[Federal Register Volume 62, Number 13 (Tuesday, January 21, 1997)]
[Rules and Regulations]
[Pages 2927-2969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1390]


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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 53

[CC Docket No. 96-149; FCC 96-489]


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

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: The First Report and Order (Order) released December 24, 1996 
clarifies certain provisions of sections 271 and 272 of the 
Communications Act of 1934, as amended, and promulgates regulations to 
implement other provisions. The intended effect of this Order is to 
further the Commission's goal of fostering competition in the 
telecommunications market.

EFFECTIVE DATE: February 20, 1997. The collections of information 
contained within sections 53.203(b) and (e) of these Rules are 
contingent upon approval by the Office of Management and Budget. The 
Commission will publish a document at a later date establishing the 
effective date.

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

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Order 
adopted December 23, 1996, and released December 24, 1996. This Order 
contains new or modified information collections subject to the 
Paperwork Reduction Act of 1995 (PRA). It has been submitted to the 
Office of Management and Budget (OMB) for review under the PRA. OMB, 
the general public, and other federal agencies are invited to comment 
on the proposed or modified information collections contained in this 
proceeding. This is a synopsis, the full text of this Order is 
available for inspection and copying during normal business hours in 
the FCC Reference Center (Room 239), 1919 M St., NW., Washington, DC. 
The complete text also may be obtained through the World Wide Web, at 
http://www.fcc.gov/Bureaus/Common Carrier/Orders/fcc96489.wp, or may be 
purchased from the Commission's copy contractor, International 
Transcription Service, Inc., (202) 857-3800, 2100 M St., NW., Suite 
140, Washington, DC 20037.

Regulatory Flexibility Analysis

    We determined that section 605(b) of the Regulatory Flexibility Act 
of 1980, 5 U.S.C. 605(b), does not apply to the rules adopted in this 
Order because they do not have a significant economic impact on a 
substantial number of small entities, as defined by section 301(3) of 
the Regulatory Flexibility Act.

Paperwork Reduction Act

    Some of the rules adopted in this Order impose information 
collection requirements that are explained in a companion order, 
entitled Implementation of the Telecommunications Act of 1996: 
Accounting Safeguards Under the Telecommunications Act of 1996, CC 
Docket No. 96-150, FCC 96-490. The paperwork reduction estimates 
associated with these rules are contained in this section. The 
Commission, as part of its continuing effort to reduce paperwork 
burdens, invites the general public and the Office of Management and 
Budget (OMB) to comment on the information collections contained in 
this Order, as required by the Paperwork Reduction Act of 1995, Public 
Law No. 104-12. Written comments by the public on the information 
collections are due 30 days after date of publication in the Federal 
Register. OMB notification of action is due (60 days from date of 
publication in the Federal Register.) Comments should address: (a) 
whether the new or modified collection of information is necessary for 
the proper performance of the functions of the Commission, including 
whether the information shall have practical utility; (b) the accuracy 
of the Commission's burden estimates; (c) ways to enhance the quality, 
utility, and clarity of the information collected; and (d) ways to 
minimize the burden of the collection of information on the respondents 
including the use of automated collection techniques or other forms of 
information technology.
    OMB Approval Number: 3060-0734.
    Title: Implementation of the Telecommunications Act of 1996: 
Accounting Safeguards Under the Telecommunications Act of 1996.
    Form No.: N/A.
    Type of review: Revision.
    Respondents: Businesses or other for profit.

[[Page 2928]]



----------------------------------------------------------------------------------------------------------------
                                        No. of                                                                  
           Section/title             respondents        Est. time per response           Total annual burden    
----------------------------------------------------------------------------------------------------------------
Affiliate Company, Books, Records             20  6,056.25 hrs.....................  121,125 hrs.               
 and Accounts, Section 272.                                                                                     
Arms' Length Requirement...........            7  72 hrs...........................  504 hrs.                   
----------------------------------------------------------------------------------------------------------------

    Total Annual Burden: 121,629 total hours in this Report and Order 
(Total Annual Burden hours for OMB control number 3060-0734--
180,536.75).
    Estimated Costs Per Respondents: $0.
    Needs and Uses: The attached item adopts safeguards to govern the 
Bell Operating Companies' (BOCs) entry into certain new markets. It 
promulgates rules and policies implementing and, where necessary, 
clarifying the non-accounting separate affiliate and nondiscrimination 
safeguards prescribed by Congress in sections 271 and 272 of the 
Communications Act of 1934, as amended. These safeguards are intended 
both to protect subscribers to BOC monopoly services, such as local 
telephony, against the potential risk of having to pay costs incurred 
by the BOCs to enter competitive markets, such as interLATA services 
and equipment manufacturing, and to protect competition in those 
markets from the BOCs' ability to use their existing market power in 
local exchange services to obtain an anticompetitive advantage in those 
new markets the BOCs seek to enter.

Synopsis of First Report and Order

I. Introduction

    In February 1996, the Telecommunications Act of 1996 became law. 
Telecommunications Act of 1996, Public Law No. 104-104, 110 Stat. 56 
(1996 Act), to be codified at 47 U.S.C. Secs. 151 et seq. The intent of 
the 1996 Act is ``to provide for a pro-competitive, de-regulatory 
national policy framework designed to accelerate rapidly private sector 
deployment of advanced telecommunications and information technologies 
and services to all Americans by opening all telecommunications markets 
to competition.''
    In this proceeding, we adopt non-accounting safeguards, pursuant to 
section 272 of the Communications Act, to govern entry by the Bell 
Operating Companies (BOCs) into certain new markets. This proceeding is 
one of a series of interrelated rulemakings that collectively will 
implement the telephony provisions of the 1996 Act. Other proceedings 
under the 1996 Act have focused on opening markets to entry by new 
competitors, establishing rules to preserve and advance universal 
service, establishing rules for competition in those markets that are 
opened to competitive entry, and on lifting legal and regulatory 
barriers to competition.
    Upon enactment, the 1996 Act permitted the BOCs immediately to 
provide interLATA services that originate outside of their in-region 
states. The 1996 Act conditions the BOCs' entry into in-region 
interLATA services on their compliance with certain provisions of 
section 271. Under section 271, we must determine, among other things, 
whether the BOC has complied with the safeguards imposed by section 272 
and the rules adopted herein. Section 272 addresses the BOCs' provision 
of interLATA telecommunications services originating in states in which 
they provide local exchange and exchange access services, interLATA 
information services, and BOC manufacturing activities.
    On July 18, 1996, we initiated this proceeding by releasing a 
Notice of Proposed Rulemaking (NPRM) 61 FR 39397 (July 29, 1996) that 
sought comment on the non-accounting separate affiliate and 
nondiscrimination safeguards of the 1996 Act. These provisions govern 
the BOCs' entry into certain new markets. We initiated a separate 
proceeding to address the accounting safeguards required to implement 
sections 260 and 272 through 276 of the Communications Act. Comments on 
the non-accounting separate affiliate and nondiscrimination safeguards 
were filed on August 15, 1996, and reply comments were filed on August 
30, 1996.
    The NPRM also sought comment on whether we should relax the 
dominant carrier classification that under our current rules would 
apply to in-region, interstate, domestic, interLATA services provided 
by the BOCs' interLATA affiliates. Further, the NPRM sought comment on 
whether we should modify our existing rules for regulating the 
provision of in-region, interstate, interexchange services by 
independent local exchange carriers (LECs) (namely, carriers not 
affiliated with a BOC). Finally, the NPRM considered whether to apply 
the same regulatory treatment to the BOC affiliates' and independent 
LECs' provision of in-region, international services, as would apply to 
the provision of in-region, interstate, domestic, interLATA services 
and in-region, interstate, domestic interexchange services, 
respectively. This order addresses only the non-accounting separate 
affiliate and nondiscrimination safeguards in sections 271 and 272. The 
classification of BOC affiliates or independent LECs (and their 
affiliates) as dominant or non-dominant will be addressed in a separate 
Report and Order in this docket.
    In this order, we promulgate rules and policies implementing, and, 
where necessary, clarifying the non-accounting separate affiliate and 
nondiscrimination safeguards prescribed by Congress in sections 271 and 
272. These safeguards are intended both to protect subscribers to BOC 
monopoly services, such as local telephony, against the potential risk 
of having to pay costs incurred by the BOCs to enter competitive 
markets, such as interLATA services and equipment manufacturing, and to 
protect competition in those markets from the BOCs' ability to use 
their existing market power in local exchange services to obtain an 
anticompetitive advantage in those new markets the BOCs seek to enter. 
Our action today continues the process of enhancing competition in all 
telecommunications markets as envisioned by the 1996 Act.

A. Background

    The fundamental objective of the 1996 Act is to bring to consumers 
of telecommunications services in all markets the full benefits of 
vigorous competition. As we recognized in the First Interconnection 
Order, 61 FR 45476 (August 29, 1996), ``[t]he opening of all 
telecommunications markets to all providers will blur traditional 
industry distinctions and bring new packages of services, lower prices, 
and increased innovation to American consumers.'' With the removal of 
legal, economic, and regulatory impediments to entry, providers of 
various telecommunications services will be able to enter each other's 
markets and provide various services in competition with one another. 
Both the BOCs and other firms, most notably existing interexchange 
carriers, will be able to offer a widely recognized brand name that is 
associated with telecommunications services. As firms expand the scope 
of their existing operations to new product lines, they will 
increasingly offer consumers the ability to purchase local, intraLATA,

[[Page 2929]]

and interLATA telecommunications services, as well as wireless, 
information, and other services, from a single provider (i.e., ``one 
stop shopping''), and other advantages of vertical integration.
    The 1996 Act opens local markets to competing providers by imposing 
new interconnection and unbundling obligations on existing providers of 
local exchange service, including the BOCs. The 1996 Act also allows 
the BOCs to provide interLATA services in the states where they 
currently provide local exchange and exchange access services once they 
satisfy the requirements of section 271. Moreover, by requiring 
compliance with the competitive checklist set out in section 
271(c)(2)(B) as a prerequisite to BOC provision of in-region interLATA 
service, the statute links the effective opening of competition in the 
local market with the timing of BOC entry into the long distance 
market, so as to ensure that neither the BOCs nor the existing 
interexchange carriers could enjoy an advantage from being the first to 
enter the other's market.
    In enacting section 272, Congress recognized that the local 
exchange market will not be fully competitive immediately upon its 
opening. Congress, therefore, imposed in section 272 a series of 
separate affiliate requirements applicable to the BOC's provision of 
certain new services and their engagement in certain new activities. 
These requirements are designed, in the absence of full competition in 
the local exchange marketplace, to prohibit anticompetitive 
discrimination and cost-shifting, while still giving consumers the 
benefit of competition.
    As we observed in the NPRM, BOC entry into in-region interLATA 
services raises issues for competition and consumers, even after a BOC 
has satisfied the requirements of section 271(d)(3). BOCs currently are 
the dominant providers of local exchange and exchange access services 
in their in-region states, accounting for approximately 99.1 percent of 
the local service revenues in those markets. If a BOC is regulated 
under rate-of-return regulation, a price caps structure with sharing 
(either for interstate or intrastate services), a price caps scheme 
that adjusts the X-factor periodically based on changes in industry 
productivity, or if any revenues it is allowed to recover are based on 
costs recorded in regulated books of account, it may have an incentive 
to allocate improperly to its regulated core business costs that would 
be properly attributable to its competitive ventures.
    In addition, a BOC may have an incentive to discriminate in 
providing exchange access services and facilities that its affiliate's 
rivals need to compete in the interLATA telecommunications services and 
information services markets. For example, a BOC may have an incentive 
to degrade services and facilities furnished to its affiliate's rivals, 
in order to deprive those rivals of efficiencies that its affiliate 
enjoys. Moreover, to the extent carriers offer both local and interLATA 
services as a bundled offering, a BOC that discriminates against the 
rivals of its affiliates could entrench its position in local markets 
by making these rivals' offerings less attractive. With respect to BOC 
manufacturing activities, a BOC may have an incentive to purchase only 
equipment manufactured by its section 272 affiliate, even if such 
equipment is more expensive or of lower quality than that available 
from other manufacturers.
    Moreover, if a BOC charges other firms prices for inputs that are 
higher than the prices charged, or effectively charged, to the BOC's 
section 272 affiliate, then the BOC could create a ``price squeeze.'' 
In that circumstance, the BOC affiliate could lower its retail price to 
reflect its unfair cost advantage, and competing providers would be 
forced either to match the price reduction and absorb profit margin 
reductions or maintain their retail prices at existing levels and 
accept market share reductions. This artificial advantage may allow the 
BOC affiliate to win customers even though a competing carrier may be a 
more efficient provider in serving the customer. Unlawful 
discriminatory preferences in the quality of the service or 
preferential dissemination of information provided by BOCs to their 
section 272 affiliates, as a practical matter, can have the same effect 
as charging unlawfully discriminatory prices. If a BOC charged the same 
rate to its affiliate for a higher quality access service than the BOC 
charged to unaffiliated entities for a lower quality service, or 
disclosed information concerning future changes in network architecture 
to its manufacturing affiliate before disclosing it to others, the BOC 
could effectively create the same ``price squeeze'' discussed above.
    The structural and nondiscrimination safeguards contained in 
section 272 ensure that competitors of the BOC's section 272 affiliate 
have access to essential inputs, namely, the provision of local 
exchange and exchange access services, on terms that do not 
discriminate against the competitors and in favor of the BOC's 
affiliate. Because the BOC has the incentive to provide its affiliate 
with the most efficient access, the statute requires the BOC to provide 
competitors the same access. Access to such inputs on nondiscriminatory 
terms will enable a new entrant to compete effectively, assuming it is 
at least as efficient as the BOC and/or its section 272 affiliate. At 
the same time, Congress also was sensitive to the value to the BOCs of 
potential efficiencies stemming from economies of scale. Our task is to 
implement section 272 in a manner that ensures that the fundamental 
goal of the 1996 Act is attained--to open all telecommunications 
markets to robust competition--but at the same time does not impose 
requirements on the BOCs that will unfairly handicap them in their 
ability to compete. The rules and policies adopted in this order seek 
to preserve the carefully crafted statutory balance to the extent 
possible until facilities-based alternatives to the local exchange and 
exchange access services of the BOCs make those safeguards no longer 
necessary.

B. Overview and Summary

    Section 272 allows a BOC to engage in the manufacturing of 
telecommunications equipment and CPE, the origination of certain 
interLATA telecommunications services, and the provision of interLATA 
information services, as long as the BOC provides these activities 
through a separate affiliate. Unless extended by the Commission, the 
statutory separate affiliate requirements for manufacturing and 
interLATA telecommunications services expire three years after a BOC or 
any BOC affiliate is authorized to provide in-region interLATA 
services. The statutory interLATA information services separate 
affiliate requirement expires on February 8, 2000, four years after 
enactment of the 1996 Act, unless extended by the Commission.
    This order implements the structural separation requirements 
mandated by section 272 in a manner that is designed to prevent 
improper cost allocation between the BOC and its section 272 affiliate 
and discrimination by the BOC in favor of its section 272 affiliate. In 
particular, we construe the section 272(b)(1) ``operate independently'' 
requirement to prohibit the BOC and its section 272 affiliate from 
jointly owning transmission and switching facilities or the land and 
buildings on which such facilities are located. Moreover, we prohibit a 
BOC and its affiliates, other than the section 272 affiliate itself, 
from providing operating, installation, and maintenance services 
associated with the facilities owned by the section 272

[[Page 2930]]

affiliate. Similarly, a section 272 affiliate may not provide such 
services associated with the BOC's facilities. These requirements 
should reduce the potential for the improper allocation of costs to the 
BOC that should be allocated to the section 272 affiliate. In addition, 
they should ensure that a section 272 affiliate must follow the same 
procedures as its competitors in order to gain access to a BOC's 
facilities. Consistent with these requirements and those established 
pursuant to sections 272(b)(5) and 272(c)(1), however, a section 272 
affiliate may negotiate with an affiliated BOC on an arm's length basis 
to obtain transmission and switching facilities, to arrange for 
collocation of facilities, and to provide or obtain services other than 
those expressly prohibited herein.
    The structural separation requirements of section 272, in 
conjunction with the affirmative nondiscrimination obligations imposed 
by that section, also are intended to address concerns that the BOCs 
could potentially use local exchange and exchange access facilities to 
discriminate against competitors in order to gain an anticompetitive 
advantage for their affiliates that engage in competitive activities. 
We interpret section 272(c)(1) as imposing a flat prohibition against 
discrimination more stringent than the bar on ``unjust and 
unreasonable'' discrimination contained in section 202 of the Act. In 
short, the BOCs must treat all other entities in the same manner in 
which they treat their section 272 affiliates. We conclude that a BOC 
may not discriminate in favor of its section 272 affiliate by: (1) 
Providing exchange access services to competing interLATA service 
providers at a higher rate than the rate offered to its section 272 
affiliate; (2) providing a lower quality service to competing interLATA 
service providers than the service it provides to its section 272 
affiliate at a given price; (3) giving preference to its affiliate's 
equipment in the procurement process; or (4) failing to provide advance 
information about network changes to its competitors. We seek comment 
in a Further Notice of Proposed Rulemaking on specific disclosure 
requirements to implement section 272(e)(1).
    In this order, we also seek to ensure that BOC section 272 
affiliates have the same opportunity to compete for customers as other 
long distance service providers. The joint marketing rules we have 
established limit the ability of the largest interexchange carriers to 
market jointly their interLATA service with resold BOC local exchange 
service, until the BOC receives in-region, interLATA authority under 
section 271 or until 36 months after enactment of the 1996 Act. Once 
the BOC receives interLATA authority, the restrictions on interexchange 
carrier joint marketing expire, and the interexchange carriers and the 
BOCs and their section 272 affiliates may engage in the same types of 
marketing activities.
    In addition, we clarify that the Communications Act allows a 
section 272 affiliate to purchase unbundled elements pursuant to 
section 251(c)(3) and telecommunications services at wholesale rates 
under section 251(c)(4). Thus, the section 272 affiliate may provide 
integrated services in the same manner as other competitors. Such an 
approach is consistent with the objectives of the 1996 Act, which are 
to give service providers the freedom to develop a wide array of 
service packages and allow consumers to select what best suits their 
needs. We note, however, that the BOC may not transfer local exchange 
and exchange access facilities and capabilities to the section 272 
affiliate, or another affiliate, in order to evade regulatory 
requirements.
    We recognize that no regulatory scheme can completely prevent or 
deter discrimination, particularly in its more subtle forms. In this 
order, we shift the burden of production to the BOCs in the context of 
section 271(d)(6) enforcement proceedings in order to alleviate the 
burden on the complainant and facilitate the detection of 
anticompetitive behavior. Because the BOC is likely to be in sole 
possession of most of the relevant information necessary to establish 
the complainant's case, shifting the burden is the most efficient way 
of resolving complaints alleging violations of the conditions of in-
region interLATA entry under section 271(d)(3). The goal of this 
proceeding and others is to establish a regulatory framework that 
enables service providers to enter each other's markets and compete on 
an equal footing by not allowing one service provider to game 
regulatory requirements in such a way as to hinder competition.

II. Scope of Commission Authority

A. Rulemaking Authority

1. Background
    In the NPRM, we addressed the scope of the Commission's authority, 
pursuant to sections 271 and 272, over interLATA services, interLATA 
information services and manufacturing activities. Although we did not 
seek comment on whether the Commission has authority to adopt rules 
implementing section 272, several commenters addressed this issue.
2. Discussion
    We reject as unfounded the assertion that the Commission lacks 
authority to adopt regulations implementing section 272. Sections 4(i), 
201(b), and 303(r) of the Act authorize the Commission to adopt any 
rules it deems necessary or appropriate in order to carry out its 
responsibilities under the Act, so long as those rules are not 
otherwise inconsistent with the Act. Nothing in section 272 bars the 
Commission from exercising the rulemaking authority granted by these 
sections of the Act to clarify and implement the requirements of 
section 272. Moreover, courts repeatedly have held that the 
Commission's general rulemaking authority is ``expansive'' rather than 
limited. In addition, as AT&T notes, it is well-established that an 
agency has the authority to adopt rules to administer congressionally 
mandated requirements. Contrary to those parties that argue that 
section 272 is self-executing, we find that Congress enacted in section 
272 broad principles that require interpretation and implementation in 
order to ensure an efficient, orderly, and uniform regime governing BOC 
entry into in-region interLATA telecommunications and other markets 
covered by section 272. In the NPRM, we identified areas of ambiguity 
in the requirements of section 272 with the specific goal of clarifying 
and implementing Congress' intent in that provision. That remains our 
goal in this Order. Due to the importance of the introduction of 
competition to the local exchange market, we believe this Order to be 
both important and necessary to protect BOC customers and new entrants. 
Further, we agree with PacTel that it serves the interests of justice 
for us to clarify in advance the section 272 requirements so that BOCs 
and other parties may be advised of what is required to meet the 
condition for 271 authorization that in-region interLATA services be 
provided in compliance with section 272.
    We are not persuaded by the argument that the removal of the Senate 
bill's provision regarding implementing regulations from the 1996 Act 
indicates Congress' intent that section 272 be self-executing. Parties 
advancing this argument rely on a rule of statutory construction 
providing that, when a provision in a prior draft is altered in the 
final legislation, Congress intended a change from the prior version. 
The courts have rejected this rule of statutory construction, however, 
when changes from one draft to another are not explained. In this 
instance, the only statement from Congress regarding the

[[Page 2931]]

meaning of the omission of the Senate provision appears in the Joint 
Explanatory Statement. According to that Statement, all differences 
between the Senate Bill, the House Amendment, and the substitute 
reached in conference are noted therein ``except for clerical 
corrections, conforming changes made necessary by agreements reached by 
the conferees, and minor drafting and clerical changes.'' Because the 
Joint Explanatory Statement did not address the removal of the Senate 
bill provision, the logical inference is that Congress regarded the 
change as an inconsequential modification, rather than a significant 
alteration. Moreover, it seems implausible that, in enacting the final 
version of section 272, Congress intended a radical alteration of the 
Commission's general rulemaking authority. We therefore conclude that 
elimination of the proposed provision was a nonsubstantive change. 
Based on the foregoing, we find, pursuant to the general rulemaking 
authority vested in the Commission by sections 4(i), 201(b), and 303(r) 
of the Act, and consistent with fundamental principles of 
administrative law, that the Commission has the requisite authority to 
promulgate rules implementing section 272 of the Act.

B. Scope of Commission's Authority Regarding InterLATA Services

1. Background
    In the NPRM, we tentatively concluded that the Commission's 
authority under sections 271 and 272 applies to intrastate and 
interstate interLATA services provided by BOCs or their affiliates. We 
based this tentative conclusion in part on our analysis that Congress 
intended sections 271 and 272 to replace the pre-Act restrictions on 
the BOCs contained in the MFJ, which barred their provision of both 
intrastate and interstate interLATA services. We also observed that the 
interLATA/intraLATA distinction appears to some extent to have 
supplanted the traditional interstate/intrastate distinction for 
purposes of sections 271 and 272. We further noted that reading 
sections 271 and 272 as applying to all interLATA services fits well 
with the structure of the statute as a whole, and that reading the 
sections as limited to interstate services would lead to implausible 
results. We also indicated that we do not believe that section 2(b) of 
the Act precludes the conclusion that our authority under sections 271 
and 272 applies to intrastate as well as interstate interLATA services. 
Finally, we asked parties that disagreed with the foregoing analysis to 
comment on the extent to which the Commission may have authority to 
preempt state regulation with respect to some or all of the non-
accounting matters addressed by sections 271 and 272.
2. Discussion
    For the reasons set forth below, we conclude that sections 271 and 
272, and the Commission's authority thereunder, apply to intrastate as 
well as interstate interLATA services provided by the BOCs or their 
affiliates. We base this conclusion on the scope of the pre-1996 Act 
MFJ restrictions on the BOCs' provision of interLATA services, as well 
as on the plain language of sections 271 and 272, and the requirements 
of those sections. In addition, we find that section 2(b) does not bar 
the Commission from establishing regulations to clarify and implement 
the requirements of section 272 that apply to intrastate interLATA 
services and other intrastate matters that are within the scope of 
section 272. We hold, therefore, that the rules we establish to 
implement section 272 are binding on the states, and the states may not 
impose regulations with respect to BOC provision of intrastate 
interLATA service that are inconsistent with section 272 and the 
Commission's rules under section 272. We emphasize, however, that the 
scope of the Commission's authority under sections 271 and 272 extends 
only to matters covered by those sections. Those sections do not alter 
the jurisdictional division of authority with respect to matters 
falling outside their scope. For example, rates charged to end users 
for intrastate interLATA service have traditionally been subject to 
state authority, and will continue to be.
    We stated in the NPRM, and several parties agree, that section 
601(a) of the 1996 Act indicates that Congress intended the provisions 
of the Act to supplant the MFJ. That section provides:

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

    No party challenges the fact that the MFJ generally prohibited the 
BOCs and their affiliates from providing any interLATA services--
interstate or intrastate. Moreover, no party challenges the fact that 
the term ``interLATA services'' as used in the MFJ referred to both 
intrastate and interstate services.
    Similarly, with respect to the term ``interLATA services'' as used 
in sections 271 and 272, the DOJ, AT&T, and BellSouth maintain that, 
because the Act defines the term ``interLATA'' to include intrastate 
services, references in sections 271 and 272 to interLATA services 
apply to both intrastate and interstate services. We agree.
    The Act defines ``interLATA service'' as ``telecommunications 
between a point in a local access and transport area and a point 
located outside such area.'' The Act further defines the term ``LATA'' 
as ``a contiguous geographic area * * * established before the date of 
enactment of the [1996 Act] by a Bell operating company such that no 
exchange area includes points within more than 1 metropolitan 
statistical area, consolidated metropolitan statistical area, or State, 
except as expressly permitted under the [MFJ]'' or subsequently 
modified with approval of the Commission. This definition expressly 
recognizes that a LATA may comprise an area, such as a metropolitan 
statistical area, that is smaller than a state. Indeed, the DOJ notes 
that most LATAs established by the MFJ consist of only parts of 
individual states; only nine LATAs out of a total of 158 encompass an 
entire state. Thus, by defining an interLATA service as 
telecommunications from a point inside a LATA to a point outside a 
LATA, the Act expressly recognizes that interLATA services may include 
telecommunications between two LATAs within a single state. 
Accordingly, we find that the term ``interLATA services,'' as used in 
sections 271 and 272, expressly refers to both intrastate and 
interstate services.
    Although the term ``interLATA services'' as used in the MFJ and in 
sections 271 and 272 refers to both interstate and intrastate interLATA 
services, the New York Commission and others assert that, when Congress 
transferred responsibility for enforcing the prohibition on the BOCs' 
provision of interLATA services from the U.S. District Court to the 
Commission, it intended to limit our authority only to interstate 
interLATA services. To the contrary, we find that reading sections 271 
and 272 as granting the Commission authority over intrastate as well as 
interstate interLATA services is consistent with, and indeed necessary 
to effectuate, Congress' intent that sections 271 and 272 replace the 
restrictions of the MFJ with respect to BOC provision of interLATA 
services.
    The jurisdictional limitation that the New York Commission and 
others seek

[[Page 2932]]

to read into sections 271 and 272 would lead to implausible results. 
Specifically, under that statutory interpretation, the BOCs would have 
been permitted to provide in-region, intrastate, interLATA services 
upon enactment, without complying with the section 271 entry 
requirements or the section 272 safeguards, and subject only to any 
existing, generally applicable state rules on interexchange entry. Any 
such rules, presumably, would not have been specifically directed at 
BOC entry, because of the long-standing MFJ prohibition on entry. 
Because concerns about BOC control of bottleneck facilities needed for 
the provision of in-region interLATA services are applicable to both 
interstate and intrastate services, it seems clear that sections 271 
and 272 apply equally to the BOCs' provision of both intrastate and 
interstate, in-region, interLATA services. We find no reasonable basis 
for concluding that Congress intended to lift the MFJ's ban on BOC 
provision of intrastate interLATA services, which constitute 
approximately 30 percent of interLATA traffic, and permit the BOCs to 
offer such services before satisfying the requirements of sections 271 
and 272. As the DOJ notes, ``Congress could not have intended, for 
example, to open up the intrastate interLATA market immediately for BOC 
entry, without the carefully-devised entry requirements of Section 271, 
while at the same time establishing those requirements with respect to 
interstate interLATA entry. Nor could Congress have meant to defeat the 
safeguards carefully imposed under Section 272 by permitting the BOCs 
to engage in the behavior which Section 272 prohibits, as long as they 
do it within the individual states.'' Indeed, we find it significant 
that neither the states nor the BOCs have argued that such a result was 
intended. In light of this analysis, we find that the Commission's 
authority under sections 271 and 272 extends to both intrastate and 
interstate interLATA services.
    Similarly, several parties support the conclusion that our 
authority to consider the applications of BOCs seeking to provide in-
region interLATA service pursuant to section 271(d) applies to both 
interstate and intrastate services. None of the state representatives 
and BOCs commenting on this issue claims that the Commission's 
authority under section 271(d) does not apply to a BOC's provision of 
intrastate interLATA services. Despite the lack of controversy on this 
point, several commenters claim that rules adopted under section 272 
apply only to interstate services. We believe that the requirements of 
sections 271 and 272 repudiate this argument. In granting an 
application under section 271(d), the Commission must determine, among 
other things, that the BOC meets the requirements of section 
271(d)(3)(B). Under this provision, the Commission must find that the 
requested authorization ``will be carried out in accordance with the 
requirements of section 272.'' In light of the Commission's authority 
to approve entry into both intrastate and interstate in-region 
interLATA service, pursuant to section 271, it seems logical and 
necessary that the Commission's authority to impose safeguards 
established by section 272, should similarly extend to both intrastate 
and interstate interLATA service.
    Several parties have argued that, although the MFJ restrictions on 
the BOCs applied to both interstate and intrastate interLATA services, 
the states retained authority to regulate a BOC's intrastate interLATA 
services when such services were authorized by the MFJ court. They 
assert, therefore, that, even if sections 271 and 272 apply to 
intrastate services, those provisions would not divest the states of 
authority over intrastate services. As we stated at the outset of this 
discussion, the scope of the Commission's authority under sections 271 
and 272 extends only to matters covered by those sections, i.e., 
authorization for BOC entry into in-region interLATA service and the 
safeguards imposed in section 272. We do not dispute that the states 
retain their authority to regulate intrastate services in other 
contexts.
    We further find that the requirements of sections 271 and 272 
buttress our conclusions regarding the scope of the Commission's 
jurisdiction. For example, we find it significant that section 271(h) 
directs the Commission to address intrastate matters relating to BOC 
provision of incidental interLATA services. That section states that 
``[t]he Commission shall ensure that the provision of [incidental 
interLATA services] by a Bell operating company or its affiliate will 
not adversely affect telephone exchange service ratepayers or 
competition in any telecommunications market.'' Telephone exchange 
service is primarily an intrastate service. This reference to a plainly 
intrastate service indicates that the scope of section 271 encompasses 
intrastate matters, and thus the Commission's authority thereunder 
applies to both intrastate and interstate interLATA services.
    State representatives and some BOCs argue that sections 2(b) and 
601(c) of the Act preserve the states' authority to adopt rules 
regarding BOC provision of intrastate interLATA services. They argue 
that section 2(b) bars the Commission from exercising authority under 
sections 271 and 272 to establish rules applicable to intrastate 
interLATA services. For the reasons set forth below, we find that 
section 2(b) does not preclude us from finding that sections 271 and 
272, and our authority to promulgate rules thereunder, apply to BOC 
provision of intrastate interLATA services.
    In Louisiana Public Service Commission v. Federal Communications 
Commission, 476 U.S. 355, 377 (1986), the Supreme Court determined 
that, in order to overcome section 2(b)'s limits on the Commission's 
jurisdiction with respect to intrastate communications service, 
Congress must either modify section 2(b) or grant the Commission 
additional authority. As explained above, we find that the term 
``interLATA services,'' by the Act's own definition, includes 
intrastate services, and that Congress, in sections 271 and 272, 
expressly granted the Commission authority over intrastate interLATA 
services for purposes of those sections. Accordingly, consistent with 
the Court's statement in Louisiana, we find that section 2(b) does not 
limit our authority over intrastate interLATA services under sections 
271 and 272.
    In addition, we find that, in enacting sections 271 and 272 after 
section 2(b), and squarely addressing therein the issues before us, 
Congress intended for sections 271 and 272 to take precedence over any 
contrary implications based on section 2(b). In construing these 
provisions, we are mindful that ``it is a commonplace of statutory 
construction that the specific governs the general.'' Moreover, where 
amended and original sections of a statute cannot be harmonized, the 
new provisions should be construed to prevail as the latest declaration 
of legislative will. We find also that, in enacting the 1996 Act, there 
are other instances where Congress indisputably gave the Commission 
intrastate jurisdiction without amending section 2(b). For instance, 
section 251(e)(1) provides that ``[t]he Commission shall have exclusive 
jurisdiction over those portions of the North American Numbering Plan 
that pertain to the United States.'' Section 253 directs the Commission 
to preempt state regulations that prohibit the ability to provide 
intrastate services. Section 276(b) directs the Commission to 
``establish a per call compensation plan to ensure that payphone 
service providers are fairly compensated for each and every completed 
intrastate and interstate call.'' Section 276(c) provides

[[Page 2933]]

that, ``[t]o the extent that any State [payphone] requirements are 
inconsistent with the Commission's regulations, the Commission's 
regulations on such matters shall preempt such State requirements.'' 
None of these provisions is specifically excepted from section 2(b), 
yet all of them explicitly give the Commission jurisdiction over 
intrastate matters. Thus, we find that the lack of an explicit 
exception in section 2(b) does not require us to conclude that the 
Commission's jurisdiction under sections 271 and 272 is limited to 
interstate services. A contrary holding would nullify several explicit 
grants of authority to the Commission, noted above, and would render 
substantial parts of the statute meaningless. Thus, in this instance, 
we believe that the lack of an explicit exception in section 2(b) is 
not dispositive of the scope of the Commission's jurisdiction.
    Moreover, as stated above, with the exception of the New York 
Commission, the parties challenging the Commission's authority to 
preempt state regulation under sections 272 do not address the issue of 
whether ``interLATA services'' are defined by the Act to include 
intrastate services. The New York Commission agrees with us that it 
does. These parties (including the New York Commission) also do not 
challenge the proposition that Congress vested in the Commission 
authority over BOC entry into all in-region interLATA services--
intrastate and interstate. We find it difficult to reconcile these 
parties' silence on these issues, as well as the New York Commission's 
agreement that ``interLATA services'' includes intrastate services, 
with their position that section 2(b) limits the application of the 
Commission's implementing rules under section 272 to interstate 
interLATA services. If, as it remains undisputed in the record, the 
Commission would necessarily determine, in assessing whether to allow 
BOC entry into in-region interLATA services, whether a BOC's provision 
of intrastate as well as interstate interLATA services complies with 
section 272, we can find no basis to maintain that the Commission's 
authority under sections 271 and 272 does not include authority to 
apply its interpretation of section 272 to all of the interLATA 
services--intrastate and interstate--at issue in the BOC's 271 in-
region interLATA services application.
    NARUC and the Missouri Commission stress that earlier drafts of the 
legislation would have amended section 2(b) to make an exception for 
certain sections of Title II, including sections 271 and 272, but the 
enacted version did not include that exception. They argue that this 
change demonstrates that Congress intended that section 2(b)'s 
limitations remain fully in force with regard to sections 271 and 272. 
We find this argument unpersuasive.
    As noted above, parties that attach significance to the omission of 
the proposed amendment of section 2(b) rely on a rule of statutory 
construction providing that, when a provision in a prior draft is 
altered in the final legislation, Congress intended a change from the 
prior version. This rule of statutory construction has been rejected, 
however, when changes from one draft to another are not explained. In 
this instance, the only statement from Congress regarding the meaning 
of the omission of the section 2(b) amendment appears in the Joint 
Explanatory Statement. According to the Joint Explanatory Statement, 
all differences between the Senate Bill, the House Amendment, and the 
substitute reached in conference are noted therein ``except for 
clerical corrections, conforming changes made necessary by agreements 
reached by the conferees, and minor drafting and clerical changes.'' 
Because the Joint Explanatory Statement did not address the removal of 
the section 2(b) amendment from the final bill, the logical inference 
is that Congress regarded the change as an inconsequential modification 
rather than a significant alteration. It seems implausible that, by 
enacting the final version, Congress intended a radical alteration of 
the Commission's authority under sections 271 and 272, given the total 
lack of legislative history to that effect. Based on the foregoing, we 
conclude that elimination of the proposed amendment of section 2(b) was 
a nonsubstantive change.
    Moreover, even if it were appropriate to speculate as to the 
meaning of the omission of the section 2(b) exception, we disagree with 
the argument that the omission necessarily indicates that Congress 
intended not to provide the Commission authority over intrastate 
services in sections 271 and 272. We find it is equally possible that 
Congress omitted the exception based on an understanding that the use 
of the term interLATA in sections 271 and 272 established a clear grant 
of authority over intrastate services and therefore that such an 
exception was unnecessary.
    We similarly are not persuaded that section 601(c) of the 1996 Act 
evinces an intent by Congress to preserve states' authority over 
intrastate matters. Section 601(c) of the 1996 Act provides that the 
Act and its amendments ``shall not be construed to modify, impair, or 
supersede Federal, State, or local law unless expressly so provided in 
such Act or amendments.'' As explained above, we conclude that sections 
271 and 272, which apply to interLATA services, were expressly intended 
to modify federal and state law and jurisdictional authority.
    For all of the reasons discussed above, we conclude that sections 
271 and 272, and the Commission's authority thereunder, apply to 
intrastate and interstate interLATA services provided by the BOCs or 
their affiliates. We hold, therefore, that the rules we establish to 
implement section 272 are binding on the states, and the states may not 
impose, with respect to BOC provision of intrastate interLATA service, 
requirements inconsistent with sections 271 and 272 and the 
Commission's rules under those provisions. In this regard, based on 
what we find is clear congressional intent that the Commission is 
authorized to make determinations regarding BOC entry into interLATA 
services, we reject the suggestion by the Wisconsin Commission that, 
after the Commission has granted a BOC application for authority under 
section 271, a state nonetheless may condition or delay BOC entry into 
intrastate interLATA services.

C. Scope of Commission's Authority Regarding Manufacturing Services

    In the NPRM, we tentatively concluded that the Commission's 
authority under section 272 extends to all BOC manufacturing of 
telecommunications equipment and CPE. Only two parties, Sprint and TIA, 
commented on this issue, and both agreed with our tentative conclusion.
    We adopt our tentative conclusion that our authority under section 
272 extends to all BOC manufacturing of telecommunications equipment 
and CPE. As we stated in the NPRM, to the extent that sections 271 and 
272 address BOC manufacturing activities, we believe that the same 
statutory analysis set forth above with respect to interLATA services 
would apply. We see no basis for distinguishing among the various 
subsections of sections 271 and 272. Even apart from that analysis, 
however, we believe that the provisions concerning manufacturing 
clearly apply to all manufacturing activities. Section 2(b) of the 
Communications Act limits the Commission's authority over ``charges, 
classifications, practices, services, facilities, or regulation for or 
in connection with intrastate communications service.'' Even though, 
for the reasons stated above, we find section 2(b) not to be relevant 
to

[[Page 2934]]

sections 271 and 272, we find that the manufacturing activities 
addressed by sections 271 and 272 are not, in any event, within the 
scope of section 2(b). Alternatively, even if section 2(b) were deemed 
to apply with respect to BOC manufacturing, we find that such 
manufacturing activities plainly cannot be segregated into interstate 
and intrastate portions. Thus, any state regulation inconsistent with 
sections 271 and 272 or our implementing regulations would necessarily 
thwart and impede federal policies, and should be preempted.

III. Activities Subject to Section 272 Requirements

    Section 272(a) provides that a BOC (including any affiliate) that 
is a LEC subject to the requirements of section 251(c) may provide 
certain services only through a separate affiliate. Under section 272, 
BOCs (or BOC affiliates) may engage in the following activities only 
through one or more affiliates that are separate from the incumbent LEC 
entity: (A) Manufacturing activities; (B) interLATA telecommunications 
services that originate in-region; and (C) interLATA information 
services. We discuss below both the activities subject to the section 
272 separate affiliate requirements and the activities that are exempt 
from these requirements.

A. General Issues

1. Definition of ``InterLATA services''
    a. Background. In the NPRM, we indicated that the 1996 Act defines 
``interLATA service'' as a telecommunications service. We further 
stated that, where the 1996 Act draws distinctions between in-region 
and out-of-region ``interLATA services,'' these distinctions do not 
apply to interLATA information services.
    b. Discussion. Upon consideration of the arguments raised in the 
record, we modify our interpretation of the scope of the term 
``interLATA service.'' Consistent with the views of the commenters that 
addressed this point, we conclude that the term ``interLATA services'' 
encompasses both interLATA information services and interLATA 
telecommunications services.
    We are persuaded that the definition of ``interLATA service,'' 
which is ``telecommunications between a point located in a [LATA] and a 
point located outside such area,'' does not limit the scope of the term 
to telecommunications services because, as MFS and BellSouth point out, 
information services are also provided via telecommunications. 
Elsewhere in this Report and Order, we conclude that ``interLATA 
information services'' must include a bundled, interLATA transmission 
component. Thus, interLATA information services are provided via 
interLATA telecommunications transmissions and, accordingly, fall 
within the definition of ``interLATA service.'' Moreover, we believe 
that it is a more natural, common-sense reading of ``interLATA 
services'' to interpret it to include both telecommunications services 
and information services. In addition, as MFS argues, in section 
272(a)(2), Congress uses and distinguishes between ``interLATA 
telecommunications services'' and ``interLATA information services,'' 
demonstrating that it limited the term ``interLATA services'' to 
transmission services when it wished to. Further, if Congress had 
intended the term ``interLATA services'' to include only interLATA 
telecommunications services, its use of the term ``interLATA 
telecommunications services'' in section 272(a)(2) would have been 
unnecessary and redundant.
    As MCI points out, interpreting the term ``interLATA services'' to 
include both interLATA telecommunications and interLATA information 
services means that a BOC may not provide in-region interLATA 
information services until it obtains section 271 authorization. As a 
practical matter, we believe that interpreting ``interLATA services'' 
to include interLATA information services will not alter the 
application of section 271. As noted above, and discussed in greater 
detail below, we conclude that the term ``interLATA information 
service'' refers to an information service that incorporates as a 
necessary, bundled element an interLATA telecommunications transmission 
component provided to the customer for a single charge. Thus, 
regardless of whether we interpret ``interLATA service'' to include 
interLATA information services, a BOC would be required to obtain 
section 271 authorization prior to providing, in region, the interLATA 
telecommunications transmission component of an interLATA information 
service.
2. Application of Section 272 Safeguards to International InterLATA 
Services
    In the NPRM, we tentatively concluded that Congress intended the 
section 272 safeguards to apply to all domestic and international 
interLATA services. All of the parties that commented on this point 
supported this tentative conclusion. As noted above, the 1996 Act 
defines ``interLATA services'' as ``telecommunications between a point 
located in a [LATA] and a point located outside such area.'' The 
definition does not distinguish between domestic and international 
interLATA services. Further, international telecommunications services, 
which originate in a LATA and terminate in a country other than the 
United States, or vice versa, fit within the statutory definition of 
interLATA services. Thus, we hereby adopt our tentative conclusion.
3. Provision of Services Through a Single Affiliate
    a. Background. In the NPRM, we tentatively concluded that BOCs may 
conduct all, or some combination of, manufacturing activities, 
interLATA telecommunications services, and interLATA information 
services through a single separate affiliate, so long as the affiliate 
satisfies all statutory and regulatory requirements imposed on the 
provision of each type of service. Elsewhere in the NPRM, we sought 
comment on whether the 1996 Act permits us to, and if so, whether we 
should, interpret or apply any of the requirements of section 272(b) 
differently with respect to a BOC's provision of interLATA 
telecommunications services, which are regulated under Title II, as 
opposed to a BOC's engagement in manufacturing and provision of 
interLATA information services, which are unregulated activities. In 
addition, we sought comment on how we could impose different regulatory 
requirements if a BOC provides both regulated and unregulated services 
through a single affiliate.
    b. Discussion. Based on the comments submitted in the record and 
our analysis of the 1996 Act, we adopt our tentative conclusion that 
BOCs may conduct all, or some combination, of manufacturing activities, 
interLATA telecommunications services, and interLATA information 
services through a single separate affiliate. Section 272(a) requires a 
BOC to provide these services through ``one or more affiliates'' that 
are ``separate from any operating company entity that is subject to the 
requirements of section 251(c).'' We conclude that this language is 
intended to allow the BOCs flexibility in structuring their provision 
of competitive services, so long as those services are separated from 
the BOCs' provision of any local exchange services that are subject to 
the requirements of section 251(c).
    We further conclude, as a policy matter, that it is not necessary 
to require the BOCs to separate their manufacturing activities from 
their

[[Page 2935]]

provision of interLATA telecommunications services and interLATA 
information services, as suggested by VoiceTel. First, a BOC's 
manufacturing activities do not entail control over bottleneck local 
exchange facilities. Second, during the period that the MFJ prohibited 
the BOCs from engaging in manufacturing activities, a competitive 
market for these activities developed. The market for information 
services is fully competitive; the market for interLATA 
telecommunications services is also substantially competitive. Thus, 
while a BOC may achieve certain efficiencies and economies of scope by 
conducting all three categories of activity through the same section 
272 affiliate, it cannot thereby increase its ability to exercise 
market power in either the manufacturing, interLATA telecommunications 
services, or interLATA information services markets. Further, we note 
that section 273, which is the subject of a separate proceeding, 
establishes additional safeguards applicable to BOC manufacturing 
activities, which are intended to promote competition and prevent 
discrimination. For these reasons, we conclude that BOCs may conduct 
all, or some combination of, manufacturing activities, interLATA 
telecommunications services, and interLATA information services through 
the same section 272 affiliate.
    Further, we decline to adopt different requirements pursuant to 
section 272(b) for regulated and unregulated activities. The safeguards 
of section 272(b) apply to any ``separate affiliate required by'' 
section 272(a). Thus, the section 272(b) safeguards address the BOCs' 
potential to allocate costs improperly and to discriminate in favor of 
their section 272 affiliates, irrespective of the activities in which 
those affiliates engage.
4. Manufacturing Activities
    In the NPRM, we stated that BOCs may only engage in manufacturing 
activities through a separate affiliate that meets the requirements of 
section 272, and noted that section 273 sets forth additional 
safeguards applicable to BOC entry into manufacturing activities. 
Subsequent to the closing of the record in this proceeding, the 
Commission released a Notice of Proposed Rulemaking to clarify and 
implement the provisions of section 273. Several parties have raised 
arguments relating to the section 273 provisions on the record in this 
proceeding. Because this proceeding implements the non-accounting 
safeguards provisions of sections 271 and 272, arguments relating to 
the specific provisions of section 273 are more appropriately addressed 
in the section 273 proceeding. We note that BOCs must conduct their 
manufacturing activities through a section 272 separate affiliate, 
manufacture and provide telecommunications equipment and CPE in 
accordance with section 273, and comply with the regulations that the 
Commission promulgates to implement both sections 272 and 273.

B. Mergers/Joint Ventures of Two or More BOCs

1. Background
    In the NPRM, we tentatively concluded that, pursuant to sections 
271(i)(1) and 153(4)(B), if two or more of the BOCs combine their 
operations through merger or acquisition, the in-region states of the 
resultant entity shall include all of the in-region states of each of 
the BOCs involved in the merger/acquisition. We sought comment on 
whether the entry into a merger agreement or a joint venture 
arrangement by two or more BOCs affects the application of the section 
271 and 272 non-accounting separate affiliate and nondiscrimination 
requirements to those BOCs. We further sought comment on whether 
additional safeguards are required to ensure that these BOCs do not 
provide the affiliates of their merger partners with an unfair 
competitive advantage during the pendency of their merger agreement.
2. Discussion
    We note the unanimous support among parties that commented on the 
issue, and hereby affirm our tentative conclusion that, upon completion 
of a merger between or among BOCs, the in-region states of the merged 
entity shall include all of the in-region states of each of the BOCs 
involved in the merger. We decline, however, to adopt a general rule 
that would treat the regions of merging BOCs as combined prior to 
completion of the merger, for the purposes of applying the section 272 
separate affiliate and nondiscrimination safeguards. Section 272 
requires a BOC to provide certain services (interLATA 
telecommunications and information services and manufacturing 
activities) through one or more separate affiliates, and establishes 
nondiscrimination requirements that apply to the BOC's conduct and its 
relationship with these affiliates. Section 3(1), in turn, defines an 
``affiliate'' as ``a person that (directly or indirectly) owns or 
controls, is owned or controlled by, or is under common ownership and 
control with, another person.'' Prior to completion of a merger, the 
merging BOCs are neither affiliates, nor successors or assigns, of one 
another. Thus, entry into a merger agreement does not render the 
section 272 safeguards applicable to a BOC's relationship with its 
merger partner, nor to its relationship with its merger partner's 
affiliates. Moreover, treating the regions of merging BOCs as combined 
from the inception of a merger agreement might create considerable 
problems in applying the section 271 and 272 safeguards. For example, 
if BOC A were offering out-of-region interLATA services in BOC B's 
region at the time the two entered a merger agreement, BOC A might be 
required immediately to cease the provision of such services until it 
had received approval under section 271 to offer in-region interLATA 
services. That result would be both disruptive and confusing to 
customers.
    We further decline to adopt any additional regulations applicable 
to pending mergers or joint ventures between or among BOCs. We are 
persuaded that adequate protections against discriminatory and 
anticompetitive conduct already apply to mergers, acquisitions, and 
joint ventures among BOCs. As the DOJ and other commenters point out, 
these protections include the nondiscrimination obligations of sections 
201 and 202 of the Communications Act, which, among other things, 
prevent the BOCs from unjustly or unreasonably discriminating in 
providing facilities or services to interexchange carriers, and would 
thus govern a BOC's relationship with the long-distance affiliate of 
its merger partner. Continuing enforcement of the MFJ equal access 
requirements and pre-existing Commission-prescribed interconnection 
requirements, pursuant to section 251(g), also safeguards against BOC 
discrimination in favor of the affiliates of their merger partners. 
Further, as USTA notes, BOCs will be subject to the pre-merger review 
process under the Hart-Scott-Rodino amendment to the Clayton Act. See 
15 U.S.C. Sec. 18a. Moreover, as MCI suggests, we retain our authority 
to impose additional safeguards in the context of particular mergers, 
should circumstances demonstrate the need for such safeguards, on a 
case-by-case basis.

C. Previously Authorized Activities

1. Background
    In the NPRM, we sought comment on the meaning of and interaction 
between sections 271(f), 272(a)(2)(B)(iii), and 272(h). Specifically, 
we sought comment on whether, subject to the

[[Page 2936]]

exception established by section 272(a)(2)(B)(iii), section 272(h) 
requires the BOCs to come into compliance with the section 272 
safeguards with respect to all of the activities listed in section 
272(a)(2) (A)-(C) that they were providing on the date of enactment of 
the 1996 Act. We observed that section 272(a)(2)(B)(iii) establishes an 
exemption for ``previously authorized activities described in section 
271(f)'' from the separate affiliate requirement for ``origination of 
interLATA telecommunications services.'' We sought comment on whether 
Congress intended, through section 272(h), to require BOCs engaged in 
previously authorized manufacturing activities and interLATA 
information services to come into compliance with the section 272 
requirements.
2. Discussion
    Based on the record before us and our analysis of the relevant 
statutory terms, we conclude that BOCs may continue to provide all 
previously authorized services without interruption, pursuant to the 
terms and conditions set forth in the MFJ court orders that authorize 
those services. Previously authorized interLATA information services 
and manufacturing activities must come into compliance with the section 
272 separate affiliate requirements within one year. Previously 
authorized interLATA telecommunications services, which do not have to 
comply with the section 272 separate affiliate requirements, must 
continue to be provided pursuant to the terms and conditions of the MFJ 
court orders that authorize them.
    Section 271(f). As a general matter, section 271 addresses the 
timing and requirements for BOC entry into the interLATA market. 
Section 271(f) specifies that neither section 271(a) nor section 273 
``prohibits'' a BOC or its affiliate from engaging, at any time after 
enactment, in any activity previously authorized by an order of the MFJ 
court, subject to the terms and conditions imposed by the court. We 
conclude that the purpose of Section 271(f) is to preserve the BOCs' 
ability to engage in previously authorized activities, without first 
having to obtain section 271 authorization from the Commission. Section 
271(f) by its terms does not address, and thus does not preclude, 
application of the section 272 separate affiliate requirements to 
previously authorized services. Except for specifying that BOCs may 
continue to provide previously authorized services pursuant to the 
terms and conditions contained within the MFJ court order authorizing 
the service, section 271(f) does not address the manner in which BOCs 
must structure their provision of previously authorized services, or 
whether they must provide these services through a separate affiliate. 
These issues are addressed in section 272.
    Section 272(a)(2)(B)(iii). Section 272 sets forth separate 
affiliate and nondiscrimination requirements with which the BOC must 
comply in order to provide certain services. Separate subsections of 
section 272(a)(2) establish separate affiliate requirements for BOC 
provision of manufacturing activities (section 272(a)(2)(A)), 
origination of interLATA telecommunications services (section 
272(a)(2)(B)), and interLATA information services (section 
272(a)(2)(C)). Section 272(a)(2)(B)(iii) exempts ``previously 
authorized activities described in section 271(f)'' from the separate 
affiliate requirement for ``origination of interLATA telecommunications 
services.'' We conclude that, because this exemption appears in section 
272(a)(2)(B), it applies by its terms only to previously authorized 
activities that involve the origination of interLATA telecommunications 
services.
    Previously authorized activities described in section 271(f) may 
include both manufacturing activities and interLATA information 
services. Neither of these types of previously authorized activities, 
however, is exempt from the section 272 separate affiliate 
requirements, because neither section 272(a)(2)(A) nor section 
272(a)(2)(C) contains an exemption for previously authorized activities 
similar to the explicit exemption set forth in section 
272(a)(2)(B)(iii). We reject Ameritech's argument that section 
272(a)(2)(B)(iii) exempts previously authorized interLATA information 
services from the section 272 separate affiliate requirements, because 
section 272(a)(2)(B) applies only to origination of interLATA 
telecommunications services. Section 272(a)(2)(C) establishes the 
separate affiliate requirement for BOC provision of interLATA 
information services; there are exceptions to this requirement for 
electronic publishing services and alarm monitoring services, but there 
is no exception specified for previously authorized activities.
    Section 272(h). As the majority of commenters agree, section 272(h) 
establishes a one-year transition period for BOCs to comply with the 
separate affiliate requirements of section 272 for all services they 
were providing on the date of enactment of the 1996 Act that are not 
exempt from these requirements. Because we concluded in the preceding 
paragraphs that previously authorized interLATA information services 
and manufacturing activities are not exempt from the section 272 
separate affiliate requirements, BOCs providing these services must 
comply with those requirements within one year of enactment. We reject 
PacTel's argument that section 272(h) gives the BOCs one year to comply 
with the various requirements imposed by section 272 on their provision 
of exchange and exchange access services, because we find these 
requirements are effective immediately upon a BOC's entry into the in-
region interLATA market pursuant to section 271.
    Differential Treatment. We conclude that, with respect to requiring 
compliance with the section 272 separate affiliate requirements, 
Congress intended to treat previously authorized interLATA 
telecommunications services differently from previously authorized 
interLATA information services and manufacturing activities. Certain of 
the BOCs argue that such a distinction is justified because it would be 
more difficult to provide previously authorized interLATA 
telecommunications services on a separated basis. Ameritech, however, 
argues that certain previously authorized interLATA information 
services, such as TDDS, would be equally difficult to provide on a 
separated basis. Section 10 of the Communications Act requires us to 
forbear from applying any provision of the Act that is not necessary to 
ensure just and reasonable charges and practices in the 
telecommunications marketplace, or to protect consumers, if we find 
that such forbearance would promote competition and is consistent with 
the public interest. Thus, to the extent a BOC demonstrates, with 
respect to a particular previously authorized interLATA information 
service, that forbearance from the section 272 separate affiliate 
requirement fully satisfies the section 10 test, we must forbear from 
requiring the BOC to provide that service through a section 272 
affiliate.

D. Out-of-Region InterLATA Information Services

1. Background
    In the NPRM, we tentatively concluded that the BOCs must provide 
interLATA information services through a separate affiliate, regardless 
of whether these services are provided in-region or out-of-region. We 
observed that section 272(a)(2)(B)(ii) exempts out-of-region interLATA 
services from the

[[Page 2937]]

separate affiliate requirement for ``origination of interLATA 
telecommunications services,'' but there is no analogous exemption from 
the section 272(a)(2)(C) separate affiliate required for interLATA 
information services (other than electronic publishing and alarm 
monitoring services).
2. Discussion
    Based on the record before us and our own statutory analysis, we 
hereby adopt our tentative conclusion that BOCs must provide out-of-
region interLATA information services through a section 272 separate 
affiliate. Although we concluded above that ``interLATA information 
services'' are included within the term ``interLATA services'' as used 
in section 271(b), that determination does not alter the conclusion 
that BOCs must provide out-of-region interLATA information services 
through a section 272 separate affiliate. Section 271(b)(2) permits a 
BOC or its affiliate to provide interLATA services, including interLATA 
information services, that originate outside its in-region states, 
immediately upon enactment of the 1996 Act. Section 271, however, does 
not address whether such services must be provided through a separate 
affiliate; that issue is addressed in section 272(a).
    Section 272(a)(2)(B) requires a separate affiliate for the 
``origination of interLATA telecommunications services,'' but exempts 
from that requirement ``out-of-region services described in section 
271(b)(2).'' We conclude that the exception created by section 
272(a)(2)(B)(ii) extends only to out-of-region interLATA services that 
are telecommunications services. Section 272(a)(2)(C) requires a 
separate affiliate for ``interLATA information services,'' and exempts 
electronic publishing and alarm monitoring services from that 
requirement. There are no other exceptions to the requirements of 
section 272(a)(2)(C). As several commenters noted, section 272(a)(2)(B) 
explicitly excludes out-of-region services, but section 272(a)(2)(C) 
does not. We agree with MCI that the explicit exclusion of out-of-
region interLATA telecommunications services in one subsection of the 
statute, and the absence of such an express exclusion of out-of-region 
interLATA information services in another subsection of the same 
provision, suggests that Congress intended not to exclude the latter 
from the separate affiliate requirement. Therefore, we find that out-
of-region interLATA information services are not excluded from the 
separate affiliate requirement for interLATA information services.
    BellSouth has argued that requiring BOCs to provide out-of-region 
interLATA information services through a section 272 separate affiliate 
violates the First Amendment. As noted above, we find that this result 
is required by the statute. Although the courts have ultimate authority 
to determine the constitutionality of this and other statutes, we find 
it appropriate to state that we find BellSouth's argument to be without 
merit. BellSouth bases its argument on an assertion that as ``content-
related'' services, information services are commercial speech entitled 
to First Amendment protections. We conclude, first, that with respect 
to certain information services, a BOC neither provides, nor exercises 
editorial discretion over, the content of the information associated 
with those particular services, and therefore provision of those 
information services does not constitute speech subject to First 
Amendment protections. Second, to the extent that BOC provision of 
other interLATA information services constitutes speech for First 
Amendment purposes, the section 272 separate affiliate requirement 
neither prohibits the BOCs from providing such services, nor places any 
restrictions on the content of the information the BOCs may provide. 
Instead, the section 272 separate affiliate requirement is a content-
neutral restriction on the manner in which BOCs may provide interLATA 
information services, intended by Congress to protect against improper 
cost allocation and discrimination concerns. Thus, we conclude that the 
separate affiliate requirement imposed by section 272 of the 
Communications Act on BOC provision of interLATA information services 
does not violate the First Amendment.

E. Incidental InterLATA Services

1. Background
    In the NPRM, we sought comment on whether we should establish any 
non-accounting structural or nonstructural safeguards for BOC provision 
of the ``incidental interLATA services'' set forth in section 271(g), 
in light of section 271(h). Section 271(h) directs the Commission to 
ensure that the provision of incidental interLATA services ``will not 
adversely affect telephone exchange service ratepayers or competition 
in any telecommunications market,'' and states that the provisions of 
section 271(g) ``are intended to be narrowly construed.'' We also 
sought comment regarding the interplay between section 271(h) and 
section 254(k), which prohibits telecommunications carriers from 
``us[ing] services that are not competitive to subsidize services that 
are subject to competition.''
2. Discussion
    Section 271(b)(3) permits the BOCs to provide incidental interLATA 
services described in section 271(g) immediately after the date of 
enactment of the 1996 Act. Thus, unlike other in-region interLATA 
services, BOCs may provide incidental interLATA services originating in 
their own in-region states without receiving prior authorization from 
the Commission pursuant to section 271(d). Neither section 271(b) nor 
section 271(g) addresses whether BOCs must provide incidental interLATA 
services through a section 272 separate affiliate; this issue is 
addressed by section 272 itself.
    Scope of the section 272(a)(2)(B)(i) exemption. Section 
272(a)(2)(B)(i) sets forth an exception to the separate affiliate 
requirement imposed on ``origination of interLATA telecommunications 
services.'' Congress specifically limited this exception to the 
``incidental interLATA services described in paragraphs (1), (2), (3), 
(5), and (6) of section 271(g).'' Consistent with the analysis set 
forth in the two immediately preceding sections of this Order, we 
conclude that the section 272(a)(2)(B)(i) exception applies, by its 
terms, to the origination of incidental interLATA services that are 
telecommunications services.
    For the most part, the incidental interLATA services enumerated 
within the section 272(a)(2)(B)(i) exception are telecommunications 
services. (Congress deliberately excluded remote data storage and 
retrieval services that fall within section 271(g)(4) from the section 
272(a)(2)(B)(i) exception.) Although the incidental interLATA services 
set forth in sections 271(g)(1)(A), (B), and (C) include audio, video, 
and other programming services that do not appear to be solely 
telecommunications services, section 271(h) specifies that these 
incidental interLATA services ``are limited to those interLATA 
transmissions incidental to the provision by a [BOC] or its affiliate 
of video, audio, and other programming services that the company or its 
affiliate is engaged in providing to the public.'' We therefore 
conclude that, pursuant to section 272(a)(2)(B)(i), BOCs are not 
required to provide the interLATA telecommunications transmission 
incidental to provision of the programming services listed in sections 
271(g)(1)(A), (B), and (C) through a

[[Page 2938]]

section 272 separate affiliate. Moreover, alarm monitoring services, 
listed as incidental interLATA services under section 271(g)(1)(D), are 
explicitly excepted from the section 272 separate affiliate 
requirements under section 272(a)(2)(C).
    In addition, section 271(g)(2), which designates as ``incidental 
interLATA services'' the interLATA provision of ``two-way interactive 
video services or Internet services over dedicated facilities to or for 
elementary and secondary schools as defined in section 254(h)(5),'' may 
encompass services that are not solely telecommunications services. The 
statute does not classify educational interactive interLATA services as 
either telecommunications services or information services. We 
conclude, however, that the explicit inclusion of section 271(g)(2) in 
the list of services subject to the section 272(a)(2)(B)(i) exception 
exempts educational interactive interLATA services from the section 272 
separate affiliate requirements. This interpretation is consistent with 
Congress' clear intent, expressed in other provisions of the 1996 Act, 
to promote the provision of advanced telecommunications and information 
services, of which educational interactive interLATA services are 
examples, to eligible public and non-profit elementary and secondary 
schools. The inclusion of educational interactive interLATA services 
among the list of ``incidental interLATA services'' that BOCs could 
provide immediately upon enactment of the 1996 Act without prior 
Commission authorization promotes the congressional goal of rapidly 
deploying advanced telecommunications by permitting the BOCs to offer 
such services. Thus, we further find it reasonable to conclude that 
Congress did not wish to impose a significant regulatory barrier, in 
the form of a separate affiliate requirement, on BOC provision of these 
services.
    Additional regulation of incidental interLATA services. We decline 
to impose the section 272 separate affiliate requirements on incidental 
interLATA services that, as discussed above, are exempt from those 
requirements under section 272(a)(2)(B)(i). Section 272 itself does not 
require the BOCs to provide these services through a separate 
affiliate. Further, we conclude as a legal matter that neither section 
271(h) nor section 254(k) requires us to impose the section 272 
separate affiliate requirements on exempt incidental interLATA services 
in order to protect telephone exchange ratepayers or competition in the 
telecommunications market. Moreover, we decline to do so as a matter of 
policy, because we see no present need to impose structural separation 
requirements beyond those mandated by Congress in order to protect 
against improper cost allocation and access discrimination. We likewise 
decline to impose any other structural separation requirements on BOC 
provision of these services, as suggested by certain commenters. This 
decision comports with the Commission's prior determinations not to 
impose structural separation requirements in contexts in which it found 
that nonstructural safeguards provide sufficient protection against 
improper cost allocation and access discrimination (e.g., BOC provision 
of enhanced services).
    Under our rules, the BOCs are subject to existing nonstructural 
safeguards in their provision of incidental interLATA services, and we 
conclude that these safeguards are sufficient to protect telephone 
exchange ratepayers and competition in telecommunications markets, in 
accordance with section 271(h). For accounting purposes, incidental 
interLATA services will be treated as non-regulated services under our 
Part 32 affiliate transaction rules and Part 64 cost allocation rules, 
and accordingly costs associated with provision of those services may 
not be allocated to regulated services accounts. Further, at the 
federal level and in many states, the BOCs are subject to price cap 
regulation, which reduces their incentive to engage in strategic cost-
shifting behavior. The BOCs are also subject to the section 251 
interconnection and unbundling requirements, which compel them to make 
available to other telecommunications carriers the local network 
elements and local exchange facilities that such carriers may require 
to provide services comparable to the incidental interLATA services 
listed in section 271(g). Further, the BOCs are subject to network 
disclosure requirements imposed by section 251(c)(5), which require 
them to give timely information about network changes to their 
affiliates' competitors.
    Given the complement of nonstructural safeguards to which the BOCs 
are subject in their provision of incidental interLATA services, we 
find that the record in this proceeding does not justify the imposition 
of additional nonstructural safeguards on these services. We decline to 
extend to the integrated provision of incidental interLATA services any 
of the section 272(c) and 272(e) nondiscrimination requirements that 
depend on the existence of a section 272 affiliate, as suggested by 
AT&T. Further, we decline to adopt any additional unbundling 
requirements applicable to BOC provision of incidental interLATA 
services, as suggested by MCI. We agree with BellSouth that it would be 
inconsistent with the 1996 Act for us to require the BOCs to unbundle 
and make available interLATA transmission services that they are not 
authorized to provide except as components of an incidental interLATA 
service (i.e., without obtaining prior authorization under section 271 
or complying with the section 272 separation requirements). For the 
foregoing reasons, we decline to adopt any additional structural or 
nonstructural safeguards applicable specifically to BOC provision of 
incidental interLATA services.

F. InterLATA Information Services

1. Relationship Between Enhanced Services and Information Services
    a. Background. In the NPRM, we sought comment on the services that 
are included in the statutory definition of ``information service,'' 
and whether that term encompasses all activities that the Commission 
classifies as ``enhanced services.'' We noted that the statutory 
definition of ``information service'' is based on the definition used 
in the MFJ, and that prior to passage of the 1996 Act, neither the 
Commission nor the MFJ court resolved the question of whether the 
definition of enhanced services under the Commission's rules was 
synonymous with the definition of information services under the MFJ.
    b. Discussion. We conclude that all of the services that the 
Commission has previously considered to be ``enhanced services'' are 
``information services.'' We are persuaded by the arguments advanced by 
ITAA, CIX, and others, that the differently-worded definitions of 
``information services'' and ``enhanced services'' can and should be 
interpreted to extend to the same functions. We believe that 
interpreting ``information services'' to include all ``enhanced 
services'' provides a measure of regulatory stability for 
telecommunications carriers and ISPs alike, by preserving the 
definitional scheme under which the Commission exempted certain 
services from Title II regulation. We agree with ISPs that regulatory 
certainty and continuity benefits both large and small service 
providers. In sum, we find no basis to conclude that by using the MFJ 
term ``information services'' Congress intended a significant departure 
from the Commission's usage of ``enhanced services.''

[[Page 2939]]

    We also find, however, that the term ``information services'' 
includes services that are not classified as ``enhanced services'' 
under the Commission's current rules. Stated differently, we conclude 
that, while all enhanced services are information services, not all 
information services are enhanced services. As noted by U S West, 
``enhanced services'' under Commission precedent are limited to 
services ``offered over common carrier transmission facilities used in 
interstate communications,'' whereas ``information services'' may be 
provided, more broadly, ``via telecommunications.'' Further, we agree 
with BellSouth and AT&T that live operator telemessaging services that 
do not involve ``computer processing applications'' are information 
services, even though they do not fall within the definition of 
``enhanced services.''
    We further conclude that, subject to the exceptions discussed 
below, protocol processing services constitute information services 
under the 1996 Act. We reject Bell Atlantic's argument that 
``information services'' only refers to services that transform or 
process the content of information transmitted by an end-user, because 
we agree with Sprint that the statutory definition makes no reference 
to the term ``content,'' but requires only that an information service 
transform or process ``information.'' We also agree with ITI and ITAA 
that an end-to-end protocol conversion service that enables an end-user 
to send information into a network in one protocol and have it exit the 
network in a different protocol clearly ``transforms'' user 
information. We further find that other types of protocol processing 
services that interpret and react to protocol information associated 
with the transmission of end-user content clearly ``process'' such 
information. Therefore, we conclude that both protocol conversion and 
protocol processing services are information services under the 1996 
Act.
    This interpretation is consistent with the Commission's existing 
practice of treating end-to-end protocol processing services as 
enhanced services. We find no reason to depart from this practice, 
particularly in light of Congress' deregulatory intent in enacting the 
1996 Act. Treating protocol processing services as telecommunications 
services might make them subject to Title II regulation. Because the 
market for protocol processing services is highly competitive, such 
regulation is unnecessary to promote competition, and would likely 
result in a significant burden to small independent ISPs that provide 
protocol processing services. Thus, policy considerations support our 
conclusion that end-to-end protocol processing services are information 
services.
    We note that, under Computer II and Computer III, we have treated 
three categories of protocol processing services as basic services, 
rather than enhanced services, because they result in no net protocol 
conversion to the end-user. These categories include protocol 
processing: (1) involving communications between an end-user and the 
network itself (e.g., for initiation, routing, and termination of 
calls) rather than between or among users; (2) in connection with the 
introduction of a new basic network technology (which requires protocol 
conversion to maintain compatibility with existing CPE); and (3) 
involving internetworking (conversions taking place solely within the 
carrier's network to facilitate provision of a basic network service, 
that result in no net conversion to the end-user). We agree with PacTel 
that analogous treatment should be extended to these categories of ``no 
net'' protocol processing services under the statutory regime. Because 
``no net'' protocol processing services are information service 
capabilities used ``for the management, control, or operation of a 
telecommunications system or the management of a telecommunications 
service,'' they are excepted from the statutory definition of 
information service. Thus, ``no net'' protocol conversion services 
constitute telecommunications services, rather than information 
services, under the 1996 Act.
    We further find, as suggested by PacTel, that services that the 
Commission has classified as ``adjunct-to-basic'' should be classified 
as telecommunications services, rather than information services. In 
the NATA Centrex order, the Commission held that the enhanced services 
definition did not encompass adjunct-to-basic services. See 101 FCC 2d 
349, 359-361, Paras. 24-28 (1985). Although the latter services may 
fall within the literal reading of the enhanced service definition, 
they facilitate establishment of a basic transmission path over which a 
telephone call may be completed, without altering the fundamental 
character of the telephone service. Similarly, we conclude that 
``adjunct-to-basic'' services are also covered by the 
``telecommunications management exception'' to the statutory definition 
of information services, and therefore are treated as 
telecommunications services under the 1996 Act.
2. Distinguishing InterLATA Information Services Subject to Section 272 
From IntraLATA Information Services
    a. Background. In the NPRM, we sought comment on how to distinguish 
between interLATA information services, which are subject to the 
section 272 separate affiliate requirements, and intraLATA information 
services, which are not. In particular, we asked whether an information 
service should be considered an interLATA service only when the service 
actually involves an interLATA telecommunications transmission 
component, or, alternatively, when it potentially involves interLATA 
telecommunications transmissions (e.g., the service can be accessed 
across LATA boundaries). We further sought comment regarding how the 
manner in which a BOC structures its provision of an information 
service may affect whether the service is classified as interLATA.
    We also invited comment on whether a particular service for which a 
BOC had applied for or received an MFJ waiver should presumptively be 
treated as an interLATA information service subject to the separate 
affiliate requirements of section 272. In addition, we sought comment 
on whether we should presume that services provided by BOCs pursuant to 
CEI plans approved by the Commission prior to the enactment of the 1996 
Act are intraLATA information services.
    b. Discussion. InterLATA Transmission/Resale. We conclude that, as 
used in section 272, the term ``interLATA information service'' refers 
to an information service that incorporates as a necessary, bundled 
element an interLATA telecommunications transmission component, 
provided to the customer for a single charge. We find, as noted in the 
comments of AT&T, MCI, and the BOCs, that this definition of interLATA 
information service conforms to the MFJ precedent in this area. See 
United States v. Western Electric, 907 F.2d 160, 163 (D.C. Cir. 1990). 
We further conclude that a BOC provides an interLATA information 
service when it provides the interLATA telecommunications transmission 
component of the service either over its own facilities, or by 
reselling the interLATA telecommunications services of an interexchange 
provider. This conclusion also comports with MFJ precedent.
    USTA contends that BOC provision of interLATA transmission through 
resale should be permitted because it does not

[[Page 2940]]

raise improper cost allocation and discrimination concerns. This 
argument, however, does not address the key issue of what is required 
by the statute. As discussed above, we find that section 601(a) of the 
1996 Act indicates that Congress intended the provisions of the 1996 
Act to supplant the MFJ. Therefore, we conclude that the restrictions 
imposed by the 1996 Act on BOC provision of interLATA services, like 
the interLATA restrictions imposed under the MFJ, apply to services 
provided through resale, as well as to services provided through the 
BOC's own transmission facilities. Moreover, we decline to adopt 
PacTel's suggestion that end-user receipt of an ``interLATA benefit'' 
should be the test for determining whether an information service is 
interLATA. PacTel's proposed test is inconsistent with MFJ precedent 
and would be very difficult to administer. Finally, we reject the 
arguments raised by Sprint and MFS that we should classify all 
information services as interLATA services because of the difficulties 
inherent in distinguishing between interLATA and intraLATA information 
services. We conclude that it is possible to distinguish between 
interLATA and intraLATA information services by applying the rule 
established by this Order.
    InterLATA Access. We agree with AT&T and the BOCs that an 
information service may not be considered interLATA merely because it 
may be accessed on an interLATA basis by means independently chosen by 
the customer, such as a presubscribed interexchange carrier. In 
interpreting the statutory restrictions on BOC provision of interLATA 
information services, we are concerned not with the manner in which an 
information service is used, but rather with the components of the 
service that are provided by the BOC. When a BOC is neither providing 
nor reselling the interLATA transmission component of an information 
service that may be accessed across LATA boundaries, the statute does 
not require that service to be provided through a section 272 separate 
affiliate. We reject MFS's contention that, where an interLATA 
transmission service is necessary for a customer to obtain access to a 
particular BOC-provided information service, that information service 
should be considered interLATA, even if the necessary interLATA 
transmission component is separately provided by another carrier. In 
such circumstances, the BOC is not providing any interLATA services, 
and therefore is not required by section 272 to provide the information 
service in question through a separate affiliate.
    Moreover, as the BOCs point out, if we were to determine that the 
mere possibility of interLATA access was sufficient to classify an 
information service as an interLATA service, that rule would render any 
telecommunications service that carries traffic that originates in one 
LATA and terminates in another, including local exchange service and 
exchange access service, an interLATA service. Congress clearly did not 
intend that result.
    In addition, we agree with the BOCs that classifying information 
services as interLATA solely because end-users may obtain access to the 
service across LATA boundaries would represent a significant departure 
from Commission precedent, as well as from MFJ precedent. BOCs are 
currently providing a number of information services on an integrated 
basis pursuant to the Commission's Computer III regulations, and users 
may obtain access to some, if not all, of these services on an 
interLATA basis. If we were to determine that these services were 
interLATA services simply because end-users may obtain access across 
LATA boundaries, BOCs would have to change the manner in which they are 
providing many of these services, which would likely result in lost 
efficiency and disruption of services to customers. We see no basis in 
the statute to adopt such an interpretation, as sections 271 and 272 
are intended to govern the BOCs' provision of services that they were 
previously prohibited from providing under the MFJ, not services that 
they were previously authorized to provide under the MFJ.
    Bundling. As we concluded above, an interLATA information service 
incorporates a bundled interLATA telecommunications transmission 
component. When a customer obtains interLATA transmission service from 
an interexchange provider that is not affiliated with a BOC, the use of 
that transmission service in conjunction with an information service 
provided by a BOC or its affiliate does not make the information 
service a BOC interLATA service offering. A customer also may obtain an 
in-region interLATA telecommunications service from a BOC section 272 
affiliate that the customer uses in conjunction with an intraLATA 
information service provided by that affiliate or by the BOC itself. 
When such telecommunications and information services are provided, 
purchased, and priced separately, we conclude that they do not 
collectively constitute an interLATA information service offering by 
the BOC. (We note that even when an information service and interLATA 
transmission service are ostensibly separately priced, if the BOC 
offers special discounts or incentives to customers that take both 
services, this would constitute sufficient evidence of bundling to 
render the information service an interLATA information service.) In 
such a situation, the BOC would, of course, be required to provide the 
in-region interLATA transmission service pursuant to section 271 
authorization and the section 272 separate affiliate and 
nondiscrimination requirements. The BOC could choose to provide the 
separate, intraLATA information service either on an integrated basis, 
in compliance with the Commission's CEI and ONA requirements, or 
through a separate affiliate.
    Remote Databases/Network Efficiency. BOCs may not provide interLATA 
services in their own regions, either over their own facilities or 
through resale, before receiving authorization from the Commission 
under section 271(d). Therefore, we conclude that BOCs may not provide 
interLATA information services, except for information services covered 
by section 271(g)(4), in any of their in-region states prior to 
obtaining section 271 authorization. Section 271(g)(4) designates as an 
incidental interLATA service the interLATA provision by a BOC or its 
affiliate of ``a service that permits a customer that is located in one 
LATA to retrieve stored information from, or file information for 
storage in, information storage facilities of such company that are 
located in another LATA.'' Because BOCs were able to provide incidental 
interLATA services immediately upon enactment of the 1996 Act, they may 
provide interLATA information services that fall within the scope of 
section 271(g)(4) without receiving section 271(d) authorization from 
the Commission. Since section 271(g)(4) services are not among the 
incidental interLATA services exempted from section 272 separate 
affiliate requirements, however, they must be provided in compliance 
with those requirements. To the extent that parties have argued in the 
record that centralized data storage and retrieval services that fall 
within section 271(g)(4) either are not interLATA information services, 
or are not subject to the section 272 separate affiliate requirements, 
we specifically reject these arguments.
    We also reject the BOCs' argument that their use of interLATA 
transmission, outside the control of the end-user and solely to 
maximize network efficiencies, in connection with

[[Page 2941]]

the provision of an information service, does not render that 
information service interLATA in nature. Whenever interLATA 
transmission is a component of an information service, that service is 
an interLATA information service, unless the end-user obtains that 
interLATA transmission service separately, e.g., from its presubscribed 
interexchange provider. To the extent that BOCs are allowed to perform 
certain interLATA call processing functions associated with their 
provision of telephone exchange service or exchange access service in 
connection with an intraLATA information service, however, they may 
continue to do so without transforming that information service into an 
interLATA information service.
    We also reject PacTel's claim that a BOC's use of interLATA 
transmission solely for its own business convenience in providing an 
information service falls within the ``telecommunications management 
exception'' to ``information service.'' We disagree with PacTel's 
assertion that this practice is covered by the ``technical management 
exception,'' because the BOC would be providing interLATA transmission 
in connection with the management of an information service, not ``the 
management of a telecommunications service,'' as specified by section 
3(20). Further, as noted above, we believe that the 
``telecommunications management exception'' is analogous to the 
Commission's classification of certain services as ``adjunct-to-
basic;'' that is, it covers services that may fit within the literal 
reading of the information services definition, but that are used to 
facilitate the provision of a basic telecommunications transmission 
service, without altering the character of that service. In other 
words, the ``technical management exception'' relates to the 
classification of services as either telecommunications services or 
information services; it has no bearing upon the classification of 
either of these types of services as intraLATA or interLATA. As such, 
the ``telecommunications management exception'' provides no safe harbor 
for interLATA transmission services employed by BOCs in connection with 
the provision of information services.
    Presumptions Regarding Previously Authorized Information Services. 
With respect to information services that the BOCs were authorized to 
provide prior to passage of the 1996 Act, we conclude that as a matter 
of administrative convenience it is helpful to establish several 
rebuttable presumptions regarding intraLATA or interLATA 
classification. Thus, we will presume that information services that 
BOCs were authorized to provide pursuant to CEI plans, without MFJ 
waivers, are intraLATA information services. Similarly, we will presume 
that information services for which BOCs were required to obtain MFJ 
waivers are interLATA information services. We conclude that these 
presumptions are rebuttable, rather than conclusive, because the BOCs 
have noted that, for expediency purposes, they sometimes requested and 
obtained MFJ waivers in order to provide services that were not clearly 
interLATA in nature. Thus, a BOC would be able to rebut the presumption 
that an information service provided pursuant to an MFJ waiver is an 
interLATA information service by showing that it had obtained a waiver 
to provide the service on an intraLATA basis prior to 1991. Similarly, 
the presumption that an information service provided pursuant to a CEI 
plan is an intraLATA information service may be rebutted by a showing 
that the information service incorporates a bundled, interLATA 
telecommunications transmission component, as specified in this Order.
3. BOC-provided Internet Access Services
    a. Background. On June 6, 1996, the Common Carrier Bureau (Bureau) 
released an order approving a CEI plan filed by Bell Atlantic for the 
provision of Internet Access Service. MFS had filed comments opposing 
Bell Atlantic's plan, arguing, inter alia, that Bell Atlantic's 
Internet access service offering is an interLATA service that Bell 
Atlantic may only provide through a section 272 affiliate after 
obtaining section 271 authorization from the Commission. Following 
release of the Bell Atlantic CEI Plan Order, MFS filed a petition for 
reconsideration of that Order, raising similar arguments. At about the 
same time, Southwestern Bell Telephone Company (SWBT) filed a CEI plan 
for Internet Support Services. On July 25, 1996, one week after the 
Commission released the NPRM in this proceeding, MFS filed with the 
Commission a petition seeking to consolidate proceedings related to the 
Bell Atlantic CEI Plan Order reconsideration and the SWBT Internet 
support CEI plan with the instant proceeding, on the grounds that the 
three proceedings raise similar novel, policy, factual, and legal 
arguments. Although the NPRM in the instant proceeding did not 
specifically seek comment on the proper classification or regulatory 
treatment of BOC-provided Internet services and Internet access 
services under the 1996 Act, several parties discussed these matters in 
their comments, in the course of addressing how we should define 
``interLATA information services.''
    b. Discussion. The preceding sections of this Order establish a 
definition of ``interLATA information service'' that should assist the 
BOCs and other interested parties in determining the types of 
information services that the BOCs are statutorily-required to provide 
through section 272 affiliates. If a BOC's provision of an Internet or 
Internet access service (or for that matter, any information service) 
incorporates a bundled, in-region, interLATA transmission component 
provided by the BOC over its own facilities or through resale, that 
service may only be provided through a section 272 affiliate, after the 
BOC has received in-region interLATA authority under section 271. We 
believe that this is not the appropriate forum for considering whether 
the various specific Internet services provided by the BOCs are 
``interLATA information services'' because such determinations must be 
made on a case-by-case basis. We believe that the lawfulness of the 
specific Internet services provided by Bell Atlantic and SWBT is more 
appropriately analyzed in the context of the separate CEI plan 
proceedings regarding each service that are currently pending before 
the Bureau, consistent with the rules and policies enunciated in this 
rulemaking proceeding. Therefore, we deny MFS's request to consolidate 
proceedings related to the provision of Internet and Internet access 
services by Bell Atlantic and SWBT with the instant proceeding.
4. Impact of the 1996 Act on the Computer II, Computer III, and ONA 
requirements
    a. Background. In the NPRM, we concluded that, because the 1996 Act 
does not establish regulatory requirements for BOC provision of 
intraLATA information services, Computer II, Computer III, and ONA 
requirements continue to govern BOC provision of these services, to the 
extent that these requirements are consistent with the 1996 Act. We 
sought comment on which of the Commission's existing requirements were 
inconsistent with, or had been rendered unnecessary by, the 1996 Act, 
as well as on the specific provisions of the 1996 Act that supersede 
the existing requirements. We also sought comment on the impact of the 
statute on our pending Computer III Further Remand Proceedings.
    b. Discussion. Consistency of Commission's Computer II, Computer 
III, and ONA Rules with the 1996 Act.

[[Page 2942]]

We conclude that the Computer II, Computer III, and ONA requirements 
are consistent with the 1996 Act, and continue to govern BOC provision 
of intraLATA information services. By its terms, the 1996 Act imposes 
separate affiliate and nondiscrimination requirements on BOC provision 
of ``interLATA information services,'' but does not address BOC 
provision of intraLATA information services. We concluded above that, 
for the purposes of applying sections 271 and 272, interLATA 
information services must include a bundled interLATA transmission 
component. We further conclude, in light of our definition of interLATA 
information services, that BOCs are currently providing a number of 
information services on an intraLATA basis. We find that the BOCs may 
continue to provide such intraLATA information services on an 
integrated basis, in compliance with the nonstructural safeguards 
established in Computer III and ONA.
    We reject Bell Atlantic's conclusory assertions that the 1996 Act's 
customer proprietary network information (CPNI), network disclosure, 
nondiscrimination, and accounting provisions supersede various of the 
Commission's Computer III nonstructural safeguards. We also reject 
NYNEX's claim that the section 251 interconnection and unbundling 
requirements render the Commission's Computer III and ONA requirements 
unnecessary. Based on our review of the record in this proceeding, we 
conclude that the pending Computer III Further Remand Proceedings are 
the appropriate forum in which to examine the necessity of retaining 
any or all of these individual Computer III and ONA requirements. We 
therefore plan to issue a Further NPRM in that proceeding to determine 
how to regulate BOC provision of intraLATA information services in 
light of the 1996 Act.
    In the interim, the Commission's Computer II, Computer III, and ONA 
rules are the only regulatory means by which certain independent ISPs 
are guaranteed nondiscriminatory access to BOC local exchange services 
used in the provision of intraLATA information services. As noted 
above, the section 272 nondiscrimination requirements do not apply to 
BOC provision of intraLATA information services, and ISPs that are not 
telecommunications carriers cannot obtain interconnection or access to 
unbundled elements under section 251. Thus, we believe that continued 
enforcement of these safeguards is necessary pending the conclusion of 
the Computer III Further Remand Proceedings and establishes important 
protections for small ISPs that are not provided elsewhere in the Act.
    Requiring section 272 affiliates for intraLATA information 
services. We decline to require the BOCs to provide intraLATA 
information services through section 272 affiliates. It is clear that 
section 272 does not require the BOCs to offer intraLATA information 
services through a separate affiliate. We further decline to exercise 
our general rulemaking authority to impose such a requirement. We 
conclude that the record in this proceeding does not justify a 
departure from our determination, in Computer III, to allow BOCs to 
provide intraLATA information services on an integrated basis, subject 
to appropriate nonstructural safeguards. Some parties in this 
proceeding argue that we should harmonize our regulatory treatment of 
intraLATA information services provided by the BOCs with the section 
272 requirements imposed by Congress on interLATA information services. 
We invite these parties to comment on these matters in response to the 
Further NPRM we intend to issue in the Computer III Further Remand 
Proceedings.
    Application of Computer II, Computer III, and ONA requirements to 
section 272 affiliate activities. We conclude that a BOC that provides 
interLATA telecommunications services and information services through 
the same section 272 affiliate may bundle such services without 
providing comparably efficient interconnection to the basic underlying 
interLATA telecommunications services. Under our definition of 
``interLATA information service,'' as explained above, such service 
must include a bundled interLATA telecommunications element. Hence, to 
prohibit a BOC affiliate from bundling interLATA telecommunications and 
information services would effectively prevent the BOCs from offering 
any interLATA information services, a result clearly not contemplated 
by the statute. Further, we note that the market for information 
services is fully competitive, and the market for interLATA 
telecommunications services is substantially competitive. Thus, we see 
no basis for concern that a section 272 affiliate providing an 
information service bundled with an interLATA telecommunications 
service would be able to exercise market power. If, however, a BOC's 
section 272 affiliate were classified as a facilities-based 
telecommunications carrier (i.e., it did not provide interLATA 
telecommunications services solely through resale), the affiliate would 
be subject to a Computer II obligation to unbundle and tariff the 
underlying telecommunications services used to furnish any bundled 
service offering.
    Under our current regulatory regime, a BOC must comply fully with 
the Computer II separate subsidiary requirements in providing an 
information service in order to be relieved of the obligation to file a 
CEI plan for that service. We decline to adopt NYNEX's proposal that we 
find that all BOC information services provided through a section 272 
separate affiliate satisfy the Computer II separate subsidiary 
requirements, because we conclude that the record in this proceeding is 
insufficient to support such a conclusion. Instead, we intend to 
examine this issue further in the context of the Computer III Further 
Remand Proceedings. Further, we reject USTA's argument that ONA 
reporting requirements do not extend to intraLATA information services 
provided through a section 272 separate affiliate. BOCs must comply 
with the ONA requirements regardless of whether they provide 
information services on a separated or integrated basis.

G. Information Services Subject to Other Statutory Requirements

1. Electronic Publishing (section 274)
    a. Background. In the NPRM, we observed that, although electronic 
publishing is specifically identified as an information service, 
interLATA provision of electronic publishing is exempt from section 
272, and is instead subject to section 274. Noting that we had 
initiated a separate proceeding to clarify and implement, inter alia, 
the requirements of section 274, we sought comment on how to 
distinguish information services subject to the section 272 
requirements from electronic publishing services subject to the section 
274 requirements. We also invited parties to comment on whether, in 
situations involving services that do not clearly fall within either 
the definition of ``electronic publishing'' (section 274(h)(1)) or the 
enumerated exceptions thereto (section 274(h)(2)), we should identify 
as ``electronic publishing'' those services for which the carrier 
controls, or has a financial interest in, the content of information 
transmitted by the service.
    b. Discussion. Upon review of the record and further consideration, 
we conclude that it is not necessary to adopt the ``financial interest 
or control'' test in determining whether a particular BOC service 
involves the provision of electronic publishing, in addition to the 
definitions set forth in sections

[[Page 2943]]

274(h)(1) and 274(h)(2). Generally speaking, if a particular service 
does not appear to fit clearly within either the definition of 
``electronic publishing,'' set forth in section 274(h)(1), or the 
exceptions thereto listed in section 274(h)(2), determining the 
appropriate classification of that service will involve a highly fact-
specific analysis that is better performed on a case-by-case basis. In 
the context of such a case-by-case determination, the Commission may 
consider a number of factors, including whether the BOC controls, or 
has a financial interest in, the content of information transmitted to 
end-users. We also note that the definition of electronic publishing, 
as well as specific services encompassed by that definition, may be 
further refined in the Electronic Publishing proceeding.
    We also decline to adopt ITAA's suggestion that, because of 
potential difficulties in distinguishing between information services 
and electronic publishing services, we should impose substantially the 
same separate affiliate requirements on both. Such an approach would be 
directly contrary to the statute. Congress set forth distinct separate 
affiliate and nondiscrimination requirements in sections 272 and 274, 
and specified that the former apply to interLATA information services, 
while the latter apply to all BOC-provided electronic publishing 
services. To impose the section 272 requirements on electronic 
publishing services, or to impose the section 274 requirements on 
interLATA information services, would be inconsistent with the clear 
statutory scheme.
    Moreover, we specifically reject AT&T's contention that electronic 
publishing services are subject to the section 272 separate affiliate 
requirements, pursuant to section 272(a)(2)(B), which imposes a 
separate affiliate requirement on interLATA telecommunications 
services. Electronic publishing services, however, are specifically 
included within the statutory definition of information services. 
Accordingly, electronic publishing services would be subject to section 
272(a)(2)(C), which imposes a separate affiliate requirement on 
interLATA information services, except that section 272(a)(2)(C) 
specifically exempts ``electronic publishing (as defined in section 
274(h)).''
2. Telemessaging (section 260)
    a. Background. In the NPRM, we tentatively concluded that 
``telemessaging'' is an information service. We further tentatively 
concluded that BOC provision of telemessaging on an interLATA basis is 
subject to the section 272 separate affiliate requirements, in addition 
to the section 260 safeguards.
    b. Discussion. Based on our review of the comments and analysis of 
the statute, we hereby adopt our tentative conclusion that 
telemessaging is an information service. We reject PacTel's contention 
that live operator services do not constitute information services. 
Under the statute, live operator services ``used to record, transcribe, 
or relay messages'' are telemessaging services. Because these functions 
plainly provide ``the capability for * * * storing * * * or making 
available information'' via telecommunications, we conclude that live 
operator telemessaging services fall within the statutory definition of 
information services. We also adopt our tentative conclusion that BOCs 
that provide telemessaging services that meet the definition of 
interLATA information services must do so in accordance with the 
section 272 requirements, in addition to the section 260 requirements.

IV. Structural Separation Requirements of Section 272

A. Application of the Section 272(b) Requirements

    Section 272(b) of the Communications Act establishes five 
structural and transactional requirements for separate affiliate(s) 
established pursuant to section 272(a). We address each of the 
requirements below, with the exception of section 272(b)(2), which we 
discuss in the Accounting Safeguards Order.

B. The ``Operate Independently'' Requirement

1. Background
    Section 272(b)(1) states that a separate affiliate ``shall operate 
independently from the BOC.'' The Act does not elaborate on the meaning 
of the phrase ``operate independently.'' We stated in the NPRM that 
under principles of statutory construction, a statute should be 
interpreted so as to give effect to each of its provisions. We 
therefore tentatively concluded that the section 272(b)(1) ``operate 
independently'' provision imposes requirements beyond those contained 
in subsections 272(b)(2)-(5).
    As we observed in the NPRM, section 274(b) contains similar 
language to section 272(b)(1). It states that ``[a] separated affiliate 
or electronic publishing joint venture shall be operated independently 
from the [BOC].'' Subsections 274(b)(1)-(9) list several requirements 
that govern the relationship of an electronic publishing entity and the 
BOC with which it is affiliated. We sought comment on the relevance of 
the ``operated independently'' language of section 274(b) when 
construing the ``operate independently'' requirement of section 
272(b)(1).
    In addition, we sought comment on what rules, if any, we should 
adopt to implement the requirements of section 272(b)(1). Moreover, we 
asked whether we should impose one or more of the separation 
requirements established in the Computer II or Competitive Carrier 
proceedings.
    In the Computer II proceeding, the Commission required AT&T to 
provide enhanced services through a separate affiliate, a requirement 
that the Commission extended to the BOCs following divestiture. The 
Commission required the enhanced services subsidiary to ``have its own 
operating, marketing, installation and maintenance personnel for the 
services and equipment it offer[ed],'' to comply with information 
disclosure requirements, and to maintain its own books of account. The 
Commission prohibited the regulated entity and its enhanced services 
subsidiary from using in common any leased or owned physical space or 
property on which transmission equipment or facilities used in basic 
transmission services were located, barred them from sharing computer 
capacity, and limited the regulated entity's ability to provide 
software to the affiliate. Moreover, the Commission barred the enhanced 
services subsidiary from constructing, owning, or operating its own 
transmission facilities, thereby requiring it to obtain such facilities 
from a local exchange carrier pursuant to tariff.
    In the Competitive Carrier proceeding, the Commission prescribed 
the separation requirements to which independent LECs must conform to 
be regulated as nondominant in the provision of domestic, interstate, 
interexchange services. Specifically, an independent LEC must provide 
interstate interexchange services through an affiliate that:
    (1) maintains separate books of account; (2) does not jointly own 
transmission or switching facilities with its affiliated exchange 
telephone company; and (3) acquires that exchange telephone company's 
services at tariffed rates and conditions.
2. Discussion
    We adopt our tentative conclusion that the ``operate 
independently'' requirement of section 272(b)(1) imposes requirements 
beyond those listed in sections 272(b)(2)-(5). This conclusion is based 
on the principle of

[[Page 2944]]

statutory construction that a statute should be construed so as to give 
effect to each of its provisions.
    Relationship of Section 272(b)(1) to Section 274(b). Section 274(b) 
mandates that a separated affiliate or electronic publishing joint 
venture be ``operated independently'' and then lists nine specific 
requirements governing the relationship between a BOC and a separated 
affiliate. In contrast, section 272(b) imposes five structural and 
transactional requirements governing the relationship between a BOC and 
a section 272 affiliate, one of which is that the affiliate ``shall 
operate independently from the [BOC].'' The structural differences in 
the organization of the two sections suggest that the term ``operate 
independently'' in section 272(b)(1) should not be interpreted to 
impose the same obligations on a BOC as section 274(b). In particular, 
while the enumerated requirements of section 274(b) may be interpreted 
to define the term ``operated independently'' in that context, they do 
not define the term ``operate independently'' as used in section 
272(b). We agree with SBC that, because the requirements listed in 
sections 274(b)(1)-(9) of the Act overlap with the requirements of 
sections 272(b), (c), and (e), it would be redundant to incorporate all 
of the section 274(b) requirements into the ``operate independently'' 
requirement of section 272(b)(1).
     Defining ``Operate Independently.'' The requirements that we adopt 
to implement section 272(b)(1) are intended to prevent a BOC from 
integrating its local exchange and exchange access operations with its 
section 272 affiliate's activities to such an extent that the affiliate 
could not reasonably be found to be operating independently, as 
required by the statute. In order to protect against the potential for 
a BOC to discriminate in favor of a section 272 affiliate in a manner 
that results in the affiliate's competitors operating less efficiently, 
we seek to ensure that a section 272 affiliate and its competitors 
enjoy the same level of access to the BOC's transmission and switching 
facilities. Accordingly, we conclude that operational independence 
precludes the joint ownership of transmission and switching facilities 
by a BOC and its section 272 affiliate, as well as the joint ownership 
of the land and buildings where those facilities are located. 
Furthermore, operational independence precludes a section 272 affiliate 
from performing operating, installation, and maintenance functions 
associated with the BOC's facilities. Likewise, it bars a BOC or any 
BOC affiliate, other than the section 272 affiliate itself, from 
performing operating, installation, or maintenance functions associated 
with the facilities that the section 272 affiliate owns or leases from 
a provider other than the BOC with which it is affiliated. Consistent 
with these requirements and those established pursuant to sections 
272(b)(5) and 272(c)(1), a section 272 affiliate may negotiate with an 
affiliated BOC on an arm's length and nondiscriminatory basis to obtain 
transmission and switching facilities, to arrange for collocation of 
facilities, and to provide or to obtain services other than those 
expressly prohibited herein.
    We agree with several commenters that joint ownership of 
transmission and switching facilities and the property on which they 
are located would permit such substantial integration of the BOCs' 
local operations with their interLATA activities as to preclude 
independent operation, in violation of section 272(b)(1). Imposing a 
prohibition on such joint ownership also avoids the need to allocate 
the costs of such transmission and switching facilities between BOC 
activities and the competitive activities in which a section 272 
affiliate may be involved. We agree with the claims of some commenters 
that, because the costs of wired telephony networks and network 
premises are largely fixed and largely shared among local, access, and 
other services, sharing of switching and transmission facilities may 
provide a significant opportunity for improper allocation of costs 
between the BOC and its section 272 affiliate.
    By prohibiting joint ownership of transmission and switching 
facilities, we also reduce the potential for a BOC to discriminate in 
favor of its section 272 affiliate. Consistent with this purpose, we 
define transmission and switching facilities broadly to include the 
facilities used to provide local exchange and exchange access service. 
The prohibition ensures that a section 272 affiliate must obtain any 
such facilities pursuant to section 272(b)(5), which requires all 
transactions between a BOC and its section 272 affiliate to be on an 
arm's length basis and reduced to writing. Requiring section 272 
affiliates to obtain transmission and switching facilities from a BOC 
on an arm's length basis will increase the transparency of such 
transactions, thereby facilitating monitoring and enforcement of the 
section 272 requirements. Moreover, a section 272 affiliate and its 
interLATA competitors will have to follow the same procedures when 
obtaining services and facilities from a BOC. As described below, 
sections 272(c) (1) and (e) require a section 272 affiliate to obtain 
services and facilities on the same rates, terms, and conditions 
available to unaffiliated entities. Contrary to the suggestion of some 
commenters, those nondiscrimination safeguards would offer little 
protection if a BOC and its section 272 affiliate were permitted to own 
transmission and switching facilities jointly. To the extent that a 
section 272 affiliate jointly owned transmission and switching 
facilities with a BOC, the affiliate would not have to contract with 
the BOC to obtain such facilities, thereby precluding a comparison of 
the terms of transactions between a BOC and a section 272 affiliate 
with the terms of transactions between a BOC and a competitor of the 
section 272 affiliate. Together, the prohibition on joint ownership of 
facilities and the nondiscrimination requirements should ensure that 
competitors can obtain access to transmission and switching facilities 
equivalent to that which section 272 affiliates receive.
    The requirement that a BOC and its section 272 affiliate not 
commonly own the land and buildings where their transmission and 
switching facilities are located, like the prohibition on joint 
ownership of facilities, should ensure that a section 272 affiliate and 
its competitors both receive the best available access to transmission 
and switching facilities. It does not, however, preclude a section 272 
affiliate from collocating its equipment in end offices or on other 
property owned or controlled by its affiliated BOC. Rather, as IDCMA 
recognizes, the requirement should ensure that collocation agreements 
between a BOC and its section 272 affiliate are reached pursuant to 
arm's length negotiations and that the same collocation opportunities 
are available to similarly situated non-affiliated entities. Moreover, 
the ban on joint ownership of facilities should protect local exchange 
competitors that request physical collocation by ensuring that a BOC's 
section 272 affiliate does not obtain preferential access to the 
limited available space in the BOC's central office.
    We decline to read the ``operate independently'' requirement to 
impose a blanket prohibition on joint ownership of property by a BOC 
and a section 272 affiliate. Rather, we limit the restriction to joint 
ownership of transmission and switching facilities and the land and 
buildings where those facilities are located. We conclude that the 
prohibition we have adopted should ensure that the section 272 
affiliate's

[[Page 2945]]

competitors gain nondiscriminatory access to those transmission and 
switching facilities that both section 272 affiliates and their 
competitors may be unable to obtain from other sources. We find that 
joint ownership of other property, such as office space and equipment 
used for marketing or the provision of administrative services, may 
provide economies of scale and scope without creating the same 
potential for discrimination by the BOCs. Moreover, we believe that the 
Commission's accounting rules; the separate books, records, and 
accounts requirement of section 272(b); and the audit requirement of 
section 272(d) provide adequate protection against the potential for 
improper cost allocation.
    We further conclude that allowing the same personnel to perform the 
operating, installation, and maintenance services associated with a 
BOC's network and the facilities that a section 272 affiliate owns or 
leases from a provider other than the BOC would create the opportunity 
for such substantial integration of operating functions as to preclude 
independent operation, in violation of section 272(b)(1). Regardless of 
whether the BOC or the section 272 affiliate were to provide such 
services, we agree with AT&T that allowing the same individuals to 
perform such core functions on the facilities of both entities would 
create substantial opportunities for improper cost allocation, in terms 
of both the personnel time spent in performing such functions and the 
equipment utilized. We conclude, as we did in the BOC Separations 
Order, 49 FR 1190 (January 10, 1984), that allowing the sharing of such 
services would require ``excessive, costly and burdensome regulatory 
involvement in the operation, plans and day-to-day activities of the 
carrier * * * to audit and monitor the accounting plans necessary for 
such sharing to take place.'' Accordingly, we read section 272(b)(1) to 
bar a section 272 affiliate from contracting with a BOC or another 
entity affiliated with the BOC to obtain operating, installation, and 
maintenance functions associated with the section 272 affiliate's 
facilities. As stated above, we believe that a prohibition on joint 
ownership of transmission and switching facilities is necessary to 
ensure that a BOC complies with the nondiscrimination requirements of 
section 272. Consistent with that approach, we further interpret the 
term ``operate independently'' to bar a BOC from contracting with a 
section 272 affiliate to obtain operating, installation, or maintenance 
functions associated with the BOC's facilities. Allowing a BOC to 
contract with the section 272 affiliate for operating, installation, 
and maintenance services would inevitably afford the affiliate access 
to the BOC's facilities that is superior to that granted to the 
affiliate's competitors.
    We clarify that section 272(b)(1) does not preclude a BOC or a 
section 272 affiliate from providing telecommunications services to one 
another, so long as each entity performs itself, or obtains from an 
unaffiliated third party, the operating, installation, and maintenance 
functions associated with the facilities that it owns or leases from an 
entity unaffiliated with the BOC. In particular, if a section 272 
affiliate obtains unbundled elements from a BOC, that BOC can perform 
the operating, installation, and maintenance functions associated with 
those facilities. Moreover, we recognize the need for an exception to 
the prohibition on shared operating, installation, and maintenance 
services to allow the BOC to obtain support services for sophisticated 
equipment purchased from the affiliate on a compensatory basis. For 
instance, the BOC could contract with the section 272 affiliate for the 
installation, maintenance, or repair of equipment, or the affiliate 
could train the BOC's personnel to perform such functions. We further 
note that the limited prohibition on shared services that we adopt is 
consistent with section 272(e)(4), which states that a BOC or BOC 
affiliate that is subject to section 251(c) ``may provide any interLATA 
or intraLATA facilities or services to its interLATA affiliate if such 
services or facilities are made available to all carriers at the same 
rates and on the same terms and conditions.'' As we discuss below, 
section 272(e)(4) does not grant a BOC the authority to provide 
particular services to its affiliate, but rather prescribes the manner 
in which a BOC must provide those services that it is otherwise 
authorized to provide. Thus, section 272(e)(4) does not grant a BOC the 
authority to provide operating, installation, and maintenance services 
associated with the facilities that a section 272 affiliate owns or 
leases from a provider other than the BOC.
    In imposing these requirements, we reject the contention of some 
commenters that Congress considered and rejected a prohibition on the 
joint ownership of telecommunications transmission or switching 
equipment or other property. Although the House bill contained such a 
prohibition, the Senate bill did not. The Joint Explanatory Statement 
indicates merely that the conference committee adopted the Senate 
version of this provision with several modifications and does not offer 
any specific explanation for the exclusion of the joint ownership 
restriction. In these circumstances, our obligation is to interpret the 
language of section 272(b)(1) in a manner consistent with its purpose, 
which is to ensure the operational independence of a section 272 
affiliate from its affiliated BOC.
    The limited prohibition on shared services that we impose rests on 
the ``operate independently'' requirement of section 272(b)(1), rather 
than the requirement of section 272(b)(3) that a BOC and its section 
272 affiliate have ``separate officers, directors, and employees.'' 
Accordingly, we reject the statutory construction argument advanced by 
several BOCs, which is predicated on the text of the latter provision. 
Those BOCs argue that, if a rule against separate employees were 
sufficient to prevent the sharing of in-house services, Congress would 
not have prohibited a BOC from engaging in purchasing, installation, 
maintenance, hiring, training, and research and development for the 
separated affiliate, in addition to forbidding the BOC and its 
separated affiliate from having common officers, directors, and 
employees, in section 274(b).
    We believe it is consistent with both the letter and purposes of 
section 272 to strike an appropriate balance between allowing the BOCs 
to achieve efficiencies within their corporate structures and 
protecting ratepayers against improper cost allocation and competitors 
against discrimination. We decline to impose additional structural 
separation requirements given the nondiscrimination safeguards, the 
biennial audit requirement, and other public disclosure requirements 
imposed by section 272. In combination with the accounting protections 
established in the Accounting Safeguards Order, we believe the 
requirements set forth herein will protect against potential 
anticompetitive behavior.
    In particular, we decline to read the ``operate independently'' 
requirement to impose a prohibition on all shared services. We 
recognize the inherent tension between the ``operate independently'' 
requirement and allowing the integration of services. As we discuss 
further below, however, we believe the economic benefits to consumers 
from allowing a BOC and its section 272 affiliate to derive the 
economies of scale and scope inherent in the integration of some 
services outweigh any potential for competitive harm created thereby. 
Therefore, we permit the sharing of administrative and other services. 
For example, we read

[[Page 2946]]

section 272(b)(1) not to preclude a BOC and a section 272 affiliate 
from contracting with one another to provide marketing services.
    In construing other provisions of section 272, we address the 
concerns of those commenters who urge us to interpret section 272(b)(1) 
to prohibit a BOC and a section 272 affiliate from engaging in various 
forms of joint research and development. As a preliminary matter, we 
note that the MFJ Court considered equipment design and development to 
be an integral part of ``manufacturing,'' as the term was used in the 
MFJ. We emphasize that to the extent that research and development is a 
part of manufacturing, it must be conducted through a section 272 
affiliate, pursuant to section 272(a). To the extent that a BOC seeks 
to develop services for or with its section 272 affiliate, the BOC must 
develop services on a nondiscriminatory basis for or with other 
entities, pursuant to section 272(c)(1).
    Finally, although a number of commenters support a Computer II-type 
prohibition on a section 272 affiliate's ability to construct, own, or 
operate its own local exchange facilities, we conclude that such a 
prohibition is not required by the language of section 272(b)(1). As 
several BOCs suggest, limiting a section 272 affiliate to resale would 
not necessarily increase the affiliate's operational independence, 
particularly if the affiliate had to acquire facilities from its 
affiliated BOC as a result of the requirement.

C. Section 272(b)(3) and Shared Services

1. Background
    In the NPRM, we tentatively concluded that the section 272(b)(3) 
requirement that a BOC and its section 272 affiliate have ``separate 
officers, directors, and employees'' prohibits the sharing of in-house 
functions, including operating, installation, and maintenance, as well 
as administrative services. We noted that, pursuant to the Computer II 
proceeding, the Commission allowed AT&T and its enhanced services 
subsidiaries to share certain administrative services--accounting, 
auditing, legal services, personnel recruitment and management, 
finance, tax, insurance, and pension services--on a cost reimbursable 
basis, but required the subsidiary to have its own operating, 
marketing, installation, and maintenance personnel for the services and 
equipment it offered. We sought comment on whether section 272(b)(3) 
forbids the sharing of outside services or other types of personnel 
sharing.
    In the context of our discussion of section 272(g), we sought 
comment on the related question of whether a section 272 affiliate must 
purchase marketing services from an affiliated BOC on an arm's length 
basis, pursuant to section 272(b)(5). Moreover, we sought comment on 
whether it is necessary to require a BOC and its section 272 affiliate 
to contract jointly with an outside marketing entity for joint 
marketing of interLATA and local exchange services in order to comply 
with section 272(b)(3). Finally, we invited parties to comment on the 
corporate and financial arrangements that are necessary to comply with 
sections 272(g)(2), 272(b)(3), and 272(b)(5).
2. Discussion
    Sharing of Services. Based on the record before us, we decline to 
prohibit the sharing of services other than operating, installation, 
and maintenance services, as described above. We clarify that ``sharing 
of services'' means the provision of services by the BOC to its section 
272 affiliate, or vice versa. In response to our tentative conclusion 
on this issue in the NPRM, the BOCs have argued persuasively that such 
a prohibition is neither required as a matter of law, nor desirable as 
a matter of policy. We note that section 272(b)(3) on its face is 
silent on the issue of shared services. We are persuaded by the 
arguments of the BOCs that the section 272(b)(3) requirement that a BOC 
and a section 272 affiliate have separate officers, directors, and 
employees simply dictates that the same person may not simultaneously 
serve as an officer, director, or employee of both a BOC and its 
section 272 affiliate. Thus, as MFS asserts, an individual may not be 
on the payroll of both a BOC and a section 272 affiliate. As discussed 
below, to the extent that a BOC provides services to its section 272 
affiliate, it must provide them to other entities on the same rates, 
terms, and conditions, pursuant to section 272(c)(1).
    We also decline to impose a prohibition on the sharing of services 
other than operating, installation, and maintenance services, on policy 
grounds. We find that, if we were to prohibit the sharing of services, 
other than those restricted pursuant to section 272(b)(1), a BOC and a 
section 272 affiliate would be unable to achieve the economies of scale 
and scope inherent in offering an array of services. We do not believe 
that the competitive benefits of allowing a BOC and a section 272 
affiliate to achieve such efficiencies are outweighed by a BOC's 
potential to engage in discrimination or improper cost allocation. As 
we have noted, the Commission permitted the sharing of administrative 
services in the Computer II Final Order, 45 FR 31319 (May 13, 1980), on 
the grounds that ``[w]ith an appropriate accounting system, whatever 
administrative efficiencies may exist are preserved.'' We reject the 
arguments of some parties that, because of changes in the 
telecommunications marketplace and the language of the 1996 Act, a 
different outcome is warranted in this case.
    We recognize that allowing the sharing of in-house services will 
require a BOC to allocate the costs of such services between the 
operating company and its section 272 affiliate and provide 
opportunities for improper cost allocation, exchanges of information, 
and discriminatory treatment that may not be revealed in a subsequent 
audit. Indeed, in the Computer II proceeding, the Commission indicated 
that a major reason for prohibiting the sharing of particular services, 
such as marketing services, was its desire to eliminate ``the inherent 
difficulties in allocating joint and common costs.'' For these reasons, 
we conclude that a BOC and a section 272 affiliate may share in-house 
services with each other only to the extent that such sharing is 
consistent with sections 272(b)(1), 272(b)(5), and 272(c)(1) of the 
Act.
    Consistent with section 272(b)(1), a BOC and its section 272 
affiliate may not share operating, installation, and maintenance 
services, as discussed above. In addition, as we conclude in the 
Accounting Safeguards Order, an agreement to provide in-house services 
by a BOC to its section 272 affiliate (or vice versa) constitutes a 
transaction between that BOC and its section 272 affiliate, so that the 
requirements of section 272(b)(5) govern. Accordingly, such 
transactions must be conducted on an arm's length basis, reduced to 
writing, and made available for public inspection. Moreover, such 
transactions must be consistent with the affiliate transaction rules, 
as modified in the Accounting Safeguards Order. In addition, the 
section 272 requirements that a BOC and its section 272 affiliate 
maintain separate books, records, and accounts, and be subject to an 
audit every two years should strengthen the ability of competitors and 
regulators to detect any inequities in cost allocation for shared 
services. We agree with commenters who contend that, in any event, 
federal price cap regulation reduces a BOC's incentives to allocate 
costs improperly. Finally, section 272(c)(1) ensures that to the extent 
that

[[Page 2947]]

a BOC provides services to its section 272 affiliate, it must make them 
available to the affiliate's competitors on the same rates, terms, and 
conditions.
    We further conclude that section 272(b)(3) does not preclude the 
parent company of the BOC and the section 272 affiliate from performing 
functions for both the BOC and the section 272 affiliate, subject to 
the requirements of section 272(b)(1). Similarly, an affiliate of the 
BOC, such as a services affiliate, could provide services to both a BOC 
and a section 272 affiliate. We are not persuaded by claims that the 
sharing of services provided to a BOC and its section 272 affiliate by 
a parent company or another BOC affiliate would allow the BOC and the 
section 272 affiliate to achieve an unacceptable level of integration. 
Instead, we agree with the view that the section 272(b)(3) separate 
employees requirement extends only to the relationship between a BOC 
and its section 272 affiliate. To the extent that the BOC contracts 
with an unregulated affiliate, it is subject to the affiliate 
transaction rules. Moreover, a parent company or a BOC affiliate that 
performs services for both a BOC and its section 272 affiliate must 
fully document and properly apportion the costs incurred in furnishing 
such services.
    Consistent with our conclusions, we decline to read section 
272(b)(3) to preclude the sharing of marketing services. Given that 
section 272(g) expressly contemplates that the each entity may market 
or sell the services of the other, we conclude that a BOC and its 
section 272 affiliate may provide marketing services for each other. We 
agree with those commenters that assert that the entities must provide 
such services pursuant to arm's length transactions, consistent with 
the requirements of section 272(b)(5). Moreover, the parent of a BOC 
and its section 272 affiliate or another BOC affiliate may perform 
marketing functions for both entities.
    Services Provided by an Outside Entity. We further conclude that 
section 272(b)(3) does not prohibit a BOC and its section 272 affiliate 
from obtaining services from the same outside supplier. Indeed, we find 
no statutory support for limiting permissible outsourcing, as proposed 
by MCI or Time Warner.
    Nor do we construe section 272(b)(3), when read in light of section 
272(b)(1), to require a BOC and a section 272 affiliate to contract 
with outside entities to perform their joint marketing services. We 
agree with the Citizens for a Sound Economy Foundation that such a 
requirement would reduce the BOCs' ability to serve consumers without 
providing additional protection against anticompetitive behavior. Each 
entity, however, must pay its full share of any outsourced services 
that it receives.
    Other activities. We reject AT&T's request that we interpret 
section 272(b)(3) to prohibit compensation schemes that base the level 
of remuneration of BOC officers, directors, and employees on the 
performance of the section 272 affiliate, or vice versa. We conclude 
that tying the compensation of an employee of a section 272 affiliate 
to the performance of a Regional Holding Company and all of its 
enterprises as a whole, including the performance of the BOC, does not 
make that individual an employee of the BOC. Similarly, tying the 
compensation of a BOC employee to the performance of a Regional Holding 
Company and all of its enterprises as a whole, including the 
performance of the section 272 affiliate, does not make that individual 
an employee of the section 272 affiliate.

E. Section 272(b)(4)

1. Background
    Section 272(b)(4) states that a section 272 affiliate ``may not 
obtain credit under any arrangement that would permit a creditor, upon 
default, to have recourse to the assets of the [BOC].'' In the NPRM, we 
tentatively concluded ``that a BOC may not co-sign a contract or any 
other instrument with a separate affiliate that would allow the 
affiliate to obtain credit in a manner that violates'' this section. We 
sought comment on what other types of activities section 272(b)(4) 
prohibits, whether the Commission should establish specific 
requirements regarding those activities, and the relative costs and 
benefits of such regulation.
2. Discussion
    As we stated in the NPRM, the intent of this provision is to 
protect ratepayers from shouldering the cost of a default by a section 
272 affiliate. We adopt our tentative conclusion that section 272(b)(4) 
prohibits a BOC from co-signing a contract or any other instrument with 
a section 272 affiliate that would allow the affiliate to obtain credit 
in a manner that grants the creditor recourse to the BOC's assets in 
the event of default by the section 272 affiliate. Moreover, because 
the provision precludes the section 272 affiliate from obtaining credit 
under ``any arrangement that would permit a creditor, upon default, to 
have recourse to the assets of the [BOC],'' we find that section 
272(b)(4) likewise prohibits the parent of a BOC or any non-272 
affiliate from co-signing a contract or any other arrangement with the 
BOC's section 272 affiliate that would allow the creditor to obtain 
such recourse to the BOC's assets in the event of default by the 
section 272 affiliate. Indeed, we conclude that section 272(b)(4) 
prohibits a section 272 affiliate from entering into any arrangement to 
obtain credit that permits the lender recourse to the BOC in the event 
of default.
    While preventing the affiliate from jeopardizing ratepayer assets, 
we conclude that section 272(b)(4) does not forbid a section 272 
affiliate from using assets other than its own as collateral when 
seeking credit. To impose such a restriction where, as here, it is not 
needed to protect ratepayer assets, would force section 272 affiliates 
to operate inefficiently, to the detriment of consumers and 
competition. In particular, we agree with MCI and Sprint that a BOC's 
parent could secure credit, whether through the issuance of bonds or 
otherwise, for the benefit of the section 272 affiliate, provided that 
BOC assets are not at risk.

F. Section 272(b)(5)

1. Background
    Section 272(b)(5) states that an affiliate ``shall conduct all 
transactions with the [BOC] of which it is an affiliate on an arm's 
length basis with any such transactions reduced to writing and 
available for public inspection.'' In the NPRM, we sought comment on 
whether this provision necessitates the adoption of any non-accounting 
safeguards.
2. Discussion
    We conclude that we need not adopt additional non-accounting 
safeguards to implement section 272(b)(5). In the Accounting Safeguards 
Order, we address the definition of ``transactions'' and consider the 
provision's requirement that all transactions be ``reduced to writing 
and available for public inspection.'' Moreover, in our discussion of 
sections 272(b)(1) and (b)(3), we make clear that ``transactions'' 
include the provision of services and transmission and switching 
facilities by the BOC and its affiliate to one another. We reject 
CompTel's proposal to adopt additional requirements, which are 
addressed generally in other parts of this Order and the companion 
Accounting Safeguards Order.

 V. Nondiscrimination Safeguards

    As we observed in the NPRM, after a BOC enters a competitive 
market, such as long distance, it may have an incentive to use its 
control of local exchange facilities to discriminate against its 
affiliate's rivals. Section

[[Page 2948]]

272(c) of the Act responds to these competitive concerns by 
establishing nondiscrimination safeguards that apply to the BOCs' 
provision of manufacturing, interLATA telecommunications, and interLATA 
information services. We address the requirements of this section 
below.

A. Relationship of Section 272(c)(1) and Pre-existing Nondiscrimination 
Requirements

1. Background
    Section 272(c)(1) states that ``[i]n its dealings with its 
affiliate described in subsection (a), a [BOC] (1) may not discriminate 
between that company or affiliate and any other entity in the provision 
or procurement of goods, services, facilities, and information, or in 
the establishment of standards.'' In the NPRM, we sought comment on the 
relationship between the nondiscrimination obligations imposed by 
sections 272(c)(1) and the Commission's pre-existing nondiscrimination 
obligations in sections 201 and 202. In particular, we sought comment 
on whether the flat prohibition against discrimination in section 
272(c)(1) imposes a stricter standard for compliance than the ``unjust 
and unreasonable'' standard in section 202.
2. Discussion
    We find that section 272(c)(1) establishes an unqualified 
prohibition against discrimination by a BOC in its dealings with its 
section 272 affiliate and unaffiliated entities. Section 202(a), by 
contrast, prohibits ``any unjust or unreasonable discrimination * * *, 
or * * * any undue or unreasonable preference or advantage.'' Because 
the text of the section 272(c)(1) nondiscrimination bar differs from 
the section 202(a) prohibition, we conclude that Congress did not 
intend section 272's prohibition against discrimination in the 1996 Act 
to be synonymous with the ``unjust and unreasonable'' discrimination 
language used in the 1934 Act, but rather, intended a more stringent 
standard. We therefore reject the arguments of those who argue that the 
section 272(c)(1) standard is not materially different from the 
standard in section 202.

 B. Meaning of Discrimination in Section 272(c)(1)

1. Background
    We tentatively concluded in the NPRM that the prohibition against 
discrimination in section 272(c)(1) means, at a minimum, that BOCs must 
treat all other entities in the same manner as they treat their section 
272 affiliates, and must provide and procure goods, services, 
facilities, and information to and from these other entities under the 
same terms, conditions, and rates. We noted, however, that a requesting 
entity may have equipment with different technical specifications than 
the equipment of the BOC section 272 affiliate. We sought comment, 
therefore, on whether the terms of section 272(c)(1) could be construed 
to require a BOC to provide a requesting entity with a quality of 
service or ``functional outcome'' identical to that provided to its 
affiliate even if this would require the BOC to provide goods, 
facilities, services, or information to a requesting entity that are 
different from those provided to the affiliate.
2. Discussion
    We affirm our tentative conclusion that BOCs must treat all other 
entities in the same manner as they treat their section 272 affiliates. 
We conclude therefore that, pursuant to section 272(c)(1), a BOC must 
provide to unaffiliated entities the same goods, services, facilities, 
and information that it provides to its section 272 affiliate at the 
same rates, terms, and conditions. We decline, as some commenters 
suggest, to interpret section 272(c)(1) more broadly to conclude that a 
BOC must provide unaffiliated entities different goods, services, 
facilities, and information than it provides to its section 272 
affiliate in order to ensure that it is providing the same quality of 
service or functional outcome to both its affiliate and unaffiliated 
entities. To do so would, in effect, be interpreting this section the 
same way we interpreted section 251(c)(2) in the First Interconnection 
Order, 61 FR 45476 (August 29, 1996). We believe that to interpret the 
nondiscrimination requirement of section 272(c)(1) in this manner would 
be inappropriate as a matter of statutory construction, inconsistent 
with its legislative purpose, and unenforceable.
    As a matter of statutory construction, we find that the 
nondiscrimination provision of section 272(c)(1), by its terms, is much 
narrower in scope than the requirement in section 251(c)(2). Section 
251(c)(2) imposes on incumbent LECs ``the duty to provide, for the 
facilities and equipment of any requesting telecommunications carrier, 
interconnection with the local exchange carrier's network * * * that is 
at least equal in quality to that provided by the [LEC] to itself or to 
any subsidiary, affiliate, or any other party to which the carrier 
provides interconnection.'' In the First Interconnection Order, we 
interpreted the term ``equal in quality'' as requiring an incumbent LEC 
to provide interconnection to its network at a level of quality that is 
at least indistinguishable from that which the incumbent LEC provides 
itself. Further, we found that, to the extent a carrier requests 
interconnection that is of a superior or lesser quality than the 
incumbent LEC currently provides, the incumbent LEC is obligated to 
provide the requested interconnection to the extent technically 
feasible.
    The language of section 272(c)(1), in contrast, contains no such 
``equal in quality'' requirement; it simply requires that unaffiliated 
entities receive the same treatment as the BOC gives to its section 272 
affiliate. Unlike section 251, therefore, section 272(c) is not a 
vehicle by which requesting entities can require a BOC to provide 
goods, facilities, services, or information that are different from 
those that the BOC provides to itself or to its affiliates. Nor is it, 
as some commenters suggest, designed to prevent a BOC from 
discriminating between unaffiliated competitors.
    Our reading of the statutory language of sections 251 and 272 is 
consistent with the differing underlying purposes of those provisions. 
The section 251 requirements are designed to ensure that incumbent LECs 
do not discriminate in opening their bottleneck facilities to 
competitors. As we stated in the First Interconnection Order, ``[u]nder 
section 251, incumbent [LECs], including [BOCs], are mandated to take 
several steps to open their network to competition, including providing 
interconnection, offering access to unbundled elements to their 
networks, and making their retail services available at wholesale rates 
so that they can be resold.'' In implementing section 251, therefore, 
we adopted rules to open one of the last monopoly bottleneck 
strongholds in telecommunications--the local exchange and exchange 
access market.
    In adopting rules in this proceeding, however, our goal is to 
ensure that BOCs do not use their control over local exchange 
bottlenecks to undermine competition in the new markets they are 
entering--interLATA services and manufacturing. The section 272 
safeguards, among other things, are intended to protect competition in 
these markets from the BOCs' ability to use their existing market power 
in local exchange services to obtain an anticompetitive advantage. We 
find that when viewed in this context, the section 272(c)(1) 
nondiscrimination provision is designed to provide the BOC an

[[Page 2949]]

incentive to provide efficient service to rivals of its section 272 
affiliate, by requiring that potential competitors do not receive less 
favorable prices or terms, or less advantageous services from the BOC 
than its separate affiliate receives.
    We find that interpreting section 272 to require ``functional 
equality'' between a BOC section 272 affiliate and any unaffiliated 
entity would not only be impractical, but unenforceable. The 
``functional equality'' standard would require a BOC to provide 
additional services or functions to other entities that it does not 
provide to its own affiliate. Because section 272, unlike section 251, 
contains no requirement that a BOC must provide goods, services, 
facilities, and information to the extent ``technically feasible,'' it 
would be extremely difficult, as a practical matter, to limit the types 
of goods, services, and facilities that a BOC would be obligated to 
provide to requesting entities. Further, the terms ``functional 
outcome'' or ``functional equality'' are likely to mean different 
things to different entities. Because the meaning of these terms is 
likely to depend on the particular characteristics of each requesting 
entity, the Commission would be required to apply this standard to a 
myriad of factual circumstances on a case-by-case basis. As one 
commenter observes, ensuring this type of equality would be impossible 
to do, as well as impossible to enforce.
    We reject the argument that, because our interpretation of section 
272(c)(1) effectively limits competitors to those options that the BOC 
affiliate finds ``useful,'' a BOC will be able to design network 
interfaces that work optimally only with its section 272 affiliate's 
specifications and not with the specifications of other entities. 
Section 272(c)(1) prohibits a BOC from discriminating in the 
establishment of standards. As we conclude below, a BOC's adoption of a 
network interface that favors its section 272 affiliate and 
disadvantages an unaffiliated entity will establish a prima facie case 
of discrimination under section 272(c)(1). Further, section 272(c)(1) 
prohibits a BOC from discriminating in the provision of facilities or 
information, and section 251(c)(5) imposes upon BOCs certain network 
disclosure requirements. As mentioned above, section 251(c)(5) requires 
incumbent LECs to provide reasonable public notice of network changes 
affecting competing service providers' performance or ability to 
provide telecommunications services, as well as changes that would 
affect the incumbent LEC's interoperability with other service 
providers. In the Second Interconnection Order, 61 FR 47284 (September 
6, 1996), we interpreted this provision to require incumbent LECs to 
disclose changes subject to this requirement at the ``make/buy'' point. 
In light of the requirements of sections 272(c)(1) and 251(c)(5), we 
decline at this time to impose additional obligations on the BOCs to 
ensure that they structure their own networks to achieve the same level 
of interoperability that the section 272 affiliate receives from the 
BOC.
    We also decline to adopt MCI's suggested presumption that the 
specifications requested by an unaffiliated entity are the appropriate 
ones for a truly separate and independent affiliate and that any 
different specifications needed by the BOC's section 272 affiliate 
reflect a lack of proper physical and operational separation from the 
BOC. We recognize that there may be circumstances, such as the adoption 
of a new and innovative technology by the BOC section 272 affiliate, 
where differences in technical specifications between a section 272 
affiliate and an unaffiliated entity do not evidence a lack of 
structural separation between the BOC and its section 272 affiliate.
    As discussed below, we conclude that the protection of section 
272(c)(1) extends to any good, service, facility, or information that a 
BOC provides to its section 272 affiliate. We therefore agree with AT&T 
that to the extent a BOC develops new services for or with its section 
272 affiliate, it must develop new services for or with unaffiliated 
entities in the same manner. That is, we find that the development of 
new services, including the development of new transmission offerings, 
is the provision of service under section 272(c)(1) that, once provided 
by the BOC to its section 272 affiliate, must be provided to 
unaffiliated entities in a nondiscriminatory manner. In the NPRM, we 
recognized the potential for competitive harm in a situation in which a 
BOC failed to cooperate with an interLATA carrier that is introducing 
an innovative new service until the BOC's section 272 affiliate is 
ready to initiate the same service. Similarly, AT&T asserts that the 
section 272(c)(1) nondiscrimination requirement should be interpreted 
to prevent BOCs from denying a competitor's request for a new or more 
cost effective access arrangement on the ground that all entities, 
including its section 272 affiliate, are receiving the same access 
service at the same price. We find that the BOC, under section 
272(c)(1), is obligated to work with competitors to develop new 
services if it cooperates in such a manner with its section 272 
affiliate.
    We agree with AT&T therefore that if, as we outlined in our NPRM, a 
BOC purposely delayed the implementation of an innovative new service 
by denying a competitor's reasonable request for interstate exchange 
access until the BOC section 272 affiliate was ready to provide 
competing service, such conduct may constitute unlawful discrimination 
under the Act. Moreover, as we observed in the NPRM, although the 1996 
Act imposes specific nondiscrimination obligations on the BOCs and 
their section 272 affiliates, the Communications Act imposed certain 
pre-existing nondiscrimination requirements on common carriers 
providing interstate communications service. Among them, section 201 
provides that all common carriers have a duty ``to establish physical 
connections with other carriers,'' and to furnish telecommunications 
services ``upon reasonable request therefor.'' We conclude, therefore, 
that if a BOC were to engage in strategic behavior to benefit its 
section 272 affiliate, in the manner suggested by AT&T, such action may 
not only violate section 272(c)(1), but would also violate sections 
201(a) of the Act.
    Finally, we conclude that a complainant will be found to have 
established a prima facie case of unlawful discrimination under section 
272(c)(1) if it can demonstrate that a BOC has not provided 
unaffiliated entities the same goods, services, facilities, and 
information that it provides to its section 272 affiliate at the same 
rates, terms, and conditions. To rebut the complainant's case, the BOC 
may demonstrate, among other things, that rate differentials between 
the section 272 affiliate and unaffiliated entity reflect differences 
in cost or that the unaffiliated entity expressly requested superior or 
less favorable treatment in exchange for paying a higher or lower price 
to the BOC. We recognize, as Sprint and Time Warner suggest, there will 
be some instances where the costs of providing certain goods, services, 
or facilities to its affiliate and to an unaffiliated entity differ. As 
we stated in the First Interconnection Order, where costs differ, rate 
differences that accurately reflect those differences are not 
unlawfully discriminatory. Strict application of the section 272(c)(1) 
prohibition on discrimination would itself be discriminatory if the 
costs of supplying customers are different. Similarly, we also 
conclude, as we did

[[Page 2950]]

in the First Interconnection Order, that ``price differences, such as 
volume and term discounts, when based upon legitimate variations in 
costs, are permissible under the 1996 Act when justified.''

C. Definition of ``Goods, Services, Facilities and Information'' in 
Section 272(c)(1)

1. Background
    In the NPRM we sought comment on the interplay among the 
definitions of the terms ``services,'' ``facilities,'' and 
``information'' in various subsections of 272, and between section 272 
and section 251(c). We also sought 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). We asked parties to comment on whether further defining the 
terms ``goods,'' ``services,'' ``facilities,'' and ``information'' 
would enable competing providers to detect violations of this section 
by enabling them to compare more accurately a BOC's treatment of its 
affiliate with a BOC's treatment of unaffiliated competing providers.
2. Discussion
    We conclude that any attempt to define exhaustively the terms 
``goods, services, facilities, and information'' in section 272(c)(1) 
may unnecessarily limit the scope of this section's otherwise 
unqualified nondiscrimination requirement. At the same time, however, 
we disagree with ITAA that the Commission should refrain from 
attempting to clarify the meaning of these terms. We find instead that 
clarifying the types of activities these terms encompass will provide 
useful guidance to potential competitors that seek to avail themselves 
of the protections of section 272(c)(1). In enforcing the 
nondiscrimination requirement of section 272(c)(1), we intend to 
construe these terms broadly to prevent BOCs from discriminating 
unlawfully in favor of their section 272 affiliates.
    We find that neither the terms of section 272(c)(1), nor the 
legislative history of this provision, indicates that the terms 
``goods, services, facilities, and information'' should be limited in 
the manner suggested by some commenters. We therefore decline to 
interpret the terms in section 272(c)(1) as including only 
telecommunications-related or, even more specifically, common carrier-
related ``goods, services, facilities, and information.'' Similarly, we 
reject arguments set forth by NYNEX, PacTel, and U S West that the term 
``services'' should exclude administrative and support services. 
Although NYNEX contends that, as a practical matter, unaffiliated 
entities are unlikely to avail themselves of such services, we find 
that there are certain administrative services, such as billing and 
collection services, that unaffiliated entities may find useful. 
Further, as discussed above, we construe the term ``services'' to 
encompass any service the BOC provides to its section 272 affiliate, 
including the development of new service offerings.
    We conclude therefore that the protection of section 272(c)(1) 
extends to any good, service, facility, or information that a BOC 
provides to its section 272 affiliate. For example, we find that if a 
BOC were to decide to transfer ownership of a unique facility, such as 
its Official Services network, to its section 272 affiliate, it must 
ensure that the transfer takes place in an open and nondiscriminatory 
manner. That is, pursuant to the nondiscrimination requirement of 
section 272(c)(1), the BOC must ensure that the section 272 affiliate 
and unaffiliated entities have an equal opportunity to obtain ownership 
of this facility.
     We also conclude that the terms ``services,'' ``facilities,'' and 
``information'' in section 272 should be interpreted to include, among 
other things, the meaning of these terms under section 251(c). The term 
``facilities,'' therefore, includes but is not limited to the seven 
unbundled network elements described in the First Interconnection 
Order. We decline to limit the scope of these terms to their meaning in 
section 251 because section 272 encompasses a broader range of 
activities than does section 251. We also emphasize that in contrast to 
section 251, where an incumbent LEC is prohibited from discriminating 
against any requesting telecommunications carrier, section 272(c)(1) 
prohibits BOCs from discriminating against ``any other entity.'' 
Because section 272 does not define the term ``entity,'' we interpret 
this unqualified term broadly to ensure that all competitors may 
benefit from the protections of section 272(c)(1). Thus, we agree with 
Sprint that this term should include the definition of the term 
``entity'' as set forth in the electronic publishing section of the 
Act; however, we also find it appropriate to include within the meaning 
of ``entity'' the providers of the activities encompassed by section 
272. We conclude, therefore, that the term ``entity'' includes 
telecommunications carriers, ISPs, and manufacturers.
    We disagree with ATSI and CIX, however, that by interpreting ``any 
other entity'' to include information service providers and by 
concluding that the term ``facilities'' in section 272(c)(1) 
encompasses the meaning of that term as it is used in section 251(c), 
ISPs acquire the right to obtain unbundled access to the local loop and 
other network elements whenever BOCs provide their section 272 
affiliates with such access. Pursuant to section 251(c)(3), only 
telecommunications carriers providing a telecommunications service are 
entitled to obtain access to unbundled network elements. Because ISPs 
may only obtain access to unbundled elements pursuant to section 251 to 
the extent they are providing telecommunications services, we conclude 
that they may not attempt to circumvent the limitations of section 251 
by virtue of their rights under section 272(c)(1). This conclusion is 
consistent with our finding in the Second Interconnection Order that 
the inclusion of information services in the definition of ``services'' 
under section 251(c)(5) ``does not vest information service providers 
with substantive rights under other provisions of section 251, except 
to the extent that they are also operating as telecommunications 
carriers.'' To the extent, however, that a BOC chooses voluntarily to 
provide facilities, including network elements, to a section 272 
affiliate that is solely providing information services (and thus does 
not qualify as a telecommunications carrier under section 251), we 
conclude that a BOC must, pursuant to section 272(c)(1), provide such 
facilities to other requesting ISPs.
    We therefore agree with MFS that, if a BOC chooses to allow its 
information service affiliate to collocate routers, servers, or other 
equipment, section 272(c)(1) requires that the same accommodations be 
extended, on a nondiscriminatory basis, to competing ISPs. Collocation 
is a means of achieving interconnection and access to unbundled network 
elements that incumbent LECs, including BOCs, must provide to 
requesting carriers under section 251. Although section 251 does not 
require incumbent LECs to permit entities other than telecommunications 
carriers to collocate equipment on an incumbent LEC's premises, 
sections 251 and 272 do not prohibit BOCs from voluntarily allowing 
ISPs to collocate equipment on their premises. Thus, we find that, if a 
BOC permits its section 272 affiliate to collocate facilities used to 
provide information services, the BOC must permit collocation, under

[[Page 2951]]

section 272(c)(1), by similarly situated entities. If the BOC's section 
272 affiliate qualifies as a ``telecommunications carrier,'' the BOC 
need only permit other telecommunications carriers to collocate their 
equipment. If, however, the BOC's section 272 affiliate only provides 
information services, the BOC must permit similarly situated ISPs to 
collocate equipment at the BOCs premises, even if such entities do not 
qualify as telecommunications carriers.
    As Sprint points out, the term ``information'' in section 272(c)(1) 
is not limited as it is in section 272(e)(2) to information 
``concerning [the BOC's] provision of exchange access.'' In fact, as 
noted above, we find no limitation in the statutory language on the 
type of information that is subject to the section 272(c)(1) 
nondiscrimination requirement. For this reason, we reject U S West's 
assertion that section 272(c)(1) only governs that information which 
may give a separate affiliate an ``unfair advantage.'' We conclude, 
however, that the term ``information'' includes, but is not limited to, 
CPNI and network disclosure information. We therefore reject arguments 
made by some BOCs that the nondiscrimination provision of section 
272(c)(1) does not govern the BOCs use of CPNI. With respect to CPNI, 
we conclude that BOCs must comply with the requirements of both 
sections 222 and 272(c)(1). We decline to address parties' arguments 
raised in this proceeding regarding the interplay between section 
272(c)(1) and section 222 to avoid prejudging CPNI issues that will be 
addressed in a separate proceeding.

D. Establishment of Standards

1. Background
    Section 272(c)(1) prohibits a BOC from discriminating between its 
section 272 affiliate and other entities in the ``establishment of 
standards.'' In the NPRM we sought comment on what ``standards'' are 
encompassed by this provision. We observed that a BOC may act 
anticompetitively by creating standards that require or favor equipment 
designs that are proprietary to its section 272 affiliate. We sought 
comment on what procedures, if any, we should implement to ensure that 
a BOC does not discriminate between its affiliate and other entities in 
setting standards. We asked parties to comment, for example, on whether 
BOCs should be required to participate in standard-setting bodies in 
the development of standards covered by section 272(c)(1).
2. Discussion
    We conclude that the term ``standards'' in section 272(c)(1) 
includes the meaning of this term as it is used in section 273. In the 
Manufacturing NPRM, we sought comment on how the term ``standards'' 
should be defined ``for purposes of implementation of the 1996 Act to 
ensure that standards processes are open and accessible to the 
public.'' We note, however, that unlike the use of the term 
``standards'' in sections 273(d)(4) and 273(d)(5), the term 
``standards'' in section 272(c)(1) is not limited by the term 
``industry-wide.'' We conclude, therefore, that section 272(c)(1) 
prohibits discrimination in the establishment of any standard, not only 
those that are ``industry-wide.''
    As we observed in the Manufacturing NPRM, the process by which 
standards are established may present opportunities for anticompetitive 
behavior by the BOCs. We decline, however, to implement additional 
procedures, beyond those outlined in section 273, to ensure that BOCs 
do not discriminate between their section 272 affiliates and other 
entities in establishing industry-wide standards. Rather, we agree with 
Bellcore and PacTel that the procedures for the establishment of 
industry-wide standards and generic requirements for telecommunications 
equipment and CPE appear at this time to be adequately addressed by the 
requirements contained in section 273(d)(4). For example, in response 
to MCI, we note that section 273(d)(4) already provides for an open 
standards-setting process whereby all interested parties have the 
opportunity to fund and participate in the development of industry-wide 
standards or generic requirements on a ``reasonable and 
nondiscriminatory basis.'' We find no basis in the record for 
concluding that the requirements established by section 273, and any 
regulations adopted thereunder, will not be sufficient to deter 
discrimination in the establishment of industry-wide standards.
    Although we decline at this time to establish additional procedures 
beyond those required in section 273(d)(4), we recognize that there is 
a distinct potential competitive danger that a BOC will use standards 
in its own and its section 272 affiliate's network that are not 
``industry-wide'' (that is, not employed by ``at least 30 percent of 
all access lines'') or established by an accredited standards 
development organization, but rather specifically tailored to meet its 
own needs or those of its section 272 affiliate. Because such standards 
may not be developed in an open and nondiscriminatory process, such as 
the one required for the establishment of industry-wide standards in 
section 273(d)(4), we find that those standards may place unaffiliated 
entities at a competitive disadvantage. For example, if a BOC adopts a 
particular non-accredited or non-industry-wide protocol or network 
interface, it may, by virtue of its substantial size and market share, 
effectively force competing entities to alter their specifications in 
order to maintain the same level of interoperability with the BOC or 
the BOC affiliate. We conclude, therefore, that the adoption of any 
standard that has the effect of favoring the BOC's section 272 
affiliate and disadvantaging an unaffiliated entity will establish a 
prima facie violation of section 272(c)(1).
    We also conclude, on the basis of the record before us, that it is 
not necessary as a matter of law, nor desirable as a matter of policy, 
to require BOC participation in the standards-setting process. The 
language of section 272(c)(1) cannot be read as requiring such 
participation; moreover, BOCs have an interest in participating 
voluntarily in standard-setting organizations because standards that 
are ultimately adopted may materially impact the BOCs' competitive 
position. Further, we decline to become involved at this time in the 
standard-setting process, as suggested by AT&T, in order to accomplish 
the purposes of section 272(c)(1). Unlike section 256, which, among 
other things, permits the Commission to participate in the development 
of public telecommunications network interconnectivity standards that 
promote access, section 272(c)(1) does not contemplate Commission 
involvement. Moreover, we reject MCI's proposal that we insert 
ourselves into the dispute resolution process to accomplish the 
purposes of section 272(c)(1). Section 273(d)(5) requires the 
Commission to prescribe a dispute resolution process to address the 
anticompetitive harms that may result from the establishment of 
industry-wide standards under section 273(d)(4) and expressly prohibits 
the Commission from becoming a party to this process. As to disputes 
that may arise in the context of other public standard-setting 
processes, we find, on the basis of the record before us, that 
Commission involvement beyond its existing role in the section 208 
complaint process is unnecessary.

[[Page 2952]]

E. Procurement Procedures

1. Background
    Section 272(c)(1) also prohibits the BOCs from discriminating 
between their section 272 affiliates and other entities in their 
procurement of goods, services, facilities, and information. In the 
NPRM, we observed that this provision prohibits 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. We 
sought 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. We invited 
comment, specifically, on the nature and extent of rules necessary to 
ensure that such procedures are implemented.
2. Discussion
    As stated above, we find that section 272(c)(1) establishes an 
unqualified prohibition against discrimination by a BOC in its dealings 
with its section 272 affiliate and unaffiliated entities. We conclude, 
therefore, that any discrimination with respect to a BOC's procurement 
of goods, services, facilities, or information between its section 272 
affiliate and an unaffiliated entity establishes a prima facie case of 
discrimination under section 272(c)(1). For example, consistent with 
our observations in the NPRM, we find that a prima facie case of 
discrimination under section 272(c)(1) may be established if a BOC 
purchases manufactured network equipment solely from its section 272 
affiliate, purchases such equipment from its affiliate at inflated 
prices, or gives any preference to the affiliate's equipment in the 
procurement process, thereby excluding rivals from the market in the 
BOC's service area.
    Insofar as section 272(c)(1) governs a BOC's procurement of 
manufacturing services, we find that BOC procurement of 
telecommunications equipment should be performed in a manner consistent 
with the manufacturing requirements of section 273. We conclude, 
therefore, that section 272(c)(1) requires a BOC to adhere to the 
nondiscrimination and procurement standards governing the procurement 
of telecommunications equipment set forth in sections 273(e)(1) and 
273(e)(2) of the Act. We therefore defer consideration of detailed 
procurement procedures with respect to telecommunications equipment to 
the Manufacturing NPRM, which specifically addresses the requirements 
of these sections. We conclude, however, that the BOCs must, at a 
minimum, comply with any and all regulations adopted to implement the 
standards of sections 273(e)(1) and 273(e)(2); failure to do so may be 
evidence of discrimination under section 272(c)(1).
     We recognize, however, that the nondiscrimination requirement of 
section 272(c)(1) encompasses a broader range of activities than those 
described in sections 273(e)(1) and 273(e)(2). Nevertheless, because 
the record is largely silent on the nature and extent of rules 
necessary to ensure that BOCs do not discriminate in their procurement 
of goods, services, facilities, and information under section 
272(c)(1), we decline, at this time, to adopt rules to implement this 
requirement. In response to TIA's concerns, therefore, we conclude that 
the record in this proceeding does not support adoption of any concrete 
procurement procedures beyond those already mandated by sections 
273(e)(1) and 273(e)(2). Although we decline to issue rules, we caution 
BOCs that allegations of discrimination in their procurement of goods, 
services, facilities, and information under section 272(c)(1) will be 
evaluated in light of that section's unqualified prohibition on 
discrimination. Further, we note that allegations of discrimination may 
more easily be rebutted by demonstrated compliance with pre-existing, 
publicly available procedures for procurement.

F. Enforcement of Section 272(c)(1)

    In the NPRM, we observed that the Commission 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 sought comment on whether any of the reporting 
and other requirements 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) and provide protection against the type of 
BOC behavior that section 272(c)(1) seeks to curtail. We address this 
issue, as well as the requirements and mechanisms necessary to 
facilitate the detection and adjudications of section 272 violations, 
below in part IX.

VI. Fulfillment of Certain Requests Pursuant to Section 272(e)

A. Section 272(e)(1)

1. Background
    Section 272(e)(1) states that a BOC and a BOC affiliate subject to 
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.'' In the 
NPRM, we tentatively concluded that the term ``unaffiliated entity'' 
includes ``any entity, regardless of line of business, that is not 
affiliated with a BOC'' as defined under section 153(1) of the Act. We 
sought comment on the scope of the term ``requests'' and on whether it 
included, inter alia, ``initial installation requests, as well as any 
subsequent requests for improvement, upgrades or modifications of 
service, or repair and maintenance of * * * services.'' We tentatively 
concluded that section 272(e)(1) requires the BOCs to treat 
unaffiliated entities on a nondiscriminatory basis in completing orders 
for telephone exchange service and exchange access, but does not grant 
unaffiliated entities any additional rights beyond those otherwise 
granted by the Communications Act or Commission rules. We also sought 
comment regarding how to implement section 272(e)(1) and specifically 
inquired whether reporting requirements for service intervals analogous 
to those imposed by Computer III and ONA would be sufficient.
2. Discussion
    Based on our analysis of the record, we adopt our tentative 
conclusion that the term ``unaffiliated entity'' includes ``any entity, 
regardless of line of business, that is not affiliated with a BOC'' as 
defined under section 153(1) of the Act. Also based on the record, we 
conclude that section 272(e)(1) requires the BOCs to treat unaffiliated 
entities on a nondiscriminatory basis in completing orders for 
telephone exchange service and exchange access, but does not grant 
unaffiliated entities any additional rights to make requests beyond 
those granted by the Communications Act or Commission rules. We 
conclude that the term ``requests'' should be interpreted broadly, and 
that it includes, but is not limited to, initial installation requests, 
subsequent requests for improvement, upgrades or modifications of 
service, or

[[Page 2953]]

repair and maintenance of these services.
    Section 272(e)(1) unambiguously states that a BOC must fulfill 
requests from unaffiliated entities at least as quickly as it fulfills 
its own or its affiliates' requests. To implement this statutory 
directive, we conclude that, for equivalent requests, the response time 
a BOC provides to unaffiliated entities should be no greater than the 
response time it provides to itself or its affiliates. We are not 
persuaded by the BOC's argument that variations among individual 
requests make any comparison between requests meaningless, and thus 
make such a standard unachievable. The BOC must fulfill equivalent 
requests within equivalent intervals. Thus, for example, an 
unaffiliated entity's request of a certain size, level of complexity, 
or in a specific geographic location must be fulfilled within a period 
of time that is no longer than the period of time in which a BOC 
responds to an equivalent request from itself or its affiliates. 
Because we anticipate that the facts relating to each request will 
vary, we believe it is appropriate to determine whether requests are 
equivalent on a case-by-case basis.
    Section 272(e)(1) requires a BOC to fulfill the requests of 
unaffiliated entities within a period no longer than the period in 
which it fulfills its own or its affiliates requests. Because the 
statute does not mandate that a BOC follow a particular procedure in 
meeting this requirement, we decline to adopt the proposals of AT&T and 
Teleport to require the BOCs to use electronic order processing systems 
or to use the identical systems that the BOCs use to process their own 
service requests. We emphasize, however, regardless of the procedures 
that a BOC employs to process service orders from unaffiliated 
entities, it must be able to demonstrate that those procedures meet the 
statutory standard. Under current industry practice, BOCs and 
interexchange carriers use electronic mechanisms to implement PIC 
changes; exchange billing information; and, in some instances, provide 
ordering, repair, and trouble administration information. We believe 
that these current mechanisms, and the requirement that incumbent LECs 
provide nondiscriminatory access to operation support systems functions 
pursuant to sections 251(c)(3) and 251(c)(4) of the Act, will promote 
the use of electronic interfaces between unaffiliated entities and the 
BOCs.
    We also conclude that the BOCs must make available to unaffiliated 
entities information regarding the service intervals in which the BOCs 
provide service to themselves or their affiliates. The statute imposes 
a specific performance standard on the BOCs in section 272(e)(1), and 
we conclude that, absent Commission action, the information necessary 
to detect violations of this requirement will be unavailable to 
unaffiliated entities. Unlike the information necessary to ensure 
compliance with other subsections of section 272, there is no 
requirement that the information necessary to verify compliance with 
section 272(e)(1) must be disclosed under other provisions of the Act 
or Commission rules. Without the disclosure requirements imposed here, 
parties will be unable readily to ascertain how long it takes a BOC to 
fulfill its own or its affiliates' requests for service. Section 
272(b)(5), which requires that all transactions between a BOC and its 
section 272 affiliate be reduced to writing and made available for 
public inspection, does not provide parties an adequate mechanism to 
obtain information necessary to evaluate compliance with section 
272(e)(1) because section 272(b)(5) is necessarily prospective in 
nature. The information disclosed pursuant to section 272(b)(5) will 
allow unaffiliated entities to determine that a BOC and its section 272 
affiliate have reached an agreement and the relevant terms and 
conditions of that agreement, but the document produced to satisfy 
section 272(b)(5) will not allow parties to determine the time it 
actually takes for a BOC to fulfill its own or its affiliates' 
requests. Section 272(e)(1) governs actual BOC performance, not 
contractual arrangements. Moreover, section 272(b)(5) by itself is 
insufficient to implement section 272(e)(1) because it will only make 
information available about transactions between a BOC and its section 
272 affiliate; section 272(e)(1), in contrast, governs requests by the 
BOC itself and all of the BOC's affiliates. We also conclude that, in 
order to provide meaningful enforcement of section 272(e)(1), interval 
response times must be disclosed more frequently than the biennial 
audit required by section 272(d). Finally, a disclosure obligation will 
allow all entities to compare, in a timely fashion, their own service 
intervals with those provided to the BOC or its affiliates. Contrary to 
the contentions of some BOCs, vendor management programs similar to the 
one utilized by AT&T would not provide this information. These vendor 
management programs provide information to a BOC customer about the 
service intervals the BOC provides to that customer, but do not provide 
comparative data about the service intervals provided to other 
entities, such as BOC affiliates.
    We do not agree with PacTel that the absence of discrimination 
found in ONA reports indicates that disclosure requirements are of 
little value in enforcing section 272(e)(1). Disclosure requirements 
are valuable because they promote compliance and give aggrieved 
competitors a basis for seeking a remedy directly from a BOC. If 
competitors can easily obtain data about a BOC's compliance with 
section 272(e)(1), this increases the likelihood that potential 
discrimination can be detected and penalized; this, in turn, decreases 
the danger that discrimination will occur in the first place. 
Disclosure requirements also minimize the burden on the Commission's 
enforcement process because entities will have the information needed 
to resolve disputes informally prior to submitting a complaint to the 
Commission. We also are not persuaded by NYNEX and Ameritech that the 
automation and nondiscriminatory design of their provisioning and 
maintenance procedures obviate the need for disclosure requirements. 
Although the BOCs' use of nondiscriminatory, automated order processing 
systems is important for meeting the requirements of section 272(e)(1), 
the existence of these systems does not guarantee that requests placed 
via these systems are actually completed within the requisite period of 
time. Finally, we are not persuaded by the arguments of U S West and 
PacTel that, because parties are able to incorporate information 
disclosure requirements into agreements negotiated under sections 251 
and 252 of the Act, a separate information disclosure requirement is 
unnecessary. Section 272(e)(1) and section 251 do not govern similar 
activities. Section 251 provides a framework that requires incumbent 
LECs to provide, inter alia, interconnection, unbundled network 
elements, and wholesale services to requesting telecommunications 
carriers. In contrast, section 272(e)(1) requires BOCs to fulfill 
requests for telephone exchange service and exchange access from 
unaffiliated entities on a nondiscriminatory basis. To link compliance 
with section 272(e)(1) to the outcome of individual negotiations would 
not adequately implement section 272(e)(1), particularly because the 
class of entities entitled to nondiscriminatory treatment under section 
272(e)(1) is much broader than the class of entities who may make 
requests under section 251.

[[Page 2954]]

    In response to the comments raised in the record, we conclude that 
we should seek further comment on the specific information disclosure 
requirements proposed by AT&T in an ex parte letter filed after the 
official pleading cycle closed. In the NPRM, we sought comment on 
whether reporting requirements analogous to the Computer III and ONA 
reporting requirements would be sufficient to implement section 
272(e)(1). The parties are divided about the usefulness of service 
interval reporting similar to ONA reporting for implementing section 
272(e)(1) and on the merits of AT&T's proposal. We agree with NYNEX 
that we should provide an additional opportunity for parties to comment 
on the specific aspects of the disclosure requirements needed to 
implement section 272(e)(1); therefore, we are separately issuing a 
Further Notice of Proposed Rulemaking regarding these matters.
    We reject at this time, however, AT&T's more expansive proposal to 
require BOCs to submit to the Commission the underlying data for the 
information they must make publicly available. The submission of data 
necessary to meet this requirement--including, for example, every 
trouble report submitted to a BOC for a given period--would impose a 
substantial administrative burden on the BOCs, and possibly on the 
Commission as well, and is unnecessary to enforce section 272(e)(1). We 
also decline to order the BOCs to publicize the response times for all 
entities, as suggested by AT&T and Teleport, because the standard 
established by section 272(e)(1) is the response time given to the BOC 
itself and its affiliates.

B. Section 272(e)(2)

1. Background
    Section 272(e)(2) states that a BOC and a BOC affiliate that is 
subject to 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.'' In the NPRM, we 
sought comment on the scope of the term ``facilities, services, or 
information concerning its provision of exchange access'' and the term 
``other providers of interLATA services in that market.'' We also 
sought comment on the relevance of the MFJ and prior Commission 
proceedings, including our equal access rules, in implementing this 
provision.
2. Discussion
    Definitional issues. We conclude that section 272(e)(2) does not 
require a BOC to provide facilities, services, or information 
concerning its provision of exchange access to ISPs, as suggested by 
ITAA and MFS. Although ISPs are included within the term ``other 
providers of interLATA services,'' ISPs do not use exchange access as 
it is defined by the Act, and, therefore, section 272(e)(2)'s 
requirement that BOCs provide exchange access on a nondiscriminatory 
basis is not applicable to ISPs. ``Exchange access'' is defined as 
``the offering of access to telephone exchange services or facilities 
for the purpose of the origination or termination of telephone toll 
services.'' ``Telephone toll service'' is defined, in turn, as 
``telephone service between stations in different exchange areas for 
which there is made a separate charge not included in contracts with 
subscribers for exchange service.'' This definition makes clear that 
``telephone toll service'' is a ``telecommunications service.'' 
Therefore, by definition, an entity that uses ``exchange access'' is a 
telecommunications carrier. Because ISPs do not provide telephone toll 
services, and therefore are not telecommunications carriers, they are 
not eligible to obtain exchange access pursuant to section 272(e)(2).
    We are not persuaded by ITAA's argument that, because section 
272(f)(2) states that the requirements of section 272 cease to apply 
with respect to interLATA information services at sunset, but exempts 
section 272(e) from the sunset requirement, section 272(e), including 
section 272(e)(2), must apply to ISPs. Section 272(f)(2) cannot be read 
to extend the application of section 272(e)(2) beyond its express 
terms. Similarly, we reject MFS's argument that we should use section 
272(e)(2) to grant ISPs rights under section 251 because, as we 
articulated above, this would expand the scope of section 251 beyond 
its express limitations.
    We agree with U S West that the term ``in that market'' is intended 
to ensure that, to benefit from section 272(e)(2), an interLATA 
provider must be operating in the same geographic area as the relevant 
BOC affiliate. Therefore, we conclude that the term ``providers of 
interLATA services in that market'' means any interLATA services 
provider authorized to provide interLATA service in the same state 
where the relevant section 272 affiliate is providing service. We have 
designated a state as the relevant geographic area for purposes of 
section 272(e)(2) because the BOCs will obtain authorization to provide 
interLATA services on a state-by-state basis.
    Implementation of section 272(e)(2). In light of the protections 
imposed in other portions of the Act and our rules, we conclude that we 
do not need to adopt rules to implement section 272(e)(2) at this time. 
In our First Interconnection Order and Second Interconnection Order, we 
adopted rules implementing section 251 of the Act, which address, inter 
alia, the provision of exchange access and network disclosure 
requirements under the Act. In addition, section 251(g) of the Act 
preserves the equal access requirements in place prior to the passage 
of the 1996 Act, including obligations imposed by the MFJ and any 
Commission rules. If, in the future, it appears that additional rules 
are necessary to enforce the requirements of section 272(e)(2), we will 
take action at that time.
    We conclude that a separate disclosure requirement under section 
272(e)(2) is not warranted. Section 272(b)(5) requires that all 
transactions between a BOC and its section 272 affiliate be reduced to 
writing and made available for public inspection. Parties will be able 
to determine the specific services and facilities that a BOC provides 
to its section 272 affiliate by inspecting the documentation that must 
be maintained pursuant to section 272(b)(5). In addition, information 
about a BOC's provision of exchange access to itself or to its 
affiliates will be available through the information disclosure 
requirement we are imposing pursuant to section 272(e)(1). Accordingly, 
we reject AT&T's suggestion that the Commission require the BOCs to 
disclose publicly all exchange access services and facilities used by 
their interLATA affiliates and to update these disclosures whenever 
upgrades are made.
    We conclude that our current network disclosure rules are 
sufficient to meet the requirement of section 272(e)(2) that BOCs 
disclose any ``information concerning * * * exchange access'' on a 
nondiscriminatory basis. Therefore, we conclude that AT&T's suggestion 
that the Commission mandate additional technical disclosure 
requirements is unnecessary. Section 251(c)(5) imposes on incumbent 
LECs ``[t]he duty to provide reasonable public notice of changes in the 
information necessary for the transmission and routing of services 
using that local exchange carrier's facilities or networks, as well as 
of any other changes that would affect the interoperability of those 
facilities and networks.'' We have adopted detailed rules specifying 
how this requirement is to be implemented.

[[Page 2955]]

Further, the Commission's prior network disclosure requirements are 
still in place, including the Computer II ``all carrier rule'' and the 
Computer III network disclosure requirements. We emphasize that if a 
BOC preferentially disclosed information to its section 272 affiliate 
or withheld information from competing providers of interLATA services, 
that BOC would be in violation of section 272(e)(2). Our rules 
implementing section 251(c)(5) explicitly prohibit this behavior: they 
require LECs to make network disclosures according to a specific 
timetable, and prohibit preferential disclosures in advance of that 
timetable. We do not address IDCMA's concerns regarding information 
disclosures for manufacturers because section 273 addresses the needs 
of manufacturers in detail, and we are addressing the implementation of 
section 273 in a separate proceeding.

C. Section 272(e)(3)

1. Background
    Section 272(e)(3) provides that a BOC and a BOC 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 carriers for such service.'' 
In the NPRM, we tentatively concluded that a section 272 affiliate's 
purchase of telephone exchange service and exchange access at tariffed 
rates, or imputation of tariffed rates to the BOC, would be sufficient 
to implement section 272(e)(3). We additionally sought comment 
regarding the appropriate mechanism to enforce this provision in the 
absence of tariffed rates.
2. Discussion
    We adopt our tentative conclusion that a section 272 affiliate's 
purchase of telephone exchange service and exchange access at tariffed 
rates, or a BOC's imputation of tariffed rates, will ensure compliance 
with section 272(e)(3). If a section 272 affiliate purchases telephone 
exchange service or exchange access at the highest price that is 
available on a nondiscriminatory basis under tariff, section 
272(e)(3)'s requirement that a BOC must charge its section 272 
affiliate 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 will be fulfilled. In addition, we 
conclude that other mechanisms are available under the Act to ensure 
that BOCs charge nondiscriminatory prices in accordance with section 
272(e)(3). If a section 272 affiliate were to acquire services or 
unbundled elements from a BOC at prices that are available on a 
nondiscriminatory basis under section 251, the terms of section 
272(e)(3) would be met. To the extent that a statement of generally 
available terms filed pursuant to section 271(c)(1)(B) would include 
prices that are available on a nondiscriminatory basis in a manner 
similar to tariffing, and a BOC's section 272 affiliate obtains access 
or interconnection at a price set forth in the statement, this would 
also demonstrate compliance with section 272(e)(3). We address the 
appropriate allocation and valuation of these transactions for 
accounting purposes in our companion Accounting Safeguards Order.
    We further conclude that section 272(e)(3) requires that a BOC must 
make volume and term discounts available on a nondiscriminatory basis 
to all unaffiliated interexchange carriers. We do not agree, however, 
with those parties that suggest that additional requirements are 
necessary to implement section 272(e)(3). AT&T, for example, proposes 
that a BOC or section 272 affiliate pay ``a price per unit of traffic 
that reflects the highest unit price that any interexchange carrier 
pays for a like exchange or exchange access service.'' We agree with 
the BOCs that AT&T's suggested rule would unfairly disadvantage BOC 
affiliates by preventing them from receiving volume discounts that 
other interexchange carriers with similar access traffic volumes would 
receive. We agree with Ameritech that, because the provision of 
services that fall under section 272(e)(3) must either be tariffed or 
made publicly available under section 252(h), unaffiliated 
interexchange carriers will be able to detect discriminatory 
arrangements. We recognize that a BOC may have an incentive to offer 
tariffs that, while available on a nondiscriminatory basis, are in fact 
tailored to its affiliate's specific size, expansion plans, or other 
needs. Our enforcement authority under section 271(d)(6) and section 
208 are available to address this and other forms of potential 
discrimination by a BOC.
    We reject MCI's proposal that the Commission review the BOC section 
272 affiliates' prices, or profits, or both, to ensure that the section 
272 affiliates' prices cover their access charges and all other costs. 
MCI's contention that access charges are excessive is more 
appropriately addressed in the Commission's forthcoming proceeding on 
access charge reform. We also note that the ability of competing 
carriers to acquire access through the purchase of unbundled elements 
(if those unbundled elements are properly priced) will increase 
pressure on the BOCs to decrease access charges, and will give 
competing carriers the opportunity to charge retail prices that reflect 
the lower cost of unbundled elements. We interpret section 272(e)(3) to 
require the BOCs to charge nondiscriminatory prices, as indicated 
above, and to allocate properly the costs of exchange access according 
to our affiliate transaction and joint cost rules, as modified by our 
companion Accounting Safeguards Order. We conclude that further rules 
addressing predatory pricing by BOC section 272 affiliates are not 
necessary because adequate mechanisms are available to address this 
potential problem. A BOC section 272 affiliate that charges a rate for 
interstate services below its incremental cost of providing such 
services would be in violation of sections 201 and 202 of the Act. 
Federal antitrust law also would apply to the predatory pricing of 
interstate and intrastate services; and the pricing of intrastate 
services can also be addressed at the state level. Further, as we 
indicated in the NPRM, the danger of successful predation by BOCs in 
the interexchange market is small. We also reject MCI's proposal 
because, as the BOCs argue and MCI concedes, Commission review of 
affiliates' retail prices would place an enormous administrative burden 
on the Commission. Such a review would also discourage BOC section 272 
affiliates from competing on the basis of service prices. Because we 
find that adequate remedies exist to address anticompetitive pricing by 
BOC section 272 affiliates, we believe that regulation of these new 
interLATA providers' retail prices pursuant to section 272(e)(3) would 
not conform with the deregulatory, pro-competitive goals of the 1996 
Act.

D. Section 272(e)(4)

1. Background
    Section 272(e)(4) states that a BOC and a BOC affiliate that is 
subject to section 251(c) ``may provide any interLATA or intraLATA 
facilities or services to its interLATA affiliate if such services or 
facilities are made available to all carriers at the same rates and on 
the same terms and conditions, and so long as the costs are 
appropriately allocated.'' In the NPRM, we sought comment regarding the 
scope of the

[[Page 2956]]

term ``interLATA or intraLATA facilities or services'' including, for 
example, whether it included ``information services and all facilities 
used in the delivery of such services.''
2. Discussion
    We conclude that section 272(e)(4) does not alter the requirements 
of sections 271 and 272(a). Section 272(e)(4) is not a grant of 
authority for BOCs to provide ``interLATA or intraLATA facilities or 
services'' in contravention of the scheme governing BOC provision of 
in-region interLATA services in section 271 or the requirement that 
these services must be provided through a separate affiliate in section 
272(a). Section 272(e)(4) is intended to ensure the nondiscriminatory 
provision of services that the BOCs are authorized to offer directly, 
and not through an affiliate, such as those services exempted from 
section 271 prior to the sunset of the separate affiliate requirement. 
Like the other subsections of section 272, section 272(e)(4) prescribes 
the manner in which a BOC must offer services and facilities it is 
authorized to provide.
    We find no basis in the 1996 Act for the BOCs' argument that 
section 272(e)(4) is a grant of authority for the BOCs to provide 
interLATA services and facilities. By its terms, section 272(e)(4) 
contains no reference to the provisions of section 271 governing BOC 
entry into in-region interLATA services. Therefore, interpreting 
section 272(e)(4) as an immediate and independent grant of authority 
that allows BOCs to provide ``interLATA or intraLATA facilities or 
services,'' even where such provision is prohibited by other sections 
of the statute, would contravene the requirement of section 271 that 
BOCs receive Commission approval prior to providing these services.
    We are also unpersuaded by PacTel's alternative argument that 
section 272(e)(4) is not a grant of authority, but that section 272 
allows the BOCs to provide wholesale, ``carrier to carrier'' interLATA 
services directly, rather than through the section 272 affiliate. 
PacTel states that section 271 requires BOCs to obtain authorization 
from the Commission before providing ``interLATA services,'' but, in 
contrast, section 272(a)(2)(B) only requires BOCs to offer interLATA 
``telecommunications service'' through a separate affiliate. PacTel 
also states that the definition of ``interLATA service'' is broad and 
makes no distinction between retail and wholesale offerings, but that 
``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 the facilities used.'' PacTel therefore argues that only 
interLATA telecommunications services offered ``directly to the 
public'' must be offered through a separate affiliate. PacTel contends 
that retail services are services offered ``directly to the public'' 
that must be offered through a section 272 affiliate, but that 
wholesale services may be offered from the BOC because they are not 
``telecommunications services.'' We reject PacTel's argument because it 
is inconsistent with language of section 251(c)(4) and because the 
legislative history indicates that the definition of telecommunications 
services is intended to clarify that telecommunications services are 
common carrier services, which include wholesale services to other 
carriers.
    A comparison between the definitions relied upon by PacTel and the 
language of section 251(c)(4) leads us to conclude that wholesale 
services are not excluded from the definition of ``telecommunications 
service.'' Unlike the definition of telecommunications service, section 
251(c)(4) explicitly uses the terms ``retail'' and ``wholesale.'' 
Section 251(c)(4) states that incumbent LECs must offer, ``at wholesale 
rates any telecommunications service that the carrier provides at 
retail to subscribers who are not telecommunications carriers * * *'' 
This language implicitly recognizes that some telecommunications 
services are wholesale services. If this were not the case, the 
qualifying phrase ``that the carrier provides at retail'' would be 
superfluous.
    The legislative history and the definition of common carriage 
further support this conclusion. The Joint Explanatory Statement states 
that the definition of telecommunications service ``recognize[s] the 
distinction between common carrier offerings that are provided to the 
public * * * and private services.'' Therefore, the term 
``telecommunications service'' was not intended to create a retail/
wholesale distinction, but rather a distinction between common and 
private carriage. Common carrier services include services offered to 
other carriers. For example, exchange access service is offered on a 
common carrier basis, but is offered primarily to other carriers. In 
addition, both the Commission's rules and the common law have held that 
offering a service to the public is an element of common carriage. The 
Commission's rules define a ``communication common carrier'' as ``any 
person engaged in rendering communication for hire to the public,'' and 
the courts have held that the indiscriminate offering of a service to 
the public is an essential element of common carriage. Neither the 
Commission nor the courts, however, has construed ``the public'' as 
limited to end-users of a service. In NARUC I, the Court of Appeals for 
the D.C. Circuit held that an entity may qualify as a common carrier 
even if ``the nature of the service rendered is sufficiently 
specialized as to be of possible use to only a fraction of the total 
population.'' See NARUC v. FCC, 525 F.2d 630, 641 (D.C. Cir. 1976). In 
light of the statutory language of section 251(c)(4), legislative 
history, Commission precedent, and the common law, we decline to limit 
the definition of telecommunications services to retail services.
    If a BOC wishes to utilize the capacity on its Official Services 
network to provide interLATA services to other carriers or to end-
users, it must do so in accordance with the requirements of the 1996 
Act and our rules. Specifically, the BOC must provide in-region, 
interLATA services through a section 272 affiliate as required by 
section 272(a). If a BOC, therefore, seeks to transfer ownership of its 
Official Services network to its section 272 affiliate, it must ensure 
that the transfer takes place in a nondiscriminatory manner, as 
explained supra in part V.C, and must comport with our affiliate 
transaction rules.
    Finally, although the term ``interLATA services'' includes both 
interLATA information services and interLATA telecommunications 
services, we conclude that ISPs are not entitled to nondiscriminatory 
treatment under section 272(e)(4). The definitional sections of the Act 
make clear that the term ``carriers'' is synonymous with the term 
``common carriers,'' which does not include ISPs. Therefore, the 
requirement that the BOCs provide interLATA or intraLATA facilities or 
services to ``all carriers'' on a nondiscriminatory basis does not 
extend to ISPs under section 272(e)(4).

[[Page 2957]]

E. Sunset of Subsections 272(e) (2) and (4)

1. Background
The NPRM sought comment regarding how to reconcile an apparent conflict 
between sections 272(e) and 272(f). We noted that subsections 272(e)(2) 
and (e)(4) establish standards that refer to BOC affiliates. On the one 
hand, those sections could be interpreted as subject to sunset because 
they depend on the existence of a separate affiliate. On the other 
hand, section 272(f) specifically exempts section 272(e) from the 
sunset requirements. We sought comment regarding whether Congress 
intended to eliminate the requirements of sections 272(e)(2) and (e)(4) 
once the BOCs were no longer required to maintain separate affiliates 
under section 272(a).
2. Discussion
    We find that the plain language of the statute compels us to 
conclude that sections 272(e)(2) and 272(e)(4) can be applied to a BOC 
after sunset only if that BOC retains a separate affiliate. The 
nondiscrimination obligations imposed by subsections (e)(2) and (e)(4) 
are framed in reference to a BOC's treatment of its affiliates. In 
contrast, the nondiscrimination obligations imposed by subsections 
(e)(1) and (e)(3) are framed in reference to the BOC ``itself'' as well 
as the BOC affiliate. If a BOC does not maintain a separate affiliate, 
subsections (e)(2) and (e)(4) cannot be applied because there will be 
no frame of reference for the BOC's conduct. Section 272(f), however, 
exempts section 272(e) from sunset without qualification. In order to 
give meaning to section 272(f), we conclude that subsections (e)(2) and 
(e)(4) will apply to a BOC's conduct so long as that BOC maintains a 
separate affiliate. Subsections (e)(1) and (e)(3) will continue to 
apply in all events.
    A number of safeguards will be available to prevent discriminatory 
behavior by BOCs after the separate affiliate requirements of section 
272 cease to apply. As we explain in detail above, section 251(c)(5), 
section 251(g), and the Commission's rules imposing network disclosure 
and equal access requirements oblige BOCs to provide exchange access on 
a nondiscriminatory basis. In addition, intraLATA services and 
facilities must be provided on a nondiscriminatory basis under section 
251(c)(3), and the provision of interLATA services and facilities will 
continue to be governed by the nondiscrimination provisions of sections 
201 and 202 of the Act. In addition, once local competition develops, 
it will provide a check on the BOCs' discriminatory behavior because 
competitors of the BOC affiliates will be able to turn to other 
carriers for local exchange service and exchange access.

VII. Joint Marketing

A. Joint Marketing Under Section 271(e)

1. Background
    Section 271(e)(1) limits the ability of certain interexchange 
carriers to market interLATA services jointly with BOC local services 
purchased for resale. Specifically, the statute states that:
    Until a Bell operating company is authorized pursuant to [section 
271(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.
    In the NPRM, we sought comment on whether we should interpret 
section 271(e) to prohibit, for example, promoting the availability of 
interLATA services and local exchange services in the same 
advertisement, making these services available from a single source, or 
providing bundling discounts for the purchase of both services. We also 
observed that the clear language of the statute only restricts covered 
interexchange carriers (i.e., those carriers that fall within the scope 
of section 271(e) of the Act) from joint marketing interLATA services 
and BOC local services purchased for resale. Thus, section 271(e) does 
not preclude these interexchange carriers from jointly marketing local 
exchange services provided over their own facilities, or through the 
purchase of unbundled network elements pursuant to section 251(c)(3). 
Nor does section 271(e) prohibit those interexchange carriers from 
``marketing'' BOC resold local exchange services. Rather, the 
prohibition is limited to ``jointly marketing'' BOC resold local 
services with interLATA services.
2. Discussion
    Scope of section 271(e). We agree with the consensus of the 
commenters that the language in section 271(e) is clear--the joint 
marketing prohibition applies only to the marketing of interLATA 
services together with BOC local exchange services purchased for resale 
pursuant to section 251(c)(4). We refer to the latter services in the 
balance of this discussion as ``BOC resold local services.'' In the 
First Interconnection Order, we stated that the terms of section 271(e) 
do not prevent affected interexchange carriers from marketing interLATA 
services jointly with local exchange services provided through the use 
of unbundled network elements obtained pursuant to section 251(c)(3). 
We affirm that conclusion and, accordingly, reject USTA's suggestion 
that we extend the section 271(e) restriction to apply to the joint 
marketing of such services. We find that the express text of the 
statute limits the prohibition to BOC resold local services obtained 
pursuant to section 251(c)(4) and we decline to extend the restriction 
beyond the limits mandated by Congress. We further conclude, for the 
same reason, that the joint marketing restriction does not apply if the 
covered interexchange carrier provides local service over its own 
facilities, or by reselling local exchange services purchased from a 
local exchange carrier that is not a BOC.
    Specific Joint Marketing Restrictions. We conclude that Congress 
adopted the joint marketing restriction in section 271(e) in order to 
limit the ability of covered interexchange carriers to provide ``one-
stop-shopping'' of certain services until the BOC is authorized to 
provide interLATA service in the same territory. We agree with the 
majority of commenters that bundling BOC resold local services and 
interLATA services (including interLATA telecommunications and 
interLATA information services) into a package that can be sold in a 
single transaction constitutes the type of joint marketing that 
Congress intended to restrict by enacting section 271(e). We define 
``bundling'' to mean offering BOC resold local exchange services and 
interLATA services as a package under an integrated pricing schedule. 
Thus, we find that section 271(e) restricts covered interexchange 
carriers from, among other things, providing a discount if a customer 
purchases both interLATA services and BOC resold local services, 
conditioning the purchase of one type of service on the purchase of the 
other, and offering both interLATA services and BOC resold local 
services as a single combined product. This restriction applies until 
the BOC receives authorization under section 271 to offer interLATA 
service in an in-region state, or February 8, 1999, whichever comes 
first.
    We also conclude that section 271(e) bars covered interexchange 
carriers from marketing interLATA services and BOC resold local 
services to consumers through a single transaction. We define

[[Page 2958]]

a ``single transaction'' to include, at a minimum, the use of the same 
sales agent to market both products to the same customer during a 
single communication. Although requiring separate transactions for 
different types of services might preclude interexchange carriers from 
taking advantage of economies of scale, we agree with those commenters 
who argue that such a restriction is an essential element of the joint 
marketing prohibition in section 271(e) during the period the 
limitation remains in effect. We reject the suggestion of some BOCs 
that the section 271(e) restriction requires covered interexchange 
carriers to establish separate sales forces for marketing interLATA 
services and BOC resold local services. We agree with the commenting 
parties that claim neither the statute nor the legislative history 
indicates that Congress intended to impose such a requirement. 
Moreover, in our view, requiring a separate sales force is not 
necessary to accomplish the primary congressional objective of barring 
the affected interexchange carrier from offering ``one-stop shopping'' 
for interLATA and BOC resold local services. Thus, a single agent is 
permitted to market interLATA services in the context of one 
communication, and to market BOC resold local services to the same 
potential customer in the context of a separate communication.
    The application of the section 271(e) joint marketing restriction 
to advertising implicates constitutional issues. We are aware of our 
obligation under Supreme Court precedent to construe the statute 
``where fairly possible so as to avoid substantial constitutional 
questions.'' See United States v. X-Citement Video, 115 S.Ct. 464, 467, 
469 (1994). In the advertising context, the Supreme Court has held that 
the First Amendment protects ``the dissemination of truthful and 
nonmisleading commercial messages about lawful products and services.'' 
See 44 Liquormart, Inc. v. Rhode Island, 116 S.Ct. 1495, 1504 (1996) 
(44 Liquormart). We must be careful, therefore, not to construe section 
271(e) as imposing an advertising restriction that is overly broad. The 
fact that section 271(e) permits a covered interexchange carrier to 
offer and market separately both interLATA services and BOC resold 
services and also permits such carriers to offer and market jointly 
interLATA services and local services provided through means other than 
BOC resold local services (e.g., through the use of unbundled network 
elements, over its own facilities, or by reselling local exchange 
services purchased from a local exchange carrier that is not a BOC) 
makes the task of crafting an effective advertising restriction 
particularly difficult. For example, we see no lawful basis for 
restricting a covered interexchange carrier's right to advertise a 
combined offering of local and long distance services, if it provides 
local service through means other than reselling BOC local exchange 
service. In addition, we cannot adopt a blanket rule that prohibits 
interexchange carriers from publicizing in one advertisement that they 
offer interLATA services and publicizing in a separate advertisement 
that they offer BOC resold local services. As MCI points out, the 
statute permits interexchange carriers to offer both types of services 
through the same corporate entity and under the same brand name. Thus, 
such advertisements would be truthful statements about lawful 
activities.
    A closer question is whether we may ban a covered interexchange 
carrier from claiming in a single advertisement that it offers both 
interLATA services and local services in instances where the carrier 
intends to furnish the latter through BOC resold local services, which 
it is authorized to market only on a stand-alone basis. On the one 
hand, such an advertisement would contain truthful statements about 
services that the interexchange carrier is authorized to provide. On 
the other hand, such an advertisement may be inconsistent with the 
section 271(e) prohibition against jointly marketing the two types of 
services. As some BOCs appear to recognize, however, the principal 
concern with the promotion of both services in a single advertisement 
is that it may suggest ``to consumers that the services are available 
jointly as a package when in fact they are not.'' We agree with these 
commenters that the First Amendment does not confer the right to 
deceive the public. Indeed, the Supreme Court has emphasized that the 
First Amendment does not prevent the government from regulating 
commercial speech to avoid such deceptions. Further, the Court has held 
that the government ``may require commercial messages to appear in such 
a form, or include such additional information, warnings and 
disclaimers, as are necessary to prevent its being deceptive.'' See 44 
Liquormart, 116 S.Ct. at 1506 (internal quotation marks omitted). 
Consistent with this precedent, we conclude that a covered 
interexchange carrier may advertise the availability of interLATA 
services and BOC resold local services in a single advertisement, but 
such carrier may not mislead the public by stating or implying that it 
may offer bundled packages of interLATA service and BOC resold service, 
or that it can provide ``one-stop shopping'' of both services through a 
single transaction. As discussed above, both activities are prohibited 
under section 271(e).
    We further conclude that the joint marketing restriction in section 
271(e) applies only to activities that take place prior to the 
customer's decision to subscribe. We agree with AT&T that, after a 
potential customer subscribes to both interLATA and BOC resold local 
services from a covered interexchange carrier, that carrier should be 
permitted to provide joint ``customer care'' (i.e., a single bill for 
both BOC resold local services and interLATA services, and a single 
point-of-contact for maintenance and repairs). Such activities are 
post-marketing activities. To impose additional prohibitions on post-
marketing activities would add additional burdens not required by the 
statute. Furthermore, a rule that would require a customer to send 
separate payments to the same corporate entity would be confusing and 
burdensome, and therefore would not serve the public interest. 
Customers should also be permitted to make a single phone call for 
complaints and repairs about both local and long distance services once 
they have ordered both services. Because we interpret section 271(e) to 
apply only to activities that take place prior to a customer's decision 
to subscribe, we conclude that, once a customer subscribes to both 
local exchange and interLATA services from a carrier that is subject to 
the restrictions of 271(e), that carrier may market new services to an 
existing subscriber.
    We recognize that the principles we have adopted to implement the 
requirements of section 271(e) may not address all of the possible 
marketing strategies that a covered interexchange carrier might 
initiate to sell BOC resold local services and interLATA services to 
the public. We emphasize, however, that in enforcing this statutory 
section, we intend to examine the specific facts closely to ensure that 
covered interexchange carriers are not contravening the letter and 
spirit of the congressional prohibition on joint marketing by conveying 
the appearance of ``one-stop shopping'' BOC resold local services and 
interLATA services to potential customers.

[[Page 2959]]

B. Section 272(g)

1. Marketing Restrictions on BOC Section 272 Affiliates
    a. Background. Section 272(g)(1) provides that a BOC affiliate may 
not market or sell telephone exchange services provided by the BOC 
``unless that company permits other entities offering the same or 
similar service to market and sell its telephone exchange services.'' 
In the NPRM, we requested comment on what regulations, if any, are 
necessary to implement this provision.
    b. Discussion. We agree with the BOCs that no regulations are 
necessary to implement section 272(g)(1). We do not adopt the three-
month advance notice period proposed by AT&T, because it is not 
required by the statute. Nor do we believe that such a notice period is 
necessary in order for other carriers to receive nondiscriminatory 
treatment. As PacTel notes, any agreement between a BOC and its 
affiliate that enables the affiliate to market or sell BOC services 
must be conducted on an arm's length basis, reduced to writing, and 
made publicly available as required by section 272(b)(5). Thus, under 
section 272(g)(1), other entities offering services that are the same 
or similar to services offered by the BOC affiliate would have the same 
opportunity to market or sell the BOC's telephone exchange service 
under the same conditions as the BOC affiliate.
    We also agree with Sprint that the term ``same or similar service'' 
in section 272(g)(1) encompasses information services. Thus, a section 
272 affiliate may not market or sell information services and BOC 
telephone exchange services unless the BOC permits other information 
service providers to market and sell telephone exchange services. 
Finally, we decline to adopt MCI's requested clarification that 
272(g)(1) applies to the international sphere. MCI appears to be 
concerned about a BOC's discriminatory provision of exchange access to 
foreign carriers. We conclude, however, that section 272(g)(1) applies 
only to the provision of ``telephone exchange'' service, not to the 
provision of ``exchange access.'' Section 202 bars a BOC from 
unreasonable discrimination in the provision of exchange access 
services used to originate and terminate domestic interstate and 
international toll traffic.
2. Marketing Restrictions on BOCs
    a. Background. 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).'' In the NPRM, we sought comment on whether section 272(g)(2) 
imposes the same types of restrictions on the BOCs that section 271(e) 
imposes on the interexchange carriers.
    b. Discussion. We agree with the BOCs that no regulations are 
necessary to implement section 272(g)(2). The statute clearly states 
that BOCs are prohibited from either selling or marketing in-region 
interLATA services provided by a section 272 affiliate until they have 
received approval from the Commission under section 271. We note, 
however, that section 272 does not prohibit a BOC that provides out-of-
region interLATA services, or intraLATA toll service, from marketing or 
selling those services in combination with local exchange services. If 
such advertisements reach in-region customers, however, the BOC must 
make it clear to those customers that the advertisements do not apply 
to in-region interLATA services. This obligation is similar to the 
obligation discussed above, which requires covered interexchange 
carriers to disclose to consumers receiving BOC resold local service 
that bundled packages are not available to them. After a BOC receives 
authorization under section 271, the restriction in section 272(g)(2) 
is no longer applicable, and the BOC will be permitted to engage in the 
same type of marketing activities as other service providers.
    Inbound Marketing. We conclude that BOCs must continue to inform 
new local exchange customers of their right to select the interLATA 
carrier of their choice and take the customer's order for the interLATA 
carrier the customer selects. The obligation to continue to provide 
such nondiscriminatory treatment stems from section 251(g) of the Act, 
because we have not adopted any regulations to supersede these existing 
requirements. Specifically, the BOCs must provide any customer who 
orders new local exchange service with the names and, if requested, the 
telephone numbers of all of the carriers offering interexchange 
services in its service area. A customer orders ``new service'' when 
the customer either receives service from the BOC for the first time, 
or moves to another location within the BOC's in-region territory. As 
part of this requirement, a BOC must ensure that the names of the 
interexchange carriers are provided in random order. We decline to 
adopt NCTA's request that we extend this obligation to require that 
BOCs inform inbound callers of other cable operators and providers of 
video services in the area, however, because no such obligation 
currently exists, and no new requirement is imposed by the statute. We 
further conclude that the continuing obligation to advise new customers 
of other interLATA options is not incompatible with the BOCs' right to 
market and sell the services of their section 272 affiliates under 
section 272(g). Thus, a BOC may market its affiliate's interLATA 
services to inbound callers, provided that the BOC also informs such 
customers of their right to select the interLATA carrier of their 
choice.
    Teaming. We conclude that section 272(g) is silent with respect to 
the question of whether a BOC may align itself with an unaffiliated 
entity to provide interLATA services prior to receiving section 271 
approval. We agree with the BOCs that the language of section 272(g) 
only restricts the BOC's ability to market or sell interLATA services 
``provided by an affiliate required by [section 272].'' We note, 
however, that any equal access requirements pertaining to ``teaming'' 
activities that were imposed by the MFJ remain in effect until the BOC 
receives section 271 authorization. Thus, to the extent that BOCs align 
with non-affiliates, they must continue to do so on a nondiscriminatory 
basis.
3. Section 272(g)(3)
    a. Background. Section 272(g)(3) states that ``[t]he joint 
marketing and sale of services permitted under this subsection shall 
not be considered to violate the nondiscrimination provisions of 
subsection [272](c).''
    b. Discussion. Some of the activities identified by the parties 
appear to fall clearly within the scope of section 272(g)(3) and hence 
would be excluded from the section 272(c) nondiscrimination 
requirements. For example, activities such as customer inquiries, sales 
functions, and ordering, appear to involve only the marketing and sale 
of a section 272 affiliate's services, as permitted by section 272(g). 
Other activities identified by the parties, however, appear to be 
beyond the scope of section 272(g), because they may involve BOC 
participation in the planning, design, and development of a section 272 
affiliate's offerings. In our view, such activities are not covered by 
the section 272(g) exception to the BOC's nondiscrimination 
obligations. We see no point to attempt at this time to compile an 
exhaustive list of the specific BOC activities that would be covered by 
section 272(g). We recognize

[[Page 2960]]

that such determinations are fact specific and will need to be made on 
a case-by-case basis.

C. Interplay Between Sections 271(e), 272(g) and Other Provisions of 
the Statute

1. Background
    In the NPRM, we sought comment on whether the affiliate may 
purchase marketing services from the BOC on an arm's length basis 
pursuant to section 272(b)(5), or whether a BOC and its affiliate 
should be required to contract jointly with an outside marketing entity 
for joint marketing of interLATA and local exchange service in order to 
comply with section 272(b)(3). We also sought comment on the interplay 
between the marketing restrictions in sections 271 and 272 and the CPNI 
provisions set forth in section 222 that are the subject of a separate 
proceeding. In addition, we requested comment on whether the joint 
marketing provision in section 274(c) has any bearing on how we should 
apply the joint marketing provisions in sections 271 and 272.
2. Discussion
    As discussed above in Part IV.C, we conclude that a BOC and its 
affiliate are not required to contract jointly with an outside entity 
in order to comply with section 272(b)(3). Thus, a BOC and its 
affiliate may provide marketing services for each other, provided that 
such services are conducted pursuant to an arm's-length transaction, 
consistent with the requirements of section 272(b)(5). We decline to 
address parties' arguments raised in this proceeding regarding the 
interplay between section 272(g) and either section 222 or section 
274(c) to avoid prejudging issues in our pending CPNI proceeding, CC 
Docket No. 96-115, or our electronic publishing proceeding, CC Docket 
No. 96-152. We emphasize that, if a BOC markets or sells the services 
of its section 272 affiliate pursuant to section 272(g), it must comply 
with the statutory requirements of section 222 and any rules 
promulgated thereunder.

VIII. Provision of Local Exchange and Exchange Access by BOC Affiliates

A. Background

    In the NPRM, we expressed concern that a BOC might attempt to 
circumvent the section 272 safeguards by transferring local exchange 
and exchange access facilities and capabilities to one of its 
affiliates. We requested comment on whether we should prohibit all 
transfers of network capabilities from a BOC to an affiliate. 
Alternatively, we sought comment on whether a BOC transfer of network 
capabilities to an affiliate would make that affiliate a successor or 
assign of the BOC pursuant to section 3(4)(B) of the Act and, 
consequently, subject the affiliate to the nondiscrimination 
requirements of section 272(c)(1) and 272(e).
    We also requested comment on whether, if a BOC were permitted to 
transfer local exchange and exchange access capabilities to an 
affiliate, we should exercise our general rulemaking authority to adopt 
regulations to prevent such an affiliate from engaging in 
discriminatory practices, or whether existing statutory prohibitions on 
discrimination are sufficient. For example, we noted that BOC 
affiliates that provide interstate interLATA telecommunications 
services already would be subject to the requirements of sections 201 
and 202, which are applicable to all common carriers. Those obligations 
would not apply to information services affiliates and manufacturing 
affiliates, however, because they are not ``common carriers'' under the 
Act. As an additional matter, we tentatively concluded that a BOC 
affiliate that is classified as an incumbent LEC would also be subject 
to the nondiscrimination requirements of section 272(c).

B. Discussion

    Transfer of local exchange and exchange access capabilities. We 
conclude that a BOC cannot circumvent the section 272 requirements by 
transferring local exchange and exchange access facilities and 
capabilities to an affiliate. As we discussed above, all goods, 
services, facilities, and information that the BOC provides to its 
section 272 affiliate are subject to the section 272(c)(1) 
nondiscrimination requirement. Application of section 272(c)(1) to the 
BOC's provision of such items should address to a large extent concerns 
about the BOC ``migrating'' or ``transferring'' key local exchange and 
exchange access services and facilities to the 272 affiliate. We note, 
however, that there are still legitimate concerns that a BOC could 
potentially evade the section 272 or 251 requirements by, for example, 
first transferring facilities to another affiliate or the BOC's parent 
company, which would then transfer the facilities to the section 272 
affiliate. To address this problem, we conclude that, if a BOC 
transfers to an affiliated entity ownership of any network elements 
that must be provided on an unbundled basis pursuant to section 
251(c)(3), we will deem such entity to be an ``assign'' of the BOC 
under section 3(4) of the Act with respect to those network elements. 
Any successor or assign of the BOC is subject to the section 272 
requirements in the same manner as the BOC. Thus, the interLATA and 
manufacturing operations contemplated by section 272 would need to 
occur in an affiliate other than the one to which the local exchange 
and exchange access facilities have been transferred. We also note 
that, based on the plain language of the statute, section 272(c) only 
applies to the BOC or an affiliate that is a ``successor or assign'' of 
the BOC. We agree with Ameritech that, unlike sections 272 (a) and (e), 
section 272(c) does not apply to BOC affiliates merely because they 
qualify as incumbent LECs.
    We decline to adopt an absolute prohibition on a BOC's ability to 
transfer local exchange and exchange access facilities and capabilities 
to an affiliate, because we conclude based on the record before us that 
such a restriction would be overly broad and exceed the requirements of 
the Act. We note, however, that our determination does not preclude a 
state from prohibiting a BOC's transfer of local exchange facilities 
under its regulatory framework for incumbent LECs.
    In view of our decision to treat a BOC affiliate as a ``successor 
or assign'' of the BOC if the BOC transfers network elements to the 
affiliate, we find it unnecessary at this time to adopt additional 
nondiscrimination regulations applicable to section 272 affiliates. A 
section 272 affiliate that is not deemed a ``successor or assign'' of a 
BOC would nevertheless be subject to the obligations imposed by section 
202--which prohibits common carriers from, among other things, engaging 
in ``unjust and unreasonable'' practices with respect to the provision 
of interstate services. Moreover, BOC interLATA services affiliates 
that offer intrastate interLATA telecommunications services would be 
subject to corresponding nondiscrimination obligations that state 
statutes and regulations typically impose on common carriers. We 
conclude based on the current record that these existing requirements 
should be adequate to protect competition and consumers against 
anticompetitive conduct by a BOC section 272 affiliate.
    Integrated affiliates. Numerous commenters also request that we 
address whether the separate affiliate safeguards imposed by section 
272 prohibit a section 272 affiliate from offering local exchange 
service through the same corporate entity. Based on our analysis of the 
record and the applicable statutory provisions, we conclude that

[[Page 2961]]

section 272 does not prohibit a section 272 affiliate from providing 
local exchange services in addition to interLATA services, nor can such 
a prohibition be read into this section. Specifically, section 
272(a)(1) states that--

    A Bell operating company (including any affiliate) which is a 
local exchange carrier that is subject to the requirements of 
section 251(c) may not provide any service described in [section 
272(a)(2)] unless it provides that service through one or more 
affiliates that * * * are separate from any operating company entity 
that is subject to the requirements of section 251(c) * * *

    We find that the statutory language is clear on its face--a BOC 
section 272 affiliate is not precluded under section 272 from providing 
local exchange service, provided that the affiliate does not qualify as 
an incumbent LEC subject to the requirements of section 251(c). Because 
the text and the purpose of the statute are clear, there is no need, as 
CCTA suggests, to resort to legislative history. We also agree with 
Ameritech that a BOC affiliate should not be deemed an incumbent LEC 
subject to the requirements of section 251(c) solely because it offers 
local exchange services; rather, section 251(c) applies only to 
entities that meet the definition of an incumbent LEC under section 
251(h). Section 251(h)(1) defines an incumbent LEC as, inter alia, a 
local exchange carrier that: (1) on the date of enactment of the 
Telecommunications Act of 1996, provided telephone exchange service, 
and (2) was a member of the National Exchange Carrier Association 
(NECA) or becomes a successor or assign of such a member. Because no 
BOC affiliate was a member of NECA when the 1996 Act was enacted, such 
affiliates may be classified as incumbent LECs under this statutory 
provision only if they are successors or assigns of their affiliated 
BOCs. Alternatively, under section 251(h)(2), if the Commission 
determines that a carrier occupies a position in the market for 
telephone exchange service within an area that is comparable to the 
position occupied by the incumbent LEC, and such carrier has 
substantially replaced an incumbent LEC, such carrier may be treated by 
rule as an incumbent LEC for purposes of section 251. We find no basis 
in the record of this proceeding to find that a BOC affiliate must be 
classified as an incumbent LEC under section 251(h)(2) merely because 
it is engaged in local exchange activities. Absent such a finding, BOC 
affiliates that are neither one of the Bell operating companies listed 
under 153(4)(A), nor a successor or assign of any such company, are not 
subject to the separation requirements of section 272.
    Furthermore, we conclude that section 251 does not preclude section 
272 affiliates from obtaining resold local exchange service pursuant to 
section 251(c)(4) and unbundled elements pursuant to section 251(c)(3), 
because the statute does not place any restrictions on the types of 
telecommunications carriers that may qualify as ``requesting 
carriers.'' We disagree with CCTA's assertion that section 272 
affiliates cannot be treated as requesting carriers, because such 
affiliates are ``part of the standard for determining nondiscriminatory 
interconnection by the [incumbent LEC] for all other telecommunications 
carriers.'' The fact that a determination of whether an incumbent LEC 
provides nondiscriminatory access may be based on a comparison of the 
access that the incumbent LEC provides itself or its affiliate does not 
preclude such affiliate from being a ``requesting carrier'' under 
section 251. There is nothing inconsistent with both requiring 
nondiscriminatory access and at the same time allowing an affiliate to 
be a requesting carrier. Moreover, we find nothing in the statute or in 
the First Interconnection Order that limits the definition of 
``requesting carrier'' to non-affiliates. Thus, section 272 affiliates 
cannot be precluded under section 251 from qualifying as ``requesting 
carriers'' that are entitled to purchase unbundled elements or retail 
services at wholesale rates from the BOC.
    We further conclude that section 272(g)(1) cannot be read as 
imposing a limitation on the ability of section 272 affiliates to 
exercise their rights under section 251(c)(3). We are not persuaded by 
AT&T's argument that, because section 272(g)(1) sets forth limited 
conditions under which section 272 affiliates may ``market or sell'' 
local exchange services, allowing those affiliates to purchase 
unbundled elements is inconsistent with the Act. Rather, we agree with 
CCTA that section 272(g)(1) speaks only to marketing issues, and does 
not address the conditions under which a section 272 affiliate may 
provide local exchange services. Furthermore, we find AT&T's claim that 
allowing section 272 affiliates to provide local exchange service 
through unbundled elements will ``artificially and decisively slant 
[the] playing field in the BOC's favor'' unpersuasive, because other 
telecommunications carriers will be able to provide local exchange 
service through unbundled elements on the same terms and conditions. 
AT&T's concern that the affiliate will be able to avoid access charges 
by obtaining the unbundled elements appears to be premised on the view 
that access charges are currently too high. The issue of reforming 
access charges will, however, be addressed in a separate proceeding. 
Moreover, we conclude that MCI's argument--that opportunities for 
discrimination and cross-subsidy are greater when the BOC provides 
network elements to its affiliate than when it provides resold 
services--is speculative. To the extent that concerns over 
discrimination arise, there are safeguards in sections 251 and 252 to 
address such concerns. We therefore decline to distinguish between a 
section 272 affiliate's ability to provide local service by reselling 
BOC local exchange service and its ability to offer such service by 
purchasing unbundled elements from the BOC.
    We also conclude as a matter of policy that regulations prohibiting 
BOC section 272 affiliates from offering local exchange service do not 
serve the public interest. The goal of the 1996 Act is to encourage 
competition and innovation in the telecommunications market. We agree 
with the BOCs that the increased flexibility resulting from the ability 
to provide both interLATA and local services from the same entity 
serves the public interest, because such flexibility will encourage 
section 272 affiliates to provide innovative new services. To the 
extent that there are concerns that the BOCs will unlawfully subsidize 
their affiliates or accord them preferential treatment, we reiterate 
that improper cost allocation and discrimination are prohibited by 
existing Commission rules and sections 251, 252, and 272 of the 1996 
Act, and that predatory pricing is prohibited by the antitrust laws. 
Our affiliate transaction rules, as modified by our companion 
Accounting Safeguards Order, address the BOCs' ability to engage in 
improper cost allocation. The rules in this Order and our rules in our 
First Interconnection Order and our Second Interconnection Order ensure 
that BOCs may not favor their affiliates. In sum, we find no basis in 
the record for concluding that competition in the local market would be 
harmed if a section 272 affiliate offers local exchange service to the 
public that is similar to local exchange service offered by the BOC.
    Although we conclude that the 1996 Act authorizes section 272 
affiliates to purchase unbundled elements, we emphasize that BOC 
facilities and services provided to section 272 affiliates must be made 
available to others on the same terms, conditions, and prices provided 
to the BOC affiliate

[[Page 2962]]

pursuant to the nondiscrimination requirements of sections 272 and 
251(c)(3). Thus, if a BOC affiliate is a requesting carrier under 
section 251, the BOC is required to treat unaffiliated requesting 
carriers in the same manner that the BOC treats its affiliate, unless 
the unaffiliated entity has requested different treatment. For example, 
if a BOC were to provide its section 272 affiliate with access to 
operational support systems (OSS) functions via a different method or 
system than it provides to requesting carriers under section 251, we 
would regard such discriminatory treatment as a violation of section 
251(c)(3). We believe such nondiscrimination requirements will prevent 
BOCs from providing special treatment to their affiliates.
    State regulation. As mentioned above, several BOCs have already 
submitted applications to state regulatory commissions seeking 
authority to provide both local exchange services and interLATA 
services from the same affiliate. Although we conclude that the 1996 
Act permits section 272 affiliates to offer local exchange service in 
addition to interLATA service, we recognize that individual states may 
regulate such integrated affiliates differently than other carriers.

IX. Enforcement

A. Reporting Requirements under Section 272

1. Background
    BOCs are required under Computer III to provide information to 
third parties regarding changes to the network and new network services 
and to report periodically on the quality and timeliness of 
installation and maintenance. We sought comment in the NPRM on what 
requirements or mechanisms were necessary to facilitate the detection 
of violations of the separate affiliate and nondiscrimination 
requirements of section 272. We asked parties to comment on whether we 
should impose reporting and other requirements on BOCs analogous to 
those requirements imposed in the Computer III and subsequent ONA 
proceedings to ensure compliance with section 272 requirements. We 
specifically requested comment on whether these requirements are 
sufficient to implement the section 272(c)(1) nondiscrimination 
requirement.
2. Discussion
    We conclude that none of the reporting or other requirements of 
Computer III/ONA is necessary to implement the requirements of section 
272(c)(1) at this time. For the same reasons, we further conclude that 
(with the exception of section 272(e)(1)), no reporting requirements 
are needed to facilitate the detection and adjudication of violations 
of the separate affiliate and nondiscrimination requirements of section 
272. As many commenters observe, reporting requirements serve two 
primary purposes. First, they act to deter potential anticompetitive 
behavior by requiring BOCs to provide objective proof of their 
compliance with the separate affiliate and nondiscrimination 
requirements. Second, they enable competitors, as well as the 
Commission, to detect any potential violations of these requirements. 
We believe, however, that sufficient mechanisms already exist within 
the 1996 Act both to deter anticompetitive behavior and to facilitate 
the detection of potential violations of section 272 requirements. 
Nevertheless, we intend to monitor compliance with section 272 
requirements and, of course, reserve the ability to undertake 
appropriate measures in the event that future developments warrant.
    The requirements of section 272(b), as discussed above, discourage 
anticompetitive behavior by the BOC by requiring the BOC and its 
section 272 affiliate to adhere to certain structural and transactional 
requirements, including the requirement to ``operate independently.'' 
We therefore conclude that it is unnecessary to impose the Computer 
III/ONA reporting requirements in order to implement the separate 
affiliate and nondiscrimination requirements of section 272. Further, 
we note that even some commenters that support imposing Computer III/
ONA reporting requirements on BOCs admit that they do not seem useful 
or practical.
    We find, instead, that several of the disclosure requirements 
established in the 1996 Act will facilitate the detection of 
anticompetitive behavior. Section 272(d), for example, requires that a 
BOC obtain and pay for a biennial joint federal/state audit to 
determine whether it has ``complied with [section 272] and the 
regulations promulgated under this section * * *.'' We conclude that 
this broad audit requirement is intended to verify BOC compliance with 
the accounting and non-accounting requirements of section 272, as 
implemented. In addition, we note that, pursuant to section 
271(d)(3)(B), a BOC may not receive authorization to provide in-region 
interLATA services until it shows, among other things, that the 
``requested authorization will be carried out in accordance the 
requirements of section 272.'' In view of these requirements, we reject 
ITAA's suggestion that BOCs should submit to the Commission section 272 
compliance plans, and periodic reports regarding their implementation 
of those plans, as unnecessarily burdensome.
    In addition, the section 272(b)(5) requirement that all 
transactions between a BOC and its section 272 affiliate be reduced to 
writing and made publicly available should serve as a powerful 
mechanism both to detect violations of the section 272 requirements and 
to deter anticompetitive behavior. Similarly, we find that our 
interpretation of section 272(c)(1) as a flat prohibition against 
discrimination will work in conjunction with the section 272(b)(5) 
disclosure requirement to deter anticompetitive behavior. Under section 
272(c)(1), any difference between the goods, services, and facilities 
given to a section 272 affiliate and those given to an unaffiliated 
entity may give rise to a claim of discrimination. Some commenters 
argue that the requirement of section 272(b)(5) should be extended to 
encompass not only transactions between a BOC and its section 272 
affiliate, but also transactions between a BOC and unaffiliated 
entities. We find, however, that section 272(b)(5), by its terms, 
applies only to the transactions between the BOC and its section 272 
affiliate. Extending such a requirement to transactions between a BOC 
and unaffiliated entities would expand the scope of this section beyond 
the statutory requirements and is not necessary to detect the type of 
discrimination that section 272 is intended to prevent. As discussed 
below, parties may make a request for such reporting requirements in 
the context of their interconnection negotiations with BOCs. Presented 
with such a request, the BOC will have the obligation to negotiate this 
proposal in good faith pursuant to section 251(c)(1).
    In addition to the requirements of section 272, the Act also 
imposes other disclosure requirements on the BOCs that, in our view, 
largely address the concerns cited by parties arguing for additional 
reporting requirements. For example, section 251(c)(5) requires all 
incumbent LECs, including BOCs, to disclose publicly information about 
network changes that will affect a competing service provider's 
performance or ability to provide service or will affect the incumbent 
LEC's interoperability with other service providers. In implementing 
this requirement in our Second Interconnection Order, we found that 
this disclosure about network changes ``promotes open and vigorous

[[Page 2963]]

competition'' and provides ``sufficient disclosure to insure against 
anticompetitive acts.'' Similarly, section 273(c)(1) requires BOCs to 
maintain and file with the Commission full and complete information of 
the protocols and technical requirements used for network connection, 
and section 273(c)(4) requires BOCs to provide ``to interconnecting 
carriers providing telephone exchange service, timely information on 
the planned deployment of telecommunications equipment.''
    We also find that, beyond the reporting requirements mandated under 
the 1996 Act, there are other avenues by which a telecommunications 
carrier may obtain information relevant to detecting anticompetitive 
BOC conduct. For example, competitive telecommunications carriers, on 
their own initiative, could seek to incorporate certain performance and 
quality standards into their negotiated or arbitrated interconnection 
agreements to ensure that BOCs satisfy their obligation to provide 
service in a nondiscriminatory manner. As noted above, BOCs, like any 
other incumbent LEC, are obligated to negotiate such requests in good 
faith pursuant to section 251(c)(1). Through this process, competitive 
carriers will be able to tailor the interconnection agreement to 
include only those reporting requirements that they deem necessary or 
find to be most useful. Further, pursuant to section 252(a), BOCs must 
file all interconnection agreements with the appropriate state 
commission and under section 252(h) these agreements must be made 
publicly available; the terms and conditions of these interconnection 
agreements, therefore, are on public record and available to 
competitors. We also note that there are several state utility 
commissions that, pursuant to state administrative code, require LECs 
to conform to certain service standards and make service quality 
reports publicly available. New York and Virginia, for example, require 
all LECs to file periodic service quality or standard of service 
reports.
    We believe that the reporting requirements required by the 1996 
Act, those required under state law, and those that may be incorporated 
into interconnection agreements negotiated in good faith between BOCs 
and competing carriers will collectively minimize the potential for 
anticompetitive conduct by the BOC in its interexchange operations. In 
addition to deterring potential anticompetitive behavior, these 
information disclosures will also facilitate detection of potential 
violations of the section 272 requirements. We, therefore, agree with 
those parties who argue that there is no need to impose additional 
reporting requirements at this time. Further, we note that even several 
parties who advocate the imposition of additional reporting 
requirements recognize the inherent difficulty of identifying and 
preventing every type of discrimination through regulatory measures.
    Finally, we believe that the complaint process will bring 
violations of section 272 to the attention of the Commission. Congress 
has established a mechanism in section 271(d) to facilitate the 
enforcement of the requirements of section 272. Further, as discussed 
below, if the information necessary to prove a complainant's claim is 
not publicly available, the complainant has the opportunity to obtain 
the necessary documentation from the BOC in the context of an 
enforcement proceeding. We expect that BOC competitors will be vigilant 
in detecting BOC deficiencies and will avail themselves of the 
expedited complaint process established by section 271(d)(6).

B. Section 271(d)(6) Enforcement Provisions

    As discussed in the NPRM, 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 to obtain Commission 
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 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.
1. Commission's Enforcement Authority under Section 271(d)(6)
    a. Background. In the NPRM, we sought to clarify the relationship 
between the Commission's authority under section 271(d)(6) and the 
Commission's existing enforcement authority under sections 206-209 of 
the Communications Act. We tentatively concluded 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. We 
sought 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 unlawful 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.''
    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 271(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. In 
the NPRM, we stated that the Commission may determine that a BOC has 
ceased to meet the conditions of its approval under section 271(d)(3) 
either via the resolution of an expedited complaint proceeding pursuant 
to section 271(d)(6)(B) or in a proceeding commenced on its own motion.
    b. Discussion. We affirm our tentative conclusion that section 
271(d)(6) augments the Commission's existing enforcement authority. We 
reject both NYNEX's contention that the specific remedies of section 
271(d)(6)(A) supersede the general sanctions contained in sections 206-
209 of the Act as well as SBC's assertion that there is no statutory 
basis for applying the provisions of section 206-209 when a violation 
of section 271(d)(3) has been alleged. As AT&T observes, there is no 
support in the statute or its legislative history for the assertion 
that Congress intended to eliminate the damages remedy that applies to 
all other violations of Title II for violations of sections 271 and 
272, especially in light of the competitive concerns that underlie the 
1996 Act. We also conclude

[[Page 2964]]

that, where a complainant seeks damages as a result of the underlying 
alleged violative conduct, a Commission determination on whether the 
BOC has ceased to meet the conditions and the imposition of a section 
271(d)(6)(A) sanction, where appropriate, would fulfill the 
Commission's statutory duty to ``act on such complaint within 90 
days.'' Completion of this statutory obligation, however, would not 
preclude the complainant from filing a supplemental complaint to 
determine the actual amount of damages.
    With respect to imposition of a Title V penalty (e.g., forfeiture 
and fines) pursuant to section 271(d)(6)(A)(ii), we note that Title V 
provides for a separate process that is initiated by the issuance of a 
notice of apparent liability. We find, therefore, that the Commission's 
obligation under section 271(d)(6) is satisfied with respect to Title V 
penalties if, within 90 days (or longer if parties agree) of receiving 
a complaint, the Commission, upon finding a BOC liable for unlawful 
conduct, issues a notice of apparent liability pursuant to section 503. 
Finally, we affirm our tentative conclusion that the Commission may 
make a determination that a BOC has ceased to meet the conditions for 
entry either in a proceeding commenced on its own motion or via the 
resolution of a complaint proceeding. We further find, as most 
commenters suggest, that the Commission is not bound by the 90-day time 
constraint when it initiates a proceeding on its own motion.
2. Legal and Evidentiary Standards
    a. Background. We sought comment in the NPRM on the legal and 
evidentiary standards necessary to establish that a BOC has ceased to 
meet the conditions required for its approval to provide in-region 
interLATA service. The majority of commenters assert that prescribing 
the elements of every claim that could conceivably be brought before 
the Commission would, at this point, be a fruitless exercise. USTA 
maintains that, in order to invoke section 271(d)(6), the complainant's 
allegations and supporting proof must be of such character that, had it 
been presented prior to entry, the Commission would not have approved 
the BOC's application. Similarly, MCI contends that a complainant 
seeking section 271(d)(6) relief should state that the defendant BOC is 
no longer meeting the conditions for entry, cite the specific 
requirements the BOC is violating, and describe how it is violating 
them.
    b. Discussion. MCI and USTA correctly point out that section 
271(d)(6) cannot be invoked unless the complainant alleges that the BOC 
has failed to meet the conditions of entry under section 271(d)(3). We 
conclude, however, that the procedural aspects of this showing are best 
addressed in our pending proceeding to adopt expedited complaint 
procedures. We agree with the majority of commenters and conclude that, 
beyond the duties and obligations discussed elsewhere in this Order, we 
need not establish at this time substantive rules that would define the 
specific legal elements of a claim that a BOC has failed or ceased to 
meet the conditions for entry under section 271(d)(3). Although we 
recognize that the establishment of substantive standards or ``bright 
line'' tests could assist in expediting the ultimate disposition of 
complaints invoking the 90-day statutory resolution deadline under 
section 271(d)(6), the conditions for entry include not only compliance 
with the section 272 requirements, but also satisfaction of the 
requirements of the competitive checklist in section 271(c)(2)(B), as 
well as a demonstration that the BOC application is consistent with the 
public interest, convenience, and necessity. Given the widely varying 
circumstances that may arise in the context of complaints alleging 
failure to meet the conditions of entry, we conclude that it is best to 
determine a BOC's compliance or noncompliance with these requirements 
on the basis of concrete facts presented in particular cases, rather 
than by substantive rule in this notice-and-comment proceeding.
    For these same reasons, we agree with a majority of the commenters 
that it would be impractical to prescribe specific evidentiary 
standards for establishing violations of all of the substantive 
requirements contained in the competitive checklist. Just as the 
circumstances that arise in the context of 271(d)(6) complaints are 
likely to vary from case to case, so too will the information necessary 
to prove or disprove allegations that the BOC has ceased to meet the 
conditions of entry. We note as a general matter that, consistent with 
the requirements of the APA, the Commission's practice in formal 
complaint proceedings pursuant to section 208 has been to determine 
compliance or noncompliance with the Act or the Commission's rules and 
orders according to a ``preponderance of the evidence'' standard of 
proof. Neither section 271 nor its legislative history prescribe a 
different standard of proof for establishing a BOC's failure to meet 
the conditions required for entry; we conclude, therefore, that this 
evidentiary standard applies equally to section 271(d)(6) complaints. 
In the paragraphs that follow, we address related issues regarding what 
constitutes a prima facie showing that a BOC has ceased to meet one or 
more of the conditions for interLATA entry and whether the burden of 
proof should shift to the defendant BOC once the complainant makes such 
a showing. Notwithstanding the existence of a prima facie showing or 
any shift in the burden of production, as discussed below, to the 
extent that a complainant and defendant BOC differ over the material 
facts underlying a section 271(d)(6) complaint, the preponderance of 
evidence standard will guide our ultimate disposition of the complaint.
3. Prima Facie Standard
    a. Background. We sought comment in the NPRM on what constitutes a 
prima facie showing that a BOC has ceased to meet one or more of the 
conditions for interLATA entry. We asked parties to comment on whether 
it is 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).
    b. Discussion. We conclude that complainants invoking the expedited 
complaint procedures of section 271(d)(6)(B) must 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 a BOC has ceased to meet 
the conditions for entry. Contrary to the suggestion of NYNEX and 
others, we did not propose in our NPRM that it would be sufficient for 
a complainant to establish a prima facie case without the submission of 
``proper supporting evidence.'' Such a showing is not permissible under 
either our present pleading requirements or under the rules we propose 
in the Enforcement NPRM, 61 FR 67978 (December 26, 1996), on expedited 
complaint procedures. Under our present rules, a formal complaint is 
required to include certain categories of information, including 
specific facts and legal authorities upon which the complaint is based. 
In addition, a formal complaint must identify or describe specifically 
and in detail the carrier conduct that forms the basis for the 
complaint as well as the nature of injury sustained. Further, in our 
Enforcement NPRM, we recently proposed to

[[Page 2965]]

augment these requirements by requiring that a formal complaint include 
facts supported by relevant documentation or affidavits. Under our 
proposed rules, a complainant that fails to meet these pleading 
requirements may face either a dismissal of the complaint or a summary 
denial of the relief sought. Thus, in light of the pleading 
requirements that presently exist, as well as those proposed in the 
Enforcement NPRM, we reject allegations by some commenters that the 
prima facie standard we are adopting in this Order will violate the 
defendant's procedural rights, allow a complainant to file only a 
``bare notice-type complaint,'' or invite a flood of frivolous suits 
designed to harass the BOCs.
    We reject the recommendations of AT&T and MCI that we adopt 
specific criteria the complainant must demonstrate in order to 
establish a prima facie showing. As we stated above, beyond the legal 
and evidentiary standards established in this proceeding, it would be 
imprudent for us, at this time, to attempt to propose a comprehensive 
list of the showings that complainants will be required to make in 
order to demonstrate violations of the conditions of entry. Rather, we 
find it more appropriate to establish a generally applicable prima 
facie standard that is suitable for all complaints invoking section 
271(d)(6), not just those alleging specific violations of the section 
272 requirements.
 4. Burden-Shifting and Presumption of Reasonableness
    a. Background. In the NPRM, we sought comment on whether the pro-
competitive goals of the 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). 
We sought comment specifically 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).
     We also observed in the NPRM that in complaints challenging the 
rates, terms, and conditions of non-dominant carrier service offerings 
under sections 201(b) and 202(a), the Commission has effectively 
established a rebuttable presumption that such rates and practices are 
lawful. We tentatively concluded 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.
    b. Discussion. For the reasons and in the manner discussed below, 
we conclude that the burden of production with respect to an issue 
should shift to the BOC after the complainant has demonstrated a prima 
facie case that a defendant BOC has ceased to meet the conditions of 
entry. As an initial matter, we note that the term ``burden of proof'' 
has historically been used to describe two separate but related 
concepts. First, it has been used to describe the burden of persuasion 
with respect to a particular issue which, under the traditional view, 
never shifts from one party to the other at any stage in the 
proceeding. Second, it has been used to describe the burden of going 
forward with evidence necessary to avoid an adverse decision on that 
issue. This burden may shift back and forth between the parties. Under 
the approach we adopt today, the burden of production or coming forward 
with evidence will shift to the defendant BOC once the complainant has 
established a prima facie case that the conditions of interLATA entry 
have been violated. In other words, the defendant BOC will have an 
affirmative obligation to produce evidence and arguments necessary to 
rebut the complainant's prima facie case or risk an adverse ruling. The 
complainant, however, will have the ultimate burden of persuasion 
throughout the proceeding; that is, to show that the ``preponderance of 
the evidence'' produced in the proceeding weighs in its favor. As 
explained more fully below, shifting the burden of production to the 
defendant BOC once a prima facie case has been made will require the 
party most likely to have relevant information in its possession to 
produce the information at an early stage in the proceeding.
     Currently, in a typical complaint proceeding, the complainant has 
the burden of establishing that a common carrier has violated the 
Communications Act or a Commission rule or order. This burden of 
persuasion does not shift to the defendant carrier at any time in the 
proceeding. As Sprint observes, however, in view of the statutory 
mandate to resolve section 271(d)(3) complaints in 90 days, the 
Commission must balance the need for expeditious resolution of the 
complaint against the need to develop a full record. We recognize, as 
do many commenters, that, even though some information may be publicly 
available, in many cases the BOC will be the sole possessor of certain 
information relevant to the disposition of the complainant's case. Our 
primary goal, as we expressed in the NPRM, is to give full force and 
effect to the pro-competitive policies underlying section 271(d)(6) by 
ensuring the full and fair resolution of complaints challenging a BOC's 
compliance with the conditions for interLATA entry within the statutory 
90-day period. We find that shifting the burden of production to the 
defendant BOC after a prima facie showing has been made by the 
complainant will facilitate our ability to reach this goal.
     Further, as we observed in the NPRM, effective enforcement of the 
conditions of interLATA entry, including the separate affiliate and 
nondiscrimination requirements of section 272, is critical to ensuring 
the full development of competition in the local and interexchange 
telecommunications markets. Many commenters argue that prompt 
enforcement of these conditions is essential not only to ensure the 
advent of true competition, but also to ensure that the BOCs take the 
conditions of entry seriously, particularly after they enter the in-
region interLATA market. We conclude that shifting the burden of 
production to the BOC will facilitate the detection of anticompetitive 
behavior by the BOC and will enable us to adjudicate expeditiously 
complaints alleging violations of section 271(d)(3). Further, as 
mentioned above, in the context of a complaint proceeding, BOCs will 
have an affirmative obligation to produce all relevant evidence in 
their possession to rebut the complainant's claim or face an adverse 
ruling. Shifting the burden of production, therefore, may ultimately 
reduce the number of complaints filed against the BOCs by encouraging 
them to divulge exculpatory evidence before enforcement proceedings 
begin.
     Many commenters that support shifting the burden of proof do not 
specify whether they advocate shifting the burden of persuasion or the 
burden of production. It is evident from the context of some comments, 
however, that a few commenters support a shift in the burden of 
persuasion, rather than a shift in the burden of production. In 
response to these commenters, we find that most of the competitive 
concerns they raise in support of shifting the burden of persuasion are 
more than adequately addressed by shifting the burden of production. 
For example, some parties that advocate shifting the burden of 
persuasion argue that complainants frequently will require

[[Page 2966]]

specific information that is within the exclusive possession of the BOC 
in order to substantiate their claim. These parties contend that 
requiring the complainant to maintain the burden of proof would result 
in needless, extensive discovery, and shifting the burden will give 
BOCs the incentive to produce information necessary to resolve the 
complaint. We conclude that these concerns, as well as our goal of 
facilitating the full and fair resolution of claims alleging violations 
of the conditions of entry within the statutory 90-day period, are 
satisfied without requiring BOCs to prove a negative in order to avoid 
liability, i.e., to prove, by a preponderance of the evidence, that 
they did not violate the conditions of entry. Further, we find it 
unnecessary to address most of the BOCs' arguments against burden-
shifting because they are directed against shifting the ultimate burden 
of persuasion rather than the burden of production.
     We do find it necessary, however, to respond to Ameritech's 
argument that informational asymmetry between the complainant and 
defendant is best addressed in the context of the discovery process. 
Ameritech maintains that, if the Commission's discovery processes are 
too cumbersome, they ought to be reformed rather than replaced with 
burden-shifting. Similarly, other commenters propose various procedural 
requirements that we might impose to enable us to resolve complaints 
within the 90-day statutory window. Moreover, a few commenters suggest 
that Alternative Dispute Resolution may be another mechanism by which 
to facilitate resolution of complaints alleging a violation of section 
271(d)(3).
    In response to these arguments, we note that purpose of the 
Enforcement NPRM is to streamline our current procedures and pleading 
requirements so that we may expedite the processing of all formal 
complaints and resolve complaints within the deadlines imposed by the 
1996 Act. We therefore find that it would be inadvisable to attempt to 
establish any new procedural rules in this proceeding. Moreover, as 
PacTel points out, we do not have an adequate record on which to base 
any such rules. In response to Ameritech, we note that in the 
Enforcement NPRM we specifically proposed to reform our discovery 
process. Specifically, we sought comment on a range of options to 
eliminate or modify the discovery process, including prohibiting 
discovery as a matter of right, limiting the amount or scope of 
discovery, and allowing the state to set timetables for completion of 
discovery on an individual case basis. By shifting the burden of 
production to the BOC after a prima facie showing has been made by the 
complainant, we are ensuring that information relevant to the 
complainant's claim is disclosed early in the process, and thereby 
providing the Commission a sufficient record on which to make a 
decision, even in the potential absence of traditional discovery.
     Finally, we affirm our tentative conclusion 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. The presumption of lawfulness 
given to nondominant carrier rates and practices is employed in the 
context of complaints alleging violations of sections 201(b) and 
202(b), where the complaint must demonstrate that the defendant's rates 
and practices are ``unjust and unreasonable.'' We agree with MCI that a 
presumption of reasonableness is an irrelevant concept in the context 
of complaints alleging violations of the conditions of interLATA 
approval in section 271(d)(3), particularly given our interpretation of 
section 272(c)(1) as an unqualified prohibition on discrimination.
5. Enforcement Measures under Section 271(d)(6)(A)
    a. Background. 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.
     In the NPRM, we tentatively concluded that we will follow the 
procedures set forth in Title V to impose Title V penalties, including 
forfeitures, under section 271(d)(6)(A). As to the non-forfeiture 
enforcement measures, we sought 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 
sought 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 interpreted ``opportunity for hearing'' not to require a 
trial-type hearing before an Administrative Law Judge (ALJ). We also 
tentatively concluded that Congress, by imposing a 90-day deadline for 
complaints, did not intend to afford the BOC trial-type hearings in 
enforcement proceedings pursuant to section 271(d).
    b. Discussion. We affirm our tentative conclusion that we will 
follow the procedures set forth in Title V to impose Title V penalties 
in enforcement actions alleging violations of the conditions of entry 
under section 271(d)(3). As to non-forfeiture enforcement measures, we 
conclude that it is impractical, at this point in time, to prescribe 
the specific elements and factors that would warrant issuance of an 
order to ``correct the deficiency'' or an order suspending or revoking 
a BOC's approval to provide in-region interLATA service. We agree with 
AT&T that to do so would limit our remedial flexibility. Nor do we find 
it appropriate to establish specific evidentiary standards; rather, our 
determination of which non-forfeiture measure to impose will depend on 
the specific facts and circumstances presented in a particular case. We 
find, nevertheless, that a BOC will have a full and fair opportunity to 
submit evidence and arguments challenging the imposition of a 
prescribed sanction within the statutory 90-day period.
    We conclude that the phrase ``opportunity for hearing'' in section 
271(d)(6)(A) does not require a trial-type hearing before an ALJ prior 
to the imposition of non-forfeiture enforcement measures. Although we 
recognize, as PacTel and USTA suggest, that hearings may be necessary 
to resolve material questions of fact, such as when oral testimony or 
cross-examination is required, we do not agree that trial-type hearings 
before an ALJ are required before the Commission imposes any non-
forfeiture sanction. We find instead that, regardless of whether the 
Commission is imposing a non-forfeiture sanction in a proceeding 
commenced on its own motion or in the context of a complaint 
proceeding, the Commission can satisfy the hearing requirement of 
section 271(d)(6)(A) through written submissions rather than oral 
testimony. Finally, we affirm our tentative conclusion that Congress, 
by imposing a 90-day deadline for complaints, did not intend to afford 
BOCs trial-type hearings in all enforcement proceedings pursuant to 
section 271(d)(6)(B).

[[Page 2967]]

X. Final Regulatory Flexibility Certification

    The Commission certified in the NPRM that the proposed rules would 
not have a significant economic impact on a substantial number of small 
entities because the proposed rules did not pertain to small entities. 
Written public comment was requested on this proposed certification, 
and only one comment was received. For the reasons stated below, we 
certify that the rules adopted herein will not have a significant 
economic impact on a substantial number of small entities. This 
certification conforms to the Regulatory Flexibility Act (RFA), as 
amended by the Small Business Regulatory Enforcement Fairness Act of 
1996 (SBREFA).
    The RFA incorporates the definition of small business concerns set 
forth in 15 U.S.C. Sec. 632 (small business concerns are independently 
owned and operated, not dominant in their field of operations, and meet 
any additional criteria established by the Small Business 
Administration (SBA)). The rules we adopt in this Order implement the 
non-accounting separate affiliate and nondiscrimination provisions of 
sections 271 and 272 of the Act, and will apply to the BOCs when they 
enter previously restricted markets. The NPRM stated that, because BOCs 
are dominant in their field of operations, they are by definition not 
small entities and therefore no regulatory flexibility analysis is 
required. We now note as well that none of the BOCs is a small entity 
because each BOC is an affiliate of a Regional Holding Company (RHC), 
and all of the BOCs or their RHCs have more than 1,500 employees. The 
order also clarifies the joint marketing restrictions that will apply 
to the nation's largest interexchange carriers for an interim period 
pursuant to section 271. The most recent data shows that only AT&T, 
MCI, and Sprint meet the statutory threshold. Moreover, these carriers 
are not small entities under the SBA definition because each has more 
than 1,500 employees.
    NTCA contends that small incumbent LECs should be considered small 
entities under the SBA's definition, and therefore, the basis of the 
proposed certification was incorrect. The certification contained in 
the NPRM applied both to our proposed rules implementing sections 271 
and 272 and to our proposed rules addressing LEC interexchange 
services. This Order implements only sections 271 and 272, and, as we 
have indicated, affects only the BOCs, AT&T, MCI and Sprint. NTCA's 
arguments concerning small incumbent LECs are not relevant to this 
Order, therefore, and will be addressed in a separate Order in this 
docket.
    We therefore certify, pursuant to section 605(b) of the RFA, that 
the rules adopted in this order do not have a significant economic 
impact on a substantial number of small entities. The Commission shall 
provide a copy of this certification to the Chief Counsel for Advocacy 
of the SBA, and include it in the report to Congress pursuant to the 
SBREFA. The certification will also be published in the Federal 
Register.
    Report to Congress. The Commission shall send a copy of this FRFA, 
along with this Order, in a report to Congress pursuant to the SBREFA, 
5 U.S.C. Sec. 801(a)(1)(A). A copy of this FRFA will also be published 
in the Federal Register.

XI. Ordering Clauses

    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) the REPORT AND ORDER IS ADOPTED, effective 30 
days after publication of a summary in the Federal Register. The 
collections of information contained within are contingent upon 
approval by the Office of Management and Budget.
    It is further Ordered that the MFS Petition to Consolidate 
Proceedings in CC Docket Nos. 96-149, 85-229, 90-623, 95-20, and CCBPol 
96-09 filed on July 25, 1996 is DENIED.
    It is further Ordered that Part 53 of the Commission's Rules, 47 
CFR Sec. 53 is ADDED as set forth below.

List of Subjects in 47 CFR Part 53

    Bell Operating Companies, Communications common carriers, InterLATA 
services, Separate affiliate safeguards, Telephone.

Federal Communications Commission.
William F. Caton,
Acting Secretary.

Rule Changes

    Part 53 of Title 47 of the Code of Federal Regulations is added to 
read as follows:

PART 53--SPECIAL PROVISIONS CONCERNING BELL OPERATING COMPANIES

Subpart A--General Information

Sec.
53.1  Basis and purpose.
53.3  Terms and definitions.

Subpart B--Bell Operating Company Entry into InterLATA Services

53.101  Joint marketing of local and long distance services by 
interLATA carriers.

Subpart C--Separate Affiliate; Safeguards

53.201  Services for which a section 272 affiliate is required.
53.203  Structural and transactional requirements.
53.205  Fulfillment of certain requests. [Reserved]
53.207  Successor or assign.

Subpart D--Manufacturing by Bell Operating Companies

53.301  [Reserved]

Subpart E--Electronic Publishing by Bell Operating Companies

53.401  [Reserved]

Subpart F--Alarm Monitoring Services

53.501 [Reserved]

    Authority: Sections 1-5, 7, 201-05, 218, 251, 253, 271-75, 48 
Stat. 1070, as amended, 1077; 47 U.S.C. 151-55, 157, 201-05, 218, 
251, 253, 271-75, unless otherwise noted.

Subpart A--General Information.


Sec. 53.1  Basis and purpose.

    (a) Basis. The rules in this part are issued pursuant to the 
Communications Act of 1934, as amended.
    (b) Purpose. The purpose of the rules in this part is to implement 
sections 271 and 272 of the Communications Act of 1934, as amended, 47 
U.S.C. 271 and 272.


Sec. 53.3  Terms and definitions.

    Terms used in this part have the following meanings:
     Act. The Act means the Communications Act of 1934, as amended.
    Affiliate. An affiliate is 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 part, 
the term ``own'' means to own an equity interest (or the equivalent 
thereof) of more than 10 percent.
    AT&T Consent Decree. The AT&T Consent Decree is the order entered 
August 24, 1982, in the antitrust action styled United States v. 
Western Electric, Civil Action No. 82-0192, in the United States 
District Court for the District of Columbia, and any judgment or order 
with respect to such action entered on or after August 24, 1982.
    Bell Operating Company (BOC). The term Bell operating company
    (1) Means any of the following companies: Bell Telephone Company of 
Nevada, Illinois Bell Telephone Company, Indiana Bell Telephone 
Company, Incorporated, Michigan Bell Telephone Company, New England

[[Page 2968]]

Telephone and Telegraph Company, New Jersey Bell Telephone Company, New 
York Telephone Company, U S West Communications Company, South Central 
Bell Telephone Company, Southern Bell Telephone and Telegraph Company, 
Southwestern Bell Telephone Company, The Bell Telephone Company of 
Pennsylvania, The Chesapeake and Potomac Telephone Company, The 
Chesapeake and Potomac Telephone Company of Maryland, The Chesapeake 
and Potomac Telephone Company of Virginia, The Chesapeake and Potomac 
Telephone Company of West Virginia, The Diamond State Telephone 
Company, The Ohio Bell Telephone Company, The Pacific Telephone and 
Telegraph Company, or Wisconsin Telephone Company; and
    (2) Includes any successor or assign of any such company that 
provides wireline telephone exchange service; but
    (3) Does not include an affiliate of any such company, other than 
an affiliate described in paragraphs (1) or (2) of this definition.
    In-Region InterLATA service. In-region interLATA service is 
interLATA service that originates in any of a BOC's in-region states, 
which are the states in which the BOC 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 February 7, 1996. For the purposes of this part, 800 service, 
private line service, or equivalent services that terminate in a BOC's 
in-region state and allow the called party to determine the interLATA 
carrier are considered to be in-region interLATA service.
    InterLATA Information Service. An interLATA information service is 
an information service that incorporates as a necessary, bundled 
element an interLATA telecommunications transmission component, 
provided to the customer for a single charge.
    InterLATA Service. An interLATA service is a service that involves 
telecommunications between a point located in a LATA and a point 
located outside such area. The term ``interLATA service'' includes both 
interLATA telecommunications services and interLATA information 
services.
    Local Access and Transport Area (LATA). A LATA is a contiguous 
geographic area:
    (1) Established before February 8, 1996 by a BOC such that no 
exchange area includes points within more than one metropolitan 
statistical area, consolidated metropolitan statistical area, or state, 
except as expressly permitted under the AT&T Consent Decree; or
    (2) Established or modified by a BOC after February 8, 1996 and 
approved by the Commission.
    Local Exchange Carrier (LEC). A LEC is any person that is engaged 
in the provision of telephone exchange service or exchange access. Such 
term does not include a person insofar as such person is engaged in the 
provision of commercial mobile service under section 332(c) of the Act, 
except to the extent that the Commission finds that such service should 
be included in the definition of such term.
    Out-of-Region InterLATA service. Out-of-region interLATA service is 
interLATA service that originates outside a BOC's in-region states.
    Section 272 affiliate. A section 272 affiliate is a BOC affiliate 
that complies with the separate affiliate requirements of section 
272(b) of the Act and the regulations contained in this part.

Subpart B--Bell Operating Company Entry Into InterLATA Services


Sec. 53.101  Joint marketing of local and long distance services by 
interLATA carriers.

    (a) Until a BOC is authorized pursuant to section 271(d) of the Act 
to provide interLATA services in an in-region State, or until February 
8, 1999, 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) of the Act with 
interLATA services offered by that telecommunications carrier.
    (b) For purposes of applying section 271(e) of the Act, 
telecommunications carriers described in paragraph (a) of this section 
may not:
    (1) Market interLATA services and BOC resold local exchange 
services through a ``single transaction.'' For purposes of this 
section, we define a ``single transaction'' to include the use of the 
same sales agent to market both products to the same customer during a 
single communication;
    (2) Offer interLATA services and BOC resold local exchange services 
as a bundled package under an integrated pricing schedule.
    (c) If a telecommunications carrier described in paragraph (a) of 
this section advertises the availability of interLATA services and 
local exchange services purchased from a BOC for resale in a single 
advertisement, such telecommunications carrier shall not mislead the 
public by stating or implying that such carrier may offer bundled 
packages of interLATA service and BOC local exchange service purchased 
for resale, or that it can provide both services through a single 
transaction.

Subpart C--Separate Affiliate; Safeguards


Sec. 53.201  Services for which a section 272 affiliate is required.

    For the purposes of applying section 272(a)(2) of the Act:
    (a) Previously authorized activities. When providing previously 
authorized activities described in section 271(f) of the Act, a BOC 
shall comply with the following:
    (1) A BOC shall provide previously authorized interLATA information 
services and manufacturing activities through a section 272 affiliate 
no later than February 8, 1997.
    (2) A BOC shall provide previously authorized interLATA 
telecommunications services in accordance with the terms and conditions 
of the orders entered by the United States District Court for the 
District of Columbia pursuant to section VII or VIII(C) of the AT&T 
Consent Decree that authorized such services.
    (b) InterLATA information services. A BOC shall provide an 
interLATA information service through a section 272 affiliate when it 
provides the interLATA telecommunications transmission component of the 
service either over its own facilities, or by reselling the interLATA 
telecommunications services of an interexchange provider.
    (c) Out-of-region interLATA information services. A BOC shall 
provide out-of-region interLATA information services through a section 
272 affiliate.


Sec. 53.203  Structural and transactional requirements.

    (a) Operational independence.
    (1) A section 272 affiliate and the BOC of which it is an affiliate 
shall not jointly own transmission and switching facilities or the land 
and buildings where those facilities are located.
    (2) A section 272 affiliate shall not perform any operating, 
installation, or maintenance functions associated with facilities owned 
by the BOC of which it is an affiliate.
    (3) A BOC or BOC affiliate, other than the section 272 affiliate 
itself, shall not perform any operating, installation, or maintenance 
functions associated with facilities that the BOC's section 272 
affiliate owns or leases from a provider other than the BOC.

[[Page 2969]]

    (b) Separate books, records, and accounts. A section 272 affiliate 
shall maintain books, records, and accounts, which shall be separate 
from the books, records, and accounts maintained by the BOC of which it 
is an affiliate.
    (c) Separate officers, directors, and employees. A section 272 
affiliate shall have separate officers, directors, and employees from 
the BOC of which it is an affiliate.
    (d) Credit arrangements. A section 272 affiliate shall not obtain 
credit under any arrangement that would permit a creditor, upon 
default, to have recourse to the assets of the BOC of which it is an 
affiliate.
    (e) Arm's-length transactions. A section 272 affiliate shall 
conduct all transactions with the BOC of which it is an affiliate on an 
arm's length basis, pursuant to the accounting rules described in 
Sec. 32.27 of this chapter, with any such transactions reduced to 
writing and available for public inspection.


Sec. 53.205  Fulfillment of certain requests. [Reserved]


Sec. 53.207  Successor or assign.

    If a BOC transfers to an unaffiliated entity ownership of any 
network elements that must be provided on an unbundled basis pursuant 
to section 251(c)(3) of the Act, such entity will be deemed to be an 
``assign'' of the BOC under section 3(4) of the Act with respect to 
such transferred network elements. A BOC affiliate shall not be deemed 
a ``successor or assign'' of a BOC solely because it obtains network 
elements from the BOC pursuant to section 251(c)(3) of the Act.

Subpart D--Manufacturing by Bell Operating Companies


Sec. 53.301  [Reserved]

Subpart E--Electronic Publishing by Bell Operating Companies


Sec. 53.401  [Reserved]

Subpart F--Alarm Monitoring Services


Sec. 53.501  [Reserved]

[FR Doc. 97-1390 Filed 1-17-97; 8:45 am]
BILLING CODE 6712-01-P