[Federal Register Volume 61, Number 132 (Tuesday, July 9, 1996)]
[Rules and Regulations]
[Pages 35964-35971]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17404]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Chapter I

[CC Docket No. 96-21, FCC 96-288]


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

AGENCY: Federal Communications Commission.

ACTION: Interim rule.

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SUMMARY: In this Report and Order, the Commission facilitates the 
efficient and rapid provision of out-of-region, domestic, interstate, 
interexchange services by the BOCs, as contemplated by the 
Telecommunications Act of 1996 (1996 Act), while still protecting 
ratepayers and competition in the interexchange market, by removing 
dominant regulation for BOCs that provide such services through an 
affiliate that complies with certain safeguards. These safeguards are 
the same as those that have applied for more than ten years to 
affiliates of independent local exchange companies (LECs) (i.e., 
exchange telephone companies, including GTE, other than the BOCs) that 
are regulated as non-dominant interexchange carriers under the rules 
established in the Competitive Carrier proceeding. These rules will 
permit the rapid entry by the BOCs into the provision of out-of-region 
interstate, interexchange services while providing protection against 
anticompetitive conduct.

EFFECTIVE DATE: August 8, 1996.

FOR FURTHER INFORMATION CONTACT: Michael Pryor (202) 418-0495 or 
Melissa Waksman (202) 418-0913, Common Carrier Bureau, Policy and 
Program Planning Division.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's 
Report and Order adopted on June 28, 1996, and released on July 1, 
1996, FCC 96-288. The full text of this Report and Order is available 
for inspection and copying during normal business hours in the FCC 
Reference Center (Room

[[Page 35965]]

239), 1919 M St., N.W., Washington, DC. The complete text also may be 
purchased from the Commission's copy contractor, International 
Transcription Service, Inc., (202) 857-3800, 2100 M St., NW., Suite 
140, Washington, DC 20037.
    Paperwork Reduction: Public burden for this recordkeeping 
requirement is estimated to average 6056 hours per response, including 
the time for reviewing instructions, searching existing data sources, 
gathering and maintaining the data needed, and completing and reviewing 
the collection of information. Send comments regarding this burden 
estimate or any other aspect of this recordkeeping requirement, 
including suggestions for reducing the burden, to the Federal 
Communications Commission, Records Management Branch, Paperwork 
Reduction Project, Washington, D.C. 20554 and to the Office of 
Management and Budget, Paperwork Reduction Project, Washington, D.C. 
20503.

Synopsis of Notice of Proposed Rulemaking

I. Introduction

    1. In enacting the Telecommunications Act of 1996 (1996 Act), Pub. 
L. No. 104-104, 110 Stat. 56 (1996) codified at 47 U.S.C. Secs. 151 et 
seq, Congress sought to establish ``a pro-competitive, de-regulatory 
national policy framework'' for the United States telecommunications 
industry. The 1996 Act, among other things, provided that upon 
enactment the Bell Operating Companies (BOCs) could provide interLATA 
telecommunications services originating outside of their in-region 
states. In response to the new legislation, the Commission released, on 
February 14, 1996, a Notice of Proposed Rulemaking, 61 FR 6607 (Feb. 
21, 1996), in which the Commission proposed an interim regime to govern 
the BOCs' provision of out-of-region domestic, interstate, 
interexchange service. The Notice addressed all ``out-of-region'' 
interstate, interexchange services (including interLATA and intraLATA 
services). Eighteen parties filed comments and thirteen parties filed 
reply comments.
    2. Under our existing rules, BOC provision of out-of-region, 
interstate, interexchange services is subject to dominant carrier 
regulation. In order to facilitate the efficient and rapid provision of 
out-of-region, domestic, interstate, interexchange services by the 
BOCs, as contemplated by the 1996 Act, while still protecting 
ratepayers and competition in the interexchange market, we remove 
dominant regulation for BOCs that provide out-of-region, interstate, 
interexchange services through an affiliate that complies with certain 
safeguards. These safeguards are the same as those that have applied 
for more than ten years to affiliates of independent local exchange 
companies (LECs) that are regulated as non-dominant interexchange 
carriers under the rules established in the Competitive Carrier 
proceeding. The safeguards require that the affiliate: (1) maintain 
separate books of account from the LEC; (2) not jointly own 
transmission or switching facilities with the LEC; and (3) take any 
tariffed services from the affiliated LEC pursuant to the terms and 
conditions of the LEC's generally applicable tariff. We also conclude 
that a BOC affiliate providing out-of-region, domestic, interstate, 
interexchange services should be treated, for purposes of the BOCs' 
accounting, as a nonregulated affiliate under the Commission's joint 
cost and affiliate transactions rules, just as independent LEC 
affiliates are now treated.
    3. The regime adopted in this Report and Order is expressly 
designed as an interim measure to facilitate the BOCs' prompt provision 
of out-of-region, domestic, interstate, interexchange services. In 
March 1996, the Commission sought comment in the Interexchange NPRM, on 
whether to modify or eliminate these affiliate requirements as a 
condition for non-dominant treatment of independent LEC provision of 
out-of-region, interstate, interexchange services. We also sought 
comment on whether, if we modify or eliminate these requirements for 
independent LECs, we should also eliminate or modify our treatment of 
BOC out-of-region, interstate, interexchange services. We will 
establish final rules for BOC out-of-region, interstate, interexchange 
services in that proceeding.

II. Background

A. The Competitive Carrier Proceeding

    4. Between 1979 and 1985, the Commission conducted the Competitive 
Carrier proceeding, in which it examined how its regulations should be 
adapted to reflect and facilitate the increasing competition in 
telecommunications markets. In a series of orders, the Commission 
distinguished between carriers with market power (dominant carriers) 
and those without market power (non-dominant carriers). The Commission 
gradually relaxed its regulation of non-dominant carriers because it 
concluded that non-dominant carriers lacked the incentive and ability 
to engage in conduct that might be anticompetitive or otherwise 
inconsistent with the public interest.
    5. In its First Report and Order, 45 FR 52453, November 18, 1980, 
the Commission classified AT&T and its then-affiliated local exchange 
companies as well as independent local exchange companies as dominant 
carriers and concluded that these dominant carriers should be subject 
to the ``full panoply'' of Title II regulation. Recently, in light of 
increasing competition in the interstate, domestic, interexchange 
telecommunications market, and evidence that AT&T no longer possesses 
the ability to control prices unilaterally, the Commission reclassified 
AT&T as a non-dominant carrier in that market.
    6. In its Fourth Report and Order, 48 FR 52452, November 1983, the 
Commission considered how it should regulate the provision of 
interstate, interexchange services by independent LECs. Because the 
Modification of Final Judgment, United States v. Western Elec. Co., 552 
F. Supp. 131 (D.D.C. 1982), aff'd. sub nom., Maryland v. United States, 
460 U.S. 1001 (1983), prohibited BOCs from offering interLATA services, 
the Fourth Report and Order addressed only the interstate, 
interexchange offerings of independent LECs. The Commission determined 
that interexchange carriers affiliated with independent LECs would be 
regulated as non-dominant carriers. In the Fifth Report and Order, 49 
FR 34824, September 4, 1984, the Commission explained its definition of 
the term ``affiliate'' as ``a carrier that is owned (in whole or in 
part) or controlled by, or under common ownership (in whole or in part) 
or control with, an exchange telephone company,'' and identified three 
separation requirements that the affiliate must meet in order to 
qualify for non-dominant treatment. These requirements are that the 
affiliate: (1) maintain separate books of account; (2) not jointly own 
transmission or switching facilities with the LEC; and (3) if it uses 
the LEC's services, it should acquire them via the LEC's tariffs. The 
Commission further concluded that, if the LEC provided interstate, 
interexchange services directly, rather than through an affiliate, 
those services would be subject to dominant carrier regulation.
    7. The Fifth Report and Order also addressed the regulation of the 
BOCs' provision of interLATA services:

    The BOCs currently are barred by the [Modification of Final 
Judgment] from providing interLATA services. . . . If this bar is 
lifted in the future, we would regulate the BOCs' interstate, 
interLATA services as dominant until we determined what degree

[[Page 35966]]

of separation, if any, would be necessary for the BOCs or their 
affiliates to qualify for nondominant regulation.

B. The 1996 Act and the BOC Out-of-Region Notice of Proposed Rulemaking

    10. Section 271(b)(2), added by the 1996 Act, provides:

    A Bell operating company, or any affiliate of that Bell 
operating company, may provide interLATA services originating 
outside its in-region States after the date of enactment of the 
Telecommunications Act of 1996, subject to subsection (j).

Thus, the 1996 Act does not require a BOC to obtain Commission 
authorization prior to offering out-of-region, interstate, interLATA 
services. The 1996 Act, however, does not modify the Commission's 
determination in the Fifth Report and Order that BOC provision of 
interstate, interLATA services initially would be subject to dominant 
carrier regulation.
    11. Immediately after the 1996 Act became law, we issued the BOC 
Out-of-Region NPRM, in which we proposed, under certain conditions, to 
remove dominant carrier regulation of the BOCs' provision of out-of-
region, interstate, interexchange services. In our Notice, we 
tentatively concluded that, as an interim measure, if a BOC creates an 
affiliate to provide out-of-region, interstate, interexchange services 
(including interLATA and intraLATA services), and if the affiliate 
satisfies the minimal separation requirements set forth in the Fifth 
Report and Order that apply to the interexchange affiliates of 
independent LECs, then the BOC affiliate's provision of those 
interexchange services would be regulated on a non-dominant basis. We 
also noted that LECs providing interexchange services through 
affiliates pursuant to the Fifth Report and Order treat those 
affiliates as nonregulated affiliates under the Commission's joint cost 
rules and affiliate transactions rules for exchange carrier accounting 
purposes. In our Notice, we sought comment on whether a BOC affiliate 
providing out-of-region, interstate, interexchange services also should 
be treated as a nonregulated affiliate for BOC accounting purposes. 
Finally, we tentatively concluded that, at least for now, if a BOC 
provides out-of-region, interstate, interexchange services directly, or 
through an affiliate that fails to comply with these minimal separation 
requirements, then dominant carrier regulation would be retained for 
those services.

III. Discussion

A. The Purpose of the Interim Rules

    12. This proceeding is necessary to enable the BOCs to begin 
competing in an out-of-region area in the interexchange market on a 
non-dominant basis. Currently, BOC provision of interstate, 
interexchange service is subject to dominant carrier regulation until 
we determine the degree of separation, if any, necessary for non-
dominant treatment. Thus, BOC out-of-region services would be subject 
to dominant regulation, whether those services were offered directly by 
the BOC or through another entity, no matter how structurally separate 
from the BOC. We take no position in this proceeding on whether the 
structural separation requirements, other safeguards established by the 
1996 Act, and our existing regulations that would apply to BOC 
provision of in-region services are sufficient to allow us to relax 
dominant carrier regulation for the separate subsidiaries through which 
the BOCs must provide in-region, interLATA services. See 47 U.S.C. 
Sec. 272. We will address that issue in a separate proceeding.
    13. In our Notice, we tentatively concluded that we could remove 
dominant carrier regulation of BOC out-of-region, interstate, 
interexchange services by applying to the BOCs the same rules that have 
worked well for independent LECs. These rules were specifically 
designed to impose minimal burdens on the smaller, independent LECs, 
and thus are less stringent than the structural separation required 
under our Computer II regime, and contain fewer restrictions than 
imposed by the 1996 Act for BOC provision of in-region, interLATA 
services. At the same time, the Commission found in the Fifth Report 
and Order that these separation requirements provided some protection 
against anticompetitive abuses that could arise from the LECs' control 
over local bottleneck facilities.
    14. Because we believe that we should move expeditiously in order 
to advance the goals of the 1996 Act, we specifically stated in the 
Notice that the actions we take in this proceeding would be interim. By 
applying the well-established rules applicable to independent LECs as 
an interim measure, we are able to: remove dominant carrier regulation 
for BOC out-of-region, interstate, interexchange services, thereby 
facilitating prompt and competitive entry by the BOCs into those 
services; have the same level of assurance of protecting competition 
and ratepayers as we have with independent LECs and their interexchange 
affiliates; and avoid engaging in a protracted proceeding. We have 
already issued a Notice in which we initiate a more comprehensive 
review of the rules that are applicable to both independent LECs and 
the BOCs in the provision of out-of-region, interstate, interexchange 
services. In the Interexchange NPRM, we sought comment on whether it 
may be appropriate to modify or eliminate the minimal separation 
requirements applied to independent LEC affiliates providing 
interstate, interexchange services originating outside of their local 
exchange areas. We also sought comment on whether, if we do modify or 
eliminate such requirements for independent LECs, we should apply the 
same requirements to BOC provision of out-of-region, interstate, 
interexchange services. We will finalize our rules governing both BOC 
and independent LEC provision of out-of-region, interstate, 
interexchange services in that proceeding.

B. Non-dominant Classification for BOC Affiliates

    15. The record does not dissuade us from proceeding on an interim 
basis as proposed in the Notice. NYNEX and Pactel support, as an 
interim measure, adoption of the BOC Out-of-Region NPRM's tentative 
conclusions, including use of the Commission's joint cost and affiliate 
transactions rules. NYNEX contends that the proposed rules are ``an 
excellent first regulatory step that the Commission can take promptly 
to enable BOC entry into the long distance service markets.'' Pactel 
supports the rules as a method of ensuring regulatory parity among all 
exchange companies, BOCs and independent LECs, even though Pactel 
disputes that the BOCs have market power in the interexchange market.
    16. The remaining BOCs object to removing dominant regulation only 
for affiliates meeting the Fifth Report and Order requirements and 
contend that out-of-region, interstate, interexchange services should 
be regulated as non-dominant even if provided on an unseparated basis. 
These commenters raise essentially three arguments: (1) BOCs do not 
have market power in the interexchange market under the criteria, such 
as market share, established in the Competitive Carrier proceeding and 
those applied in reclassifying AT&T as a non-dominant interexchange 
carrier; (2) BOCs have neither the ability nor the incentive to 
leverage their control over local facilities to impede competition in 
the interexchange market, especially given current regulations and the 
provisions of the 1996 Act that are designed to open the local market 
to

[[Page 35967]]

competition; and (3) the proposed separation requirements for out-of-
region interexchange services are inconsistent with the 1996 Act.
    17. BellSouth additionally argues that, by proposing to regulate 
BOCs as dominant if they directly provide out-of-region, interexchange 
services based on their market power in the provision of local 
services, we are resurrecting the ``all services'' approach. BellSouth 
states that, in the Competitive Carrier orders, the Commission adopted 
an ``all services'' approach under which a finding that a carrier was 
dominant in the provision of one service subjected a carrier to 
dominant regulation of all services. BellSouth argues that, under this 
``all services'' approach, the Commission ruled that bottleneck 
facilities were prima facie evidence of dominance in all markets. 
BellSouth maintains that the Commission rejected this approach in the 
AT&T Reclassification Order. We reject this analysis. The ``all 
services'' question addressed in the AT&T Reclassification Order was 
whether the Commission could find AT&T non-dominant only if ``AT&T 
lacks the ability to control the price of every tariffed service in the 
relevant market.'' A very different question is posed by the BOCs entry 
into out-of-region, interstate, interexchange services: whether a firm 
with market power in one relevant market (the local exchange and 
exchange access market) can leverage that power to gain market power or 
an unfair advantage in another, related market (the interexchange 
market).
    18. As for the non-BOC commenters, MCI and TRA argue that, given 
the potential for the BOCs to engage in anticompetitive conduct, the 
BOC affiliate should be regulated as dominant. Almost all of the other 
non-BOC commenters support non-dominant regulation of BOC out-of-region 
services if provided through a separate affiliate, but contend that the 
safeguards proposed in the Notice are insufficient to protect against 
abuses by the BOCs. Specifically, these parties claim that without 
these additional safeguards the BOCs could use their control over local 
exchange facilities to unfairly discriminate in pricing or service 
quality against competing interexchange carriers or could cross-
subsidize their long distance operations by shifting costs to the local 
exchange and exchange access operations. They urge the Commission, 
therefore, to impose full structural separation on the out-of-region 
affiliate, including the separations imposed by section 272 on the in-
region interexchange affiliate. They also seek to bar joint marketing 
of local and out-of-region services or, at least, require that 
marketing personnel and operations be separated. Some ask the 
Commission to require that the BOC provide all Title II services to its 
affiliate at the generally applicable tariffed rates and that all non-
Title II services and access to information obtained by the BOC by 
virtue of its provision of local exchange service be provided on a non-
discriminatory basis or that such information not be shared at all. 
Finally, non-BOC commenters dispute claims that the Notice's proposals 
are inconsistent with the 1996 Act.
    19. We adopt here the interim rules proposed in the Notice, at 
least until completion of our broader rulemaking proceeding, the 
Interexchange NPRM. The Fifth Report and Order safeguards we adopt 
herein on an interim basis have worked relatively well since 1984 to 
protect against potential abuses by the independent LECs in their 
provision of interexchange services and we believe that they will 
provide adequate interim protection as the BOCs begin providing out-of-
region interexchange services. As the Commission noted in the Fifth 
Report and Order, these safeguards provide some protection against 
``cost-shifting and anticompetitive conduct.'' These safeguards have 
been applied to independent LEC provision of interexchange services 
originating in and out of their regions and should provide sufficient 
interim safeguards for BOC provision of solely out-of-region services. 
Additionally, these safeguards will be supplemented with the 
application of our cost allocation and affiliate transaction rules, as 
explained below, which provide further protection against cost 
misallocations. Moreover, no party has presented persuasive evidence to 
show that, at this time, these rules will not be effective interim 
measures.
    20. At the same time, we believe that these minimal requirements 
should be in place pending further analysis of these issues. Not only 
has the Commission adopted an NPRM to address these specific issues, 
but we also have launched various proceedings, and are in the process 
of issuing further rulemakings, relating to the implementation of 
various aspects of the 1996 Act. These proceedings touch upon issues 
raised in this proceeding, such as the proper market definition and the 
scope of various safeguards. We believe it is prudent to assess the 
record in those proceedings in order to assist us in adopting a 
comprehensive and cohesive framework that addresses the myriad issues 
involving BOC provision of services that the BOCs previously have been 
barred from offering.
    21. Thus we reject AT&T's argument that the proposed rules should 
not be adopted because, AT&T contends, they improperly depart from the 
use of a single, nationwide, interexchange market without submarkets 
without providing a reasoned explanation. The Notice proposed to apply, 
on an interim basis, the same rules to BOC out-of-region services that 
we apply to independent LECs. We do not find that AT&T has presented 
persuasive reasons to depart from this prior precedent for purposes of 
these interim rules. Moreover, in the Notice, we explicitly proposed to 
address only BOC provision of out-of-region, interstate, interexchange 
services. At the same time, we made clear that we were planning to 
adopt these rules on an interim basis, pending a future proceeding to 
consider more fully the long-term issues raised by BOC entry into out-
of-region, interstate, interexchange services. We note that on March 
25, 1996, we released the Interexchange NPRM initiating that 
proceeding. In proposing to look only at BOC provision of out-of-
region, interstate, interexchange service here, we sought to balance 
the goal of the 1996 Act to allow swift BOC entry into the 
interexchange market, subject to interim safeguards, with the need for 
a comprehensive review of our rules. We believe it is within our 
discretion to conduct our proceedings in such a manner as to 
accommodate these twin purposes.
    22. We find that our interim plan of removing dominant carrier 
regulation for BOC affiliates meeting the Fifth Report and Order 
separation requirements and retaining dominant regulation for BOCs that 
provide out-of-region services directly will not impose an unreasonable 
burden on the BOCs. Initially, we believe it is important to clarify 
the scope of the Fifth Report and Order separation requirements. Most 
commenters refer to the Fifth Report and Order requirements as 
structural separation. This is true only in the sense that the BOC or 
LEC non-dominant interexchange affiliate is a separate legal entity. In 
no other sense do we require ``structural separation.'' Indeed, in the 
Fifth Report and Order, the Commission specifically rejected arguments 
that structural separation requirements should be imposed between an 
independent LEC and its interexchange affiliate because the Commission 
found that structural separation would impose unreasonable burdens on 
smaller, independent LECs. The Commission specifically sought to avoid 
imposing

[[Page 35968]]

excessive burdens and noted that the LEC affiliate qualifying for non-
dominant treatment ``is not necessarily structurally separated from the 
exchange telephone company in the sense ordered in the Second Computer 
Inquiry * * * (e.g., fully-separated personnel and marketing are not 
necessary for nondominant treatment).'' Thus, except for the ban on 
joint ownership of transmission and switching facilities, a restriction 
which we believe should pose little, if any, burden on the provision of 
out-of-region, interstate, interexchange services, the BOC and the 
interexchange affiliate will be able to share personnel and other 
resources or assets. The affiliate may be staffed by BOC personnel, 
housed in existing BOC offices, and use BOC marketing or other 
services. Providing interexchange services through such an affiliate 
will not impede the BOCs' ability to realize efficiencies gained 
through the use of joint resources. To help ensure that the BOCs 
properly allocate the costs of any services provided to the 
interexchange affiliate, however, we require that the BOC treat this 
affiliate for accounting purposes as a nonregulated affiliate and 
therefore subject to our cost allocation and affiliate transactions 
rules.
    23. Additionally, we clarify the separate books of account 
requirement and the requirement that to the extent the affiliate 
obtains BOC services it do so under the terms of the BOC's tariff. We 
do not require that the interexchange affiliate maintain separate books 
of account that comply with our Part 32 rules. Instead, the separate 
books of account requirement refers to the fact that, as a separate 
legal entity, the affiliate must maintain its own books of account as a 
matter of course. This is consistent with the current accounting 
treatment of the interexchange affiliates of independent LECs. Books of 
account refer to the financial accounting system a company uses to 
record, in monetary terms, the basic transactions of a company. These 
books of account reflect the company's assets, liabilities, and equity, 
and the revenues and expenses from operations. Each company has its own 
separate books of account. The Commission's Part 32 rules, the Uniform 
System of Accounts (USOA), prescribe the books of account for the 
telephone companies. The Part 32 USOA, however, is not required to be 
kept by affiliates of a telephone company. These affiliates maintain 
their own separate books of account. We note that, if a telephone 
company decides to conduct out-of-region, interstate, interexchange 
service within the telephone company without using a separate 
affiliate, this activity would be reflected in the telephone company's 
USOA accounts, because the USOA reflects the telephone company's total 
operations. As to the tariff requirement, we clarify that this 
provision applies only to services for which the BOC is required to 
file a tariff, not to detariffed services such as billing and 
collection. The provision also only applies when the affiliate obtains 
tariffed services from its affiliated BOC.
    24. Parties have offered no credible evidence to support 
contentions that the Fifth Report and Order separation requirements 
constitute burdensome regulation. Indeed, the entry of interexchange 
carriers affiliated with independent LECs over the past decade serves 
as evidence that these conditions will not prevent the BOCs from 
competing effectively. Moreover, we note that several BOCs have already 
established, or plan to establish, subsidiaries through which they will 
provide interexchange services that meet or exceed these separation 
requirements. We believe that separation requirements designed to 
accommodate the resources of small independent LECs will not impose an 
unreasonable burden on the much larger regional Bell companies, 
particularly on an interim basis.
    25. Finally, we conclude, as an interim measure, that if a BOC 
chooses to offer out-of-region interstate interexchange services 
directly, it will be subject to dominant carrier regulation and to 
price cap regulation. Specifically, we require that the BOCs include 
such services in the price cap Basket for interexchange services. See 
47 CFR Sec. 61.42(d)(4).

C. Consistency With the 1996 Act

    26. Several BOC commenters argue that the separate affiliate 
requirement, even as an interim measure, is inconsistent with the 
provisions of the 1996 Act. They contend that the 1996 Act specifically 
excluded out-of-region services from the separate affiliate requirement 
contained in new section 272. Some further argue that, because dominant 
regulation is so onerous, conditioning non-dominant treatment on 
complying with the separation requirements effectively requires BOCs to 
establish a separate affiliate to provide out-of-region interstate, 
interexchange services in contravention of the 1996 Act. They also 
argue, more generally, that the proposed rules are inconsistent with 
the overall deregulatory emphasis of the new legislation.
    27. Bell Atlantic contends that the proposed separation 
requirements are inconsistent with the 1996 Act for two reasons: (1) 
section 272(f) contains a sunset provision for the in-region affiliate 
whereas the proposed separation requirements are open-ended; and (2) a 
BOC interexchange affiliate providing out-of-region services would be 
barred from jointly owning transmission and switching facilities with 
its operating company affiliate, whereas Section 272 contains no such 
restriction for the in-region separate affiliate. Bell Atlantic 
concludes that it would have to establish two subsidiaries, one for in-
region and one for out-of-region services.
    28. Non-BOC commenters dispute these arguments. Some argue that, 
because the 1996 Act is silent as to the type of regulatory regime that 
the Commission should impose on the BOCs' provision of out-of-region 
interexchange services, the statute contemplates that the Commission 
may apply its existing dominant/nondominant regulatory regime. These 
parties further point out that the separate subsidiary provisions of 
the 1996 Act contain a savings clause which states that ``[n]othing in 
this subsection shall be construed to limit the authority of the 
Commission under any other section of this Act to prescribe safeguards 
consistent with the public interest, convenience and necessity.'' 
Vanguard contends that the BOCs are essentially arguing that the 1996 
Act repealed the Commission's existing statutory authority to apply its 
dominant carrier rules to BOC interexchange affiliates by implication. 
Vanguard asserts that a statutory construction that would repeal an 
agency's authority by implication is ``highly disfavored'' by the 
courts except where there is an irreconcilable conflict between the two 
statutes or where there is compelling evidence that Congress intended 
to repeal the prior statute. Sprint and others contend that the 
proposed safeguards are less burdensome than the statutory separate 
subsidiary requirement and note that, while the 1996 Act mandates a 
separate subsidiary to provide in-region services, the Commission's 
proposal permits the BOCs to offer out-of-region services through an 
affiliate or directly.
    29. We reject the contention that section 272(a)(2) prohibits us 
from retaining the dominant/non-dominant regulatory framework which the 
Commission has applied to interexchange carriers prior to passage of 
the 1996 Act for BOC provision of out-of-region, interstate, 
interexchange services. More specifically, we do not

[[Page 35969]]

agree that, by excluding out-of-region services from those services 
that a BOC must provide through a structurally separate affiliate, 
section 272(a)(2) bars the Commission from according non-dominant 
regulation of BOC out-of-region, interstate, interexchange services 
only to BOC affiliates that comply with the separation requirements we 
adopt in this Order. Section 272(a)(2), relied upon by the BOC 
commenters, provides in pertinent part that:

    The services for which a separate affiliate is required by 
paragraph (1) are:
* * * * *
    (B) Origination of interLATA telecommunications services, other 
than--
* * * * *
    (ii) out-of-region services described in section 271(b)(2).

As noted by MCI, the legislation is silent on the issue of dominant/
non-dominant regulation of BOC interLATA services. We conclude that 
Congress did not intend by implication to repeal our authority to 
impose dominant or non-dominant regulatory treatment as we deem 
necessary to protect the public interest consistent with our statutory 
mandates. To the contrary, Section 601(c) of the 1996 Act provides that 
we are not to presume that Congress intended to supersede our existing 
regulations unless expressly so provided.
    30. Nor is there any inconsistency between the separation 
requirements we adopt by this Order as an interim measure and the 1996 
Act. We do not mandate that the BOCs provide out-of-region, interstate, 
interexchange services through a separate affiliate. Instead, this 
Order concludes that, on an interim basis, BOCs will continue to be 
subject to dominant carrier treatment if they offer out-of-region 
interstate, interexchange services directly. The same requirement has 
applied to all independent LECs since 1984. This order, in effect, 
offers the BOCs a choice of providing out-of-region, interstate, 
interexchange services under dominant regulation if they wish to 
furnish those services directly or under non-dominant regulation if 
they wish to offer those services through a separate affiliate that 
meets the separation requirements.
    31. We also note that the 1996 Act's provisions for the 
structurally separate in-region subsidiary contain more restrictions 
than those that will apply to the BOC affiliates' provision of out-of-
region, interstate, interexchange services as a non-dominant carrier. 
For example, the 1996 Act requires that the separate subsidiary that 
must be established to provide in-region interLATA services must have 
separate officers, directors, and employees, and may not obtain credit 
under any arrangement that would permit recourse to the BOC. See 47 
U.S.C. Sec. 272(b). None of these requirements applies to the BOCs' 
out-of-region affiliate.
    32. Bell Atlantic contends, however, that our proposed separation 
conditions are, in fact, more rigorous than those established by the 
1996 Act for in-region services because we have not suggested a sunset 
date and have barred joint ownership of transmission and switching 
facilities. We are seeking comment in the Interexchange NPRM on whether 
to modify or eliminate the separation requirements for independent LECs 
in their provision of out-of-region, interstate, interexchange service 
as a condition for non-dominant treatment. We are also seeking comments 
on whether, if we modify or eliminate these separation requirements for 
independent LECs, we should apply the same treatment to BOC provision 
of out-of-region, interstate, interexchange service. Bell Atlantic's 
argument is more appropriately addressed in that proceeding. During the 
interim period that will be covered by the rules we promulgate today, a 
prohibition on joint ownership of switching and transmission facilities 
should cause no hardship on the BOC provision of out-of-region services 
because, as the BOCs maintain, they initially will be using other 
carriers' facilities and because of the geographic separation of in-
region facilities and out-of-region services. Additionally, the fact 
that the 1996 Act contains a sunset provision for certain restrictions 
is not a basis for concluding that our interim rules for BOC out-of-
region, interstate, interexchange services are inconsistent with the 
1996 Act.

D. Proposed Mergers

    33. After the record in this proceeding closed, SBC Communications 
Inc., and Pacific Telesis Group announced, on April 1, 1996, an 
agreement to merge their operations. Three weeks later, on April 21, 
1996, Bell Atlantic and NYNEX announced that they had reached an 
agreement to merge. We believe that mergers such as these raise 
concerns with respect to the provision of out-of-region services during 
the pendency of the merger. Specifically, they raise the concern that, 
in the period prior to a merger's consummation, one partner to the 
merger may act in ways to favor those out-of-region services of its 
merger partner that originate in the first partner's service territory. 
For example, BOC A may favor BOC B's long distance services originating 
in BOC A's territory because BOC A may eventually share in BOC B's 
profits. We do not believe that the record in this proceeding provides 
an adequate basis on which to address the specific concerns raised by 
such pending mergers. Accordingly, we exclude from the services covered 
by this Order, those out-of-region services that originate in the in-
region states of a merger partner during the period prior to the 
consummation of the merger. Given the interim nature of the rules we 
are establishing in this Order, and the fact that we are not aware of 
plans by any of the potential merger partners to provide out-of-region 
services originating in their respective partners' service territories, 
we believe that this approach likely will not impose any burdens on the 
affected parties. Should such parties determine, however, to provide 
such services, those parties should request the Commission, on an 
individual case basis, for a determination of whether such services can 
be provided on a non-dominant basis. Because our concern relates to the 
incentives of one party to favor the operations of the other party 
during the pendency of the merger, should an announced merger not be 
consummated, the interim rules established in this Order for out-of-
region services shall apply to all out-of-region services provided by 
the parties to the proposed merger.
    34. Nothing in this section on proposed mergers should be construed 
as indicating the Commission's position with respect to mergers in 
other sectors of the telecommunications industry or outside of this 
particular and unusual context. A unique confluence of circumstances 
lead us to conclude that it is both reasonable and prudent to postpone 
our determination of the appropriate regulatory treatment for BOC out-
of-region services originating in a potential merger partner's 
territory. These unique circumstances include: (1) The announcement of 
mergers, following the closure of the record in this proceeding, 
involving four of the seven regional Bell companies that would be 
subject to the rules established in this proceeding; (2) the concern 
that a BOC, through its position in the local telephone exchange market 
and its bottleneck control over inputs into the interexchange market, 
may have the ability, along with the incentive, to favor the out-of-
region interexchange services operations of a potential merger partner; 
(3) the interim nature of these rules; and (4) the 1996 Act's 
authorization for BOCs to begin providing out-of-region services upon 
enactment. Given these unique circumstances, we emphasize that this

[[Page 35970]]

action is limited to the facts and circumstances set forth in this 
discussion of proposed mergers.

E. Joint Cost and Affiliate Transactions Rules

    35. In the BOC Out-of-Region NPRM, we stated that independent LECs 
providing interexchange services through affiliates pursuant to the 
Fifth Report and Order treat those affiliates as nonregulated 
affiliates under the Commission's joint cost and affiliate transactions 
rules for exchange carrier accounting purposes. The BOC Out-of-Region 
NPRM sought comment on whether BOC out-of-region, interstate, 
interexchange services should be treated as nonregulated services for 
BOC accounting purposes.
    36. AT&T, Pactel, NYNEX, Comptel and Vanguard support the treatment 
of BOC out-of-region affiliates as non-regulated for accounting 
purposes. AT&T and Comptel believe such rules are necessary to 
constrain the BOCs' ability to cross-subsidize and to ensure that local 
monopoly assets are not used unfairly to advantage long distance 
operations. Vanguard asserts that the rules would not impose a burden 
because BOCs account for certain services on this basis already and 
because such treatment would merely entail setting up the initial 
account for service, not changing existing procedures. NYNEX states 
that these rules have been effective as applied to independent LECs, 
and thus would not be unreasonable to apply to BOCs providing similar 
services. AT&T and Comptel also contend that some type of independent 
audit should be performed periodically to certify that long distance 
affiliates retain their financial independence. Pactel supports 
application of the affiliate transaction rules as an interim measure.
    37. Ameritech opposes application of the affiliate transactions 
rules to BOC interexchange affiliates. It contends that the joint cost 
and affiliate transactions rules are designed to allocate costs between 
regulated and nonregulated activities, not between two regulated 
services and that, in any event, application of those rules would be 
unnecessary because the Part 69 rules already require BOCs to identify 
separately interexchange costs. At a minimum, Ameritech argues that the 
rules should not apply to any BOC subject to pure price cap regulation 
at the state and federal level. The Public Utilities Commission of Ohio 
(PUCO) also opposes treating the affiliate as nonregulated because they 
contend that accounting abuses are better detected by treating the 
affiliate's services as regulated.
    38. Our existing accounting safeguards for affiliate transactions 
were developed in the Joint Cost Order and are codified in Parts 32 and 
64 of our Rules. The Part 64 cost allocation rules prescribe how 
carriers separate the costs of regulated activities from the costs of 
nonregulated activities, where the nonregulated activities are 
performed directly by the carrier rather than through an affiliate. The 
Part 32 affiliate transactions rules prescribe the way costs are 
recorded, for Title II accounting purposes, when a regulated carrier 
does business with its nonregulated affiliates. These rules are 
designed to prevent local exchange carriers from imposing the costs and 
risks of their competitive ventures on local telephone ratepayers. 
These rules do not require carriers or their affiliates to charge any 
particular prices for assets transferred or services provided; rather, 
they require carriers to use certain specified valuation methods in 
determining the amounts to record in their Part 32 accounts, regardless 
of the prices charged.
    39. Because the cost allocation and affiliate transactions rules 
are an important component of our accounting safeguards, we find that 
these rules should apply to BOCs providing out-of-region, interstate, 
interexchange services through a separate affiliate. Even though 
interLATA services are regulated services under Title II, under the 
rules we adopt herein, the BOCs, for accounting purposes, will treat 
the services as nonregulated, so as to make applicable our cost 
allocation and affiliate transaction rules. The fact that interLATA 
services are regulated services in and of itself does not eliminate the 
potential for cost misallocation between the BOCs competitive 
(interLATA) and noncompetitive (local exchange and exchange access) 
services. Thus, we believe that application of our cost allocation and 
affiliate transaction rules is necessary to minimize the possibility 
that a BOC could improperly shift the costs of its interstate, 
interexchange operations to its regulated local exchange and exchange 
access ratepayers. We also note that this requirement is consistent 
with the current practice of independent LECs that treat their 
affiliates providing interexchange services as nonregulated for 
exchange carrier accounting purposes.
    40. We find that requiring BOCs to treat affiliates providing out-
of-region services as nonregulated will not be unduly burdensome. BOCs 
currently have systems in place to account for transactions between 
their nonregulated affiliates (i.e., for transactions between a BOC and 
any of its information services which are not regulated under Title 
II). Such a requirement will not entail extensive modification of 
existing company procedures for the provision of interexchange services 
because, prior to the passage of the 1996 Act, BOCs were prohibited 
from providing interstate, interexchange services.

IV. Additional Issues

A. Regulation of CMRS-Related InterLATA Services

    41. The BOC Out-of-Region NPRM stated that ``BOC provision to 
commercial mobile radio service customers, of interstate, interLATA 
services originating outside any of the BOC's in-region states, is 
included in the out-of-region services addressed in this proceeding.''
    42. BellSouth argues that the language in the Notice is susceptible 
to two interpretations. According to BellSouth, it may apply to: (1) 
The sale of out-of-region, interexchange service by a BOC to 
unaffiliated commercial mobile radio service (CMRS) customers; or (2) 
the provision of out-of-region, interexchange CMRS service by a BOC. 
BellSouth believes that the Commission intended the first of these 
interpretations--BOCs offering out-of-region long distance to 
unaffiliated CMRS customers on a stand alone basis, not in conjunction 
with the BOC's provision of CMRS--and BellSouth opposes applying the 
Notice's proposed rules to this service for all of the same reasons it 
opposes any separation requirements for out-of-region services. 
BellSouth contends that the other interpretation--BOC's offering 
interexchange, CMRS--constitutes ``incidental'' CMRS interLATA services 
and is beyond the scope of this proceeding. To the extent that a CMRS 
provider offers interexchange services in conjunction with its 
provision of CMRS, the interexchange service is itself incidental CMRS, 
and thus exempted from section 272 separate affiliate requirements, 
according to BellSouth. Bell Atlantic and SBC also oppose any 
restrictions on BOC provision of incidental interLATA services, 
including CMRS, because most of these services were excluded from the 
separate subsidiary requirement of 272.
    43. MCI contends that the scope of Section 272 is irrelevant 
because the 1996 Act does not prevent the Commission from imposing its 
own separation requirements. Vanguard supports the proposed separation

[[Page 35971]]

requirements on the assumption that they will be applied to BOC 
provision of interLATA services to the customers of its affiliated 
cellular companies. Vanguard argues that the interest that a BOC has in 
its cellular operations increases the incentives to engage in 
anticompetitive conduct because such conduct can benefit both its long 
distance operations and its cellular operations. Comptel urges the 
Commission to apply to all incidental interLATA services the same rules 
applied to out-of-region interexchange services because they raise the 
same concerns about discrimination and cross-subsidization.
    44. BellSouth's interpretation of our reference to CMRS in footnote 
two of the BOC Out-of-Region NPRM is correct. Our statement in the BOC 
Out-of-Region NPRM was intended to clarify that a BOC offering out-of-
region long distance service to unaffiliated CMRS customers on a stand 
alone basis would be considered ``out-of-region'' services for purposes 
of this rulemaking. BOC provision of interexchange services to its 
affiliated CMRS customers is beyond the scope of this proceeding. We 
also reject as beyond the scope of this proceeding Comptel's request to 
apply the separation requirements to all ``incidental'' services 
established under section 272(g).

B. Definition of Certain Services as In-Region Services

    45. Section 271(j) provides that certain calls that originate out-
of-region will be deemed in-region traffic. Specifically, this section 
provides that ``a [BOC] application to provide 800 service, private 
line service, or their equivalents that terminate in an in-region State 
of that [BOC], and allow the called party to determine the interLATA 
carrier, shall be considered an in-region service subject to the 
requirements of subsection (b)(1).''
    46. Comptel argues that the Commission should declare collect and 
third party billed calls to numbers terminating in the BOC's region and 
BOC calling card calls to in-region numbers as ``equivalent'' services 
and thus be deemed in-region services. Comptel's rationale is that, 
like 800 number and private line services, the party paying for the 
call selects the interLATA carrier and thus is subject to the BOCs' 
local power. Comptel states that the Commission should therefore 
prohibit the BOC out-of-region affiliate from completing collect calls, 
third-party billed calls, or BOC calling card calls to terminating 
numbers located within the BOC's region. Ameritech opposes Comptel's 
interpretation, and asserts that calling card, collect and third party 
calls that are placed from out-of-region do not fall within 271(j) 
because the calling party, not the called party, determines the long 
distance carrier. Ameritech states that the calling party decides 
whether to complete the call on a 0+ basis or use access codes, and if 
access codes are used, the calling party decides which carrier to use.
    47. The key factor in determining whether a service falls within 
the scope of section 271(j) as ``equivalent'' to 800 or private line 
service is whether the called party determines the interLATA carrier 
that is used. As Ameritech notes, calling card, collect and third party 
billed calls that originate out-of-region and terminate in-region do 
not fall within the scope of section 271(j) because it is the calling 
party, not the called party, that determines the interLATA carrier. 
Because the called party does not determine the interLATA carrier that 
is used, there is no justification for treating such calls as in-region 
services. Thus, we reject Comptel's proposal that we add calling card, 
collect and third party calls to those services classified as ``in-
region'' under section 271(j).

V. Procedural Issues

A. Regulatory Flexibility Act Analysis

    48. We certify that the Regulatory Flexibility Act is not 
applicable to the interim rules we are adopting in this proceeding. 
These interim rules will not result in a significant economic impact on 
a substantial number of small business entities, as defined by Section 
601(3) of the Regulatory Flexibility Act. Entities subject to the rule 
changes are generally large corporations, affiliates of large 
corporations, or are dominant in their fields of operation, and, thus, 
are not ``small entities'' as defined by the Act. See 15 U.S.C. 
Sec. 632(a)(1). We are nevertheless committed to reducing the 
regulatory burdens on small communications services companies whenever 
possible, consistent with our other public interest responsibilities. 
The Secretary shall send a copy of this Report and Order to the Chief 
Counsel for Advocacy of the Small Business Administration in accordance 
with Section 605(b) of the Regulatory Flexibility Act, 5 U.S.C. 
Secs. 601, et seq. (1981).

B. Paperwork Reduction Act

    49. The recordkeeping requirements in this item are contingent upon 
approval of the Office of Management and Budget.

VI. Ordering Clause

    50. Accordingly, it is ordered that, pursuant to Sections 1, 4, 
201-205, 215, 218, 220, and 271 of the Communications Act of 1934, as 
amended, 47 U.S.C. Secs. 151, 154, 201-205, 215, 218 and 220, the 
REPORT AND ORDER is hereby ADOPTED. The requirements adopted in this 
Report and Order shall be effective 30 days after publication in the 
Federal Register.

Federal Communications Commission.
William F. Caton,
Acting Secretary.
[FR Doc. 96-17404 Filed 7-8-96; 8:45 am]
BILLING CODE 6712-01-P