[Federal Register Volume 61, Number 146 (Monday, July 29, 1996)]
[Proposed Rules]
[Pages 39397-39424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19135]


-----------------------------------------------------------------------


FEDERAL COMMUNICATIONS COMMISSION
47 CFR Chapter I

[CC Docket No. 96-149, FCC 96-308]


Implementation of the Non-Accounting Safeguards of Sections 271 
and 272 of the Communications Act of 1934, as Amended; and Regulatory 
Treatment of LEC Provision of Interexchange Services Originating in the 
LEC's Local Exchange Area

AGENCY: Federal Communications Commission.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Commission is issuing this Notice of Proposed Rulemaking 
seeking comment on proposed regulations to implement, and, where 
necessary, to clarify the non-accounting separate affiliate and 
nondiscrimination safeguards prescribed by Congress in section 272 of 
the Telecommunications Act of 1996. Congress enacted these safeguards 
to help prevent Bell Operating Companies (BOCs) from improperly using 
their market power in the local telephone market to gain an unfair 
advantage over their rivals in the in-region interLATA service markets 
and certain other businesses, such as the manufacturing of 
telecommunications equipment. These safeguards are intended to 
encourage the development of robust competition in all 
telecommunications markets. The Commission also seeks comment on 
whether to relax the dominant carrier classification that currently 
applies to the (BOCs) provision of in-region, interstate, domestic 
interLATA services, as well as whether it should modify its existing 
rules for regulating independent local exchange carriers' (LECs) 
provision of interstate, interexchange services in areas where those 
LECs provide local telephone service. The Commission also considers 
whether to apply the same regulatory classification to BOC and 
independent LEC provision of in-region international service as the 
Commission adopts for their provision of in-region, interstate, 
domestic, interLATA services and in-region, interstate, domestic, 
interexchange services, respectively.

DATES: Comments are due on or before August 15, 1996 and Reply Comments 
are due on or before August 30, 1996. Written comments by the public on 
the proposed and/or modified information collections are due August 15, 
1996. Written comments must be submitted by the Office of Management 
and Budget (OMB) on the proposed and/or modified information 
collections on or before September 27, 1996.

ADDRESSES: Comments and reply comments should be sent to Office of the 
Secretary, Federal Communications Commission, 1919 M Street, NW., Room 
222, Washington, DC 20554, with a copy to Janice Myles of the Common 
Carrier Bureau, 1919 M Street, NW., Room 544, Washington, DC 20554. 
Parties should also file one copy of any documents filed in this docket 
with the Commission's copy contractor, International Transcription 
Services, Inc., 2100 M Street, NW., Suite 140, Washington, DC 20037. In 
addition to filing comments with the Secretary, a copy of any comments 
on the information collections contained herein should be submitted to 
Dorothy Conway, Federal Communications

[[Page 39398]]

Commission, Room 234, 1919 M Street, NW., Washington, DC 20554, or via 
the Internet to [email protected], and to Timothy Fain, OMB Desk Officer, 
10236 NEOB, 725-17th Street, NW., Washington, DC 20503 or via the 
Internet to [email protected].

FOR FURTHER INFORMATION CONTACT: Melissa Waksman, Attorney, Common 
Carrier Bureau, Policy and Program Planning Division, (202) 418-1580, 
or Radhika Karmarkar, Attorney, Common Carrier Bureau, Policy and 
Program Planning Division, (202) 418-1580. For additional information 
concerning the information collections contained in this NPRM contact 
Dorothy Conway at 202-418-0217, or via the Internet at [email protected].

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Notice 
of Proposed Rulemaking adopted July 17, 1996 and released July 18, 1996 
(FCC 96-308). This NPRM contains proposed or modified information 
collections subject to the Paperwork Reduction Act of 1995 (PRA). It 
has been submitted to the Office of Management and Budget (OMB) for 
review under the PRA. OMB, the general public, and other Federal 
agencies are invited to comment on the proposed or modified information 
collections contained in this proceeding. The full text of this Notice 
of Proposed Rulemaking is available for inspection and copying during 
normal business hours in the FCC Reference Center (Room 239), 1919 M 
St., NW., Washington, DC. The complete text also may be purchased from 
the Commission's copy contractor, International Transcription Service, 
Inc., (202) 857-3800, 2100 M St., NW., Suite 140, Washington, DC 20037.

Paperwork Reduction Act

    This NPRM contains either a proposed or modified information 
collection. The Commission, as part of its continuing effort to reduce 
paperwork burdens, invites the general public and the Office of 
Management and Budget (OMB) to comment on the information collections 
contained in this NPRM, as required by the Paperwork Reduction Act of 
1995, Public Law No. 104-13. Public and agency comments are due at the 
same time as other comments on this NPRM; OMB notification of action is 
due September 27, 1996. Comments should address: (a) Whether the 
proposed collection of information is necessary for the proper 
performance of the functions of the Commission, including whether the 
information shall have practical utility; (b) the accuracy of the 
Commission's burden estimates; (c) ways to enhance the quality, 
utility, and clarity of the information collected; and (d) ways to 
minimize the burden of the collection of information on the 
respondents, including the use of automated collection techniques or 
other forms of information technology.
    OMB Approval Number: None.
    Title: Implementation of the Non-Accounting Safeguards of Sections 
271 and 272 of the Communications Act of 1934, as amended; and 
Regulatory Treatment of LEC Provision of Interexchange Services 
Originating in the LEC's Local Exchange Area.
    Form No.: N/A.
    Type of Review: New collection.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Estimated time                
                     Information collection                         respondents    per response    Total annual 
                                                                     (approx.)        (hours)     burden (hours)
----------------------------------------------------------------------------------------------------------------
Network disclosure..............................................               5              48             240
Installation and maintenance reporting--timeliness..............               5               8              40
Installation and maintenance reporting--quality.................               5               1               5
Procurement procedure...........................................               5               2              10
Nondiscriminatory information provision.........................               5              36             180
Third party reporting, compliance monitoring, and other                                                         
 information collection.........................................               5              16              80
----------------------------------------------------------------------------------------------------------------

    Total Annual Burden: 555 hours.
    Respondents: Bell Operating Companies.
    Estimated costs per respondent: $0.
    Needs and Uses: The NPRM seeks comment on a number of issues, the 
result of which could lead to the imposition of information 
collections. The NPRM seeks comment on certain reporting requirements 
to implement the non-accounting nondiscrimination requirements of the 
1996 Act.

SYNOPSIS OF NOTICE OF PROPOSED RULEMAKING

I. Introduction

    1. In February 1996, Congress passed and the President signed the 
``Telecommunications Act of 1996.'' This legislation makes sweeping 
changes affecting all consumers and telecommunications service 
providers. The intent of this legislation is ``to provide for a pro-
competitive, de-regulatory national policy framework designed to 
accelerate rapidly private sector deployment of advanced 
telecommunications and information technologies and services to all 
Americans by opening all telecommunications markets to competition.'' 
Upon enactment, the 1996 Act permitted the Bell Operating Companies 
(BOCs) to provide interLATA services that originate outside of their 
in-region states. The 1996 Act permits the BOCs to provide in-region 
interLATA services upon our finding that they have met the requirements 
of new section 271 of the Communications Act. Under section 271, we 
must determine, among other things, whether a BOC seeking to provide 
in-region interLATA services has complied with the safeguards imposed 
by new section 272 of the Communications Act and the rules that we 
adopt to implement the provisions of that section.
    Under the 1996 Act, a ``local access and transport area'' (LATA) is 
``a contiguous geographic area (A) established before the date of 
enactment of the [1996 Act] by a [BOC] such that no exchange area 
includes points within more than 1 metropolitan statistical area, 
consolidated metropolitan statistical area, or State, except as 
expressly permitted under the AT&T Consent Decree; or (B) established 
or modified by a [BOC] after such date of enactment and approved by the 
Commission.'' 47 U.S.C. Sec. 153(25). LATAs were created as part of the 
Modification of Final Judgment's (MFJ) ``plan of reorganization'' by 
which the BOCs were divested from AT&T. Pursuant to the MFJ, ``all BOC 
territory in the continental United States [was] divided into LATAs, 
generally centering upon a city or other identifiable community of 
interest.'' United States v. Western Elec. Co., 569 F. Supp. 990, 993 
(D.D.C. 1983). The purpose of establishing the LATAs was only to 
delineate the areas within which the respective BOCs would be permitted 
to provide telecommunications services (i.e., intraLATA services); it 
was ``not to distinguish the area in which a telephone call [would] be 
`local' from

[[Page 39399]]

that in which it [would] become a `toll' or long distance call.'' Id. 
at 995. LATAs are comprised of combinations of local exchanges, and are 
generally much larger than the traditional local exchange areas and 
local calling areas defined by local regulators. While AT&T proposed to 
create 161 LATAs to cover the BOCs' territory, there were, at the time 
of the plan of reorganization, approximately 7,000 local exchanges 
within that territory. Id. at 993 n.9. There are currently 182 BOC 
LATAs. Bell Communications Research, Local Exchange Routing Guide, 
Sec. 1, at 1-2 (Mar. 1, 1996) (Local Exchange Routing Guide).
    3. In this Notice of Proposed Rulemaking (NPRM), we consider rules 
to implement, and, where necessary, to clarify the non-accounting 
separate affiliate and nondiscrimination safeguards prescribed by 
Congress in section 272. That section addresses the BOCs' provision of 
interLATA telecommunications services originating in states in which 
they provide local exchange and exchange access services, interLATA 
information services, and BOC manufacturing activities. The MFJ 
prohibited the BOCs from providing information services, providing 
interLATA services, or manufacturing and selling telecommunications 
equipment or manufacturing customer premises equipment (CPE). This 
prohibition was based on the theory that the BOCs could leverage their 
market power in the local market to impede competition in the interLATA 
services, manufacturing and information services markets. The 
information services restriction was modified in 1987 to allow BOCs to 
provide voice messaging services and to transmit information services 
generated by others. We also seek in this proceeding to determine 
whether to relax the dominant carrier classification that currently 
applies to the BOCs' provision of in-region, interstate, domestic 
interLATA services, and whether to apply the same regulatory 
classification to the BOCs' provision of in-region, international 
services.
    4. This proceeding is one of a series of interrelated rulemakings 
that collectively will implement the 1996 Act. Certain of these 
proceedings focus on opening markets to entry by new competitors. Other 
proceedings will establish fair rules for competition in these markets 
that are opened to competitive entry, and yet other proceedings will 
focus on lifting outmoded legal and regulatory constraints. We seek in 
the instant rulemaking to adopt safeguards to govern the BOCs' entry 
into certain new markets. Specifically, this proceeding focuses on the 
non-accounting BOC separate affiliate and nondiscrimination safeguards 
that Congress adopted in the 1996 Act to foster the development of 
robust competition in all telecommunications markets. As discussed more 
fully below, these safeguards are intended both to protect subscribers 
to BOC monopoly services, such as local telephony, against the 
potential risk of having to pay costs incurred by the BOCs to enter 
competitive services, such as interLATA services and equipment 
manufacturing, and to protect competition in those markets from the 
BOCs' ability to use their existing market power in local exchange 
services to obtain an anticompetitive advantage in those new markets 
the BOCs seek to enter.
    5. This proceeding also examines whether the potential risks of 
BOCs' using market power in local exchange and exchange access services 
to obtain an advantage in the markets for BOC affiliates that provide 
in-region, interstate, domestic, interLATA services will be 
sufficiently limited such that we can relax the dominant carrier 
classification that under our current rules would apply to such 
interLATA services provided by a BOC affiliate. We also consider 
whether we should modify our existing rules for regulating the 
provision of in-region, interstate, interexchange services by an 
independent LEC (an exchange telephone company other than a BOC). 
Finally, we consider whether to apply the same regulatory treatment to 
the BOC affiliates' and independent LECs' provision of in-region, 
international services, as we adopt for their provision of in-region, 
interstate, domestic, interLATA and in-region, interstate, domestic, 
interexchange services, respectively.
    6. We use the term ``independent LECs'' to refer to both the 
independent LECs and their affiliates. For purposes of this proceeding, 
we define an independent LEC's ``in-region services'' as 
telecommunications services originating in the independent LEC's local 
exchange areas or 800 service, private line service, or their 
equivalents that: (1) terminate in the independent LEC's local exchange 
areas, and (2) allow the called party to determine the interexchange 
carrier, even if the service originates outside the independent LEC's 
local exchange areas.

A. Background

    The 1996 Act seeks to eliminate artificial legal and regulatory 
barriers, as well as economic impediments, to entry into 
telecommunications markets. This new scheme permits the BOCs to engage 
in the activities from which they were barred by the MFJ if they 
satisfy certain statutory conditions that are intended to prevent them 
from improperly using their market power in the local exchange market 
against their competitors in the interLATA telecommunications services, 
interLATA information services, and manufacturing markets, and from 
improperly allocating the costs of their new ventures to subscribers to 
local exchange access services, and if they have taken sufficient steps 
to open their local exchange networks to competition.
    8. Enactment of the 1996 Act opens the way for BOCs to provide 
interLATA services in states in which they currently provide local 
exchange and exchange access services. Their provision of such 
interLATA services offers the prospect of increasing competition among 
providers of such services. BOCs can offer a widely recognized brand 
name that is associated with telecommunications services, the ability 
for consumers to purchase local, intraLATA and interLATA 
telecommunications services from a single provider (i.e., ``one-stop 
shopping''), and other advantages of vertical integration. Similar 
benefits could follow from BOC provision of interLATA information 
services and BOC manufacturing activities.
    9. In lifting or modifying the restrictions on the BOCs, the new 
regulatory scheme established by the 1996 Act indicates that BOC entry 
into in-region interLATA services raises issues for competition and 
consumers, even after a BOC has satisfied the requirements of section 
271(d)(3)(A) and (C). BOCs currently provide an overwhelming share of 
local exchange and exchange access services in areas where they provide 
such services--approximately 99.5 percent of the market as measured by 
revenues. If it is regulated under rate-of-return regulation, a price 
caps structure with sharing (either for interstate or intrastate 
services), a price caps scheme that adjusts the X-factor periodically 
based on changes in industry productivity, or if its entitlement to any 
revenues is based on costs recorded in regulated books of account, a 
BOC may have an incentive to improperly allocate to its regulated core 
business costs that would be properly attributable to its competitive 
ventures.
    10. In addition, a BOC may have an incentive to discriminate in 
providing exchange access services and facilities that its affiliate's 
rivals need to compete in the interLATA telecommunications and 
interLATA information services

[[Page 39400]]

markets. For example, a BOC could seek to grant undue preferences to 
its interLATA affiliate in furnishing such services and facilities, in 
order to gain a competitive advantage for its interLATA affiliate. 
Moreover, to the extent carriers offer both local and interLATA 
services as a bundled offering, if a BOC were to discriminate, it could 
entrench its position in local markets by making its rivals' offerings 
less attractive alternatives for local and access services. With 
respect to BOC manufacturing activities, a BOC may have an incentive to 
purchase only its own equipment, even if such equipment is more 
expensive or of lower quality than that available from other 
manufacturers. Although the 1996 Act permits the BOCs to engage in 
previously restricted activities, it imposes a mix of structural and 
non-structural safeguards that are intended to protect subscribers to 
BOC monopoly services and competitors against potential improper cost 
allocation and discrimination. Our goal in this proceeding is to 
establish non-accounting separate affiliate and nondiscrimination 
safeguards to implement Congress's objectives.
    11. The emergence of efficient, facilities-based alternatives to 
the local exchange and exchange access services offered by the BOCs 
will, over time, eliminate the need for safeguards that Congress 
prescribed in the 1996 Act and the implementing rules that we will 
adopt in this proceeding. We began the movement toward that ultimate 
goal when we adopted our NPRM to implement new section 251 of the 
Communications Act. Other proceedings, such as our upcoming access 
reform rulemaking and the jurisdictional separations reform proceeding, 
also will contribute to achieving our goal of fostering efficient 
competition in local telecommunications markets. Until we reach that 
goal, we seek to minimize the burden on the BOCs of the rules that we 
adopt in this proceeding, but at the same time we seek to avoid the 
potential exposure of both ratepayers in local markets controlled by 
the BOCs and competitors of the new BOC service providers to the 
potential risk of improper cost allocations and unlawful 
discrimination.

B. Overview of Sections 271 and 272

    12. The 1996 Act conditions BOC entry into in-region interLATA 
service on compliance with certain provisions of sections 271 and 272. 
Section 271 sets forth prerequisites, including a competitive checklist 
requiring compliance with certain provisions in sections 251 and 252, 
for approval of a BOC's application to provide in-region interLATA 
service. Section 271(b)(1) conditions a BOC's ability to provide 
interLATA service originating in its region upon receipt of Commission 
approval under section 271(d)(3). Section 271(d)(3), in turn, requires 
the Commission to make three findings before approving BOC entry. 
First, the Commission must find that the interconnection agreements or 
statements approved at the state level under section 252 satisfy the 
competitive checklist contained in section 271(c)(2)(B). Second, the 
Commission must ensure that the structural and nondiscrimination 
safeguards mandated in section 272 will be met. Finally, the Commission 
must find that BOC entry into the in-region interLATA market is 
``consistent with the public interest, convenience, and necessity.'' In 
acting on a BOC's application for authority to provide in-region 
interLATA services, the Commission must consult with the Attorney 
General and give substantial weight to the Attorney General's 
evaluation of the BOC's application. In addition, the Commission must 
consult with the applicable state commission to verify that the BOC 
complies with the requirements in subsection (c).
    13. Section 272 establishes separate affiliate requirements that 
apply to BOC provision of manufacturing of telecommunications equipment 
and CPE, interLATA telecommunications services that originate in-region 
(other than certain previously authorized activities and certain 
incidental interLATA services), and interLATA information services (in-
region and out-of-region). The statutory separate affiliate 
requirements for manufacturing and in-region interLATA 
telecommunications services expire three years after a BOC or any BOC 
affiliate is authorized to provide in-region interLATA services. The 
statutory interLATA information services separate affiliate requirement 
expires four years after enactment of the 1996 Act. The statute gives 
the Commission the discretion to extend either of these periods by rule 
or order. This NPRM concerns the non-accounting separate affiliate and 
nondiscrimination requirements of sections 271 and 272.
    14. The structural separation requirements of section 272 are 
intended to prevent potential improper cost allocations by the BOCs in 
two principal ways. First, by requiring the BOCs and their separate 
affiliates to use different employees for their respective activities, 
section 272 allows the cost of each employee to be assigned directly to 
the appropriate entity thereby reducing the joint and common costs that 
require allocation between the telephone operating companies and the 
affiliates engaged in competitive businesses. Second, by requiring a 
BOC to maintain appropriate records documenting transactions between 
the BOC and its affiliate, section 272 discourages the improper 
allocation of costs between the two entities by making detection of 
such practices easier.
    15. The structural separation requirements of section 272, in 
conjunction with the affirmative nondiscrimination obligations imposed 
by that section, are intended to address concerns that the BOCs could 
potentially use local exchange and exchange access facilities to 
discriminate unlawfully against competitors in order to gain a 
competitive advantage for their affiliates that engage in competitive 
activities. These safeguards seek to prevent a BOC from discriminating 
in favor of its affiliates by, for example: 1) providing exchange 
access services to its interLATA service affiliate at a lower rate than 
the rate offered to competing interLATA service providers; 2) providing 
a higher quality service to its interLATA service affiliate than the 
service it provides to competing interLATA service providers at the 
same price; 3) purchasing products needed for its local exchange 
network that are manufactured by its affiliate even when the 
affiliate's competitors offer the same or higher quality product at a 
lower price, or a higher quality product at the same price charged by 
the affiliate; or 4) providing advance information about network 
changes to its competitive affiliates.
    16. If a BOC charges its competitors prices for inputs that are 
higher than the prices charged, or effectively charged, to the BOC's 
affiliate, then the BOC can create a ``price squeeze.'' In that 
circumstance, the BOC affiliate could lower its retail price to reflect 
its unfair cost advantage, and competing providers would be forced 
either to match the price reduction and absorb profit margin reductions 
or maintain their retail prices at existing levels and accept 
reductions in their market shares. If the price squeeze was severe 
enough and continued long enough, the BOC affiliate's market share 
could become so large, and the competitors so weakened, that the 
affiliate could unilaterally raise and sustain a price above 
competitive levels by restricting its output. Alternatively, the BOC 
affiliate could simply match its competitors' prices and extract 
supracompetitive profits.

[[Page 39401]]

Unlawful discriminatory preferences in the quality of the service or 
preferential dissemination of information provided by BOCs to their 
affiliates, as a practical matter, can have the same effect as charging 
unlawfully discriminatory prices. If a BOC charged the same rate to its 
affiliate for a higher quality access service than the BOC charged to 
non-affiliates for a lower quality service, or disclosed information 
concerning future changes in network architecture to its manufacturing 
affiliate before the BOC disclosed it to others, the BOC could 
effectively create the same ``price squeeze'' discussed above.

C. Classification of Carriers as Dominant or Non-Dominant

    17. Between 1979 and 1985, the Commission conducted the Competitive 
Carrier proceeding, in which it examined how its regulations should be 
adapted to reflect and promote increasing competition in 
telecommunications markets. In a series of orders, the Commission 
distinguished two kinds of carriers--those with market power (dominant 
carriers) and those without market power (non-dominant carriers). In 
the Competitive Carrier Fourth Report and Order (48 FR 52452 (November 
18, 1983)), the Commission defined market power alternatively as ``the 
ability to raise prices by restricting output'' and as ``the ability to 
raise and maintain price above the competitive level without driving 
away so many customers as to make the increase unprofitable.'' The 
Commission recognized that, in order to assess whether a carrier 
possesses market power, one must first define the relevant product and 
geographic markets. Throughout the Competitive Carrier proceeding, the 
Commission relaxed its tariff filing and facilities authorization 
requirements for non-dominant carriers and focused its regulatory 
efforts on constraining the ability of dominant carriers to exercise 
market power.
    18. This proceeding considers whether we should relax the dominant 
carrier regulation that under our current rules would apply to in-
region, interstate, domestic, interLATA services provided by the BOCs' 
interLATA affiliates. As a preliminary matter, we note that there are 
two ways in which a carrier can profitably raise and sustain prices 
above competitive levels and thereby exercise market power. First, a 
carrier may be able to raise and sustain prices by restricting its own 
output (which usually requires a large market share); second, a carrier 
may be able to raise and sustain prices by increasing its rivals' costs 
or by restricting its rivals' output through the carrier's control of 
an essential input, such as access to bottleneck facilities, that its 
rivals need to offer their services. We seek comment on whether the BOC 
affiliates should be classified as dominant carriers under our rules 
only if we find that they have the ability profitably to raise and 
sustain prices of in-region, interstate, domestic, interLATA services 
significantly above competitive levels by restricting their own output, 
or whether the affiliates should be classified as dominant if the BOCs 
have the ability to raise and sustain prices of such interLATA services 
significantly above competitive levels by raising the costs of their 
affiliates' interLATA rivals.
    19. We then seek comment, with respect to both types of market 
power, on whether the BOC affiliates should be classified as dominant 
or non-dominant. In considering whether a BOC affiliate could raise its 
prices by restricting its own output, we seek comment on whether, in 
light of the requirements established by, and pursuant to, sections 271 
and 272, together with other existing Commission rules, the BOCs will 
be able to use, or leverage, their market power in the local exchange 
and exchange access markets to such an extent that their interLATA 
affiliates could profitably raise and sustain prices of in-region, 
interstate, domestic, interLATA services significantly above 
competitive levels by restricting their own output. In considering 
whether a BOC affiliate could cause increases in prices for in-region, 
interstate, domestic, interLATA services by raising the costs of its 
affiliate's interLATA rivals, we seek comment whether the statutory and 
regulatory safeguards will prevent a BOC from engaging in unlawful 
discrimination or other anticompetitive conduct that will raise its 
affiliate's rivals' costs. We also seek comment on whether regulating 
BOC in-region interLATA affiliates as dominant would help to prevent 
improper allocations of costs or discrimination by the BOCs in favor of 
their interLATA affiliates, or would at least mitigate the effects of 
such activities. We also consider whether we should modify our existing 
rules for regulating independent LECs' provision of in-region, 
interstate, interexchange services.
    20. In our recent order addressing BOC provision of interLATA 
services originating out-of-region, we considered whether, on an 
interim basis, BOC provision of out-of-region services should remain 
subject to dominant carrier regulation. Interim BOC Out-of-Region Order 
(61 FR 35964 (July 9, 1996)) at para. 2. We found, inter alia, that, on 
an interim basis, if a BOC provides out-of-region domestic, interstate, 
interexchange services offered through an affiliate that satisfies the 
separation requirements imposed on independent LECs in the Competitive 
Carrier Fifth Report and Order (49 FR 34824 (September 4, 1984)), we 
would remove dominant carrier regulation for such services. Id. In the 
Interexchange NPRM (61 FR 14717 (April 3, 1996)), we asked whether we 
should modify or eliminate the separation requirements imposed as a 
condition for non-dominant treatment of independent LEC provision of 
interstate, interexchange services originating outside their local 
exchange areas. Interexchange NPRM at para. 61. We also sought comment 
on whether, if we modify or eliminate these separation requirements for 
independent LECs, we should apply the same requirements to BOC 
provision of out-of-region interstate, interexchange services. Id.
    21. Finally, we consider whether to apply the same regulatory 
classification to the BOC affiliates' and independent LECs' provision 
of in-region, international services as we adopt for their provision of 
in-region, interstate, domestic, interLATA services and in-region, 
interstate, domestic, interexchange services, respectively. In doing 
so, we emphasize that there is more than one basis for finding a United 
States (U.S.) carrier dominant in the provision of international 
services. The issue we address in this NPRM is whether a BOC affiliate 
or independent LEC should be regulated as dominant in the provision of 
in-region, international services because of the BOC or independent 
LEC's current retention of bottleneck facilities on the U.S. end of an 
international link. The separate issue of whether a BOC, an independent 
LEC, or any other U.S. carrier should be regulated as dominant in the 
provision of international services because of the market power of an 
affiliated foreign carrier in a foreign destination market was 
addressed by the Commission last year in the Foreign Carrier Entry 
Order (61 FR 4937 (February 9, 1996)). That decision adopted a separate 
framework for regulating U.S. international carriers (including BOCs or 
independent LECs ultimately authorized to provide in-region 
international services) as dominant on routes where an affiliated 
foreign carrier has the ability to discriminate in favor of its U.S. 
affiliate through control of bottleneck services or facilities in the 
foreign destination market. No carriers are exempt from this policy to 
the extent they have foreign affiliations.

II. Scope of the Commission's Authority

    22. As a preliminary matter, we address the scope of the 
Commission's

[[Page 39402]]

authority to adopt rules implementing the non-accounting provisions of 
sections 271 and 272 of the Communications Act, as amended. In the 
following subsections, we address the scope of the Commission's 
authority over interLATA services and interLATA information services 
and its authority over manufacturing activities.

A. InterLATA Services and InterLATA Information Services

    23. Sections 271 and 272 by their terms address BOC provision of 
``interLATA'' services and ``interLATA'' information services. Many 
states contain more than one LATA, and thus, interLATA traffic may be 
either interstate or intrastate. Accordingly, we must determine whether 
sections 271 and 272, and our authority pursuant to those sections, 
apply only to interstate interLATA services and interstate interLATA 
information services, or to interstate and intrastate interLATA 
services and interstate and intrastate interLATA information services.
    24. The MFJ, when it was in effect, governed BOC provision of both 
interstate and intrastate services. The 1996 Act provides:

    Any conduct or activity that was, before the date of enactment 
of this Act, subject to any restriction or obligation imposed by the 
[MFJ] shall, on and after such date, be subject to the restrictions 
and obligations imposed by the Communications Act of 1934 as amended 
by this Act and shall not be subject to the restrictions and the 
obligations imposed by [the MFJ].

    This section supersedes the MFJ, and explains that the 
Communications Act is to serve as its replacement. As set forth below, 
we believe that section 271 and 272 of the Act were intended to replace 
the MFJ as to both interstate and intrastate interLATA services and 
interLATA information services. Thus, we propose that our rules 
implementing these sections apply to both interstate and intrastate 
services. We seek comment on this tentative conclusion, on our 
analysis, and on any alternative views that commenters may propose.
    25. Sections 271 and 272 make no explicit reference to interstate 
and intrastate services, but they do make reference to a different 
geographic boundary--the LATA, as originally defined by the MFJ and now 
by the 1996 Act. The interLATA/intraLATA distinction appears to some 
extent to have supplanted the traditional interstate/intrastate 
distinction for purposes of these sections.
    26. As to interLATA services, the MFJ prohibited the BOCs and their 
affiliates from providing any interLATA services, interstate or 
intrastate, unless specifically authorized by the MFJ or a waiver 
thereunder. Reading sections 271 and 272 as applying to all interLATA 
services fits well with the structure of the statute as a whole. 
Sections 251 and 252 of the Act establish rules and procedures for 
competitive entry into local exchange markets. In the Interconnection 
NPRM (61 FR 18311 (April 25, 1996)), we tentatively concluded that 
Congress intended these sections to apply to both interstate and 
intrastate aspects of interconnection. These new obligations imposed on 
BOCs (as well as other LECs), enacted at the same time as sections 271 
and 272, clearly are part of the process for entry into the interLATA 
marketplace. Indeed, BOCs are permitted to provide in-region interLATA 
services only after they have met the requirements of section 271, 
including a competitive checklist requiring compliance with certain 
provisions in sections 251 and 252.
    27. We note also that the structure of sections 271 and 272 
themselves indicates that these sections were intended to address both 
interstate and intrastate services. For instance, BOCs are directed to 
apply for interLATA entry on a state-by-state basis, and the Commission 
is directed to consult with the relevant State Commission before making 
any determination with respect to an application in order to verify the 
BOC's compliance with the requirements for providing in-region 
interLATA services. As we believe it did in sections 251 and 252, 
Congress appears to have put in place rules to govern both interstate 
and intrastate services, and provided a role for both the Commission 
and the states in implementing those rules.
    28. By contrast, reading sections 271 and 272 as limited to the 
provision of interstate services would mean that the BOCs would have 
been permitted to provide in-region, intrastate, interLATA services 
upon enactment and without any guidance from Congress as to entry 
requirements or safeguards, subject only to any pre-existing state 
rules on interexchange entry. Any such rules, presumably, would not 
have been directed at BOC entry, which had for many years been 
prohibited. Concerns about BOC control of bottleneck facilities over 
the provision of in-region interLATA services are equally important for 
both interstate and intrastate services. Thus, the reasons for imposing 
the procedures and safeguards of sections 271 and 272 apply equally to 
the BOCs' provision of both intrastate and interstate, in-region, 
interLATA services. We find it implausible that Congress could have 
intended to lift the MFJ's ban on BOC provision of interLATA services 
without making any provision for orderly entry into intrastate 
interLATA services, which constitute approximately 30 percent of 
interLATA traffic. Based on the preceding analysis, we tentatively 
conclude that our authority under sections 271 and 272 applies to 
intrastate and interstate interLATA services and intrastate and 
interstate interLATA information services provided by the BOCs or their 
affiliates.
    29. We believe that section 2(b) of the Communications Act does not 
require a contrary result. Section 2(b) provides that, except as 
provided in certain enumerated sections not including sections 271 and 
272, ``nothing in [the Communications Act] shall be construed to apply 
or to give the Commission jurisdiction with respect to * * * charges, 
classifications, practices, services, facilities, or regulations for or 
in connection with intrastate communications service by wire or radio 
of any carrier * * *.'' In enacting sections 271 and 272 after section 
2(b) and squarely addressing therein the issues before us, we 
tentatively conclude that Congress intended for sections 271 and 272 to 
take precedence over any contrary implications based on section 2(b). 
We note also, that in enacting the 1996 Act, there are instances where 
Congress indisputably gave the Commission intrastate jurisdiction 
without amending section 2(b). Thus, we believe that the lack of an 
explicit exception in section 2(b) should in this instance create less 
of a presumption that the Commission's jurisdiction under sections 271 
and 272 is limited to interstate services than would ordinarily be the 
case.
    30. We seek comment on the jurisdictional analysis set forth above. 
In particular, we ask that parties disagreeing with this analysis set 
forth their own alternative analysis of how sections 271 and 272 apply 
to interstate and intrastate interLATA services and interLATA 
information services.
    31. To the extent that commenters disagree with the analysis set 
forth above, we also seek comment on the extent to which the Commission 
may have authority to preempt state regulation with respect to some or 
all of the non-accounting matters addressed by sections 271 and 272. 
The Commission has authority to preempt state regulation of intrastate 
communications services where such state regulation would thwart or 
impede the Commission's exercise of its lawful authority over 
interstate communications services, such as when it is not ``possible 
to separate the

[[Page 39403]]

interstate and intrastate portions of the asserted FCC regulation.'' 
Thus, we seek specific comment on (1) the extent to which it may not be 
possible to separate the interstate and intrastate portions of the 
regulations we propose here to implement sections 271 and 272, and (2) 
the extent to which state regulation inconsistent with our regulations 
may thwart or impede the Commission's exercise of lawful authority over 
interstate interLATA services. We seek comment, for example, on 
potentially inconsistent state regulations regarding: (1) a BOC 
affiliate's ability to use, co-use, or co-own facilities with the BOC; 
(2) a BOC affiliate's ability to share personnel with the BOC; and (3) 
a BOC's ability to discriminate in favor of its affiliate.
    32. We note that when the Commission adopted rules to govern the 
BOCs' provision of enhanced services rules prior to the enactment of 
the 1996 Act, it preempted certain inconsistent state structural 
separation requirements dealing with the intrastate portion of 
jurisdictionally mixed enhanced services. The U.S. Court of Appeals for 
the Ninth Circuit upheld this exercise of our preemption authority, 
agreeing that the state separation requirements would essentially 
negate the Commission's goal of allowing BOC provision of interstate 
enhanced services on a non-separated basis. Along the same lines, it is 
conceivable that a state may try to impose separate affiliate or 
nondiscrimination requirements on the intrastate portion of 
jurisdictionally mixed services that are inconsistent with the 
requirements in section
    33. We believe that California III may provide support for 
Commission preemption of such inconsistent state regulations, to the 
extent that the regulations would thwart or impede the Commission's 
exercise of its authority over interstate interLATA services or 
interstate interLATA information services pursuant to sections 271 and 
272. We seek comment on this analysis. We also seek comment on whether 
state regulation of intrastate services that is less stringent than the 
Commission's regulation of interstate services could thwart or impede 
the Commission's exercise of its authority over interstate, interLATA, 
information services.

B. Manufacturing Activities

    34. To the extent that sections 271 and 272 address BOC 
manufacturing activities, we believe that the same statutory analysis 
set forth above would apply. We see no basis for distinguishing among 
the various subsections of sections 271 and 272. Even apart from that 
analysis, however, we believe that the provisions concerning 
manufacturing clearly apply to all manufacturing activities. Section 
2(b) of the Communications Act limits the Commission's authority over 
``charges, classifications, practices, services, facilities, or 
regulation for or in connection with intrastate communications 
service.'' We believe that the manufacturing activities addressed by 
sections 271 and 272, however, are not within the scope of section 
2(b). Alternatively, if section 2(b) applies with respect to BOC 
manufacturing, we believe that such manufacturing activities plainly 
cannot be segregated into interstate and intrastate portions. Thus, any 
state regulation inconsistent with sections 271 and 272 or our 
implementing regulations would necessarily thwart and impede federal 
policies, and should be preempted. We tentatively conclude, therefore, 
that our authority under section 272 extends to all BOC manufacturing 
of telecommunications equipment and CPE. We seek comment on this 
tentative conclusion.

III. Activities Subject to Section 272 Requirements

    35. Section 272 provides that a BOC (including any affiliate) that 
is a LEC subject to the requirements of section 251(c) may provide 
certain services only through a separate affiliate. Under section 272, 
BOCs (or BOC affiliates) may engage in the following activities only 
through one or more affiliates that are separate from the incumbent LEC 
entity: (A) manufacturing activities; (B) interLATA telecommunications 
services that originate in-region; and (C) interLATA information 
services. We discuss each of these activities separately below and seek 
comment where necessary about which activities are subject to the 
section 272 separate affiliate requirements. Section 272(a)(2)(B) 
exempts from the separate affiliate requirement for interLATA 
telecommunications services certain incidental interLATA services (as 
described in sections 271(g)(1), (2), (3), (5), and (6)), out-of-region 
services (as described in section 271(b)(2)), and previously authorized 
activities (as described in section 271(f)). Although they are 
information services, electronic publishing (as defined in section 
274(h)) and alarm monitoring services (as defined in section 275(e)) 
are exempted from the section 272 separate affiliate requirements, and 
are subject to their own specific statutory separate affiliate and/or 
nondiscrimination requirements.
    36. We tentatively conclude that the separate affiliate and 
nondiscrimination safeguards adopted in this proceeding pursuant to 
section 272 will apply to a BOC's provision of both domestic and 
international interLATA telecommunications services that originate in a 
BOC's in-region states. The 1996 Act defines ``interLATA services'' as 
``telecommunications between a point located in a local access and 
transport area and a point located outside such area.'' Because this 
definition does not distinguish between domestic and international 
calls, we tentatively conclude that Congress intended to apply the same 
safeguards to BOC provision of domestic and international interLATA 
services that originate in-region. Similarly, in the provisions 
concerning interLATA information services, Congress has not 
distinguished between domestic and international provision of these 
services. The 1996 Act does not specify a definition for ``interLATA 
information services.'' Consequently, we tentatively conclude that the 
safeguards adopted in this proceeding will apply to BOC provision of 
both domestic and international interLATA information services. We seek 
comment on these tentative conclusions.
    37. As a threshold matter, we note that section 272(a)(1) requires 
a BOC to provide services subject to the section 272 separate affiliate 
requirements through ``one or more affiliates.'' Based on this 
statutory language, we tentatively conclude that a BOC may, if it 
chooses, conduct all, or some combination, of its manufacturing 
activities, interLATA telecommunications services, and interLATA 
information services in a single separate affiliate, as long as all the 
requirements imposed pursuant to the statute and our regulations are 
otherwise met. We seek comment on this tentative conclusion. If a BOC 
places its local exchange operations in a separate affiliate, pursuant 
to section 272(a)(1), the local exchange affiliate must be separate 
from the BOC affiliate or affiliates engaged in covered competitive 
activities.
    38. Section 272(h) provides that ``[w]ith respect to any activity 
in which a Bell operating company is engaged on the date of enactment 
of the Telecommunications Act of 1996, such company shall have one year 
from such date of enactment to comply with the requirements of this 
section.'' Section 271(f) states ``[n]either [section 271(a)] nor 
section 273 shall prohibit a [BOC] from engaging, at any time after the 
date of enactment of the [1996 Act], in any activity to the extent 
authorized by, and subject to the terms and conditions contained in'' 
an order of the MFJ Court. As further discussed below, section

[[Page 39404]]

272(h) appears to cover activities included in the definition of 
``previously authorized activities'' described in section 271(f). We 
therefore seek comment on whether, subject to the exceptions discussed 
below, section 272(h) applies to the activities listed in section 
272(a)(2)(A)-(C) that the BOCs were providing on the date the 1996 Act 
was passed. Parties contending that section 271(f) bars the Commission 
from applying section 272(h) to such activities should explain their 
interpretation of the requirements of section 272(h).

A. Manufacturing

    39. Section 273(a) allows a BOC to manufacture and provide 
telecommunications equipment, and to manufacture CPE, if the Commission 
has authorized that BOC or any BOC affiliate to provide in-region 
interLATA services under section 271(d). BOCs may only engage in 
manufacturing activities through a separate affiliate that meets the 
requirements of section 272. Section 273 sets out certain additional 
safeguards and nondiscrimination requirements applicable to BOC entry 
into manufacturing activities, including separate affiliate 
requirements applicable to entities that certify either 
telecommunications equipment or CPE manufactured by unaffiliated 
entities. As noted above, in this NPRM we address the non-accounting 
separate affiliate and nondiscrimination requirements of sections 271 
and 272; we will address the additional safeguards established in 
section 273 in a separate proceeding.

B. InterLATA Telecommunications Services

    40. Section 271 addresses the entry of the BOCs into the provision 
of three categories of interLATA telecommunications services: services 
that originate in-region, services that originate out-of-region, and 
incidental interLATA services. Section 272, in turn, requires a BOC to 
establish a separate affiliate for:

    (B) Origination of interLATA telecommunications services, other 
than-
    (i) incidental interLATA services described in paragraphs (1), 
(2), (3), (5), and (6) of section 271(g);
    (ii) out-of-region services described in section 271(b)(2); or 
(iii) previously authorized activities described in section 271(f). 
Id. Sec. 272(a)(2)(B).

The 1996 Act defines ``telecommunications'' as ``the transmission, 
between or among points specified by the user of information of the 
user's choosing without change in the form or content of the 
information as sent and received.'' ``Telecommunications service'' is 
defined as ``the offering of telecommunications for a fee directly to 
the public or to such classes of users as to be effectively available 
directly to the public regardless of facilities used.''
    41. Section 271(g) provides:

    For purposes of this section, the term ``incidental interLATA 
services'' means the interLATA provision by a Bell operating company 
or its affiliate--
    (1)(A) of audio programming, video programming, or other 
programming services to subscribers to such services of such company 
or affiliate;
    (B) of the capability for interaction by such subscribers to 
select or respond to such audio programming, video programming, or 
other programming services;
    (C) to distributors of audio programming or video programming 
that such company or affiliate owns or controls, or is licensed by 
the copyright owner of such programming (or by an assignee of such 
owner) to distribute; or
    (D) of alarm monitoring services;
    (2) of two-way interactive video services or Internet services 
over dedicated facilities to or for elementary and secondary schools 
as defined in section 254(h)(5);
    (3) of commercial mobile services in accordance with section 
332(c) of this Act and with the regulations prescribed by the 
Commission pursuant to paragraph (8) of such section;
    (4) of a service that permits a customer that is located in one 
LATA to retrieve stored information from, or file information for 
storage in, information storage facilities of such company that are 
located in another LATA;
    (5) of signaling information used in connection with the 
provision of telephone exchange services or exchange access by a 
local exchange carrier; or
    (6) of network control signaling information to, and receipt of 
such signaling information from, common carriers offering interLATA 
services at any location within the area in which such Bell 
operating company provides telephone exchange services or exchange 
access.

    42. Under the 1996 Act, BOC provision of ``incidental interLATA 
services'' is treated differently than BOC provision of other in-region 
interLATA telecommunications services in two respects. First, section 
271(b)(3) specifies that a BOC, or any BOC affiliate, may provide 
incidental interLATA services originating in any state immediately 
after the date of enactment of the 1996 Act, while section 271(b)(1) 
conditions BOC provision of other in-region interLATA services upon 
prior approval by the Commission. Second, section 272(a)(2)(B)(i) 
exempts from the section 272 separate affiliate requirement all of the 
incidental interLATA telecommunications services listed in subsection 
271(g), except a BOC's provision of a service ``that permits a customer 
that is located in one LATA to retrieve stored information from, or 
file information for storage in, information storage facilities of such 
company that are located in another LATA.'' Section 271(h) requires 
that the Commission ensure that the provision of incidental services by 
a BOC or its affiliate ``will not adversely affect telephone exchange 
service ratepayers or competition in any telecommunications market,'' 
and states that the provisions of section 271(g) ``are intended to be 
narrowly construed.'' We seek comment on what, if any, non-accounting 
structural or nonstructural safeguards the Commission should establish 
to implement the requirements of section 271(h). We seek comment 
regarding the interplay between section 271(h) and section 254(k), 
which prohibits telecommunications carriers from ``us[ing] services 
that are not competitive to subsidize services that are subject to 
competition.'' Parties proposing that the Commission adopt specific 
safeguards to implement section 271(h) should explain how these 
safeguards would be consistent with section 272(a)(2)(B)(i), which 
exempts incidental interLATA services from the section 272 separate 
affiliate requirements.
    43. Section 272(a)(2)(B)(iii) exempts from ``origination of 
interLATA telecommunications services'' for which a separate affiliate 
is required ``previously authorized activities described in section 
271(f).'' We seek comment on whether, in light of section 272(h), 
Congress intended section 272(a)(2)(B)(iii) to grant a permanent 
exemption for previously authorized activities from the separate 
affiliate requirements of section 272.
    44. We note that section 272(a)(2)(B)(iii) refers to ``previously 
authorized activities'' as defined in section 271(f), which includes 
manufacturing activities and interLATA information services. We also 
note that section 272(a)(2)(A) and (C) expressly require the BOCs to 
engage in manufacturing activities and the provision of interLATA 
information services in accordance with section 272. Therefore, we seek 
comment on whether sections 272(a)(2)(A) and (C), in combination with 
section 272(h), require that BOCs come into compliance with section 
272, within one year of the date of passage of the 1996 Act, with 
respect to any manufacturing activities or interLATA information 
services in which they were engaged on the date of passage. We seek 
comment, in particular, on whether Congress

[[Page 39405]]

intended to treat previously authorized manufacturing and interLATA 
information services differently from previously authorized interLATA 
telecommunications services.
    45. Subject to the exceptions discussed in the preceding 
paragraphs, section 272 safeguards apply to interLATA 
telecommunications services which originate within a BOC's region. 
Section 271(i)(1) defines an in-region state as ``a State in which a 
Bell operating company or any of its affiliates was authorized to 
provide wireline telephone exchange service pursuant to the 
reorganization plan approved under the AT&T Consent Decree, as in 
effect on the day before the date of enactment of the 
Telecommunications Act of 1996.'' Section 153(4)(B) indicates that the 
definition of a BOC includes ``any successor or assign of any such 
company that provides wireline telephone exchange service.'' We note 
that two pairs of BOCs have proposed to merge their operations (through 
both mergers and acquisitions). If these or other mergers among the 
BOCs are completed, we believe, pursuant to section 153(4)(B), that the 
in-region states of the merged entity shall include all of the in-
region states of each of the BOCs involved in the merger. We seek 
comment on this interpretation. We are concerned, however, that our 
existing and proposed safeguards may not be sufficient to address 
potential concerns about the practices of proposed merger partners 
during the pendency of the merger. Specifically, a BOC could 
potentially discriminate, during this period, in favor of the interLATA 
affiliate of the BOC's future merger partner that is offering service 
in the BOC's in-region area. Therefore, we seek comment on what effect, 
if any, the entry into a merger agreement by two or more of the BOCs 
has upon the application of the section 271 and 272 non-accounting 
separate affiliate and nondiscrimination requirements to the BOCs that 
are parties to the agreement, and what, if any, additional safeguards 
are required to ensure that these BOCs do not provide the affiliates of 
their merger partners with an unfair competitive advantage during the 
pendency of their merger agreement. We note also the possibility that 
the BOCs may enter into joint ventures for the provision of interLATA 
services. We seek comment regarding what effect, if any, joint venture 
arrangements involving two or more of the BOCs have upon the 
application of the section 271 and 272 requirements to those BOCs.

C. InterLATA Information Services

    46. The MFJ originally barred the BOCs from providing information 
services. This restriction was subsequently narrowed, and then 
eliminated entirely in 1991. As a consequence, the BOCs were providing 
information services at the time the 1996 Act became law. We note that, 
although the 1996 Act distinguishes between in-region interLATA 
telecommunications services and out-of-region interLATA 
telecommunications services, no such distinction is made with respect 
to interLATA information services. The 1996 Act defines ``interLATA 
service'' as referring to telecommunications service. Thus, where the 
1996 Act draws distinctions between in-region and out-of-region 
``interLATA services,'' as it does in section 271(b), these 
distinctions do not apply to information services. Specifically, 
section 272(a)(2)(B) excepts out-of-region interLATA telecommunications 
services described in section 271(b)(2) from the section 272 separate 
affiliate requirements. By contrast, section 272(a)(2)(C) states that a 
separate affiliate is required to provide ``[i]nterLATA information 
services, other than electronic publishing (as defined in section 
274(h)) and alarm monitoring services (as defined in section 275(e)).'' 
Based on the statutory language, we tentatively conclude that the BOCs 
must provide interLATA information services through a separate 
affiliate, regardless of whether these services are provided in-region 
or out-of-region. We seek comment on this tentative conclusion.
1. Definition of ``Information Services''
    47. The 1996 Act defines ``information service'' as ``the offering 
of a capability for generating, acquiring, storing, transforming, 
processing, retrieving, utilizing, or making available information via 
telecommunications, and includes electronic publishing, but does not 
include any use of any such capability for the management, control, or 
operation of a telecommunications system or the management of a 
telecommunications service.'' We seek comment on what services are 
included in the statutory definition of information services. In this 
regard, we note that in the Computer III proceeding, the Commission 
established rules for BOC provision of ``enhanced services,'' pursuant 
to which the BOCs were permitted to provide certain enhanced services 
prior to the passage of the 1996 Act.
    48. The Commission's existing regulatory framework distinguishes 
between ``basic'' services and ``enhanced'' services. Basic services 
are common carrier transmission services, and are subject to Title II 
regulation. Enhanced services, which combine common carrier services 
with non-common carrier services, are not subject to Title II 
regulation. Under the Commission's rules, the term ``enhanced 
services'' refers to ``services, offered over common carrier 
transmission facilities used in interstate communications, which employ 
computer processing applications that act on the format, content, code, 
protocol or similar aspects of the subscriber's transmitted 
information; provide the subscriber additional, different, or 
restructured information; or involve subscriber interaction with stored 
information.''
    49. We seek comment on whether all activities that the Commission 
classifies as ``enhanced services'' fall within the statutory 
definition of ``information service.'' Prior to passage of the 1996 
Act, neither the Commission nor the MFJ court resolved the question of 
whether enhanced services were equivalent to information services under 
the MFJ. We note that the Joint Explanatory Statement states that the 
definition of ``information services'' used in the 1996 Act was based 
on the definition used in the MFJ. If parties contend that 
``information services'' differ from ``enhanced services'' in any 
regard, they should identify the distinctions that should be drawn 
between the two categories, describe any overlap between the two 
categories, and delineate the particular services that would come 
within one category and not the other.
2. InterLATA Nature of Information Services
    50. Section 272(a)(2)(C) requires that a BOC provide interLATA 
information services only through a separate affiliate. In contrast, 
the 1996 Act does not establish any separate affiliate requirement for 
the provision of intraLATA information services. Under the Commission's 
existing regulatory scheme, enhanced services have not been regulated 
under Title II. Thus, the Commission previously has not made a 
regulatory distinction between intraLATA and interLATA information 
services, as the 1996 Act now does.
    51. In order to determine which activities are subject to the 
separate affiliate requirement, we invite parties to comment on how we 
should distinguish between an interLATA information service and an 
intraLATA information service. In general, BOC provision of information 
services

[[Page 39406]]

involves both basic underlying transmission components, which transmit 
end-user information without change in the form or content of the 
information, and enhanced or information service functionality, which 
generates, acquires, stores, transforms, processes, retrieves, utilizes 
or makes available end-user information. We seek comment regarding 
whether an information service (such as voicemail) should be considered 
an interLATA service only when the service actually involves an 
interLATA telecommunications transmission component. In the 
alternative, should we classify as an interLATA information service any 
information service that potentially involves an interLATA 
telecommunications transmission component (e.g., the service can be 
accessed across LATA boundaries)? We ask parties to comment with 
specificity upon the types of services that should be classified as 
interLATA or intraLATA information services.
    52. We further request comment regarding whether and how the manner 
in which a BOC structures its provision of an information service 
affects whether the service is classified as interLATA, and thus 
subject to the separate affiliate and nondiscrimination requirements of 
the Communications Act. For example, if the non-transmission computer 
facilities that a BOC uses to provide an information service are 
located in a different LATA from the end-user, should that service be 
classified as an interLATA information service? Alternatively, must an 
interLATA information service incorporate non-transmission components 
or functionalities that are located in different LATAs?
    53. We seek comment on the relevance of what BOCs have done in the 
past in determining now what activities may only be offered through a 
separate affiliate. We note that, prior to the 1996 Act, some BOCs 
received MFJ waivers in order to employ transmission services that 
crossed LATA boundaries for the provision of certain enhanced services. 
We seek comment regarding whether the fact that a BOC in the past 
applied for or received an MFJ waiver for the provision of a particular 
enhanced service presumptively renders that service an interLATA 
information service subject to the separate affiliate requirements of 
section 272.
    54. All of the BOCs currently are providing enhanced services in 
some or all of their in-region states, pursuant to comparably efficient 
interconnection (CEI) plans approved by the Commission's Common Carrier 
Bureau. Because the MFJ barred BOC provision of interLATA services, we 
seek comment regarding whether, when a BOC has not applied for or 
received an MFJ waiver to provide a particular enhanced service, but 
instead is providing that enhanced service pursuant to a CEI plan 
approved prior to the enactment of the 1996 Act, we should presume that 
enhanced service to be an intraLATA information service that is not 
subject to the separate affiliate requirements of section 272. To the 
extent that existing services offered pursuant to approved CEI plans 
are not subject to section 272, we seek comment regarding whether 
passage of the 1996 Act directly or indirectly affects how we should 
treat such services.
3. Impact of the 1996 Act on Existing Commission Requirements for 
Information Services
    55. Because the 1996 Act does not establish regulatory requirements 
for BOC provision of intraLATA information services, we conclude that, 
with respect to these services, our existing Computer II, Computer III, 
and ONA requirements remain in place to the extent that they are 
consistent with the 1996 Act. The Commission developed those 
requirements to address the same concerns that Congress sought to 
address through the establishment of separate affiliate and 
nondiscrimination requirements in sections 271 and 272. We note that 
the combination of our Computer II, Computer III, and ONA proceedings 
established various unbundling and interconnection requirements for BOC 
provision of enhanced services. Under Computer II, the BOCs and other 
facilities-based carriers must unbundle their basic services from their 
enhanced services. Under Computer III and ONA, the BOCs must further 
unbundle the manner in which they provide basic services and make these 
unbundled basic services available to competing ESPs. Under our rules, 
these interconnection and unbundling requirements associated with the 
provision of enhanced services continue to apply to the BOCs regardless 
of whether they provide enhanced services on an integrated or a 
separated basis.
    56. We conclude that we should continue to enforce those existing 
Computer II, Computer III, and ONA requirements that are consistent 
with the 1996 Act, and we ask commenters to specify whether, and to 
what extent, the existing requirements are inconsistent with the 1996 
Act. If parties contend that the statute supersedes our Computer II, 
Computer III, and ONA unbundling and interconnection requirements for 
BOC provision of intraLATA information services, they should identify 
the specific provisions of section 271 and 272 that they believe 
supersede our requirements, as well as the specific unbundling and 
interconnection requirements they believe these provisions impose upon 
the BOCs.
    57. We recognize that some of the anticompetitive concerns we 
sought to address through the establishment of the Computer II, 
Computer III, and ONA requirements may now be addressed by new 
statutory provisions or by the anticipated competition that 
implementation of the statute should foster. We consequently seek 
comment on which, if any, of our Computer II, Computer III, and ONA 
rules may have been rendered unnecessary by the 1996 Act. Parties 
should also address the possible impact of the statutory requirements 
on our pending Computer III Further Remand Proceedings.

D. Overlap Between InterLATA Information Services and Services Subject 
to Other Statutory Requirements

    58. Under the 1996 Act, electronic publishing is specifically 
included within the category of information services. InterLATA 
provision of electronic publishing, however, is specifically exempted 
from the separate affiliate requirements of section 272. Instead, 
section 274 establishes specific separate affiliate and 
nondiscrimination requirements which apply to the provision of 
electronic publishing services by the BOCs.
    59. The 1996 Act defines ``electronic publishing'' to mean:

the dissemination, provision, publication, or sale to an 
unaffiliated entity or person, of any one or more of the following: 
news (including sports); entertainment (other than interactive 
games); business, financial, legal, consumer, or credit materials; 
editorials, columns, or features; advertising; photos or images; 
archival or research material; legal notices or public records; 
scientific, educational, instructional, technical, professional, 
trade, or other literary materials; or other like or similar 
information.

The 1996 Act lists specific services that do not fall within the 
definition of electronic publishing. These excepted services include, 
among other things: common carrier provision of telecommunications 
service, information access service, information gateway service, voice 
storage and retrieval, electronic mail, certain data and transaction 
processing services, electronic billing or advertising of a BOC's 
regulated telecommunications services, language translation or data 
format conversion, ``white pages''

[[Page 39407]]

directory assistance, caller identification services, repair and 
provisioning databases, credit card and billing validation for 
telephone company operations, 911-E and other emergency assistance 
databases, video programming and full motion video entertainment on 
demand.
    60. We will examine the meaning of the phrase ``electronic 
publishing'' in greater depth in a separate proceeding on the section 
274 separate affiliate and nondiscrimination requirements. For the 
purposes of this proceeding, we seek comment in order to distinguish 
information services that are subject to the section 272 requirements 
from electronic publishing services that are subject to the section 274 
requirements. We anticipate that this issue will arise with respect to 
services that are neither clearly encompassed by the statutory 
definition of ``electronic publishing'' nor specifically listed in the 
delineated exceptions to that definition. We seek comment on whether, 
where such classification questions arise, we should classify as 
``electronic publishing'' services those services for which the carrier 
controls, or has a financial interest in, the content of information 
transmitted by the service. We note that under the MFJ, ``electronic 
publishing'' was defined as ``the provision of any information which a 
provider or publisher has, or has caused to be originated, authored, 
compiled, collected, or edited, or in which he has a direct or indirect 
financial or proprietary interest, and which is disseminated to an 
unaffiliated person through some electronic means.'' United States v. 
Western Elec. Co., 552 F. Supp. 131, 178, 181 (D.D.C. 1982).
    61. The 1996 Act defines ``telemessaging'' as ``voice mail and 
voice storage and retrieval services, any live operator services used 
to record, transcribe, or relay messages (other than telecommunications 
relay services), and any ancillary services offered in combination with 
these services.'' We tentatively conclude that telemessaging is an 
information service. Unlike electronic publishing and alarm monitoring 
services, which are information services that are specifically exempted 
from the section 272(a) separate affiliate requirements, BOC provision 
of telemessaging services is not specifically exempted from these 
requirements. Therefore, we tentatively conclude that BOC provision of 
telemessaging on an interLATA basis is subject to the section 272(a) 
separate affiliate requirements, in addition to the section 260 
safeguards, which apply to all incumbent LECs, including the BOCs. We 
seek comment on this tentative conclusion.

IV. Structural Separation Requirements of Section 272

    62. Section 272(b) of the Communications Act establishes five 
structural and transactional requirements for the separate affiliate 
(or affiliates) established pursuant to section 272(a). Specifically, 
the 1996 Act requires that the separate affiliate:

    (1) shall operate independently from the [BOC];
    (2) shall maintain books, records, and accounts in the manner 
prescribed by the Commission which shall be separate from the books, 
records, and accounts maintained by the [BOC] of which it is an 
affiliate;
    (3) shall have separate officers, directors, and employees from 
the [BOC] of which it is an affiliate;
    (4) may not obtain credit under any arrangement that would 
permit a creditor, upon default, to have recourse to the assets of 
the [BOC]; and
    (5) shall conduct all transactions with the [BOC] of which it is 
an affiliate on an arm's length basis with any such transactions 
reduced to writing and available for public inspection.

We discuss each of these requirements below.
    63. We note that section 272(a)(1) requires a BOC to provide 
services subject to the section 272 separate affiliate requirements 
through ``one or more affiliates.'' As we tentatively concluded above, 
a BOC may, if it chooses, conduct all, or some combination, of its 
manufacturing activities, interLATA telecommunications services, and 
interLATA information services in a single separate affiliate. A BOC's 
potential incentive and ability to favor its affiliate and to 
improperly allocate costs may vary, however, depending on the activity 
involved. For this reason, the structural and transactional 
requirements of section 272(b) may need to be implemented differently 
with respect to the three activities enumerated in the statute. We seek 
comment on whether the 1996 Act permits us to, and if so, whether we 
should, interpret or apply any of the section 272(b) requirements 
differently with respect to BOC provision of services regulated under 
Title II (namely, provision of interLATA telecommunications services) 
as opposed to nonregulated activities (namely, manufacturing and 
interLATA information services). In addition, we seek comment on how 
such different regulatory requirements could be imposed on the three 
activities if all three are provided through one affiliate.

A. Section 272(b)(1)

    64. Section 272(b)(1) states that the separate affiliate ``shall 
operate independently from the [BOC].'' The 1996 Act does not elaborate 
on the meaning of the phrase ``operate independently.'' Under 
principles of statutory construction, a statute should be interpreted 
so as to give effect to each of its provisions. Accordingly, we 
tentatively conclude that we should interpret the ``operate 
independently'' requirement in section 272(b)(1) as imposing 
requirements beyond those listed in subsections 272(b)(2)-(5). We seek 
comment on this tentative conclusion. We also seek comment on what 
requirements the Commission should adopt to implement the statutory 
requirement that affiliates operate independently.
    65. In the Computer II proceeding, the Commission required AT&T to 
provide CPE and enhanced services through separate subsidiaries. The 
Commission extended the Computer II requirements to the BOCs after 
divestiture. Computer II mandated ``maximum separation,'' based on a 
determination that structural separation was an effective means of 
ensuring that the BOCs treated unaffiliated ESPs and CPE vendors 
identically to their own affiliated enhanced service and CPE 
operations. Under Computer II, the BOC's enhanced services subsidiary 
could not construct, own, or operate its own transmission facilities, 
and was required to obtain basic transmission capacity from the 
regulated carrier pursuant to tariff. In addition, the Commission 
prohibited the regulated entity and unregulated subsidiaries from using 
in common any leased or owned physical space or property on which was 
located transmission equipment or facilities used to provide basic 
transmission services. In Computer II, the Commission also required the 
BOC to provide unregulated services through computer facilities that 
were separate from those used to provide regulated services. In 
addition, the Commission prohibited the regulated entity and the 
unregulated subsidiaries from developing software for each other. In 
Computer II, the Commission also prohibited a subsidiary that provided 
both CPE and enhanced services from marketing any other equipment to 
affiliated entities--e.g., transmission or other network equipment. We 
noted, however, that BOC manufacturing affiliates could continue to 
sell directly to affiliated carriers.
    66. In the Competitive Carrier proceeding, the Commission also 
established certain separation

[[Page 39408]]

requirements that independent LECs need to meet in order to be 
regulated as non-dominant in the provision of interstate interexchange 
services. These requirements are less stringent than the Computer II 
separate subsidiary requirements. In Competitive Carrier, the 
Commission required, in order for independent LECs to be non-dominant, 
that they provide interstate interexchange services through an 
affiliate and that the affiliate: 1) maintain separate books of 
account; 2) not jointly own transmission or switching facilities with 
the exchange telephone company; and 3) obtain any exchange telephone 
company services at tariffed rates and conditions. We seek comment on 
whether the ``operate independently'' requirement in section 272(b)(1) 
should be interpreted as imposing one or more of the separation 
requirements established in Computer II or Competitive Carrier.
    67. We note that section 274(b) states that ``[a] separated 
affiliate or electronic publishing joint venture shall be operated 
independently from the [BOC],'' and then prescribes specific activities 
that the electronic publishing affiliate can and cannot perform. We 
seek comment on the relevance of the ``operated independently'' 
requirement in section 274(b) when construing what Congress intended in 
section 272(b)(1). For example, among other restrictions, section 
274(b) prohibits a BOC from ``perform[ing] hiring or training of 
personnel on behalf of a separated affiliate,'' as well as 
``perform[ing] research and development on behalf of a separated 
affiliate.''

B. Section 272(b)(2)

    68. Section 272(b)(2) states that the affiliate shall maintain 
separate books, records, and accounts in the manner prescribed by the 
Commission. As noted above, we will address the implementation issues 
associated with this section in a separate rulemaking.

C. Section 272(b)(3)

    69. Section 272(b)(3) states that the affiliate ``shall have 
separate officers, directors, and employees from the [BOC] of which it 
is an affiliate.'' In Computer II, the Commission required the separate 
subsidiary to have its own operating, marketing, installation, and 
maintenance personnel for the services and equipment it offered./ Under 
Computer II, however, the Commission permitted certain administrative 
services to be shared on a cost reimbursable basis. Specifically, the 
Commission permitted the sharing of the following administrative 
services: accounting, auditing, legal services, personnel recruitment 
and management, finance, tax, insurance, and pension services. We 
tentatively conclude that section 272(b)(3) prohibits the sharing of 
in-house functions such as operating, installation, and maintenance 
personnel, including the sharing of administrative services that are 
permitted under Computer II if those services are performed in-house. 
We seek comment on whether section 272(b)(3) prohibits the BOC and an 
affiliate from sharing the same outside services, such as insurance or 
pension services. We also seek comment on what other types of personnel 
sharing may be prohibited by section 272(b)(3).

D. Section 272(b)(4)

    70. Section 272(b)(4) states that the affiliate ``may not obtain 
credit under any arrangement that would permit a creditor, upon 
default, to have recourse to the assets of the [BOC].'' This 
restriction appears to be designed to protect subscribers to a BOC's 
exchange and exchange access services from bearing the cost of default 
by BOC affiliates. We tentatively conclude that a BOC may not co-sign a 
contract, or any other instrument with a separate affiliate that would 
allow the affiliate to obtain credit in a manner that violates section 
272(b)(4). We seek comment on this tentative conclusion and on what 
other types of activities are prohibited by this provision. Parties are 
invited to comment on whether we should establish specific requirements 
regarding the types of activities that are contemplated by arrangements 
that are consistent with the requirements of section 272(b)(4). To the 
extent that there are a range of options, we seek comment on the 
relative costs and benefits of each.

E. Section 272(b)(5)

    71. Section 272(b)(5) states that the affiliate ``shall conduct all 
transactions with the [BOC] of which it is an affiliate on an arm's 
length basis with any such transactions reduced to writing and 
available for public inspection.'' As previously noted, we will address 
the implementation issues associated with this accounting requirement 
in a separate rulemaking. We seek comment, however, in this NPRM about 
whether implementation of the ``arm's length'' requirement specified in 
section 272(b)(5) necessitates any non-accounting safeguards.

V. Nondiscrimination Safeguards

A. Nondiscrimination Provisions of Section 272

    72. After a BOC affiliate enters competitive markets, that BOC will 
become subject to the economic incentives of the marketplace and 
therefore may have an incentive to favor its competitive affiliate or 
to take actions that could weaken the affiliate's rivals. As previously 
noted, a BOC's control of essential local exchange facilities provides 
a BOC with the opportunity to take these actions. In brief, a BOC could 
provide inferior service to, charge higher prices to, withhold 
cooperation from, or fail to share information with its rivals in 
competitive markets. If a BOC were to provide inferior service to a 
rival, the quality of the rival's interLATA telecommunications service 
or information service would be degraded, making the rival less 
attractive to customers and lowering the prices the rival could charge. 
If a BOC were to charge higher prices to the rival, the rival would 
have to charge higher prices to customers and consequently lose market 
share or accept lower profits. In another example, a BOC could possibly 
withhold cooperation from an interexchange carrier that needs the BOC's 
assistance to introduce an innovative new service, until the BOC's 
affiliate is ready to initiate the same innovative service. A BOC could 
also share information with its manufacturing affiliate or set 
standards that enable its manufacturing affiliate to produce equipment 
at a lower cost or with superior compatibility with the BOC's network 
as compared to that of competing manufacturers. A BOC's behavior in one 
area could affect a rival in its provision of multiple services. For 
example, a BOC's provision of degraded local service could affect the 
rival's provision of telecommunications and information services.
    73. Sections 272(c)(1) and (e) set forth nondiscrimination 
safeguards that apply to BOC provision of manufacturing, interLATA 
telecommunications services, and interLATA information services. 
Section 272(c)(1) sets forth broad nondiscrimination safeguards that 
govern a BOC's dealings with its section 271(a) affiliate and is 
subject to the sunset provisions set forth in section 272(f). Section 
272(e), on the other hand, establishes more specific duties that must 
be fulfilled by the BOC and its affiliates that are subject to section 
251(c), and is specifically excepted from the sunset provisions that 
apply to the other requirements in section 272. We seek comment on 
whether, before

[[Page 39409]]

sunset, the non-accounting requirements of section 272(e) are subsumed 
completely within the requirements of section 272(c)(1). In addition, 
we invite parties to comment on any additional interplay between 
sections 272(c)(1) and 272(e) that are not specifically addressed 
below.
    74. A number of terms and requirements in section 272(c)(1) overlap 
with the terms and requirements of section 272(e)(1)-(4). In addition, 
some of these terms appear in other sections of the 1996 Act, in 
particular, section 251. We seek comment on the interplay between the 
definitions of the terms ``services,'' ``facilities,'' and 
``information'' in various subsections of 272, and between section 272 
and section 251(c). We seek comment on what regulations, if any, are 
necessary to clarify the types or categories of services, facilities, 
or information that must be made available under section 272(c)(1) and 
(e) in light of section 251(c). In particular, we seek comment on 
whether Congress meant something different by the terms ``services'' 
and ``facilities'' as used in section 271(c)(1) and (e). Additionally, 
variations on some of these terms appear in the four subsections of 
section 272(e), and we seek comment on the significance of these 
differences. We seek comment on whether further defining these terms, 
and the term ``goods,'' would enable competing providers to detect 
violations of this section by enabling them to compare more accurately 
a BOC's treatment of its affiliates with a BOC's treatment of 
unaffiliated competing providers. We note that, for example, a 
requesting entity may have equipment with different technical 
specifications from a BOC affiliate's equipment. Therefore, we further 
seek comment on whether the terms of sections 272(c)(1) and (e) could 
be construed to require a BOC to provide a requesting entity with a 
quality of service or functional outcome identical to that provided to 
its affiliate even if this would require the BOC to provide goods, 
facilities, services, or information to the requesting entity that are 
different from those provided to the BOC affiliate.
    75. The 1996 Act allows certain entities to interconnect with the 
local exchange carrier's network and to ``acquire access to network 
elements on an unbundled basis'' under just, reasonable, and 
nondiscriminatory terms and conditions.'' In Computer III, the 
Commission imposed unbundling and interconnection requirements which 
allowed ESPs to acquire unbundled basic services from the BOCs, AT&T, 
and GTE in order to provide enhanced services. Sections 272(c)(1) and 
272(e) require that varying categories of entities receive 
nondiscriminatory treatment from the BOCs. The unbundling required by 
our Computer III and ONA rules, and the provisions of sections 251, 
272(c)(1), and 272(e) are all available to different categories of 
entities. We seek comment on the impact of the variations between these 
categories of entities when implementing sections 272(c)(1) and (e), 
and the applicability of these sections to ESPs that are currently able 
to obtain unbundled network services under Computer III and ONA.

B. Applicability of Pre-Existing Nondiscrimination Requirements

    76. Although the 1996 Act imposes specific nondiscrimination 
requirements on BOCs and their section 272(a) affiliates, we note that 
certain statutory provisions that predate the 1996 Act also impose 
nondiscrimination requirements on all common carriers. Under section 
201, all common carriers have a duty ``to establish physical 
connections with other carriers,'' and to furnish telecommunications 
services ``upon reasonable request therefor.'' Section 201 also 
requires that ``[a]ll charges, practices, classifications, and 
regulations . . . shall be just and reasonable.'' In addition, section 
202 makes it unlawful for any common carrier ``to make any unjust or 
unreasonable discrimination in charges, practices, classifications, 
regulations, facilities, or services,'' or ``to make or give any 
unreasonable preference or advantage to any particular person, class of 
persons, or locality.'' Pursuant to these statutory provisions, the 
Commission established requirements for interconnection between local 
exchange carriers and interexchange telecommunications service 
providers, and for interconnection between BOCs and ESPs. We seek 
comment on the relationship between the nondiscrimination obligations 
imposed by sections 272(c)(1) and 272(e) and the Commission's pre-
existing nondiscrimination provisions. In particular, we seek to 
determine what non-accounting nondiscrimination rules, if any, are 
necessary to implement the section 272(c)(1) and 272(e) 
nondiscrimination requirements.
    77. The nondiscrimination provisions of sections 272(c)(1) do not 
apply to the conduct of BOC affiliates, and the nondiscrimination 
provisions of section 272(e) do not apply to BOC affiliates that are 
not subject to section 251(c). By its terms, section 272(c) applies to 
the conduct of a BOC alone. Section 272(e) applies to the conduct of a 
BOC or a BOC affiliate that is subject to section 251(c) (i.e. an 
affiliate that is an incumbent LEC). For this reason, a BOC might have 
the incentive and ability to transfer network capabilities of its local 
exchange company to the operations of its competitive affiliates to 
avoid the nondiscriminatory provision of these capabilities as required 
by sections 272(c)(1) and (e). Section 272(a), however, requires any 
BOC affiliate that is a local exchange carrier subject to section 
251(c) to be separate from the section 272(a) affiliates required for 
the provision of competitive activities. We tentatively conclude, 
therefore, that any transfer by a BOC of existing network capabilities 
of its local exchange entity to its affiliates is prohibited by section 
272(a), and we seek comment on this tentative conclusion. In addition, 
section 153(4)(B) states that the definition of a BOC includes ``any 
successor or assign of any such company that provides wireline 
telephone exchange service.'' Thus, we seek comment regarding whether, 
in the alternative, a transfer by a BOC of network capabilities to a 
competitive affiliate would qualify that affiliate as a successor or 
assign of the BOC under section 153(4)(B), thus subjecting the 
competitive affiliate to the nondiscrimination requirements of sections 
272(c)(1) and 272(e).
    78. If parties do not believe that section 272(a) and section 
153(4)(B) prevent such transfers of local exchange network 
capabilities, we seek comment on whether additional regulations are 
necessary to prevent discriminatory practices in the provision of these 
capabilities by BOC affiliates. Because a BOC affiliate's provision of 
interLATA telecommunications services is subject to sections 201 and 
202 of the Communications Act, we seek comment as to whether those 
nondiscrimination obligations would provide sufficient protection 
against discriminatory practices by a BOC interLATA telecommunications 
affiliate, or whether we should impose additional non-accounting 
safeguards to prevent a BOC from discriminatorily providing these 
network capabilities through its interLATA telecommunications 
affiliate. In contrast, information services affiliates and 
manufacturing affiliates, because they are not ``common carriers'' 
under the Communications Act, are not subject to sections 201 and 202. 
Therefore, we seek comment as to whether other provisions of the 
Communications Act permit us to, and if so whether we should, place any 
additional nondiscrimination requirements on affiliates that engage in

[[Page 39410]]

these activities. We also seek comment on whether nondiscrimination 
provisions that are established in other sections of the Communications 
Act, for example the restrictions on manufacturing affiliates in 
section 273 or those on electronic publishing affiliates in section 
274, affect our treatment of other services under sections 272(c)(1) 
and 272(e), particularly when one affiliate engages in multiple 
activities.

C. Section 272(c)(1)

    79. Section 272(c)(1) provides that, in its dealings with its 
affiliate, a BOC ``may not discriminate between that company or 
affiliate and any other entity in the provision or procurement of 
goods, services, facilities, and information, or in the establishment 
of standards.'' As noted above, section 202 of the Communications Act 
makes it unlawful for any common carrier ``to make any unjust or 
unreasonable discrimination in charges, practices, classifications, 
regulations, facilities, or services.'' We seek comment, therefore, on 
whether Congress intended to impose a stricter standard for compliance 
with section 272(c)(1) by enacting this flat prohibition on 
discrimination.
    80. We tentatively conclude that the prohibition against 
discrimination in section 272(c)(1) means, at minimum, that BOCs must 
treat all other entities in the same manner as they treat their 
affiliates, and must provide and procure goods, services, facilities 
and information to and from these other entities under the same terms, 
conditions, and rates. We seek comment on this tentative conclusion, as 
well as on what regulations, if any, are necessary to implement this 
provision. Comments should be specific in terms of needed regulations, 
the problem they would address, and how they would address the 
identified problem. We also seek comment on whether a BOC can treat 
unaffiliated entities differently with respect to the activities at 
issue in section 272(c)(1), as long as such disparate treatment is 
justified upon an appropriate showing of differences between the 
unaffiliated entities (e.g., such as differences in the unaffiliated 
entities' network architecture). We also seek comment on whether the 
nondiscrimination safeguards should vary based on whether the affiliate 
is providing interLATA telecommunications services, interLATA 
information services, or manufacturing. In particular, we seek comment 
on whether, in addition to any tariffing or structural separation 
requirements proposed in this NPRM, any specific non-accounting 
safeguards are needed to enforce the nondiscriminatory pricing 
requirement of section 272(c)(1).
    81. Section 272(c)(1) states, inter alia, that a BOC may not 
discriminate in the provision of goods, services, facilities, and 
information. As BOCs enter competitive markets, they may have 
additional incentives and opportunities to discriminate in favor of 
their affiliates in violation of section 272. As indicated above, a BOC 
could provide unaffiliated telecommunications carriers or information 
service providers with inferior connections, or could disclose 
information to its affiliates before disclosing this information to 
unaffiliated carriers, providers, or manufacturers.
    82. The Commission has previously adopted a regulatory scheme to 
ensure that the BOCs do not discriminate in the provision of basic 
services used to provide enhanced services or in disclosing changes in 
the network that are relevant for the competitive manufacture of CPE. 
We believe that the existing Computer III regulatory scheme contains 
non-accounting safeguards that provide protection against the type of 
BOC behavior that section 272(c)(1) seeks to curtail. The Computer III 
requirements provide for nondiscriminatory access to unbundled network 
services as well as nondiscriminatory access to the same quality of 
service, installation, and maintenance. In addition, BOCs are required 
to provide information to third parties regarding information on 
changes to the network and new network services. BOCs are also required 
to report on the quality and timeliness of installation and 
maintenance. We seek comment on whether any of the nondiscrimination 
safeguards that the Commission applied to the BOCs in the Computer III 
and ONA proceedings, which were adopted in lieu of the structural 
separation requirements of Computer II, are sufficient to implement 
section 272(c)(1).
    83. We further seek comment on the scope of the term ``goods, 
services, facilities and information'' for which the 1996 Act prohibits 
discrimination. We note that our Computer III requirements do not 
specifically address ``goods,'' and therefore seek comment on what 
regulations, if any, would be necessary to define that term. We also 
seek comment on whether the separate customer proprietary network 
information (CPNI) provisions of the 1996 Act affect the requirement to 
provide information on a nondiscriminatory basis in this section.
    84. Section 272(c)(1) requires, inter alia, that the BOCs not 
discriminate with regard to their procurement of goods, services, 
facilities, and information. We note that this provision prohibits, for 
example, a BOC from purchasing manufactured network equipment solely 
from its affiliate, purchasing the equipment from the affiliate at 
inflated prices, or giving any preference to the affiliate's equipment 
in the procurement process and thereby excluding rivals from the market 
in the BOC's service area and undermining competition. We seek comment 
on how the BOCs could establish nondiscriminatory procurement 
procedures designed to ensure that other entities are treated on the 
same terms and conditions as a BOC affiliate in the procurement of 
goods, services, facilities, and information. We also seek comment on 
the nature and extent of rules necessary to ensure that such procedures 
are implemented.
    85. Section 272(c)(1) also prohibits a BOC from discriminating in 
the establishment of standards. We seek comment on what ``standards'' 
are encompassed by this provision. We also seek comment on what 
procedures, if any, we should implement to ensure that the BOC does not 
discriminate between its affiliate and other entities in setting 
standards. For instance, should BOCs be required to participate in 
standard-setting bodies in the development of standards covered by this 
section? We note that, for example, a BOC could act anticompetitively 
by creating standards that require or favor equipment designs which are 
proprietary to its affiliate. A BOC's knowledge of both its affiliate's 
and its competitors' networks might also allow a BOC to adopt or modify 
equipment standards that its affiliates would be able to comply with 
more easily, or at less cost, than could unaffiliated carriers. We seek 
comment on what regulations, if any, are necessary to implement this 
nondiscrimination safeguard.
    86. We note that the difference in language between section 272(c) 
and sections 272(a) and (e) might appear to allow a BOC affiliate that 
provides local exchange services to avoid compliance with section 
272(c). Although sections 272(a) and 272(e) apply to a BOC and an 
affiliate subject to 251(c), section 272(c) refers only to the 
``dealings'' by a ``Bell operating company'' with its section 272(a) 
affiliates. Section 153(4), however, states that a ``Bell operating 
company'' includes ``any successor or assign [of a BOC] * * * that 
provides wireline telephone exchange service.'' Reading these sections 
together, we

[[Page 39411]]

tentatively conclude that Congress did not intend for a BOC to be able 
to move its incumbent local exchange operations to an affiliate in 
order to avoid complying with section 272(c). Thus, we tentatively 
conclude that, if a BOC affiliate is engaged in local exchange 
activities and is therefore subject to section 251(c), then the local 
exchange affiliate would be subject to 272(c) requirements when dealing 
with BOC affiliates engaged in competitive activities.

D. Section 272(e)

    87. Section 272(e) of the Communications Act places several 
additional obligations on BOCs and BOC affiliates that are subject to 
the requirements of section 251(c). Sections 272(f)(1) and 272(f)(2) 
provide that the requirements of section 272(e) do not sunset. Some of 
the provisions in section 272(e), however, could be interpreted as 
subject to sunset because their requirements are contingent on the 
existence of a separate affiliate. Section 272(e)(2) states that the 
BOC ``shall not provide any facilities, services, or information 
concerning its provision of exchange access to the affiliate described 
in subsection (a) unless such facilities, services, or information are 
made available to other providers of interLATA services in that market 
on the same terms and conditions.'' Similarly, section 272(e)(4) states 
that the 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.'' 
If the BOCs did not maintain section 272(a) separate affiliates after 
that requirement expired, it is unclear whether the nondiscrimination 
requirements of sections 272(e) (2) and (4) would be maintained. We 
seek comment on whether Congress intended to sunset the requirements in 
sections 272(e) (2) and (4) if the BOCs eliminated their section 272(a) 
separate affiliates. Commenters claiming that the requirements of those 
sections survive the elimination of the section 272(a) separate 
affiliates should explain in detail how these requirements should be 
applied in those circumstances.
1. Section 272(e)(1)
    88. Pursuant to section 272(e)(1), ``[a BOC] and an affiliate that 
is subject to the requirements of section 251(c) 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.''
    89. In the 1996 Act, ``affiliate'' is defined as:

a person that (directly or indirectly) owns or controls, is owned or 
controlled by, or is under common ownership or control with, another 
person. For purposes of this paragraph, the term 'own' means to own 
an equity interest (or the equivalent thereof) of more than 10 
percent.

We tentatively conclude we should interpret ``an unaffiliated entity'' 
to include any entity, regardless of line of business, that is not 
affiliated with a BOC under the foregoing statutory definition. We seek 
comment on this tentative conclusion.
    90. We seek comment on the scope of the term ``requests'' under 
this subsection. We seek comment on whether these requests should 
include, inter alia, initial installation requests, as well as any 
subsequent requests for improvement, upgrades or modifications of 
service, or repair and maintenance of these services.
    91. We tentatively conclude that section 272(e)(1) requires BOCs to 
treat unaffiliated entities nondiscriminatorily in the provision of 
exchange services or exchange access in terms of timing, but does not 
create any additional rights beyond those granted to unaffiliated 
entities through the 1996 Act, pre-existing provisions of the 
Communications Act, or other Commission rules. We seek comment on this 
tentative conclusion.
    92. We additionally seek comment on how to implement the phrase ``a 
period no longer than the period in which it provides such * * * 
service to itself or to its affiliates'' and whether rules are needed 
to enforce this requirement. We note that, in offering new and advanced 
services, slow provision of telephone exchange service or access 
service may delay the offering of services by unaffiliated entities and 
thus reduce their ability to compete. We seek comment on what 
mechanisms, if any, we should establish in order to ensure that a BOC 
fulfills service requests in compliance with this section. We further 
seek comment on whether reporting requirements for service intervals 
analogous to those imposed by Computer III and ONA would be sufficient 
to implement this provision.
2. Section 272(e)(2)
    93. Section 272(e)(2) states that a BOC and an affiliate that is 
subject to the requirements of section 251(c) ``shall not provide any 
facilities, services, or information concerning its provision of 
exchange access to [a section 272(a) 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.'' 
We seek comment on what regulations, if any, we should adopt to 
implement this statutory requirement.
    94. We seek comment on the scope of the term ``facilities, services 
or information concerning [the] provision of exchange access.'' We also 
seek comment on how to interpret the phrase ``other providers of 
interLATA services in that market.'' We further seek comment on the 
relevance of previous Commission proceedings or provisions of the MFJ 
governing BOC provision of facilities, services or information when 
implementing this section.
3. Section 272(e)(3)
    95. Section 272(e)(3) provides that a BOC and an affiliate that is 
subject to the requirements of section 251(c) ``shall charge [a section 
272(a) 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 carrier for such services.'' 
We tentatively conclude that the BOCs' provision of telephone exchange 
and exchange access services under tariffed rates, including their 
affiliates' purchase at these rates pursuant to tariff or imputation of 
these rates to the BOCs, is sufficient to implement this provision. We 
also seek comment on the appropriate mechanism to enforce this 
provision in the absence of tariffed rates for the specified services. 
We seek comment on what additional regulations, if any, are necessary 
to implement this statutory provision.
4. Section 272(e)(4)
    96. Section 272(e)(4) states that a BOC and an affiliate that is 
subject to the requirements of section 251(c) ``may provide any 
interLATA or intraLATA facilities or services to its interLATA 
affiliate if such services or facilities are made available to all 
carriers at the same rates and on the same terms and conditions, and so 
long as the costs are appropriately allocated.'' We seek comment 
regarding the scope of the term ``interLATA or intraLATA facilities or 
services.'' For example, does it include information services and all 
facilities used in the delivery of such services? We seek comment on 
what additional regulations, if any, are necessary to implement this 
statutory provision.

[[Page 39412]]

VI. Marketing Provisions of Sections 271 and 272

    97. Section 272(g)(1) provides that ``[a] Bell operating company 
affiliate required by this section may not market or sell telephone 
exchange services provided by the Bell operating company unless that 
company permits other entities offering the same or similar service to 
market and sell its telephone exchange services.'' We seek comment on 
what regulations, if any, are necessary to implement this provision.
    98. Section 271(e) restricts joint marketing by certain large 
telecommunications carriers:

    Until a Bell operating company is authorized pursuant to 
subsection (d) to provide interLATA services in an in-region State, 
or until 36 months have passed since the date of enactment of the 
Telecommunications Act of 1996, whichever is earlier, a 
telecommunications carrier that serves greater than 5 percent of the 
Nation's presubscribed access lines may not jointly market in such 
State telephone exchange service obtained from such company pursuant 
to section 251(c)(4) with interLATA services offered by that 
telecommunications carrier.

Section 272(g)(2) states that ``[a BOC] may not market or sell 
interLATA service provided by an affiliate required by this section 
within any of its in-region States until such company is authorized to 
provide interLATA services in such State under section 271(d).'' 
Sections 271(e) and 272(g)(2) appear to be parallel provisions that are 
intended to prevent BOCs and the largest interexchange carriers from 
marketing local and long distance services jointly prior to the BOCs' 
entry into in-region interLATA service, if the interexchange carrier is 
purchasing incumbent LEC services pursuant to section 251(c)(4) for 
resale. We note that, on its face, this provision does not preclude a 
covered interexchange carrier from jointly marketing local exchange 
services provided through interconnection of the interexchange 
carrier's facilities with an incumbent LEC pursuant to section 
251(c)(2), or through purchase of unbundled network elements pursuant 
to section 251(c)(3). We tentatively conclude that the term ``market or 
sell'' in section 272(g)(2) should be construed similarly to the term 
``jointly market'' in section 271(e). We seek comment on this tentative 
conclusion. We also seek comment on whether these sections encompass 
such prohibitions as, for example, advertising the availability of 
interLATA services combined with local exchange services, making these 
services available from a single source, or providing bundling 
discounts for the purchase of both services.
    99. Section 272(g)(2) allows the BOC to market and sell the 
interLATA services of its affiliate after the BOC enters the interLATA 
market pursuant to section 271(d). Section 272(g)(3) provides that 
``[t]he joint marketing and sale of services permitted under this 
subsection shall not be considered to violate the nondiscrimination 
provisions of subsection (c).'' Section 272(b)(3) requires the BOC and 
its affiliate to maintain separate officers, directors, and employees, 
and section 272(b)(5) requires a section 272(a) affiliate to conduct 
``all transactions with the [BOC] * * * on an arm's length basis with 
any such transactions reduced to writing and available for public 
inspection.'' We invite parties to comment on the corporate and 
financial arrangements that are necessary to comply with sections 
272(g)(2), 272(b)(3), and 272(b)(5). We seek comment on whether the 
affiliate must purchase marketing services from the BOC on an arm's 
length basis pursuant to section 272(b)(5). We further seek comment on 
whether, instead of allowing BOC personnel to market its affiliate's 
services at arm's length, it is necessary to require a BOC and its 
affiliate to jointly contract to an outside marketing entity for joint 
marketing of interLATA and local exchange service in order to comply 
with the provisions of section 272(b)(3).
    100. We seek comment on additional issues raised by the marketing 
provisions of the 1996 Act. We seek comment on the interplay between 
the joint marketing provisions in sections 271 and 272 and the CPNI 
provisions set forth in section 222 that are the subject of a separate 
proceeding. We also seek comment on whether the joint marketing 
provision in section 274(c) has any indirect bearing on how we should 
apply the joint marketing provisions in sections 271 and 272.

VII. Enforcement of Sections 271 and 272

A. Mechanisms to Facilitate Enforcement of the Separate Affiliate and 
Nondiscrimination Safeguards of Sections 271 and 272

    101. Enforcement of the statutory separate affiliate and 
nondiscrimination safeguards established by sections 271 and 272 and 
the rules that we may adopt to implement those provisions will be 
critical to ensuring the full development of competition in the local 
and interexchange telecommunications markets. We seek comment generally 
on the mechanisms necessary to facilitate the detection and 
adjudication of violations of these safeguards and, specifically, on 
how the Commission should exercise its enforcement powers under section 
271(d)(6).
    102. We seek comment on what requirements or mechanisms are 
necessary to facilitate detection and adjudication of violations of the 
separate affiliate and nondiscrimination requirements discussed above. 
For instance, should we impose reporting requirements on BOCs analogous 
to those requirements imposed by our CEI plans and ONA plans under 
Computer III? We recognize, however, that this will impose burdens on 
the BOCs as well as the Commission. Alternatively, would a third party 
compliance monitoring or reporting system be a more effective method of 
detecting violations of these provisions?
    103. We seek comment on what mechanisms, other than reporting 
requirements imposed on BOCs or their affiliates, would facilitate 
detection and adjudication of violations of sections 271 and 272, by 
both the Commission and third parties. In particular, we seek comment 
on mechanisms that would allow third parties to identify the goods, 
services, facilities, or information that have been provided to BOC 
affiliates or other parties. For example, are the disclosure 
requirements under section 272(b)(5) a sufficient means of detecting 
violations? We seek comment on whether we should determine that a BOC 
or its affiliate would be in violation of sections 272(c)(1) and (e) if 
a BOC provides varying levels of service between its affiliate and 
third parties as well as between third parties themselves. We also seek 
comment on whether there are reasonable grounds by which a BOC or its 
affiliate could justify deviation from a rate, term or condition 
established under sections 272(c)(1) and (e). In proposing regulations 
for this section, commenting parties should state specifically what 
regulations or procedures should be required and how a specific 
provision of sections 272(c)(1) or (e) make them necessary.

B. Section 271 Enforcement Provisions

    104. Section 271(d)(6) of the Communications Act gives the 
Commission specific authority to enforce the conditions that a BOC is 
required to meet in order for the Commission to grant the BOC 
authorization to provide in-region interLATA services. Specifically, 
section 271(d)(6) states:

    (A) COMMISSION AUTHORITY.--If at any time after the approval of 
an application under [section 271(d)(3)], the Commission determines 
that a [BOC] has ceased to meet

[[Page 39413]]

any of the conditions required for such approval, the Commission 
may, after notice and opportunity for a hearing--
    (i) issue an order to such company to correct the deficiency;
    (ii) impose a penalty on such company pursuant to title V; or
    (iii) suspend or revoke such approval.
    (B) RECEIPT AND REVIEW OF COMPLAINTS.--The Commission shall 
establish procedures for the review of complaints concerning 
failures by [BOCs] to meet conditions required for approval under 
[section 271(d)(3)]. Unless the parties otherwise agree, the 
Commission shall act on such complaint within 90 days.

    We seek to clarify the relationship between this section and the 
Commission's existing enforcement authority under sections 206-209 of 
the Communications Act. Section 206 provides that, ``any common 
carrier'' found to be in violation of the Communications Act shall ``be 
liable to the person or persons injured thereby for the full amount of 
damages sustained in consequence of any such violation.'' Section 207 
of the Communications Act permits any person ``damaged'' by the actions 
of any common carrier to bring suit for the recovery of these damages. 
Section 208(a) authorizes complaints by any person ``complaining of 
anything done or omitted to be done by any common carrier'' subject to 
the Communications Act or its provisions. Section 209 specifies that 
the Commission will ``make an order directing the carrier to pay to the 
complainant'' any damages amount a complainant successfully 
establishes. We tentatively conclude that, in the context of 
``complaints concerning failures by [BOCs] to meet the conditions 
required for approval under [section 271(d)(3)],'' section 271(d)(6) 
generally augments the Commission's existing enforcement authority. For 
example, we believe that, in a situation where a complainant 
successfully establishes conduct (such as a failure to provide 
nondiscriminatory access to operator call completion services) that 
would constitute both a failure by the BOC to meet the conditions of 
its approval, as well as the basis for financial harm, the Commission 
could impose any of the sanctions specified in section 271(d)(6)(A), 
and could also award damages pursuant to its preexisting authority 
under section 209. We seek comment on this tentative conclusion. We 
also seek comment on whether, in a situation where a complaint alleges 
that a BOC has ceased to meet the conditions for approval to provide 
in-region interLATA telecommunications services and seeks damages as a 
result of the underlying alleged violative conduct, a Commission 
determination that the BOC has ceased to meet the conditions and the 
imposition of a section 271(d)(6)(A) sanction would fulfill the 
Commission's duty to ``act on such complaint within 90 days.''
    105. In order to approve a BOC's application to provide in-region 
interLATA services pursuant to section 271(d)(3), the Commission must 
determine that the BOC: meets the requirements of section 271(c)(1); 
satisfies the competitive checklist in section (c)(2)(B); complies with 
the requirements of section 272; and demonstrates that the approval of 
its application is consistent with the public interest, convenience, 
and necessity. Section 271(d)(6)(A) sets forth various actions the 
Commission may take at any time after the approval of an application, 
and after notice and opportunity for a hearing, if it determines that a 
BOC has ceased to meet any of these conditions. We believe that there 
are two ways in which the Commission may determine that a BOC has 
ceased to meet the conditions of its approval. First, the Commission 
could make such a determination via the resolution of an expedited 
complaint proceeding pursuant to section 271(d)(6)(B). Second, the 
Commission could make such a determination on its own motion. We seek 
comment on this interpretation.
    106. In addition, we seek comment on what legal and evidentiary 
standards are necessary to establish that a BOC has ceased to meet the 
conditions required for its approval to provide in-region interLATA 
service. As noted above, in order to establish a violation of section 
201, a complainant must show that the defendant's terms of service and 
charges are ``unjust and unreasonable.'' Similarly, in order to 
establish a violation of section 202(a), a complainant must demonstrate 
``unjust and unreasonable discrimination.'' Sections 271(c)(1), 
(c)(2)(B), and 272, in contrast, set forth no such standards that we 
must apply to complaints arising under these sections. We seek comment, 
therefore, on the types of showings that should be required of a 
complainant and a defendant BOC in order to ensure a full and fair 
resolution, within the 90-day statutory window, of a complaint alleging 
that a BOC has ceased to meet the conditions required for approval to 
provide in-region interLATA services.
    107. In the context of a complaint proceeding, we seek comment on 
what constitutes a prima facie showing that a BOC has ceased to meet 
any or all of the conditions for interLATA entry. Is it enough for 
complainants invoking the expedited complaint procedures under section 
271(d)(6)(B) to plead, along with proper supporting evidence, ``facts 
which, if true, are sufficient to constitute a violation of the Act or 
Commission order or regulation'' in order to establish a prima facie 
showing that the BOC has ceased to meet the conditions for approval in 
section 271(d)(3)? Is such a broad, generally applicable, standard more 
likely to engender frivolous complaints, or is it more likely to 
facilitate a complainant's ability to bring anti-competitive behavior 
by a BOC to the attention of the Commission? In the alternative, should 
the prima facie showing required be specific to the particular 
condition at issue, i.e., the requirements of section 271(c)(1), the 
conditions set forth in the competitive checklist of section 
271(c)(2)(B), and the requirements of section 272? If so, commenters 
should describe what specific acts or omissions are sufficient to 
establish a prima facie showing that each of these conditions is no 
longer met.
    108. Currently, in a typical complaint proceeding, the complainant 
generally has the burden of establishing that a common carrier has 
violated the Communications Act or a Commission rule or order. 
Ordinarily, this burden of proof does not, at any time in the 
proceeding, shift to the defendant carrier. In the case of section 
202(a) complaints, however, once a complainant alleging a violation 
establishes that the services are like and that discrimination exists 
between them, the burden shifts to the defendant carrier to show that 
the discrimination is justified and, therefore, not unreasonable within 
the meaning of section 202(a). In some instances, parties who have 
initiated formal complaint proceedings with the Commission have 
expressed concern that defendant carriers, in particular the BOCs, have 
an inherent advantage in the proceedings because of their control over 
the information regarding their service offerings and related practices 
necessary for a full and fair resolution of the disputed issues. These 
parties have further complained that the discovery mechanism contained 
in the Commission's formal complaint rules of practice and procedure is 
cumbersome and seldom produces on a timely basis information of 
decisional significance. We, therefore, seek to assist parties in their 
pursuit of complaints before the Commission that BOCs have ceased to 
meet the conditions for interLATA entry, by ensuring the prompt and 
fair resolutions these complaints within the statutory 90-day period.

[[Page 39414]]

    109.With this objective in mind, we believe it appropriate to 
inquire into whether the pro-competitive goals of the 1996 Act are 
advanced by shifting the ultimate burden of proof from the complainant 
to a defendant BOC, not just in complaints alleging discrimination 
under section 202(a), but in all complaints alleging that a BOC has 
ceased to meet any of the conditions for its approval to provide 
interLATA services under section 271(d)(3). Because the defendant BOC 
is likely to be in sole possession of information relevant to the 
complainant's case, and because the complaint must be acted upon in 90 
days, we believe that shifting the burden may be an efficient way of 
resolving complaints invoking the expedited procedures of section 
271(d)(6). We also find that by alleviating the burden on the 
complainant, burden-shifting may be a means of facilitating the 
detection of alleged anti-competitive behavior by the BOCs. We, 
therefore, seek comment on whether the burden should shift to the 
defendant BOC once the complainant makes a prima facie showing that a 
BOC has ceased to meet the conditions of section 271(d)(3), as it does 
when a complainant makes a prima facie showing of discrimination under 
section 202(a). If the burden should not shift upon a prima facie 
showing, we seek comment on what particular facts or circumstances 
established by the complainant, if any, would warrant shifting the 
burden of proof to a defendant BOC.
    110. If we were to establish a rebuttable presumption, i.e., a 
shift in the burden of proof to the BOC upon a particular showing by 
the complainant, we seek comment on the type of evidentiary showing the 
defendant BOC must make in order to rebut the presumption that it has 
ceased to meet the conditions for approval. For example, is it enough 
for the BOC to establish the propriety of its conduct? Further, we 
invite parties to comment on whether the burden should shift to the 
defendant for any and all alleged violations of sections 271 or 272. 
Or, should rebuttable presumptions exist only for some of the 
requirements of 271 and 272, such as the competitive checklist 
requirements of section 271 and the nondiscrimination provisions of 
section 272? If commenters believe that a rebuttable presumption should 
exist for certain requirements but not others, they should explain with 
specificity why violations of some requirements warrant a rebuttable 
presumption and violations of others do not. In addition, we ask 
parties to comment on whether there are other mechanisms, instead of 
burden-shifting, that will facilitate the ability of a complainant to 
obtain a full and fair resolution of its complaint within the 90-day 
statutory window.
    111. The Commission has effectively established a rebuttable 
presumption under sections 201(b) and 202(a) whereby the rates and 
practices of non-dominant carriers are presumed to be lawful. A 
complainant challenging a non-dominant carrier's rates or practices 
under these sections, therefore, must overcome this presumption of 
lawfulness in order to bring a successful action. A dominant carrier, 
on the other hand, is afforded no such presumption of lawfulness. We 
tentatively conclude that, in the context of complaints alleging that a 
BOC has ceased to meet the conditions required for the provision of in-
region interLATA services, we will not employ a presumption of 
reasonableness in favor of the BOC or BOC affiliate, regardless of 
whether the BOC or BOC affiliate is regulated as a dominant or non-
dominant carrier. We seek comment on this tentative conclusion.
    112. Section 271(d)(6)(A) provides that if, at any time after 
approval of a BOC application, the Commission determines that the BOC 
has ceased to meet any of the conditions of its approval to provide 
interLATA services, the Commission may, after notice and opportunity 
for a hearing: (1) Issue an order to the BOC to ``correct the 
deficiency;'' (2) impose a penalty pursuant to Title V; or (3) suspend 
and revoke the BOC's approval to provide in-region interLATA services. 
Pursuant to section 503(b)(1)(B), a person who ``willfully or 
repeatedly'' fails to comply with any of the provisions of the 
Communications Act or any rule, regulation, or order issued by the 
Commission under the Communications Act, is liable to the United States 
for a forfeiture penalty. Section 503(b)(2)(B) authorizes the 
Commission to assess forfeitures against common carriers of up to one 
hundred thousand dollars for each violation, or each day of a 
continuing violation, up to a statutory maximum of one million dollars 
for a single act or failure to act. In exercising such authority, the 
Commission is required to take into account ``the nature, 
circumstances, extent, and gravity of the violation and, with the 
respect to the violator, the degree of culpability, any history of 
prior offenses, ability to pay, and such other matters as justice may 
require.''
    113. We tentatively conclude that we will follow the procedures set 
forth in Title V to impose Title V penalties, including forfeitures, 
under this section. As to the non-forfeiture sanctions, we seek comment 
on whether the Commission should exercise its enforcement discretion 
and impose these sanctions on an individual case basis or whether we 
should establish specific legal and evidentiary standards for each type 
of sanction. Further, we seek comment on the appropriate ``notice and 
opportunity for a hearing'' for the imposition of these non-forfeiture 
sanctions both in the context of a complaint proceeding and on the 
Commission's own motion. We interpret ``opportunity for hearing'' not 
to require a trial-type hearing before an Administrative Law Judge 
(ALJ) (an APA hearing), and invite comment on this interpretation. In 
coming to this view, we note that section 271(d)(6)(A) does not require 
a ``hearing on the record,'' which would trigger these extensive 
procedural requirements under the APA. Moreover, although proceedings 
under sections 204 and 205 of the Communications Act are generally 
conducted as rulemakings, these sections use similar language with 
respect to hearing requirements, and proceedings pursuant to sections 
204 and 205 generally occur through written responses. In addition, we 
note that, in allowing for forfeitures, section 271(d)(6)(A) 
specifically requires the Commission to impose forfeitures pursuant to 
Title V of the Communications Act. Section 503(b) of the Communications 
Act, the general forfeiture provision, although leaving the choice to 
Commission discretion, allows for either an adjudicatory proceeding 
before an ALJ (an APA hearing) or a paper hearing before the Commission 
pursuant to notice of apparent liability procedures. We also 
tentatively conclude that Congress, by imposing a 90-day deadline for 
complaints, did not intend to afford the BOCs trial-type hearings in 
enforcement proceedings pursuant to section 271(d). Finally, we also 
tentatively conclude that the filing of a complaint invoking the 
expedited procedures of section 271(d)(6)(B) may trigger a hearing 
under section 271(d)(6)(A) and that the written response by a BOC will 
generally afford the BOC sufficient hearing rights to allow the 
Commission to impose non-forfeiture sanctions. We invite comment on 
these tentative conclusions.
    114. We seek comment broadly on whether there are other ways, in 
addition to the sanctions listed in section 271(d)(6)(A), by which the 
Commission can create incentives for the BOCs to ensure that they 
continue to meet the conditions required for approval under section 
271(d)(3). For

[[Page 39415]]

example, would the adoption of alternative dispute resolution 
procedures, analogous to those mandated under section 273(d)(5) of the 
Communications Act, facilitate resolution of complaints alleging a 
violation of any of these conditions? As we note above, section 
271(d)(6)(B) of the Communications Act prescribes expedited procedures 
for the review of complaints alleging that a BOC has ceased to meet the 
conditions required for approval to provide in-region interLATA 
services. Are there other ways to expedite the resolution of such 
complaints? We seek comment on what else the Commission can do to 
facilitate the ability of a complainant to obtain a determination that 
a BOC has ceased to meet the conditions, which can then provide a basis 
for pursuing a private right of action for the recovery of damages in 
federal district court under section 207 of the Communications Act.

VIII. Classification of LECS and Their Affiliates as Dominant or Non-
Dominant Carriers

    115. In this section, we seek comment on whether we should regulate 
the BOC affiliates as non-dominant carriers in the provision of in-
region, interstate, domestic, interLATA services. We also seek comment 
on whether we should continue to apply to independent LECs (i.e., LECs, 
other than the BOCs) the existing separation requirements established 
in the Competitive Carrier Fifth Report and Order, which are a 
prerequisite for independent LECs to qualify as non-dominant carriers 
in the provision of interstate, domestic, interexchange services 
originating in their local exchange areas. Finally, we consider whether 
to apply the same regulatory classification to the BOC affiliates' and 
independent LECs' provision of in-region, international services as we 
adopt in this proceeding for their provision of in-region, interstate, 
domestic, interLATA services and in-region, interstate, domestic, 
interexchange services, respectively.

A. Background

    116. Under our rules, non-dominant carriers are not subject to rate 
regulation, and may file tariffs that are presumed lawful on one day's 
notice and without cost support. Non-dominant carriers are also subject 
to streamlined section 214 requirements. In contrast, dominant carriers 
are subject to price cap regulation, as specified by Commission order, 
and must file tariffs on 14, 45, or 120 days' notice, with cost support 
data for above-cap and out-of-band tariff filings, and with additional 
information for new service offerings. Dominant domestic carriers must 
also obtain specific prior Commission approval to construct a new line, 
to extend a line or to acquire, lease or operate any line, as well as 
to discontinue, reduce, or impair service.
    117.In the Competitive Carrier First Report and Order (45 FR 76148 
(November 18, 1980)), the Commission classified LECs and pre-
divestiture AT&T as dominant, with respect to both local exchange and 
interstate long distance services, and therefore subject to the ``full 
panoply'' of then-existing Title II regulation. In contrast, the 
Commission classified MCI, Sprint, and other ``miscellaneous common 
carriers'' as non-dominant carriers.
    118. Later in the Competitive Carrier proceeding, the Commission 
reconsidered how it should regulate the provision of interstate, 
interexchange services by independent LECs. In the Competitive Carrier 
Fourth Report and Order, the Commission determined that interexchange 
carriers affiliated with independent LECs would be regulated as non-
dominant interexchange carriers. In the Competitive Carrier Fifth 
Report and Order, the Commission clarified that an ``affiliate'' of an 
independent LEC was ``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.'' The Commission further 
clarified that, in order to qualify for non-dominant treatment, the 
affiliate providing interstate, interexchange services must: (1) 
maintain separate books of account; (2) not jointly own transmission or 
switching facilities with its affiliated exchange telephone company; 
and (3) acquire any services from its affiliated exchange telephone 
company at tariffed rates, terms and conditions. The Commission added 
that any interstate, interexchange services offered directly by an 
independent LEC (rather than through a separate affiliate) or through 
an affiliate that did not satisfy the specified conditions would be 
subject to dominant carrier regulation. The Commission observed that 
these separation requirements would provide some ``protection against 
cost-shifting and anticompetitive conduct'' by an independent LEC that 
could result from its control of local bottleneck facilities.
    119. In the Competitive Carrier Fifth Report and Order, the 
Commission also addressed the possible entry of the BOCs into 
interstate, interLATA services in the future:

    The BOCs currently are barred by the [MFJ] from providing 
interLATA services * * *. If this bar is lifted in the future, we 
would regulate the BOCs' interstate, interLATA services as dominant 
until we determined what degree of separation, if any, would be 
necessary for the BOCs or their affiliates to qualify for 
nondominant regulation.

    120.Because the 1996 Act has superseded the MFJ's prohibition 
against the BOCs' provision of interLATA services, we determine in this 
proceeding whether we should regulate the BOCs or their affiliates as 
dominant in the provision of in-region, interstate, domestic, interLATA 
services. We also consider in this section whether we should modify our 
existing rules that require independent LECs to comply with the 
separation requirements described above in order to qualify for non-
dominant regulatory treatment in the provision of interstate, domestic 
interexchange services that originate in their local exchange areas.
    121. Our rules define a dominant carrier as one that possesses 
market power, and a non-dominant carrier as a carrier not found to be 
dominant (i.e., one that does not possess market power). As noted, in 
the Competitive Carrier Fourth Report and Order, the Commission defined 
market power alternatively as ``the ability to raise prices by 
restricting output'' and ``the ability to raise and maintain price 
above the competitive level without driving away so many customers as 
to make the increase unprofitable.'' In determining whether the BOC 
affiliates or independent LECs should be classified as dominant or non-
dominant, it is first necessary to define the appropriate product and 
geographic markets for assessing the market power of BOC affiliates in 
the provision of in-region, interstate, domestic, interLATA services 
and the market power of independent LECs in the provision of 
interstate, domestic, interexchange services originating in areas where 
they control local exchange facilities. We also address the relevant 
product and geographic market definitions for assessing the market 
power of BOC affiliates and independent LECs in their provision of in-
region, international services.

B. Definition of the Relevant Product and Geographic Markets

    122. In the Interexchange NPRM, we sought comment on whether we 
should retain the relevant product and geographic market definitions 
adopted in the Competitive Carrier proceeding with respect to the 
provision of domestic interexchange services. Based on the analysis set 
forth in the 1992 Merger Guidelines, we tentatively concluded that, 
under certain circumstances, we should use narrower market definitions 
than those adopted

[[Page 39416]]

in the Competitive Carrier proceeding. In this NPRM, we seek comment on 
how we should apply in this proceeding the market definition approaches 
that we proposed in the Interexchange NPRM, assuming they are adopted. 
We also seek comment on how, if we do not adopt the approach proposed 
in the Interexchange NPRM, we should define the relevant product and 
geographic markets for purposes of this proceeding.
1. Relevant Product Markets
    123. In the Competitive Carrier proceeding, the Commission defined 
the relevant product market, for purposes of assessing the market power 
of domestic interexchange carriers covered by that proceeding, as ``all 
interstate, domestic, interexchange telecommunications services'' and 
concluded that there were no relevant submarkets. In the Interexchange 
NPRM, we questioned whether a narrower product market definition might 
provide a ``more refined analytical tool'' for evaluating whether a 
carrier or group of carriers together possess market power.
    124. Under the 1992 Merger Guidelines, ``[m]arket definition 
focuses solely on demand substitution factors--i.e., possible consumer 
responses.'' 1992 Merger Guidelines at 20,571. However, ``[s]upply 
substitution factors--i.e., possible production responses--are 
considered . . . in the identification of firms that participate in the 
relevant market and the analysis of entry.'' Id. In the Interexchange 
NPRM, we noted that consideration of substitutability of demand 
supports the use of a narrower relevant product market than that 
defined in the Competitive Carrier proceeding. Based on this analysis, 
we stated that ``we believe that we should define as a relevant product 
market an interstate, interexchange service for which there are no 
close substitutes or a group of services that are close substitutes for 
each other, but for which there are no other close substitutes.''
    125. We acknowledged, however, that it might be impracticable to 
delineate all relevant product markets for interstate, domestic, 
interexchange services. We also stated our belief that we need not do 
so, in light of our previous finding that substantial competition 
exists with respect to most interstate, domestic, interexchange service 
offerings. We tentatively concluded that we should address the question 
of whether a specific interstate, domestic, interexchange service (or 
group of services) constitutes a separate relevant product market 
``only if there is credible evidence suggesting that there is or could 
be a lack of competitive performance with respect to that service (or 
group of services).'' We sought comment on this tentative conclusion in 
the Interexchange NPRM.
    126. Applying the approach proposed in the Interexchange NPRM, we 
note that, at this time, we are not aware of any evidence suggesting 
that there is a particular interLATA service or group of services that 
is or will be provided by the BOC affiliates or the independent LECs 
with respect to which ``there is or could be a lack of competitive 
performance.'' We therefore tentatively conclude that, if we adopt the 
approach to product market definition outlined above (and proposed in 
the Interexchange NPRM), we should treat all interstate, domestic, 
interLATA telecommunications services as the relevant product market 
for purposes of determining whether the BOC affiliates have market 
power in the provision of interstate, domestic, interLATA services; for 
independent LECs, we likewise tentatively conclude that we should treat 
all interstate, domestic, interexchange telecommunications services as 
the relevant product market. We seek comment on this tentative 
conclusion. We also seek comment on whether credible evidence exists 
that suggests that there is a particular interexchange service or group 
of services that is or will be provided by the BOC affiliates or the 
independent LECs with respect to which ``there is or could be a lack of 
competitive performance.'' Parties recommending that particular 
services be grouped in narrower relevant product markets should 
substantiate this contention with relevant evidence. Specifically, in 
order to make such a showing, in this proceeding or in the future, a 
party must present pricing or performance data or an analysis of 
structural factors that, in either case, show that the service or group 
of services is not competitive.
    127. We also seek comment on alternative approaches to product 
market definition (including the product market definition established 
in the Competitive Carrier proceeding) that we should adopt in this 
proceeding if we decide not to adopt the approach proposed in the 
Interexchange NPRM. Parties should also discuss how these alternative 
approaches to product market definition should be applied in this 
proceeding.
    128. In the International Competitive Carrier Order (50 FR 48191 
(November 22, 1985)), the Commission determined that, for international 
service, demand and supply elasticity revealed distinct product 
markets, international message telephone service (IMTS) and non-IMTS. 
The Commission concluded that (a) AT&T was dominant in the provision of 
IMTS, and (b) all other IMTS providers (e.g., Sprint and MCI), except 
the non-contiguous domestic carriers, were not dominant. No carrier, 
the Commission found, was dominant in the provision of non-IMTS 
service. The Commission subsequently found AT&T to be non-dominant in 
the provision of IMTS. We tentatively conclude that we should retain 
the same product definition for the provision of international services 
by the BOCs' affiliates and the independent LECs. We seek comment on 
this tentative conclusion.
2. Relevant Geographic Markets
    129. In the Competitive Carrier proceeding, the Commission 
concluded that there was ``a single national relevant geographic market 
(including Alaska, Hawaii, Puerto Rico, U.S. Virgin Islands, and other 
U.S. offshore points) for interstate, domestic, interexchange 
telecommunications services, with no relevant submarkets.'' In the 
Interexchange NPRM, we observed that ``more sharply focused market 
definitions will aid us in evaluating whether the BOCs possess market 
power with respect to the provision of interLATA services in areas 
where they provide local access service.''
    130. As previously noted, the 1992 Merger Guidelines focus on 
demand substitution factors for purposes of market definition. In 
considering these factors in the Interexchange NPRM, we noted that, at 
its most fundamental level, interexchange calling involves a customer 
making a connection from a specific location to another specific 
location. We also expressed the view that most telephone customers do 
not view interexchange calls originating in different locations to be 
substitutes for each other. Accordingly, we tentatively concluded that 
``the relevant geographic market for interstate, interexchange services 
should be defined as all calls from one particular location to another 
particular location.'' We sought comment on this tentative conclusion 
in the Interexchange NPRM.
    131. We recognized, however, that it would be impracticable to 
conduct a market power analysis in each geographic market implied by 
this point-to-point market definition. We also stated our belief that, 
in the majority of cases, economic factors and the realities of the 
marketplace should cause point-to-point markets to behave in a 
sufficiently similar manner to allow us to evaluate broader, more 
manageable groups of markets for purposes of market power analysis. We 
tentatively concluded that we should generally continue to treat 
interstate,

[[Page 39417]]

interexchange services as a single national market when examining 
whether a carrier or group of carriers acting together has market 
power. We expressed the belief, however, that there may be special 
circumstances that require us to examine an area smaller than the 
entire nation, for purposes of market power analysis. We therefore 
proposed ``to examine a particular point-to-point market (or group of 
markets) for the presence of market power if there is credible evidence 
suggesting that there is or could be a lack of competition in that 
market (or group of markets) and there is a showing that geographic 
rate averaging will not sufficiently mitigate the exercise of market 
power (if it exists) in that market (or group of markets).''
    132. In applying that approach, we believe that there are special 
circumstances that make it appropriate for us to examine an area 
smaller than the entire nation for purposes of assessing the market 
power of a BOC affiliate or independent LEC. As discussed above, it is 
possible that a BOC, through cost misallocation or discrimination, may 
be able to use its market power in local exchange and exchange access 
services to disadvantage the BOC affiliate's interexchange competitors. 
Such cost misallocation or discrimination conceivably could enable the 
BOC affiliate eventually to obtain the ability to raise unilaterally 
its price for in-region, interstate, domestic, interLATA services above 
competitive levels by restricting its output. With respect to each 
originating in-region location, the determination of whether a BOC 
affiliate or independent LEC possesses market power in that market will 
turn on the same issue--whether the BOC or independent LEC can leverage 
the market power arising from its control of access facilities 
sufficiently to give the BOC affiliate or independent LEC affiliate, 
respectively, market power in that point-to-point market in the 
provision of interstate, domestic, interLATA services or interstate, 
domestic, interexchange services, respectively. We believe that, given 
the BOCs' and independent LECs' current retention of monopoly control 
over bottleneck facilities, a BOC or independent LEC can exercise 
market power in either all or none of these point-to-point markets 
originating in the areas where the BOC or independent LEC controls 
local exchange facilities. We also recognize that geographic rate 
averaging of interstate long distance services alone may not be 
sufficient to offset the anticompetitive effects of a BOC's or 
independent LEC's use of the market power resulting from its control 
over local access facilities.
    133. We tentatively conclude, therefore, that, at this stage, the 
BOCs' current monopoly control of bottleneck facilities constitutes 
``credible evidence suggesting that there is or could be a lack of 
competition'' with respect to interstate, domestic, interLATA services 
originating in a BOC's in-region area. Consequently, we tentatively 
conclude that we should evaluate a BOC's point-to-point markets in 
which calls originate in-region separately from its point-to-point 
markets in which calls originate out-of-region, for the purpose of 
determining whether a BOC interLATA affiliate possesses market power in 
the provision of in-region, interstate, domestic, interLATA services. 
Similarly, we tentatively conclude that we should evaluate an 
independent LEC's point-to-point markets in which calls originate in 
its local exchange areas separately from its markets in which calls 
originate outside those areas, for the purpose of determining whether 
an independent LEC possesses market power in the provision of in-
region, interstate, domestic, interexchange services.
    134. We seek comment on this proposed approach. We invite parties 
to discuss why they believe we should examine smaller or larger areas 
for purposes of determining whether a BOC affiliate or independent LEC 
possesses market power in the provision of interstate, domestic, 
interLATA services or interstate, domestic, interexchange services, 
respectively.
    135. We seek comment on alternative approaches to geographic market 
definition that we should adopt in this proceeding (including the 
geographic market definition established in the Competitive Carrier 
proceeding) if we decide not to adopt the approach proposed in the 
Interexchange NPRM. Parties should also discuss how these alternative 
approaches to geographic market definition should be applied in this 
proceeding.
    136. In the International Competitive Carrier Order, the Commission 
determined that, for international service, every destination country 
constituted a separate geographic market based ``primarily on the need 
for a carrier to obtain an operating agreement prior to providing 
service to a given country.'' With the possible exception of routes 
where a BOC affiliate or independent LEC is affiliated with one or more 
foreign carriers, we believe that there are no critical distinctions on 
the basis of a BOC affiliate's or independent LEC's market shares, 
their respective sizes and resources, demand and supply elasticities, 
or conditions of entry from one destination country to another which 
would require a route-by-route analysis of these carriers' market 
positions. Further, the Commission recently determined that there is no 
evidence to ``suggest[ ] that entry barriers vary substantially among 
geographic markets.'' Thus, we tentatively conclude that, for purposes 
of this proceeding, we can analyze the market power of the BOC 
affiliates and independent LECs on a worldwide basis, and need not 
generally make route-by-route findings, with the exception of routes in 
which the carriers are affiliated with foreign carriers in the 
destination market. We seek comment on this tentative conclusion. We 
also invite parties to discuss why they believe we should examine 
smaller areas for purposes of determining whether a BOC affiliate or 
independent LEC possesses market power in the provision of in-region, 
international services.

C. Classification of BOC Affiliates

    137. In this section, we consider whether we should relax the 
dominant carrier regulation that under our current rules would apply to 
in-region, interstate, domestic, interLATA services provided by BOC 
affiliates. In order to do so, our rules require us to determine that 
the BOC affiliates will not possess market power in the provision of 
those services in the relevant product and geographic markets. We also 
consider whether to apply the same regulatory classification to the BOC 
affiliates' provision of in-region, international services as we impose 
on their provision of in-region, interstate, domestic, interLATA 
services.
    138. As a preliminary matter, we note that there are two ways in 
which a carrier can profitably raise and sustain prices above 
competitive levels and thereby exercise market power. For convenience, 
we refer in the following discussion to a carrier's ability to engage 
in such a strategy as the ability to ``raise prices.'' First, a carrier 
may be able to raise prices by restricting its own output (which 
usually requires a large market share); second, a carrier may be able 
to raise prices by increasing its rivals' costs or by restricting its 
rivals' output through the carrier's control of an essential input, 
such as access to bottleneck facilities, that its rivals need to offer 
their services.
    139. Courts, applying the Sherman Act, have long distinguished 
between the ability of a firm to restrict output and raise its price 
above the competitive

[[Page 39418]]

level and the ability of a firm to leverage its market power in one 
market to gain a competitive advantage in a second market. See, e.g., 
United States v. Griffith, 334 U.S. 100, 107-08 (1948) (holding that 
monopoly power had been illegally used ``to beget monopoly''); Berkey 
Photo, Inc.v. Eastman Kodak Co., 603 F.2d 263, 275-76 (2d Cir. 1979), 
cert. denied, 444 U.S. 1093 (1980); Viacom Intern'l Inc. v. Time Inc., 
785 F. Supp. 371 (S.D.N.Y. 1992). Although a number of courts have 
disagreed with Berkey's conclusion that ``the use of monopoly power 
attained in one market to gain a competitive advantage in another is a 
violation of section 2 [of the Sherman Act], even if there has not been 
an attempt to monopolize the second market,'' Berkey, 603 F.2d at 276 
(emphasis added), these courts have not questioned the distinction 
described above. See, e.g., Alaska Airlines, Inc. v. United Airlines, 
Inc., 948 F.2d 536, 547 (9th Cir. 1991); Fineman v. Armstrong World 
Indus., Inc., 980 F.2d 171, 206 (3d Cir. 1992). Economists likewise 
have recognized such a distinction by distinguishing between 
``Stiglerian'' market power, which is the ability of a firm profitably 
to raise and sustain its price significantly above the competitive 
level by restricting its output, and ``Bainian'' market power, which is 
the ability of a firm profitably to raise and sustain its price 
significantly above the competitive level by raising its rivals' costs 
and thereby causing the rivals to restrain their output. T.G. 
Krattenmaker, R.H. Lande, and S.C. Salop, Monopoly Power and Market 
Power in Antitrust Law, 76 Geo. L.J. 241, 249-253 (1987). We note that 
raising rivals' costs does not necessarily result in an increase in 
prices. If a BOC raises the costs of its affiliate's rivals so that the 
rivals raise their prices, the affiliate could choose not to raise its 
prices, in order to increase its market share. The exercise of this 
type of market power could also delay the introduction of new 
technologies or degrade the quality of service that a BOC affiliate's 
interLATA competitors would otherwise provide.
    140. We seek comment on whether the BOC affiliates should be 
classified as dominant carriers in the provision of in-region, 
interstate, domestic, interLATA services under our rules only if we 
find that they have the ability to raise prices of those services by 
restricting their own output, or whether the affiliates should be 
classified as dominant if the BOCs have the ability to raise prices by 
raising the costs of their affiliates' interLATA rivals. We believe 
that our regulations associated with the classification of a carrier as 
dominant generally are designed to prevent a BOC affiliate from raising 
price by restricting its output rather than to prevent a BOC from 
raising price by raising its rivals' costs. For example, price cap 
regulation of a BOC affiliate's retail rates for in-region, interLATA 
services should prevent the affiliate from achieving higher retail 
interLATA prices, but generally would not prevent the BOC from raising 
its affiliate's rivals' costs through discrimination or other 
anticompetitive conduct. Although price cap regulation could limit a 
BOC affiliate's ability to raise its interLATA rates if the BOC caused 
the affiliate's rivals to raise their prices by increasing their costs, 
price regulation would not prevent the affiliate from profiting from 
the BOC's raising of rivals' costs through increased market share. Such 
behavior would be profitable if the BOC were thereby able to retard a 
rival's innovation or cause its affiliate's rivals to lose market share 
to the affiliate. We note that this form of anticompetitive conduct 
might well involve increasing the affiliate's own output. We also note 
that the definitions of market power cited by the Commission in the 
Competitive Carrier Fourth Report and Order referred to the concept of 
a carrier raising price by restricting its own output.
    141. In determining whether a firm possesses market power, the 
Commission previously has focused on certain well-established market 
features, including market share, supply and demand substitutability, 
the cost structure, size, or resources of the firm, and control of 
bottleneck facilities. All but the last of these features, bottleneck 
control, appear to focus exclusively on whether the carrier has the 
ability to raise price by restricting its own output. With respect to 
the first index, market share, we believe that the fact that each BOC 
affiliate initially will have zero market share in the provision of in-
region, interstate, domestic, interLATA services suggests that the 
affiliate initially will not be able profitably to raise and sustain 
its price by restricting its output. Because, however, the affiliate's 
zero market share results from its exclusion from the market until now, 
it says little about whether the affiliate would quickly achieve the 
ability to raise price by restricting output. Although our analysis 
below focuses on the possibility that a BOC affiliate would gain such 
ability through anticompetitive activity by the BOC, we recognize and 
seek comment on the possibility that an affiliate could gain such 
ability through means other than anticompetitive conduct. For example, 
the strength of a BOC's brand identity in its region alone might enable 
its affiliate to gain substantial market share quickly, thereby giving 
it the ability to raise price by restricting its output. As to supply 
substitutability, since all interLATA customers currently are served by 
the affiliates' competitors and could continue to be served by them 
after BOC affiliates enter the domestic interLATA market, we believe 
that the availability of this transmission capacity will constrain the 
BOC affiliates' ability to raise its domestic interLATA prices. 
Moreover, we recently found that the purchasing decisions of most 
customers of domestic interexchange services are sensitive to changes 
in price and would be willing to shift their traffic to an 
interexchange carrier's rival if the carrier raises its prices. We also 
believe that the cost structure, size, and resources of the BOC 
affiliates are not likely to enable them to raise prices for their 
domestic interLATA services. In the AT&T Reclassification Order, the 
Commission noted that the issue is whether a carrier's ``lower costs, 
sheer size, superior resources, financial strength, and technical 
capabilities'' ` ``are so great to preclude the effective functioning 
of a competitive market.' '' We seek comment on this analysis.
    142. As noted above, in assessing whether a BOC affiliate would 
quickly achieve market power in the provision of in-region, interstate, 
domestic, interLATA services, we must also consider the significance of 
the BOCs' current control of bottleneck access facilities. We noted 
earlier that a BOC's control of access facilities poses two principal 
problems as the BOC enters markets from which it has previously been 
prohibited--improper allocation of costs and unlawful discrimination. 
The BOCs' control of access facilities is a factor in both types of 
market power discussed above. In analyzing whether a BOC affiliate 
could raise its prices by restricting its own output, the primary 
inquiry is whether the safeguards in the 1996 Act and any Commission 
rules implementing these safeguards, coupled with other provisions of 
the Communications Act and Commission regulations, will sufficiently 
constrain a BOC's ability to improperly allocate costs, discriminate 
unlawfully, or engage in other anticompetitive conduct such that its 
affiliate would not quickly gain the ability to raise price by 
restricting its output of in-region, interstate, domestic, interLATA 
services. In analyzing whether a BOC could cause increases in the 
prices for in-region, interstate, domestic, interLATA services by 
raising the costs

[[Page 39419]]

of its affiliate's interLATA rivals, the inquiry focuses on whether the 
statutory and regulatory safeguards will prevent a BOC from engaging in 
unlawful discrimination or other anticompetitive conduct that would 
raise its affiliate's rivals' costs.
    143. As noted above, improper allocation of costs by a BOC is of 
concern because such action may allow a BOC to recover costs incurred 
by its affiliate to provide interstate, domestic, interLATA services 
from subscribers to the BOC's local exchange and exchange access 
services, in order to give the affiliate an unfair advantage over its 
competitors. For purposes of market power analysis, however, we are 
concerned with improper allocation of costs only to the extent it 
enables a BOC affiliate to set retail interLATA prices at predatory 
levels (i.e., below the costs incurred to provide those services), 
drive out its interLATA competitors, and then raise and sustain retail 
interLATA prices significantly above competitive levels. A BOC may be 
more likely to attempt to improperly allocate costs to the extent the 
BOC and BOC affiliate share common facilities and personnel. As 
discussed above, section 272 imposes structural safeguards to prevent a 
BOC from improperly allocating costs among its affiliate's interLATA 
services and services provided by the BOC. Specifically, the statute 
requires a BOC affiliate to ``operate independently'' from the BOC, 
maintain separate books, records, and accounts from the BOC, and have 
separate officers, directors, and employees. In addition, a BOC 
affiliate must conduct all transactions with the BOC on an arm's length 
basis, and all such transactions must be reduced to writing and made 
available for public inspection. We believe that these safeguards will 
constrain a BOC's ability to improperly allocate costs and make it 
easier to detect any improper allocation of costs that may occur.
    144. We believe that price cap regulation of the BOC's access 
services also reduces the potential that the BOCs would improperly 
allocate the costs of their affiliates' interLATA services. As the 
Commission previously explained, ``[b]ecause price cap regulation 
severs the direct link between regulated costs and prices, a carrier is 
not able to recoup misallocated nonregulated costs by raising basic 
service rates, thus reducing the incentive for the BOCs to allocate 
nonregulated costs to regulated services.'' We recognize that under our 
current interim LEC price cap rules, a BOC could select an X-factor 
option that requires it to share interstate earnings with its customers 
that exceed specified benchmarks and permit the BOC to make a low-end 
adjustment if interstate earnings fall below a specified threshold. 
Consequently, this regime may create some incentive for a BOC to 
allocate costs from interLATA services to access services in order to 
reduce the amount of profits the BOC is required to share with its 
interstate access service customers. Similarly, the possibility of 
future re-calibration of price cap levels also implies that price cap 
regulation does not fully sever the link between regulated costs and 
prices. We note, however, that we have tentatively concluded in the BOC 
Accounting Safeguards NPRM that we should apply our affiliate 
transaction rules to transactions between the BOCs and their interLATA 
affiliates, in order to make it more difficult for a BOC to allocate to 
its regulated local exchange and exchange access services costs that 
should be assigned to its affiliate's in-region, interLATA activities.
    145. In addition, we note that, even if a BOC is able to allocate 
improperly the costs of its affiliate's interLATA services, it is 
questionable whether a BOC affiliate could successfully engage in 
predation. At least three interexchange carriers--AT&T, MCI, and 
Sprint--have nationwide or near-nationwide network facilities. These 
are large well-established companies with customers throughout the 
nation. It may be unlikely, therefore, that a BOC affiliate, whose 
customers presumably would be concentrated in one geographic region, 
could drive one or more of these companies from the market. Even if it 
could do so, there is a question whether the BOC affiliate would later 
be able to raise prices in order to recoup lost revenues. As Professor 
Spulber has observed, ``[e]ven in the unlikely event that [a BOC 
affiliate] could drive one of the three large interexchange carriers 
into bankruptcy, the fiber-optic transmission capacity of that carrier 
would remain intact, ready for another firm to buy the capacity at a 
distress sale and immediately undercut the [affiliate's] noncompetitive 
prices.'' We recognize that action taken in concert by two or more BOCs 
could have a more significant impact on interLATA competitors. In 
paragraph , infra, we seek comment on the effect, if any, that a merger 
of or joint venture between two or more BOCs should have on our 
determination of whether to classify one of the BOC's interLATA 
affiliate as dominant or non-dominant.
    146. We seek comment on whether the structural safeguards in 
section 272, price cap regulation of the BOC's access services, and the 
accounting safeguards proposed in the Accounting Safeguards NPRM are 
sufficient to prevent the BOCs from improperly allocating costs between 
monopoly local exchange and exchange access services and their 
affiliates' competitive interLATA services to such an extent that their 
interLATA affiliates would quickly gain the ability profitably to raise 
and sustain prices of in-region, interstate, domestic, interLATA 
services significantly above competitive levels by restricting its 
output of these services. If so, we seek comment on whether regulation 
of a BOC's interLATA affiliate as a dominant carrier would prevent the 
BOC affiliate from engaging in such pricing practices. We seek comment 
on whether a BOC's ability improperly to allocate the costs between 
interLATA and exchange access services would enable the BOC to raise 
the costs of its affiliate's interLATA competitors.
    147. In addition to improper allocation of costs, a BOC potentially 
could use its market power in the provision of local exchange and 
exchange access services to the advantage of its interLATA affiliate by 
discriminating against the affiliate's interLATA competitors with 
respect to the provision of exchange and exchange access services. As 
previously discussed, there are various ways in which a BOC could 
attempt to discriminate against unaffiliated interLATA carriers. For 
example, a BOC could provide its affiliate's interLATA competitors with 
poorer quality interconnection to the BOC's local network than it 
provides to its affiliate, or it could unnecessarily delay satisfying 
its competitors' requests to connect to the BOC's network. As a more 
specific example, the BOC may fail to cooperate with an interLATA 
carrier that is introducing an innovative new service until the BOC's 
interLATA affiliate is ready to initiate the same service. To the 
extent that interexchange customers believe that the BOC affiliate 
offers a higher quality of service, the BOC affiliate may be able to 
raise its interLATA rates. Moreover, even occasional disruptions of a 
competing carrier's services may cause customers to choose another 
carrier. We believe that these and other forms of discrimination may be 
difficult to police, particularly in situations where the level of the 
BOC's ``cooperation'' with unaffiliated interLATA carriers is difficult 
to quantify. To the extent customers value ``one-stop shopping,'' 
degrading a carrier's interexchange service may also undermine the 
attractiveness of the carrier's interexchange/local exchange package

[[Page 39420]]

and thereby strengthen the BOC's dominant position in the provision of 
local exchange services.
    148. As previously noted, sections 272 (c) and (e) set forth both 
general and specific nondiscrimination safeguards that apply to BOC 
provision of in-region interLATA telecommunications service and other 
services. For example, section 272(e)(3) requires that a BOC charge its 
affiliate ``an amount for access to its telephone exchange service and 
exchange access that is no less than the amount [that the BOC charges] 
any unaffiliated interexchange carriers for such services.'' Section 
272 also restricts the ability of a BOC to provide ``facilities, 
services, or information concerning its provision of exchange access to 
[its affiliate,] unless [it makes] such facilities, services, or 
information * * * available to other providers of interLATA services in 
that market on the same terms and conditions.'' Section 272(e)(1) 
explicitly prohibits a BOC from discriminating against unaffiliated 
carriers by delaying their requests for exchange service and exchange 
access. The statute also includes joint marketing restrictions to 
preclude, for example, a BOC affiliate from bundling long distance 
service with its affiliated BOC's local service, unless competing 
interexchange carriers have the same ability to bundle their long 
distance service with the BOC's local services. As noted, we recognize 
that the nondiscrimination requirements in section 272 will not 
eliminate the BOCs' incentive to discriminate against competing 
interexchange carriers. We seek comment, however, on whether and the 
extent to which these safeguards would prevent the BOCs from gaining 
the two types of market power discussed above. Specifically, we seek 
comment on whether these safeguards would prevent a BOC from raising 
the costs of its affiliate's interLATA rivals by discriminating against 
those competitors, and on whether these safeguards would prevent a BOC 
from discriminating to such an extent that its interLATA affiliate 
would quickly acquire the ability profitably to raise and sustain the 
price of in-region, interstate, domestic, interLATA services 
significantly above competitive levels by restricting their output.
    149. There is at least one other way, in addition to the improper 
allocation of costs and discrimination, in which a BOC could use the 
market power that arises from its control of local bottleneck 
facilities to give its affiliate a competitive advantage in the 
provision of in-region, interstate, domestic, interLATA services. 
Absent appropriate regulation, a BOC could potentially raise the price 
of access to all interexchange carriers, including its affiliate. 
Equivalently, a BOC could fail to pass through to interexchange 
carriers a reduction in the cost of providing access services. Price 
cap regulation would not be effective in eliminating the effect of a 
price squeeze initiated under these circumstances. This would cause 
competing interLATA carriers to raise their retail interLATA rates in 
order to remain profitable. The BOC affiliate could then capture 
additional market share by not raising its prices to reflect the 
increase in access charges. This process is known as a price squeeze. 
Although the BOC affiliate would report little or no profit, the BOC 
firm as a whole would receive higher access revenues from unaffiliated 
interexchange carriers and increased revenues from the affiliate's 
interLATA services causes by its increased share of interLATA traffic. 
If the BOC were to raise its access rates high enough, it would be 
impossible for the interexchange competitors to compete effectively. 
Thus, the entry of a BOC's affiliate into the provision of in-region, 
interstate, domestic, interLATA services gives the BOC an incentive to 
raise its price for access services in order to disadvantage its 
affiliate's rivals, increase its affiliate's market share, and increase 
the profits of the BOC overall. One constraint on the BOC's ability to 
engage in such conduct is the Commission's price cap regulation of the 
BOCs' access services. We seek comment on whether price cap regulation 
of the BOCs' access services prevents a BOC from raising its 
affiliate's rivals' costs by raising the price of access. We also seek 
comment on whether price cap regulation will sufficiently constrain a 
BOC from raising the price of access to such an extent that its 
interLATA affiliate would quickly gain the ability profitably to raise 
and sustain the price of in-region, interstate, domestic, interLATA 
services significantly above competitive levels by restricting its 
output. Parties arguing that price cap regulation is not a sufficient 
constraint on such anticompetitive behavior should also comment on 
what, if any, mechanisms could be implemented to address this issue.
    150. Based on the preceding discussion of the ramifications of the 
BOCs' control of local facilities, we seek comment on whether the 
statutory and regulatory safeguards currently imposed on the BOCs and 
their affiliates are sufficient for us to relax the dominant carrier 
regulation that under our current rules would apply to in-region, 
interstate, domestic, interLATA services provided by the BOC 
affiliates. Parties should address this issue with respect to both 
types of market power discussed above--raising price by restricting 
output and raising price by raising rivals' costs. Parties contending 
that the safeguards are not sufficient, and therefore that we should 
classify the BOC affiliates as dominant, should also comment with 
specificity on whether we should impose price cap regulation on those 
affiliates.
    151. Parties should also address whether regulating BOC affiliates 
as dominant carriers, including imposing price cap regulation on their 
in-region, interstate, domestic, interLATA services, would provide any 
additional protection against a BOC affiliate gaining market power in 
the provision of these services, beyond that provided by the safeguards 
established by the 1996 Act, our implementing rules, and our existing 
regulations. We thus seek comment on whether imposing dominant carrier 
regulation, including price cap regulation, on a BOC affiliate would 
limit the incentive and ability of the BOC parent to engage in improper 
allocation of costs, discrimination, or other anticompetitive conduct. 
As previously discussed, dominant carrier regulation of the BOC 
interLATA affiliates may subject the affiliates' interLATA services to 
price cap regulation, as specified by Commission order, would require 
the affiliates to file interLATA tariffs with cost support data and on 
longer notice periods, and would impose more stringent section 214 
requirements on the affiliates than those that apply to non-dominant 
carriers. Although we currently review complaints against dominant 
carriers under a different standard than complaints against non-
dominant carriers (non-dominant carriers rates and practices are 
presumed lawful, while non-dominant carriers receive no presumption of 
lawfulness), we have tentatively concluded in this NPRM that, in the 
context of complaints alleging that a BOC has ceased to meet the 
conditions required for the provision of in-region interLATA services, 
we will not employ a presumption of reasonableness in favor of the BOC 
or BOC affiliate, regardless of whether it is regulated as a dominant 
or non-dominant carrier. Commenters should discuss which, if any, of 
the regulations that would be applicable to BOC affiliates as dominant 
carriers would constrain the ability of the BOCs to engage in improper 
allocation of costs, discrimination, or other anticompetitive conduct 
to the extent

[[Page 39421]]

that the affiliate would gain market power. Commenters should also 
address any other costs or benefits of imposing dominant carrier 
regulation on BOC affiliates. Finally, parties that favor dominant 
carrier regulation of the BOCs' in-region interLATA affiliates should 
comment on whether there are additional, administratively workable and 
less burdensome safeguards that would permit us to regulate the 
affiliates as non-dominant carriers.
    152. The entry of the BOCs into in-region interLATA services does 
not mark the first occasion when this Commission has considered the 
safeguards that are needed when a LEC provides a competitive service 
that uses the LEC's exchange access service. In the Competitive Carrier 
proceeding, the Commission examined the safeguards that would be 
required when an independent LEC provided interstate, domestic, 
interexchange services. The Commission initially concluded in the 
Competitive Carrier First Report and Order that it would regulate the 
independent LECs' interstate long distance services as dominant carrier 
offerings because of their control over bottleneck local exchange and 
exchange access facilities. Subsequently, the Commission relaxed its 
regulation of interstate, domestic, interexchange services provided by 
an affiliate of an independent LEC, subject to the conditions discussed 
above, but affirmed its regulation of such services under dominant 
carrier rules if the independent LEC offered the service directly.
    153. The Commission adopted a similar approach to BOC entry into 
the provision of enhanced services. As noted, the Commission in the 
Computer II rulemaking initially imposed rigorous structural separation 
requirements on the BOC and its enhanced services affiliate. The 
Commission later replaced these structural separation safeguards with 
the non-structural safeguards adopted in Computer III. Based on its 
experience in administering the Computer II requirements, the 
Commission concluded that non-structural safeguards could furnish 
adequate protections against the risk of the BOCs engaging in 
anticompetitive improper allocation of costs and discriminatory 
practices in order to achieve an unfair advantage over competing 
enhanced services providers. Although the U.S. Court of Appeals for the 
Ninth Circuit vacated portions of the Commission's Computer III 
decisions in three separate decisions, see supra n.88, the most recent 
decision found that the Commission had justified its elimination of 
structural separation. California v. FCC, 39 F.3d 919, 923 (9th Cir. 
1994).
    154. Our experience with regulating the independent LECs' provision 
of interstate, domestic, interexchange services and the BOCs' provision 
of enhanced services suggests that our existing safeguards have worked 
reasonably well and generally have been effective, in conjunction with 
our regular audits of the BOCs, in deterring the improper allocation of 
costs and unlawful discrimination. To be sure, we have found instances 
where individual BOCs may not have complied with our non-structural 
safeguards in providing non-regulated services. Our experience to date, 
however, has not disclosed a systematic pattern of anticompetitive 
abuses by independent LECs or the BOCs that would indicate that our 
safeguards are ineffective.
    155. We recognize, however, that our experience in regulating the 
independent LECs' provision of interstate, domestic, interexchange 
services and the BOCs' provision of enhanced services may not be 
directly relevant to our analysis of the effectiveness of our existing 
and proposed safeguards that would apply to the BOCs' provision of in-
region, interstate, domestic, interLATA service. The BOCs' local 
exchange and exchange access bottleneck facilities extend over much 
larger geographic areas than the independent LECs' facilities. 
Moreover, because the BOCs are likely to offer local exchange and 
interLATA services as integrated offerings to end users, they may have 
a greater incentive and ability to use their control over local 
bottlenecks to obtain anticompetitive advantages over their interLATA 
rivals. Indeed, to the extent that both the BOCs and their competitors 
offer local and long distance services as a unified package, BOC 
practices that reduce the attractiveness of their competitors' long 
distance offerings would make the package of services as a whole less 
attractive. We invite parties to comment on this assessment.
    156. As noted, two pairs of BOCs have proposed to merge their 
operations, which would result in merged BOCs of greater size and with 
larger in-region areas. We seek comment on what effect, if any, a 
merger of or joint venture between two or more BOCs should have on our 
determination whether to classify the interLATA affiliate of one of 
those BOCs as dominant or non-dominant. Parties should also discuss 
what effect, if any, such a proposal to merge or to enter into a joint 
venture should have on this determination.
    157. We also seek comment on whether, if we decide not to adopt the 
domestic market definition approaches discussed in the previous section 
of this NPRM, we should classify the BOC affiliates as dominant or non-
dominant in the provision of in-region, interstate, domestic, interLATA 
services. Parties are invited to discuss how alternative approaches to 
market definition should affect how we classify the BOC affiliates in 
the provision of those services.
    158. With respect to in-region, international services, we 
tentatively conclude that we should apply the same regulatory treatment 
for the BOC affiliates' provision of in-region, international services 
as we apply for their provision of in-region, interstate, domestic, 
interLATA services. The relevant issue in both contexts is whether the 
BOC affiliate can leverage its market power in local exchange and 
exchange access services to raise prices (by restricting its own output 
or by raising the costs of its rivals) in another market (the domestic 
interLATA or international market). We find no practical distinctions 
between a BOC's ability and incentive to use its market power in the 
provision of local exchange and access services to improperly allocate 
costs, discriminate against, or otherwise disadvantage unaffiliated 
domestic interexchange competitors as opposed to international service 
competitors. We thus tentatively conclude that we should apply the same 
regulatory treatment for BOC affiliates' provision of in-region, 
international services as we adopt for their provision of in-region, 
interstate, domestic, interLATA services. We seek comment on this 
tentative conclusion.
    159. This tentative conclusion presumes that a BOC or BOC affiliate 
does not have an affiliation with a foreign carrier that has the 
ability to discriminate in favor of the BOC or an affiliate of the BOC 
through control of bottleneck services or facilities in a foreign 
destination market. Our proposal to adopt the same regulatory 
classification for a BOC affiliate's provision of in-region, 
international services as for its provision of in-region, interstate, 
domestic, interLATA services does not modify our decision to regulate a 
U.S. international carrier as dominant on those U.S. international 
routes where an affiliated foreign carrier has the ability to 
discriminate against unaffiliated U.S. international carriers through 
control of bottleneck services or facilities in the foreign market. The 
safeguards that we apply to carriers that we classify as dominant based 
on a foreign carrier affiliation are contained in Section 63.10(c) of 
the our rules and are designed to address the incentive and ability of 
the foreign carrier to

[[Page 39422]]

discriminate in favor of its U.S. affiliate in the provision of 
services or facilities necessary to terminate U.S. international 
traffic. This framework for addressing issues raised by foreign carrier 
affiliations will apply to the BOCs' provision of U.S. international 
services as an additional component of our regulation of the U.S. 
international services market.
    160. Finally, we observe that most of the section 272 safeguards 
will cease to apply to a BOC three years after the BOC or its affiliate 
is authorized to provide interLATA services under section 271(d), 
unless the Commission extends such period by rule or order. To the 
extent effective local competition develops, the need for many of the 
section 272 safeguards will wane. We have no way of knowing at this 
time, however, the rate at which local competition will occur. We also 
intend to monitor the performance of the BOCs in the interexchange 
marketplace, including their affiliates' market share in the provision 
of in-region, interLATA services and in-region, international services. 
We may therefore consider in a later proceeding, if necessary, the 
impact that the removal of the section 272 safeguards pursuant to 
section 272(f)(1) would have on our regulation of BOC provision of in-
region, interstate, domestic interLATA services and in-region, 
international services.

D. Classification of Independent LECs or Their Affiliates

    161. In this section we consider whether we should modify our 
existing rules that require independent LECs (exchange telephone 
companies other than the BOCs) to comply with certain specified 
separation requirements in order to qualify for non-dominant regulatory 
treatment in the provision of in-region, interstate, domestic, 
interexchange services. We also consider whether to apply the same 
regulatory classification to the independent LECs' provision of in-
region, international services as we adopt in this proceeding for their 
provision of in-region, interstate, domestic, interexchange services. 
For purposes of this analysis, we tentatively conclude that, because 
control of local exchange and exchange access facilities is our primary 
rationale for imposing a separate affiliate requirement on independent 
LECs, we should limit application of these requirements to incumbent 
independent LECs that control local exchange and exchange access 
facilities. For purposes of determining which independent LECs are 
``incumbent,'' we propose to use the definition of ``incumbent local 
exchange carrier'' as provided in Section 251(h) of the Communications 
Act. Section 251(h) provides that a LEC is an incumbent LEC, with 
respect to a particular area, if: (1) the LEC provided telephone 
exchange service in that area on the date of enactment of the 1996 Act 
(February 8, 1996), and (2) the LEC was deemed to be a member of NECA 
on the date of enactment or the LEC became a successor or assign of a 
NECA member after the date of enactment. By limiting application of the 
separate affiliate requirements to incumbent independent LECs, we will 
avoid imposing unnecessary regulation on new entrants in the local 
exchange market, such as interexchange carriers, cable television 
companies, and CMRS providers, that will not have control of local 
exchange and exchange access facilities. We seek comment on this 
tentative conclusion.
    162. Under the current rules as set forth in the Competitive 
Carrier Fifth Report and Order, independent LEC provision of 
interstate, domestic, interexchange services is subject to non-dominant 
treatment if such services are offered through an affiliate that meets 
certain requirements. For purposes of qualifying for regulation as a 
non-dominant carrier, an ``affiliate'' of an independent LEC is ``a 
carrier that is owned (in whole or in part) or controlled by, or under 
common control with, an exchange telephone company.'' Specifically, in 
order to qualify for non-dominant treatment, the affiliate must: (1) 
maintain separate books of account; (2) not jointly own transmission or 
switching facilities with the exchange telephone company; and (3) 
obtain any exchange telephone company services at tariffed rates and 
conditions. If an independent LEC provides interstate, domestic, 
interexchange services directly, those services are subject to dominant 
regulation. The Fifth Report and Order separation requirements apply to 
all independent LECs, regardless of their size. We note that some of 
our accounting rules relating to the Competitive Carrier Fifth Report 
and Order separation requirements do recognize a distinction between 
larger and smaller independent LECs. At this time, there are no 
independent LECs that are regulated as dominant in the provision of 
interstate, domestic, interexchange services. In other words, every LEC 
that provides such services has elected to do so through an affiliate 
satisfying the Competitive Carrier requirements, rather than providing 
those services directly subject to dominant regulation.
    163. We believe that it is appropriate at this time to review the 
regulatory treatment of independent LEC provision of interstate, 
domestic, interexchange services. Although the 1996 Act does not alter 
the application of the Competitive Carrier separation requirements to 
independent LECs, it does remove the restriction on BOC provision of 
interLATA services, and specifies a new regulatory regime to govern BOC 
provision of these services. In addition, in our recent Interexchange 
NPRM, we addressed whether we should modify or eliminate the separation 
requirements currently imposed upon independent LECs in order to 
qualify for non-dominant treatment in the provision of interstate, 
domestic, interexchange services that originate outside the areas in 
which they control local access facilities. We have concluded, in the 
Interim BOC Out-of-Region Order, that, for now, we would remove 
dominant carrier regulation for BOC out-of-region, interstate, 
domestic, interexchange services when offered through an affiliate that 
meets the Competitive Carrier separation requirements. In light of 
these regulatory changes, and in order to effect a comprehensive review 
of the appropriate regulatory framework to govern the provision of 
interstate, domestic, interexchange services by local exchange 
companies (or their affiliates), we believe it is important to evaluate 
whether we should continue to classify independent LECs as dominant in 
the provision of in-region, interstate, domestic, interexchange 
services, if they provide those services directly. We also believe it 
is appropriate to evaluate the continuing necessity of applying the 
Competitive Carrier requirements to the provision of those services by 
independent LECs.
    164. In the previous section, we sought comment on whether the 
BOC's interLATA affiliates should be classified as dominant carriers 
under our rules only if we find that they have the ability to raise 
prices of in-region, interstate, domestic, interLATA services by 
restricting their own output of these services, or, in the alternative, 
whether the affiliates should be classified as dominant if the BOCs 
have the ability to raise prices by raising the costs of their 
affiliates' interLATA rivals. We recognized that a BOC's control of 
local exchange and exchange access facilities potentially gives a BOC 
an incentive and ability to disadvantage its affiliate's interexchange 
competitors through improper allocation of costs, discrimination, or 
other anticompetitive conduct. We therefore sought comment on whether, 
despite the statutory and regulatory safeguards currently imposed on 
the BOCs, a BOC would be able to

[[Page 39423]]

disadvantage its affiliate's rivals to such an extent that the 
affiliate would quickly gain the ability profitably to raise price 
above competitive levels by restricting its output, and, in the 
alternative, whether the safeguards would prevent the BOCs from raising 
their rivals' costs.
    165. We believe that we should apply a similar analysis for 
determining whether we should continue to classify an independent LEC 
as dominant if it provides in-region, interstate, domestic, 
interexchange services directly (rather than through an affiliate 
complying with the Competitive Carrier requirements). We therefore seek 
comment on whether, absent the Competitive Carrier requirements, an 
independent LEC would be able to use its market power in local exchange 
and exchange access services to disadvantage its interexchange 
competitors to such an extent that it will quickly gain the ability 
profitably to raise the price of in-region, interstate, domestic, 
interexchange services significantly above competitive levels by 
restricting output. We also seek comment whether, absent the 
Competitive Carrier requirements, an independent LEC would be able to 
raise its rivals' costs.
    166. We believe that, regardless of our determination of whether 
the independent LECs should be classified as dominant or non-dominant 
if they provide in-region, interstate, domestic, interexchange services 
directly, some level of separation may be necessary between an 
independent LEC's interstate, domestic, interexchange operations and 
its local exchange operations. This separation may be necessary in 
order to minimize the potential that an independent LEC could use its 
control of local bottleneck facilities to improperly shift costs or 
discriminate against interexchange competitors. Such anticompetitive 
conduct would be of concern irrespective of whether such an exercise 
provides a basis for classifying the BOC affiliates as dominant 
carriers under our current rules. Accordingly, we seek comment on 
whether we should require independent LECs to provide in-region, 
interstate, domestic, interexchange services subject to the Competitive 
Carrier separation requirements or a variation of those requirements. 
We seek comment on whether the existing Competitive Carrier 
requirements are sufficient safeguards to apply to independent LECs to 
address any potential competitive concerns. Commenters proposing to 
modify or add to these requirements should address the extent to which 
there is a possibility of improperly allocating costs or other 
discriminatory or anticompetitive conduct, and if so, specifically how 
the proposed modification or addition would mitigate such conduct.
    167. We also invite comment on whether there are certain 
circumstances that warrant different regulatory treatment among the 
independent LECs. For example, does the size of an independent LEC make 
a difference in determining what type of separation requirements should 
apply? We believe that, in principle, the size of a LEC will not affect 
its incentives to engage in cross subsidization between its monopoly 
services and its competitive services. It may be the case, however, 
that for small or rural independent LECs, the benefits to rate-payers 
of a separate affiliate requirement may be less than the costs imposed 
by such a requirement. For example, certain of our accounting rules, 
such as cost allocation manual filings and annual independent audit 
requirements, apply only to larger LECs (those with annual operating 
revenues of $100 million or more), in recognition that the costs of 
compliance with such requirements could be potentially burdensome on 
smaller independent LECs. We therefore seek comment on whether there is 
some minimum independent LEC size below which the separation 
requirements, if any are retained, should not apply.
    168. For the reasons expressed earlier, we tentatively conclude 
that we should apply the same regulatory approach that we adopt for an 
independent LEC's provision of interstate, domestic, interexchange 
services originating within its local service area to an independent 
LEC's provision of international services originating within its local 
service area. The rules we adopt in this proceeding will be designed to 
protect against leveraging of market power from one market (the local 
exchange and exchange access market) to gain market power in other 
markets (the domestic interexchange and international services 
markets). We seek comment on this proposed approach.
    169. As indicated above, our proposal to adopt the same regulatory 
approach for an independent LEC's provision of in-region, international 
services does not modify our decision to regulate a U.S. international 
carrier as dominant on those U.S. international routes where an 
affiliated foreign carrier has the ability to discriminate against 
unaffiliated U.S. international carriers through control of bottleneck 
services or facilities in the foreign market. In addition, our proposal 
for the regulation of the independent LECs would not modify the 
regulatory treatment of the noncontiguous domestic carriers to the 
extent they are regulated as dominant due to a lack of competition in 
their IMTS markets.
    170. Finally, we seek comment on whether any or all of the separate 
affiliate requirements that we may ultimately decide to apply, or to 
continue to apply, to independent LECs should be subject to some type 
of sunset, such as the sunset provision applicable to BOCs under 
Section 272(f)(1) of the Communications Act.

IX. Conclusion

    171. We seek comment on the foregoing issues regarding the 
implementation of Sections 271 and 272 of the 1996 Act and our proposed 
regulatory regime to govern the BOC affiliates' provision of in-region 
interstate, interLATA services pursuant to the terms of the 1996 Act. 
Any party disagreeing with our tentative conclusions should explain 
with specificity in terms of costs and benefits its position and 
suggest alternative policies.

X. Procedural Issues

A. Ex Parte Presentations

    172. This is a non-restricted notice-and-comment rulemaking 
proceeding. Ex parte presentations are permitted, in accordance with 
the Commission's rules, provided that they are disclosed as required. 
See generally 47 CFR Secs. 1.1200, 1.1202, 1.1204, 1.1206.

B. Regulatory Flexibility Analysis

    173. Section 603 of the Regulatory Flexibility Act, as amended, 
requires an initial regulatory flexibility analysis in notice and 
comment rulemaking proceedings, unless we certify that ``the rule will 
not, if promulgated, have a significant economic impact on a 
significant number of small entities.'' The Regulatory Flexibility Act 
generally defines the term ``small entity'' as having the same meaning 
as ``small-business concern'' under the Small Business Act, which 
defines ``small-business concern'' as ``one which is independently 
owned and operated and which is not dominant in its field of operation 
* * *.'' This proceeding pertains to the BOCs and other ILECs which, 
because they are dominant in their field of operations, are by 
definition not small entities under the Regulatory Flexibility Act. We 
therefore certify, pursuant to Section 605(b) of the Regulatory 
Flexibility Act, that the rules will not, if promulgated, have a 
significant economic impact on a substantial number of small entities. 
The Secretary shall send a copy of this NPRM, including this 
certification and

[[Page 39424]]

statement, to the Chief Counsel for Advocacy of the Small Business 
Administration. A copy of this certification will also be published in 
the Federal Register notice.

C. Initial Paperwork Reduction Act of 1995 Analysis

    174. This NPRM contains either a proposed or modified information 
collection. As part of its continuing effort to reduce paperwork 
burdens, we invite the general public and the Office of Management and 
Budget (OMB) to take this opportunity to comment on the information 
collections contained in this NPRM, as required by the Paperwork 
Reduction Act of 1995, Public Law No. 104-13. Public and agency 
comments are due August 15, 1996; OMB comments are due September 27, 
1996. Comments should address: (a) Whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information shall have practical 
utility; (b) the accuracy of the Commission's burden estimates; (c) 
ways to enhance the quality, utility, and clarity of the information 
collected; and (d) ways to minimize the burden of the collection of 
information on the respondents, including the use of automated 
collection techniques or other forms of information technology.

D. Comment Filing Procedures

    175. Pursuant to applicable procedures set forth in Sections 1.415 
and 1.419 of the Commission's rules, 47 CFR Secs. 1.415, 1.419, 
interested parties may file comments on or before August 15, 1996, and 
reply comments on or before August 30, 1996. To file formally in this 
proceeding, you must file an original and six copies of all comments, 
reply comments, and supporting comments. If you want each Commissioner 
to receive a personal copy of your comments, you must file an original 
and eleven copies. Comments and reply comments should be sent to Office 
of the Secretary, Federal Communications Commission, 1919 M Street, 
NW., Room 222, Washington, DC 20554, with a copy to Janice Myles of the 
Common Carrier Bureau, 1919 M Street, NW., Room 544, Washington, DC 
20554. Parties should also file one copy of any documents filed in this 
docket with the Commission's copy contractor, International 
Transcription Services, Inc., 2100 M Street, NW., Suite 140, 
Washington, DC 20037. Comments and reply comments will be available for 
public inspection during regular business hours in the FCC Reference 
Center, 1919 M Street, NW., Room 239, Washington, DC 20554.
    176. In order to facilitate review of comments and reply comments, 
both by parties and by Commission staff, we require that comments be no 
longer than eighty (80) pages and reply comments be no longer than 
forty (40) pages, including exhibits, appendices, affidavits, or other 
attachments. Empirical economic studies, technical drawings, and copies 
of relevant state orders will not be counted against these page limits. 
These page limits will not be waived and will be strictly enforced. 
Comments and reply comments must include a short and concise summary of 
the substantive arguments raised in the pleading. Comments and reply 
comments must also comply with Section 1.49 and all other applicable 
sections of the Commission's Rules. See 47 CFR Sec. 1.49. However, we 
require here that a summary be included with all comments and reply 
comments, regardless of length, although a summary that does not exceed 
three pages will not count toward the page limit for comments or reply 
comments. This summary may be paginated separately from the rest of the 
pleading (e.g., as ``i, ii''). We also direct all interested parties to 
include the name of the filing party and the date of the filing on each 
page of their comments and reply comments. Comments and reply comments 
must clearly identify, in their Table of Contents, the specific 
paragraphs or sections of this NPRM to which a particular comment or 
set of comments is responsive. If a portion of a party's comments does 
not fall under a particular topic listed in the Table of Contents of 
this NPRM, such comments must be included in a clearly labelled section 
at the beginning or end of the filing. All parties are encouraged to 
utilize a table of contents, regardless of the length of their 
submission. Parties may not file more than a total of ten (10) pages of 
ex parte submissions, excluding cover letters. This 10 page limit does 
not include: (1) Written ex parte filings made solely to disclose an 
oral ex parte contact; (2) written material submitted at the time of an 
oral presentation to Commission staff that provides a brief outline of 
the presentation; or (3) written materials filed in response to direct 
requests from Commission staff. Ex parte filings in excess of this 
limit will not be considered as part of the record in this proceeding.
    177. Parties are also asked to submit comments and reply comments 
on diskette. Such diskette submissions would be in addition to and not 
a substitute for the formal filing requirements addressed above. 
Parties submitting diskettes should submit them to Janice Myles of the 
Common Carrier Bureau, 1919 M Street, NW., Room 544, Washington, DC 
20554. Such a submission should be on a 3.5 inch diskette formatted in 
an IBM compatible form using MS DOS 5.0 and WordPerfect 5.1 software. 
The diskette should be submitted in ``read only'' mode. The diskette 
should be clearly labelled with the party's name, proceeding, type of 
pleading (comment or reply comments) and date of submission. The 
diskette should be accompanied by a cover letter.
    178. Written comments by the public on the proposed and/or modified 
information collections are due August 15, 1996, and reply comments 
must be submitted not later than August 30, 1996. Written comments must 
be submitted by the Office of Management and Budget (OMB) on the 
proposed and/or modified information collections on or before 60 days 
after date of publication in the Federal Register. In addition to 
filing comments with the Secretary, a copy of any comments on the 
information collections contained herein should be submitted to Dorothy 
Conway, Federal Communications Commission, Room 234, 1919 M Street, 
NW., Washington, DC 20554, or via the Internet to [email protected] and 
to Timothy Fain, OMB Desk Officer, 10236 NEOB, 725 17th Street, NW., 
Washington, DC 20503 or via the Internet to [email protected].

XI. Ordering Clauses

    179. Accordingly, it is ordered that pursuant to Sections 1, 2, 4, 
201-205, 215, 218, 220, 271, 272, and 303(r) of the Communications Act 
of 1934, as amended, 47 U.S.C. Secs. 151, 152, 154, 201-205, 215, 218, 
220, 271, 272, and 303(r), a Notice of Proposed Rulemaking is hereby 
adopted.
    180. It is further ordered that, the Secretary shall send a copy of 
this Notice of Proposed Rulemaking, including the regulatory 
flexibility certification, to the Chief Counsel for Advocacy of the 
Small Business Administration, in accordance with paragraph 603(a) of 
the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (1981).

Federal Communications Commission
William F. Caton,
Acting Secretary.
[FR Doc. 96-19135 Filed 7-25-96; 8:45 am]
BILLING CODE 6712-01-P