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

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## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** July 7, 1997
- **Citation:** 62 FR 36216

## Text

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]
BILLING CODE 6712-01-P

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A97-17647. Public record. Not legal advice.