DA 95-36 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, DC 20554 In the Matter of ) Bell Operating Companies' ) Joint Petition for Waiver of ) Computer II Rules ) MEMORANDUM OPINION AND OR DER Adopted: January 11, 1995 Released: January 11, 1995 By the Chief, Common Carrier Bureau: I. Introduction 1. On November 14, 1994, the Bell Operating Companies (BOCs) jointly filed a petition for an interim waiver of the Commission's Computer II rules (BOC Petition). The BOC petition was precipitated by the opinion of the United States Court of Appeals for the Ninth Circuit (Ninth Circuit) in California v. FCC (California III) remanding in part the Commission's BOC Safeguards Order. The BOC Safeguards Order had established a framework for lifting the structural separation requirements of Computer II that had governed BOC provision of enhanced services. The BOCs seek a waiver, if deemed necessary by the Commission, to continue existing enhanced service offerings to consumers on an integrated basis, to continue integrated enhanced service research, development, and market trials, and to offer new enhanced services associated with video dialtone on an integrated basis without obtaining prior Commission approval. Concern about the severe service disruptions that could occur for up to five million customers leads us to grant the BOC Petition in substantial part and to clarify the requirements that will govern BOCs' enhanced service offerings, pending further Commission action on remand. 2. Specifically, we conclude that, after the California III decision, the BOCs may generally provide enhanced services after complying with the Comparably Efficient Interconnection (CEI) plan regime in effect before the Commission completely lifted structural separation requirements. We grant the BOCs a limited waiver to continue providing those enhanced services that they first offered after the CEI plan approval requirement had expired, conditioned on their filing CEI plans for those services within sixty days after the release of this order. We also grant the BOCs a limited waiver to continue existing market trials initiated after the expiration of the CEI plan approval requirement, conditioned on their filing market trial notifications within sixty days after the release of this order. To the extent that the California III decision might be regarded as returning regulation to the Computer II framework, we grant the BOCs limited waivers of the Computer II structural separation requirements, pending conclusion of remand proceedings. 3. Accordingly, we grant any necessary waivers to enable the BOCs to: (1) provide existing enhanced services pursuant to CEI plans approved prior to the lifting of structural separation; (2) continue providing other existing enhanced services, pending Commission consideration of CEI plans for those services; (3) file CEI plans for any new enhanced services; (4) continue to perform research and planning activities and technical trials for enhanced services; (5) continue existing market trials, conditioned on their filing the market trial notifications required under the CEI plan regime; and (6) begin market trials of new enhanced services pursuant to the market trial requirements of the CEI plan regime. We decline to treat video-dialtone-related enhanced services differently from other new enhanced services. II. Background A. Commission and Court Decisions 4. Computer II generally required the BOCs to offer enhanced services through structurally separate subsidiaries, unless they obtained a waiver from the Commission. In its Computer III decisions, the Commission permitted the BOCs to integrate their enhanced service and their basic service offerings, provided that the BOCs complied with certain nonstructural safeguards designed to prevent anticompetitive and discriminatory behavior. 5. As a first step in implementing Computer III, the Commission permitted the BOCs, pending full structural relief, to offer individual enhanced services on an integrated basis following approval of service-specific CEI plans. In their CEI plans, BOCs were required to describe: (1) the enhanced service or services to be offered, (2) how the underlying basic services would be made available for use by competing enhanced service providers (ESPs), and (3) how the BOC would comply with the other nonstructural safeguards Computer III imposed. Such other safeguards governed: timely disclosure to competing ESPs of network information, including technical interfaces; access to and use of customer proprietary network information (CPNI); and quarterly reporting to help ensure that BOC provision of basic services to competing ESPs was nondiscriminatory in terms of quality, installation, and maintenance. Market trials of enhanced services were also allowed pursuant to more limited filing requirements. 6. Computer III concluded that, in the longer term, with the implementation of Open Network Architecture (ONA), the BOCs should be permitted to provide integrated enhanced services without prior Commission approval of service-specific CEI plans. The Commission ordered the BOCs to develop ONA plans under which the BOCs would unbundle elements of their networks and offer them to competing ESPs on a nondiscriminatory basis. In the Computer III Phase I Order, the Commission stated that once those ONA plans were approved, it would fully lift the Computer II structural separation requirements. 7. In 1990, the Ninth Circuit vacated and remanded three of the Commission's Computer III orders on the basis that the Commission had not shown that its nonstructural guidelines adequately protect against improper cross-subsidization of enhanced services by the BOCs. The Commission at that time issued an interim waiver permitting the BOCs to continue offering enhanced services on an integrated basis pursuant to their approved CEI plans. In addition, the Commission reimposed ONA requirements on the BOCs independent of removing structural separation requirements. In 1991, the Commission adopted the BOC Safeguards Order, which strengthened the safeguards criticized by the court in California I, and decided to lift Computer II structural separation requirements fully once BOC ONA plans were approved and implemented. 8. In a series of orders between 1988 and the end of 1992, the Commission approved BOC ONA plans that described the unbundled basic services each BOC proposed to provide as ONA services and the terms under which they would be offered. During the 1992-1993 period, the Common Carrier Bureau approved the lifting of structural separation requirements for individual BOCs upon their showing that they had implemented all of the ONA services in their initial ONA plans. 9. In 1993, the Ninth Circuit decided California II, which upheld the orders approving BOC ONA plans. The California II court concluded that the Commission had scaled back its vision of ONA since Computer III, but that the issue of whether the lifting of structural separation was still justified was not properly before it. 10. In California III, the Ninth Circuit upheld much of the BOC Safeguards Order. The court upheld the Commission's findings that a regime of nonstructural safeguards adequately prevented improper cross-subsidization of enhanced services by the BOCs. The court also upheld the preemption elements of the BOC Safeguards Order. Moreover, the court noted that California I had determined that the Commission had justified, in Computer III, the use of nonstructural safeguards such as ONA to prevent the BOCs from providing ESPs with inferior access to basic network services. The court acknowledged that as an interim measure until ONA was implemented, CEI plans "ensured that enhanced services competitors were provided with interconnections with the BOCs' own networks that were substantially equivalent to the interconnections that the BOCs provided for their own enhanced services." 11. Nonetheless, the court remanded that part of the BOC Safeguards Order lifting all structural separation requirements. The court found that the Commission had not adequately explained the decision to lift these requirements when the BOCs' approved ONA plans did not provide for fundamental unbundling of the BOC networks. According to the court, the Commission had found, in the original Computer III Phase I Order, that fundamental unbundling was necessary to protect against access discrimination in the absence of general structural separation requirements. Under the Commission's interim CEI regime, "the BOCs could provide integrated enhanced services pending the unbundling of the networks" pursuant to individually approved CEI plans that ensured that the interconnections given BOCs and their competitors were "substantially equivalent." In contrast, ONA was supposed to give competing ESPs the ability to "pick and choose" network service elements not used by the BOCs in providing their own enhanced services. In the absence of an explanation from the Commission why it no longer regarded such fundamental unbundling as necessary to prevent access discrimination, the court found the Commission's overall cost benefit analysis flawed, and the decision to lift structural separation arbitrary and capricious under the Administrative Procedure Act. B. BOC Petition 12. The BOCs collectively request an interim waiver of the Computer II rules so that they can continue to provide existing and new customers with enhanced services offered pursuant to previously-approved CEI and ONA plans. The BOCs also seek permission to continue unseparated planning and development of enhanced services, including technology tests and market trials, and to offer new enhanced services associated with video dialtone on an integrated basis without obtaining prior Commission authorization. The BOCs request this interim waiver for so long as necessary for the Commission to conduct proceedings to determine whether to extend this relief during the pendency of the remand proceeding. The BOCs interpret California III to reinstate the Computer III CEI plan requirements. Nonetheless, as a contingency, they request the broadest relief that may ultimately be deemed necessary by the Commission -- a waiver of the Computer II rules for their existing enhanced services. The BOCs state that, absent a waiver, they could be found in violation of the Computer II rules upon issuance of the Ninth Circuit's mandate. The BOCs contend that it will be impossible for them to comply with the Computer II structural separation requirements immediately. 13. The BOCs argue that there is good cause to waive the Computer II rules because approximately five million customers depend upon BOC enhanced services for their business and personal use. The BOCs state that a return to structural separation would require relocating enhanced service equipment, hiring new personnel, and locating and renovating facilities. Such an undertaking, according to the BOCs, would severely disrupt customer service. The BOCs assert that CEI requirements, cost accounting safeguards, and other safeguards that the Commission has established will prevent discrimination against competing enhanced service providers and cross-subsidization of BOC enhanced services by regulated service ratepayers. C. Pleadings 14. MCI Telecommunications Corporation (MCI), CompuServe Incorporated (CompuServe), Information Technology Association of America (ITAA), and Prodigy Services Company (Prodigy) oppose, in whole or in part, the BOC Petition. MCI and Compuserve assert that California III returns the industry to the structural separation requirements of Computer II. MCI states that previous orders in the Computer II proceeding establish a specific standard for Computer II waivers. MCI claims that the BOC Petition fails to meet these requirements, because the requested relief would "eviscerate the Computer II rules" and the BOCs have provided insufficient data to support their claim that service disruption would occur if structural separation were reimposed. According to MCI, the BOCs must also demonstrate that the enhanced services the BOCs are unable to provide on a structurally separate basis are not available from competing ESPs. Finally, MCI contends that California III demonstrates that existing safeguards are insufficient to prevent anticompetitive conduct by the BOCs during a Computer II waiver. 15. CompuServe, Prodigy, and ITAA state that they do not object to the granting of a waiver limited to those enhanced services which the BOCs were offering on an integrated basis at the time of the California III decision. On the other hand, these parties object to the portions of the BOC Petition that request permission to conduct enhanced service research and development and to initiate new enhanced services related to video dialtone. CompuServe, Prodigy, and ITAA assert that the California III decision demonstrates that the BOCs do have the ability to discriminate against competing ESPs during the pendency of a waiver. 16. CompuServe suggests that the BOCs should begin planning for a return to structural separation, and that the BOCs' assertions about the difficulty of structural separation derive from their own unwillingness to plan for such a contingency. Prodigy argues that the Commission should put the burden on the BOCs to justify on a service-specific basis continuing waivers for existing enhanced services and seek further comment on refining the separate subsidiary requirements to prevent access discrimination. According to ITAA, the Commission should attempt to maintain the status quo until it has an opportunity to respond to California III. ITAA argues that the Commission should grant a waiver only for existing enhanced services until the BOCs can file, and the Commission can decide on, service-specific requests for waivers for each of the enhanced services the BOCs provide on an integrated basis. 17. Two parties support or do not oppose the BOC Petition. United States Telephone Association (USTA) states that the BOCs have provided "compelling evidence" of the potential for widespread confusion and service disruption if a waiver is not granted. According to USTA, "it is only sensible" that the Commission should grant the requested waiver to minimize uncertainty during the pendency of remand proceedings. Newspaper Association of America (NAA) states that it "recognizes that there may be a practical need for a brief, interim waiver." Although it does not oppose a waiver, NAA urges the Commission to use the California III remand as an opportunity to reimpose structural separation. 18. In reply, the BOCs state that five of the six parties that filed comments support or do not oppose the major portion of the relief requested in the BOC Petition. The BOCs argue that none of the comments opposing the BOC Petition take into account the fact that the Bureau granted a waiver under substantially similar circumstances in 1990. The BOCs reject the suggestion that the Georgia Public Service Commission's findings regarding BellSouth's "MemoryCall" voice mail service demonstrate the ineffectiveness of nonstructural safeguards. According to the BOCs, the MemoryCall proceeding applied a far stricter standard than the Commission should use to evaluate an interim waiver request; involved a fundamental policy difference between state and federal regulators; and was preempted by the Commission. IV. Discussion A. Regulatory Regime After California III 19. In California III, the court remanded only one issue: the adequacy of the BOC Safeguards Order's cost benefit analysis to support the complete removal of structural separation after the unbundling of basic network services described in the BOC ONA plans. The California III court did not hold that the safeguards elaborated in the BOC Safeguards Order were inadequate; rather, it stated that the Commission had never explained its rationale for lifting structural separation requirements completely, after the "dilution" of the original vision for ONA. 20. The court did not find fault with the Computer III CEI service-specific plan regime. In fact, the court acknowledged that the CEI plans ensured that competitors received substantially equivalent interconnection. Thus, we disagree with parties who argue that the effect of California III is to reinstate Computer II rules that had previously governed the BOCs' enhanced services offerings. Instead, we conclude that the partial vacation of the BOC Safeguards Order generally reinstates the Computer III service- by-service CEI plan regime, augmented by the implementation of ONA under BOC ONA plans. Thus, as safeguards against access discrimination, BOCs must file CEI plans for integrated enhanced services until the Commission concludes remand proceedings. 21. CEI plans were designed to ensure that the "basic service functions utilized by a carrier-provided enhanced service [were] available to others on an unbundled basis, with technical specifications, functional capabilities, and other quality and operational characteristics, such as installation and maintenance times, equal to those provided to the carrier's enhanced services." BOC CEI plans detailed how BOCs proposed to comply with a set of "CEI parameters" for specific enhanced services. CEI parameters established in Computer III include: interface functionality, unbundling of basic services, resale, technical characteristics, installation and maintenance reporting, end user access, CEI availability, minimization of transport costs, and recipients of CEI. Under the CEI requirements, the BOCs must provide ESPs with interconnection to the BOCs' networks at the same tariffed rates that the BOCs themselves pay. BOCs must provide ESPs with access to all network service elements that the BOCs require for the provision of their own enhanced services. CEI therefore prevents the BOCs from providing competing ESPs with network connections inferior to those the BOCs themselves rely on. 22. In the interim, until the Commission acts on the California III remand, the BOCs must continue to comply with the procedures established in their approved ONA plans, since ONA requirements are independent of the removal of structural separation requirements. For example, BOCs still must provide new ONA services that ESPs need to provide enhanced services. The 120-day service request process permits ESPs to request a new ONA basic service and within 120 days to receive a response from the BOC of whether the BOC will provide the service. The BOC must give specific reasons if it declines to offer the service. The BOC evaluation is to be based on the ONA selection criteria set forth in the original Computer III Phase I Order: market area demand, utility as perceived by ESPs, and costing and technical feasibility. If an ESP finds the BOC response unsatisfactory, it may seek redress from the Commission by filing a petition for declaratory ruling. ESPs may also request that the Information Industry Liaison Committee (IILC) of the Alliance for Telecommunications Industry Solutions consider the technical feasibility of the service before requesting the service from one or more BOCs. 23. In addition, the BOCs must continue to comply with other safeguards against access discrimination, including CEI parameters and the equal access standard requirements discussed above, CPNI rules, nondiscrimination reporting requirements, and network information disclosure rules. Our experience with these safeguards indicates that they are effective in reducing the ability of BOCs to engage in access discrimination. 24. Finally, as they could under the Computer III CEI regime, the BOCs may continue to perform on an integrated basis, planning, research, and development for new enhanced services, including technical and market trials. B. Waiver and CEI Plan Filing Requirements 25. In response to a petition, the Commission may waive any provision of its rules or orders if good cause is shown. Courts have upheld an agency's authority to adopt interim measures to prevent industry disruption after agency rules have been vacated. These interim measures may remain in effect while the agency conducts remand proceedings. We find that it is in the public interest to grant a limited interim waiver of the Commission's Computer III rules to permit the BOCs to continue offering on an integrated basis enhanced services that are not the subject of approved CEI plans, pending the filing and review of CEI plans. Although the ultimate question raised by the California III decision remains to be addressed, we are confident that the continued application of our nonstructural safeguards will enable us to protect against anticompetitive behavior by the BOCs during the duration of the waiver. 26. We conclude that, taking into account the safeguards against access discrimination discussed in the previous section, the public interest will be served by granting the waivers in this order and by our clarifying how BOCs may provide integrated enhanced services while the Commission completes the remand proceedings. The BOCs have been offering some enhanced services on an integrated basis pursuant to approved CEI plans for more than six years and other enhanced services pursuant to approved BOC ONA plans in the several years since structural relief has been granted. We find that it would not be feasible for the BOCs to offer enhanced services on a fully separated basis immediately. More than five million customers now subscribe to and depend upon BOC enhanced service offerings, and customers who are not yet receiving service may have made business plans based on a legitimate expectation that they would be able to receive services for which CEI plans have been approved. Absent a waiver, the BOCs could be forced to suspend certain enhanced services upon which millions of customers depend, thus causing severe dislocation and confusion. This would be a particularly disruptive outcome if the Commission were to decide on remand to permit the BOCs to offer enhanced services on an integrated basis. When coupled with existing nonstructural safeguards, an interim waiver would prevent such hardship, ensure continued availability of new services to the public, lessen disruption to and uncertainty for BOC business planning, and preserve the efficiencies achieved through BOCs integrating enhanced services. 27. While temporarily suspending the provision of some BOC enhanced service offerings could significantly harm customers, the potential harm to competitors and ratepayers of permitting the BOCs to continue certain integrated operations for a limited time is quite small. The Bureau issued a similar type of waiver in 1990 following California I, and that waiver was not subsequently challenged before the Commission or in court. The arguments in favor of granting a waiver are even stronger now than they were four years ago, because now the Commission has put further safeguards into place through implementation of ONA, and the number of customers facing service disruptions has increased more than thirty-fold since 1990. Moreover, the scope of the Ninth Circuit's remand before us is much narrower than the court's remand in 1990. 28. For all of these reasons, we conclude that Computer III waivers serve the public interest by enabling the BOCs to continue providing integrated enhanced services pursuant to the CEI plan requirements that we establish below. In order to avoid unnecessary disruption and customer dislocation, and to allow the Commission sufficient time to assess more fully the effects of the Ninth Circuit's opinion and formulate a response, we grant the BOCs, pending conclusion of further proceedings on remand, a limited waiver of Computer III to continue providing enhanced services and conducting market trials initiated after the CEI plan approval requirement had expired. We condition this waiver on their filing CEI plans and market trial notifications for these services within sixty days after the release of this order. 29. As noted above, we conclude that California III returns the regulation of BOC enhanced services to a Computer III service-specific CEI plan regime. Thus, a Computer II waiver is not required, and we need only grant the BOCs limited Computer III waivers to encompass enhanced services that do not comply with the CEI plan requirements. To the extent that the effect of California III might be regarded as returning regulation of BOC enhanced services to the Computer II framework, however, we believe that a limited waiver of Computer II would be in the public interest for the same reasons stated above. 30. Accordingly, we grant any necessary waivers, pending the completion of remand proceedings, so that BOCs are subject to the following requirements: a. BOCs may continue to provide existing enhanced services pursuant to approved CEI plans. If new basic services are used to provide those enhanced services or major changes are made in the enhanced services as approved in specific CEI plans, the BOCs must file amendments to the CEI plans within sixty days. Whether the Commission will seek public comment on those amendments will depend on the magnitude of the change. BOCs may continue to provide these services while the Commission reviews any amendments. b. BOCs may continue to provide existing enhanced services on an integrated basis pursuant to approved ONA plans. Each BOC is required to file CEI plans for enhanced services not covered by existing CEI plans within sixty days of the release date of this order. These CEI plans will be placed on comment cycles and will be deemed approved in ninety days unless the Commission notifies the BOC otherwise. Because the BOC ONA plans already incorporate the CEI parameters that will be reviewed in the CEI plans filed for these services, and to avoid customer disruption, BOCs may continue to provide these services pursuant to this waiver while the Commission reviews the CEI plans. c. BOCs must file CEI plans for new enhanced services that they propose. New enhanced services shall not be provided until their CEI plans are approved by the Common Carrier Bureau. d. BOCs may continue existing market trials of enhanced services. Within sixty days of the release of this order, for market trials currently underway, BOCs must file market trial notifications as required in the BOC Market Trial Order. As indicated in that order, market trials will be deemed approved in ninety days unless the Commission notifies the BOC otherwise. BOCs must follow the market trial requirements of the BOC Market Trial Order for new market trials they propose. e. As they could under the Computer III CEI plan regime prior to the lifting of structural separation, the BOCs may continue to perform on an integrated basis planning, research, and development for new enhanced services, including technical trials. We note that although the Commission's 1990 Computer II waiver denied the BOCs this ability, the California III court has concluded that the Commission's strengthened cost accounting safeguards are adequate safeguards against improper cross- subsidization. The possibility of access discrimination in integrated research and development activities is minimal, as the BOCs cannot discriminate in providing access to services that do not yet exist. As the BOCs explain in their petition, the failure to grant such a waiver will lead to significant wasted expenditures in identifying noncompliant research and development activities, and could delay or halt the deployment of new enhanced services of benefit to consumers. 31. The BOC Petition also seeks a waiver to offer enhanced services associated with video dialtone. We do not grant this part of the requested waiver, because we conclude that this new enhanced service is subject to CEI plan requirements. We see no reason to treat enhanced services associated with video dialtone service differently from other services subject to CEI filing requirements. V. Conclusion 32. In view of the potential for severe customer dislocation and the effective regulatory safeguards the Commission now has in place, we conclude that the limited interim waiver that we adopt in this order is in the public interest. We therefore grant the BOC Petition in substantial part. VI. Ordering Clauses 33. Accordingly, IT IS ORDERED that pursuant to Sections 0.91, 0.291, and 1.3 of the Commission's Rules, 47 C.F.R.  0.91, 0.291, and 1.3, the BOC Joint Contingency Petition for Interim Waiver of the Computer II Rules, IS GRANTED to the extent described herein and otherwise DENIED. 34. IT IS FURTHER ORDERED that this order IS EFFECTIVE upon issuance of the Ninth Circuit's mandate in California III. FEDERAL COMMUNICATIONS COMMISSION Kathleen M.H. Wallman Chief, Common Carrier Bureau