[Federal Register Volume 66, Number 73 (Monday, April 16, 2001)]
[Rules and Regulations]
[Pages 19398-19402]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9327]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 64

[CC Docket Nos. 96-61 and 98-183; FCC 01-98]


Policy and Rules Concerning the Interstate, Interexchange 
Marketplace; Review of Customer Premises Equipment and Enhanced 
Services Unbundling Rules in the Interexchange, Exchange Access and 
Local Exchange Markets

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: This document eliminates the bundling restriction, adopted in 
the Commission's Computer II proceeding, that limits the ability of 
common carriers to offer consumers bundled packages of 
telecommunications services and customer premises

[[Page 19399]]

equipment (CPE) at a discounted price. It also clarifies that all 
facilities-based carriers may offer bundled packages of enhanced 
services and basic telecommunications at a single price, subject to 
existing safeguards. This action should benefit consumers by allowing 
them to take advantage of packages of innovative services and 
equipment, and foster increased competition in the markets for CPE, 
enhanced and telecommunication services.

DATES: Effective May 16, 2001.

FOR FURTHER INFORMATION CONTACT: Jodie Donovan-May, Attorney Advisor, 
Policy and Program Planning Division, Common Carrier Bureau, (202) 418-
1580.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report 
and Order in CC Docket Nos. 96-61 and 98-183 released March 30, 2001. 
The complete text of this document is available for inspection and 
copying during normal business hours in the FCC Reference Information 
Center, Courtyard Level, 445 12th Street, SW., Washington, DC, and also 
may be purchased from the Commission's copy contractor, International 
Transcription Services (ITS, Inc.), CY-B400, 445 12th Street, SW., 
Washington, DC. It is also available on the Commission's website at 
http://www.fcc.gov/ccb/ppp/2001ord.html

Synopsis of Report and Order

    1. In light of the record developed in response to the Further 
Notice in this docket (63 FR 56892, Oct. 23, 1998), the Commission 
concludes that it is appropriate to eliminate the CPE bundling 
restriction in its entirety and clarify, but not eliminate, the 
enhanced services requirement, both adopted in the Commission's 
Computer II proceeding, Amendment of Sec. 64.702 of the Commission's 
Rules and Regulations (Second Computer Inquiry), 77 FCC 2d 384 (1980), 
so that all carriers may offer consumers packages of equipment, 
enhanced services, and telecommunications services at a single price. 
The Commission finds that consumers can benefit significantly by 
relying on the competitive markets that exist for the components 
contained in a bundle, and that as a result of this competition, and 
existing safeguards that are applicable in certain instances, the 
Commission no longer needs to rely on the CPE bundling regulation to 
ensure that carriers do not restrict consumers from taking advantage of 
competitive suppliers of CPE. It also clarifies that under the existing 
rules, carriers may offer consumers bundles of enhanced and basic 
telecommunications services, subject to existing safeguards, thereby 
encouraging further options for consumers.
    2. CPE Bundling. The Commission adopts its tentative conclusion to 
eliminate the bundling restriction codified in Sec. 64.702(e) of its 
rules, 47 CFR 64.702(e), in order to allow nondominant interexchange 
carriers, including the nondominant interexchange affiliates of the 
incumbent local exchange carriers (LECs), to bundle CPE with their 
interstate, domestic, interexchange services. The Commission concludes 
that both the CPE market and the interstate, domestic, interexchange 
market are sufficiently competitive so that it is extremely unlikely 
that interexchange carriers could engage in anticompetitive behavior if 
the Commission permits them to provide packages of services and CPE 
bundled at a single price. The Commission also finds that incumbent 
LECs should be able to offer packages of service that include CPE and 
local exchange service at one price. It acknowledges that because the 
local exchange market is not substantially competitive and because 
incumbent LECs have market power, it must balance the risk that the 
incumbents can act anticompetitively with the public interest benefits 
associated with bundling. After undertaking this analysis, the 
Commission concludes that the risk of anticompetitive behavior by the 
incumbent LECs is low, not only because of the economic difficulty that 
even dominant carriers face in attempting to link forcibly the purchase 
of one component to another, but also because of the safeguards that 
currently exist to protect against this behavior. In particular, 
incumbent LECs will, under state law, offer local exchange service 
separately on an unbundled tariffed basis if they bundle such service 
with CPE. The Commission also requires them to offer exchange access 
service and any other service for which the Commission considers them 
to be dominant separately on nondiscriminatory terms if they bundle 
such service with CPE. The Commission also considered that the 
Telecommunications Act of 1996 (1996 Act) changed the 
telecommunications landscape from that which existed at the time that 
CPE bundling restriction was adopted originally, and that such changes, 
in conjunction with the benefits of bundling as seen in the wireless 
CPE context, supported a decision to eliminate the CPE bundling 
restrictions for all carriers, including incumbent LECs.
    3. Enhanced Services: In the case of enhanced services, the 
Commission clarifies that there is currently no prohibition on the 
bundling of basic telecommunications service and enhanced service at a 
single, discounted price for any carrier. This clarification will allow 
carriers to offer innovative packages of enhanced services bundled with 
basic telecommunications service and CPE. In order to ensure that 
competitive enhanced service providers continue to have 
nondiscriminatory access to the underlying transmission capacity, the 
Commission does not eliminate the existing requirement that facilities-
based carriers offer such capacity to these providers on the same terms 
and conditions under which they provide such service to their own 
enhanced service operations. For nondominant carriers, this safeguard 
is based on the Commission's existing Computer II requirements. For 
Bell Operating Companies (BOCs), the Commission's Computer III 
requirements (51 FR 24350, July 3, 1986) also require that the BOC 
offer the basic transmission service separately pursuant to tariff. All 
incumbent LECs are also subject to requirement to offer basic local 
exchange service on an unbundled, tariffed, nondiscriminatory basis, 
thereby enabling customers to purchase enhanced services from 
competitive suppliers and still obtain local service from the incumbent 
pursuant to tariff. Incumbent LECs are also subject to specific 
safeguards in sections 260, 274 and 275 of the 1996 Act, 47 USC 260, 
274 and 275. The Commission's cost accounting rules also reduce the 
BOCs' incentive to misallocate costs between their regulated and 
unregulated service operations. Finally, the Commission emphasized that 
section 202 of the Act, 47 U.S.C. 202, applies to dominant and 
nondominant carriers that provide transmission service to competitive 
enhanced service providers.
    4. Universal Service Allocation. Section 254 of the Act, 47 U.S.C. 
254, requires every telecommunications carrier that provides interstate 
telecommunications service to ``contribute, on an equitable and 
nondiscriminatory basis, to the specific, predictable, and sufficient 
mechanisms established by the Commission to preserve and advance 
universal service.'' The Commission's rules require entities with 
interstate end-user revenues to contribute to the universal service 
fund. Further, contributions are based solely on end-user

[[Page 19400]]

telecommunications revenue, and thus exclude enhanced services and CPE.
    5. When carriers generate revenues from stand-alone service or 
product offerings, the calculation of their universal service 
contributions is relatively straightforward. Carriers report revenues 
from telecommunications services and revenues from non-
telecommunications offerings (including CPE and enhanced services 
revenues) in separate sections of the Commission's revenue worksheet, 
which is submitted semi-annually. Carriers are assessed universal 
service contributions only on their revenues from telecommunications 
services. If carriers generate revenues from bundled packages of 
telecommunications services and CPE/enhanced services, however, the 
calculation of their universal service contributions becomes more 
complicated.
    6. In this Order, the Commission suggests two methods that 
contributors may use to allocate revenue when telecommunication 
services and CPE/enhanced services are offered as a bundled package. 
Its primary goal is to have a framework that deters carrier gaming 
while being competitively neutral, easy to administer, and simple to 
understand. The Commission's existing rules, 47 CFR 54.706, 54.709, 
require carriers to contribute to the universal service support 
mechanism based on interstate end-user telecommunications revenue. The 
Commission recognizes that carriers may bundle goods and services in a 
multitude of ways that cannot be anticipated, and thus it affords 
carriers the needed flexibility to determine the appropriate allocation 
of revenues for universal service support purposes. In reporting 
revenues, carriers should remain mindful of their contribution 
obligation under the current rule and are expected to exercise good 
faith in reporting revenues. Detailed further are two ways carriers 
could report revenues that would afford them ``safe harbor'' protection 
under the rule. The overriding intent is to maintain stability and 
predictability in funding the universal service support mechanisms.
    7. First, contributors may elect to report revenues from bundled 
telecommunications and CPE/enhanced service offerings based on the 
unbundled service offering prices, with no discount from the bundled 
offering being allocated to telecommunications services. For example, 
assume that a carrier offers voice-mail service, an enhanced service, 
as a stand-alone offering for $6.00, and also offers basic phone 
service, a telecommunications service, for $20.00. The carrier offers 
the two services for the bundled price of $22.00, resulting in a 
discount of $4.00. Under this approach, the carrier would report 
telecommunications service revenue of $20.00 per month (the stand-alone 
price for the phone service) and non-telecommunications revenue of 
$2.00 per month (the stand-alone price for voice-mail minus the 
discount from the bundled offering). Carriers will likely continue to 
offer both bundled and unbundled telecommunications service offerings. 
Because incumbent local exchange carriers will continue to tariff 
services separately and nondominant carriers will likely continue to 
offer unbundled pricing to meet the needs of consumers, this method 
provides carriers with an easily ascertainable method of allocating 
revenues for purposes of calculating universal service contributions.
    8. Alternatively, contributors may elect to treat all bundled 
revenues as telecommunications service revenue for purposes of 
determining their universal service obligations. For example, assume 
that a carrier offers a bundled package of voice-mail and basic phone 
service to end-users at $25.00 per month. The carrier decides that it 
cannot distinguish revenue for the basic service (the 
telecommunications service) from voice-mail (the non-telecommunications 
service). This carrier would report telecommunications revenue of 
$25.00 per month. This option would permit those contributors that are 
unable or unwilling to separate end-user telecommunications revenues 
from non-telecommunications revenue to comply with their universal 
service obligations when they generate revenues from bundled 
telecommunications services and CPE/enhanced service offerings.
    9. These allocation methods are ``safe harbors'' and will be 
afforded a presumption of reasonableness in an audit or enforcement 
context. Both of the previously-described methods enable carriers to 
allocate revenues for purposes of universal service contributions in an 
easily ascertainable and reasonable manner. These methods also decrease 
the investigative burden in an audit or other enforcement proceeding 
because the necessary information is easily obtained and verified. 
Thus, these allocation methods provide certainty to both carriers and 
the Commission, and the Commission encourages their use.
    10. Carriers may choose to use allocation methods other than the 
two described previously. Carriers should realize, however, that any 
other allocation methods may not be considered reasonable, and will be 
evaluated on a case-by-case basis in an audit or enforcement context. 
In evaluating the reasonableness of any alternative methods, the 
Commission will apply the standards underlying the safe harbors 
described previously. For example, carriers should not apply discounts 
to telecommunications services in a manner that attempts to circumvent 
a carrier's obligation to contribute to the universal service support 
mechanisms. Should an audit or enforcement proceeding be initiated, 
carriers will need to provide evidence that the amount of reported 
telecommunication revenues reflects compliance with the carrier's 
obligation to contribute to the universal service support mechanism 
based on interstate end-user telecommunications revenue.
    11. The methods outlined are examples of how carriers may report 
revenues for universal service purposes, and carriers may choose to use 
a different method altogether. The Commission adopts this approach in 
recognition of the fact that, at this time, we cannot anticipate the 
various ways in which carriers may choose to bundle their goods and 
services. The Commission concludes that this flexible, simple, and 
easily administered approach will continue to maintain stability and 
predictability in the universal service fund, while granting carriers 
considerable freedom in deciding how to bundle their offerings. 
Finally, the Commission notes that as it gains experience with carrier 
practices, it may in the future seek comment on whether to adopt 
additional rules.
    12. Impact of Bundling on Network Disclosure and Part 68 
Requirements. The Commission concludes that its existing network 
disclosure policy and rules ensure that carriers that bundle CPE and 
transmission services will continue to provide CPE suppliers with 
access to information about the carriers' networks that the suppliers 
require to offer competitive products. The Commission believes that 
normal market forces pressure interexchange carriers to provide CPE 
suppliers with necessary network information, and that sections 201 and 
202 of the Act safeguard against anticompetitive conduct in this area. 
It therefore does not find that any additional public disclosure 
requirements are necessary for interexchange carriers that bundle CPE 
with interstate, domestic, interexchange services.
    13. The Commission's network disclosure rules, 47 CFR 51.325(a)(3), 
require incumbent LECs to disclose network changes that could affect 
the manner in which CPE is attached to their networks. The Commission 
also

[[Page 19401]]

concludes that allowing carriers to bundle CPE with transmission 
services will not affect the Commission's requirement that CPE not 
cause harm to the network, and does not affect the technical criteria 
that the telecommunications industry will now establish on its own, as 
a result of the Commission's action to streamline the CPE technical and 
registration procedures in 47 CFR part 68 (66 FR 7579, Jan. 24, 2001). 
The network disclosure rule, 47 CFR 51.327, which requires incumbent 
LECs to disclose publicly, at a minimum, complete information about 
network design, technical standards and planned changes to the network, 
will also continue to act as a safeguard to prevent incumbent LECs that 
bundle enhanced services with local exchange service from acting in an 
anticompetitive manner.

Final Regulatory Flexibility Act Analysis

    14. The Regulatory Flexibility Act (RFA) \1\ requires that 
regulatory flexibility analyses be prepared for notice and comment 
rulemaking proceedings, unless the agency certifies that ``the rule 
will not, if promulgated, have a significant economic impact on a 
substantial number of small entities.'' \2\ The RFA generally defines 
the term ``small entity'' as having the same meaning as the terms 
``small business,'' ``small organization,'' and ``small governmental 
jurisdiction.'' \3\ The RFA defines a ``small business'' to be the same 
as a ``small business concern'' under the Small Business Act.\4\ 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 
Small Business Administration (SBA).\5\
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    \1\ The Regulatory Flexibility Act, see 5 U.S.C. 601 et seq., 
has been amended by the Contract With America Advancement Act of 
1996, Public Law No. 104-121, 110 Stat. 847 (1996) (CWAAA). Title II 
of the CWAAA is the Small Business Regulatory Fairness Act of 1996 
(SBREFA).
    \2\ 5 U.S.C. 605(b).
    \3\ 5 U.S.C. 601(6).
    \4\ 5 U.S.C. 601(3) (incorporating by reference the definition 
of ``small business concern'' in 5 U.S.C. 632).
    \5\ 15 U.S.C. 632.
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    15. Consistent with the effort to reduce regulation wherever 
conditions warrant,\6\ this Report and Order reviews the state of 
competition in the CPE and enhanced services market to determine if 
such competition warrants amending the bundling restrictions adopted in 
the Computer II Order. It also reviews the state of competition in the 
interstate, domestic interexchange, and local exchange markets to 
determine the likelihood that nondominant and incumbent carriers in 
these markets could engage in anticompetitive behavior if they are 
permitted to bundle such telecommunications services with CPE or 
enhanced services. In undertaking this analysis, the Report and Order 
acknowledges that because the local exchange market is not fully 
competitive and because incumbent LECs have market power, the 
Commission must balance the risk that incumbents can act 
anticompetitively with the public interest benefits of bundling. In 
light of the significant benefits of bundling outlined in the record 
developed in response to the Further Notice and the state of 
competition in the various component markets, the Report and Order 
finds that it is appropriate to eliminate the CPE bundling restriction 
for all carriers. In the case of enhanced services, it retains the 
requirement that facilities-based carriers continue to offer the 
underlying transmission service component of an enhanced service on 
nondiscriminatory terms, and clarifies that as long as the carriers 
meet this requirement, they may bundle enhanced services with 
telecommunications services at a single price.
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    \6\ See 47 U.S.C. 161.
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    16. The Commission considered the potential impact of the Report 
and Order on three categories of entities: ``small interexchange 
carriers;'' ``small incumbent LECs;'' and ``small non-incumbent LECs.'' 
The Report and Order will not have a significant economic impact on a 
substantial number of these entities because it relieves them of 
regulations that have prohibited them from offering consumers packages 
of telecommunications services and CPE at a single price. Removal of 
these rules will provide small entities the necessary flexibility to 
market services and CPE in a less restricted manner. In addition, these 
small entities will not have to incur certain transactional costs 
associated with separately offering and billing consumers for the 
components of a service package. In fact, it is expected that any 
economic impact will be a positive one. The Report and Order clarifies 
that small interexchange carriers, small incumbent LECs and small non-
incumbent LECs may offer packages of enhanced services and 
telecommunications services at a single price, provided that they 
continue to comply with the existing requirements to offer competitive 
enhanced service providers access to the underlying transmission 
service component of an enhanced service on nondiscriminatory terms. By 
clarifying this requirement, the Report and Order provides regulatory 
certainty. Therefore, there is no significant economic impact on such 
entities.
    17. In addition, the Commission considered the impact of the 
proposed rule revisions on information service providers (ISPs) and 
other competitive enhanced service providers. ISPs that described 
themselves as small businesses indicated in the record that they could 
suffer an economic impact from the rules proposed in the Further Notice 
if the Commission did not maintain the requirement that they be able to 
acquire underlying transmission capacity to provide enhanced services 
from the incumbent LECs on nondiscriminatory terms. We have maintained 
this requirement for all incumbent LECs. ISPs also indicated that they 
could not acquire the transmission service on nondiscriminatory terms 
if incumbent LECs were permitted to bundle CPE with telecommunications 
services. The Report and Order confirms that the transmission service 
component of CPE bundles will be separately available from the 
incumbent LECs on a nondiscriminatory basis. Therefore, there is no 
significant economic impact on small ISPs and small competitive 
enhanced service providers.
    18. Accordingly, we certify that the Report and Order will not have 
a significant economic impact on a substantial number of small 
entities.
    19. The Commission will send a copy of this Report and Order, 
including a copy of this final certification, in a report to Congress 
pursuant to the Small Business Regulatory Enforcement Fairness Act of 
1996.\7\ In addition, the Report and Order and this final certification 
will be sent to the Chief Counsel for Advocacy of the Small Business 
Administration, and will be published in the Federal Register.\8\
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    \7\ 5 U.S.C. 801(a)(1)(A).
    \8\ 5 U.S.C. 605.
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List of Subjects in 47 CFR Part 64

    Communications common carriers, Communications equipment, Enhanced 
services.

Federal Communications Commission.
Magalie Roman Salas,
Secretary.

Rule Changes

    For the reasons discussed in the preamble, 47 CFR part 64 is 
amended as follows:

[[Page 19402]]

PART 64--MISCELLANEOUS RULES RELATING COMMON CARRIERS

    1. The authority citation for part 64 continues to read as follows:

    Authority: 47 U.S.C. 154, 47 U.S.C. 225, 47 U.S.C. 
251(e)(1).151, 154, 201, 202, 205, 218-220, 254, 302, 303, and 337 
unless otherwise noted. Interpret or apply sections 201, 218, 225, 
226, 227, 229, 332, 48 Stat. 1070, as amended. 47 U.S.C. 201-204, 
208, 225, 226, 227, 229, 332, 501 and 503 unless otherwise noted.


    2. Section 64.702 is amended by revising paragraph (e) to read as 
follows:


Sec. 64.702  Furnishing of enhanced services and customer-premises 
equipment.

* * * * *
    (e) Except as otherwise ordered by the Commission, the carrier 
provision of customer premises equipment used in conjunction with the 
interstate telecommunications network may be offered in combination 
with the provision of common carrier communications services, except 
that the customer premises equipment shall not be offered on a tariffed 
basis.

[FR Doc. 01-9327 Filed 4-13-01; 8:45 am]
BILLING CODE 6712-01-U