[Federal Register Volume 69, Number 61 (Tuesday, March 30, 2004)]
[Rules and Regulations]
[Pages 16494-16496]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6946]


=======================================================================
-----------------------------------------------------------------------

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 53

[WC Docket No. 03-228; FCC 04-54]


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

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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

SUMMARY: This document adopts rules eliminating the Commission's 
Operating, Installation, and Maintenance (OI&M) sharing prohibition. 
The Commission finds that, in light of the other existing section 272 
non-structural requirements, eliminating the OI&M sharing prohibition 
would neither materially increase Bell operating companies' (BOCs) 
abilities or incentives to misallocate costs or discriminate against 
unaffiliated rivals, nor would it diminish the ability of the 
Commission to monitor and enforce compliance with the Act. The 
Commission finds that there is sufficient evidence to show that the 
OI&M sharing prohibition has increased the section 272 affiliates' 
operating costs, and that the elimination of the OI&M sharing 
prohibition would likely result in substantial cost savings to the 
affiliates and enable the affiliates to compete more effectively in the 
interexchange market. Therefore, the Commission concludes that the OI&M 
sharing prohibition poses significant adverse consequences that 
outweigh any potential benefits of enforcing structural separation of 
OI&M services, given the protections afforded to consumers and 
competitors by section 272's other non-structural safeguards.

DATES: Effective March 30, 2004.

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 Report 
and Order (R&O) in WC Docket No. 03-228, FCC 04-54, adopted March 11, 
2004 and released March 17, 2004. The complete text of this R&O 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 Report and Order

    1. Background. Sections 271 and 272 of the Communications Act, as 
amended, 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. In addition, section 272 imposes structural 
and transactional requirements on section 272 separate affiliates, 
including the requirement to ``operate independently'' from the BOC.
    2. Section 272(b)(1) directs that the separate affiliate required 
pursuant to section 272(a) ``shall operate independently from the 
[BOC].'' In 1996, the Commission adopted rules to implement the 
``operate independently'' requirement that prohibit 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. 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. 
On November 3, 2003, the Commission adopted the Notice of Proposed 
Rulemaking (68 FR 65665, November 21, 2003) in this proceeding to seek 
comment on whether it should modify or eliminate the rules adopted to 
implement section 272(b)(1)'s ``operate independently'' requirement, 
including the OI&M sharing prohibition.
    3. ``Operate Independently.'' In this Order, the Commission rejects 
arguments that it must retain both the OI&M sharing prohibition and the 
joint facilities ownership restriction in order to give meaning to 
section 272(b)(1)'s ``operate independently'' language. The Commission 
reaffirms the conclusion of the previous Commission that section 
272(b)(1) is ambiguous. An agency is free to modify its interpretation 
of an ambiguous statutory provision when other reasonable 
interpretations may exist, provided that it acknowledges its change of 
course and provides a rational basis for its shift in policy. In fact, 
a reexamination of rules is particularly appropriate where, as here, 
the Commission has gained more experience over time and new ways of 
achieving regulatory goals have developed. In the instant situation, 
the Commission has chosen to reexamine the rules adopted to implement 
section 272(b)(1) in light of its eight years of experience in 
implementing the 1996 Act (including applicable cost allocation and 
nondiscrimination rules), its additional experience with monitoring 
section 272 affiliates, and, more generally, the growth of competition 
in all telecommunications markets. Thus, the Commission concludes that 
it should eliminate the OI&M sharing prohibition but retain the joint 
facilities ownership restriction under section 272(b)(1), consistent 
with its obligation to implement the statutory directive that the 
section 272 affiliate and the BOC ``operate independently.''
    4. Operating, Installation, and Maintenance Services. The 
Commission finds that the OI&M prohibition is an overbroad means of 
preventing anti-competitive conduct and poses significant costs that 
outweigh any potential benefits. Because the prohibition on OI&M 
sharing is not directly compelled by section 272(b)(1), the Commission 
eliminates sections 53.203(a)(2) through (a)(3) of its rules. The 
Commission concludes that the remaining section 272 requirements, 
together with its other non-structural safeguards, will continue to 
serve as effective protections against anticompetitive conduct by BOCs 
following elimination of the OI&M sharing prohibition. In the context 
of OI&M functions, the Commission concludes that the existing non-
structural safeguards are well-tailored and sufficient to provide 
effective and efficient protections against cost misallocation and 
discrimination by BOCs. Based on the record in this proceeding, the 
Commission does not expect that eliminating the OI&M sharing 
prohibition will materially increase BOCs' abilities or incentives to 
misallocate costs or discriminate against unaffiliated rivals in price 
or performance. Nor will eliminating the

[[Page 16495]]

prohibition diminish the ability of the Commission to monitor and 
enforce compliance with the Act in light of non-structural safeguards. 
Following elimination of the OI&M sharing prohibition, the Commission 
will be able to effectively monitor the performance of BOC provision of 
OI&M functions through application of (1) the other section 272 
requirements and (2) the Commission's affiliate transactions and cost 
allocation rules.
    5. Costs of the OI&M Sharing Prohibition. The Commission finds that 
there is sufficient evidence in the record to show that the OI&M 
sharing prohibition has increased the section 272 affiliates' operating 
costs, and that the elimination of the OI&M sharing prohibition will 
likely result in substantial cost savings to the affiliates and enable 
the affiliates to compete more effectively in the interexchange market. 
It recognizes that, at the time the OI&M sharing prohibition was 
adopted, the Commission acknowledged that structural separation may 
sacrifice economies of scale and scope. The Commission, nonetheless, 
concluded that the benefits of the OI&M sharing prohibition outweighed 
these costs. It now finds, however, that, when the historical and 
projected costs of the OI&M sharing prohibition against protections 
afforded by our structural and non-structural safeguards are 
considered, the costs of the rule exceed the likely benefits of 
maintaining the rule. Moreover, the Commission finds that the likely 
savings to the section 272 affiliates by elimination of the rule, in 
conjunction with the BOCs' adherence to our structural and non-
structural rules, including the cost allocation rules, supports a 
finding for the elimination of the OI&M sharing prohibition at this 
time. The Commission further finds that the evidence supports BOCs' 
claims that the OI&M sharing prohibition imposes inefficiencies that 
prevent BOCs from competing more effectively in the interexchange 
market.
    6. Joint Facilities Ownership. The joint facilities ownership 
restriction was adopted concurrently with the OI&M sharing prohibition 
to implement the ``operate independently'' requirement of section 
272(b)(1). The joint facilities ownership restriction, codified in 
section 53.203(a)(1) of the Commission's rules, provides that ``[a] 
section 272 affiliate and the BOC of which it is an affiliate shall not 
jointly own transmission and switching facilities or the land and 
buildings where those facilities are located.'' In adopting this 
restriction, the Commission believed that joint ownership of facilities 
could facilitate cost misallocation and discrimination. Based on the 
record presented in this proceeding, the Commission continues to 
believe that, unlike the OI&M sharing prohibition, the costs of 
maintaining separate ownership of facilities does not outweigh the 
benefits the rule provides against cost misallocation and 
discrimination. In making this determination, the Commission is mindful 
that the record support for eliminating the joint facilities ownership 
restriction is much more limited and inconclusive than the record that 
has been presented on the OI&M sharing prohibition. Therefore, the 
Commission retains the joint facilities ownership restriction to ensure 
that BOCs and their affiliates continue to operate independently.

Final Regulatory Flexibility Certification

    7. The Regulatory Flexibility Act of 1980, as amended (RFA), 
requires that an initial regulatory flexibility analysis 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.'' 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).
    8. In the Notice, the Commission sought comment generally on 
whether we should modify or eliminate the rules adopted to implement 
the ``operate independently'' requirement of section 272(b)(1) of the 
Act. Specifically, it sought 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 
sought 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.
    9. The Order eliminates the OI&M sharing prohibition, under 
sections 53.203(a)(2) through (a)(3) of the Commission's rules, because 
the Commission finds that it is an overbroad means of preventing cost 
misallocation or discrimination by BOCs against unaffiliated rivals. 
Further, the Order retains 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, under section 53.203(a)(1) of the Commission's rules.
    10. The rules adopted in this Order 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 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, it is noted that, 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 rule amendments 
directly affect only BOCs and section 272 affiliates, based on the 
foregoing, we conclude that a substantial number of small entities will 
not be affected by the rules.
    11. Therefore, the Commission certifies that the requirements of 
the Order will not have a significant economic impact on a substantial 
number of small entities. The Commission will send a copy of the Order, 
including a copy of this Final Regulatory Flexibility Certification, in 
a

[[Page 16496]]

report to Congress pursuant to the Congressional Review Act. In 
addition, the Order and this final certification will be sent to the 
Chief Counsel for Advocacy of the SBA, and will be published in the 
Federal Register.

Final Paperwork Reduction Act Analysis

    12. This Report and Order does not contain information 
collection(s) subject to the Paperwork Reduction Act of 1995 (PRA), 
Pub. L. 104-13.

Ordering Clauses

    13. Pursuant to 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), the Report and Order is adopted.
    14. Pursuant to sections 1.103(a) and 1.427(b) of the Commission's 
rules, 47 CFR 1.103(a), 1.427(b), that this Report and Order and 
Memorandum Opinion and Order shall be effective upon publication of the 
Report and Order in the Federal Register.
    15. The Commission's Consumer and Governmental Affairs Bureau, 
Reference Information Center, shall send a copy of this Order, 
including the Final Regulatory Flexibility Certification, to the Chief 
Counsel for Advocacy of the Small Business Administration.

List of Subjects in 47 CFR Part 53

    Telecommunications, Special Provisions concerning Bell operating 
companies.

Federal Communications Commission.
Marlene H. Dortch,
Secretary.

Final Rules

0
For the reasons discussed in the preamble, the Federal Communications 
Commission amends 47 CFR part 53 as follows:

PART 53--SPECIAL PROVISIONS CONCERNING BELL OPERATING COMPANIES

0
1. The authority citation for part 53 continues to read as follows:

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


0
2. In Sec.  53.203, revise paragraph (a)(1) to read as follows:


Sec.  53.203  Structural and transactional requirements.

    (a) * * * (1) A section 272 affiliate and the BOC of which it is an 
affiliate shall not jointly own transmission and switching facilities 
or the land and buildings where those facilities are located.
* * * * *
[FR Doc. 04-6946 Filed 3-29-04; 8:45 am]
BILLING CODE 6712-01-P