[Federal Register Volume 62, Number 128 (Thursday, July 3, 1997)]
[Rules and Regulations]
[Pages 35974-36018]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17407]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 64
[CC Docket No. 96-149; FCC 97-142]
Regulatory Treatment of LEC Provision of Interexchange Services
Originating in the LEC's Local Exchange Area
AGENCY: Federal Communications Commission.
ACTION: Final rule.
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SUMMARY: The Second Report and Order in CC Docket No. 96-149 and Third
Report and Order in CC Docket No. 96-61 (Order) addresses issues
concerning market definition, the regulatory treatment of Bell
Operating Companies' (BOCs) and independent local exchange carriers'
(LECs) provision of in-region long distance and international services,
and separation requirements for the BOCs' and independent LECs'
provision of out-of-region long distance services. This action taken by
the Commission will further the pro-competitive, deregulatory
objectives of the Telecommunications Act of 1996 (1996 Act) by
eliminating unnecessary regulation that is currently imposed on BOCs
and, in certain circumstances, on independent LECs.
EFFECTIVE DATE: This final rule, which contains information collection
requirements, shall become effective September 11, 1997, following OMB
approval, unless FCC publishes a timely document in the Federal
Register changing the effective date of the rule.
FOR FURTHER INFORMATION CONTACT: Katherine Schroder, Attorney, Policy
and Program Planning Division, Common Carrier Bureau, (202) 418-1580.
For additional information concerning the information collections
contained in this 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 April 17, 1997, and released April 18, 1997, as modified by
Regulatory Treatment of LEC Provision of Interexchange Services
Originating in the LEC's Local Exchange Area; Policy and Rules
Concerning the Interstate, Interexchange Marketplace, CC Docket Nos.
96-149, 96-61, Order on Reconsideration, FCC 97-229 (released June 26,
1997) (Reconsideration Order).
In the Reconsideration Order, the Commission makes the following
minor modifications to the Order to clarify language and make minor
corrections: (1) The Commission makes minor modifications to paragraphs
173 and
[[Page 35975]]
188 of the Order to correct and clarify the meaning of these
paragraphs; (2) the Commission amends 47 CFR 64.1903(c) adopted in the
Order so that it is consistent with the text of the Order; (3) the
Commission amends paragraph 226 of the Final Regulatory Analysis in the
Order to be consistent with the changes made to paragraph 173; (4) the
Commission extends the effective date of the Order in the ordering
clauses to comply with the requirements of the Paperwork Reduction Act
of 1995, Public Law 104-13, 109 Stat. 163 (1995); (5) in the ordering
clauses and rules, the Commission redesignates subpart Q to subpart T
in part 64 of title 47 of the Code of Federal Regulations; and (6) the
Commission modifies the rules published in Appendix B of the Order to
correct minor typographical and numbering errors.
The full text of the Order (as released on April 18, 1997) and the
Reconsideration Order is available for inspection and copying during
normal business hours in the FCC Reference Center, 1919 M St., N.W.,
Room 239, Washington, D.C. The complete text of the Order (as released
on April 18, 1997) may also be obtained through the World Wide Web at
http://www.fcc.gov/Bureaus/Common Carrier/Orders/fcc97-142.wp, and the
complete text of the Reconsideration Order may be obtained through the
World Wide Web at http://www.fcc.gov/Bureaus/Common Carrier/Orders/
fcc97-229.wp. The complete text of the Order (as released on April 18,
1997) and the Reconsideration Order may also be purchased from the
Commission's copy contractor, International Transcription Service,
Inc., (202) 857-3800, 2100 M St., N.W., Suite 140, Washington, D.C.
20037.
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. The Commission inadvertently omitted specifically
including the collections and their burdens in the PRA portion of the
notice of proposed rulemaking in CC Docket No. 96-149 (61 FR 39397
(July 29, 1996)).
Regulatory Flexibility Analysis
As required by the Regulatory Flexibility Act, this Order contains
a Final Regulatory Flexibility Analysis which is set forth in Section
VI. The Commission performed a comprehensive analysis of the Order with
regard to small entities and small incumbent LECs. This analysis
includes: (1) A statement of the need for and objectives of this Order
and the regulations contained within; (2) a summary and analysis of the
significant issues raised in response to the initial regulatory
flexibility analysis; (3) description and estimates of the number of
small entities and small incumbent LECs affected by this Order; (4)
summary analysis of the projected reporting, recordkeeping, and other
compliance requirements; and (5) description of the steps taken by the
Commission to minimize the significant economic impact of this Order on
small entities and small incumbent LECs, including the significant
alternatives considered and rejected.
The regulations adopted in this Order are necessary to implement
the provisions of the 1996 Act.
Paperwork Reduction Act
This Order contains new or modified information collection. The
Commission, as part of its continuing effort to reduce paperwork
burdens, invites the general public and OMB to comment on the
information collections contained in this Order, as required by the
Paperwork Reduction Act of 1995, Public Law 104-12. Written comments by
the public on the information collections are due August 4, 1997. OMB
notification of action is due September 2, 1997. 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: None.
Title: Separate Affiliate Requirement for Independent Local
Exchange Carrier (LEC) Provision of International, Interexchange
Services (47 CFR 64.1901-64.1903).
Form NO.: N/A.
Type of Review: New collection.
Respondents: Business or other for-profit.
Public reporting burden for the collection of information is
estimated as follows:
------------------------------------------------------------------------
Annual
hour
Information collection No. of respondents burden
(approx.) per
response
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Maintaining books of account of Approximately 10......... 6,056
independent LEC's international,
interexchange affiliate separate
from LEC's local exchange and
other activities
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Total annual Burden: 60,560 burden hours for all respondents.
Estimated Costs Per Respondent: $100,300.
Needs and Uses: The Commission imposes the recordkeeping collection
to ensure that independent LECs providing international, interexchange
services through a separate affiliate are in compliance with the
Communications Act, as amended, and with Commission policies and
regulations.
Synopsis of Order
I. Introduction
1. In February 1996, the ``Telecommunications Act of 1996'' became
law. Telecommunications Act of 1996, Public Law 104-104, 110 Stat. 56
(1996 Act), codified at 47 U.S.C. Secs. 151 et seq. (Hereinafter, all
citations to the 1996 Act will be to the 1996 Act as it is codified in
the United States Code.) The 1996 Act amended the Communications Act of
1934 (Communications Act). The intent of this legislation is ``to
provide for a pro-competitive, de-regulatory national policy framework
designed to accelerate rapidly private sector deployment of advanced
telecommunications and information technologies and services to all
Americans by opening all telecommunications markets to competition.''
In this rulemaking and related proceedings, the Commission is adopting
policies necessary to achieve the pro-competitive, deregulatory goals
of the 1996 Act.
2.Upon enactment, the 1996 Act permitted the Bell Operating
Companies (BOCs) (for purposes of this proceeding, we adopt the
definition of the term ``Bell Operating Company'' contained in 47
U.S.C. Sec. 153(4)) to provide interLATA services that originate
outside of their regions. See 47 U.S.C. Sec. 271(b)(2). The
Modification of Final Judgment (MFJ), which ended the government's
antitrust suit against AT&T, and which resulted in the divestiture of
the BOCs from AT&T,
[[Page 35976]]
prohibited the BOCs from providing interLATA services. See United
States v. Western Elec. Co., 552 F. Supp. 131, 214 n.316 (D.D.C. 1982);
United States v. Western Elec. Co., 552 F. Supp. 131 (D.D.C. 1982),
aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983); see
also United States v. Western Elec. Co., Civil Action No. 82-0192
(D.D.C. Apr. 11, 1996) (vacating the MFJ). For purposes of this
proceeding, we adopt the definition of the term ``in-region state''
that is contained in 47 U.S.C. Sec. 271(i)(1). We note that section
271(j) provides that a BOC's in-region services include 800 service,
private line service, or their equivalents that terminate in an in-
region state of that BOC and that allow the called party to determine
the interLATA carrier, even if such services originate out-of-region.
Id. Sec. 271(j). The 1996 Act defines ``interLATA services'' as
``telecommunications between a point located in a local access and
transport area and a point located outside such area.'' 47 U.S.C.
Sec. 153(21). Under the 1996 Act, a ``local access and transport area''
(LATA) is ``a contiguous geographic area (A) established before the
date of enactment of the (1996 Act) by a (BOC) such that no exchange
area includes points within more than 1 metropolitan statistical area,
consolidated metropolitan statistical area, or State, except as
expressly permitted under the AT&T Consent Decree; or (B) established
or modified by a (BOC) after such date of enactment and approved by the
Commission.'' 47 U.S.C. Sec. 153(25). LATAs were created as part of the
MFJ's ``plan of reorganization.'' United States v. Western Elec. Co.,
569 F. Supp. 1057 (D.D.C. 1983), aff'd sub nom. California v. United
States, 464 U.S. 1013 (1983). Pursuant to the MFJ, ``all BOC territory
in the continental United States [was] divided into LATAs, generally
centering upon a city or other identifiable community of interest.''
United States v. Western Elec. Co., 569 F. Supp. 990, 993 (D.D.C.
1983). On March 25, 1996, the Commission released a Notice of Proposed
Rulemaking (61 FR 14717 (April 3, 1996) initiating a review of its
regulation of interstate, domestic, interexchange telecommunications
services in light of the passage of the 1996 Act and the increasing
competition in the interexchange market over the past decade. Among
other things, the Commission asked whether it should modify or
eliminate the separation requirements imposed on independent local
exchange carriers (LECs) (exchange telephone companies other than the
BOCs) as a condition for non-dominant treatment of their interstate,
domestic, interexchange services originating outside their local
exchange areas. We use the term ``independent LECs'' to refer to both
the independent LECs and their affiliates. The Commission also sought
comment on whether, if it modifies or eliminates these separation
requirements for independent LECs, it should apply the same
requirements to BOC provision of out-of-region interstate, domestic,
interexchange services. In a recent order addressing BOC provision of
interLATA services originating out-of-region, we considered whether, on
an interim basis, BOC provision of out-of-region services should remain
subject to dominant carrier regulation. See Bell Operating Company
Provision of Out-of-Region Interstate, Interexchange Services, (61 FR
35964 (July 9, 1996)) (Interim BOC Out-of-Region Order) recon. pending.
We concluded, inter alia, that, on an interim basis, if a BOC provides
out-of-region domestic, interstate, interexchange services offered
through an affiliate that satisfies the separation requirements imposed
on independent LECs in the Competitive Carrier Fifth Report and Order
(49 FR 34824 (September 4, 1984)), we would remove dominant carrier
regulation for such services. Id. at para. 2.
Thus, we currently apply the same regulatory treatment to the BOCs'
provision of out-of-region, domestic, interstate, interexchange
services as we apply to the independent LECs' provision of those
services. The Commission also proposed to revise the relevant product
and geographic market definitions for purposes of determining whether a
carrier should be regulated as dominant or non-dominant in the
provision of interstate, domestic, interexchange services.
Interexchange NPRM at Paras. 41-42. In the Interexchange NPRM, the
Commission also raised issues relating to: implementation of the rate
averaging and rate integration requirements in section 254(g) of the
Communications Act; detariffing for domestic services of non-dominant
interexchange carriers; and the current prohibition against bundling
customer services equipment with the provision of interstate,
interexchange services by non-dominant interexchange carriers. On
August 7, 1996, we issued a Report and Order implementing the rate
averaging and rate integration requirements. See Policy and Rules
Concerning the Interstate, Interexchange Marketplace; Implementation of
Section 254(g) of the Communications Act of 1934, as amended (61 FR
42558 (August 16, 1996)) (Rate Integration Order). On October 31, 1996,
we issued a Second Report and Order which eliminates Sec. 203 tariff
filing requirements for interstate, domestic, interexchange services by
nondominant interexchange carriers and orders all nondominant
interexchange carriers to cancel their tariffs for those services
within nine months from the effective date of the Order. Policy and
Rules Concerning the Interstate, Interexchange Marketplace;
Implementation of Section 254(g) of the Communications Act of 1934 (61
FR 59340 (November 22, 1996)) (Tariff Forbearance Order), stayed
pending judicial review, MCI Telecom. Corp. v. FCC, No. 96-1459 (D.C.
Cir. Feb. 13, 1997). See also Policy and Rules Concerning the
Interstate, Interexchange Marketplace: Guidance Concerning
Implementation as a Result of the Stay Order of the U.S. Court of
Appeals for the D.C. Circuit, CC Docket No. 96-61, Public Notice, DA
97-493 (rel. March 6, 1997). In the Tariff Forbearance Order, we stated
our intent to issue a Further Notice of Proposed Rulemaking that will
address the continued applicability of the prohibitions against the
bundling of both CPE and enhanced services with interstate,
interexchange services by non-dominant interexchange carriers. Id. at
para. 118.
3. The 1996 Act conditions the BOCs' entry into in-region,
interLATA service on their compliance with certain provisions of
section 271 of the Act. Under section 271, we must determine, among
other things, whether the BOC has complied with the safeguards imposed
by section 272 and our rules promulgated thereunder. 47 U.S.C.
Sec. 271(d)(3)(B). The Commission also must find that the
interconnection agreements or statements approved by the appropriate
state commission under section 252 satisfy the competitive checklist
contained in section 271(c)(2)(B), and that the BOC's entry into the
in-region interLATA market is ``consistent with the public interest,
convenience and necessity.'' Id. Secs. 271(d)(3)(A), (d)(3)(C). For
purposes of section 271, such interconnection agreements must be made
with a facilities-based competitor that meets specified criteria. Id.
Sec. 271(c)(1)(A). In acting on a BOC's application for authority to
provide in-region interLATA services, the Commission must consult with
the Attorney General and give substantial weight to the Attorney
General's evaluation of the BOC's application. Id. Sec. 271(d)(2)(A).
In addition, the Commission must consult with the applicable state
commission to verify that the BOC complies with the requirements of
section 271(c). Id. Sec. 271(d)(2)(B). Section 272 requires,
[[Page 35977]]
among other things, that a BOC provide in-region, interLATA service
through a separate affiliate that meets the requirements of section
272(b).
4. On July 18, 1996, we released a Notice of Proposed Rulemaking
(61 FR 39397 (July 29, 1996)) in which we sought comment on the non-
accounting separate affiliate and nondiscrimination safeguards in
section 272. We also sought comment on whether we should alter the
dominant carrier classification that under our current rules would
apply to in-region, interstate, domestic, interLATA services provided
by the BOCs' section 272 interLATA affiliates (BOC interLATA
affiliates). For convenience, we use the term ``BOC interLATA
affiliates'' to refer to the separate affiliates established by the
BOCs, in conformance with section 272(a)(1), to provide in-region,
interLATA services. Although we referred to these affiliates as ``BOC
affiliates'' in the NPRM, our findings in this Order apply only to
affiliates established in conformance with section 272(a)(1). Further,
we sought comment on whether we should modify our existing rules for
regulating the provision of in-region, interstate, domestic,
interexchange services by an independent LEC. For purposes of this
proceeding, we have defined an independent LEC's ``in-region services''
as telecommunications services originating in the independent LEC's
local exchange areas or 800 service, private line service, or their
equivalents that: (1) Terminate in the independent LEC's local exchange
areas, and (2) allow the called party to determine the interexchange
carrier, even if the service originates outside the independent LEC's
local exchange areas. Id. at para. 4 n.12 Finally, we invited comment
on whether we should apply the same regulatory treatment to the BOC
interLATA affiliates' and independent LECs' provision of in-region,
international services that we apply to their provision of in-region,
interstate, domestic, interLATA services and in-region, interstate,
domestic interexchange services, respectively. We recently adopted
rules to implement the section 272 non-accounting separate affiliate
and nondiscrimination safeguards. On the same day, we adopted rules to
implement the accounting safeguards in sections 260 and 271 through
276.
5. This Order addresses the market definition and dominant/non-
dominant classification issues raised in the Interexchange NPRM and the
Non-Accounting Safeguards NPRM. With respect to market definition, we
adopt the approach proposed in the NPRMs. Specifically, we revise our
current product and geographic market definitions in accordance with
the 1992 Merger Guidelines. We conclude that we should define as a
relevant product market any interstate, domestic, long distance service
for which there are no close substitutes, or a group of services that
are close demand substitutes (Demand substitutability identifies all of
the products or services that consumers view as substitutes for each
other, in response to changes in price. For example, if, in response to
a price increase for orange juice, consumers instead purchase apple
juice, apple juice would be considered a demand substitute for orange
juice.) for each other, but for which there are no other close demand
substitutes. In places where we use the term ``long distance
services,'' we mean interstate, domestic or international, interLATA
services provided by the BOC interLATA affiliates and interstate,
domestic or international, interexchange services provided by
independent LECs, respectively. We define the relevant geographic
market for interstate, domestic, long distance services as all possible
routes that allow for a connection from one particular location to
another particular location (i.e., a point-to-point market). We
conclude, however, that when a group of point-to-point markets exhibit
sufficiently similar competitive characteristics (i.e., market
structure), we can aggregate such markets, rather than examine each
individual point-to-point market separately. Therefore, if we conclude
that the conditions for a particular service in any point-to-point
market are sufficiently representative of the conditions for that
service in all other domestic point-to-point markets, then we will
examine aggregate data, rather than data particular to each domestic
point-to-point market. With respect to the BOC interLATA affiliates and
independent LECs, however, we conclude that we should analyze point-to-
point markets that originate in-region separately from those point-to-
point markets that originate out-of-region to determine whether the BOC
affiliates' or independent LECs' market power in local exchange and
exchange access services results in market power in the interexchange
market. We note that, in some cases, it may be necessary to focus
specifically on the termination point because the local exchange
carrier that serves the end-user customer will necessarily have market
power with regard to that customer.
6. We also conclude that a BOC interLATA affiliate should be
classified as dominant only if we find that it has the ability
profitably to raise and sustain prices of in-region, interstate,
domestic, interLATA services significantly above competitive levels by
restricting its own output. Dominant carriers are subject to more
stringent regulation than non-dominant carriers, including price cap
regulation, when specified by Commission order, and tariff filing
notice periods of 14, 25 or 120 days. See supra para. 12 for more
detail on the regulatory distinctions between dominant and non-dominant
interexchange carriers. In light of the requirements established by,
and pursuant to, sections 271 and 272, together with other existing
Commission rules, we conclude that the BOCs will not be able to use, or
leverage, their market power in the local exchange or exchange access
markets to such an extent that their section 272 interLATA affiliates
could profitably raise and sustain prices of in-region, interstate,
domestic, interLATA services significantly above competitive levels by
restricting the affiliate's own output. We also conclude that
regulating BOC in-region interLATA affiliates as dominant carriers
generally would not help to prevent improper allocations of costs,
discrimination by the BOCs against rivals of their interLATA
affiliates, or price squeezes by the BOCs or the BOC interLATA
affiliates. Although certain aspects of dominant carrier regulation may
address these concerns, we conclude that the burdens they would impose
on competition, competitors, and the Commission outweigh any potential
benefits. As a result, we classify the BOC interLATA affiliates as non-
dominant in the provision of in-region, interstate, domestic, interLATA
services.
7. We also classify the independent LECs as non-dominant in the
provision of in-region, interstate, domestic, interexchange services,
because the independent LECs do not have the ability profitably to
raise and sustain prices of in-region, interstate, domestic,
interexchange services above competitive levels by restricting their
own output of these services. We conclude, however, that the
independent LECs' control of local exchange and exchange access
facilities potentially enables them to misallocate costs from their in-
region, interexchange services, discriminate against rivals of their
interLATA affiliates, and engage in other anticompetitive conduct. We
therefore require the independent LECs to provide their in-region,
interstate, domestic, interexchange services through separate
affiliates that satisfy
[[Page 35978]]
the separation requirements adopted in the Competitive Carrier Fifth
Report and Order, para. 9 (1984). Nevertheless, we give companies
providing in-region, interexchange services on an integrated basis one
year from the date of release of this order to comply with the
Competitive Carrier Fifth Report and Order separation requirements. See
infra section II.B.
8. In addition, we adopt the same regulatory treatment of the BOC
interLATA affiliates' and independent LECs' provision of in-region,
international services, as we adopt for their provision of in-region,
interstate, domestic, interLATA and in-region, interstate, domestic,
interexchange services, respectively. Accordingly, we will classify
each BOC interLATA affiliate or independent LEC affiliate as non-
dominant in the provision of in-region, international services, unless
it (or its parent) is affiliated within the meaning of
Sec. 63.18(h)(1)(i) of the rules, with a foreign carrier that has the
ability to discriminate against rivals of its U.S. affiliate through
control of bottleneck services or facilities in a foreign market. In
that case, we will apply section 63.10(a) of the rules to determine
whether to regulate the BOC interLATA affiliate or independent LEC
affiliate as a dominant carrier in its provision of service between the
United States and that foreign market. In doing so, we emphasize that
there is more than one basis for finding a U.S. carrier dominant in the
provision of international services. The separate issue of whether a
BOC interLATA affiliate, an independent LEC affiliate, or any other
U.S. carrier should be regulated as dominant in the provision of
international services because of the market power of an affiliated
foreign carrier in a foreign destination market was addressed by the
Commission last year in the Foreign Carrier Entry Order. Market Entry
and Regulation of Foreign-affiliated Entities (60 FR 67332 (December
29, 1995)) (Foreign Carrier Entry Order), recon. pending. See also
Regulation of International Common Carrier Services (57 FR 57964
(December 8, 1992)) Paras. 19-24 (1992) (International Services Order).
The Foreign Carrier Entry Order maintained a separate framework adopted
in the International Services Order for regulating U.S. international
carriers (including BOCs or independent LECs ultimately authorized to
provide in-region international services) as dominant on routes where
an affiliated foreign carrier has the ability to discriminate in favor
of its U.S. affiliate through control of bottleneck services or
facilities in the foreign destination market. No carriers are exempt
from this policy to the extent they have foreign affiliations. Section
63.10(a) of the Commission's rules provides that: (1) carriers having
no affiliation with a foreign carrier in the destination market are
presumptively non-dominant for that route; (2) carriers affiliated with
a foreign carrier that is a monopoly in the destination market are
presumptively dominant for that route; (3) carriers affiliated with a
foreign carrier that is not a monopoly on that route receive closer
scrutiny by the Commission; and (4) carriers that serve an affiliated
destination market solely through the resale of an unaffiliated U.S.
facilities-based carrier's switched services are presumptively non-
dominant for that route. We will require the independent LECs to
provide in-region international services through separate affiliates
that satisfy the Competitive Carrier Fifth Report and Order separation
requirements, consistent with the requirements we apply to their
provision of in-region, interstate, domestic, interexchange services.
In the Non-Accounting Safeguards Order, we concluded that the section
272 safeguards apply to the BOCs' provision of in-region, international
services. Non-Accounting Safeguards Order at para. 58.
9. Finally, we consider whether we should modify or eliminate the
separation requirements imposed on the BOCs and independent LECs as a
condition for non-dominant treatment of their provision of out-of-
region interstate, domestic, interexchange services. We conclude that
those requirements are unnecessary, and we therefore eliminate the
separation requirements as a condition for non-dominant treatment of
the BOCs' and independent LECs' provision of out-of-region, interstate,
domestic, interexchange services.
10. The actions we take in this proceeding will further the pro-
competitive, deregulatory objectives of the 1996 Act by eliminating
unnecessary regulation that is currently imposed on interexchange
carriers affiliated with BOCs and independent LECs. Although we are
classifying these carriers as non-dominant with respect to their
provision of in-region and out-of-region long distance services, as
summarized above, we recognize that, as long as these carriers retain
market power in providing local exchange and exchange access services,
they will have some incentive and ability to misallocate costs to local
exchange and exchange access services, to discriminate against their
long distance competitors, and to engage in other anticompetitive
conduct. We conclude, however, that the regulatory structure we adopt
today will continue the process of enhancing competition in all
telecommunications markets as envisioned by the 1996 Act.
II. Background
11. Between 1979 and 1985, the Commission conducted the Competitive
Carrier proceeding, in which it examined how its regulations should be
adapted to reflect and promote increasing competition in
telecommunications markets. In a series of orders, the Commission
distinguished between two kinds of carriers--those with market power
(dominant carriers) and those without market power (non-dominant
carriers). In the Competitive Carrier Fourth Report and Order (48 FR
52452 (November 18, 1983)), the Commission defined market power
alternatively as ``the ability to raise prices by restricting output''
and as ``the ability to raise and maintain price above the competitive
level without driving away so many customers as to make the increase
unprofitable.'' The 1992 Department of Justice/Federal Trade Commission
Merger Guidelines similarly define market power as ``the ability
profitably to maintain prices above competitive levels for a
significant period of time.'' 1992 Merger Guidelines, at 20,570. The
Commission recognized that, in order to assess whether a carrier
possesses market power, one must first define the relevant product and
geographic markets. In the Competitive Carrier proceeding, the
Commission relaxed its tariff filing and facilities authorization
requirements for non-dominant carriers and focused its regulatory
efforts on constraining the ability of dominant carriers to exercise
market power.
12. Our rules define a dominant carrier as one that possesses
market power, and a non-dominant carrier as a carrier not found to be
dominant (i.e., one that does not possess market power). Under our
rules, non-dominant carriers are not subject to rate regulation, and
currently may file tariffs that are presumed lawful on one day's notice
and without cost support. Tariff Filing Requirements for Nondominant
Carriers (60 FR 52865 (October 11, 1995)). As previously discussed, we
adopted mandatory detariffing for nondominant interexchange carriers in
the Tariff Forbearance Order, but that Order has been stayed pending
judicial review. See supra n. 8. Non-dominant carriers are also subject
to streamlined section 214 requirements. In contrast, dominant
interexchange carriers are subject to price cap regulation, when
[[Page 35979]]
specified by Commission order, and must file tariffs on 14, 45, or 120
days' notice, with cost support data for above-cap and out-of-band
tariff filings, and with additional information for new service
offerings. We note that effective February 1997, a local exchange
carrier may file with the Commission a new or revised charge,
classification, regulation, or practice on a streamlined basis. Unless
the Commission takes action under 47 U.S.C. Sec. 204(a)(1), any charge,
classification, regulation, or practice shall be deemed lawful and
shall be effective 7 days (in the case of a rate reduction) or 15 days
(in the case of a rate increase) after the date on which it is filed
with the Commission. 47 U.S.C. Sec. 204(a)(3). See also Implementation
of Section 402(b)(1)(A) of the Telecommunications Act of 1996 (62 FR
5757 (February 7, 1997)). Dominant domestic carriers must also obtain
specific prior Commission approval to construct a new line or to
acquire, lease or operate any line, as well as to discontinue, reduce,
or impair service. We note that the Commission has simplified this
process to permit a carrier to file an annual ``blanket'' Section 214
application for all construction planned for the year. See id.
Sec. 63.06. Moreover, pursuant to section 402(b)(2)(A) of the 1996 Act,
the Commission is required to ``permit any common carrier . . . to be
exempt from the requirements of Section 214 of the 1934 Act for the
extension of any line.'' We are addressing the implementation of
section 402(b)(2)(A), including the issue of what constitutes an
``extension of any line,'' in a separate proceeding. See Implementation
of Section 402(b)(2)(A) of the Telecommunications Act of 1996 (62 FR
4965 (February 3, 1997)). Finally, we note that the Commission has
eliminated prior approval requirements to add, modify, or delete
circuits on authorized international routes as they apply to U.S.
international carriers that are regulated as dominant for reasons other
than having foreign carrier affiliations. In addition, such dominant
carriers are required to obtain prior Commission approval to
discontinue, reduce, or impair service on a particular route and notify
the Commission of the conveyance of international cable capacity. See
Streamlining the International Section 214 Authorization Process and
Tariff Requirements (61 FR 15724 (April 9, 1996)), Paras. 50, 77, 80-81
(Streamlining Order).
13. In the Competitive Carrier First Report and Order (45 FR 76148
(November 18, 1980)), the Commission classified LECs and pre-
divestiture AT&T as dominant, with respect to both local exchange and
interstate long distance services, and therefore subject to the ``full
panoply'' of then-existing Title II regulation. In light of increasing
competition in the interstate, domestic, interexchange
telecommunications market, and evidence that AT&T no longer possessed
the ability to control price unilaterally, the Commission reclassified
AT&T as a non-dominant carrier in that market. Motion of AT&T Corp. to
be Reclassified as a Non-Dominant Carrier, Order, 11 FCC Rcd 3271
(1996) (AT&T Reclassification Order), recon. pending. In contrast, the
Commission classified MCI, Sprint, and other ``specialized common
carriers'' as non-dominant carriers.
14. In the Competitive Carrier Fourth Report and Order, the
Commission determined that interexchange carriers affiliated with
independent LECs would be regulated as non-dominant interexchange
carriers. In the Competitive Carrier Fifth Report and Order, the
Commission clarified that an ``affiliate'' of an independent LEC was
``a carrier that is owned (in whole or in part) or controlled by, or
under common ownership (in whole or in part) or control with, an
exchange telephone company.'' The Commission further clarified that, in
order to qualify for non-dominant treatment, the affiliate providing
interstate, interexchange services must: (1) Maintain separate books of
account; (2) not jointly own transmission or switching facilities with
its affiliated exchange telephone company; and (3) acquire any services
from its affiliated exchange telephone company at tariffed rates, terms
and conditions. Competitive Carrier Fifth Report and Order, 98 FCC 2d
at 1198, para. 9. The Commission noted that ``[a]n affiliate qualifying
for nondominant treatment is not necessarily structurally separated
from an exchange telephone company in the sense ordered in the Second
Computer Inquiry. . . .'' The Commission added that any interstate,
interexchange services offered directly by an independent LEC (rather
than through a separate affiliate) or through an affiliate that did not
satisfy the specified conditions would be subject to dominant carrier
regulation.
15. In the Competitive Carrier Fifth Report and Order, the
Commission also addressed the possible entry of the BOCs into
interstate, interLATA services in the future:
The BOCs currently are barred by the [MFJ] from providing
interLATA services. . . . If this bar is lifted in the future, we
would regulate the BOCs' interstate, interLATA services as dominant
until we determined what degree of separation, if any, would be
necessary for the BOCs or their affiliates to qualify for
nondominant regulation.
In this Order, we revisit the question of the appropriate
regulatory treatment of BOCs and independent LECs in the provision of
long distance services.
III. Market Definition
A. General Application
1. Background
16. In order to determine that a particular carrier or group of
carriers possesses market power, (The 1992 Merger Guidelines define
market power as ``the ability profitably to maintain prices above
competitive levels for a significant period of time.'' 1992 Merger
Guidelines at 20,570-71. ``Sellers with market power also may lessen
competition on dimensions other than price, such as product quality,
service, or innovation.'' Id. at 20,571, note 6.) it is first necessary
to define the relevant product and geographic markets. In the
Competitive Carrier proceeding, the Commission found, for purposes of
assessing the market power of interexchange carriers, that: ``(1)
Interstate, domestic, interexchange telecommunications services
comprise the relevant product market, and (2) the United States
(including Alaska, Hawaii, Puerto Rico, U.S. Virgin Islands, and other
U.S. offshore points) comprises the relevant geographic market for this
product, with no other relevant submarkets.'' In the Interexchange
NPRM, the Commission proposed to reexamine and refine the market
definitions adopted in the Competitive Carrier proceeding. In the Non-
Accounting Safeguards NPRM, the Commission proposed to apply this new
approach to market definition in assessing the market power of BOC
interLATA affiliates and independent LECs in their provision of
interstate, domestic, long distance services.
17. In the Interexchange NPRM, the Commission asked whether it
should adopt more sharply focused market definitions than those adopted
in the Competitive Carrier proceeding to provide us with a more refined
analytical tool for evaluating market power. To establish a more
narrowly-focused approach that more accurately reflects the realities
of the marketplace and is flexible enough to accommodate unique market
situations, the Commission tentatively concluded that it should follow
the approach for defining relevant markets contained in the 1992 Merger
Guidelines. As the Commission noted in the Interexchange NPRM, the
market definition approach taken in the 1992 Merger Guidelines has been
recognized increasingly by courts
[[Page 35980]]
and scholars as an important tool in assessing market power.
2. Comments
18. Several commenters agree with our proposal to reexamine the
product and geographic market definitions adopted in the Competitive
Carrier proceeding. Some emphasize that redefining the market would aid
in determining whether BOC interLATA affiliates and independent LECs
possess market power with respect to their provision of long distance
services. Other commenters recognize the more general benefit in
providing the Commission with a more refined and flexible analytical
tool to evaluate whether any carrier possesses market power in the long
distance marketplace.
19. Although it generally supports a reexamination of the relevant
market definitions, Sprint argues that it is not readily apparent
whether more particularized definitions would represent an improvement
over the broader definitions adopted in the Competitive Carrier
proceeding. Sprint urges the Commission to continue to use the
definitions adopted in the Competitive Carrier proceeding and to
examine the issue, in light of the 1992 Merger Guidelines, on a case-
by-case basis only.
20. In general, the BOCs oppose the Commission's proposal to
redefine the product and geographic markets adopted in the Competitive
Carrier proceeding. They argue that BOC entry into interLATA services
should not serve as a basis to reconsider the relevant market
definitions and that it would be unreasonable to isolate portions of
the national market to analyze the market power of new entrants when a
single national market has been used to assess the market power of
incumbent interexchange carriers. BellSouth cautions that any change in
the market definitions will also require the Commission to reconsider
previous decisions based on the existing definitions. SBC and U S West
assert that the fast-changing telecommunications marketplace may render
modifications in the market definitions quickly obsolete. SBC claims
that the 1992 Merger Guidelines were never intended to serve as a basis
for determining whether or how to regulate a market or to establish a
rationale for disparate regulation of market participants. USTA argues
that a market definition based only on demand conditions, omitting
supply factors and competitive conditions, could result in an
inaccurate finding of significant market power.
21. Although Ameritech does not disagree with the Commission's
proposal to use the 1992 Merger Guidelines to define relevant markets,
it claims that it would be impractical and unnecessary to define each
and every product and geographic market. If the Commission adopts its
proposed approach, however, Ameritech asks that the Commission clarify
that the 1992 Merger Guidelines will be used to assess market power for
other services, including interstate access services.
22. AT&T argues that the definitions adopted in the Competitive
Carrier proceeding are appropriate for determining whether carriers,
other than those that control the local bottleneck, possess market
power in interexchange services because supply substitutability and the
widespread pervasiveness of ubiquitous calling plans demonstrate that
there is a single, national market for such services. AT&T emphasizes
that the 1992 Merger Guidelines provide support for the existing market
definitions, rather than the Commission's proposed new approach,
because the 1992 Merger Guidelines recognize the importance of supply
substitutability in defining relevant markets and advocate aggregate
market descriptions where production substitution among a group of
products is nearly universal among the firms selling one or more of
those products, as is the case in the telecommunications industry.
23. The Department of Justice (DOJ) contends that it is not
necessary for the Commission to adopt a precise definition of the
relevant markets involved in the provision of a BOC interLATA
affiliate's interLATA services and that the Commission should refrain
from doing so at this time. To the extent the Commission chooses to
define markets in this proceeding, however, DOJ urges the Commission to
be mindful of the different objectives of defining markets for purposes
of regulation and antitrust enforcement. DOJ asserts that, while the
approach proposed by the Commission in the Interexchange NPRM for
defining relevant markets is ``not unreasonable,'' changes in the
telecommunications industry may require the Commission to define
markets more precisely in the future and that it may be inappropriate
to address this issue at this time. DOJ Aug. 30, 1996 Reply at 20.
Although DOJ, like AT&T, believes that the market definition is
irrelevant in assessing the market power of BOC interLATA affiliates,
its conclusion is based on its assessment that the BOC interLATA
affiliates will not be able to exercise, at least in the near term, the
type of market power targeted by dominant carrier regulation. Id. at
16-17.
24. MFS argues that the 1992 Merger Guidelines are too generic to
apply to the telecommunications industry and should not be used to
redefine the appropriate product and geographic markets. MFS argues,
for example, that while the 1992 Merger Guidelines contemplate
industries in which goods are substitutable, the telecommunications
services market is made up of services that are not substitutes, but
rather essential inputs used by competitors. In addition, MFS claims
that the 1992 Merger Guidelines are not well-suited to highly segmented
industries, such as the telecommunications industry, which is segmented
into residential, business, peak, off-peak, local, toll and access
services. This market segmentation, MFS claims, makes it possible for
dominant firms to engage in predatory cross-subsidization between
market segments. MFS further contends that, while the 1992 Merger
Guidelines focus on geographic factors and pricing issues, measuring
market power in the telecommunications industry requires consideration
of such non-pricing issues as physical collocation, interconnection,
and the allocation of telephone numbers. Finally, MFS argues that the
focus on demand substitutability in the 1992 Merger Guidelines results
in an inaccurate measurement of market power in the telecommunications
industry because the monopolists or near-monopolists that control the
local exchange and exchange access market may foreclose competition by
raising the price of an essential facility they provide to competitors
without also raising the price of the service they sell to end-users.
3. Discussion
25. We conclude that the 1992 Merger Guidelines provide an
appropriate analytical framework for defining relevant markets in order
to assess market power in the interstate, domestic, long distance
marketplace. We disagree with those commenters that claim that the 1992
Merger Guidelines are inapplicable in a regulatory setting or are based
on generalized market concepts that are inapplicable to the
telecommunications industry. We find that the 1992 Merger Guidelines
are based on fundamental and widely-applicable economic principles,
such as principles of demand and supply substitution. Supply
substitutability identifies all productive capacity that can be used to
produce a particular good, whether it is currently being used to
produce that good or to produce some
[[Page 35981]]
other, even unrelated, good. For example, if a factory that is
producing desks could be converted quickly and inexpensively to the
production of wheelbarrows, then the owner of that factory should be
considered a potential producer of wheelbarrows. That does not mean,
however, that desks and wheelbarrows are in the same relevant product
market. As previously noted, demand substitutability identifies all of
the products or services that consumers view as substitutes for each
other, in response to changes in price. For example, if, in response to
a price increase for orange juice, consumers instead purchase apple
juice, apple juice would be considered a demand substitute for orange
juice. Accordingly, we reject MFS's contention that the
telecommunications industry is so unique that the 1992 Merger
Guidelines are inapplicable. MFS's concern that, by relying on the 1992
Merger Guidelines, the Commission will only consider demand-based
factors in assessing market power is unfounded. As discussed supra,
although we will rely on demand substitutability in defining relevant
markets, market definition is only one component in assessing market
power. The 1992 Merger Guidelines are intended to guide DOJ and the FTC
in their analysis of mergers taking place in any industry, not only
mergers in particular industries.'' These guidelines outline the
present enforcement policy of the Department of Justice and the Federal
Trade Commission (the ``Agency'') concerning horizontal acquisitions
and mergers (``mergers'') subject to section 7 of the Clayton Act, to
section 1 of the Sherman Act, or to section 5 of the FTC Act.'' 1992
Merger Guidelines at p. 20,569-3. The economic principles contained in
the 1992 Merger Guidelines are not limited to an analysis of particular
types of markets, but rather are broadly drawn to accommodate virtually
all marketplace characteristics.We note that there is a recognition in
the 1992 Merger Guidelines that they will be applied to ``a broad range
of possible factual circumstances.'' 1992 Merger Guidelines at p.
20,569-3. In fact, DOJ agrees that ``[t]he Commission's market
definition, like market definition under the antitrust laws, should be
guided by the basic economic principles that inform competitive
analysis and market definitions under the DOJ Merger Guidelines.'' We
acknowledge that, in its comments, DOJ notes that the different
objectives of regulation and antitrust enforcement may affect the
application of the market definition in those contexts. We agree and
realize that the markets defined in a particular antitrust suit may
reach different results. DOJ does not argue, however, that the
fundamental concepts and principles espoused in the 1992 Merger
Guidelines apply only in the merger context.
26. We conclude that we should revise our product and geographic
market definitions to follow the approach taken in the 1992 Merger
Guidelines. Most commenters do not appear to articulate serious
disagreements with the fundamental economic principles on which we base
our revised approach to defining the relevant product and geographic
markets. Rather, they appear to focus their concerns on the impact that
this new approach may have on specific assessments of market power. We
believe that our market power analysis, including our approach to
defining the relevant product and geographic markets, should not be
formulated by focusing on end-results, but instead should be focused on
the application of sound economic principles and analysis. As a result,
we conclude that the product and geographic market definitions defined
in the Competitive Carrier proceeding should be refined to follow the
approach taken in the 1992 Merger Guidelines in order to ensure that
our market power assessments are based on the most accurate, up-to-
date, and generally accepted economic principles relating to market
analysis. As new carriers enter the long distance marketplace and as
the telecommunications marketplace changes in the face of increased
competition, the flexibility inherent in our new approach to defining
the relevant product and geographic markets enables us to make a more
accurate measurement of market power than before by accounting for
unique carrier characteristics that could impact the dynamics of the
marketplace. For example, potential new entrants to the long distance
marketplace, such as BOCs, utility companies, and cable companies,
possess different characteristics that could impact, inter alia, the
types of services offered in the long distance marketplace and the
method in which long distance services are priced. For example, many
new carriers have begun entering the long distance market by targeting
particular types of customers or by targeting customers in particular
areas, suggesting that carriers do not view the interstate, domestic,
long distance market as a single national market or as a single market
of interchangeable and substitutable services.
27. In contrast to some commenters, we find that supply
substitutability (As previously noted, supply substitutability
identifies all productive capacity that can be used to produce a
particular good, whether it is currently being used to produce that
good or to produce some other, even unrelated, good.) should not be
used to define relevant markets, but rather should be used to determine
which providers are currently serving, or potentially could be serving,
a relevant market only after that market has been identified. As the
1992 Merger Guidelines note, ``[o]nce defined, a relevant market must
be measured in terms of its participants and concentration.
Participants include firms currently producing or selling the market's
products in the market's geographic area. In addition, participants may
include other firms depending on their likely supply responses to a
`small but significant and nontransitory' price increase. A firm is
viewed as a participant if, in response to a `small but significant and
nontransitory' price increase, it likely would enter rapidly into
production or sale of a market product in the market's area, without
incurring significant sunk costs of entry and exit. Firms likely to
make any of these supply responses are considered to be `uncommitted'
entrants because their supply response would create new production or
sale in the relevant market and because that production or sale could
be quickly terminated without significant loss.'' 1992 Merger
Guidelines at p. 20,572. We conclude that our market definitions should
be based solely on demand substitutability considerations. As
previously noted, demand substitutability identifies all of the
products or services that consumers view as substitutes for each other,
in response to changes in price. This conclusion accords with the 1992
Merger Guidelines, which state that, ``market definition focuses solely
on demand substitution factors--i.e., possible consumer responses.
Supply substitution factors--i.e., possible production responses--are
considered elsewhere in the Guidelines in the identification of firms
that participate in the relevant market and the analysis of entry.''
28. Under the 1992 Merger Guidelines, market power is determined by
delineating both the product and geographic market in which power may
be exercised and, then, identifying those firms that are current
suppliers and those firms that are potential suppliers in that
particular market. Therefore, in determining whether a carrier is able
to
[[Page 35982]]
exercise market power in the provision of a particular service or group
of services or within a particular area, we must consider two issues.
First, in the case of the relevant product market, we must consider
whether, if all carriers raised the price of a particular service or
group of services, customers would be able to switch to a substitute
service offered at a lower price. With respect to the relevant
geographic market, we must consider whether, if all carriers in a
specified area raised the price of a particular service or group of
services, customers would be able to switch to the same service offered
at a lower price in a different area. Second, with respect to supply
substitutability, we must consider whether, if a carrier raised the
price of a particular service or group of services, other carriers,
currently not offering that service or group of services, would have
the incentive and the ability to begin provisioning a substitute
service quickly and easily. For example, if we were assessing the
market power of a carrier providing long distance service from Miami,
and determined that another carrier currently providing service in Los
Angeles would also begin providing service from Miami if the price of
the service in Miami were to increase, we would consider the impact of
the Los Angeles carrier's potential entry into Miami in assessing the
market power of the Miami carrier. This does not mean, however, that
customers in Miami consider long distance service offered in Los
Angeles as a substitute for service offered in Miami. Therefore, long
distance service offered in Miami and long distance service offered in
Los Angeles would not be considered as services in the same relevant
geographic market. By following the approach taken in the 1992 Merger
Guidelines, we will continue to weigh supply substitutability as an
important factor in assessing market power, but we will not use it as a
factor in defining the relevant product and geographic markets.
29. We acknowledge that the approach to defining relevant markets
that we adopt in this proceeding departs from the approach adopted in
the Competitive Carrier proceeding and applied in the AT&T
Reclassification Order. For the reasons discussed herein, we believe
these more refined definitions are now necessary. To the extent that
various parties argue that our new approach is contrary to our decision
in the AT&T Reclassification Order, it is well-established that the
Commission may change approaches as long as it provides a reasoned
explanation for doing so. Should any modifications be necessary to
decisions reached in the AT&T Reclassification Order, they will be
addressed, as necessary, in further proceedings. We emphasize, however,
that, because market definition is only one step in assessing market
power, changes made in the approach to defining relevant markets will
not necessarily produce different assessments of market power.
30. We also reject the argument that we should not revise the
product and geographic market definitions because of the dynamic
changes taking place in the long distance marketplace. To the contrary,
we believe that these changes in the long distance marketplace provide
a compelling reason to modify our approach to defining the relevant
product and geographic markets. Our new approach to defining relevant
markets will be consistently applied, yet contain inherent
flexibilities, so that our assessment of market power will always be
based on a particular carrier's or group of carriers' unique market
situation. For example, in recognition that certain carriers may
control discrete facilities in specific geographic areas, target
particular types of customers, or provide specialized services, our new
market definitions allow us to examine the relevant product and
geographic markets at the level of detail necessary to make a more
accurate assessment of market power than under the Competitive Carrier
definitions. We find that the definitions developed in the Competitive
Carrier proceeding would not provide us with sufficient flexibility to
account for the impact such unique market situations may have on
assessing market power because these definitions are too broad to
analyze markets at the necessary level of detail. At the time the
Commission defined the relevant product and geographic markets in the
Competitive Carrier proceeding, telecommunications services were
provided primarily by a single national carrier. Under such a
regulatory model, the use of a simplified definition of relevant
markets did not significantly hinder our analysis of market power.
Today, in light of the dramatic changes that have been occurring in the
long distance marketplace, particularly those brought on by the passage
of the Telecommunications Act of 1996, with many firms competing to
provide more specialized and regionalized long distance services to
different types of customers, more detailed market definitions are
needed to assess market power more accurately and to pinpoint the
particular markets where that power is or could be exercised.
B. Product Market Definition
1. General Approach to Product Market Definition
a. Background
31. In the Competitive Carrier proceeding, the Commission defined
the relevant product market as ``all interstate, domestic,
interexchange telecommunications services . . . with no relevant
submarkets.'' In the Interexchange NPRM, we tentatively concluded that
we should refine our analysis and define as a relevant product market
any domestic, interstate, interexchange service for which there are no
close demand substitutes or any group of services that are close
substitutes for each other but for which there are no other close
demand substitutes. Recognizing, however, that delineating all relevant
product markets would be administratively burdensome and that the
Commission has previously found that there is substantial competition
with respect to most interstate, domestic, interexchange services, the
Commission tentatively concluded that we generally should address the
question of whether a specific domestic, interstate, interexchange
service, or group of services, constitutes a separate product market
only where there is credible evidence suggesting that there is or could
be a lack of competitive performance with respect to a particular
service or group of services. We asked commenters to evaluate this new
approach and to suggest any other possible approaches.
b. Comments
32. Several commenters support the proposed approach to redefining
the relevant product market. Many commenters agree that the Commission
should rely on demand substitutability in defining relevant product
markets. A number of commenters argue, however, that the Commission
should continue to recognize supply substitutability in defining the
relevant product market and, therefore, should not modify the relevant
product market definition adopted in the Competitive Carrier
proceeding.
33. GTE concedes that the definition proposed in the Interexchange
NPRM would provide the Commission with the flexibility to accommodate a
rapidly-evolving, technology-driven environment and would enable the
Commission to assess a particular service provider's ability to exert
market power over new products. GTE claims, however, that the certainty
of the Commission's standard would diminish
[[Page 35983]]
if different market evaluations were applied to particular carriers or
groups of carriers absent a relatively strong basis for distinguishing
them. Although it generally supports the revised approach to defining
the relevant product market, the Florida Public Service Commission
warns that logical sets of substitutable services will likely intersect
with one another, which could render the Commission's approach to
defining relevant product markets unworkable in practice.
34. AT&T opposes the approach proposed in the Interexchange NPRM.
It emphasizes that the 1992 Merger Guidelines support an aggregate
product market definition where ``production substitution among a group
of products is nearly universal among the firms selling one or more of
the products,'' as in the telecommunications industry. AT&T claims
that, due to pervasive supply substitutability, a product market
defined by a single service would yield the same market share and
market power results as the single product market approach adopted in
the Competitive Carrier proceeding. Because there is no difference
between the facilities used to provide different services, AT&T argues
that there is ample capacity for carriers to attract customers from any
carrier that attempts to exercise market power with respect to a
particular service. AT&T further claims that the Commission's recent
analysis of AT&T's 800 directory assistance and analog private line
offerings provide no basis to abandon the single product market
definition. AT&T contends that the Commission recognized that AT&T's
pricing of 800 directory assistance is constrained by supply
substitutability principles, and that the migration of analog private
line customers to digital and virtual private line services
demonstrates that these services are substitutable and, therefore, in
the same market.
35. The BOCs generally oppose the product market definition
proposed in the Interexchange NPRM. BellSouth supports retention of the
current product market definition on the grounds that there is high
cross-elasticity of demand among virtually all interexchange services,
most of which are interchangeable services that are packaged
differently, and that the distinctions between services can be easily
erased by entities such as resellers. For example, BellSouth argues
that, if a sole supplier of any particular interexchange service raised
its prices by five percent or more, most customers would turn to a
different service as an alternative. BellSouth disputes the
Commission's suggestion that market power over discrete fringe services
may warrant redefinition of the relevant product market. It further
asserts that delineating relevant product markets would be
administratively burdensome and might cause carriers without market
power to be regulated as dominant carriers. BellSouth claims that the
Commission's proposed approach would be inconsistent with the
Commission's decision in the AT&T Reclassification Order, in which AT&T
was classified as nondominant even though it was found to control two
discrete services in the overall product market. BellSouth also
contends that the Commission's proposed approach seems to signal a
return to the ``all-services'' methodology of assessing dominance,
which was expressly rejected in the AT&T Reclassification Order.
36. PacTel agrees that the product market definition turns on
whether there are sufficiently close substitutes for a product or group
of products. PacTel contends, however, that because services, such as
MTS, discount plans, WATS, 800 service, foreign exchange service,
wireless and even ``carrier'' access services, are highly substitutable
options for consumers to place or receive long distance calls, the
relevant product market should include all interstate, long distance
services. USTA questions the Commission's use of a demand-elasticity
methodology to define the relevant domestic product market, especially
when the Commission proposes to continue to emphasize supply
substitutability in defining the international product market. USTA
asserts that the Commission has consistently and continually recognized
a single relevant product market, and contends that the Commission
should not abandon this long-settled definition in favor of numerous,
fragmented submarkets.
37. A number of commenters support our proposal in the
Interexchange NPRM to delineate separate product markets only if there
is credible evidence demonstrating that there is or could be a lack of
competitive performance with respect to a particular service or group
of services. MCI claims that, although some interexchange services may
have characteristics indicative of discrete product markets, there is
no lack of competitive performance with respect to a particular service
or group of services that would warrant the Commission's delineating
the boundaries of specific product markets. The Pennsylvania Commission
cautions that state commissions and consumer advocacy groups may not
have access to the information necessary to determine whether credible
evidence exists, especially if the Commission detariffs non-dominant
carriers. Sprint states that the Commission should reexamine various
product markets if circumstances require.
38. ACTA suggests that a separate relevant market should be
established where the Commission finds that a carrier possesses market
power over a particular market segment. In delineating product markets,
ACTA believes that the Commission should consider many factors
including such customer classifications as residential, small/medium
businesses, and large businesses, but cautions that product markets
based on discrete offerings may not adequately account for products
offered as a package of services.
39. Two commenters identify particular services that, they contend,
should be classified as separate product markets. The Pennsylvania
Commission recommends that the Commission define three separate product
markets: (1) MTS or residential long distance; (2) WATS/800 service;
and (3) virtual network-type services (all services provided within
software defined networks). SNET argues that the Commission should
treat interstate toll free directory assistance as a separate product
market because there are no substitutes and structural barriers make
entry impossible.
c. Discussion
40. We conclude that the product market definition adopted in the
Competitive Carrier proceeding should be revised to reflect the 1992
Merger Guidelines' approach to defining relevant markets. The 1992
Merger Guidelines define the relevant product market as ``a product or
group of products such that a hypothetical profit maximizing firm that
was the only present and future seller of those products (`monopolist')
likely would impose at least a `small but significant and
nontransitory' increase in price.'' Accordingly, in defining the
relevant product market, one must examine whether a ``small but
significant and nontransitory'' increase in the price of the relevant
product would cause enough buyers to shift their purchases to a second
product, so as to make the price increase unprofitable. If so, the two
products should be considered in the same product market. 1992 Merger
Guidelines at p. 20,572. As explained above, we find that this new
approach to defining the relevant product market will provide us with a
more refined and narrowly-focused tool that more accurately reflects
marketplace realities. We, therefore, adopt our tentative conclusion in
the Interexchange NPRM
[[Page 35984]]
that we should define as a relevant product market any interstate,
domestic, long distance service for which there are no close demand
substitutes, or a group of services that are close substitutes for each
other, but for which there are no other close demand substitutes. As
previously noted, demand substitutability identifies all of the
products or services that consumers view as substitutes for each other,
in response to changes in price. We also adopt our tentative conclusion
that we need not delineate the boundaries of specific product markets,
except where there is credible evidence suggesting that there is or
could be a lack of competitive performance with respect to a particular
service or group of services.
41. Unlike the approach to product market definition adopted in the
Competitive Carrier proceeding, our new approach will rely exclusively
on demand considerations to define the relevant product market, rather
than supply substitutability. As previously noted, supply
substitutability identifies all productive capacity that can be used to
produce a particular good, whether it is currently being used to
produce that good or to produce some other, even unrelated, good. As
discussed above, supply substitutability will continue to be a relevant
factor in assessing market power, but will not be used as a factor in
defining the relevant market. We disagree with USTA that our approach
to defining the relevant market in the international services market is
inconsistent with our approach in the domestic context. See discussion
infra at Paras. 53,80. Although this distinction may be subtle, we
believe that it is important in order to ensure that each step we take
in assessing market power is grounded in fundamental economic
principles and marketplace realities. Our new approach, however, does
not reflect an ``all-services'' methodology of assessing dominance, in
which a carrier must be deemed dominant with respect to all services if
it is found to have market power over any single service. Rather, our
new approach allows us, where warranted, to focus our analysis on
particular services and limit our assessment of market power with
regard to only those particular services.
42. We further adopt our tentative conclusion that we need not
delineate any particular product markets to analyze the market power of
a particular carrier or group of carriers unless there is credible
evidence suggesting that there is or could be a lack of competitive
performance with respect to a particular service or group of services.
For example, if the price/cost ratio for a particular interexchange
service is four times that of the price/cost ratio for all other
interexchange services, that may constitute credible evidence of a lack
of competitive performance. We recognize that the various services
available in the interstate, domestic, long distance marketplace are
changing. For example, we noted in the Interexchange NPRM that ``our
finding (in the AT&T Reclassification Order) that the prices of 800
directory assistance and analog private line services could profitably
be raised above competitive levels may imply these services constitute
distinct relevant product markets.'' Interexchange NPRM, 11 FCC Rcd at
7166, para. 44. Patterns of consumer demand and the forces of
competition spur continual innovation and force carriers constantly to
reevaluate current services, remove outdated services, and add new
services to the marketplace. In light of these marketplace dynamics, we
conclude it is best to establish a consistent approach to defining the
relevant product market that maintains the flexibility to recognize
separate product markets only when there is credible evidence
indicating that there is or could be a lack of competitive performance
with respect to a particular service or group of services.
43. Despite two commenters' recommendations that we identify for
all purposes, in this proceeding, particular services as separate
product markets, we decline to do so at this time. We conclude that
such a determination should only be made in the context of assessing
the market power of a particular carrier or group of carriers. In this
proceeding, we only assess the market power of BOC interLATA affiliates
and independent LECs. As noted supra at para. 29, any modifications
that we may make to decisions reached in the AT&T Reclassification
Order will be addressed, as necessary, in further proceedings. We
emphasize, however, that because market definition is only one step in
assessing market power, changes made in the approach to defining
relevant markets will not necessarily produce different assessments of
market power. Unless there is credible evidence suggesting that there
is or could be a lack of competitive performance with respect to a
particular service or group of services, we will treat these services
together, by analyzing aggregate data that encompasses all long
distance services, rather than information particular to specific
services. Such data may include, but not be limited to, price level of
services, the number of competitors, the share of sales by competitors,
and the ease with which potential entrants can provide these services.
Recognizing that we have previously found that there is substantial
competition with respect to most interstate, long distance services,
such an approach allows us to avoid the burdensome task of delineating
separate product markets when there is no other credible evidence
suggesting that a particular carrier or group of carriers is exercising
or has the ability to exercise market power, with respect to a
particular service or group of services. Therefore, we will refrain
from examining narrower relevant product markets except when such
credible evidence has come to our attention. As we conclude infra at
para. 50, for purposes of assessing the market power of BOC interLATA
affiliates and independent LECs in their provision of domestic,
interstate, long distance services, we need not delineate separate
product markets because there is no credible evidence in the record
that indicates that there is or will be a lack of competitive
performance associated with any particular long distance service
offered by BOC interLATA affiliates or independent LECs.
44. We conclude that the approach we adopt here will not impose an
undue burden on parties seeking to have the Commission define narrower
relevant product markets in order to assess the market power of a
particular carrier or group of carriers. Such parties will not have to
prove that there is an actual lack of competitive performance with
respect to a particular service or group of services. Rather, they must
only present credible evidence that there is or could be a lack of
competitive performance. Credible evidence should include information
sufficient to identify services that are likely substitutes and the
carrier or group of carriers that allegedly possesses market power.
Contrary to the concerns of the Pennsylvania Public Utilities
Commission, because information suggesting a lack of competitive
performance, such as availability of service from a single provider, is
easily observable, we need not require data from proprietary sources
for this purpose. Moreover, as we recognized in the Tariff Forbearance
Order, even in the absence of tariffs for interstate, domestic,
interexchange services offered by non-dominant carriers, we conclude
that information concerning the rates, terms and conditions for such
services will still be readily accessible to consumers and other
interested parties because customers will continue to receive this
information through, inter
[[Page 35985]]
alia, the billing process, notifications required by service contracts
or state consumer protection laws, and marketing materials, such as
advertisements.
2. Product Market Definition for BOC InterLATA Affiliates and
Independent LECs
a. Background
45. In the Non-Accounting Safeguards NPRM, we tentatively concluded
that if we adopt the market definition approach proposed in the
Interexchange NPRM, we should treat all interstate, domestic, long
distance services as the relevant product market for purposes of
determining whether BOC interLATA affiliates have market power in their
provision of in-region domestic, interstate, interLATA services and
whether independent LECs have market power in their provision of in-
region domestic, interstate, interexchange services.
b. Comments
46. Although commenters disagree over whether the Commission should
adopt the approach to the product market definition proposed in the
Interexchange NPRM, most commenters agree with the Commission's
tentative conclusion in the Non-Accounting Safeguards NPRM that
interstate, domestic, long distance services should be treated as a
single product market for purposes of assessing whether BOC interLATA
affiliates and independent LECs have market power.
47. AT&T argues that the interexchange product market definition is
irrelevant to whether the BOCs could abuse their power in the local
market to impede interexchange competition. Instead, AT&T contends that
the proper markets to analyze are the local exchange and exchange
access service markets, rather than the interexchange market. DOJ also
argues that the product market definition is irrelevant to whether BOC
interLATA affiliates could exercise market power in the interLATA
marketplace because BOC interLATA affiliates clearly do not have the
ability to raise prices by restricting output.
48. BellSouth contends that since the Commission did not redefine
the product market in order to evaluate whether AT&T was a dominant
carrier, it need not reconsider the definition in order to evaluate the
competitive effects of BOC entry into the interexchange market. USTA
and GTE agree with the Commission's tentative conclusion that all
interstate, domestic, interexchange services should be considered the
relevant product market for independent LECs.
49. The Independent Telephone Telecommunications Alliance (ITTA)
contends that the Commission should adopt a product market defined as
``all telecommunications services,'' that encompasses such services as
interexchange, local, access and wireless services, in recognition of
the new market structure envisioned by the 1996 Act in which firms will
be providing a broad range of services. The Competitive
Telecommunications Association (CTA) contends that the relevant product
market should include those services that rely on or utilize the BOCs'
local network.
c. Discussion
50. We are aware of no evidence, nor has any commenter presented
any such evidence in the record, that suggests that there is a
particular interexchange service or group of services that will be
provided by BOC interLATA affiliates or independent LECs with respect
to which there is or could be a lack of competitive performance.
Moreover, we have found previously that there is substantial
competition with respect to most interstate, domestic, interexchange
service offerings. As a result, we conclude that we need not conduct
any particularized product market inquiry in order to evaluate the
market power of BOC interLATA affiliates and independent LECs for
interexchange services. We conclude that, at this time and for purposes
of determining whether BOC interLATA affiliates or independent LECs
have market power in the provision of domestic, interstate, long
distance services, our assessment of market power will remain the same,
regardless of whether we examine each individual long distance service,
different groupings of long distance services, or aggregate data that
encompasses all long distance services. Therefore, in assessing the
market power of BOC interLATA affiliates and independent LECs in the
provision of domestic, interstate, long distance services, we find it
is appropriate at this time to evaluate their market power with respect
to all interstate, domestic, long distance services, rather than
conducting a separate analysis of each individual service.
51. We disagree with AT&T's assertion that the product market
definition is irrelevant in assessing whether BOC interLATA affiliates
or independent LECs possess market power in the domestic, interstate,
long distance market. As discussed above, we believe that a relevant
product market must be defined before we can evaluate whether a
particular carrier or group of carriers possesses market power. While
we agree with AT&T that other factors are important in making our
overall assessment of market power, we conclude that we must define the
relevant product market in order to reach an accurate assessment of
whether BOC interLATA affiliates or independent LECs possess market
power in the domestic, interstate, long distance marketplace.
3. International Product Market for BOC InterLATA Affiliates and
Independent LECs
52. In the Non-Accounting Safeguards NPRM, we tentatively concluded
that we should apply the current international product market
definition, which recognizes international message telephone service
(IMTS) and non-IMTS as separate product markets, for purposes of
determining whether BOC interLATA affiliates and independent LECs
possess market power in the provision of international long distance
services.
53. MCI and NYNEX generally agree with the Commission's tentative
conclusion that IMTS and non-IMTS should be treated as the relevant
product markets for international services. USTA supports treating
international services as a product market separate from domestic
services, because international agreements and regulation create
different conditions than exist for domestic interexchange services.
Questioning the wisdom of dividing international services into two
distinct product markets, Sprint argues that the Commission should
retain flexibility to reflect the rapid changes taking place in the
product market for international communications. Sprint asserts, for
example, that, where providers engage in the resale of international
private lines interconnected to the public switched network at both
ends, the distinctions between IMTS and non-IMTS are blurred.
54. We conclude that, for purposes of determining whether BOC
interLATA affiliates and independent LECs possess market power in the
provision of international long distance services, we will modify our
tentative conclusion and examine aggregate data that encompasses all
international long distance services. Because our approach to defining
relevant markets is based on fundamental economic principles, we find
that it is applicable for assessing market power in both the domestic
and international long distance markets. Although we recognize that
international agreements and regulation
[[Page 35986]]
distinguish international long distance service from domestic long
distance service, we conclude that, while these distinctions may affect
our assessments of market power, they do not change our approach to
defining relevant markets. Therefore, we find that we should define the
relevant product market, in the international context, as any
international long distance service for which there are no close
substitutes or a group of services that are close substitutes for each
other, but for which there are no other close substitutes. We need only
delineate specific product markets, however, when there is credible
evidence suggesting that there is or could be a lack of competitive
performance with respect to a particular service or group of services.
55. Although traditionally we have recognized IMTS and non-IMTS as
separate international long distance product markets, we conclude,
similar to our conclusion in the domestic context, that this
distinction is not necessary for purposes of assessing whether BOC
interLATA affiliates and independent LECs possess market power in the
international long distance marketplace in this Order because our
assessment of market power will not change whether we examine IMTS and
non-IMTS separately as individual product markets or analyze aggregate
data that encompasses both IMTS and non-IMTS. Our decision to analyze
aggregate data that encompasses IMTS and non-IMTS, in this particular
context, does not modify our treatment of IMTS and non-IMTS as separate
product markets under the existing framework for regulating U.S.
carriers as dominant in the provision of international services because
of the market power of an affiliated foreign carrier.
C. Geographic Market
1. Geographic Market in General
a. Background
56. In the Competitive Carrier proceeding, the Commission defined
the relevant geographic market as ``the United States (including
Alaska, Hawaii, Puerto Rico, U.S. Virgin Islands, and other U.S.
offshore points) . . . with no relevant submarkets.'' In the
Interexchange NPRM, the Commission tentatively concluded that we should
refine this analysis and define a relevant geographic market for
interstate, domestic, interexchange services as all calls, in the
relevant product market, between two particular points. For purposes of
market power analysis, however, the Commission tentatively concluded
that, in general, we should treat domestic, interstate, interexchange
calling as a single, national market because geographic rate averaging,
in conjunction with the pervasiveness of ubiquitous calling plans,
should reduce the likelihood that a carrier could exercise market power
in a single point-to-point market, and because price regulation of
access services and excess capacity in interstate transport should
reduce the likelihood that an interexchange carrier could exercise
market power in most point-to-point markets. If there is credible
evidence suggesting that there is or could be a lack of competition in
a particular point-to-point market or group of point-to-point markets
and there is a showing that geographic rate averaging will not
sufficiently mitigate the exercise of market power in that market or
group of markets, we proposed to examine the individual market or group
of markets for the presence of market power. We asked commenters to
evaluate this new approach and to suggest any other possible
approaches.
b. Comments
57. Many commenters oppose the Commission's proposal to define a
relevant geographic market for interstate, domestic, interexchange
services as all calls between two points, although some commenters
concede its conceptual validity. Those parties opposing the point-to-
point market definition generally advocate the retention of the single
national market definition adopted in the Competitive Carrier
proceeding. Several commenters claim that demand patterns based on the
widespread use of ubiquitous calling plans favor a national market.
Other commenters indicate that it may be too early to define relevant
geographic markets with lasting precision and that point-to-point
markets would not be administrably viable because of the impracticality
of conducting a market power analysis in each point-to-point market. A
number of parties support our proposal to treat interstate,
interexchange calling as a single national market unless there is
credible evidence suggesting that there is or could be a lack of
competition in a particular point-to-point or group of point-to-point
markets, and there is a showing that geographic rate averaging will not
sufficiently mitigate the exercise of market power.
58. AT&T disagrees with the Commission's point-to-point market
analysis and argues that a single national market definition reflects
the way that competitors have built and conducted their business. AT&T
also notes that the Commission has rejected point-to-point markets on
several previous occasions. AT&T, BellSouth, USTA and NYNEX emphasize
that supply substitutability demonstrates that the market is national
because several carriers have national networks with capacity to
provide alternate routing and the ease of constructing new facilities
or to resell services allows carriers to enter the market and expand
service rapidly.
59. Several commenters contend that the geographic rate averaging
and rate integration requirements in the 1996 Act and the regulatory
regime overseeing access rates point to the existence of a single,
national market because together they ensure that the benefits of
competition in one market will be passed on to customers in other
markets. Bell Atlantic supports a single national market because, as
long as customers select a carrier for nationwide coverage, national
pricing schemes will drive the market, whether or not certain carriers
offer services originating only in a particular region. PacTel claims
that the trend toward uniform, distance-insensitive pricing
demonstrates that the interexchange market remains a national one. USTA
asserts that if point-to-point markets are appropriate, AT&T should not
have been classified as a non-dominant interexchange carrier because it
is the sole carrier serving a number of different cities.
60. PacTel and GTE submit that a single nationwide geographic
market is supported by economic theory, Commission precedent, the AT&T
Reclassification Order, and the 1996 Act. GTE acknowledges, however,
that certain service providers may be able to take advantage of their
market power in some point-to-point markets, despite geographic rate
averaging, regulated access pricing and excess transmission capacity.
In such situations, GTE recognizes that a narrower geographic market
may be appropriate to measure market power if there is credible
evidence of a lack of competition in a particular market. GTE adds
that, if the Commission does adopt a point-to-point approach, this
analysis should apply to IXCs as well as LECs.
61. Ameritech does not oppose the possibility of identifying
smaller markets than the national market, but claims that it is unable
to identify any such markets at this time. DOJ acknowledges that the
relevant geographic market theoretically could be defined as all calls
between two particular points, but argues that examining markets at
such a level of detail would be impractical.
62. LDDS claims that, although, for most purposes, the appropriate
relevant
[[Page 35987]]
geographic market for interstate, interexchange services is national,
the division between local and long distance will blur as competition
develops in the local market and the Commission must be able to employ
an appropriate geographic market definition to reflect these changes.
ACTA and GCI oppose the Commission's proposal to treat interstate,
interexchange services generally as a single national market. According
to ACTA, such a definition would overlook route-specific pricing
schemes designed to defeat competitive entry. GCI argues that certain
obvious characteristics, such as a de facto or de jure monopoly in the
provision of a service or a shortage of capacity in interstate
transport, should provide adequate justification for examining a
particular market for the presence of market power. GCI cites AT&T/
Alascom's facilities monopoly in rural Alaska and the limited fiber
optic capacity linking Alaska to the continental United States as such
examples.
63. A few commenters propose alternative approaches for defining
relevant geographic markets, including markets based on state
boundaries or local exchange boundaries and markets based on
Metropolitan Statistical Areas (MSAs), Basic Trading Areas (BTAs) or
Major Trading Areas (MTAs). See, e.g., Frontier April 19, 1996 Comments
at 1-2; PaPUC April 19, 1996 Comments at 10-11; Missouri Public Counsel
May 3, 1996 Reply at 3. We note that Rand McNally & Company is the
copyright owner of the Basic Trading and Major Trading Area Listings,
which list the counties contained in each BTA, as embodied in Rand
McNally's Trading Area System Diskette and Atlas & Marketing Guide.
Rand McNally has licensed the use of its copyrighted MTA/BTA listings
and maps for certain wireless telecommunications services. See
Amendment of Parts 2 and 90 of the Commission's Rules to Provide for
the Use of 200 Channels Outside the Designated Filing Areas in the 896-
901 MHz and the 935-940 MHz Bands Allotted to the Specialized Mobile
Radio Pool (60 FR 21987 (May 4, 1995)). GCI asserts that, because
market power does not follow any preestablished lines, the Commission
should conduct a market power analysis for any area for which there is
a nonfrivolous allegation of market power.
c. Discussion
64. We conclude that the geographic market definition adopted in
the Competitive Carrier proceeding should be revised to reflect the
approach to defining relevant markets contained in the 1992 Merger
Guidelines. The 1992 Merger Guidelines define the relevant geographic
market as the ``region such that a hypothetical monopolist that was the
only present or future producer of the relevant product at locations in
that region would profitably impose at least a `small but significant
and nontransitory' increase in price, holding constant the terms of
sale for all products produced elsewhere.'' Accordingly, in defining
the relevant geographic market, one must examine whether a ``small but
significant and nontransitory'' increase in the price of the relevant
product at a particular location would cause a buyer to shift his
purchase to a second location, so as to make the price increase
unprofitable. If so, the two locations should be considered to be in
the same geographic market. 1992 Merger Guidelines at pp. 20,573-
20,573-3. In accordance with the principles enunciated in the 1992
Merger Guidelines, we believe that long distance calling, at its most
fundamental level, involves a customer making a connection from one
specific location to another specific location. As we stated in the
Interexchange NPRM, ``[w]e believe that most telephone customers do not
view interexchange calls originating in different locations to be close
substitutes for each other.'' Therefore, we further conclude that we
will follow the revised approach to the geographic market definition
proposed in the Interexchange NPRM and define a relevant geographic
market for interstate, domestic, long distance services as all possible
routes that allow for a connection from one particular location to
another particular location (i.e., a point-to-point market).
65. Contrary to a number of commenters, we find that defining the
relevant geographic market as a point-to-point market, rather than as a
single national market, more accurately reflects the fact that most
customers use long distance services by purchasing ubiquitous calling
plans. A point-to-point connection is a constituent element of all
types of interstate, domestic, long distance services, (As we described
in the Interexchange NPRM, ``residential interexchange services can be
thought of as a bundle of all possible interexchange calls originating
from a single point and terminating anywhere, and 800 service as a
bundle of interstate, interexchange calls originating from a certain
geographic region and terminating at a specific point.'' Interexchange
NPRM, 11 FCC Rcd at 7168, para.50.) including purely point-to-point
services, (private line service is an example of a point-to-point
service) as well as point-to-all-points services (Residential long
distance service is an example of a point-to-all-points service. Point-
to-all-points services can be viewed as a bundle of point-to-point
connections all originating at the same point.) and all-points-to-point
services. (Toll free 800 or 888 numbers that are accessible from all
domestic geographic locations would be examples of an all points-to-
point service. An all-points-to-point service can be viewed as a bundle
of point-to-point connections that all terminate at the same point.)
Ubiquitous calling plans encompass point-to-all-points services or all-
points-to-point services, which are essentially a bundle of point-to-
point connections serving a common point. Although ubiquitous calling
allows customers to make multiple point-to-point connections from or to
a common point via a single source, it does not change the nature of
interstate, domestic, long distance calling. From the customer's
perspective, while the calling plan itself may be ``ubiquitous'' in
that it offers nationwide coverage from or to a common point, the
market to purchase that plan is a localized market, not a national one.
For example, customers located in Miami generally purchase calling
plans that offer long distance service originating from Miami. Any
calling plan that provides service originating from Los Angeles, even
if it is ``ubiquitous'' service, would not be a viable substitute for
customers located in Miami. Accordingly, we believe that defining the
relevant geographic market as a point-to-point market is a more
accurate approach to assessing market power than a single national
market definition, even assuming that most long distance customers
purchase ubiquitous calling plans.
66. We recognize, however, that assessing market power in each
individual point-to-point market would be administratively impractical
and inefficient. Therefore, we clarify our proposal in the
Interexchange NPRM to treat, in general, interstate, long distance
calling as a single national market unless there is credible evidence
indicating that there is or could be a lack of competition in a
particular point-to-point market, and there is a showing that
geographic rate averaging will not sufficiently mitigate the exercise
of market power. We conclude that when a group of point-to-point
markets exhibit sufficiently similar competitive characteristics (i.e.,
market structure), we will examine that group of markets using
aggregate data that encompasses all point-to-point markets
[[Page 35988]]
in the relevant area, rather than examine each individual point-to-
point market separately. Therefore, if we conclude that the competitive
conditions for a particular service in any point-to-point market are
sufficiently representative of the competitive conditions for that
service in all other domestic point-to-point markets, then we will
examine aggregate data, rather than data particular to each domestic
point-to-point market. For example, we could analyze national market
share data, rather than market share data for particular point-to-point
markets. Such a finding would require that there be no credible
evidence that there is or could be a lack of competitive performance in
any point-to-point market for that service. As noted in the
Interexchange NPRM, we believe that geographic rate averaging, price
regulation of exchange access services, and the excess capacity in
interstate transport currently cause carriers to behave similarly in
each domestic point-to-point market and reduce the likelihood that
carriers could exercise market power in most point-to-point markets.
67. Unless there is credible evidence suggesting that there is or
could be a lack of competition in a particular point-to-point market or
group of point-to-point markets, and there is a showing that geographic
rate averaging will not sufficiently mitigate the exercise of market
power, we will refrain from employing the more burdensome approach of
analyzing separate data from each point-to-point market. We believe
that, in most cases, statistics, such as market shares, are most
usefully calculated based on aggregate data covering all domestic
point-to-point markets. In many point-to-point markets (e.g., one home
to another home), one long distance carrier will have 100 percent
market share. This does not imply, however, that this particular long
distance carrier has market power. Therefore, in using market share as
one factor in assessing market power, it is important that we examine
market share in the broadest geographic group of point-to-point markets
in which competitive conditions are reasonably homogeneous.
68. In the Interexchange NPRM, we also sought comment on how
narrowly we should define the points of origination and termination
when examining a point-to-point market. The relevant point in a point-
to-point market is the location of a particular telephone or other
telecommunications device. For example, with regard to residential long
distance service, the relevant point is each individual customer's
residence. We recognize that assessing market power at such a level of
detail would be administratively impractical. We conclude, however,
that there is no need to define larger points because, when assessing
the market power of a particular carrier or group of carriers, we will
treat together all point-to-point markets within a boundary such that
all transactions carried out within that boundary are subject to the
same competitive conditions. Therefore, for all practical purposes, we
fully expect that the relevant geographic area for assessing market
power will usually consist of multiple point-to-point connections that
exhibit the same competitive conditions. Because we will invariably
analyze a group of point-to-point markets, there is no practical need
to also redefine the individual points.
69. Although GCI has suggested that we treat Alaska as a separate
geographic market in assessing the market power of AT&T/Alascom, we do
not do so in this proceeding. As noted supra at notes 170, 171, GCI
identified the Alaska market as a separate geographic market. We also
note that GCI has filed a petition seeking reconsideration of the AT&T
Reclassification Order, in which it argues that the reclassification of
AT&T does not apply to AT&T/Alascom, Inc. because AT&T/Alascom is still
dominant in the Alaska market. See GCI petition for reconsideration or
clarification of AT&T Reclassification Order (filed Nov. 22, 1995). As
noted above, any modifications to decisions reached in the AT&T
Reclassification Order that may be necessary as a result of our
decision here will be addressed, as necessary, in further proceedings.
We emphasize, however, that, because market definition is only one step
in assessing market power, changes made in the approach to defining
relevant markets will not necessarily produce different assessments of
market power.
2. Geographic Market for BOC InterLATA Affiliates and Independent LECs
a. Background
70. In the Non-Accounting Safeguards NPRM, we tentatively concluded
that, if we adopt the approach proposed in the Interexchange NPRM, we
should evaluate a BOC's point-to-point markets in which calls originate
in-region separately from its point-to-point markets in which calls
originate out-of-region, for purposes of determining whether BOC
interLATA affiliates have market power in the provision of interstate,
domestic, interLATA services. Similarly, we tentatively concluded that
we should evaluate an independent LEC's point-to-point markets in which
calls originate in its local exchange areas separately from its markets
in which calls originate outside those areas, for the purpose of
determining whether an independent LEC possesses market power in the
provision of interstate, domestic, interexchange services.
b. Comments
71. Several commenters support the Commission's tentative
conclusion that it should evaluate a BOC's point-to-point markets in
which calls originate in-region separately from its point-to-point
markets in which calls originate out-of-region in order to determine
whether a BOC interLATA affiliate possesses market power in-region. CTA
and LDDS argue that this approach is supported by the fact that
Congress legislated different treatment for in-region and out-of-region
BOC services. Although LDDS agrees with the Commission's proposal to
identify particular markets only where credible evidence of a lack of
competition and a failure of geographic rate averaging to mitigate
market power exists, LDDS argues that the Commission should find that,
in light of BOC control over the origination and termination ends of
nearly all interstate, long distance calls, the relevant geographic
market for a BOC interLATA affiliate will be the entire region from
which it provides long distance services, regardless of whether it is
part of the region in which the BOC provides local exchange and
exchange access service. MCI contends that the approach proposed in the
Non-Accounting Safeguards NPRM recognizes that there are greater
opportunities for cross-subsidization and anticompetitive conduct for
interLATA service originating in a BOC's service region. Regardless of
the market definition, DOJ states that it is ``not unreasonable'' in
this proceeding for the Commission to distinguish a BOC's provision of
interexchange service outside its region from provision of such service
within its region. Sprint and the New York Public Service Department
urge the Commission to recognize that mergers, acquisitions, and
similar combinations by BOCs may require consideration of geographic
markets more extensive than a BOC's own region.
72. The BOCs generally oppose the approach proposed in the Non-
Accounting Safeguards NPRM and contend that the Commission should treat
domestic, interstate, interexchange services as a single national
market for purposes of determining whether a BOC interLATA affiliate
possesses in-region market power. BellSouth and USTA
[[Page 35989]]
contend that all competing carriers should be subject to the same
standards, including the same relevant market definitions, absent
compelling reasons for disparate treatment. BellSouth and USTA argue
that, given the BOCs' zero market share, the structural separation
requirements and regulatory safeguards that apply to a BOC's provision
of long distance services, and the comprehensive regulation of the
BOCs' bottleneck facilities, the Commission's assumption that BOC
interLATA affiliates may have market power over in-region interexchange
services and therefore those services may need to be examined
separately from out-of-region services is flawed.
73. NYNEX contends that the fact that the BOCs are not likely to
begin offering interexchange services with nationwide networks does not
justify redefining the geographic market because many interexchange
carriers also concentrate their offerings in particular regions. NYNEX
also asserts that the 1992 Merger Guidelines support a single,
nationwide geographic market definition regardless of whether
interexchange services provided by BOC interLATA affiliates originate
in-region or out-of-region. Bell Atlantic, BellSouth, and NYNEX argue
that geographic rate averaging will prevent the BOCs from being able to
raise prices selectively in targeted areas. Moreover, these parties
allege that even if a BOC attempted to raise rates on any given route,
other carriers would respond by offering lower rates because they would
have sufficient capacity available on their existing networks to be
able to carry the BOC customers that they would attract through lower
prices.
74. USTA argues that the Commission should not change the single,
national geographic market definition in assessing the market power of
independent LECs because: (1) The national scope of major
telecommunications companies has increased over the years, not
lessened, with the four largest IXCs controlling over 85 percent of the
market; and (2) the national market is the relevant market for
independent LECs, their competitors and the public, because
interexchange service offerings are generally ubiquitous, not local or
regional, and pricing, marketing, and networks are all national in
scope. USTA adds that customers generally purchase interexchange
services under ubiquitous calling plans, not on a point-to-point basis.
According to USTA, although independent LECs provide local exchange
services that are regional or local in scope, this does not change the
national nature of the interexchange market because customers can
choose from national, regional or local providers of long distance
service.
75. As noted above, AT&T asserts that the geographic market
definition is irrelevant in determining whether the BOCs or independent
LECs could abuse their power in the local market to impede
interexchange competition. AT&T contends that market definitions and
market share analyses are unnecessary when the presence of market power
can be proven directly, as it can here because of the BOCs' control of
the local bottleneck, or where undisputed power in one market (i.e.,
local services) can be leveraged to impede competition in a second
market (i.e., long distance). AT&T also asserts, however, that ``while
interexchange services originating in a particular BOC's service area
generally could not be a separate geographic market, a determination of
the appropriate regulatory treatment of a BOC's (or independent LEC's)
in-region interLATA services should focus on these areas.''
c. Discussion
76. In evaluating whether BOC interLATA affiliates and independent
LECs possess market power in the interstate, domestic, long distance
market, we conclude that we generally will follow the approach proposed
in the Non-Accounting Safeguards NPRM. As discussed above, we disagree
with those commenters that advocate using a single national geographic
market definition. We conclude that a local exchange carrier's control
of the local bottleneck constitutes credible evidence that there could
be a lack of competitive performance in point-to-point markets that
originate in-region. Because we expect that competitive conditions will
be different for those point-to-point markets that originate in-region
than for those point-to-point markets that originate out-of-region, we
find that our analysis of market power should reflect this expectation.
In-region, a BOC's control over the local bottleneck may give it a
competitive advantage that it does not have out-of-region, causing the
BOC to compete differently in-region than out-of-region. Therefore, the
competitive conditions in-region are likely to be different in-region
than out-of-region. Therefore, in determining whether BOC interLATA
affiliates have market power in the provision of interstate, domestic,
interLATA services, we conclude that calls originating from in-region
point-to-point markets should be analyzed separately from calls
originating from out-of-region point-to-point markets. Similarly, in
determining whether independent LECs have market power in the provision
of interstate, domestic, interexchange services, we conclude that calls
originating in point-to-point markets within their local service areas
should be analyzed separately from calls originating in point-to-point
markets outside those areas.
77. We adopt this bifurcated analysis to determine whether a BOC or
independent LEC, through improper cost allocation or discrimination,
could use its market power in local exchange and exchange access
services to disadvantage long-distance rivals of the BOC interLATA
affiliate or independent LEC. Such improper cost allocation or
discrimination might enable a BOC interLATA affiliate or independent
LEC to obtain the ability profitably to raise and sustain its price for
in-region, interstate, domestic, long distance services above
competitive levels by restricting its output of long distance services.
We are not persuaded, moreover, that geographic rate averaging of
interstate long distance services alone will necessarily suffice to
offset the potential anticompetitive effects of a BOC's or independent
LEC's use of the market power resulting from its control over local
access facilities because if a BOC interLATA affiliate's or independent
LEC's long distance customers are concentrated in one region, it may be
profitable to raise prices above competitive levels, even if geographic
rate averaging might cause it to lose market share outside that region.
78. We reject AT&T's contention that the geographic market
definition is irrelevant in assessing whether BOC interLATA affiliates
or independent LECs possess market power. As discussed above, we
conclude that a relevant geographic market must be defined in order to
conduct an accurate assessment of market power. While we agree with
AT&T that other factors are important in making our overall assessment
of market power, we do not agree that we can avoid defining the
relevant geographic market if we wish to achieve an accurate assessment
of whether BOC interLATA affiliates or independent LECs possess market
power in the long distance marketplace. Moreover, we further note that,
in some cases, it may be necessary to focus specifically on the
termination point because the local exchange carrier that serves the
end-user customer will necessarily have market power with regard to
that customer.
[[Page 35990]]
3. International Geographic Market for BOC InterLATA Affiliates and
Independent LECs
79. In the Non-Accounting Safeguards NPRM, we tentatively concluded
that, for purposes of assessing whether BOC interLATA affiliates or
independent LECs could exercise market power in the international long
distance marketplace, market power should be measured on a worldwide,
rather than route-by-route, basis, except for routes on which the
carriers are affiliated with foreign carriers in the destination
market. MCI, NYNEX and USTA agree with the Commission's tentative
conclusion.
80. In assessing whether BOC interLATA affiliates and independent
LECs possess market power in the international long distance
marketplace, we adopt our tentative conclusion, but clarify that we
will examine aggregate data that encompasses all international point-
to-point markets, unless there is credible evidence suggesting that
there is or could be a lack of competition in one or more international
point-to-point markets. Of course, as discussed above, we will examine
international point-to-point markets that originate in-region
separately from international point-to-point markets that originate
out-of-region. We acknowledge that myriad factors, including whether a
carrier controls 100 percent of the capacity of the U.S. half of a
particular international point-to-point market, may affect our
determination of whether each international point-to-point market has
competitive characteristics that are sufficiently similar to other
point-to-point markets in the international marketplace. In classifying
AT&T as non-dominant in the provision of IMTS, we generally analyzed
AT&T's market power on a worldwide basis as a surrogate for a route-by-
route analysis, except a route-by-route analysis was employed to
scrutinize those markets that have not supported entry by competing
U.S. carriers. A route-by-route approach also was used to analyze the
competitive impact of AT&T's affiliations and alliances with foreign
carriers on particular U.S. international routes. In the Matter of
Motion of AT&T Corp. to be Declared Non-Dominant for International
Service, Order, FCC 96-209, at para. 32 (rel. May 14, 1996). In such
cases, it may be necessary to conduct a more particularized analysis
and examine certain individual international point-to-point markets or
groups of point-to-point markets separately. Because no such factors
currently apply or, we believe, are likely to apply to any BOC
interLATA affiliate or independent LEC, however, we find that each
individual international point-to-point market exhibits similar
competitive characteristics to all other international point-to-point
markets. Therefore, it is unnecessary for us to conduct a separate
analysis for each international point-to-point market, given the
administrative burdens associated with such an inquiry. Our decision
here to examine aggregate data that encompasses all international
point-to-point markets does not modify our existing route-by-route
approach to consider whether U.S. carriers affiliated with a foreign
carrier should be regulated as dominant in the provision of
international services because they are affiliated with a foreign
carrier that exercises market power in a foreign market.
IV. Classification of BOC Interlata Affiliates and Independent LECS
as Dominant or Non-Dominant Carriers in the Provision of in-Region
Long Distance Services
81. In this section, we consider whether we should continue the
dominant carrier classification that under our rules would apply to the
BOC interLATA affiliates in the provision of in-region, interstate,
domestic, interLATA services. As previously discussed, for convenience,
we use the term ``BOC interLATA affiliates'' to refer to the separate
affiliates established by the BOCs, in conformance with section
272(a)(1), to provide in-region, interLATA services. See supra n. 12.
In order to reclassify the BOC interLATA affiliates as non-dominant,
our rules require us to conclude that they will not possess market
power in the provision of those interLATA services in the relevant
product and geographic markets. Our analysis of whether the BOC
interLATA affiliates should be classified as dominant or non-dominant
in the provision of in-region, interstate, domestic, interLATA services
has no bearing on the determination of whether a BOC interLATA
affiliate has satisfied the requirements of section 271(d)(3), and it
should not to be interpreted as prejudging such determinations in any
way. We also consider whether we should modify the regulatory regime
adopted in the Competitive Carrier Fifth Report and Order for the
regulation of in-region, interstate, domestic, interexchange services
provided by independent LECs. Finally, we consider whether we should
apply the same regulatory classification to the BOC interLATA
affiliates' and independent LECs' provision of in-region, international
services as we adopt in this proceeding for their provision of in-
region, interstate, domestic, long distance services. This proceeding
does not modify the Commission's separate framework, adopted in the
International Services Order and Foreign Carrier Entry Order, for
regulating United States international carriers (including BOC
interLATA affiliates or independent LECs) as dominant on routes where
an affiliated foreign carrier has the ability to discriminate in favor
of its U.S. affiliate through control of bottleneck services or
facilities in the foreign destination market. See infra para. 139.
A. Classification of BOC InterLATA Affiliates
82. We conclude that the requirements established by, and the rules
implemented pursuant to, sections 271 and 272, together with other
existing rules, sufficiently limit a BOC's ability to use its market
power in the local exchange or exchange access markets to enable its
interLATA affiliate profitably to raise and sustain prices of in-
region, interstate, domestic, interLATA services significantly above
competitive levels by restricting the affiliate's own output. We
therefore classify the BOCs' section 272 interLATA affiliates as non-
dominant in the provision of these services. We also conclude that we
should apply the same regulatory classification to the BOC interLATA
affiliates' provision of in-region, international services as we adopt
for their provision of in-region, interstate, domestic, interLATA
services.
1. Definition of Market Power and the Limits of Dominant Carrier
Regulation
a. Background
83. In the Non-Accounting Safeguards NPRM, we noted that there are
two ways in which a carrier can profitably raise and sustain prices
above competitive levels and thereby exercise market power. Non-
Accounting Safeguards NPRM at para. 131. For convenience, we refer, as
we did in the Notice, to a carrier's ability to engage in such a
strategy as the ability to ``raise prices.'' First, a carrier may be
able to raise prices by restricting its own output (which usually
requires a large market share); second, a carrier may be able to raise
prices by increasing its rivals' costs or by restricting its rivals'
output through the carrier's control of an essential input, such as
access to bottleneck facilities, that its rivals need to offer their
services. Id. We also noted that economists have recognized these
different ways to exercise market power by distinguishing between
``Stiglerian'' market power, which is the ability of a firm profitably
to raise and sustain its
[[Page 35991]]
price significantly above the competitive level by restricting its own
output, and ``Bainian'' market power, which is the ability of a firm
profitably to raise and sustain its price significantly above the
competitive level by raising its rivals' costs and thereby causing the
rivals to restrain their output. T.G. Krattenmaker, R.H. Lande, and
S.C. Salop, Monopoly Power and Market Power in Antitrust Law, 76 Geo.
L.J. 241, 249-53 (1987). We sought comment on whether the BOC interLATA
affiliates should be classified as dominant carriers in the provision
of in-region, interstate, domestic, interLATA services under our rules
only if we find that the affiliates have the ability to raise prices of
those services by restricting their own output, or whether we should
also classify the affiliates as dominant if the BOCs have the ability
to raise prices by raising the costs of their affiliates' interLATA
rivals.
b. Comments
84. Most commenters that address this issue, including DOJ, argue
that the BOC interLATA affiliates should be classified as dominant only
if they have the ability to raise the prices of interLATA services by
restricting their own output. MCI and AT&T contend, however, that we
should also classify a BOC interLATA affiliate as dominant if it (or
its BOC parent) has the ability to raise the costs or restrict the
output of the affiliate's rivals through control of an essential input,
such as exchange access, or the ability to raise the prices paid by the
affiliate and its rivals for exchange access. MCI claims that, even if
consumer prices are not raised immediately, a BOC's ability to impose
excessive costs on or to restrict essential inputs to its interexchange
rivals presents a long-run harm to competition because it will make the
BOC's rivals weaker competitors, and thereby reduce their output and
make consumer price increases inevitable. MCI asserts that raising
rivals' costs is, in fact, likely to result in an increase in the BOC
interLATA affiliate's rates, which could be prevented by dominant
carrier regulation.
c. Discussion
85. We conclude that the BOC interLATA affiliates should be
classified as dominant carriers in the provision of in-region,
interstate, domestic, interLATA services only if the affiliates have
the ability to raise prices of those services by restricting their own
output of those services. As we stated in the NPRM, we believe that our
dominant carrier regulations are generally designed to prevent a
carrier from raising prices by restricting its output rather than to
prevent a carrier from raising its prices by raising its rivals' costs.
Non-Accounting Safeguards NPRM at para. 132. Accord NYNEX Aug. 15, 1996
Comments at 51; USTA Aug. 15, 1996 Comments at 47; DOJ Aug. 30, 1996
Reply at 16. As noted in the NPRM, the definitions of market power
cited by the Commission in the Competitive Carrier Fourth Report and
Order referred to the concept of a carrier raising price by restricting
its own output. Non-Accounting Safeguards NPRM at para. 132 (citing
Competitive Carrier Fourth Report and Order, 95 FCC 2d at 558,
Paras. 7, 8). In fact, these regulations were adopted at a time when
AT&T was essentially a monopoly provider of domestic long distance
services. As discussed below, application of these regulations to a
carrier that does not have the ability to raise long distance prices by
restricting its own output could lead to incongruous results.
86. Even AT&T acknowledges that at least some of the dominant
carrier regulations, such as price ceilings and more stringent section
214 requirements, are not designed to address the potential problems
associated with BOC entry into competitive markets. For example,
although we recognize, as discussed below, that there are circumstances
in which price cap regulation (including price floors) of a BOC
interLATA affiliate's rates might decrease a BOC's ability to engage in
anticompetitive conduct, (We also conclude below that price cap
regulation of the BOCs' exchange access services will reduce the BOCs'
incentive to misallocate the costs of their affiliates' interLATA
services. See infra para. 106.) we believe that in this situation the
disadvantages of price cap regulation outweigh its benefits. Similarly,
we question whether more stringent section 214 requirements would be an
efficient means of addressing the concerns raised by BOC entry.
Congress enacted the facilities-authorization requirements in section
214 and subsequent amendments primarily to prevent investment in
unnecessary new plant by rate-base regulated common carriers and to bar
service discontinuance in areas served by a single carrier. See
Competitive Carrier First Report and Order, 85 FCC 2d at 39, para. 114.
See also H. Averch and L. L. Johnson, Behavior of the Firm under
Regulatory Constraint, 52 Amer. Econ. Rev. 1053 (1962) (a firm under
rate of return regulation has an incentive to invest in more than the
efficient amount of plant in order to increase the value of its rate
base). Because we previously have found that markets for long distance
services are substantially competitive in most areas, marketplace
forces should effectively deter carriers that face competition from
engaging in the practices that Congress sought to address through the
section 214 requirements. For example, a carrier facing competition
lacks the incentive to invest in unneeded facilities, because it cannot
extract additional revenue from its long distance customers to recoup
the cost of those facilities. If such a carrier discontinues service in
an area where it faces competition, its customers could turn to the
carrier's competitors for service. Because marketplace forces generally
eliminate the need for regulatory requirements imposed by section 214,
we have granted a blanket section 214 authorization to non-dominant
carriers such that they no longer must obtain prior approval to provide
domestic long distance service or add new facilities and we impose less
stringent requirements on non-dominant carriers that are discontinuing
service. 47 CFR Secs. 63.07, 63.71. Section 63.07 requires non-dominant
carriers to report the acquisition or construction of initial or
additional circuits to the Commission on a semi-annual basis, while
section 63.71 imposes certain notification requirements on non-dominant
carriers that plan to reduce, impair, or discontinue service. We
recognize that, for certain areas, such as those served by a single
interexchange carrier or where equal access has not been implemented,
it may still be appropriate for the Commission to review a carrier's
proposal to discontinue service.
87. We recognize that certain aspects of dominant carrier
regulation might constrain a BOC's ability to raise the costs of its
affiliate's interLATA rivals or engage in other anticompetitive
conduct. For example, requiring a BOC interLATA affiliate to file its
tariffs with advance notice and cost support data might help to detect
and prevent predatory pricing, particularly if coupled with a price
floor on the affiliate's interLATA services. Price cap regulation of a
BOC interLATA affiliate's interLATA services may deter a BOC from
raising the costs of its affiliate's rivals through discrimination or
other anticompetitive conduct by limiting the profit the affiliate
could earn as a result of the anticompetitive conduct. As we stated in
the Notice, however, price cap regulation of a BOC interLATA
affiliate's interLATA services generally would not prevent a
[[Page 35992]]
BOC from raising its affiliate's rivals costs through discrimination or
other anticompetitive conduct. Non-Accounting Safeguards NPRM at para.
132. It also would not prevent the affiliate from profiting from the
BOC's raising rivals' costs through increased market share. Id. See
also DOJ Aug. 30, 1996 Reply at 28 (impact of price cap regulation on
affiliate pricing, and therefore its deterrence effect, is not so
clear). Nevertheless, the fact that these measures might help to deter
a BOC or its interLATA affiliate from engaging in certain types of
anticompetitive conduct is not, by itself, a sufficient basis for
imposing dominant carrier regulations on the BOC interLATA affiliates.
We should also consider whether and to what extent these regulations
would dampen competition and whether other statutory and regulatory
provisions would accomplish the same objectives while imposing fewer
burdens on the carriers and the Commission. Dominant carrier regulation
should be imposed on the BOC interLATA affiliates only if the benefits
of such regulation outweigh the burdens that would be imposed on
competition, service providers, and the Commission.
88. The Commission has long recognized that the regulations
associated with dominant carrier classification can dampen competition.
For example, advance notice periods for tariff filings can stifle price
competition and marketing innovation when applied to a competitive
industry. In the Tariff Forbearance Order, we eliminated tariff filing
requirements for non-dominant carriers pursuant to our forbearance
authority under the Communications Act and ordered all non-dominant
interexchange carriers to cancel their tariffs for interstate,
domestic, interexchange services within nine months from the effective
date of the Order. Tariff Forbearance Order at para. 3. As previously
noted, the Tariff Forbearance Order is currently subject to a judicial
stay. We concluded that a regime without non-dominant interexchange
carrier tariffs for interstate, domestic, interexchange services will
be the most pro-competitive, deregulatory system. We also found that
not permitting non-dominant interexchange carriers to file tariffs with
respect to interstate, domestic, interexchange services will enhance
competition among providers of such services, promote competitive
market conditions, and achieve other objectives that are in the public
interest. We further concluded that continuing to require non-dominant
interexchange carriers to file tariffs for interstate, domestic,
interexchange services would reduce incentives for competitive price
discounting, constrain carriers' ability to make rapid, efficient
responses to changes in demand and cost, impose costs on carriers that
attempt to make new offerings, and prevent customers from seeking out
or obtaining service arrangements specifically tailored to their needs.
89. Requiring the BOC interLATA affiliates to file tariffs on
advance notice and with cost support data would impose even more
significant costs and burdens on the interLATA affiliates than the one-
day notice period formerly required of non-dominant carriers and would
adversely affect competition. Moreover, these requirements could
undermine at least some of the benefits otherwise gained by eliminating
tariff filing by non-dominant domestic interexchange carriers. In the
Tariff Forbearance Order, we found that tacit coordination of prices
for interstate, domestic, interexchange services, to the extent it
exists, would be more difficult if we eliminate tariffs, because price
and service information about such services provided by non-dominant
interexchange carriers would no longer be collected and available in
one central location. Upon full implementation of that Order, no
interexchange carrier will be obligated (or permitted) to file tariffs
for interstate, domestic, interexchange services. Upon full
implementation of this Order, all domestic interexchange carriers will
be regulated as non-dominant carriers. See infra section IV.B. If we
were to require BOC interLATA affiliates to file tariffs for
interstate, domestic, interexchange services, the ready availability of
that information might facilitate tacit coordination of prices. We also
believe that such requirements would impose significant administrative
burdens on the Commission and the BOC interLATA affiliates,
particularly to the extent they encourage the affiliates' interLATA
competitors to challenge the affiliates' interLATA rates in order to
impede the affiliates' ability to compete.
90. We find that the other regulations associated with dominant
carrier classification can also have undesirable effects on
competition. Although a price floor might help prevent a BOC interLATA
affiliate from pricing below its cost, a price floor, if set too high,
could prevent consumers from enjoying lower prices resulting from real
efficiencies. The required cost support data can also discourage the
introduction of innovative new service offerings, because it requires a
carrier to reveal its financial information to its competitors.
91. As we discussed in the NPRM, we believe that other regulations
applicable to the BOCs and their interLATA affiliates will address the
anticompetitive concerns raised in the NPRM in a less burdensome
manner. For example, a BOC's ability to engage in a ``price squeeze''
by raising its prices for access services (Under this scenario, a BOC
would raise the price of access to all interexchange carriers,
including its affiliate. This would cause competing interLATA carriers
either to raise their retail interLATA rates in order to maintain the
same profit margins or to attempt to preserve their market share by not
raising their prices to reflect the increase in access charges, thereby
reducing their profit margins. If the competing in-region interLATA
service providers raised their prices to recover the increased access
charges, the BOC interLATA affiliate could seek to expand its market
share by not matching the price increase. See infra para. 125.) (as
opposed to a BOC affiliate's lowering its long distance prices even
when the BOC has not lowered its access prices) is limited by price cap
regulation of those services. The nondiscrimination and structural
separation requirements set forth in section 272 and our rules
thereunder, price cap regulation of the BOCs' exchange access services,
and the Commission's affiliate transaction rules sufficiently reduce
the risk of successful anticompetitive discrimination and improper
allocation of costs. We agree with DOJ that applying dominant carrier
regulation to an affiliate in a downstream market would be ``at best a
clumsy tool for controlling vertical leveraging of market power by the
parent, if the parent can be directly regulated instead.'' In the Non-
Accounting Safeguards Order (62 FR 2927 (January 21, 1997)) and
Accounting Safeguards Order (62 FR 10220 (March 6, 1997)), we adopted
regulations to constrain the BOCs' ability to use their market power in
local exchange and exchange access services to engage in
anticompetitive conduct in competitive markets. We therefore reject
AT&T and MCI's contention that a BOC's ability to engage in such
conduct would provide a legitimate basis for classifying its affiliate
as dominant in the provision of in-region, interstate, domestic,
interLATA services.
92. We find that the entry of the BOC interLATA affiliates into the
provision of interLATA services has the potential to increase price
competition and lead to innovative new services and marketing
efficiencies. We see no reason to saddle the BOC interLATA affiliates
[[Page 35993]]
with regulations that are not well-suited to prevent the risks
associated with BOC entry into in-region, interstate, domestic,
interLATA services. We, therefore, conclude that the BOC interLATA
affiliates should be classified as dominant carriers only if they have
the ability to raise prices by restricting their own output.
2. Classification of BOC InterLATA Affiliates in the Provision of In-
Region, Interstate, Domestic, InterLATA Services
a. Traditional Market Power Factors (other than control of bottleneck
facilities)
i. Background
93. In the Non-Accounting Safeguards NPRM, we noted that, in
determining whether a firm possesses market power, the Commission has
previously focused on certain well-established market features,
including market share, supply and demand substitutability, the cost
structure, size or resources of the firm, and control of bottleneck
facilities. We sought comment on the application of these factors in
determining whether the BOC interLATA affiliates should be classified
as dominant or non-dominant.
ii. Comments
94. Most commenters that address the issue agree that each of the
traditional market factors weighs in favor of classifying the BOC
interLATA affiliates as non-dominant. According to Ameritech, it is
inconceivable that a BOC interLATA affiliate ``could bring AT&T to its
knees quickly'' because the affiliates will enter the long-distance
market with no customers, no traffic, no revenues, and no presubscribed
lines and will be competing against some 500 incumbent carriers,
including AT&T, MCI and Sprint, all of which are well-established in
the market. Ameritech and U S West also claim that, in considering
whether to classify the BOC interLATA affiliates as dominant, the
Commission should consider only whether the BOC interLATA affiliates
will have market power upon entry, not whether they will ``quickly
gain'' such market power.
95. The California Cable Television Association (CCTA) contends,
however, that a BOC interLATA affiliate's initial zero market share
should not dissuade the Commission from retaining dominant carrier
regulation because, as an entity affiliated with the dominant provider
in the state, it will have enormous advantages particularly in terms of
brand identification. CCTA further argues that it is likely that these
affiliates will seek to capitalize on their parental lineage by using
some or all of the BOCs' logos or other branding mechanisms. LDDS
asserts that market share in and of itself is not a measure of market
power, but rather is one of many possible indications that market power
may exist in a certain market.
iii. Discussion
96. We find that each of the traditional market factors (excluding
bottleneck control) supports a conclusion that the BOC interLATA
affiliates will not have the ability to raise price by restricting
their output upon entry or soon thereafter. As stated in the NPRM, the
fact that each BOC interLATA affiliate initially will have zero market
share in the provision of in-region, interstate, domestic, interLATA
services suggests that the affiliate will not initially be able to
raise price by restricting its output. As discussed in the NPRM,
however, we find that this factor is not conclusive in determining
whether a BOC interLATA affiliate should be classified as dominant,
because the affiliate's zero market share results from its exclusion
from the market until now, and, the affiliate potentially could gain
significant market share upon entry or shortly thereafter, because of
its brand identification with in-region customers, possible
efficiencies of integration, and the BOC's ability potentially to raise
the costs of its affiliate's interLATA rivals.
97. As to supply substitutability, we note that the Commission has
previously found that the excess capacity of AT&T's competitors is
sufficient to constrain AT&T's exercise of market power. In light of
that finding, we conclude that AT&T and its competitors, which
currently serve all interLATA customers, should be able to expand their
capacity sufficiently to attract a BOC interLATA affiliate's customers
if the affiliate attempts to raise its interLATA prices. As we
discussed in the NPRM, the Commission also recently found that the
purchasing decisions of most customers of domestic interexchange
services are sensitive to changes in price, and customers would be
willing to shift their traffic to an interexchange carrier's rival if
the carrier raises its prices. The existence of such demand
substitutability supports the conclusion that the BOC interLATA
affiliates will not have the ability to raise prices by restricting
their output. Finally, given the presence of existing interexchange
carriers, including such large well established carriers as AT&T, MCI,
Sprint, and LDDS, we find that the cost structure, size, and resources
of the BOC interLATA affiliates are not likely to enable them to raise
prices above the competitive level for their domestic interLATA
services. Although the BOCs' brand identification and possible
efficiencies of integration may give the BOC interLATA affiliates
certain cost advantages in attracting customers, their lack of
nationwide facilities-based networks would appear to put them at a
disadvantage relative to the four largest interexchange carriers, as
noted by Ameritech, particularly because the cost of resold long
distances services will generally exceed the marginal cost of providing
those services.
b. BOC Control of Bottleneck Access Facilities
i. Background
98. In the Non-Accounting Safeguards NPRM, we noted that, in
assessing whether a BOC interLATA affiliate would possess market power
in the provision of in-region, interstate, domestic, interLATA
services, we must also consider the significance of the BOCs' current
control of bottleneck exchange access facilities. We noted the concern
that a BOC's control of bottleneck access facilities would enable it to
allocate costs improperly from its affiliate's interLATA services to
the BOC's regulated exchange or exchange access services, discriminate
against its affiliate's interLATA competitors, and potentially engage
in a price squeeze against those competitors. We therefore sought
comment on whether the statutory and regulatory safeguards currently
imposed on the BOCs and their affiliates are sufficient to prevent a
BOC from engaging in such activities to such an extent that the BOC
interLATA affiliates would quickly gain the ability to raise price by
restricting output.
ii. Comments
99. Some of the BOCs dispute the Commission's assumption that the
BOCs have and will maintain control of bottleneck access facilities.
These commenters argue that any control the BOCs may have once had in
the exchange access market has been dissipated by the Commission's
expanded interconnection initiatives, the 1996 Act and the Commission's
implementing regulations, and the actions of various states. In
contrast, AT&T contends that the BOCs' monopoly control over local
bottleneck facilities gives them market power in the interexchange
market. Similarly, LDDS asserts that the BOCs will continue to possess
market power in both the local exchange and exchange access markets,
which translates into
[[Page 35994]]
market power in the in-region interLATA market. Many commenters also
specifically address the three types of anticompetitive conduct listed
above.
iii. Discussion
100. As noted in the Non-Accounting Safeguards NPRM, BOCs currently
provide an overwhelming share of local exchange and exchange access
services in areas where they provide such services--approximately 99.1
percent of the market as measured by revenues. Industry Analysis
Division, Telecommunications Industry Revenue: TRS Worksheet Data,
(Common Carrier Bureau December 1996). Tables 18 and 15 show that BOC
local and access revenues in 1995 were $65.6 billion, while CAPs and
Competitive LECs local and access revenues both in and out of BOC
regions were only $595 million. Although the 1996 Act establishes a
framework for eliminating entry barriers and thereby fostering local
competition, the evidence to date indicates that such competition is
still in its infancy. As a result, we conclude, solely for purposes of
this proceeding, that the BOCs currently possess market power in the
provision of local exchange and exchange access services in their
respective regions, and we therefore must consider whether they can use
that market power to give their interLATA affiliates the ability to
raise the prices of in-region, interstate, domestic, interLATA services
by restricting their own output of those services.
c. Improper Allocation of Costs
i. Comments
101. The BOCs and USTA assert that statutory and regulatory
safeguards should prevent any improper cost allocations from occurring,
particularly because all BOCs are subject to price-cap regulation, and
a majority have adopted the no-sharing option. PacTel asserts that the
concern over improper cost allocation ignores current regulation of the
BOCs and presumes the incompetence of both state and federal
regulators. AT&T counters that price cap regulation cannot eliminate
the incentive to allocate costs improperly because both the initial
caps and subsequent adjustments are generally set at least in part on
the basis of the BOCs' profits during the preceding years. The Economic
Strategy Institute asserts that cost accounting methodologies and
models leave room for manipulation and interpretation. It also claims
that improper cost allocation can lead to substantial cost advantages
and facilitate a price squeeze.
102. The BOCs and USTA contend that it defies economic sense to
expect any of the BOC interLATA affiliates to drive AT&T, MCI, or
Sprint from the long-distance market. Even if they could, these
commenters assert, the facilities of that carrier would remain intact,
ready for another firm to buy at distress sale prices. AT&T, CTA, and
DOJ argue, however, that the concerns expressed in the NPRM regarding
improper cost allocation are too narrow. In addition to raising the
possibility of predatory pricing, improper cost allocation may cause
substantial harm to consumers, competition, and production efficiency.
For example, improper cost allocation could lead to higher prices for
local exchange and exchange access services and could shift market
share and profits to a BOC interLATA affiliate, even if the affiliate
is less efficient than its competitors, thereby resulting in a loss of
production efficiency. AT&T asserts that such a strategy would be
costless to the BOC, for it would recover its losses in the competitive
market through contemporaneous higher rates in the non-competitive
market. As a result, no subsequent recoupment would be necessary.
According to DOJ, the Commission must consider whether applicable
regulation would prevent improper cost allocation that would result in
these adverse effects on consumers, competition, and production
efficiency. DOJ argues that regulation alone will not prevent
competitively significant improper cost allocations. The incentives to
engage in such practices, according to DOJ, will be eliminated only
when the local exchange market is subject to robust competition.
ii. Discussion
103. As noted in the Non-Accounting Safeguards NPRM, improper
allocation of costs by a BOC is of concern because such action may
allow a BOC to recover costs from subscribers to its regulated services
that were incurred by its interLATA affiliate in providing competitive
interLATA services. In addition to the direct harm to regulated
ratepayers, this practice can distort price signals in those markets
and may, under certain circumstances, give the affiliate an unfair
advantage over its competitors. Recognizing this concern, Congress
established safeguards in section 272, which we have implemented in the
Non-Accounting Safeguards Order and Accounting Safeguards Order. For
purposes of determining whether the BOC interLATA affiliates should be
classified as dominant, however, we must consider only whether the BOCs
could improperly allocate costs to such an extent that it would give
the BOC interLATA affiliates, upon entry or soon thereafter, the
ability to raise prices by restricting their own output. We conclude
that, in reality, such a situation could occur only if a BOC's improper
allocation enabled a BOC interLATA affiliate to set retail interLATA
prices at predatory levels (i.e., below the costs incurred to provide
those services), drive out its interLATA competitors, and then raise
and sustain retail interLATA prices significantly above competitive
levels. In so concluding, we do not dismiss cost misallocation as a
potential problem. We recognize that the BOCs may have an incentive to
misallocate the costs of their interLATA affiliates' interLATA
services.
104. We conclude that applicable statutory and regulatory
safeguards are likely to be sufficient to prevent the BOCs from
improperly allocating costs between their monopoly local exchange and
exchange access services and their affiliates' competitive interLATA
services to such an extent that their interLATA affiliates would be
able to eliminate other interLATA service providers and subsequently
earn supra-competitive profits by charging monopoly prices. Section
272(b) includes a number of structural safeguards that constrain a
BOC's ability to allocate costs improperly. For example, the provision
requires a BOC interLATA affiliate to ``operate independently'' from
the BOC, maintain separate books, records, and accounts from the BOC,
and have separate officers, directors, and employees. Section 272 also
requires each BOC ``to obtain and pay for a joint Federal/State audit
every 2 years conducted by an independent auditor to determine whether
such company has complied with [section 272] and the regulations
promulgated under this section. . . .'' 47 U.S.C. Sec. 272(d)(1). The
results of such audits must be submitted to the Commission and the
state commissions in each State in which the BOC provides services,
which shall make such results available for public inspection. Id.
Sec. 272(d)(2). As noted by Ameritech and Bell Atlantic, the structural
separation and audit requirements mandated in section 272 should reduce
the risk of improper allocation of costs by minimizing the amount of
joint costs that could be improperly allocated. In the Non-Accounting
Safeguards Order, we adopted rules to implement and clarify these
provisions. For example, we concluded that the requirement that
[[Page 35995]]
the BOC and its affiliate operate independently precludes the joint
ownership of transmission and switching facilities by a BOC and its
interLATA affiliate, as well as the joint ownership of the land and
buildings where those facilities are located. Non-Accounting Safeguards
Order at para.158. We noted that prohibiting joint ownership of
transmission and switching facilities would ensure that an affiliate
must obtain any such facilities pursuant to the arm's length
requirements of section 272(b)(5), thereby facilitating monitoring and
enforcement of the section 272 requirements. Id. at para.160. We also
concluded that 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. Id. at
para.158. We concluded, however, 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 such as administrative and marketing services. Id.
We also clarified 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. Id. at para.164. As noted by
BellSouth, the separate employee requirement should ensure that the
cost of each employee will be attributed directly to the appropriate
entity.
105. Section 272 also requires a BOC interLATA affiliate to conduct
all transactions with the BOC on an arm's length basis, and all such
transactions must be reduced to writing and made available for public
inspection. In the Accounting Safeguards Order, we concluded that, to
satisfy this requirement, a section 272 affiliate must, at a minimum,
provide a detailed written description of the asset or service
transferred and the terms and conditions of the transaction on the
Internet within 10 days of the transaction through the company's
Internet home page. Accounting Safeguards Order at para.122. This
information also must be made available for public inspection at the
principal place of business of the BOC. Id. We conclude that these
safeguards will constrain a BOC's ability to allocate costs improperly
and make it easier to detect any improper allocation of costs that may
occur.
106. We further find that price cap regulation of the BOCs' access
services reduces the BOCs' incentive to allocate improperly the costs
of their affiliates' interLATA services. As the Commission previously
explained, ``[b]ecause price cap regulation severs the direct link
between regulated costs and prices, a carrier is not able automatically
to recoup improperly allocated nonregulated costs by raising basic
service rates, thus reducing the incentive for the BOCs to shift
nonregulated costs to regulated services.'' We recognize that under our
current interim LEC price cap rules, a BOC can select an X-factor
option that requires it to share interstate earnings with its customers
that exceed specified benchmarks and permit the BOC to make a low-end
adjustment if interstate earnings fall below a specified threshold. The
X-factor is a component of the price cap formula that is used to adjust
the price cap index for a LEC's access services each year to account
for changes in telephone companies' costs per unit of output.
Consequently, in certain circumstances, a BOC may have an incentive to
allocate costs from interLATA services to access services in order to
reduce the amount of profits the BOC is required to share with its
interstate access service customers or become eligible for a low-end
adjustment. Time Warner Aug. 15, 1996 Comments at 12-13. Similarly, the
possibility of future re-calibration of price cap levels or out-of-band
filings also implies that price cap regulation does not fully sever the
link between regulated costs and prices. See 47 CFR Sec. 61.49(e), (f).
We note, however, that only one of the BOCs currently has adopted a
sharing option. U S West is the only BOC currently subject to a sharing
option. Data based on 1996 Annual Access Tariff Filings filed on April
2, 1996. See also USTA Aug. 15, 1996 Comments, Hausman Aff. at 8. We
also note that the Commission has sought comment on whether the sharing
option should be eliminated. Price Cap Performance Review for Local
Exchange Carriers (60 FR 52362 (October 6, 1995)). Also, in the Access
Charge Reform NPRM, we sought comment on whether we should reinitialize
price cap indices and increase the X-factor. See Access Charge Reform;
Price Cap Performance Review for Local Exchange Carriers; Transport
Rate Structure and Pricing; Usage of the Public Switched Network by
Information Service and Internet Access Providers (62 FR 4657 (January
31, 1997)) at Paras. 223-35 (Access Charge Reform NPRM). Our affiliate
transaction rules, which apply to transactions between the BOCs and
their interLATA affiliates, should make it more difficult for a BOC to
allocate improperly the costs of its affiliates' interLATA services. We
also recognize that, if a state does not impose price cap regulation on
a BOC's local exchange services, the BOC may have an incentive to
allocate costs from interLATA services to its local exchange services.
It appears, however, that many states have adopted price cap regulation
or some other alternative form of regulation for the BOCs' local
exchange services. Moreover, we are not persuaded that dominant carrier
regulation of the BOC interLATA affiliates' interLATA services would
prevent such improper cost allocation.
107. Furthermore, even if a BOC were able to allocate improperly
the costs of its affiliate's interLATA services, we conclude that it is
unlikely that a BOC interLATA affiliate could engage successfully in
predation. At least four interexchange carriers--AT&T, MCI, Sprint, and
LDDS WorldCom--have nationwide, or near-nationwide, network facilities
that cover every BOC region. These are large well-established companies
with millions of customers throughout the nation. It is unlikely,
therefore, that a BOC interLATA affiliate, whose customers are likely
to be concentrated in the BOC's local service region, (We recognize
that action taken in concert by two or more BOCs could have a more
significant impact on interLATA competitors, but believe that the
antitrust laws and our enforcement process will sufficiently limit the
risk of such concerted activity. Non-Accounting Safeguards Order at
para.70.) could drive one or more of these national companies from the
market.
Even if it could do so, it is doubtful that the BOC interLATA
affiliate would later be able to raise prices in order to recoup lost
revenues. As Professor Spulber has observed, ``[e]ven in the unlikely
event that [a BOC interLATA affiliate] could drive one of the three
large interexchange carriers into bankruptcy, the fiber-optic
transmission capacity of that carrier would remain intact, ready for
another firm to buy the
[[Page 35996]]
capacity at distress sale and immediately undercut the (affiliate's)
noncompetitive prices.''
108. We acknowledge that improper cost allocation may raise
concerns beyond the risk of predatory pricing. As AT&T and DOJ assert,
exploiting improper cost allocation to divert business to BOC interLATA
affiliates from other, more efficient suppliers would be
anticompetitive even if the latter suppliers remained in the market.
DOJ contends that this strategy would produce inefficiencies and wasted
resources and reduce future investment by competitors to improve or
expand their networks and to develop innovative technologies and
services. AT&T claims that such a strategy would be costless to the
BOC, for it would recover its losses in the competitive market through
contemporaneous higher rates in the non-competitive market, and,
consequently, subsequent recoupment would be unnecessary. As previously
stated, although we agree that these are serious concerns, we find that
they do not establish a persuasive basis for classifying the BOC
interLATA affiliates as dominant in the provision of in-region,
interstate, domestic, interLATA services. Rather, such concerns are
best addressed through enforcement of the section 272 requirements. We
also note that DOJ contends that dominant carrier regulation will not
prevent the BOCs from improperly allocating their affiliates' interLATA
costs. In fact, DOJ asserts that the incentives to engage in such
practices will be eliminated only when the local exchange market is
subject to robust competition. As previously discussed, we conclude
that dominant carrier regulation generally would not help prevent a BOC
from improperly allocating costs.
d. Unlawful Discrimination
i. Comments
109. The BOCs suggest that concerns over the BOCs' incentives to
discriminate are grossly exaggerated, given increasing competition in
exchange and exchange access services (particularly after a BOC has
satisfied the competitive checklist and other requirements in section
271) and the potential problem that customers would attribute
degradation in service quality to the BOCs, rather than their interLATA
affiliates' competitors. The BOCs further contend that, even if they
did have the incentive to discriminate, they lack the ability to do so
because of the nondiscrimination requirements in the 1996 Act and
because of engineering obstacles to such selective degradation of
service quality. Several BOCs also argue that discrimination is
unlikely to be effective unless it is apparent to customers. According
to the BOCs, if it is apparent to customers, however, it also is likely
to be apparent to their long distance carrier and regulators that have
the authority to enjoin any illegal practices. BellSouth and SBC
contend that BOCs have a significant disincentive to provide inferior
access to IXCs or otherwise jeopardize their relationship because the
access charges paid by IXCs are a major source of revenue for the BOCs,
and the IXCs increasingly will have the option of moving their exchange
access traffic to alternative LECs and CAPs. Bell Atlantic and USTA
claim that the BOCs have a long history of operating in other markets
related to their local exchange and exchange access services without
any adverse economic effects. They claim that, in each of the
businesses that the BOCs have been allowed to enter since divestiture--
cellular, voice messaging, customer premises equipment, and limited
interLATA services--output has grown, prices have fallen and
competitors have thrived. PacTel asserts that, if such discriminatory
behavior could happen, it would already have happened.
110. A number of parties contend that, despite passage of the 1996
Act, BOCs have the incentive and ability to discriminate against their
interLATA affiliates' long distance competitors. AT&T argues that the
BOCs can discriminate against interexchange competitors in numerous and
subtle ways that would be difficult to police. According to DOJ and
Time Warner, the BOCs will retain the incentive and ability to
discriminate against competitors until they are subject to actual,
sustained competition in local telephone markets.
ii. Discussion
111. In the Non-Accounting Safeguards NPRM, we noted that a BOC
potentially could use its market power in the provision of local
exchange and exchange access services to discriminate against its
interLATA affiliate's interLATA competitors to gain an advantage for
its interLATA affiliate. We noted that there are various ways in which
a BOC could attempt to discriminate against unaffiliated interLATA
carriers, such as through poorer quality interconnection arrangements
or unnecessary delays in satisfying its competitors' requests to
connect to the BOC's network. Certain forms of discrimination may be
difficult to police, particularly in situations where the level of the
BOC's ``cooperation'' with unaffiliated interLATA carriers is difficult
to quantify. To the extent customers value ``one-stop shopping,''
degrading a rival's interexchange service may also undermine the
attractiveness of the rival's interexchange/local exchange package and
thereby strengthen the BOC's dominant position in the provision of
local exchange services. We continue to be concerned that a BOC could
attempt to discriminate against unaffiliated interLATA carriers. For
purposes of determining whether the BOC interLATA affiliates should be
classified as dominant, however, we need to consider only whether a BOC
could discriminate against its affiliate's interLATA competitors to
such an extent that the affiliate would gain the ability to raise
prices by restricting its own output upon entry or shortly thereafter.
112. The 1996 Act contains a number of nondiscrimination
safeguards, which we have implemented in the Non-Accounting Safeguards
Order and Accounting Safeguards Order. For example, section 272(c)(1)
prohibits a BOC, in its dealings with its section 272 affiliate, from
``discriminat[ing] 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 Non-
Accounting Safeguards Order, we concluded that section 272(c)(1)
requires a BOC to provide 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 also
concluded that a prima facie case of discrimination would exist under
section 272(c)(1) if a BOC does not provide unaffiliated entities the
same goods, services, facilities, and information that it provides to
its section 272 affiliate at the same rates, terms, and conditions.Non-
Accounting Safeguards Order at para. 212. 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. Id. In addition, we concluded 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.
113. Section 272(e) also includes a number of specific
nondiscrimination requirements. For example, section
[[Page 35997]]
272(e)(1) requires a BOC to ``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 its affiliates.'' In
the Non-Accounting Safeguards Order, we concluded that the term
``requests'' includes, but is not limited to, initial installation
requests, subsequent requests for improvement, upgrades or
modifications of service, or repair and maintenance of these services.
We also concluded that BOCs must disclose to unaffiliated entities
information regarding service intervals in which BOCs provide service
to themselves or their affiliates. Non-Accounting Safeguards Order at
para. 241. In the Order, we sought further comment on specific
information disclosure requirements that were proposed by AT&T in an ex
parte letter filed after the official pleading cycle closed. Id. at
para. 244. This disclosure requirement should promote compliance with
section 272(e)(1) and allow competitors to resolve disputes informally
rather than using the Commission's formal complaint process.
114. Section 272(e)(2) restricts the ability of a BOC to provide
``facilities, services, or information concerning its provision of
exchange access to [its affiliate,] unless [it makes] such facilities,
services, or information * * * available to other providers of
interLATA services in that market on the same terms and conditions.''
Coupled with existing equal access and network disclosure requirements,
this provision will limit the BOCs' ability to discriminate in the
provision of such facilities, services, and information.
115. Section 272(e)(3) requires that a BOC charge its affiliate
``an amount for access to its telephone exchange service and exchange
access that is no less than the amount [that the BOC charges] any
unaffiliated interexchange carriers for such service.'' In the Non-
Accounting Safeguards Order, we recognized that this provision serves
to constrain a BOC's ability to engage in discriminatory pricing of its
exchange and exchange access service.
116. We also find that the structural separation requirements of
section 272(b) will constrain a BOC's ability to discriminate against
its affiliate's interLATA competitors. As previously noted, we have
interpreted the section 272(b)(1) requirement that a section 272
affiliate ``operate independently'' from the BOC to prohibit the joint
ownership of transmission and switching facilities by the BOC and its
affiliate. This requirement ensures that an affiliate must obtain any
such facilities on an arm's length basis pursuant to section 272(b)(5),
thereby increasing the transparency of transactions between a BOC and
its affiliates. As we observed in the Non-Accounting Safeguards Order,
``[t]ogether, 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.''
117. We recognize that the nondiscrimination requirements in the
Communications Act are effective only to the extent that they are
enforced. To this end, the 1996 Act gives the Commission specific
authority to enforce the requirements of section 272 and the other
conditions for in-region, interLATA entry incorporated in section
271(d)(3). Section 271(d)(6) provides that ``[i]f at any time after the
approval of a [BOC 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.'' In the Non-
Accounting Safeguards Order, we concluded that this authority augments
the Commission's existing enforcement authority. Section 271(d)(6) also
specifies that the Commission must act within 90 days on a complaint
alleging that a BOC has failed to meet a condition required for in-
region, interLATA approval under section 271(d)(3).
118. In light of the 90-day deadline to act upon a 271(d)(6)
complaint, we adopted certain measures in the Non-Accounting Safeguards
Order to expedite the processing of these complaints. We also recently
initiated a separate proceeding addressing the expedited complaint
procedures mandated by this subsection as well as those mandated by
other provisions of the 1996 Act. See Amendment of Rules Governing
Procedures to be Followed When Formal Complaints are Filed Against
Common Carriers (61 FR 67978 (December 26, 1990)). For example, once a
complainant has demonstrated a prima facie case that a defendant BOC
has ceased to meet the conditions of entry, the burden of production
(i.e., coming forward with evidence) will shift to the BOC defendant.
By shifting this burden of production, we have placed on the BOC an
affirmative obligation to produce evidence and arguments necessary to
rebut the complainant's prima facie case or face 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. Non-
Accounting Safeguards Order at para. 345. In the Non-Accounting
Safeguards Order, we also concluded that, in addressing 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 interLATA affiliate,
regardless of whether the BOC or BOC interLATA affiliate is regulated
as a dominant or non-dominant carrier. Id. at para. 351. 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 found 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. Id. We believe that these enforcement
mechanisms will allow us to adjudicate complaints against the BOCs and
BOC interLATA affiliates in a timely manner.
119. We conclude that the statutory and regulatory safeguards
discussed above will prevent a BOC from discriminating to such an
extent that its interLATA affiliate would have the ability, upon entry
or shortly thereafter, to raise the price of in-region, interstate,
domestic, interLATA services by restricting its output. We also
conclude that imposing dominant carrier regulation on the BOC interLATA
affiliates would not significantly aid in the prevention of most types
of discrimination. Although the advance tariff filing requirement might
help detect certain types of price discrimination, the marginal benefit
of such regulation would be outweighed by the burdens such regulation
would impose, as discussed above. See supra Paras. 88-90. Although
AT&T expresses concern about the risk of discrimination, it suggests
that the Commission should impose stringent non-discrimination
requirements and reporting obligations in order to combat this problem.
It does not contend that
[[Page 35998]]
dominant carrier regulation would help to prevent discrimination. We
are not persuaded by Time Warner's assertion that dominant carrier
regulation is necessary to ensure that the BOCs comply with their
statutory obligation to charge affiliates rates equal to those charged
unaffiliated carriers for telephone exchange and exchange access
services. Rather, as discussed above, we conclude that the section 272
safeguards, coupled with the expedited enforcement mechanism, should
provide an adequate means of ensuring that the BOCs comply with this
requirement.
e. Price Squeeze
i. Comments
120. The BOCs generally argue that they do not have the ability to
engage in a price squeeze by raising prices because their access prices
are regulated. They also note that section 272(e)(3) requires BOCs to
charge their affiliates the same access rates they charge unaffiliated
carriers. PacTel claims that a true price squeeze would occur only if
the price charged by the BOC interLATA affiliate was less than the
BOC's marginal cost of access, plus the foregone contribution from that
access, plus the affiliate's cost of providing the long distance
service. PacTel contends that it would be irrational for a BOC
interLATA affiliate to price below this level unless its object was
predation, which is not a plausible strategy. On the other hand,
according to PacTel, a BOC interLATA affiliate's acceptance of little
or no profit in order to expand its market share, by itself, would not
be a price squeeze and would not be anticompetitive. NYNEX claims that
significant changes to local exchange service and access markets
initiated by the Local Competition First Report and Order (61 FR 45476
(August 29, 1996)) make it unreasonable to fear that BOC access pricing
could result in its affiliate's attaining long distance market power,
particularly in light of the Commission's commitment to undertake and
complete access reform within the next year.
121. Non-BOC commenters generally contend that the BOCs will have
the incentive and ability to engage in a price squeeze, despite price
cap regulation of the BOCs' access services and other applicable
safeguards. The Economic Strategy Institute asserts that antitrust and
economic literature generally supports the need for regulatory
intervention in cases of price squeezes. MCI contends that the BOCs are
most likely to exercise market power by assessing excessive prices for
exchange access services for all carriers (including the BOCs'
interLATA affiliates), and price cap regulation will not prevent this
tactic because access rates are already excessive. MFS argues that, as
long as a BOC is allowed to provide both essential services and
competitive services, and as long as those essential services are
priced above cost, a ``vertically integrated'' BOC can drive even more
efficient rivals out of the market. MFS and MCI further assert that a
price squeeze would not be limited to price increases in access
services, but could also arise from the contribution BOCs earn on
stimulated demand for access services created by competitors' forced
price reductions to match a BOC interLATA affiliate price reduction.
MCI claims that such a strategy could seriously harm competition.
According to MCI, even if rivals remain in the market, they will be
weakened by the cost increases they are forced to absorb, thereby
reducing their output and the ``vigors of competition.''
122. LDDS asserts that the structural separation, accounting, and
imputation requirements in the Communications Act do not adequately
address the BOCs' access cost advantage because: (1) There is no way to
ensure that a BOC interLATA affiliate's costs, other than for access,
are reflected in its prices; (2) to the extent customers buy bundled
local exchange, long distance, and other services from a BOC interLATA
affiliate, the BOC interLATA affiliate could effectively evade
imputation requirements by passing on its access cost advantage in
reduced prices for services not subject to the Commission's direct
jurisdiction, such as local exchange and information services; (3) a
BOC will have the incentive and ability to favor its interLATA
affiliate over its competitors in the provision of bundled local
exchange and interLATA services; and (4) a BOC has the ability to
discriminate against its affiliate's interLATA competitors on terms
other than price.
123. MCI and AT&T argue that requiring cost support data and
advance notice periods for tariff filings is important to ensure that
the BOC interLATA affiliates are pricing their services above their
costs. MFS, however, questions whether regulating BOC interLATA
affiliates as dominant firms would be effective in preventing price
squeezes. It contends that the only effective mechanisms for preventing
this behavior are pricing BOC essential services at economic cost and
developing competitive alternatives to the BOCs' essential services.
124. Ameritech disputes arguments that access charges are priced
above economic costs and therefore will enable BOC interLATA affiliates
to set interLATA rates below cost without incurring a loss. According
to Ameritech, any subsidies in access are real costs that the BOC must
recover in some manner in order to remain ``whole.'' Ameritech also
claims that price squeeze arguments ignore the fact that BOC interLATA
affiliates will pay access charges to unaffiliated carriers when they
originate or terminate long distance calls out-of-region and that
facilities-based incumbent carriers actually have significant cost
advantages. Finally, Ameritech disputes the relevance of the price
squeeze arguments. According to Ameritech, a BOC interLATA affiliate's
ability to gain market share by setting rates below the cost of access
would not constitute a basis for classifying the BOC interLATA
affiliate as dominant. Ameritech is aware of no legal theory under
which such a practice could be considered unreasonable or otherwise
unlawful, since consumers would suffer no harm unless the BOC interLATA
affiliate could somehow acquire market power from its action. Bell
Atlantic and NYNEX claim that advance notice periods for tariff filings
and cost support requirements are unnecessary to ensure compliance with
the section 272 imputation requirement because the 1996 Act already
provides for a biennial audit, which is intended to serve specifically
as a check on compliance with the section 272 separation requirements,
including the imputation requirement.
ii. Discussion
125. In the Non-Accounting Safeguards NPRM, we noted that, absent
appropriate safeguards, a BOC potentially could raise the price of
access to all interexchange carriers, including its affiliate. This
would cause competing interLATA carriers either to raise their retail
interLATA rates in order to maintain the same profit margins or to
attempt to preserve their market share by not raising their prices to
reflect the increase in access charges, thereby reducing their profit
margins. If the competing in-region interLATA service providers raised
their prices to recover the increased access charges, the BOC interLATA
affiliate could seek to expand its market share by not matching the
price increase. In that event, although the BOC interLATA affiliate
would achieve lower profit margins than its rivals, all other things
being equal, the BOC corporate entity as a whole would receive
additional access revenues from unaffiliated carriers due to the access
price increase and greater
[[Page 35999]]
revenues from the affiliate's interLATA services caused by its
increased share of interLATA traffic. If the BOC were to raise its
access rates high enough, it would be impossible for interexchange
competitors to compete effectively. Thus, the entry of a BOC's
affiliate into the provision of in-region, interstate, domestic,
interLATA services might give the BOC an incentive to raise its price
for access services in order to disadvantage its affiliate's rivals,
increase its affiliate's market share, and increase the profits of the
BOC overall. Non-Accounting Safeguards NPRM at para.141. In the Notice,
we recognized that the same situation could occur if a BOC failed to
pass through to interexchange carriers a reduction in the cost of
providing access services, and that price cap regulation would not be
effective in eliminating the effect of a price squeeze initiated under
these circumstances. Id. at para.141 n.272.
126. We conclude, as discussed in the NPRM, that price cap
regulation of the BOCs' access services sufficiently constrains a BOC's
ability to raise access prices to such an extent that the BOC affiliate
would gain, upon entry or soon thereafter, the ability to raise prices
of interLATA services above competitive levels by restricting its own
output of those services. See NYNEX comments at 57. We also note that
the emergence of competition in the provision of exchange access
service may also constrain a BOC's ability to raise access prices. See
id.; SBC Aug. 30, 1996 Reply at 27. Although a BOC may be able to raise
its access rates to some extent if those rates are currently below the
applicable price cap and could fail to pass along reductions in the
cost of access if the productivity factor is too low, we conclude that
such an increase would not give a BOC affiliate the ability to raise
prices of interLATA services above competitive levels by restricting
its own output of those services. We will consider the impact of such a
potential increase on competition in the pending access charge reform
proceeding. We also note that the ability of competing carriers to
acquire access through the purchase of unbundled elements enables them
to avoid originating access charges and thus partially protect
themselves against a price squeeze. See 47 U.S.C. Sec. 252(d)(1)(A)(i).
The Commission's pricing rules interpreting section 252(d)(1)(A)(i) are
currently under stay by the 8th Circuit Court of Appeals. Iowa
Utilities Board v. FCC, No. 96-3321, 1996 WL 589284 (8th Cir. Oct. 15,
1996) (order granting stay pending judicial review). To the extent that
access charges are reformed to more closely reflect economic cost, as
is being considered in the access charge reform proceeding, the
potential for a price squeeze should be further mitigated.
127. Some commenters assert, however, that a BOC could engage in a
price squeeze without raising the price of its access services. These
commenters suggest that, because access services are currently priced
above economic cost, a BOC interLATA affiliate could set its interLATA
prices at or below the BOC's access prices and still be profitable. The
affiliate's interLATA competitors would then be faced with the choice
of setting their prices at unprofitable levels or losing market share.
Several BOCs respond that this would not be a profit-maximizing
strategy because the increased revenues they would receive from the
affiliate's interLATA services would be offset by a reduction in the
access revenues received from unaffiliated carriers. If the affiliate's
reduction in interLATA rates sufficiently increased demand, however, it
is possible the BOC interLATA affiliate's higher interLATA revenues
would more than offset lost access revenues, assuming the affiliate's
interLATA competitors do not match the affiliate's price reduction. If,
in the alternative, the competitors reduce their interLATA rates to
match the BOC interLATA affiliate's reductions, the BOC would receive
increased access revenues. In the extreme, such a situation could drive
the affiliate's rivals from the market. MCI claims that, even if such a
predatory strategy is not successful, the rivals would be weakened by
the cost increases they absorb, thereby reducing their output and their
ability to compete effectively.
128. We conclude that imposing advance tariffing and cost support
data requirements on the BOC interLATA affiliates would not be an
efficient means of preventing the BOCs from engaging in such a
predatory price squeeze strategy. As previously discussed, advance
notice periods for tariff filings could reduce the BOC interLATA
affiliates' incentives to reduce their interLATA rates. Furthermore,
requiring the BOC interLATA affiliates to file cost support data could
discourage them from introducing innovative new service offerings. We
also conclude that imposing advance tariff filing and cost support data
requirements on the BOC interLATA affiliates would not address LDDS'
concern that the BOC interLATA affiliates could effectively evade
imputation requirements by passing on their access cost advantage in
reduced prices for services not subject to the Commission's
jurisdiction, such as local exchange and information services. In
addition, we believe that, if the predatory behavior described above
were to occur, it could be adequately addressed through our complaint
process and enforcement of the antitrust laws, coupled with the
biennial audits required by section 272(d), such that the benefits of
any protections offered by advance tariffing and cost support data
requirements would be outweighed by the enormous administrative burden
those requirements would impose on the Commission. A BOC interLATA
affiliate that charges a rate for its interLATA services below its
incremental cost to provide service would be in violation of sections
201 and 202 of the Communications Act, if such a rate were sustained
for an extended period.
129. We also note that other factors constrain the ability of a BOC
or BOC interLATA affiliate to engage in a predatory price squeeze. For
example, a BOC interLATA affiliate's apparent cost advantage resulting
from its avoidance of access charges may be offset by other costs it
must incur, such as the cost of interLATA transport, which, at least
initially, may be greater than the true marginal cost of interLATA
transport for facilities-based interLATA carriers. In addition, a BOC
interLATA affiliate will have to pay terminating access charges to LECs
other than its BOC parent for calls terminating outside the BOC's
region and to competing LECs in the BOC's in-region states. Having to
pay such access charges reduces the cost disparity between the BOC
interLATA affiliate and competing interexchange carriers. Finally, we
note that a price squeeze strategy would give a BOC interLATA affiliate
the ability to raise price by restricting its own output only if it is
able to drive competitors from the market. As discussed previously, the
existence of four nationwide, or near-nationwide, network facilities
makes it unlikely that a BOC interLATA affiliate could successfully
engage in a predatory strategy. As a result, we conclude that the BOCs
or BOC interLATA affiliates will not be able to engage in a price
squeeze to such an extent that the BOC interLATA affiliates will have
the ability, upon entry or soon thereafter, to raise price by
restricting their own output. Thus we do not believe that classifying a
BOC's interLATA affiliate as a dominant carrier is necessary or
appropriate to constrain the BOC and its affiliate from attempting to
execute a predatory price squeeze.
130. We agree with commenters that assert that the risk of the BOCs
engaging in a price squeeze will be greatly
[[Page 36000]]
reduced when interLATA competitors gain the ability to purchase access
to the BOCs' networks at or near cost, and as competition develops in
the provision of exchange access services. As noted, we believe that
the ability of competing carriers to acquire access through the
purchase of unbundled elements enables them to avoid originating access
charges and thus partially protect themselves against a price squeeze.
Moreover, to the extent that access charges are reformed to more
closely reflect economic cost, as is being considered in the access
charge reform proceeding, the potential for a price squeeze should be
further mitigated.
f. Mergers or Joint Ventures Between Two or More BOCs
i. Background and Comments
131. In the Non-Accounting Safeguards NPRM, we sought comment on
what effect, if any, a merger of or joint venture between two or more
BOCs should have on our determination whether to classify the interLATA
affiliate of one of those BOCs as dominant or non-dominant. Bell
Atlantic, contends that the prospect of mergers between BOCs should not
have any impact on whether the BOCs are treated as dominant because
both parties to such a merger would be entering the long distance
market with zero market share and in competition with well established
competitors and because the merged company's access business would
remain subject to all the same market and regulatory constraints as
nonmerged BOCs. Sprint and the New York State Department of Public
Service (NYPDS) contend that mergers, acquisitions, and similar
combinations by BOCs may require consideration of geographic markets
more expansive than a particular BOC's region.
ii. Discussion
132.We conclude that a merger of or joint venture between two or
more BOCs should have no direct effect on our determination of whether
to classify the interLATA affiliates of one of those BOCs as dominant
or non-dominant. Bell Atlantic notes that, even though a merged
company's territory would grow, it would continue to be subject to the
same regulation currently imposed on the individual companies prior to
the merger or joint venture. In the Non-Accounting Safeguards Order, we
concluded that, upon completion of a merger between or among BOCs, the
in-region states of a merged entity shall include all of the in-region
states of each of the BOCs involved in the merger. Non-Accounting
Safeguards Order at para. 69. We declined, 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. We found that
adequate protections against discriminatory and anticompetitive conduct
already applied to mergers, acquisitions, and joint ventures among
BOCs. Id. Thus, the merged entity would be required to satisfy the
requirements of sections 271 and 272 in providing interLATA services
originating in those in-region states. We also note that DOJ is
currently considering the implications of such mergers and joint
ventures from an antitrust perspective.
g. Conclusion
133. Based on the preceding analysis, we conclude that the BOCs'
interLATA affiliates will not have the ability, upon entry or soon
thereafter, to raise the price of in-region, interstate, domestic,
interLATA services by restricting their own output, and, therefore,
that the BOC interLATA affiliates should be classified as non-dominant
in the provision of those services. We note, however, that we retain
the ability to impose some or all of the dominant carrier regulations
on one or more of the BOC interLATA affiliates if this proves necessary
in the future. As discussed in the NPRM, our experience with regulating
the independent LECs' provision of interstate, domestic, interexchange
services and the BOCs' provision of enhanced services suggests that our
existing safeguards have worked reasonably well and generally have been
effective, in conjunction with our regular audits, in deterring the
improper allocation of costs and unlawful discrimination. Non-
Accounting Safeguards NPRM at para. 146; PacTel Aug. 15, 1996 Comments
at 65-66 (noting that PacTel has lost significant market share in
intraLATA toll services and that Bell Atlantic and NYNEX have not
gained significant market share in the provision of interLATA corridor
services). We acknowledge, however, that there have been instances in
which individual BOCs may have not complied with our non-structural
safeguards in providing non-regulated services. See id. n. 284. See
also MCI Aug. 15, 1996 Comments at 67 (referring to the MemoryCall
case). We are not persuaded by MCI's argument that the Ninth Circuit's
decision in California III (California v. FCC, 39 F.3d 919, 923 (9th
Cir. 1994) (California III). In its Computer III decisions, the
Commission removed the separate affiliate requirements applicable to
AT&T and the BOCs, provided that they complied with certain
nonstructural safeguards intended to guarantee that they offered their
regulated network services to competing enhanced service providers on
an equal and nondiscriminatory basis. The U.S. Court of Appeals for the
Ninth Circuit vacated portions of the Commission's Computer III
decisions in three separate decisions leads to the conclusion that we
should impose dominant carrier regulation on the BOC interLATA
affiliates. As discussed above, section 272 requires the BOCs to
provide in-region, interLATA services through structurally separate
affiliates. Since section 272's structural separation requirements are
akin to those in Computer II, the Ninth Circuit's discussion of whether
the Commission had adequately justified its elimination of the Computer
II structural separation requirements for BOC enhanced services is not
relevant here.
134. We believe that the entry of the BOC interLATA affiliates into
the provision of in-region, interLATA services has the potential to
increase price competition and lead to innovative new services and
market efficiencies. We recognize that, as long as the BOCs retain
control of local bottleneck facilities, they could potentially engage
in improper cost allocation, discrimination, and other anticompetitive
conduct to favor their affiliates' in-region, interLATA services. We
conclude, however, that, to the extent dominant carrier regulation
addresses such anticompetitive conduct, the burdens imposed by such
regulation outweighs its benefits. We therefore see no reason to impose
dominant carrier regulation on the BOC interLATA affiliates, given that
section 272 contains numerous safeguards designed to prevent the BOCs
from engaging in improper cost allocation, discrimination, and other
anticompetitive conduct. Section 272(f)(1) of the Communications Act
provides that the BOC safeguards set out in section 272, other than
those prescribed in section 272(e), shall sunset three years after the
date that the BOC affiliate is authorized to provide interLATA
telecommunications services unless the Commission extends such three-
year period by rule or order. We cannot now predict how competition
will develop in local exchange markets nor can we determine at this
time what accounting and non-accounting safeguards, if any, will be
needed at that time. Accordingly, we recognize that it will be
necessary for the Commission to determine what accounting and non-
[[Page 36001]]
accounting safeguards, if any, are necessary and appropriate upon
expiration of those section 272 safeguards subject to sunset, and
whether BOC interLATA affiliates should be classified as dominant or
non-dominant in the provision of in-region, interstate, domestic,
interLATA services. We emphasize that our decision to accord non-
dominant treatment to the BOCs' provision of in-region, interLATA
services is predicated upon their full compliance with the structural,
transactional, and nondiscrimination requirements of section 272 and
our implementing rules. We believe that these safeguards, coupled with
other statutory and regulatory safeguards, are sufficient to prevent
the BOC interLATA affiliates from gaining the ability, upon entry or
shortly thereafter, to raise prices by restricting their output.
3. Classification of BOC InterLATA Affiliates in the Provision of In-
Region, International Services
a. Background
135. In the Non-Accounting Safeguards NPRM, we tentatively
concluded that we should apply the same regulatory treatment to a BOC
interLATA affiliate's provision of in-region, international services as
we apply to its provision of in-region, interstate, domestic, interLATA
services, assuming the BOC or BOC interLATA affiliate does not have an
affiliation with a foreign carrier that has the ability to discriminate
against the rivals of the BOC or its affiliate through control of
bottleneck facilities in a foreign destination market. Under this
proposal, our current framework for addressing issues raised by foreign
carrier affiliations would apply to the BOCs' provision of U.S.
international services.
b. Comments
136. Most commenters support the Commission's proposal to apply the
same regulatory treatment to the BOC interLATA affiliates' provision of
in-region, international services as it applies to in-region,
interstate, domestic interLATA services. PacTel and US West agree that
if the BOC interLATA affiliates should be non-dominant for in-region
domestic services, they should be non-dominant for in-region
international services, but they further claim that differences in the
domestic and international markets suggest that BOC interLATA
affiliates should be classified as nondominant for international
interLATA services regardless of their classification for domestic
services. PacTel agrees that the existing rules governing dominance
based on foreign market affiliations should apply to BOC interLATA
affiliates as they do to all other international carriers. PacTel
suggests, however, that the Commission should ensure that route-by-
route dominance filings, based on foreign affiliations, be concluded no
later than the grant of a section 271 entry petition.
137. MCI generally agrees with the Commission that a BOC's in-
region international service should be treated in a manner similar to
its in-region domestic interLATA service. It contends, however, that
the BOCs have unique advantages in the international services market as
a result of their ``regional focus.'' MCI expresses concern that the
BOCs will enter into special arrangements with foreign carriers under
which return traffic would be ``groomed''--i.e., the foreign carrier
would give the BOC's interLATA affiliate the return traffic that
terminates in the BOC's region. MCI contends that, by contrast, non-BOC
interexchange carriers would be required to take return traffic to
destinations all over the United States and thereby incur higher costs
in terminating such traffic. MCI notes that a disproportionate amount
of international traffic terminates in the NYNEX and Pacific Bell
regions and argues that these BOCs would have an especially lucrative
opportunity to obtain groomed traffic. MCI notes that such arrangements
may result in lower costs for terminating U.S. inbound traffic, but
characterizes these arrangements as ``anticompetitive.'' It urges the
Commission, at a minimum, to impose on the BOC interLATA affiliates the
same safeguards that it imposed on MCI in the order approving British
Telecom's (BT's) initial 20 percent investment in MCI. A number of the
BOCs respond that such additional requirements are unnecessary and
inappropriate.
c. Discussion
138. We adopt our tentative conclusion that we should apply the
same regulatory treatment to a BOC interLATA affiliate's provision of
in-region, international services as we apply to its provision of in-
region, interstate, domestic, interLATA services. As discussed in the
NPRM, the relevant issue in both contexts is whether the BOC interLATA
affiliate can exploit its market power in local exchange and exchange
access services to raise prices by restricting its own output in
another market (the domestic interLATA or international market). We
also note that the section 272 safeguards apply equally to the BOCs'
in-region, domestic, interLATA and in-region, international services.
We find no practical distinctions between a BOC's ability and incentive
to use its market power in the provision of local exchange and access
services to improperly allocate costs, discriminate against, or
otherwise disadvantage unaffiliated domestic interexchange competitors
as opposed to international service competitors.
139. In light of our classification of the BOC interLATA affiliates
as non-dominant in the provision of in-region, interstate, domestic,
interLATA services, we accordingly will classify each BOC interLATA
affiliate as non-dominant in the provision of in-region, international
services, unless it is affiliated, within the meaning of section
63.18(h)(1)(i) of our rules, with a foreign carrier that has the
ability to discriminate against the rivals of the BOC or its affiliate
through control of bottleneck services or facilities in a foreign
destination market. We will apply section 63.10(a) of our rules to
determine whether to regulate a BOC interLATA affiliate as dominant on
those U.S. international routes where an affiliated foreign carrier has
the ability to discriminate against unaffiliated U.S. international
carriers through control of bottleneck services or facilities in the
foreign destination market. The safeguards that we apply to carriers
that we classify as dominant based on a foreign carrier affiliation are
contained in Section 63.10(c) of our rules and are designed to address
the incentive and ability of the foreign carrier to discriminate
against the rivals of its U.S. affiliate in the provision of services
or facilities necessary to terminate U.S. international traffic.
Section 63.10(a) of the Commission's rules provides that: (1) Carriers
having no affiliation with a foreign carrier in the destination market
are presumptively non-dominant for that route; (2) carriers affiliated
with a foreign carrier that is a monopoly in the destination market are
presumptively dominant for that route; (3) carriers affiliated with a
foreign carrier that is not a monopoly on that route receive closer
scrutiny by the Commission; and (4) carriers that serve an affiliated
destination market solely through the resale of an unaffiliated U.S.
facilities-based carrier's switched services are presumptively
nondominant for that route. See also Regulation of International Common
Carrier Services, Paras. 19-24. This framework for addressing issues
raised by foreign carrier affiliations will apply to the BOCs'
provision of U.S. international
[[Page 36002]]
services as an additional component of our regulation of the U.S.
international services market.
140. We reject MCI's suggestion that we should impose additional
safeguards on the BOC's in-region, international services. We observe,
as an initial matter, that all U.S. international carriers are subject
to the same prohibition against accepting ``special concessions'' from
foreign carriers that we imposed on MCI in the order approving BT's
initial 20 percent investment in MCI. The grooming described by MCI
would constitute a special concession prohibited by the terms of
Section 63.14 of the Commission's rules to the extent the U.S. carrier
entered into a grooming arrangement that the foreign carrier did not
offer to similarly situated U.S. carriers. See 47 CFR Section 63.14
(``[a]ny carrier authorized to provide international communications
service * * * shall be prohibited from agreeing to accept special
concessions directly or indirectly from any foreign carrier or
administration with respect to traffic or revenue flows between the
United States and any foreign country served * * * and from agreeing to
enter into such agreements in the future * * *.'' ). A U.S. carrier
that negotiates a grooming arrangement with a foreign carrier on a
particular route would be required to submit the arrangement to the
Commission for public comment and review in circumstances where the
arrangement deviates from existing arrangements with other U.S.
carriers for the routing and/or settlement of traffic on that route.
141. We are not prepared to rule on this record, however, that the
grooming of return traffic (i.e., giving a U.S. carrier the return
traffic that terminates in a particular region) in a manner that may
ultimately reduce U.S. carrier costs and rates is anticompetitive per
se. We recently adopted guidelines for permitting in certain
circumstances flexible settlement arrangements between U.S. and foreign
carriers that do not comply with the International Settlements Policy
(ISP). Regulation of International Accounting Rates (62 FR 5535
(February 6, 1997)) (Accounting Rate Flexibility Order). The ISP
requires: (1) The equal division of accounting rates; (2) non-
discriminatory treatment of U.S. carriers; and (3) proportionate return
of U.S.-bound traffic. The ISP is designed to prevent foreign carriers
with market power from obtaining discriminatory accounting rate
concessions from competing U.S. carriers. See generally Policy
Statement on International Accounting Rate Reform (61 FR 11163 (March
19, 1996)). MCI will have ample opportunity to make its arguments, with
proper economic support, in the event a BOC interLATA affiliate or any
other U.S. international carrier seeks to establish an arrangement for
grooming return traffic.
142. We are also unpersuaded that the other conditions imposed in
the 20 percent BT investment in MCI are useful or necessary in this
case. MCI has not explained how those conditions are relevant to the
BOC interLATA affiliates' provision of in-region international service
on routes where they have no investment interest in or by a foreign
carrier. The conditions imposed on MCI apply to its operations only on
the U.S.-U.K. route, where we found that BT controlled bottleneck local
exchange and exchange access facilities on the U.K. end, and they were
targeted to limiting the potential risks of undue discrimination
between a U.S. carrier (MCI) and a foreign carrier with which the U.S.
carrier has an equity relationship (BT). We note that MCI and BT have
requested Commission approval of the transfer of control to BT of
licenses and authorization held by MCI subsidiaries, which would occur
as a result of the proposed merger of MCI and BT. See MCI
Communications Corporation and British Telecommunications PLC Seek FCC
Consent for Proposed Transfer of Control, GN Docket No. 96-245, Public
Notice, DA 96-2079 (rel. Dec. 10, 1996). To the extent a BOC has an
equity interest in a foreign carrier or the foreign carrier has such an
interest in a BOC on a particular U.S. international route, it is of
course subject to Section 63.10 of our rules. This rule sets forth the
framework for imposing certain safeguards on U.S. carriers that are
affiliated with foreign carriers that have the ability to discriminate
in the favor of their U.S. affiliate through the control of bottleneck
services or facilities.
B. Classification of Independent LECs
143. For the reasons discussed below, we conclude that the
requirements established in the Fifth Report and Order, together with
other existing rules, sufficiently limit an independent LEC's ability
to exercise its market power in the local exchange and exchange access
markets so that the LEC cannot profitably raise and sustain the price
of in-region, interstate, domestic, interexchange services by
restricting its own output. We, therefore, classify independent LECs as
non-dominant in the provision of these services. We recognize, however,
that an independent LEC conceivably could use its control over local
bottleneck facilities to allocate costs improperly, engage in unlawful
discrimination, or attempt to price squeeze. We, therefore, impose the
Fifth Report and Order separation requirements on all incumbent
independent LECs that provide in-region, interstate, domestic,
interexchange services. We further conclude that we should apply the
same regulatory classification to the independent LECs' provision of
in-region, international services that we adopt for their provision of
in-region, interstate, domestic, interexchange services.
1. Classification of Independent LECs in the Provision of In-Region,
Interstate, Domestic, Interexchange Services
a. Background
144. In the Competitive Carrier Fourth Report and Order, the
Commission determined that interexchange carriers affiliated with
independent LECs would be regulated as non-dominant carriers. In the
Competitive Carrier Fifth Report and Order, the Commission clarified
the definition of ``affiliate'' (The Commission defined a carrier
affiliated with an independent LEC as ``a carrier that is owned (in
whole or in part) or controlled by, or under common ownership (in whole
or in part) or control with, an exchange telephone company.'' Fifth
Report and Order, 98 FCC 2d at 1198, para. 9.) and identified three
separation requirements that the affiliate must meet in order to
qualify for non-dominant treatment. These requirements are that the
affiliate: (1) Maintain separate books of account; (2) not jointly own
transmission or switching facilities with the LEC; and (3) acquire any
services from its affiliated exchange company at tariffed rates, terms,
and conditions. The Commission further concluded that, if the LEC
provides interstate, interexchange service directly, rather than
through an affiliate, or if the affiliate fails to satisfy the three
requirements, those services would be subject to dominant carrier
regulation. The Commission observed that these separation requirements
would provide some ``protection against cost-shifting and
anticompetitive conduct'' by an independent LEC that could result from
its control of local bottleneck facilities.
145. In the Non-Accounting Safeguards NPRM, we sought comment on
how we should classify independent LECs' provision of in-region,
interstate, interexchange services. We also sought comment on whether,
absent the Fifth Report and Order separation requirements, an
independent LEC would be able to use its market power
[[Page 36003]]
in local exchange and exchange access services to disadvantage its
interexchange competitors to such an extent that it would quickly gain
the ability profitably to raise and sustain the price of in-region,
interstate, domestic interexchange service significantly above
competitive levels by restricting its output. We suggested that,
regardless of our determination of whether independent LECs should be
classified as dominant or non-dominant, some level of separation may be
necessary between an independent LEC's interstate, domestic,
interexchange operations and its local exchange operations to guard
against cost misallocation, unlawful discrimination, or a price
squeeze. In addition, we sought comment on whether the existing Fifth
Report and Order requirements are sufficient safeguards to apply to
independent LECs to address these concerns.
b. Comments
146. Commenters generally suggest two different schemes for
regulating independent LECs' provision of in-region, interstate,
interexchange services. First, independent LECs and others argue that
the Commission should find that independent LECS are non-dominant in
their provision of in-region, interstate, interexchange services, and
that the Fifth Report and Order requirements are no longer necessary.
According to these commenters, the Commission should eliminate the
existing Fifth Report and Order separate affiliate requirement as a
precondition for non-dominant classification. In support of their
contention that independent LECs should be regulated as non-dominant in
their provision of in-region, interstate, interexchange services, these
commenters argue that: (1) independent LECs do not have market power in
the in-region, interstate, interexchange market based on the market
power factors that the Commission applied in reclassifying AT&T as a
non-dominant interexchange carrier; (2) dominant carrier regulation
would reduce competition in the long distance market; (3) imposition of
the Fifth Report and Order separations requirements on independent
LECs' provision of in-region, interstate, interexchange service is
inconsistent with the 1996 Act; and (4) the real costs of requiring any
level of separation for independent LECs far outweighs the speculative
benefits of separation.
147. In addition, these commenters assert that independent LECs
have neither the ability nor the incentive to leverage the market power
resulting from their control over local facilities to impede
competition in the interexchange market. These commenters argue that
their inability to leverage control over local facilities is
attributable to several factors, including provisions of the 1996 Act
that are designed to open the local market to competition; the
geographic dispersion and largely rural nature of independent LEC
service territories; cost accounting safeguards, price caps on access
services, and regulations to prevent non-price discrimination in the
quality of access services provided; and the interexchange carriers'
increasing emphasis on constructing their own facilities.
148. GTE contends that the Commission is legally prohibited from
imposing separation requirements on independent LECs in general, and
specifically on GTE. GTE argues that section 601(a)(2) of the 1996 Act,
which removes the restrictions and obligations imposed by the GTE
Consent Decree, prohibits the Commission from imposing any separate
affiliate requirements on GTE. In addition, GTE asserts that section
271 and 272 added by the 1996 Act, apply only to BOCs, therefore, these
sections reflect Congress' determination that there is no need to
extend the separation requirements of section 272 to independent LECs
or GTE. Moreover, GTE maintains that, if the Commission continues to
require separate affiliates, it should modify the Fifth Report and
Order requirements to allow the affiliate to take exchange access
services not only by tariff, but also on the same basis as other
carriers that have negotiated interconnection agreements pursuant to
section 251.
149. Sprint argues that the Fifth Report and Order separation
requirements are no longer necessary because those requirements have
been incorporated into the Commission's cost allocation rules.
150. In contrast, interexchange carriers, except Sprint, and
competing access providers generally argue that the Commission not only
should retain the Fifth Report and Order separation requirements as a
condition for non-dominant treatment of independent LEC provision of
in-region, interstate, interexchange services, but also should impose
additional safeguards to prevent independent LECs from engaging in
anticompetitive behavior by virtue of their control over bottleneck
facilities.
151. Teleport argues that the Commission should impose quarterly
reporting requirements that will enable competitors and the Commission
to analyze objectively the independent LEC's service record and to
compare service to competitors with service to itself or its
affiliates. Teleport also recommends that the Commission implement an
expedited complaint process to address service quality complaints by
competing carriers.
152. AT&T argues that the Fifth Report and Order and our dominant
carrier requirements are inadequate to address independent LECs'
potential abuse of market power. AT&T contends that the Commission
should, therefore, impose the same structural separation and non-
discrimination requirements on independent LECs that we impose on BOCs,
as well as a modified form of dominant carrier regulation. AT&T also
asks the Commission to make clear that equal access requirements apply
to independent LECs, including the requirement that a customer seeking
local service from such carriers be offered the options for
interexchange service in a neutral fashion. AT&T asserts that the Fifth
Report and Order allows joint and integrated design, planning, and
provisioning of exchange and interexchange services, which inherently
discriminates against other carriers and permits the costs of long
distance operations to be misallocated to monopoly ratepayers. In
addition, AT&T, challenging SNET's claim that geographic rate averaging
would mitigate the effects of any unilateral increase in access
charges, asserts that access charges are far above cost, and that this
enables LECs to impose a price squeeze in the interexchange market.
153. MCI asserts that, given the types of abuses that control over
bottleneck facilities allows, it is necessary to review independent
LECs' in-region, interexchange rates to ensure that they fully cover
independent LEC tariffed access and other costs. MCI further contends
that enforcement of the imputation requirement is necessary to protect
against an independent LEC's adopting a price squeeze strategy, and
maintains that the Commission's cost accounting rules and after-the-
fact audits are insufficient to ensure that LEC interLATA rates cover
imputed access costs. Like AT&T, MCI claims that, because an
independent LEC's actual access costs are much lower than the tariffed
rates, an independent LEC could adopt a successful price-squeeze
strategy against its interexchange rivals. MCI adds that an independent
LEC may be able to increase its total profits by reducing the price of
its interLATA service, thereby increasing the demand for its switched
access service.
154. The Commonwealth of the Northern Mariana Islands (CNMI)
asserts that GTE-owned Micronesian
[[Page 36004]]
Telecommunications Corporation (MTC), which is the sole provider of
both local exchange and exchange access services and a major provider
of domestic and international off-island services in the Commonwealth,
currently provides domestic, interexchange services on a nondominant
basis, even though it lacks a separate subsidiary. CNMI asks the
Commission to recognize explicitly that MTC must comply with the Fifth
Report and Order separation requirements or comply with the
Commission's dominant carrier requirements. CNMI also asks the
Commission to devise specific safeguards applicable to MTC's monopoly
operations in the Commonwealth, such as a strengthened form of the
Fifth Report and Order separation requirements. GTE disputes CNMI's
claims that MTC is providing domestic interexchange services directly
as a non-dominant carrier contrary to the requirements of the
Commission's Fifth Report and Order and 1985 International Competitive
Carrier Order (50 FR 48191 (November 22, 1985)). GTE asserts that,
although MTC provides domestic exchange, exchange access and
interexchange services on an integrated basis, its domestic
interexchange services are provided on a dominant basis. GTE emphasizes
that neither the Commission nor any court has found that MTC has
engaged in any misconduct of the nature alleged by CNMI. GTE also
asserts that imposing additional regulatory requirements on MTC, which
serves 16,000 access lines in a rural location, is clearly contrary to
the deregulatory spirit and intent of the 1996 Act.
155. CNMI also asks the Commission to clarify that MTC's service
between the Commonwealth and the U.S. mainland and other U.S. points is
a domestic service, and thus requires domestic tariffing and compliance
with the strengthened form of the Fifth Report and Order separation
requirements. GTE responds that, because the Northern Mariana Islands
have long been considered an international point for service to and
from the United States, MTC currently tariffs its service to the U.S.
mainland and other U.S. points in its international tariff. GTE
contends that, pursuant to the Commission's Rate Integration Order, the
integration of the Islands into domestic rate schedules is not required
to occur until August 1, 1997. GTE states that these offshore locations
will continue to be tariffed as international points for rate purposes
until that time.
c. Discussion
i. Traditional Market Power Factors (Other Than Control of Bottleneck
Facilities)
156. As we noted above, dominant carrier regulation is generally
designed to prevent a carrier from raising prices by restricting its
own output of interexchange services. An independent LEC, therefore,
should be classified as dominant in the provision of in-region,
interstate, interexchange services only if it has the ability to raise
prices by restricting its output of these services.
157. We find that the traditional market power factors (excluding
bottleneck control) suggest that independent LECs do not have the
ability profitably to raise and sustain prices above competitive levels
by restricting their output. Based on an analysis of these traditional
market power factors--market share, supply and demand substitutability,
cost structure, size, and resources--we conclude that independent LECs
do not have the ability to raise prices by restricting their own
output. First, independent LECs generally have minimal market share,
compared with the major interexchange carriers, which suggests they
could not profitably raise and sustain interexchange prices above
competitive levels. Second, the same high supply and demand
elasticities that the Commission found constrained AT&T's pricing
behavior also apply to independent LECs. Finally, we find that low
entry barriers in the interexchange market and widespread resale of
interexchange services constrain independent LECs from exercising
market power. We conclude, therefore, that in light of the Fifth Report
and Order requirements independent LECs do not have the ability to
raise prices above competitive levels by restricting their output of
interexchange services.
ii. Control of Bottleneck Access Facilities
158. As we previously found with regard to the BOCs, traditional
market power factors are not conclusive in determining whether
independent LECs should be classified as dominant in the provision of
in-region, interstate, interexchange services. We noted in the Non-
Accounting Safeguards NPRM that an independent LEC may be able to use
its control over local exchange and exchange access services to
disadvantage its interexchange competitors to such an extent that it
will quickly gain the ability profitably to raise the price of in-
region, interstate, interexchange services above competitive levels. We
therefore must examine whether an independent LEC could improperly
allocate costs, discriminate against its in-region competitors, or
engage in a price squeeze to such an extent that the independent LEC
would have the ability to raise prices for interstate, interexchange
services by restricting its output. We find, as we did with regard to
BOCs, that independent LECs providing in-region, interstate,
interexchange services do not have the ability to engage in these
actions to such an extent that they would have the ability to raise
prices by restricting output. For the reasons discussed with regard to
the BOCs, we thus conclude that dominant carrier regulation of
independent LEC provision of in-region, interstate, interexchange
services is inappropriate.
159. We disagree, however, with those commenters that assert that
independent LECs have no ability to use their bottleneck facilities to
harm interexchange competition. We believe that, absent appropriate and
effective regulation, independent LECs have the ability and incentive
to misallocate costs from their in-region, interstate, interexchange
services to their monopoly local exchange and exchange access services
within their local service region. Improper allocation of costs by an
independent LEC is a concern because such action may allow the
independent LEC to recover costs incurred by its affiliate in providing
in-region, interexchange services from subscribers to the independent
LEC's local exchange and exchange access services. As we stated
previously, this can distort price signals in those markets and, under
certain circumstances, may give the affiliate an unfair advantage over
its competitors. We believe that the improper allocation of costs may
cause substantial harm to consumers, competition, and production
efficiency. Such cost misallocations may be difficult to detect and are
not necessarily deterred by price cap regulation.
160. Furthermore, an independent LEC, like a BOC, potentially could
use its market power in the provision of exchange access service to
advantage its interexchange affiliate by discriminating against the
affiliate's interexchange competitors with respect to the provision of
exchange and exchange access services. This discrimination could take
the form of poorer quality interconnection or unnecessary delays in
satisfying a competitors' request to connect to the independent LEC's
network.
161. We are also concerned that an independent LEC could
potentially
[[Page 36005]]
initiate a price squeeze to gain additional market share. Absent
appropriate regulation, an independent LEC could potentially raise the
price of access to all interexchange carriers which would cause
competing in-region carriers to either raise their retail rates to
maintain the same profit margins or attempt to maintain their market
share by not raising their prices to reflect the increase in access
charges, thereby reducing their profit margins. If the competing in-
region, interexchange providers raised their prices to recover the
increased access charges, the independent LEC could seek to expand its
market share by not matching the price increase. The independent LEC
could also set its in-region, interexchange prices at or below its
access prices. The independent LEC's in-region competitors would then
be faced with the choice of lowering their retail rates, thereby
reducing their profit margins, or maintaining their retail rates at the
higher price and risk losing market share.
162. As we explained earlier, the Fifth Report and Order identified
three separation requirements with which an independent LEC must comply
in order to qualify for non-dominant treatment. These requirements are
that the affiliate providing in-region, interstate, interexchange
services must: (1) maintain separate books of account; (2) not jointly
own transmission or switching facilities with the LEC; and (3) acquire
any services from its affiliated exchange companies at tariffed rates,
terms, and conditions.
163. We conclude that, although an independent LEC's control of
exchange and exchange access facilities may give it the incentive and
ability to engage in cost misallocation, unlawful discrimination, or a
price squeeze, the Fifth Report and Order requirements aid in the
prevention and detection of such anticompetitive conduct. We,
therefore, conclude that we should retain the Fifth Report and Order
separation requirements. More specifically, separate books of account
are necessary to trace and document improper allocations of costs or
assets between a LEC and its long-distance affiliate as well as
discriminatory conduct. In addition, the prohibition on jointly-owned
facilities will reduce the risk of improper cost allocations of common
facilities between the independent LEC and its interexchange affiliate.
The prohibition on jointly owned facilities also helps to deter any
discrimination in access to the LEC's transmission and switching
facilities by requiring the affiliates to follow the same procedures as
competing interexchange carriers to obtain access to those facilities.
Finally, we conclude that requiring services to be taken at tariffed
rates, or as discussed below, on the same basis as requesting carriers
that have negotiated interconnection agreements pursuant to section
251, aids in preventing a LEC from discriminating in favor of its long
distance affiliate, and reduces somewhat the risk of a price squeeze to
the extent that an affiliate's long distance prices are required to
exceed their costs for tariffed services.
164. We agree that we should modify the third Fifth Report and
Order requirement to allow independent LECs to take exchange services
not only by tariff, but also on the same basis as requesting carriers
that have negotiated interconnection agreements pursuant to section
251. GTE contends that, because under the Commission's current rules,
LECs must make interconnection agreements available to other carriers,
affiliated carriers should be able to obtain services under such terms
as well. 47 CFR 51.809. Section 252(i) states as follows:
(i) Availability to Other Telecommunications Carriers.--A local
exchange carrier shall make available any interconnection, service,
or network element provided under an agreement approved under this
section to which it is a party to any other requesting
telecommunications carrier upon the same terms and conditions as
those provided in the agreement. 47 U.S.C 252(i).
The Commission's pricing rules and interpretation of section 252(i)
are currently under stay by the 8th Circuit Court of Appeals. Iowa
Utilities Board v. FCC, No. 96-3321 (8th Cir. October 15, 1996) (Order
granting stay pending judicial review). In the Non-Accounting
Safeguards Order, we concluded that section 272 does not prohibit a BOC
interLATA affiliate from providing local exchange services in addition
to interLATA services. We also found in that Order that section 251
does not place any restrictions on which telecommunications carriers
may qualify as requesting carriers. We concluded in the Non-Accounting
Safeguards Order, therefore, that BOC section 272 affiliates should be
permitted to purchase unbundled elements under section 251(c)(3) of the
Communications Act and telecommunications services at wholesale rates
under section 251(c)(4) from the BOC on the same terms and conditions
as other competing local exchange carriers. We find no basis for
concluding that Congress intended to treat an incumbent LEC differently
from any other requesting telecommunications carrier. Accordingly, in
addition to taking exchange services by tariff, the LEC may
alternatively take unbundled network elements or exchange services for
the provision of a telecommunications service, subject to the same
terms and conditions as provided in an agreement approved under section
252 to which the independent LEC is a party.
165. As argued by many commenters, independent LECs have been
providing in-region, interstate, interexchange services on a separated
basis with no substantiated complaints of denial of access or
discrimination. The Fifth Report and Order separation requirements have
been in place for over ten years. During that time, we have received
few complaints from independent LECs about the requirements themselves.
Moreover, we previously determined that the Fifth Report and Order
requirements are not overly burdensome. As we stated in the Interim BOC
Out-of-Region Order, the separation requirements of the Fifth Report
and Order require that the LEC interexchange affiliate be a separate
legal entity. We do not, however, require actual ``structural
separation.'' Thus, as we stated in the Interim BOC Out-of-Region
Order, ``except for the ban on joint ownership of transmission and
switching facilities,'' the LEC and the interexchange affiliate ``will
be able to share personnel and other resources or assets.''
166. We are not persuaded by the arguments made by Citizens and
USTA that the separate affiliate requirement prevents independent LECs
from realizing efficiency gains though the use of joint resources.
While joint ownership of transmission and switching facilities by a LEC
and its affiliate is not permitted by our rules, the use of
transmission and switching facilities by the other is permitted. The
affiliate can contract for use of the LEC's transmission and switching
facilities at tariffed rates or on the same basis as requesting
carriers that have negotiated interconnection agreements pursuant to
section 251, and thereby continue to benefit from economies of scope.
Furthermore, we conclude that the separate books of account requirement
and the requirement that the affiliate obtain LEC services at tariffed
rates are not overly burdensome. As we explained in the Interim BOC
Out-of-Region Order, ``the separate books of account requirement refers
to the fact that, as a separate legal entity, the affiliate must
maintain its own books of account as a matter of course.'' Moreover, as
we stated previously, in addition to taking exchange services by
tariff, to the extent that the independent
[[Page 36006]]
LEC affiliate meets the requirements of 251, the LEC affiliate may
alternatively take unbundled network elements or exchange services
subject to the same terms and conditions as provided in an agreement
approved under section 252 to which the independent LEC is a party.
167. While we recognize that the Fifth Report and Order
requirements impose some regulatory burdens, we find that these burdens
are not unreasonable in light of the benefits these requirements yield
in terms of protection against improper cost allocation, unlawful
discrimination, and price squeezes. We conclude that continued
imposition of the Fifth Report and Order separation requirements is
necessary to prevent and detect any anticompetitive conduct that may
arise as a result of an independent LEC's control of bottleneck
facilities.
168. We reject GTE's contention that the 1996 Act prohibits the
Commission from imposing structural safeguards on GTE, or on any other
independent LEC. We find no reasonable basis for inferring from section
601, or any other provision in the 1996 Act, that Congress intended to
eliminate the Fifth Report and Order requirements or to repeal by
implication our authority to impose on independent LECs separation
requirements that we deem necessary to protect the public interest
consistent with our statutory mandates. To the contrary, section
601(c)(1) of the 1996 Act provides that we are not to presume that
Congress intended to supersede our existing regulations unless
expressly so provided. Section 601(c) provides as follows:
(c) Federal, State and Local Law.--
(1) No Implied Effect.--This Act and the amendments made by this
Act shall not be construed to modify, impair, or supersede Federal,
State, or local law unless expressly so provided in such Act or
amendments. Telecommunications Act of 1996, Public Law 104-104, sec.
601(c), 110 Stat. 56, 143 (to be codified as a note following 47
U.S.C. Sec. 152).
Furthermore, section 601(a)(2) of the 1996 Act deals solely with a
judicial decree, not the Commission's regulations; therefore, GTE's
argument is frivolous.
169. We are also not persuaded by Sprint's arguments that the Fifth
Report and Order requirements are no longer necessary because other
Commission requirements, such as the Commission's access charge rules,
imputation requirements, and cost allocation and affiliate transaction
rules, prevent anticompetitive conduct by an independent LEC in
providing in-region, interstate, interexchange services. While these
other requirements have significant beneficial effects, we find that
these regulations alone are not an adequate substitute for the Fifth
Report and Order separation requirements. As previously discussed, the
prohibition against jointly owned transmission and switching facilities
ensures that the affiliate obtains such facilities on an arm's length
basis. This requirement also helps to ensure that all competing in-
region providers have the same access to provisioning of transmission
and switching as that provided to the independent LEC's affiliate.
There is nothing in the Commission's rules that otherwise prohibits
joint ownership of switching and transmission facilities. Although
Sprint contends that we should impose this prohibition by modifying the
cost allocation rules, such a prohibition is possible only if a LEC
provides interexchange service through a separate affiliate, as
required by the Fifth Report and Order requirements. In addition, as
stated previously, the Fifth Report and Order requirement that the
affiliate maintain separate books of account is necessary to trace and
document improper allocations of costs or assets between a LEC and its
long distance affiliate and to detect unlawful discrimination in favor
of the affiliate. The historical purpose for the requirement that the
affiliate acquire any services from its affiliated exchange companies
at tariffed rates, terms, and conditions was to prevent the LEC from
discriminating in favor of its long distance affiliate. The Commission
recently reconfirmed the need for such a requirement when it applied
the affiliate transaction rules to all transactions between incumbent
LECs and their affiliates. We believe that the Commission's access
charge rules, imputation requirements, and cost allocation and
affiliate transaction rules continue to serve important purposes. We
conclude, however, that the Fifth Report and Order requirements are
also necessary under these circumstances to safeguard further
ratepayers against cost-shifting, discrimination, and price squeezes.
170. We reject the arguments that we should impose additional
requirements on independent LECs, including section 272 requirements,
certain aspects of dominant carrier regulation, or any other
requirements. Independent LECs tend to be more geographically dispersed
and their service territories are largely rural in nature, therefore,
they generally serve areas that are less densely populated than BOC
services areas. In addition, because the service areas of independent
LECs tend to be smaller than the service areas of the BOCs, on average,
independent LECs have fewer access lines per switch than BOCs and
provide relatively little interexchange traffic that both originates
and terminates in their region. We conclude, therefore, that
independent LECs are less likely to be able to engage in
anticompetitive conduct than the BOCs and that applying the section 272
requirements to independent LECs would be overly burdensome. The Fifth
Report and Order requirements appear to balance these competing
concerns; they address cost shifting and discrimination, but do not
appear to be overly burdensome. Although the independent LECs assert
that these requirements increase their costs, none of them has provided
specific evidence to support this claim, much less to demonstrate that
these additional costs outweigh the benefits.
171. As previously stated, we conclude that we should not apply
dominant carrier regulation to independent LECs. The dominant carrier
regulation that AT&T and MCI recommend is not necessary to prevent, nor
effective in detecting improper cost allocation, unlawful
discrimination, price squeezes, or other anticompetitive conduct. The
benefits of dominant carrier regulation are outweighed by the burdens
imposed on independent LECs. We also reject MCI's argument that we
should maintain full dominant carrier regulation in order to enforce
effectively the Commission's imputation requirements and to prevent
independent LECs from engaging in a price squeeze strategy. As we
stated previously, we believe that such predatory behavior can be
adequately addressed through our complaint process and enforcement of
the antitrust laws. Moreover, we note that the potential for a price
squeeze will be further mitigated as access charges are reformed to
reflect cost.
172. Furthermore, we confirm that the equal access restrictions
apply to independent LECs. Under the MFJ the BOCs were required to
``provide to all interexchange carriers and information service
providers exchange access, information access and exchange services for
such access on an unbundled, tariffed basis, that is equal in type,
quality, and price to that provided to AT&T and its affiliates.'' Equal
access includes the nondiscriminatory provision of exchange access
services, dialing parity, and presubscription of interexchange
carriers. Exchange access services included, but were not limited to,
``provision of network control signalling, answer supervision,
[[Page 36007]]
automatic calling number identification, carrier access codes,
directory services, testing and maintenance of facilities, and the
provision of information necessary to bill customers.'' GTE became
subject to similar requirements in 1984, and in 1985 the Commission
imposed requirements on independent LECs similar to those imposed on
GTE. As we stated in the Non-Accounting Safeguards Order, section
251(g) added by the 1996 Act preserves the equal access requirements in
place prior to the passage of the Act, including obligations imposed by
the MFJ and any commission rules. We do not decide at this time,
however, whether the allegations AT&T raises regarding SNET's alleged
pre-subscribed interexchange carrier (PIC) freeze constitutes a
violation of the Commission's equal access requirements. AT&T or any
other carrier, if it deems appropriate, can file a complaint with the
Commission raising this allegation in the proper context. We note that
on July 24, 1996, MCI filed an informal complaint with the Commission
against SNET regarding PIC-freeze disputes. Letter from MCI to John
Muleta, Chief, Enforcement Division, Common Carrier Bureau (July 24,
1996), Informal Complaint No. IC96-09734 (requesting the Commission to
conclude that SNET's solicitations authorizing SNET to protect long
distance customers from being switched without express consent violate
section 201(b) and 251 of the 1996 Act.) In addition, on September 27,
1996, AT&T filed a letter with the Enforcement Division requesting the
Commission to establish procedures under which neutral third parties
administer PIC protection. Letter from AT&T to John Muleta, Chief,
Enforcement Division, Common Carrier Bureau (Sept. 27, 1996).
173. Based on the foregoing, we conclude that we should require
independent LECs to provide in-region, interstate, interexchange
services through a separate affiliate that satisfies the Fifth Report
and Order separation requirements. We further conclude that, in light
of our finding that independent LECs do not have the power to raise and
sustain interexchange rates above competitive levels, it would be
inconsistent with our analysis to allow independent LECs to choose
whether to be regulated as a dominant carrier when providing in-region,
interstate, domestic interexchange services. We are aware, however, of
three independent LECs, Union Telephone Company (of Wyoming) (Union),
GTE Hawaiian Tel., and MTC, that currently provide interexchange
services on an integrated basis subject to dominant carrier regulation.
We recognize that the costs of complying with the Fifth Report and
Order separation requirements faced by a going concern could be greater
than the costs of complying with these requirements for independent
LECs that are currently providing these services on a separated basis.
Accordingly, Union, GTE Hawaiian Tel., MTC, and any other independent
LEC that is currently providing interexchange service on an integrated
basis subject to dominant carrier regulation shall have one year from
the date of release of this Order to comply with the Fifth Report and
Order separation requirements. This does not affect the requirement
that these providers integrate rates across their affiliates. See Rate
Integration Order, 11 FCC Rcd 9598 (para. 69). Until that time, the
Commission will continue to regulate these independent LECs as dominant
carriers. The record in this proceeding does not reflect special
circumstances necessary for a waiver of one or more of these
requirements. To the extent that special circumstances exist, however,
independent LECs may petition us to establish the necessity of a waiver
of the Fifth Report and Order requirements.
174. Because section 3(40) of the Communications Act defines a
state to include the ``Territories and possessions'' of the United
States, CNMI is a state for purposes of domestic telecommunications
regulation. In our Rate Integration Order, we stated that, in making
the section 254(g) of the Communications Act rate integration provision
applicable to interstate interexchange services provided between the
``states,'' as defined by section 153(40) of the Communications Act,
Congress made rate integration applicable to interexchange services
provided between the contiguous forty-eight states and U.S. possessions
and territories, including CNMI. In the Rate Integration Order, we
required providers of interexchange services between the Northern
Mariana Islands and the contiguous forty-eight states to do so on an
integrated basis with other interexchange services they provide by
August 1, 1997. MTC and all other carriers providing off-island
services between CNMI and other states are required to comply with
these requirements. We find no basis in the record of this proceeding
to amend these requirements. We further note that, although our Rate
Integration Order does not require providers of interexchange service
to integrate services offered to subscribers in the Commonwealth until
August 1, 1997, this does not affect our finding that, if MTC continues
to provide in-region, interstate, interexchange service directly, it
must continue to comply with our dominant carrier requirements prior to
that date.
175. We find no basis on the record in this proceeding to impose
additional requirements on MTC's provision of in-region, interstate,
domestic, interexchange service, beyond those applied in this Order. To
the extent that CNMI or any other petitioner can demonstrate that MTC
has violated our rules, we encourage parties to file a petition asking
the Commission to impose additional requirements through a petition for
declaratory ruling or a complaint filed pursuant to section 208 of the
Communications Act.
2. Application of Fifth Report and Order Separation Requirements to
Incumbent Independent LECs
a. Background
176. In the Non-Accounting Safeguards NPRM, we tentatively
concluded that, because an independent LEC's control of local exchange
and exchange access facilities is our primary rationale for imposing a
separate affiliate requirement on independent LECs, we should limit
application of any separation requirements that we adopt in this
proceeding to incumbent LECs that control local exchange and exchange
access facilities. For purposes of determining which independent LECs
are ``incumbent,'' we proposed to use the definition of ``incumbent
local exchange carrier'' contained in section 251(h) of the
Communications Act. Section 251(h) provides that a LEC is an incumbent
LEC, with respect to a particular area, if: (1) the LEC provided
telephone exchange service in that area on the date of enactment of the
1996 Act (February 8, 1996), and (2) the LEC was deemed to be a member
of NECA on the date of enactment or the LEC became a successor or
assign of a NECA member after the date of enactment.
b. Comments
177. AT&T agrees with the tentative conclusion that only those
independent LECs that control local exchange or exchange access
facilities should be subject to the requirements adopted in this
proceeding and that the Commission should rely on the definition of
``incumbent local exchange carrier'' provided in 47 U.S.C. 251(h).
178. NTCA, on the other hand, contends that the Commission should
treat new entrants no differently than it treats small incumbent LECs
because
[[Page 36008]]
new LEC entrants that provide in-region interexchange services are free
to, and have in fact, built or acquired control of local exchange
access facilities.
c. Discussion
179. We adopt our tentative conclusion that the Fifth Report and
Order separation requirements should be imposed only on incumbent
independent LECs that control local exchange and exchange access
facilities. We believe this conclusion is consistent with the 1996 Act,
which provides different regulatory treatment for incumbent and non-
incumbent LECs. This different treatment generally imposes fewer
regulatory requirements on non-incumbent LECs, which we believe
indicates Congress's view that such carriers are unable, at this time,
to affect competition adversely, and therefore, are unable to generally
harm consumers through unreasonable rates. We also believe that it
would be premature to impose such regulation on competitive LECs when
they possess little, if any, market power in the local exchange at this
time. By limiting application of the separation requirements to
incumbent independent LECs that control local exchange and exchange
access facilities, we avoid imposing unnecessary regulation on new
entrants in the local exchange market, such as neighboring LECs,
interexchange carriers, cable television companies, and commercial
mobile radio service providers, some of which may be small entities,
thus facilitating market entry and the development of competition in
the in-region, interstate, domestic, interexchange market.
3. Application of Fifth Report and Order Separation Requirements to
Small or Rural Incumbent Independent LECs
a. Background
180. In the Non-Accounting Safeguards NPRM, we sought comment on
whether there is some minimum size of independent LECs below which the
separation requirements should not apply. We noted that, in principle,
the size of a LEC will not affect its incentives to improperly allocate
costs between its monopoly services and its competitive services, but
that for small or rural independent LECs, the benefits to ratepayers of
a separate affiliate requirement may be less than the costs imposed by
such a requirement.
b. Comments
181. Several commenters contend that we should exempt certain small
or rural independent LECs (e.g., non-Class A LECs or LECs serving less
than two percent of the nation's access lines) from any separation
requirements that are retained, because the costs of imposing the
separations requirements on small carriers may outweigh the likely
benefits. Several commenters argue that small incumbent LECs lack the
market power to engage in anticompetitive conduct that is harmful to
their interexchange rivals. Sprint argues that its local operations
have little ability and incentive to engage in anticompetitive conduct,
since its service territories are widely dispersed and largely rural.
182. GTE and Bell Atlantic argue that there is no economic basis
for exempting small or rural independent LECs from the separation
requirements imposed in this Order, especially given the increasing
competition in local exchange and exchange access markets throughout
the country. GTE argues that all independent LECs, small and large,
generally serve areas that are less densely populated than BOC service
areas, have fewer access lines per switch on average, and provide
relatively small volumes of interexchange traffic that originates and
terminates in their region.
c. Discussion
183. We conclude that we should not exempt any independent LECs
from the Fifth Report and Order requirements based on their size or
rural service territory because neither a carrier's size nor the
geographic characteristics of its service area will affect its
incentives or ability to improperly allocate costs or discriminate
against rival interexchange carriers. Commenters favoring such an
exemption provide no persuasive evidence that small or rural
independent LECs that are not currently providing in-region
interexchange service on an integrated basis subject to dominant
carrier regulation would be adversely affected by continuation of the
Fifth Report and Order separation requirements or that the safeguards
are unnecessary for such carriers. Although suggested by several
commenters, a rule that exempted all LECs with less than 2 percent of
the nation's access lines would essentially eviscerate our regulation
of independent LECs because it would exempt all 1100 independent LECs
except the GTE companies (approximately 12 percent) and the Sprint/
United companies (approximately 4 percent). Industry Analysis Division,
Statistics of Communications Common Carriers 1996/96, (Com. Car. Bur.
Dec. 1996), Tables 1.1, 2.3, and 2.10. Accordingly, we will continue to
apply the Fifth Report and Order separation requirements to all
independent LECs, regardless of size. As previously noted, an
independent LEC may seek a waiver of the Fifth Report and Order
requirements on the basis of special circumstances. See supra para.
173. We note, however, that a petitioner will face a heavy burden in
demonstrating the need for such a waiver. Finally, we note that,
although NTCA argues that the separation requirements may cause small
companies to lose benefits in the form of name recognition and good
will, the Fifth Report and Order requirements do not preclude an
independent LEC from taking advantage of its good will by providing
interexchange services under the same or a similar name.
4. Classification of Independent LECs' Provision of In-Region,
International Services
a. Background
184. In the Non-Accounting Safeguards NPRM we tentatively concluded
that we should apply the same regulatory treatment to an independent
LEC's provision of international services originating within its local
service area as we adopt for independent LEC provision of interstate,
domestic, interexchange services originating within its local service
area.
b. Comments
185. Most commenters support our proposal to apply the same
regulatory treatment that we adopt for an independent LEC's provision
of in-region interstate, domestic, interexchange services to an
independent LEC's provision of in-region international services. GTE
argues that the Commission should not impose the Fifth Report and Order
requirements on independent LECs providing either in-region domestic or
international interexchange services because independent LECs do not
have market power in the provision of domestic or international in-
region interexchange services. GTE notes that it, and some other
carriers, may be subject to dominant classification on particular
routes pursuant to the Foreign Carrier Entry Order due to foreign
carrier affiliations.
186. MCI, on the other hand, argues that the Commission should
generally apply the same regulatory treatment to independent LECs'
provision of in-region, international services, but impose additional
requirements where the LEC has a foreign affiliation or other
commercial relationship with a foreign carrier. MCI urges the
Commission, at a minimum, to impose on the independent LECs in such
[[Page 36009]]
circumstances the same safeguards that it imposed on MCI in the Order
approving British Telecom's (BT's) initial 20 percent investment in
MCI.
187. In addition, CNMI asks the Commission to clarify that MTC is a
dominant carrier under the terms of the International Competitive
Carrier Order. CNMI states that in the International Competitive
Carrier Order, the Commission ruled that MTC's parent company, GTE
Hawaii, and similarly situated carriers were dominant. CNMI claims,
however, that MTC was not covered by these policies when the Commission
issued this Order because CNMI did not become a U.S. commonwealth until
November 3, 1986. CNMI asserts that, now that MTC is a domestic carrier
with significant market power and a lack of effective competition in
exchange and exchange access markets, the Commission should declare MTC
dominant in its provision of in-region, interstate, international,
interexchange service. GTE replies that imposing dominant regulation on
MTC's provision of in-region, interstate, international, interexchange
service now, when MTC has operated as non-dominant for years, would be
contrary to the deregulatory goals of the 1996 Act. In any case, GTE
asserts that independent LEC international and domestic interexchange
services should be regulated in the same manner and that independent
LECs have no market power in the international service market. GTE
further claims that MTC's exchange access service in the Northern
Mariana Islands cannot give it market power in the international
services market.
c. Discussion
188. We confirm our tentative conclusion that we should adopt the
same rules in this proceeding for an independent LEC's provision of in-
region, international, interexchange services as we adopt for its
provision of in-region, interstate, domestic, interexchange services.
As discussed above with regard to BOC provision of in-region,
international services, the relevant issue, with respect to both
domestic interexchange and international services, is whether an
independent LEC can exercise its market power in local exchange and
exchange access services to raise and sustain prices of interexchange
or international services above competitive levels by restricting its
own output. We find no practical distinctions between an independent
LEC's ability and incentive to use its control over bottleneck
facilities in the provision of local exchange and exchange access
services to improperly allocate costs, unreasonably discriminate
against, or otherwise engage in anticompetitive conduct against
unaffiliated domestic interexchange competitors as opposed to
international services competitors. Consistent with our conclusion to
limit application of the Fifth Report and Order requirements to
incumbent independent LECs that control local exchange and exchange
access facilities, for independent LECs providing in-region,
international, interexchange services, we also limit application of the
Fifth Report and Order separation requirements to incumbent independent
LECs that control local exchange and exchange access facilities.
189. In light of our decision to classify independent LECs as non-
dominant in the provision of in-region, interstate, domestic,
interexchange services and to impose the Fifth Report and Order
requirements, we will classify an independent LEC as non-dominant in
the provision of in-region, international services, unless it is
affiliated with a foreign carrier that has the ability to discriminate
in favor of the independent LEC through control of bottleneck services
or facilities in a foreign destination market. We will apply section
63.10(a) of our rules to determine whether to regulate a independent
LECs as dominant on those U.S. international routes where an affiliated
foreign carrier has the ability to discriminate against unaffiliated
U.S. international carriers through control of bottleneck services or
facilities in the foreign destination market. The safeguards that we
apply to carriers that we classify as dominant based on a foreign
carrier affiliation are contained in Section 63.10(c) of the rules and
are designed to address the incentive and ability of the foreign
carrier to discriminate in favor of its U.S. affiliate in the provision
of services or facilities necessary to terminate U.S. international
traffic. As previously noted, section 63.10(a) of the Commission's
rules provides that: (1) Carriers having no affiliation with a foreign
carrier in the destination market are presumptively non-dominant for
that route; (2) carriers affiliated with a foreign carrier that is a
monopoly in the destination market are presumptively dominant for that
route; (3) carriers affiliated with a foreign carrier that is not a
monopoly on that route receive closer scrutiny by the Commission; and
(4) carriers that serve an affiliated destination market solely through
the resale of an unaffiliated U.S. facilities-based carrier's switched
services are presumptively nondominant for that route. See also
Regulation of International Common Carrier Services, 7 FCC Rcd at 7334,
Paras. 19-24. This framework for addressing issues raised by foreign
carrier affiliations will apply to independent LECs' provision of U.S.
international services as an additional component of our regulation of
the U.S. international services market.
190. We reject MCI's suggestion that we should impose additional
safeguards on the independent LEC's in-region, international services.
As we stated with regard to the BOCs, all U.S. international carriers
are subject to the same prohibition against accepting ``special
concessions'' from foreign carriers that we imposed on MCI in the Order
approving BT's initial 20 percent investment in MCI. The grooming
described by MCI would constitute a special concession prohibited by
the terms of Section 63.14 of the Commission's rules to the extent the
U.S. carrier entered into a grooming arrangement that the foreign
carrier did not offer to similarly situated U.S. carriers. See 47 CFR
Section 63.14 (``[a]ny carrier authorized to provide international
communications service * * * shall be prohibited from agreeing to
accept special concessions directly or indirectly from any foreign
carrier or administration with respect to traffic or revenue flows
between the United States and any foreign country served * * * and from
agreeing to enter into such agreements in the future * * * .''). A U.S.
carrier that negotiates a grooming arrangement with a foreign carrier
on a particular route would be required to submit the arrangement to
the Commission for public comment and review in circumstances where the
arrangement deviates from existing arrangements with other U.S.
carriers for the routing and/or settlement of traffic on that route.
191. We believe our decision will benefit small incumbent LECs and
small entities, for many of the same reasons enumerated in our analysis
of independent LEC provision of in-region, interstate, domestic,
interexchange services. For instance, by establishing a regulatory
regime for provision of international services that is less stringent
for incumbent independent LECs than for BOCs, independent LECs, some of
which may be small incumbent LECs, will benefit by not being subjected
to regulations that may be burdensome and may hamper competition in the
international market. In addition, by limiting application of the Fifth
Report and Order separations requirements to incumbent independent
LECs, new entrants, some of which may
[[Page 36010]]
be small entities, will benefit from lower market entry costs.
192. We decline to address whether MTC should be regulated as a
dominant carrier for the provision of international services because of
the inadequate record in this proceeding. We note that CNMI or any
other petitioner may petition us to initiate a proceeding regarding
MTC's regulatory status. We reiterate, however, our conclusion that all
independent LECs that are providing international interexchange service
through an affiliate that satisfies the Fifth Report and Order
separation requirements as of the date of release of this Order must
continue to do so, and all other independent LECs providing
international interexchange service must comply with the Fifth Report
and Order separation requirements no later than one year from the date
of release of this Order. The Commission's International Bureau
recently granted GTE Hawaiian Tel.'s petition for reclassification as a
non-dominant carrier in the Hawaiian market for international message
telephone service (IMTS), subject to implementation by GTE Hawaiian
Tel. of the Fifth Report and Order separation requirements which the
Bureau imposed on an interim basis pending the outcome of this
proceeding. Petition of GTE Hawaiian Telephone Company, Inc. for
Reclassification as a Non-dominant IMTS Carrier, Order, DA 96-1748
(Int'l Bur. released Oct. 22, 1996). Our decision here does not modify
the International Bureau's determination that GTE Hawaiian Tel. will
remain a dominant IMTS carrier until it certifies to the Chief,
International Bureau, that it is in compliance with the conditions of
that Order. GTE Hawaiian Tel., must comply with the Fifth Report and
Order separation requirements, however, within one year from January 1,
1997.
5. Sunset of Separation Requirements for Independent LECs
a. Background
193. Section 272(f)(1) of the Communications Act provides that the
BOC safeguards set out in section 272 shall sunset three years after
the date that the BOC affiliate is authorized to provide interLATA
telecommunications services, unless the Commission extends such three-
year period by rule or order. In the NPRM we requested comment on
whether any regulation of independent LECs should be subject to some
type of sunset.
b. Comments
194. Frontier contends that we should eliminate any separation
requirements applicable to independent LECs' provision of in-region,
interstate, interexchange services no later than such time as section
272 requirements sunset.
195. Excel and CNMI oppose the removal of the separate affiliate
requirements applicable to independent LECs. CNMI notes that the sunset
provision in section 272 has no application to independent LECs.
Moreover, CNMI states that in insular areas such as the Commonwealth,
there is no evidence to suggest that effective local competition will
develop in the near future.
c. Discussion
196. We intend to commence a proceeding three years from the date
of adoption of this Order to determine whether the emergence of
competition in the local exchange and exchange access marketplace
justifies removal of the Fifth Report and Order requirements. We
believe that three years should be a reasonable period of time in which
to evaluate whether effective competition has developed sufficiently to
reduce or eliminate an independent LEC's bottleneck control of exchange
and exchange access facilities.
V. Classification of BOCS and Independent LECS as Dominant or Non-
Dominant in the Provision of Out-of-Region Interstate, Domestic,
Interexchange Services
197. In this section, we consider whether the Competitive Carrier
Fifth Report and Order separation requirements that were applied to the
provision of out-of-region, interstate, domestic, interexchange
services by independent LECs in the Competitive Carrier proceeding and
to the provision of such services by the BOCs in the Interim BOC Out-
of-Region Order are necessary as a condition for non-dominant
regulatory treatment. As discussed below, we conclude that BOCs and
independent LECs do not have and will not gain the ability in the near
term to use their market power in the provision of local exchange
service in their in-region markets to such an extent that the BOCs or
independent LECs could profitably raise and sustain prices for out-of-
region, interstate, domestic, interexchange services significantly
above competitive levels by restricting their own output. We therefore
classify the BOCs and independent LECs as non-dominant in the provision
of these services. We also conclude that, at this time, a BOC or an
independent LEC will not be able to raise significantly its
interexchange rivals' costs by improperly allocating costs from its
out-of-region interexchange services to its regulated exchange and
exchange access services, unlawfully discriminating against its rivals,
or engaging in a price squeeze in its provision of out-of-region,
interstate, domestic, interexchange services. We therefore eliminate
the separation requirements imposed in the Fifth Report and Order as a
condition for non-dominant regulatory treatment of the BOCs and
independent LECs in the provision of these out-of-region services.
A. Background
198. As previously noted, the Commission determined in the
Competitive Carrier proceeding that interexchange carriers affiliated
with independent LECs would be regulated as non-dominant carriers if
they satisfied the three separation requirements identified in the
Competitive Carrier Fifth Report and Order. See supra para. 144. The
three requirements are that an affiliate: (1) Maintain separate books
of account; (2) not jointly own transmission or switching facilities
with the LEC; and (3) acquire any services from its affiliated exchange
company at tariffed rates, terms, and conditions. Competitive Carrier
Fifth Report and Order, 98 FCC 2d at 1198, para. 9. The Commission
further concluded that, if the LEC provided the interstate,
interexchange services directly, rather than through an affiliate,
those services would be subject to dominant carrier regulation. Upon
enactment of the 1996 Act, the BOCs were authorized to provide
interLATA telecommunications services outside of their regions. In the
Interim BOC Out-of-Region Order, the Commission determined that, on an
interim basis, the BOCs' out-of-region, interstate, domestic,
interexchange services would be subject to the same regulatory
treatment as the Commission applied to the independent LECs'
interstate, domestic, interexchange services in the Fifth Report and
Order. Interim BOC Out-of-Region Order at Paras. 15-25. In other words,
a BOC would be subject to non-dominant treatment in the provision of
out-of-region, interstate, domestic, interexchange services if it
provided these services through a separate affiliate that satisfied the
Fifth Report and Order separations requirements, but would be regulated
as dominant if it provided these services directly. Id. at Paras. 19-
25. In the Interexchange NPRM, the Commission sought comment on whether
it should modify or eliminate the separation requirements that are
currently imposed on independent LECs and BOCs, in order to qualify for
non-dominant
[[Page 36011]]
treatment in the provision of out-of-region interstate, interexchange
services.
B. Comments
199. The BOCs and independent LECs generally argue that they cannot
exercise market power if they provide directly out-of-region, domestic,
interstate, interexchange services. Specifically, Ameritech asserts
that the Commission may impose requirements as a condition of non-
dominant treatment, such as a separate affiliate requirement, only if
it can show that such a requirement is necessary to prevent the
exercise of market power. Ameritech further argues that the Commission
cannot possibly show that a separate affiliate requirement is necessary
to prevent the exercise of market power in out-of-region interexchange
services, and thus cannot link this requirement to non-dominant status.
SBC argues that neither independent LECs nor new-entrant BOCs have
market power in the provision of out-of-region interexchange services
based on the market power factors listed in AT&T Reclassification
Order. Furthermore, SNET asserts that the Competitive Carrier Fifth
Report and Order separation requirements are not necessary for small
independent LECs. The Ohio Consumer Counsel argues, however, that rural
carriers without a national presence should be subject to separation
requirements if they receive suspensions or modification of section
251(b) or (c) of the 1996 Act.
200. In addition, the BOCs and independent LECs generally claim
that they no longer retain bottleneck control over exchange access
services and that the Fifth Report and Order separation requirements
are not necessary to prevent cross-subsidization and discrimination.
Ameritech notes that the Commission has found that a firm or group of
firms has ``bottleneck control'' when it has sufficient command over
some essential commodity or facility in its industry or trade to be
able to impede new entrants. Ameritech asserts that no BOC could impede
long-distance entry because any such effort would be a blatant
violation of equal access obligations and the Communications Act, and
such an attempt would surely be discovered and punished. Furthermore,
several LECs argue that to the extent bottleneck control previously
existed, the 1996 Act eliminates it by requiring interconnection and
access to unbundled elements and resale, and by creating incentives for
BOCs to implement these provisions in order to enter in-region long-
distance. Several BOCs further respond that they have neither the
incentive nor the opportunity to cross subsidize their long distance
services. NYNEX, BellSouth and GTE contend that separation requirements
are unnecessary because the BOCs' rates for access services are subject
to price caps. NYNEX asserts that Commission's rules control the
allocation of costs between interexchange and access services and
require LECs to impute to their interexchange services the same access
rates they charge to other carriers for in-region services. Ameritech
and Bell Atlantic argue that price caps (particularly without sharing)
and cost allocation rules will prevent cross subsidization. Bell
Atlantic also contends that geographic separation between a BOC's local
exchange operations and out-of-region long distance services eliminates
the potential for cost shifting.
201. Numerous non-LEC commenters, on the other hand, contend that
the Commission should treat BOCs and independent LECs as non-dominant
for out-of-region, interexchange services only so long as they satisfy
the separation requirements in the Fifth Report and Order. CompTel
argues that the focal point of any decision to classify a BOC as
dominant or non-dominant in interexchange services will not be the
level of competition in the interexchange market, but the extent to
which the BOC has lost its monopoly power in local exchange and
exchange access services. In addition, numerous commenters argue that
the separation requirements are necessary to prevent cross-
subsidization, unreasonable discrimination or other anticompetitive
conduct. Sprint contends that the Fifth Report and Order requirements
are the most, and perhaps the only, reliable tool at hand for detecting
and preventing cross-subsidization and discrimination. The Missouri
Commission claims that, unless LECs are required to maintain separate
records for their LEC and IXC operations, it will be difficult, if not
impossible, to determine whether any improper discrimination or cross
subsidization has occurred. The Alabama Commission asserts that the
separation requirements ensure that carriers can compete on an equal
basis in the interexchange market. MCI argues that the continuing need
for separate affiliate requirements is underscored by recent federal
and state audits of BOC and LEC affiliate transactions, which uncovered
improper cost allocations and demonstrated the ineffectiveness of the
cost allocation regulations in preventing LEC cross-subsidies between
regulated and unregulated services.
202. In addition, several commenters claim that the BOCs and
independent LECs have significant incentives to engage in improper cost
allocation, discrimination, and other anti-competitive behavior, and
are able to engage in such behavior due to their control of bottleneck
facilities. For example, MCI contends that the independent LECs' and
BOCs' local bottleneck power can be exploited beyond their service
areas by discriminating against an IXC dependent on the BOC or
independent LEC for access in its region, thereby damaging the IXC's
reputation on a national basis. MCI further asserts that the
similarity, and in some cases identity, of facilities used for monopoly
and interexchange services would greatly aggravate the risks of cross-
subsidization and discrimination on the terminating end of such calls.
Vanguard claims that, as suppliers of an essential input, BOCs are in a
position to affect the cost structures of their competitors. More
specifically, Vanguard argues that any increase in charges for
terminating traffic will raise the costs of non-affiliated
interexchange providers that terminate calls over the same route.
Vanguard notes that these increases must be absorbed by competitors,
but will not injure the BOC because raising access charges to its
affiliate will merely result in an intracompany transfer. Commenters
further contend that BOCs and independent LECs can discriminate in a
variety of ways, such as slow service provisioning, delayed information
about or roll-out of new technologies, less responsive maintenance and
customer service, and poorer connections. MCI asserts that LECs also
can exploit information obtained in their capacity as local service
providers to gain an advantage in out-of-region interexchange
marketing, including such information as validation databases, and that
they can manipulate the price or other terms and conditions of
terminating traffic, including limiting access to certain signalling
information.
203. Several commenters contend that the cost and asset shifting
techniques available to incumbent LECs are hard to detect and are not
deterred by price caps. MFS disputes BOC arguments that geographical
separation between the BOCs' in-region exchange access and out-of-
region interexchange facilities and price cap regulation moot concerns
about cost shifting. MFS asserts that a BOC's ability to fund
anticompetitive pricing schemes in the interexchange market from local
exchange market profits is not impeded just because these markets are
not contiguous or because the BOC performs artificial cost
[[Page 36012]]
allocations. MFS argues that price cap mechanisms do not perfectly
reflect actual cost changes and can yield windfall unintended profits
for BOCs which could be used to subsidize interexchange services. AT&T
contends that the BOCs' assertions that price cap regulation removes
exchange carriers' ability and incentive to allocate costs improperly
ignores the fact that not all LECs have elected price caps, and those
that have may periodically elect a ``sharing'' option. MCI asserts that
``pure'' price caps do not deter cross subsidization because the
conferring of monopoly-derived benefits upon a BOC's or independent
LEC's interexchange operations at less than their economic value
unfairly subsidizes those operations whether or not the BOC or LEC can
raise its monopoly rates to absorb additional costs.
204. In addition, numerous commenters contend that even if the
Fifth Report and Order separation requirements for independent LECs are
modified or eliminated, the Commission should maintain these
requirements as a condition for non-dominant treatment of the BOCs'
provision of out-of-region, interexchange services. Vanguard and GSA
contend that the BOCs have greater opportunity to allocate costs
improperly than the independent LECs because of their greater number of
services, larger service territories, and more extensive interoffice
facilities. Vanguard notes, for example, that each BOC serves about
one-eighth of all U.S. telephone subscribers in largely contiguous
service territories, which means that the BOCs receive more calls than
other LECs and have more opportunities to manipulate the price and
quality of terminating access than other companies. Vanguard argues
that the proposed BOC mergers would further widen the size
differentials between the BOCs and independent LECs.
205. Several non-LECs contend that the Competitive Carrier Fifth
Report and Order separation requirements are insufficient to protect
against abuses by BOCs and independent LECs, and, therefore, propose
additional safeguards. These commenters urge the Commission to: (1)
Impose full structural separation on the out-of-region affiliate; (2)
prohibit joint marketing of local and out-of-region, interexchange
services; (3) require that a LEC's out-of-region affiliate have no
preferential access to non-Title II services offered by the LEC; (4)
require that the LEC's affiliate transaction practices and cost
allocation procedures be subject to annual independent audit; and (5)
prohibit the affiliate from receiving proprietary information unless it
is made available to competitors on the same basis.
C. Discussion
206. In Section IV, we concluded that a BOC affiliate or
independent LEC should be classified as dominant in the provision of
in-region, interstate, domestic, long distance services only if it has
the ability to raise prices by restricting its output of those in-
region services. We found that each of the traditional market factors
(excluding bottleneck control) suggest that the BOC interLATA
affiliates and independent LECs do not have the ability to raise the
price of in-region, interstate, long distance services by restricting
their output of these services. We recognized that a BOC's or
independent LEC's control of local exchange and exchange access
facilities potentially gives the BOC or independent LEC an incentive to
disadvantage its interexchange competitor through improper allocations
of costs, discrimination or other anticompetitive conduct. We
concluded, however, that the statutory and regulatory safeguards
currently imposed on the BOCs and independent LECs will prevent them
from engaging in such anticompetitive conduct to such an extent that
the BOC interLATA affiliates or independent LECs have, or will have
upon entry or shortly thereafter, the ability to raise the price of in-
region, interstate, domestic, long distance services by restricting
their output of these services. Accordingly, we classified the BOC
interLATA affiliates and independent LECs as non-dominant in the
provision of these in-region services.
207. We conclude that we should apply a similar analysis in
assessing whether to classify the BOCs and independent LECs as dominant
in the provision of out-of-region, interstate, domestic, interexchange
services. We conclude that the traditional market power factors
(excluding bottleneck facilities)--market share, supply and demand
substitutability, cost structure, size, and resources--support a
finding that the BOCs and independent LECs do not have, and will not
gain the ability in the near term, to raise prices of out-of-region
interexchange services by restricting their output of these services.
More specifically, we find, first, that the BOCs begin with an
interexchange market share of zero while the market shares of the
independent LECs are negligible when compared to the major
interexchange carriers. Second, we find that the same high supply and
demand elasticities that the Commission found constrained AT&T's price
behavior also apply to the provision of out-of-region interexchange
services by the BOCs and independent LECs. Finally, we find that the
presence of existing interexchange carriers, including AT&T, MCI,
Sprint, and LDDS, prevents the BOCs and independent LECs from using
their cost structure, size, and resources to raise prices above the
competitive level for their out-of-region interstate, domestic,
interexchange services.
208. With respect to discrimination concerns related to the
provision of out-of-region, interstate, interexchange services by the
BOCs and independent LECs, we note that these carriers are not the
dominant providers of originating exchange access services in out-of-
region areas. We also note that majority of the discrimination concerns
raised by commenters focus on inferior interconnection to a LEC's
network for originating exchange access. We therefore find that the
BOCs' and independent LECs' lack of control over originating access for
its competitors' calls originating outside its region significantly
limits their ability to discriminate against their interexchange
competitors and to engage in other anticompetitive conduct. Although it
is possible that a LEC could damage an interexchange competitor's
reputation on a national basis by discriminating against an
interexchange carrier dependent on it for access in its region, we
believe this is unlikely because the BOCs and independent LECs are
subject to our equal access requirements. In addition, as discussed in
Section IV, we believe that the safeguards in place for the provision
of in-region, interstate, interexchange services by BOCs and
independent LECs further protect against originating exchange access
discrimination. We therefore conclude that our equal access provisions
and safeguards established for in-region interstate, interexchange
services provide sufficient protection to interexchange carriers for
the provision of originating exchange access as well as for the quality
of these services. Similarly, although a BOC or an independent LEC may
control the facilities used to terminate its interexchange competitors
calls in its in-region service area, we believe it has less opportunity
to discriminate against competitors through its control of these
facilities. In order to discriminate effectively through control of
terminating exchange access, the BOCs and independent LECs would have
to convince consumers that an inferior termination connection was the
fault of their interexchange carrier, and that the only way to obtain
efficient termination arrangements to this region would be
[[Page 36013]]
through the BOCs' or independent LECs' interexchange services. In
addition, to the extent such quality degradation is apparent to
consumers, it is also likely to be apparent to regulators and
interexchange competitors. We also note that the record in the
Interexchange proceeding does not demonstrate that the BOCs and LECs
have the technical ability to degrade selectively the quality of the
interconnection for their interexchange competitors through their
control of terminating exchange access. In addition, Section 222 of the
Communications Act provides all telecommunications carriers with
protection from the misuse of customer proprietary network information.
We, therefore, conclude that discrimination by a BOC or an independent
LEC is unlikely in the context of out-of-region, interstate,
interexchange services.
209. In addition, we agree with Bell Atlantic that the geographic
separation between a LEC's in-region local exchange and exchange access
operations and out-of region long distance operations mitigates the
potential for undetected improper allocation of costs. Because of this
geographic separation, it is unlikely that the out-of-region operation
will be able to share any transmission or switching facilities, many
employees, or other common costs with the in-region operation.
Consequently, improper allocation of costs is less problematic with
respect to a BOC's or independent LEC's provision of out-of-region long
distance services. We further conclude that statutory and regulatory
safeguards, including our Part 64 rules, imposed on the BOCs and
independent LECs sufficiently limit any residual ability to
disadvantage their rivals by improperly allocating costs between their
regulated local exchange and exchange access services and their out-of-
region interexchange services. Our cost allocation rules control the
allocation of cost between interexchange and local services and require
a BOC or an independent LEC to impute to its interexchange services the
same access rates it charges other carriers. Furthermore, in the
Accounting Safeguards Order, the Commission determined, solely for
federal accounting purposes, that out-of-region interLATA services
provided by incumbent LECs on an integrated basis should be treated
like nonregulated activities for purposes of our cost allocation rules.
We find that the existing statutory and regulatory safeguards, coupled
with the geographical separation between the BOCs' and LECs' in-region
and out-of-region operations, are sufficient to prevent the BOCs and
independent LECs from improperly allocating costs. We therefore
disagree with MFS' assertion that a LEC's ability to fund
anticompetitive pricing schemes in the interexchange market from local
exchange market profits exists even thought these markets are not
contiguous or because the BOC performs artificial cost allocations.
Furthermore, we note that the exchange access services for all of the
BOCs and most of the largest independent LECs are subject to our price
cap regulations. As discussed in Section IV, price cap regulation
further serves to reduce the potential that the BOCs and independent
LECs will improperly allocate the costs of their interexchange
services. Consequently, we conclude that the risk that the BOCs and
independent LECs would be able to allocate improperly substantial costs
from their out-of-region interLATA services to their monopoly local
exchange and exchange access services is not sufficient to warrant
imposing separation requirements.
210. We also conclude that the BOCs and independent LECs will not
be able to engage in a price squeeze with respect to their out-of-
region, interstate, domestic, interexchange services to such an extent
that they will gain the ability to raise prices of long distance
services by restricting their output of those services. We are not
persuaded by arguments that, because BOCs and independent LECs have
control over terminating exchange access, they will be able to effect a
price squeeze to gain market share by raising the price of terminating
access. We note that, because the BOCs and independent LECs do not have
control over originating exchange access for out-of-region, interstate,
interexchange services, they will incur the same cost for originating
access as their interexchange competitors. In addition, to the extent
that a BOC or independent LEC offers out-of-region long distance
services on an integrated basis, our rules require the carrier to
impute to itself its tariffed terminating exchange access rate. Under
section 64.901(b)(1) of our rules, tariffed services, such as exchange
access services, provided to a nonregulated activity must be charged to
the nonregulated activity at the tariffed rates and credited to the
regulated revenue account for that service. 47 CFR Sec. 64.901(b)(1).
See also 47 CFR Sec. 32.5280 (explaining how carriers must account for
the provision of tariffed services to nonregulated activities). As
previously noted, out-of-region interLATA services provided by
incumbent LECs on an integrated basis are treated as nonregulated
activities for federal accounting purposes. Accounting Safeguards Order
at para. 75. If a BOC or independent LEC offers out-of-region long
distance services through an affiliate, the affiliate will have to pay
the tariffed exchange access rate for long distance calls it terminates
on the BOC's or independent LEC's in-region network. We also note that
section 272(e)(3) of the Communications Act requires a BOC to ``charge
[its section 272 interLATA 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.'' 47 U.S.C. Sec. 272(e)(3). See also Non-Accounting
Safeguards Order at Paras. 256-58 (implementing section 272(e)(3)).
Also, price cap regulation of exchange access services mitigates the
ability of a BOC or independent LEC to effect a price squeeze by
increasing terminating exchange access rates. All BOCs and most of the
largest independent LECs are subject to price cap regulation. 1996
Annual Access Tariff Filings, DA 96-1022, para. 2 n.2 (rel. June 24,
1996). All but one BOC is subject to price caps without sharing. Data
based on 1996 Annual Access Tariff Filings filed on April 2, 1996.
Moreover, we believe an attempted price squeeze would be less likely to
be effective, because it appears that typically a BOC's originating
out-of-region calls that terminate in-region will account for a small
percentage of the BOC's total out-of-region originating traffic. We
acknowledge, however, that some BOCs and independent LECs may market
their out-of-region interexchange services to customers who routinely
terminate in the BOC's or independent LEC's in-region local exchange
and exchange access area. See, e.g., AT&T Sept. 13 Reply, Appendix B.
Finally, we note that there are other adequate mechanisms to address
such behavior. More specifically, a BOC or an independent LEC that
charges a rate for interstate services below its incremental costs of
providing service in the long term would be in violation of sections
201 and 202 of the Act. In addition, Federal antitrust law also would
apply to the predatory pricing of interstate services.
211. Based on the foregoing, we conclude that the BOCs and
independent LECs do not have, upon entry or soon thereafter, the
ability to raise the price of out-of-region,
[[Page 36014]]
interstate, interexchange services by restricting their own output even
if they are permitted to provide these services on an integrated basis.
We therefore conclude that it is not necessary to require the BOCs or
independent LECs to maintain the Competitive Carrier Fifth Report and
Order separation requirements as a condition for non-dominant
regulatory treatment for the provision of out-of-region, interstate,
interexchange services. We note, however, that because BOCs and
independent LECs are required to offer in-region, interstate,
interexchange services through a separate affiliate, some may provide
their out-of-region, interstate, interexchange services through the
same affiliate rather than directly. We further note that, in the
Accounting Safeguards Order, the Commission determined that affiliate
transactions rules apply to all transactions between incumbent local
exchange carriers and their affiliates providing any of the competitive
services of the types permitted under sections 260 and 271 through 276.
Accounting Safeguards Order at para. 256. Upon the effective date of
this Order, the requirements established herein for the provision of
out-of-region, interstate, interexchange services by BOCs will
supersede any conflicting requirements established in the Interim BOC
Out-Of-Region Order.
212. Contrary to the comments of GSA and Vanguard, we find that the
record in this proceeding does not demonstrate that a BOC is in a
better position than an independent LEC to leverage its in-region
monopoly power arising from its control of the local exchange to
benefit its provision of out-of-region long distance services. We
therefore conclude that there is no persuasive reason to implement
different regulatory schemes for the BOCs and independent LECs in the
context of their provision of out-of-region long distance services.
213. We also conclude that the Fifth Report and Order separation
requirements and the additional safeguards suggested in the record, are
not necessary to prevent the BOCs and independent LECs from raising the
costs of their interexchange rivals' services originating outside the
BOC's or independent LEC's region. As discussed above, we believe that
other applicable safeguards, coupled with the geographic separation
between the BOCs' and independent LECs' in-region and out-of-region
operations will prevent a BOC or independent LEC from favoring its out-
of-region interexchange services through improper allocation of costs,
discrimination, or other anticompetitive conduct. Further, we found in
the Interim BOC Out-of-Region Order that the commenters presented no
persuasive evidence that showed additional safeguards were warranted to
prevent improper allocation of costs and discrimination. In Section
IV.B., we found that no party presented persuasive evidence in this
proceeding that shows that it is necessary to impose additional
safeguards on the independent LECs as a condition for non-dominant
regulatory treatment for the provision of in-region, interstate,
interexchange service. Consequently, we conclude that the Fifth Report
and Order separation requirements and the proposed additional
safeguards are unnecessary in this context, and should therefore be
eliminated. With respect to small independent LECs, we note that this
decision may promote their expansion into new telecommunications
services and information services consistent with section 257 of the
Act. See 47 U.S.C. Sec. 257.
VI. Final Regulatory Flexibility Analysis
214. As required by Section 603 of the Regulatory Flexibility Act
(RFA), 5 U.S.C. Sec. 603, an Initial Regulatory Flexibility Analysis
(IRFA) was incorporated in each of the two Notices of Proposed
Rulemaking from which this Order issues. The Commission sought written
public comment on the proposals in the NPRMs. The Commission's Final
Regulatory Flexibility Analysis (FRFA) in this Order conforms to the
RFA, as amended by the Contract With America Advancement Act of 1996
(CWAAA).
A. Need for and Objectives of This Report and Order and the Regulations
Adopted Herein
215. In the 1996 Act, Congress sought to establish ``a pro-
competitive, de-regulatory national policy framework'' for the United
States telecommunications industry. Three principal goals of the
telephony provisions of the 1996 Act are: (1) Opening local exchange
and exchange access markets to competition; (2) promoting increased
competition in telecommunications markets that are already open to
competition, particularly long distance services markets; and (3)
reforming our system of universal service so that universal service is
preserved and advanced as local exchange and exchange access markets
move from monopoly to competition.
216. The regulations adopted in this Order implement the second of
these goals--promoting increased competition in the interexchange
market. The objective of the regulations adopted in this Order is to
implement as quickly and effectively as possible the national
telecommunications policies embodied in the 1996 Act and to promote the
development of competitive, deregulated markets envisioned by Congress.
In doing so, we are mindful of the balance that Congress struck between
this goal of bringing the benefits of competition to all consumers and
its concern for the impact of the 1996 Act on small incumbent local
exchange carriers.
B. Analysis of Significant Issues Raised in Response to the IRFA
217. As noted above, this Order issues from two separate Notices of
Proposed Rulemaking. In March 1996, the Commission released an NPRM
asking, among other things, whether we should modify or eliminate the
separation requirements imposed on independent LECs as a condition for
non-dominant treatment of their out-of-region, interstate, domestic,
interexchange services. In July 1996, we released an NPRM seeking
comment on, in addition to other issues, whether to modify our existing
regulations governing independent LECs' provision of in-region,
interstate, domestic, interexchange services, and whether to apply the
same regulatory treatment to their provision of in-region,
international services.
218. Summary of the Initial Regulatory Flexibility Analyses
(IRFAs). In each of the NPRMs, the Commission performed an IRFA. In the
IRFA for the Interexchange NPRM, the Commission did not find that any
of the issues that are addressed in this Order would have a significant
economic impact on a substantial number of small businesses as defined
by section 601(3) of the RFA. In the IRFA for the Non-Accounting
Safeguards NPRM, the Commission certified that its proposed regulations
would not, if promulgated, have a significant economic impact on a
substantial number of small businesses as defined by section 601(3) of
the RFA. We stated that our regulatory flexibility analysis was
inapplicable to BOCs and other incumbent LECs because these entities
are dominant in their field of operation.
1. Treatment of Small LECs
219. Comments. NTCA claims that its membership includes companies
that constitute ``small business concerns'' under the RFA. NTCA argues
that our IRFA in the Non-Accounting Safeguards NPRM incorrectly
certifies that our proposed regulations will not have a significant
economic impact on a
[[Page 36015]]
substantial number of small entities. NTCA states that the Small
Business Administration (SBA) establishes size standards for small
businesses that ``seek to ensure that a concern that meets a specific
size standard is not dominant in its field of operation.'' NTCA states
that the Commission cannot ignore SBA definitions and conclude that all
incumbent LECs are dominant for purposes of the Regulatory Flexibility
Analysis. NTCA recommends that we ``consider flexible regulatory
proposals and analyze any significant alternatives that would minimize
significant economic impacts'' of our regulations on its members that
are small companies.
220. Discussion. NTCA essentially argues that we exceeded our
authority under the RFA by certifying all incumbent LECs as dominant in
their field of operation, and concluding on that basis that they are
not small businesses under the RFA. We have found incumbent LECs to be
``dominant in their field of operation'' since the early 1980s, and we
consistently have certified under the RFA that incumbent LECs are not
subject to regulatory flexibility analyses because they are not small
businesses. We have made similar determinations in other areas. While
we recognize SBA's special role and expertise with regard to the RFA,
we are not fully persuaded on the basis of this record that our prior
practice has been incorrect. Nevertheless, in light of NTCA's concerns,
we will conduct an analysis on the impact of our regulations in this
Order on small incumbent LECs, in order to remove any possible issue of
RFA compliance. We therefore need not address NTCA's argument that many
of its members are ``small business concerns'' for purposes of the RFA.
C. Description and Estimates of the Number of Small Entities Affected
by This Report and Order
221. In this FRFA, we consider the impact of this Order on two
categories of entities, ``small incumbent LECs'' and ``small non-
incumbent LECs.'' Consistent with our prior practice, we shall continue
to exclude small incumbent LECs from the definition of a small entity
for the purpose of this FRFA. Accordingly, our use of the terms ``small
entities'' and ``small businesses'' does not encompass ``small
incumbent LECs.'' We use the term ``small incumbent LECs'' to refer to
any incumbent LECs that arguably might be defined by SBA as ``small
business concerns.'' We include ``small non-incumbent LECs'' in our
analysis, even though we believe that we are not required to do so.
222. For the purposes of this Order, the RFA defines a ``small
business'' to be the same as a ``small business concern'' under the
Small Business Act, 15 U.S.C. Sec. 632, unless the Commission has
developed one or more definitions that are appropriate to its
activities. Under the Small Business Act, a ``small business concern''
is one that: (1) is independently owned and operated; (2) is not
dominant in its field of operation; and (3) meets any additional
criteria established by the SBA. SBA has defined a small business for
Standard Industrial Classification (SIC) category 4813 (Telephone
Communications, Except Radiotelephone) to be a small entity when it has
fewer than 1,500 employees.
223. Incumbent LECs. SBA has not developed a definition of small
incumbent LECs. The closest applicable definition under SBA rules is
for telephone communications companies other than radiotelephone
(wireless) companies. The most reliable source of information regarding
the number of LECs nationwide of which we are aware appears to be the
data that we collect annually in connection with the Telecommunications
Relay Service (TRS). According to our most recent data, 1,347 companies
reported that they were engaged in the provision of local exchange
services. Although it seems certain that some of these carriers are not
independently owned and operated, or have more than 1,500 employees, we
are unable at this time to estimate with greater precision the number
of LECs that would qualify as small business concerns under SBA's
definition. Consequently, we estimate that there are fewer than 1,347
small incumbent LECs that may be affected by the decisions and
regulations adopted in this Order.
224. Non-Incumbent LECs. SBA has not developed a definition of
small non-incumbent LECs. For purposes of this Order, we define the
category of ``small non-incumbent LECs'' to include small entities
providing local exchange services which do not fall within the
statutory definition in section 251(h), including potential LECs, LECs
which have entered the market since the 1996 Act was passed, and LECs
which were not members of the exchange carrier association pursuant to
section 69.601(b) of the Commission's regulations. We believe it is
impracticable to estimate the number of small entities in this
category. We are unaware of any data on the number of LECs which have
entered the market since the 1996 Act was passed, and we believe it is
impossible to estimate the number of entities which may enter the local
exchange market in the near future. Nonetheless, we will estimate the
number of small entities in a subgroup of the category of ``small non-
incumbent LECs.'' According to our most recent data, 57 companies
identify themselves in the category ``Competitive Access Providers
(CAPs) & Competitive LECs (CLECs).'' A CLEC is a provider of local
exchange services which does not fall within the definition of
``incumbent LEC'' in section 251(h). Although it seems certain that
some of the carriers in this category are CAPs, (While the Commission
has not prescribed a definition for the term ``CAP,'' it is generally
not used to refer to companies that provide local exchange services.)
are not independently owned and operated, or have more than 1,500
employees, we are unable at this time to estimate with greater
precision the number of non-incumbent LECs that would qualify as small
business concerns under SBA's definition.
D. Summary Analysis of the Projected Reporting, Recordkeeping, and
Other Compliance Requirements
225. Under our current regulations, independent LECs are classified
as non-dominant interexchange carriers if they provide interstate,
domestic, interexchange services through an affiliate that satisfies
the separation requirements established in the Fifth Report and Order.
Independent LECs offering interstate, domestic, interexchange services
directly (rather than through a separate affiliate), or through an
affiliate that does not satisfy the specified conditions, are subject
to dominant carrier regulation. Independent LECs are permitted to
provide international, interexchange services subject to non-dominant
or dominant regulation, as determined on a case-by-case basis. Non-
dominant interexchange carriers are not subject to rate regulation, and
currently may file tariffs that are presumed lawful on one day's notice
and without cost support. Tariff Filing Requirements for Non-Dominant
Carriers. As discussed in note 8 supra, the Commission recently
determined, pursuant to section 10 of the Communications Act, to
forbear from requiring non-dominant interexchange carriers to file
tariffs for interstate, domestic, interexchange services. The
Commission therefore ordered, inter alia, non-dominant interexchange
carriers to cancel their tariffs for interstate, domestic,
interexchange services on file with the Commission within a nine-month
transition period and not to file any
[[Page 36016]]
such tariffs thereafter. Tariff Forbearance Order at Paras. 89-93,
stayed pending judicial review, MCI Telecom. Corp. v. FCC, No. 96-1459
(D.C. Cir. Feb. 13, 1997). See also Policy and Rules Concerning the
Interstate, Interexchange Marketplace; Guidance Concerning
Implementation as a Result of the Stay Order of the U.S. Court of
Appeals for the D.C. Circuit, CC Docket No. 96-61, Public Notice, DA
97-493 (rel. March 6, 1997). Non-dominant carriers are also subject to
streamlined section 214 requirements. Compliance with these
requirements may require small incumbent LECs to use accounting,
economic, technical, legal, and clerical skills.
226. In this Order, we have found that all incumbent independent
LECs, including small incumbent independent LECs, must provide in-
region, interstate, domestic, interexchange services through a separate
affiliate that satisfies the Fifth Report and Order requirements. We
are aware of three companies currently providing interexchange services
directly on dominant basis, Union Telephone Company (of Wyoming), GTE
Hawaiian Tel., and MTC. We direct companies that are not currently
providing interexchange services through a separate affiliate that
satisfies the Fifth Report and Order requirements to comply with the
Fifth Report and Order separation requirements no later than one year
from the date of release of this Order. We also extend this regulatory
regime, which applies to domestic services, to international,
interexchange services as well. Pursuant to this Order, all incumbent
independent LECs, including small incumbent independent LECs, must
provide in-region, interstate, domestic, interexchange services and
international, interexchange services through a separate affiliate that
satisfies the Fifth Report and Order separation requirements.
Specifically, incumbent independent LECs must provide these services
through a separate affiliate that must: (1) Maintain separate books of
account; (2) not jointly own transmission or switching facilities with
its affiliated exchange companies; and (3) obtain any services from its
affiliated exchange companies at tariffed rates and conditions. Fifth
Report and Order, 98 FCC 2d at 1198, para. 9. For purposes of these
requirements, an ``affiliate'' of an independent LEC is ``a carrier
that is owned (in whole or in part) or controlled by, or under common
control with, an exchange telephone company.'' Id. In this Order, we
have also eliminated the Fifth Report and Order separation requirements
as a condition for non-dominant treatment of incumbent independent
LECs' provision of out-of-region, interstate, domestic, interexchange
services.
E. Steps Taken to Minimize the Significant Economic Impact of this
Report and Order on Small Entities and Small Incumbent LECs, Including
the Significant Alternatives Considered and Rejected
227. We believe that our actions eliminating dominant carrier
regulation of independent LEC provision of in-region, interstate,
domestic, interexchange services, yet maintaining all of the Fifth
Report and Order separation requirements to guard against
anticompetitive conduct in the form of cost misallocation or
unreasonable discrimination, will facilitate the provision of in-
region, interstate, domestic, interexchange services by independent
LECs, many of which may be small incumbent LECs. We reject proposals to
remove the Fifth Report and Order requirements, for reasons set forth
in Section IV.B.1.
228. Our actions seem likely to benefit all incumbent independent
LECs providing in-region, interstate, domestic, interexchange services
on a non-dominant basis, some of which may be small incumbent LECs,
because any increase in costs of regulatory compliance can be amortized
over a period of one year. As noted in Section IV.B.1, incumbent LECs
that currently provide these services on an integrated basis subject to
dominant carrier regulation are given one year from the date of release
of this Order to comply with the Fifth Report and Order separation
requirements.
229. We decline to impose section 272 requirements, aspects of
dominant carrier regulation, or any additional requirements on
independent LECs' provision of in-region, interstate, domestic,
interexchange services. Consistent with our belief that independent
LECs are less likely to be able to engage in anticompetitive conduct
than the BOCs, we therefore establish a less stringent regulatory
regime for the independent LECs. This seems likely to benefit
independent LECs, including small incumbent LECs, by not subjecting
them to burdensome regulations that may serve only to hamper
competition in the interexchange market. For the reasons set forth in
Section IV.B.1, we reject alternatives to impose additional
requirements on independent LECs' provision of in-region, interstate,
domestic, interexchange services.
230. We limit the scope of the separation requirements to incumbent
independent LECs. By not imposing the Fifth Report and Order
requirements on non incumbent LECs, we avoid imposing unnecessary
regulation on new entrants into the local exchange market that wish to
provide in-region, interstate, domestic, interexchange services, and
will not have control of incumbent local exchange and exchange access
facilities. This seems likely to benefit all of these new entrants,
some of which may be small entities, by lowering entry costs, lowering
the disparity in market power between new entrants and incumbent LECs,
minimizing the risk of being subjected to legal action, and decreasing
administrative costs. We reject proposals to subject non-incumbent LECs
to the same requirements as incumbent LECs, for the reasons set forth
in Section IV.B.2.
231. We apply our regulations equally to all incumbent independent
LECs, in view of our conclusion that the size of an independent LEC
will not affect its incentives to engage in cost misallocation between
its monopoly services and its competitive services. Our action is
intended to foster competition in the in-region, interstate, domestic,
interexchange marketplace nationwide by preventing all incumbent
independent LECs, regardless of size, from using their control of
bottleneck local exchange and exchange access facilities to thwart new
entry. This seems likely to benefit all new entrants into the local
exchange market that wish to provide in-region, interstate, domestic,
interexchange services, some of which may be small entities, by helping
to reduce entry costs and lower the disparity in market power between
new entrants and other incumbent LECs. Moreover, our action will likely
help to establish these favorable entry conditions uniformly
nationwide, fostering increased certainty which will benefit all new
entrants, including any small entities. We reject alternatives to
exempt all incumbent LECs with less than two percent of the nation's
access lines from our regulations, for the reasons stated in Section
IV.B.3.
232. We extend the regulatory regime described above, which governs
independent LECs' provision of in-region, interstate, domestic,
interexchange services, to independent LECs' provision of in-region,
international services. We believe that this action will benefit
incumbent LECs and non-incumbent LECs, some of which may be small
incumbent LECs or small entities, for the same reasons enumerated in
our analysis for in-region, interstate, domestic, interexchange
services, such as helping
[[Page 36017]]
to reduce market entry costs, decreasing the disparity in market power
between new entrants and other incumbent LECs, and lowering
administrative costs. We decline to treat independent LECs' provision
of in-region, interstate, domestic, interexchange services and in-
region, international services differently, for the reasons stated in
Section IV.B.4.
233. As stated in Section IV.B.5, we intend to commence a
proceeding three years from the date of adoption of this Order to
determine whether the emergence of competition in the local exchange
and exchange access marketplace justifies removal of the Fifth Report
and Order requirements. We believe that three years should be a
reasonable period of time in which to expect effective competition to
develop in local exchange and exchange access markets. We reject
proposals to decide in this proceeding whether to sunset separate
affiliate requirements for independent LECs, for the reasons stated in
Section IV.B.5.
234. Report to Congress: The Commission shall send a copy of this
FRFA, along with this Report and Order, in a report to Congress
pursuant to the SBREFA, 5 U.S.C. Sec. 801(a)(1)(A). A copy of this
analysis will also be provided to the Chief Counsel for Advocacy of the
Small Business Administration, and will be published in the Federal
Register.
VII. Final Paperwork Reduction Analysis
235. Each of the two Notices of Proposed Rulemaking from which this
Order issues proposed changes to the Commission's information
collection requirements. As required by the Paperwork Reduction Act of
1995, Public Law 104-13, the Commission sought written comment from the
public and from the Office of Management and Budget (OMB) on the
proposed changes. The collections described therein, however, are
addressed in other proceedings.
236. In this Order, we have decided to require independent LECs to
comply with Fifth Report and Order separation requirements in order to
provide international, interexchange services. Pursuant to the
separation requirements, an independent LEC and its international,
interexchange affiliate must maintain separate books of account. This
requirement constitutes a new ``collection of information'' within the
meaning of the Paperwork Reduction Act of 1995, 44 U.S.C. Secs. 3501-
3520. Implementation of this requirement is subject to approval by the
Office of Management and Budget as prescribed by the Paperwork
Reduction Act.
VIII. Ordering Clauses
237. Accordingly, it is ordered that, pursuant to sections 1, 2, 4,
201, 202, 251, 271, 272 and 303(r) of the Communications Act of 1934,
as amended, 47 U.S.C. Secs. 151, 152, 154, 201, 202, 251, 271, 272, and
303(r), the Report and Order is adopted.
238. It is further Ordered that the Report and Order, which imposes
new or modified information or collection requirements, shall become
effective 70 days after publication in the Federal Register, following
approval by the Office of Management and Budget, unless a notice is
published in the Federal Register stating otherwise.
239. It is further Ordered that part 64, subpart T of the
Commission's rules, 47 CFR part 64 subpart T, is added as set forth in
rule changes attached hereto.
240. It is further Ordered that the Secretary shall send a copy of
this Report and Order, including the final regulatory flexibility
analysis, to the Chief Counsel for Advocacy of the Small Business
Administration, in accordance with paragraph 605(b) of the Regulatory
Flexibility Act, 5 U.S.C. Secs. 601 et seq.
List of Subjects in 47 CFR Part 64
Communications common carriers, Reporting and recordkeeping
requirements.
Federal Communications Commission.
William F. Caton,
Acting Secretary.
Rule Changes
Part 64 of title 47 is amended as follows:
PART 64--MISCELLANEOUS RULES RELATING TO COMMON CARRIERS
1. The authority citation for part 64 continues to read as follows:
Authority: 47 U.S.C. 154.
2. Part 64 is amended by adding new subpart T to read as follows:
Subpart T--Separate Affiliate Requirements for Incumbent
Independent Local Exchange Carriers That Provide In-Region,
Interstate Domestic Interexchange Services or In-Region
International Interexchange Services
Sec.
64.1901 Basis and purpose.
64.1902 Terms and definitions.
64.1903 Obligations of all incumbent independent local exchange
carriers.
Sec. 64.1901 Basis and purpose.
(a) Basis. These rules are issued pursuant to the Communications
Act of 1934, as amended.
(b) Purpose. The purpose of these rules is to regulate the
provision of in-region, interstate, domestic, interexchange services
and in-region international interexchange services by incumbent
independent local exchange carriers.
Sec. 64.1902 Terms and definitions.
Terms used in this part have the following meanings:
Books of Account. Books of account refer to the financial
accounting system a company uses to record, in monetary terms the basic
transactions of a company. These books of account reflect the company's
assets, liabilities, and equity, and the revenues and expenses from
operations. Each company has its own separate books of account.
Incumbent Independent Local Exchange Carrier (Incumbent Independent
LEC). The term incumbent independent local exchange carrier means, with
respect to an area, the independent local exchange carrier that:
(1) On February 8, 1996, provided telephone exchange service in
such area; and
(2) (i) On February 8, 1996, was deemed to be a member of the
exchange carrier association pursuant to Sec. 69.601(b) of this title;
or
(ii) is a person or entity that, on or after February 8, 1996,
became a successor or assign of a member described in paragraph (2) (i)
of this definition. The Commission may also, by rule, treat an
independent local exchange carrier as an incumbent independent local
exchange carrier pursuant to section 251(h)(2) of the Communications
Act of 1934, as amended.
Independent Local Exchange Carrier (Independent LEC). Independent
local exchange carriers are local exchange carriers, including GTE,
other than the BOCs.
Independent Local Exchange Carrier Affiliate (Independent LEC
Affiliate). An independent local exchange carrier affiliate is a
carrier that is owned (in whole or in part) or controlled by, or under
common ownership (in whole or in part) or control with, an independent
local exchange carrier.
In-Region Service. In-region service means telecommunications
service originating in an independent local exchange carrier's local
service areas or 800 service, private line service, or their
equivalents that:
(1) Terminate in the independent LEC's local exchange areas; and
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(2) Allow the called party to determine the interexchange carrier,
even if the service originates outside the independent LEC's local
exchange areas.
Local Exchange Carrier. The term local exchange carrier means 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 a commercial mobile service under
section 332(c), except to the extent that the Commission finds that
such service should be included in the definition of that term.
Sec. 64.1903 Obligations of all incumbent independent local exchange
carriers.
(a) Except as provided in paragraph (c) of this section, an
incumbent independent LEC providing in-region, interstate,
interexchange services or in-region international interexchange
services shall provide such services through an affiliate that
satisfies the following requirements:
(1) The affiliate shall maintain separate books of account from its
affiliated exchange companies. Nothing in this section requires the
affiliate to maintain separate books of account that comply with Part
32 of this title;
(2) The affiliate shall not jointly own transmission or switching
facilities with its affiliated exchange companies. Nothing in this
section prohibits an affiliate from sharing personnel or other
resources or assets with an affiliated exchange company; and
(3) The affiliate shall acquire any services from its affiliated
exchange companies for which the affiliated exchange companies are
required to file a tariff at tariffed rates, terms, and conditions.
Nothing in this section shall prohibit the affiliate from acquiring any
unbundled network elements or exchange services for the provision of a
telecommunications service from its affiliated exchange companies,
subject to the same terms and conditions as provided in an agreement
approved under section 252 of the Communications Act of 1934, as
amended.
(b) The affiliate required in paragraph (a) of this section shall
be a separate legal entity from its affiliated exchange companies. The
affiliate may be staffed by personnel of its affiliated exchange
companies, housed in existing offices of its affiliated exchange
companies, and use its affiliated exchange companies' marketing and
other services, subject to paragraph (a)(3) of this section.
(c) An incumbent independent LEC that is providing in-region,
interstate, domestic interexchange services or in-region international
interexchange services prior to April 18, 1997, but is not providing
such services through an affiliate that satisfies paragraph (a) of this
section as of April 18, 1997, shall comply with the requirements of
this section no later than April 18, 1998.
[FR Doc. 97-17407 Filed 7-2-97; 8:45 am]
BILLING CODE 6712-01-P