room 239,

Washington, D.C. The complete text also may be obtained through the

World Wide Web, at http://www.fcc.gov/Bureaus/Common Carrier/Orders/

fcc97-222.wp, or may be purchased from the Commission's copy

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

2100 M St., N.W., Suite 140, Washington, D.C. 20037.

Regulatory Flexibility Certification

The changes adopted in this Order do not affect our certification

in the First Report and Order (62 FR 2927 (January 21, 1997)).

Synopsis of Order on Reconsideration

I. Introduction and Summary

1. In the Non-Accounting Safeguards First Report and Order,

released on December 24, 1996, the Commission implemented the non-

accounting safeguards provisions of the Communications Act of 1934, as

amended by the Telecommunications Act of 1996 (Communications Act).

These provisions generally prescribe the manner in which the Bell

Operating Companies (BOCs) may enter certain new markets, including the

in-region interLATA services market. In this Second Order on

Reconsideration, we examine in greater depth the proper interpretation

of one of these provisions, section 272(e)(4).

2. The BOCs' interpretation--that section 272(e)(4) is an

affirmative grant of authority allowing a BOC to provide directly

(i.e., not through a separate affiliate) in-region interLATA services

on a wholesale basis--presents an apparent conflict with section

272(a), which, in relevant part, prohibits a BOC from doing precisely

this. Such conflict is only heightened by the requirement in section

272(b)(1) that a BOC and its separate affiliate must ``operate

independently,'' which, as explained below, presupposes that the BOC

may not provide any in-region interLATA services directly.

3. Confronting this apparent conflict, we conclude that our

original interpretation--that section 272(e)(4) imposes requirements on

BOC provision of interLATA services that the BOCs are otherwise

authorized to provide--is the only one that resolves the conflict in a

way that squares with the considered policy choice Congress made in

imposing a separate affiliate requirement for BOC provision of in-

region interLATA services. In the past, where courts and agencies have

chosen to impose separate affiliate requirements on the BOCs for

competitive services requiring local BOC facilities as an input, the

defining feature of such requirements has always been a prohibition on

providing such services on an end-to-end physically integrated basis,

and for an obvious reason. It is precisely the provision of such

services on an end-to-end physically integrated basis that gives rise

to the concerns that separate affiliate requirements are intended to

address. Our original interpretation of section 272(e)(4) preserves

this essential prohibition, while the BOCs' interpretation, under which

section 272(e)(4) is a grant of authority, eviscerates it. Our

interpretation is bolstered by our view that it is exceedingly unlikely

that Congress would have tucked away a fundamental grant of authority

in section 272(e), which imposes obligations on the BOCs in response to

requests from unaffiliated carriers. The thrust of section 272 is

likewise to limit, not expand, BOC authority.

II. Statutory Framework

4. BOC entry into the in-region interLATA services market is

governed by sections 271 and 272 of the Communications Act. Section

271(a) states that neither a BOC nor an affiliate ``may provide

interLATA services except as provided in this section.'' Section 271(b)

grants immediate authorization to a BOC or its affiliate to provide

interLATA services originating outside of the BOC's in-region states

(``out-of-region'' interLATA services) and to provide six specified

``incidental'' interLATA services. Section 271(f) explains that the

prohibition in section 271(a) does not apply to any activities

``previously

[[Page 36217]]

authorized'' by the court that administered the AT&T Consent Decree.

5. With respect to interLATA services originating within a BOC's

in-region states (``in-region'' interLATA services), 271(b) does not

authorize immediate entry. Specifically, section 271(b)(1) states that

a BOC or its affiliate may provide in-region interLATA services

originating in a particular state if, and only if, the Commission

formally approves the provision of such services pursuant to section

271(d)(3). Section 271(d)(3) approval for a particular state is

generally designed to ensure that the BOC has taken sufficient steps to

open its local exchange network in that state to competition. As

explained in the Non-Accounting Safeguards First Report and Order,

Congress recognized that section 271(d)(3) approval might be granted in

a particular state before the local exchange market in that state

became fully competitive. Congress thus enacted section 272 to respond

to the concerns about anticompetitive discrimination and cost-shifting

that arise when a BOC enters the interLATA services market in an in-

region state in which the local exchange market is not yet fully

competitive. As reflected in the title of section 272 (``Separate

Affiliate; Safeguards''), Congress chose to respond to these concerns

through the structural requirement of a separate affiliate. Thus,

section 272(a)(1) provides that ``[a] Bell operating company (including

any affiliate) * * * may not provide any service described in [section

272(a)(2)] unless it provides that service through one or more

[separate] affiliates'' that operate independently of the BOC.

6. Section 272(a)(2) lists three kinds of services for which a

separate affiliate is required: (a) Manufacturing services, (b)

``[o]rigination of interLATA telecommunications services'' other than

out-of-region services, previously authorized services, and all but one

of the six incidental services, and (c) ``[i]nterLATA information

services'' other than electronic publishing services and alarm

monitoring services. Thus, section 272(a)(2) requires a separate

affiliate for the origination of all but three kinds of interLATA

telecommunications services (out-of-region services, previously

authorized services, and most incidental services) and all but two

kinds of interLATA information services (electronic publishing services

and alarm monitoring services).

7. As a general matter, the other provisions in section 272 define

more precisely how structurally separate the BOC and its section 272

interLATA affiliate must be, and the terms of any relationship between

the two. With regards to structural separation, the most significant

provisions in section 272 are section 272(b)(1), which requires the

separate affiliate to ``operate independently from the [BOC],'' section

272(b)(2), which requires it to keep ``separate'' books of account, and

section 272(b)(3), which requires it to have ``separate officers,

directors, and employees.'' With regard to the relationship between the

BOC and its structurally separate affiliate, the most significant

provisions are section 272(b)(5), which requires that any dealings

between the two be conducted ``on an arm's length basis,'' ``reduced to

writing,'' and made ``available for public inspection,'' and section

272(c)(1), which provides that in such dealings, a BOC ``may not

discriminate between [the BOC] or affiliate and any other entity in the

provision or procurement of goods, services, facilities, and

information, or in the establishment of standards.''

8. Section 272(e), which is entitled ``Fulfillment of Certain

Requests,'' contains four provisions, three of which impose

particularized non-discrimination requirements pertaining to direct BOC

provision of telephone exchange service and exchange access.

Specifically, section 272(e)(1) states that a BOC ``shall fulfill any

requests from an unaffiliated entity for telephone exchange service and

exchange access within a period no longer than the period in which it

provides such telephone exchange service and exchange access to itself

or to its affiliates''; section 272(e)(2) states that a BOC ``shall not

provide any facilities, services, or information concerning its

provision of exchange access to [an] affiliate * * * unless such

facilities, services, or information are made available to other

providers of interLATA services in that market on the same terms and

conditions''; and section 272(e)(3) states that a BOC ``shall charge

the affiliate * * *, or impute to itself (if using the access for its

provision of its own services), an amount for access to its telephone

exchange service and exchange access that is no less than the amount

charged to any unaffiliated interexchange carriers for such service.''

The fourth subsection, section 272(e)(4), is the subject of this order.

As the Joint Explanatory Statement describes them, these provisions are

``[a]dditional requirements for the provision of interLATA services''

that are ``intended to reduce litigation by establishing in advance the

standard to which a BOC entity that provides telephone exchange service

or exchange access service must comply in providing interconnection to

an unaffiliated entity.''

9. The final provision in the statutory framework governing BOC

entry that bears mention is section 272(f), which provides, among other

things, for the sunset of the separate affiliate requirement in section

272(a). With respect to ``interLATA telecommunications services'' in

particular, 272(f) provides for sunset three years after grant of

section 271(d)(3) approval, unless the Commission extends the three-

year period by rule or order. For interLATA information services, the

sunset period is four years after enactment of the Telecommunications

Act of 1996 unless extended by rule or order.

10. In the Non-Accounting Safeguards First Report and Order, we

implemented these and other provisions of section 272. In so doing, we

explained that the structural and nondiscrimination requirements taken

together were intended by Congress to effectuate the goal of preventing

anticompetitive abuses by BOCs that control essential local facilities

and seek to enter competitive markets that require these facilities as

an input. More generally, we explained that:

[o]ur 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.

11. Of particular significance in the present context is the

Commission's implementation of the ``operate independently''

requirement in section 272(b)(1). As discussed below, the Commission's

implementation of the ``operate independently'' requirement is

significant because while not in dispute in the instant proceeding, the

fundamental policy issue that implementation addressed--the degree of

permissible physical integration between the BOC's local network and

the separate affiliate's interLATA network where the affiliate chooses

to have such a network--overlaps considerably with the fundamental

policy issue raised by the BOCs' proposed reading of section 272(e)(4),

namely whether the BOC may own and operate an interLATA network within

the local operating company itself and

[[Page 36218]]

thus provide interLATA services on a wholly integrated basis.

12. In the Non-Accounting Safeguards First Report and Order, we

concluded that the ``operate independently'' requirement entails four

important restrictions: (1) No joint BOC-affiliate ownership of

switching and transmission facilities, (2) no joint ownership of the

land and buildings on which such facilities are located, (3) no

provision of operation, installation, or maintenance services by the

BOC (or non-section 272 affiliate) with regards to the section 272

affiliate's facilities, and (4) no provision by the section 272

affiliate of operation, installation, or maintenance services with

respect to the BOC's facilities. We determined that these restrictions

are necessary to prevent the ``substantial integration'' of the BOC's

local network and the affiliate's interLATA network where the affiliate

chooses to have such a network. Such integration, we concluded, is the

antithesis of genuine independent operation, for it creates the very

dangers of discrimination and improper cost allocation that section 272

was designed to prevent. With respect to the possibility of

discrimination, we explained that the non-discrimination requirements

in sections 272(b)(5) and 272(c)(1) and elsewhere ``would offer little

protection if a BOC and its section 272 affiliate were permitted to own

transmission and switching facilities jointly.'' For example, ``[t]o

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, then, ``the prohibition on

joint ownership * * * and the nondiscrimination requirements should

ensure that competitors can obtain access to transmission and switching

facilities equivalent to that which section 272 affiliates receive.''

With respect to the possibility of improper cost allocation, we

explained that, ``[b]ecause the costs of wired telephone 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.''

The specific concern with improper cost allocation in this context is

that an undue proportion of these shared costs will be allocated to a

BOC's local operations, which has two negative effects. First, assuming

that the BOC is subject to a regulatory regime that links the local

rates it can charge to its costs and that the local market is not fully

competitive, such overallocation of costs would allow the BOC to

overcharge its local ratepayers by providing local service at a high

price that overestimates the true costs of that service. Second, an

overallocation of costs to the BOC's local operations means an

underallocation of costs to the affiliate's long-distance operations,

which would allow the affiliate to undercut inefficiently its

interexchange competitors by providing a long-distance service at a low

price that underestimates the true costs of that service.

III. Background and Positions of the Parties

13. Section 272(e)(4) states that a BOC ``may provide any interLATA

or intraLATA facilities or services to its interLATA affiliate if such

services or facilities are made available to all carriers at the same

rates and on the same terms and conditions, and so long as the costs

are appropriately allocated.'' In the Non-Accounting Safeguards First

Report and Order, the Commission rejected arguments that section

272(e)(4) is an affirmative grant of authority for BOCs to provide

directly interLATA services on a wholesale basis, including in-region

services. Rather, the Commission read section 272(e)(4) as a limitation

of authority, that is, as imposing a non-discrimination and cost-

allocation requirement on the provision of any interLATA or intraLATA

facilities or services that the BOC is otherwise authorized to provide.

14. On February 11, 1997, Bell Atlantic and PacTel sought summary

reversal of the Commission's interpretation of section 272(e)(4) in the

United States Court of Appeals for the District of Columbia Circuit.

The Commission responded, among other things, that some of the

statutory arguments that these BOCs advanced before the court had not

been clearly presented to the Commission, and thus that the Commission

should have an opportunity, prior to judicial review, to reconsider on

an expedited basis its interpretation in light of these arguments. On

March 31, 1997, the court granted the Commission's request, and noted

its expectation that the Commission would complete its reconsideration

within 90 days (which is the timeframe the Commission had suggested).

On April 3, 1997, the Common Carrier Bureau issued a Public Notice

seeking comment on certain specific questions relating to section

272(e)(4). The pleading cycle closed on April 24, 1997.

15. Bell Atlantic, NYNEX, SBC (which, after the merger, includes

PacTel), and BellSouth (hereinafter ``the BOCs'') filed joint comments

and reply comments that largely track the arguments made by Bell

Atlantic and PacTel in their pleadings before the Court of Appeals. The

BOCs focus principally on what they regard as the plain language of

section 272(e)(4). As noted above, section 272(e)(4) states in relevant

part that a BOC ``may provide any interLATA * * * services to its

interLATA affiliate if such services * * * are made available to all

carriers * * * on the same [rates,] terms and conditions, and so long

as the costs are appropriately allocated.'' In the BOCs' view, the

phrase ``may provide'' is the language of a grant of authority. They

also emphasize that what Congress decided the BOCs ``may provide'' is

not just some interLATA services, but ``any'' such services.

16. The BOCs do recognize certain limits on this purported grant of

authority. First, the BOCs effectively recognize that the grant of

authority is limited to wholesale interLATA services, presumably

because the only entities to which section 272(e)(4) contemplates the

BOC providing interLATA services are ``its interLATA affiliate'' and

``all carriers''--not end-users--and because reading section 272(e)(4)

as a grant of authority to provide retail interLATA services would

render section 272's separate affiliate requirement for interLATA

services utterly meaningless. They also recognize that any grant of

authority in section 272(e)(4) is conditioned on the satisfaction of

the non-discrimination and cost-allocation requirements plainly set

forth in that provision. Lastly, given that section 271(b) requires

section 271(d)(3) approval before a BOC may provide in-region

``interLATA services,'' a phrase that the BOCs agree includes wholesale

as well as retail services, the BOCs concede that the section 271(d)(3)

approval requirement must still be met before they may provide

wholesale interLATA services to their affiliates and other carriers

pursuant to section 272(e)(4). Nonetheless, in the BOCs' view, the

``may provide'' language in section 272(e)(4) compels the conclusion

that that section is fundamentally a grant of authority to the BOCs to

directly offer in-region interLATA services, whatever the limits on

that grant.

17.To bolster their plain language argument, the BOCs further

contend that

[[Page 36219]]

reading section 272(e)(4) as a grant of authority benefits long-

distance consumers. The BOCs generally claim that, if permitted by the

statute, they intend to design, build, and operate new facilities-based

interLATA networks, as well as maintain existing ones such as their

Official Services Networks. After they receive section 271(d)(3)

approval to provide in-region interLATA services, the BOCs assert that

they would use the authority granted by section 272(e)(4) to sell

interLATA services that can be provided over these networks, on a

wholesale basis, to their affiliates (as well as other carriers). The

BOCs argue that placing the design, construction, and operation of

their interLATA networks in the local operating companies in this way

benefits long-distance consumers because the BOCs are able to achieve

considerable efficiencies that in turn lead to lower long-distance

rates. A Bell Atlantic affidavit submitted by the BOCs explains the

source of these potential efficiencies:

Bell Atlantic intends to place the construction, ownership and

operation of its long-distance network in its operating telephone

companies. * * * [T]he reason is simple. The telephone companies

currently provide local exchange, exchange access, and short-haul

(or `intraLATA') long distance service. As a result, they already

own some facilities, equipment and related support systems that can

be used to provide both local and long-distance service. They also

employ a skilled workforce that is trained in the construction,

operation, installation and maintenance of telephone facilities and

equipment, and that is capable of managing local and long distance

facilities alike. Placing the construction and operation of long

distance facilities (whether new or existing) in the operating

telephone companies will allow us to make the most efficient use of

these existing resources.

18. Ten parties, including the largest interexchange carriers, a

trade association representing long-distance resellers, and two state

commissions, filed comments and/or reply comments opposing the view

that section 272(e)(4) is an affirmative grant of authority. These

parties focus primarily on what they regard as the plain language of

272(a) and the flat prohibition they say it contains on direct BOC

provision of all but a small, clearly specified subset of in-region

interLATA services (e.g., five of the six incidental services) prior to

the sunset of the separate affiliate requirement. Specifically, they

focus on the phrases ``interLATA telecommunications services'' and

``interLATA information services'' in section 272(a)(2) and argue that

both phrases plainly apply to wholesale as well as retail services--

just as the more general phrase ``interLATA services'' in section 271

applies to both. Parties opposing the BOCs also focus on the clearly

specified subset of interLATA services that are exempted from the

separate affiliate requirement in section 272(a)--``out-of-region''

services, ``incidental'' services, ``previously authorized'' services,

``electronic publishing,'' and ``alarm monitoring''--and observe that

``wholesale'' services are not among them. They find it significant as

well that the MFJ, which the section 271/272 framework replaces in

relevant part, imposed an outright bar on BOC provision of interLATA

services and in so doing, did not distinguish between retail and

wholesale services. In light of the flat prohibition in section 272(a),

the opponents of the BOCs conclude, the only sensible way to read

section 272(e)(4) is solely as a nondiscrimination and cost-allocation

requirement that limits the manner in which BOCs may provide interLATA

services that they are otherwise authorized to provide, such as the

interLATA services that fall into the subset of exceptions in section

272(a) and, when the separate affiliate requirements sunset, other

interLATA services as well.

19. The opponents of the BOCs also dispute the claim that reading

section 272(e)(4) as a grant of authority benefits consumers. Most

broadly, they assert that the BOCs' vision of an `` `integrated

supplier' of local and long-distance services * * * is wholly

disengaged from * * * [and] at war with'' the separate affiliate

requirement in section 272. Section 272, they explain, was Congress'

response to the traditional concerns for discrimination and improper

cost allocation that arise precisely when a dominant carrier providing

local exchange and exchange access services seeks to provide long-

distance service on a physically integrated basis. More specifically,

they emphasize that section 272 reflects Congress' fundamental decision

to impose a structural, as opposed to a non-structural, solution in

response to these concerns in the short-term.

20. Lastly, the opponents of the BOCs argue that, in a world in

which section 272(e)(4) is a grant of authority, it would be extremely

difficult to enforce the non-discrimination requirement. The

Telecommunications Resellers Association (TRA), for example, complains

that non-facilities-based interLATA resellers, who are the would-be

rivals of the BOCs' interLATA affiliates, ``know all too well from

their experience * * * that even the slightest preference or

discrimination can be highly consequential in a fast-paced competitive

market.'' Moreover, according to TRA, ``[g]iven the comprehensive

interaction between a non-facilities-based resale carrier and its

network service provider, the opportunities for preference or

discrimination abound.'' TRA explains that resellers need equal

treatment not only with respect to the general rates, terms, and

conditions of service but also with respect to ``myriad operational

support systems such as order provisioning, trouble resolution and

billing.'' Along similar lines, facilities-based interLATA service

providers such as AT&T and MCI complain that the BOCs will be able to

``customize'' the networks they build and the services they provide to

be responsive to the needs of their interLATA affiliates. The principal

point of such arguments appears to be that the difficulty of enforcing

the non-discrimination requirement if we were to conclude that section

272(e)(4) is a grant of authority is one more reason to question

whether Congress intended section 272(e)(4) to be such a grant of

authority.

21. In response, the BOCs claim that any conflict between section

272(a) and section 272(e)(4) is ``wholly imaginary'' because section

272(a) merely establishes ``a general rule'' providing that the BOCs

must provide certain services ``through'' an affiliate. The subsections

that follow 272(a) then ``detail the conduct that Congress understood

to be consistent with the general rule.'' Section 272(e)(4), they say,

is one such provision. The BOCs claim the conflict is wholly imaginary

also because one of the principal activities for which section 272(a)

requires a separate affiliate is the ``[o]rigination of interLATA

telecommunications services,'' and, in the BOCs'' view, the term

``origination'' describes a retail interLATA service. They argue that,

``[w]hen a BOC provides interLATA services to its affiliate under

[section 272(e)(4)] * * *, it is not `originating' interLATA services.

Rather, it is the affiliate that `originates' such services when its

retail customers place interLATA calls.''

22. Alternatively, the BOCs claim that, even assuming there were a

conflict between section 272(a) and section 272(e)(4), ``[u]nder well-

established canons of statutory interpretation, the specific

authorization contained in section 272(e)(4) would take precedence over

the general language of section 272(a).''

23. In response to the argument that the BOCs' notion of an

integrated supplier is ``at war with'' section 272, the BOCs contend

that the separate affiliate requirement in section 272 was

[[Page 36220]]

not designed to prevent a BOC from providing interLATA service on a

physically integrated basis; rather it was designed ``to make entirely

transparent the dealings between an operating company and its interLATA

affiliate.'' As for the traditional concerns about discrimination and

improper cost allocation that arise where a BOC provides integrated

service, the BOCs contend that any such concerns that Congress may have

had in enacting section 272 exist only where the BOC has incentives to

engage in discrimination and cost shifting. According to the BOCs, the

wholesale provision of interLATA services pursuant to section 272(e)(4)

does not create such incentives because of the requirement that any

wholesale interLATA services the BOC provides to its affiliate must be

made available to any other carrier on the same rates, terms, and

conditions. The BOCs assert that this requirement effectively

eliminates any incentives to engage in discrimination or improper cost

allocation because, according to the BOCs, any advantage the BOC would

gain from engaging in such conduct could not be captured by the

affiliate alone. Rather, the advantages would necessarily be offered to

all carriers.

IV. Discussion

24. As an initial matter, we agree with the BOCs to this extent:

the phrase ``may provide'' in section 272(e)(4), if viewed in

isolation, could reasonably be read as a grant of authority. Thus,

standing alone without reference to any other statutory provision,

section 272(e)(4) could reasonably be read to allow a BOC to provide

directly any interLATA services, including in-region services, to its

affiliate so long as it does so in conformity with the non-

discrimination and cost allocation requirements in that provision.

25. But section 272(e)(4) cannot be viewed in isolation; it must be

read in conjunction with other provisions to which it is integrally

related. And a thorough analysis of sections 271 and 272 confirms our

view that section 272(e)(4) is not an independent grant of authority

for the BOCs to provide wholesale interLATA services on an unseparated

basis. We conclude first that section 272(a), in relevant part,

prohibits the BOCs from doing precisely what the BOCs claim section

272(e)(4) authorizes them to do. Specifically, section 272(a) prohibits

the BOCs, after obtaining section 271(d)(3) approval and until sunset

of section 272's requirements, from providing directly most in-region

interLATA services, including wholesale services, except through a

separate affiliate. We thus confront an apparent conflict between

section 272(a) and section 272(e)(4). In so doing, we further conclude

that the only plausible construction of either provision that

reconciles the apparent conflict and serves the core purposes for which

Congress imposed a separate affiliate requirement is a construction of

section 272(e)(4) according to which it is a non-discrimination

requirement--a requirement that is similar in function, not

surprisingly, to the non-discrimination requirements that appear in

sections 272(e)(1), 272(e)(2), and 272(e)(3). The BOCs' reading of

section 272(e)(4), by contrast, fails to serve such purposes and

further, requires us to believe that Congress intended to tuck away a

fundamental grant of authority in section 272(e). In these respects and

others, our analysis indicates that the interpretation proffered by the

BOCs is unpersuasive.

26. We find unconvincing the reasons advanced by the BOCs in

support of their claim that the separate affiliate requirement in

section 272(a) can reasonably be read to refer only to retail services.

As summarized above, the BOCs first seek to justify this reading of the

statute on the ground that section 272(a) establishes a ``general''

rule and that that general rule is necessarily read to refer only to

retail services because that is the reading that makes the general rule

consistent with the apparent grant of authority in section 272(e)(4) to

provide wholesale services. There is nothing ``general,'' however,

about the separate affiliate requirement in section 272(a) with respect

to the interLATA services that are covered by that requirement. In

particular, section 272(a)(1) states that a BOC may not provide ``any

service described in [section 272(a)(2)]'' unless it provides ``that

service'' through an affiliate. Section 272(a)(2) then specifies

precisely ``[t]he services for which a separate affiliate is

required,'' namely, manufacturing activities, the origination of

interLATA telecommunications services (with three exceptions), and

interLATA information services (with two exceptions). Thus, the scope

of section 272(a)'s separate affiliate requirement appears plainly to

be fleshed out by section 272(a)(2), not by subsequent provisions in

section 272 such as section 272(e)(4).

27. This last point also serves as a complete response to the BOCs'

persistent emphasis on the word ``through'' in section 272(a)(1). In

the BOCs'' view, section 272(a)(1) does not categorically prohibit a

BOC from providing directly the services listed in section 272(a)(2);

rather, section 272(a)(1) says that the BOC may not provide such

services unless ``it,'' the BOC, provides such services ``through'' an

affiliate. And, in the BOCs'' view, ``one of the most natural ways''

for a BOC to provide such services ``through'' an affiliate is to

provide them to an affiliate, on a wholesale basis, and then to have

the affiliate resell the services on a retail basis. As an initial

matter and as explained in more detail below, in the context of past

separate affiliate requirements that have been imposed on the BOCs for

the provision of competitive services that require local BOC facilities

as an input, there is nothing ``natural'' about the BOCs' proposed

wholesale/retail framework, which would allow the BOCs to provide

interLATA services on a fully integrated basis. Such requirements,

where a court or agency has chosen to impose them, have never allowed

such integration of local BOC facilities and the extra facilities

necessary to provide the competitive service at issue. In any event,

whether ``natural'' or not, providing integrated interLATA services

``through'' a BOC affiliate by providing such services to the affiliate

cannot be squared with the language of section 272(a)(2). As

demonstrated above, section 272(a)(2) includes the exclusive list of

services that a BOC must provide ``through'' an affiliate. That list

includes ``interLATA telecommunications services'' and ``interLATA

information services,'' which--as demonstrated immediately below--

plainly include wholesale as well as retail services. Thus, it is clear

that section 272(a) requires the BOCs to provide wholesale interLATA

services ``through'' an affiliate, just as it requires them to provide

retail interLATA services ``through'' an affiliate.

28. The BOCs' other basis for reading section 272(a) to refer only

to retail services rests on the use of the term ``[o]rigination'' in

the phrase ``[o]rigination of interLATA telecommunications services''

in section 272(a)(2). As explained above, the BOCs assert that,

``[w]hen a BOC provides interLATA services to its affiliate under

[section 272(e)(4)], * * * it is not `originating' interLATA services.

* * * [I]t is the affiliate that `originates' such services when its

retail customers place interLATA calls.'' Significantly, however, the

BOCs do not offer any dictionary definition of ``origination,'' nor a

definition drawn from any other authoritative source, that supports

their particular understanding of the term. Rather, they argue that the

term ``origination'' derives its meaning from the context of section

272. Although we

[[Page 36221]]

agree that the term must be understood in its proper context, the

difficulty with the BOCs' position is that they simply assert, without

explanation, that the proper context is ``the specific activity of

providing interLATA services to . . . customers,'' i.e., providing

retail interLATA services. In contrast, sections 271 and 272 indicate

that Congress was almost certainly using the term ``origination'' in

section 272(a)(2) in a geographical sense.

29. Specifically, it is far more likely that, by requiring a

separate affiliate for ``[o]rigination of interLATA telecommunications

services,'' Congress simply meant to clarify that a separate affiliate

is required for certain interLATA telecommunications services as judged

by the point of origination of such services. Such a clarification

might have been considered helpful in light of the fact that, as noted

above, one of the exceptions to the separate affiliate requirement for

``[o]rigination of interLATA telecommunications services'' is for

``out-of-region'' services, that is, services for which the point of

origination is outside a BOC's in-region states. This out-of-region

versus in-region distinction is one of the fundamental distinctions in

section 271; section 271 permits immediate entry for the former, but

requires section 272(d)(3) approval for the latter. It is therefore

only natural that Congress would have wanted to maintain--and did

maintain--that same distinction in the separate affiliate requirement

in section 272. Further, this view of ``origination'' in section

272(a)(2) appears to be consistent with the absence of that term with

respect to ``interLATA information services.'' Because Congress failed

to include an ``out-of-region'' services exception with respect to

interLATA information services, a separate affiliate is required for

such services regardless of their point of origination.

30. The legislative history supports our view that the term

``origination'' was meant merely as a helpful clarification. It appears

that the term ``origination'' was not part of either the Senate or the

House version of section 272(a), but was added during the

reconciliation conference. For example, the Senate version of section

272(a), which was the template for the final version, stated, ``The

services for which a separate subsidiary is required * * * are: (A)

Information services * * * (B) Manufacturing services * * * (C)

InterLATA services.* * *'' Thus, both houses of Congress passed

versions of section 272(a) in which the separate affiliate requirement,

even the BOCs would have to agree, clearly applied to both retail and

wholesale interLATA services. The explanation in the Joint Explanatory

Statement of the Senate version of section 272 confirms this. It

describes the services for which a separate affiliate is required as

including ``interLATA telecommunications services,'' without the term

``origination'' preceding it and without any indication of a wholesale/

retail distinction. Thus, to accept the BOCs' argument, one would have

to conclude that the addition of the term ``origination'' during the

conference reflected Congress' decision to reject the broad consensus

that had been reached on the scope of the separate affiliate

requirement and to cut back on it significantly by limiting the

requirement to retail service offerings that originate within the BOC's

service territory. If this were the case, one would expect, at a

minimum, some discussion of such a decision in the legislative history,

but we have found no such discussion, and the parties have not pointed

to any. The Joint Explanatory Statement, for example, is silent on the

issue. Rather, the explanation in the Joint Explanatory Statement of

the final version of section 272 simply states, ``The conference

agreement adopts the Senate provisions with several modifications,''

and then goes on to discuss the major changes that occurred, without

mentioning the addition of ``origination.''

31. Moreover, equating the ``origination'' of a service with the

retail provision of that service appears to lead to unlikely results in

two respects. First, as just noted, the term ``origination'' does not

precede the other main category of interLATA service for which a

separate affiliate is required, namely, interLATA information services.

Under the BOCs' reading of the statute, then, in-region wholesale

interLATA information services would still generally require a separate

affiliate, while in-region wholesale interLATA telecommunications

services would not. Yet Congress treated these two kinds of in-region

interLATA services identically for section 271 purposes, requiring

section 271(d)(3) approval for both. The BOCs have not advanced any

plausible rationale for why Congress would have treated them

fundamentally differently for section 272 purposes.

32. Second, equating the ``origination'' of a service with the

retail provision of that service also appears to lead to unlikely

results because of the interplay between sections 271(a) and 271(b).

Section 271(a) bars BOC provision of ``interLATA services''--which, as

noted above, the BOCs agree include wholesale services--``except as

provided in this section.'' Section 271(b) then authorizes, on various

timetables, ``interLATA services originating in any of [a BOC's] in-

region States,'' ``interLATA services originating outside its in-region

States,'' and certain ``incidental interLATA services * * * originating

in any State.'' If the term ``origination'' in section 272(a)(2) refers

only to the provision of retail interLATA services, then the references

to ``originating'' in section 271(b) would also appear to refer to

retail interLATA services. Consequently, under the BOCs' reading of the

statute, section 271(a) bars a BOC from providing wholesale interLATA

services, but no provision of section 271(b) authorizes the BOCs to

provide these services, including out-of-region and incidental

wholesale services. Thus, we conclude that a carrier ``originat[es]''

an in-region interLATA service in a particular state when it provides

in-region interLATA service regardless of whether it provides that

service on a wholesale or a retail basis.

33. We note that, during the proceeding that resulted in the Non-

Accounting Safeguards First Report and Order, certain of the BOCs

advanced a different argument as to why the language of section 272(a)

does not cover wholesale services: that the phrase ``telecommunications

services'' itself--statutorily defined as ``the offering of

telecommunications for a fee directly to the public, * * * regardless

of the facilities used''--covers only retail services. Proponents of

this interpretation contended that wholesale telecommunication services

are not offered directly to ``the public,'' but only to other carriers.

In the Non-Accounting Safeguards First Report and Order, the Commission

addressed this argument at length and rejected it primarily on the

ground that it could find no basis in the statute, legislative history,

or FCC precedent for finding the reference to ``the public'' in the

statutory definition to be intended to exclude wholesale

telecommunications services. Rather, the Commission concluded that the

phrase ``the public'' was meant only to exclude private carriage

services, as opposed to common carrier services. While the BOCs have

not pressed this particular argument before the court or before the

Commission on reconsideration, Omnipoint has pressed a variant of it in

response to the Bureau's request for comments on the scope of section

272(e)(4).

34. In providing wireless service, Omnipoint explains that it often

needs transport services that cross LATA boundaries and that it could

deliver a more efficient wireless service if it

[[Page 36222]]

could use the BOCs' interLATA transport facilities, such as the

existing transport facilities that are part of the BOCs' Official

Services Networks, rather than build its own interLATA transport

facilities or lease the interLATA transport facilities of existing

interLATA service providers (facilities which Omnipoint says are

inconveniently located for its purposes). Its principal legal argument

is that our conclusion in the Non-Accounting Safeguards First Report

and Order that the phrase ``telecommunications services'' covers all

wholesale (as well as retail) telecommunication services was ``overly

broad'' and that it should be construed to exclude at least one kind of

wholesale arrangement, carrier-to-carrier leasing of high-capacity

private lines. We find no basis in the statutory definition of

``telecommunications services,'' however, for concluding that this kind

of wholesale arrangement, as opposed to all other kinds, falls outside

that definition.

35. In providing wireless service, Omnipoint explains that it often

needs transport services that cross LATA boundaries and that it could

deliver a more efficient wireless service if it could use the BOCs'

interLATA transport facilities, such as the existing transport

facilities that are part of the BOCs' Official Services Networks,

rather than build its own interLATA transport facilities or lease the

interLATA transport facilities of existing interLATA service providers

(facilities which Omnipoint says are inconveniently located for its

purposes). Its principal legal argument is that our conclusion in the

Non-Accounting Safeguards First Report and Order that the phrase

``telecommunications services'' covers all wholesale (as well as

retail) telecommunication services was ``overly broad'' and that it

should be construed to exclude at least one kind of wholesale

arrangement, carrier-to-carrier leasing of high-capacity private lines.

We find no basis in the statutory definition of ``telecommunications

services,'' however, for concluding that this kind of wholesale

arrangement, as opposed to all other kinds, falls outside that

definition.

36. US WEST, like the other BOCs, does not dispute that the

statutory definition of ``telecommunications services'' applies to

wholesale telecommunications services. It merely observes that the

statutory definition does not cover all telecommunications-like

services--most significantly, it does not include private carriage

services--and that the BOCs should be able to provide directly any

service that falls outside that definition. With the important

reminders that (1) wholesale telecommunications services are one kind

of telecommunications-like services that, as just noted, does not fall

outside that definition, and (2) the separate affiliate requirement

also applies to in-region interLATA information services, we have no

objection to this observation. In this regard, however, we note our

serious doubts whether there is any interLATA service that a BOC might

seek to provide to its affiliate that could be properly characterized

as a private carriage service, given that the BOC would be under a

legal obligation pursuant to sections 272(c)(1) and 272(e)(4) to make

such service available to any other entity--a hallmark of a common

carrier service.

37. Firmly bolstering our view that nothing in section 272(a)(2)

suggests a wholesale/retail distinction--not ``origination,'' not

``telecommunication services,'' and not any other term or phrase--is

the fact that section 251(c)(4) demonstrates that, when Congress means

to create an important wholesale/retail distinction, it does so

clearly, a point we emphasized in the Non-Accounting Safeguards First

Report and Order. Section 251(c)(4) imposes a duty on incumbent local

exchange carriers to offer for resale at wholesale rates ``any

telecommunications service that the carrier provides at retail to

subscribers who are not telecommunications carriers.'' Moreover,

section 272(a)(2) sets out quite specifically the three kinds of

services for which a separate affiliate is required and the exceptions

to each kind of service. Congress' attention to detail in this respect

makes the lack of any straightforward textual indication of a

wholesale/retail distinction in section 272 all the more telling. In

sum, we reject the BOCs' assertion that section 272(a) prohibits a BOC

from offering directly to customers only retail interLATA services

originating in-region.

38. We think that section 272(b)(1), which requires the separate

affiliate to ``operate independently'' of the BOC, provides independent

support for the fact that Congress did not intend the BOCs to provide

in-region interLATA services, on a wholesale basis, to their affiliates

and other carriers. To allow the BOCs to provide such services would be

to allow them to place the design, construction, and operation of their

interLATA facilities in their local operating companies and thus to

provide their wholesale in-region interLATA services over a uniquely

integrated local-interLATA network. As explained above, however, we

concluded in the Non-Accounting Safeguards First Report and Order that

section 272(b)(1) was principally designed to prevent substantial

integration of the local operating company's local network facilities

and the separate affiliate's long-distance network facilities (assuming

the affiliate chooses to be a facilities-based provider rather than a

reseller). And such a conclusion plainly presupposes that Congress did

not intend that local and interLATA facilities could be integrated

within the local operating company itself. For what purpose could

Congress have had in prohibiting physical integration of the local

operating company's local facilities and the affiliate's interLATA

facilities if complete physical integration of local and interLATA

networks within the local operating company itself would be permitted

regardless?

39. Having concluded that section 272(a), reinforced by section

272(b)(1), prohibits in relevant part precisely what the BOCs claim

section 272(e)(4) authorizes, we now address the BOCs' alternative

arguments regarding the proper interpretation of section 272(e)(4). As

summarized above, the BOCs contend that, even assuming arguendo we were

to find an apparent conflict between sections 272(a) and 272(e)(4),

under the well-established canon of construction, the more specific

provision overrides the more general provision. Even assuming arguendo

that this canon were applicable, however, it is far from clear that

section 272(e)(4) should be considered the more specific provision and

section 272(a) the more general. While there are certain respects in

which section 272(e)(4) is the more specific provision, there are also

certain respects in which section 272(e)(4) is the more general. For

example, one could reasonably view section 272(e)(4) as the more

general provision because that section, under the BOCs' reading of it,

constitutes a broad grant of authority to provide directly, on a

wholesale basis, any interLATA services, any interLATA facilities, any

intraLATA services, and any intraLATA facilities, whereas section

272(a) is a circumscribed limitation on that broad grant that requires

that, out of the entire universe of interLATA or intraLATA facilities

or services that a BOC is purportedly authorized to provide directly,

certain such services--specifically, manufacturing activities,

interLATA telecommunications services (with three exceptions), and

interLATA information services (with two

[[Page 36223]]

exceptions)--be provided through a separate affiliate.

40. It is also far from clear why, if we were to conclude that

section 272(e)(4) overrides section 272(a), we would not have to

conclude that it also overrides section 271(a), thus permitting the

BOCs to provide any wholesale interLATA services immediately, before

section 271(d)(3) approval--a result, as mentioned above, the BOCs

disavow. In this regard, the BOCs' attempt to distinguish section

271(a) and section 272(a) is unpersuasive. Specifically, they argue

that section 271(a) does not give way to section 272(e)(4) because

section 271(a) states that a BOC may not provide interLATA services

``except as provided in this section,'' and section 272(e)(4) is not

``in this section.'' Yet, as explained above, we think the text of

section 272(a) directs equally clearly that the services for which a

separate affiliate is required, along with any exceptions, are to be

found in section 272(a)(2) and only that provision, not in subsequent

provisions of section 272 such as section 272(e)(4).

41. In any event, we find that the canon the BOCs seek to invoke is

not applicable in this instance, at least not in the way in which the

BOCs have described it. The canon that ``the specific governs the

general'' only applies where the conflict between the statutory

provisions is inescapable, that is, where there is no plausible

construction of either provision that allows the conflict to be

reconciled. This is for good reason, for the application of the canon

where there is no such construction presupposes that Congress has

contradicted itself--a position that should be adopted only as a last

resort. Thus, we are obliged to determine whether there is a plausible

construction of either section 272(a) or 272(e)(4) that allows us to

reconcile the apparent conflict, making sense of both provisions and

serving the purposes of the statute to the greatest extent possible.

42. We are doubtful that there is any plausible construction of

section 272(a) that would allow us to reconcile the apparent conflict

and adopt the BOCs' reading of section 272(e)(4). As discussed at

length above, the BOCs' characterization of section 272(a) as a

``general'' rule, to be given content by the subsequent subsections of

section 272, cannot be sustained in light of that rule's clear

directive to look specifically to the list of services in section

272(a)(2). Moreover, the BOCs' interpretation of ``origination'' as

referring to the provision of interLATA services to retail customers

who place interLATA calls does not appear to have any basis in the

common usage of that term and appears to lead to unlikely results. The

only other possible construction would be to add to the list of

exceptions in section 272(a)(2) a ``wholesale services'' exception.

While there may be situations where it is defensible to read an

exception into a statute in order to reconcile an otherwise

irreconcilable statutory conflict, that seems inappropriate where, as

here, Congress explicitly focused on the issue of exceptions and

prescribed a specific list. Buttressing this point is the fact that the

Senate version of section 272 would have expressly authorized the

Commission to grant exceptions to the separate affiliate requirement,

but that provision was dropped by the conferees.

43. By contrast, we conclude that there is a plausible construction

of section 272(e)(4) that reconciles the apparent conflict with section

272(a) and does so in a way that is uniquely consistent with the

specific policy choice that Congress made in enacting the separate

affiliate requirement. Specifically, as we previously concluded in the

Non-Accounting Safeguards First Report and Order, we construe section

272(e)(4) to mean that the BOC may provide any interLATA or intraLATA

facilities or services it is otherwise authorized to provide to its

interLATA affiliate if such services or facilities are made available

to all carriers at the same rates and on the same terms and conditions,

and so long as the costs are appropriately allocated. Thus, in our

view, section 272(e)(4) is not a grant of authority; it merely

prescribes the manner by which BOCs may provide interLATA and intraLATA

facilities and services to their affiliates.

44. We believe this construction of section 272(e)(4) does not have

any of the defects alleged by the BOCs that might render the

construction implausible. First, our reading gives effect to all of the

statute's existing terms, including the key terms ``may provide'' and

``any'' on which the BOCs rely; our interpretation just does not read

these terms as effectuating a grant of authority.

45. Second, our interpretation does not render section 272(e)(4)

meaningless or redundant. Far from it, the provision serves precisely

the same function as the other three provisions in section 272(e). As

explained above, section 272(c)(1) imposes a general non-discrimination

requirement on the BOCs in their dealings with affiliates. In order

``to reduce litigation,'' however, Congress, in section 272(e), set

forth more particularized non-discrimination requirements tailored to

specific contexts. Section 272(e)(1), for example, sets forth a non-

discrimination requirement with respect to the time in which a BOC

fulfills requests for local exchange or exchange access service.

Similarly, section 272(e)(4) sets forth a non-discrimination

requirement with respect to the provision of interLATA or intraLATA

facilities and services that a BOC is otherwise authorized to provide--

services such as out-of-region services, five of the six incidental

services, previously authorized activities, and perhaps most

importantly, all other interLATA services as the separate affiliate

requirements expire.

46. In light of the similar function that section 272(e)(4), under

our reading, serves in relation to the other three provisions of

section 272(e), our reading also draws support from the well-

established canon of construction that statutory provisions are to be

construed in light of the company they keep. Our interpretation of

section 272(e)(4) is also consistent with the overriding focus of

section 272 generally. As both the text of section 272 and the

descriptions of the provision in the legislative history make clear,

section 272 primarily establishes structural separation requirements

and other safeguards applicable to the BOCs' provision of interLATA and

other services that the BOCs are elsewhere authorized to provide (in

section 271, for the most part). In contrast, the BOCs' proposed

reading of section 272(e)(4) as a grant of authority is flatly

inconsistent with the thrust of section 272(e) in particular and

section 272 in general. It seems unlikely enough that Congress would

have placed a fundamental grant of authority to the BOCs in section

272, the thrust of which, as just noted, is to prescribe the manner in

which the BOCs may enter certain new markets; but it seems utterly

implausible that Congress would have placed such a grant in section

272(e) as the fourth subsection of a provision entitled ``Fulfillment

of Certain Requests,'' following three other subsections that all

impose restrictions on the BOCs.

47. We recognize that our preferred interpretation of section

272(e)(4) does not give this provision the great significance the BOCs'

interpretation does. We think this fact weighs in favor of our

interpretation, however, because judging from the legislative history,

Congress did not appear to regard section 272(e)(4) as a particularly

significant provision, just as it did not appear to attach great

significance to the addition of the term ``origination'' in section

272(a). Specifically, section 272(e)(4) was introduced as part of a

[[Page 36224]]

lengthy managers' amendment to the Senate version of section 272.

Significantly, the amendment as a whole was described merely as

``mak[ing] certain technical corrections.'' Moreover, at no point

during the discussion of the managers' amendment was there any specific

discussion of section 272(e)(4) or its impact. Nor does there appear to

have been any such discussion of this provision at any later point in

the legislative history. The absence of any discussion on the measure

would seem highly unlikely, however, if section 272(e)(4) were really

intended to be a fundamental grant of authority as the BOCs claim.

48. Finally, and most importantly, we think our interpretation is

not only a plausible construction of the text, but also the only

construction that can be squared with the considered policy choice

Congress made in imposing a separate affiliate requirement for in-

region interLATA services. For many years, until the passage of the

Telecommunications Act of 1996, a well-known regulatory debate took

place--in the federal courts, in the Department of Justice, in the

Commission, and among industry groups, antitrust law experts, and

economists--regarding the wisdom of allowing the BOCs, as regulated

entities that control the bottleneck facilities of the local network,

to provide services in potentially competitive markets that require

these bottleneck facilities as an essential input of such services.

Examples of such services include interLATA services, which are

provided by connecting a BOC's local bottleneck facilities to interLATA

facilities, enhanced services, which are provided by connecting the

BOC's local facilities to computer facilities, and wireless services,

which are provided by connecting the BOC's local facilities to wireless

facilities. Certain parties in this debate emphasized the anti-

competitive dangers that arise if the BOC is permitted to provide such

services on a physically integrated basis. That is, they emphasized the

dangers that arise if the BOC is allowed to place the design,

construction, and operation of the non-local facilities at issue--such

as interLATA facilities in the case of interLATA services, computer

facilities in the case of enhanced services, or wireless facilities in

the case of wireless services--in the local operating company. For

example, with respect to interLATA services, these parties were

concerned that a BOC, if permitted to provide such services on an

integrated basis, would have the ability and incentive to arrange more

efficiently designed, higher quality connection between its local

network and its interLATA facilities than between its local network and

rivals' interLATA facilities. They were also concerned that a BOC might

take the common costs of the facilities (and employees) that are

jointly used to provide both local and interLATA service and allocate,

on its books of account, an undue proportion of such costs to its local

operations. As suggested above, such improper cost allocation would

allow the BOCs to overcharge local service ratepayers while at the same

time inefficiently undercut their interexchange competitors. On the

other side of the debate, the BOCs emphasized the significant

integrative efficiencies that result from being able to have the same

facilities (and employees) that are used in the design, construction,

and operation of their local networks used in the design, construction,

and operation of their interLATA networks. And they also disputed that

service on a physically integrated basis raises the anti-competitive

dangers described above. The MFJ bar on the provision of interLATA

services, which preceded the section 271/272 framework, clearly

reflected a judgment that the dangers were serious and outweighed any

benefits.

49. There was a related well-known debate during these years over

the wisdom of requiring the BOCs, in the event they were to be

permitted to provide competitive services that require the BOCs' local

facilities as an input for such services, to do so through a separate

affiliate. For certain such services such as wireless services, the

Commission decided, precisely because of the anti-competitive dangers

described above, that a separate affiliate would generally be required.

With respect to the provision of interLATA services on a non-dominant

basis by local exchange carriers other than the BOCs (which were not

covered by the MFJ), the Commission decided the same. For other

services such as enhanced services, the Commission originally

determined that a separate affiliate would be required, but

subsequently decided that non-structural safeguards would suffice. The

particulars of these decisions is not the point here, however. Rather,

the key point is that, as reflected in these and other similar court

and agency decisions, both sides in these separate affiliate debates,

as well as the decisionmakers who resolved them at various points,

shared a common assumption about what was fundamentally at stake in

such debates, namely, whether the BOCs could provide the competitive

service at issue on an end-to-end, physically integrated basis. Thus,

for example, in the many years of debate over the wisdom of a separate

affiliate requirement for enhanced services, it was uniformly assumed

that what was at issue was the BOCs' right to place the design,

construction, and operation of the computer facilities necessary to

furnish enhanced services--the computer hardware, the databases, etc.--

in the local operating company and thus to provide such services on an

end-to-end, physically integrated basis.

50. In any event, in enacting sections 271 and 272 of the

Telecommunications Act of 1996, Congress ended the debate with respect

to interLATA services and decided the issue legislatively. With respect

to in-region interLATA services in particular, the section 271/272

framework permits the BOCs to provide such services once they obtain

section 271(d)(3) approval, but they have to do so, at least initially,

through a separate affiliate. And as noted above, we are not at liberty

to depart from that decision during the period in which the statutory

separate affiliate requirements are in effect.

51. The BOCs respond that Congress' decision to impose a separate

affiliate requirement did not necessarily include the decision to

preclude a BOC from providing in-region interLATA service on a

physically integrated basis, that is, from placing the design,

construction, and operation of interLATA network facilities in the

local network operating company. Rather, in their view, the separate

affiliate requirement is designed merely ``to make entirely transparent

the [wholesale] dealings between an operating company and its interLATA

affiliate,'' and is entirely agnostic on whether the service ultimately

being provided by the BOC to the affiliate and being sold by the

affiliate to end users is a uniquely integrated one. Yet, as discussed

above, a bar on the integration of a BOC's local facilities and the

additional BOC facilities necessary to provide competitive services

such as interLATA services has always been understood by courts and

agencies, and the lawyers and economists arguing before them, as the

sine qua non of a separate affiliate requirement, and we presume that

Congress chose to impose a separate affiliate requirement in section

272 with that long-held common understanding in mind. And we presume

this for good reason. Again as explained above, the concerns for

discrimination and improper cost allocation that have

[[Page 36225]]

always been understood as the justification for the imposition of a

separate affiliate requirement are most present where interLATA

services are being provided on an integrated basis.

52. Indeed, were we to conclude that the BOCs were permitted to

provide interLATA services on an integrated basis, it is hard to

understand why Congress would choose to require that a separate

affiliate ``operate independently'' of the BOC, or more importantly,

why it would choose to require a separate affiliate at all. To be sure,

as the BOCs explain, a separate affiliate also forces the dealings

between the operating company and interLATA affiliate to be ``entirely

transparent.'' But the only dealings that would take place between the

operating company and the separate affiliate under the BOCs' vision of

an integrated supplier are the typical dealings that take place between

a facilities-based interLATA service provider and a reseller, that is,

dealings related to the pricing, ordering, and billing of the

facilities-based provider's interLATA services. And the possibility of

discrimination in the wholesale pricing, ordering, and billing of

interLATA services, by itself, has never been thought to justify, so

far as we are aware, the imposition of a separate affiliate requirement

in an analogous context. It is not surprising, then, that we are also

not aware of a separate affiliate requirement in any analogous context,

statutory or regulatory, past or present, in which a BOC or similarly

regulated entity has been permitted to provide facilities-based

integrated service to the separate affiliate, so long as it does not

also sell the service to end users.

53. The BOCs also argue that, even assuming that Congress, in

enacting section 272, was generally concerned with the risks of

discrimination and improper cost allocation that arise with the

provision of facilities-based integrated service, such risks are

insubstantial in light of the non-discrimination requirement in section

272(e)(4) (even under their reading of it as a grant of authority) that

bars a BOC from advantaging its interLATA affiliate. They observe that

Congress viewed the risk of discrimination and improper cost allocation

as problematic only where the BOCs possess not only the ability to

engage in such conduct, but also the incentive. In this case, the BOCs

argue, the non-discrimination requirement in section 272(e)(4) removes

any ``conceivable incentive'' they might otherwise have to engage in

prohibited conduct in the provision of wholesale interLATA services.

54. As an initial matter, we do not think that the presence of a

non-discrimination requirement would remove a BOC's incentive to

advantage its affiliate, given, among other things, the numerous

practical difficulties in enforcing such a requirement. But even

assuming arguendo that it would diminish the BOC's incentive to some

extent, the BOCs' argument here cannot withstand scrutiny. As explained

above, in a world in which section 272(e)(4) is a grant of authority,

the affiliate would be acting as a reseller that purchases finished

wholesale interLATA services from a facilities-based interLATA service

provider, i.e., the BOC. Thus, the only incentive the presence of a

non-discrimination requirement would diminish is the incentive of the

local operating company to discriminate in the pricing, ordering, and

billing of wholesale interLATA services in favor of the affiliate. Any

benefits of this kind of unlawful conduct could not be captured

entirely by the affiliate but would have to be shared. But the non-

discrimination requirement certainly would not diminish the local

operating company's more serious incentive to discriminate in the

internal design, construction, and operation of interLATA networks in

favor of itself (concern for which, as just explained, has always been

the primary justification for separate affiliate requirements in this

area) and at the expense of its rival facilities-based interLATA

service providers. Any benefits of this kind of unlawful conduct could

be captured entirely by the local operating company when it sells

finished wholesale interLATA services to its affiliate and other

resellers. In this regard, we find it significant that the BOCs claim

that `` `there is no possibility that a BOC could use its supply of

wholesale interLATA services to its affiliate to impede competition in

the retail market.' '' They make no similar claim about the possibility

that a BOC could impede competition in the way it creates that supply.

Thus, because it is clear that, with respect to the design,

construction, and operation of interLATA networks, the BOCs have the

ability and incentive to engage in the very core prohibited conduct

that Congress was concerned about when it made its policy choice to

require separate affiliates, that choice is controlling.

55. Finally, our conclusion that section 272(e)(4) is not a grant

of authority serves as a complete response to the BOCs' arguments

regarding use of their in-region, interLATA Official Services Networks.

In the Non-Accounting Safeguards First Report and Order, we noted that

a BOC is permitted to ``transfer ownership'' of its Official Services

Network to its affiliate (so long it did so in a way that gave other

carriers an equivalent opportunity to obtain ownership). We did not

offer any discussion of the issue, however, because there was no

indication in the record before us that transferring ownership of these

Networks to affiliates was something that the BOCs seek to do. As a

Bell Atlantic affidavit filed in response to our expedited

reconsideration of section 272(e)(4) notes, these networks are

``currently used in the operation of the local telephone network'' and

thus their ownership ``realistically cannot be transferred.'' Rather,

the BOCs seek to maintain ownership of their interLATA Official

Services Networks and lease excess capacity on the networks to their

affiliates. The leasing of capacity on an in-region interLATA network

is plainly an in-region interLATA service, however. And, as we conclude

in this Second Order on Reconsideration, because section 272(e)(4) is

not a grant of authority, a BOC may not directly provide in-region

interLATA services until the separate affiliate requirement is removed.

V. Conclusion

56. For the reasons stated, we find that the most sensible

interpretation of section 272(e)(4) is that it is a non-discrimination

and cost allocation requirement that applies to interLATA services that

the BOC is otherwise authorized to provide; it is not an affirmative

grant of authority to provide integrated interLATA services on a

wholesale basis. In so finding, we emphasize that Congress did not

ignore, nor have we, the integrative efficiencies that may result when

the same people and facilities of a BOC that provide local service

provide interLATA service as well. Indeed, by providing for the sunset

of the separate affiliate requirement within three years of BOC entry

(for telecommunications services) unless the Commission acts otherwise,

Congress envisioned that there may well come a point when the benefits

of such efficiencies come to outweigh any risk of anti-competitive harm

due to discrimination and improper cost allocation such that consumers

are better off. In this respect, the BOCs' emphasis on these benefits

is not misguided; it is merely premature.

VI. Ordering Clauses

57. Accordingly, it is Ordered that, pursuant to sections 1-4, 201-

205, 214,

[[Page 36226]]

251, 252, 271, 272, and 303(r) of the Communications Act of 1934, as

amended, 47 U.S.C. Secs. 151-154, 201-205, 214, 251, 252, 271, 272, and

303(r), the Second Order on Reconsideration in CC Docket No. 96-149 is

Adopted.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 97-17647 Filed 7-3-97; 8:45 am]

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