[Federal Register Volume 68, Number 225 (Friday, November 21, 2003)]
[Proposed Rules]
[Pages 65665-65667]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29054]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 53

[WC Docket No. 03-228; FCC 03-272]


Section 272(b)(1)'s ``Operate Independently'' Requirement for 
Section 272 Affiliates

AGENCY: Federal Communications Commission.

ACTION: Proposed rule.

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SUMMARY: This document initiates an inquiry regarding the Commission's 
rules implementing section 272(b)(1) of the Communications Act of 1934, 
as amended, (the Act) seeking comment on whether the Commission should 
modify the rules adopted to implement section 272(b)(1)'s ``operate 
independently'' requirement. Specifically, the Commission seeks comment 
on whether the operating, installation, and maintenance (OI&M) sharing 
prohibition is an overbroad means of preventing cost misallocation or 
discrimination by Bell operating companies (BOCs) against unaffiliated 
rivals. It also seeks comment on whether the prohibition against joint 
ownership by BOCs and their section 272 affiliates of switching and 
transmission facilities, or the land and buildings on which such 
facilities are located, should be modified or eliminated.

DATES: Comments are due December 8, 2003, and Reply Comments are due 
December 16, 2003.

FOR FURTHER INFORMATION CONTACT: Christi Shewman, Attorney-Advisor, 
Wireline Competition Bureau, at (202) 418-1686 or via the Internet at 
[email protected].

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Notice 
of Proposed Rulemaking (NPRM) in WC Docket No. 03-228, FCC 03-272, 
adopted November 3, 2003, and released November 4, 2003. The complete 
text of this NPRM is available for inspection and copying during normal 
business hours in the FCC Reference Information Center, Portals II, 445 
12th Street, SW., Room CY-A257, Washington, DC 20554. This document may 
also be purchased from the Commission's duplicating contractor, Qualex 
International, Portals II, 445 12th Street, SW., Room CY-B402, 
Washington, DC 20554, telephone 202-863-2893, facsimile 202-863-2898, 
or via e-mail [email protected]. It is also available on the 
Commission's Web site at http://www.fcc.gov.

Synopsis of the Notice of Proposed Rulemaking (NPRM)

    1. In this proceeding, the Commission seeks comment on whether the 
Commission should modify or eliminate its rules implementing the 
``operate independently'' requirement of section 272(b)(1) of the Act. 
The Commission's seven years of experience in implementing the 
Telecommunications Act of 1996 leads it to re-examine the rules 
designed to ensure that section 272 affiliates ``operate 
independently'' as required by the statute. The Commission seeks to 
determine whether these rules continue to strike an appropriate balance 
between allowing the BOCs to achieve efficiencies within their 
corporate structures and protecting ratepayers against improper cost 
allocation and competitors against discrimination.
    2. Background. Sections 271 and 272 establish a comprehensive 
framework governing BOC provision of ``interLATA service.'' Pursuant to 
section 271, neither a BOC nor a BOC affiliate may provide in-region, 
interLATA service prior to receiving section 271(d) authorization from 
the Commission. Section 272 requires BOCs, once authorized to provide 
in-region, interLATA services in a state under section 271, to provide 
those services through a separate affiliate until the section 272 
separate affiliate requirement sunsets for that particular state. 
Section 272 imposes structural and transactional requirements on 
section 272 separate affiliates, including the requirement under 
section 272(b)(1) to ``operate independently'' from the BOC.
    3. In the Non-Accounting Safeguards Order, (62 FR 2927, January 21, 
1997), the Commission concluded that the ``operate independently'' 
language of section 272(b)(1) imposes requirements

[[Page 65666]]

on section 272 separate affiliates beyond those detailed in section 
272(b)(2) through (b)(5). As a result, the Commission adopted rules to 
implement the ``operate independently'' requirement that prohibits a 
BOC and its section 272 affiliate from (1) jointly owning switching and 
transmission facilities or the land and buildings on which such 
facilities are located; and (2) providing OI&M services associated with 
each other's facilities. Specifically with regard to sharing OI&M 
functions, the Commission's rules prohibit a section 272 affiliate from 
performing OI&M functions associated with the BOC's facilities. 
Likewise, they bar a BOC or any BOC affiliate, other than the section 
272 affiliate itself, from performing OI&M functions associated with 
the facilities that its section 272 affiliate owns or leases from a 
provider other than the BOC with which it is affiliated. At the time of 
the Non-Accounting Safeguards Order, the Commission reasoned that 
allowing joint ownership of facilities and sharing of OI&M functions 
between BOCs and their 272 affiliates would create opportunities for 
improper cost allocation and discrimination that the separate affiliate 
requirement was intended to prevent. At the same time, the Commission 
recognized that restrictions on sharing of facilities and services 
impose costs, including inefficiencies within the BOCs' corporate 
structures, and that the economies of scale and scope inherent to 
integration produce economic benefits to consumers. The Commission 
explained that it was ``strik[ing] an appropriate balance between 
allowing the BOCs to achieve efficiencies within their corporate 
structures and protecting ratepayers against improper cost allocation 
and competitors against discrimination.''
    4. Operating, Installation, and Maintenance Functions. The 
Commission seeks comment on whether the cost data suggest that the 
costs of the OI&M sharing prohibition outweigh the benefits. It seeks 
comment on whether eliminating the prohibition on sharing OI&M 
functions would materially increase the BOCs' ability or incentive to 
discriminate against unaffiliated rivals in the long distance market. 
The Commission also seeks comment on whether it would diminish the 
ability of the Commission to monitor and enforce compliance with the 
Act.
    5. The Commission seeks comment on whether the potential savings to 
be gained by BOC operations and the potential for increased interLATA 
competition outweigh any benefits from continuing to apply the OI&M 
sharing prohibition. It seeks comment on whether the OI&M sharing 
prohibition imposes inefficiencies and what the extent of those 
inefficiencies is. The Commission also seeks comment on the benefits to 
consumers of allowing more integrated OI&M operations between BOCs and 
their section 272 affiliates and on the magnitude of the risks and 
adverse consequences of possible anti-competitive conduct facilitated 
by OI&M sharing. Parties are asked to address in their comments the 
effectiveness of non-structural safeguards alone, rather than 
maintaining the OI&M sharing prohibition, to prevent and detect cost 
misallocation and discrimination.
    6. Joint Facilities Ownership. In addition to the OI&M sharing 
prohibition, the Commission adopted a rule to implement section 
272(b)(1) that prohibits joint ownership of switching and transmission 
facilities or the land and buildings on which such facilities are 
located. Although the Commission reaches no tentative conclusion with 
regard to this restriction, it seeks comment on whether it is needed to 
prevent cost misallocation and discrimination. Parties are asked to 
identify both the costs and benefits of maintaining or eliminating the 
joint facilities ownership restriction. The Commission seeks comment on 
whether existing non-structural safeguards are adequate to serve the 
purpose that the joint facilities ownership restriction was intended to 
serve. Parties are also asked to discuss whether any new safeguards may 
be needed in the event that the joint facilities ownership restriction 
is eliminated. Finally, commenters should address how a conclusion by 
the Commission to eliminate both the joint facilities ownership 
restriction and the OI&M sharing prohibition would relate to the 
Commission's conclusion in the Non-Accounting Safeguards Order that the 
``operate independently'' language of section 272(b)(1) imposes 
separate and independent requirements on section 272 separate 
affiliates beyond those detailed in section 272(b)(2) through (b)(5).

Initial Paperwork Reduction Act Certification

    7. This NPRM may contain a new or modify an existing information 
collection. As part of our continuing effort to reduce paperwork 
burdens, we invite the general public and the Office of Management and 
Budget (OMB) to take this opportunity to comment on the possible 
changes in information collection contained in the NPRM, as required by 
the Paperwork Reduction Act of 1995, Public Law 104-13. Public and 
agency comments are due 60 days from the date of publication of this 
NPRM in the Federal Register. Comments should address: (1) Whether the 
possible changes in the collections of information are necessary for 
the proper performance of the functions of the Commission, including 
whether the information will have practical utility; (2) the accuracy 
of the Commission's burden estimates; (3) ways to enhance the quality, 
utility, and clarity of any information collected; and (4) ways to 
minimize the burden of any collection of information on the 
respondents, including the use of automated collection techniques or 
other forms of information technology.

Initial Regulatory Flexibility Certification

    8. The Regulatory Flexibility Act of 1980, as amended (RFA), 
requires that an initial regulatory flexibility analysis be prepared 
for notice-and-comment rule making proceedings, unless the agency 
certifies that ``the rule will not, if promulgated, have a significant 
economic impact on a substantial number of small entities.'' The RFA 
generally defines the term ``small entity'' as having the same meaning 
as the terms ``small business,'' ``small organization,'' and ``small 
governmental jurisdiction.'' In addition, the term ``small business'' 
has the same meaning as the term ``small business concern'' under the 
Small Business Act. A ``small business concern'' is one which: (1) Is 
independently owned and operated; (2) is not dominant in its field of 
operation; and (3) satisfies any additional criteria established by the 
Small Business Administration (SBA).
    9. In this NPRM, the Commission seeks comment on whether it should 
modify or eliminate the rules adopted to implement the ``operate 
independently'' requirement of section 272(b)(1) of the Act. 
Specifically, it seeks comment on whether the OI&M sharing prohibition 
is an overbroad means of preventing cost misallocation or 
discrimination by BOCs against unaffiliated rivals. The Commission also 
seeks comment on whether the prohibition against joint ownership by 
BOCs and their section 272 affiliates of switching and transmission 
facilities, or the land and buildings on which such facilities are 
located, should be modified or eliminated. The rules under 
consideration in this NPRM apply only to BOCs and their section 272 
affiliates. Neither the Commission nor the SBA has developed a small 
business size standard specifically applicable to providers of 
incumbent local exchange service and interexchange services. The

[[Page 65667]]

closest applicable size standard under the SBA rules is for Wired 
Telecommunications Carriers. This provides that such a carrier is small 
entity if it employs no more than 1,500 employees. None of the four 
BOCs that would be affected by amendment of these rules meets this 
standard. The Commission next turns to whether any of the section 272 
affiliates may be deemed a small entity. Under SBA regulation 
121.103(a)(4), ``SBA counts the * * * employees of the concern whose 
size is at issue and those of all its domestic and foreign affiliates * 
* * in determining the concern's size.'' In that regard, although 
section 272 affiliates operate independently from their affiliated 
BOCs, many are 50 percent or more owned by their respective BOCs, and 
thus would not qualify as small entities under the applicable SBA 
regulation. Moreover, even if the section 272 affiliates were not 
``affiliates'' of BOCs, as defined by SBA, as many are, the Commission 
estimates that fewer than fifteen section 272 affiliates would fall 
below the size threshold of 1,500 employees. Particularly in light of 
the fact that Commission data indicate that a total of 261 companies 
have reported that their primary telecommunications service activity is 
the provision of interexchange services, the fifteen section 272 
affiliates that may be small entities do not constitute a ``substantial 
number.'' Because the proposed rule amendments directly affect only 
BOCs and section 272 affiliates, based on the foregoing, the Commission 
concludes that a substantial number of small entities will not be 
affected by our proposal.
    10. Accordingly, for the reasons set forth above, the Commission 
certifies that the proposals in this NPRM, if adopted, will not have a 
significant economic impact on a substantial number of small entities. 
The Commission will send a copy of the Notice, including a copy of this 
Initial Regulatory Flexibility Certification, to the Chief Counsel for 
Advocacy of the SBA. This initial certification will also be published 
in the Federal Register.

Ordering Clauses

    11. Accordingly, pursuant to the authority contained in sections 2, 
4(i)-(j), 272, and 303(r) of the Communications Act of 1934, as 
amended, 47 U.S.C. 152, 154(i)-(j), 272, 303(r), this Notice of 
Proposed Rulemaking is Adopted.
    12. The Commission's Consumer and Governmental Affairs Bureau, 
Reference Information Center, shall Send a copy of this Notice of 
Proposed Rulemaking, including the Initial Regulatory Flexibility 
Certification, to the Chief Counsel for Advocacy of the Small Business 
Administration, in accordance with the Regulatory Flexibility Act.

    Federal Communications Commission.
Marlene H. Dortch,
Secretary.
[FR Doc. 03-29054 Filed 11-20-03; 8:45 am]
BILLING CODE 6712-01-P