NEWSReport No. DC 96-115NEWS ACTION IN DOCKET CASE December 24, 1996 COMMISSION IMPLEMENTS NON-ACCOUNTING STRUCTURAL SEPARATION AND NONDISCRIMINATION SAFEGUARDS PROVISIONS OF THE TELECOMMUNICATIONS ACT OF 1996 (CC Docket No. 96-149) The Commission today released an Order that implements the non-accounting structural separation and non-discrimination requirements of the Telecommunications Act of 1996. The 1996 Act conditions the Bell Operating Companies' (BOCs') entry into the market for in-region interLATA services on their compliance with certain statutory accounting and non-accounting safeguards. In enacting section 272, Congress imposed this series of separate affiliate and nondiscrimination requirements applicable to the BOCs' provision of certain new services and their engagement in certain new activities that are designed, in the absence of full competition in the local exchange marketplace, to prohibit anticompetitive discrimination and improper cost-allocation while still giving consumers the benefit of competition. Sections 271 and 272 of the Act permit a BOC, subject to approval by the Commission, to manufacture telecommunications equipment and customer premises equipment, originate certain interLATA telecommunications services, and provide interLATA information services, as long as the BOC provides these activities through a separate affiliate. Unless extended by the Commission, the statutory separate affiliate requirements for BOC manufacturing and interLATA telecommunications services expire three years after a BOC or any BOC affiliate is authorized to provide in-region interLATA services. The statutory separate affiliate requirement for interLATA information services expires on Feb 8, 2000, four years after enactment, unless extended by the Commission. The safeguards contained in section 272 ensure that competitors to the BOC's section 272 affiliate have access to essential inputs, namely the provision of local exchange and exchange access services, on terms that do not discriminate against competitors. At the same time that the Commission has adopted policies to implement section 272 in a procompetitive manner, it has also taken steps necessary to ensure that it does not impose requirements on the BOCs that will unfairly handicap their ability to compete. The structural separation requirements of section 272, in conjunction with the nondiscrimination obligations imposed by that section, also are intended to address concerns that BOCs could potentially use local exchange and exchange access facilities to discriminate against competitors in order to gain an anticompetitive advantage for their affiliates that engage in competitive activities. The Commission interprets section 272(c)(1) as imposing an unqualified prohibition against discrimination. In short, BOCs must treat all other entities in the same manner in which they treat their section 272 affiliates. In addition to the Order released today, the Commission also released a Further Notice of Proposed Rulemaking that seeks comment on information disclosure requirements to implement section 272(e)(1) of the Act. The Commission stated that parties cannot readily ascertain, through either existing disclosure obligations imposed by the Act, or existing Commission requirements, the length of time in which a BOC's or its affiliates' request for service are fulfilled. The Further Notice seeks comment on specific service categories and disclosure intervals necessary to ensure compliance with the Act. This proceeding is one of a series of interrelated rulemakings that collectively will implement the safeguards provisions of the 1996 Act. In a separate but related Order also released today, the Commission released safeguards implementing the accounting safeguards provisions of the 1996 Act. Together, these non-accounting and accounting safeguards are intended to protect subscribers of BOC monopoly services, such as local telephony, against the risk of being forced to pay costs incurred by the BOCs to provide competitive services, such as in-region interLATA services and equipment manufacturing, and to protect competition in those markets from the BOCs' ability to use their existing market power in local exchange services to obtain an anticompetitive advantage in those new markets the BOCs seek to enter. The following summarizes the key issues addressed in the Order: Non-Accounting Structural (Separate Affiliate) and Transactional Requirements The Order implements the structural separation, or separate affiliate, requirements of section 272 in a manner that is designed to prevent improper cost allocation and discrimination by the BOC in favor of its section 272 affiliate. In particular, the separate affiliate requirement mandates that BOCs and their section 272 affiliates "operate independently." The Commission determined that the "operate independently" requirement prohibits the BOC and its section 272 affiliate from jointly owning transmission and switching facilities or the land and buildings where such facilities are located. The Commission also concluded that the "operate independently" language bars a BOC's section 272 affiliate from contracting with a BOC or BOC affiliate to obtain those operating, installation, and maintenance functions associated with the facilities that it owns or leases from a provider other than the BOC with which it is affiliated, and bars a BOC from contracting with a section 272 affiliate to obtain those operating, installation, and maintenance functions associated with the BOC's facilities. Section 272 of the Act also requires the BOC and its separate affiliate to have separate officers, directors, and employees. The Commission determined that this requirement means that the same person may not simultaneously serve as an officer, director, or employee of both the BOC and a section 272 affiliate. The Commission further concluded that the 1996 Act does not bar the sharing of administrative services. In fact, the Commission determined that a BOC and its section 272 affiliate may contract with one another for administrative and marketing services, provided that each entity performs those operating, installation, and maintenance services associated with its own facilities. To the extent a BOC provides services to its section 272 affiliate, it must provide them to other entities at the same rates, terms, and conditions, pursuant to section 272(c)(1) of the Act. In addition, the Commission determined that the BOC and its section 272 affiliate may both obtain services from another BOC affiliate, such as a services affiliate, or from the parent company of the BOC and the section 272 affiliate. Nondiscrimination Requirements of the 1996 Act Section 272(c)(1) prohibits a BOC from discriminating between its section 272 affiliate and any other entity in the provision or procurement of goods, services, facilities, and information, or in the establishment of standards. The Commission concluded that this nondiscrimination provision of the 1996 Act requires a BOC to provide the same goods, services, facilities, and information to unaffiliated entities under the same rates, terms, and conditions as it provides such items to its section 272 affiliate. Other than with respect to section 272(e)(1) of the Act, the Commission did not adopt reporting requirements or procurement procedures to implement the nondiscrimination requirements of section 272. Rather, the Commission concluded that competitors will be able to obtain necessary information for detecting anticompetitive behavior through existing disclosure obligations imposed by the Act, state reporting requirements, and reporting requirements incorporated into negotiated interconnection agreements. Joint Marketing The 1996 Act prohibits the three largest interexchange carriers (IXCs) from joint marketing interLATA service with BOC local exchange service purchased for resale, prior to BOC entry into the in-region interLATA services market. The Commission concluded that, until a BOC obtains authority to provide in-region interLATA services, the statute prohibits the IXCs both from bundling interLATA services and BOC resold services in a package that can be sold in a single transaction and from marketing interLATA services and BOC resold services to consumers through a single transaction. Provision of Local Exchange Service by BOC Affiliates The Commission stated in its Order that the 1996 Act does not bar a section 272 affiliate from providing local exchange service. The Commission determined that a section 272 affiliate may purchase unbundled elements and telecommunications services at wholesale rates pursuant to section 251 of the Act, like any other requesting carrier. While the 1996 Act permits the section 272 affiliate to offer both local and long distance service, the Commission determined that individual states may elect to regulate these BOC affiliates differently than other carriers. The Commission also concluded that a BOC may not evade the requirements of section 272 by transferring local exchange services or facilities to an affiliate. The Commission determined that if a BOC transfers ownership to an affiliate of any network elements that the Commission concludes must be provided on an unbundled basis, pursuant to section 251 of the Act, the Commission will consider that affiliate to be a successor or assign of the BOC. According to the terms of the 1996 Act, that BOC affiliate would then be subject to the same regulatory requirements as the BOC with respect to those network elements. Action by the Commission December 23, 1996, by First Report and Order and Further Notice of Proposed Rulemaking (FCC 96-489). Chairman Hundt, Commissioners Quello, Ness, and Chong. -FCC- News Media contact: Mindy Ginsburg at (202) 418-1500. Common Carrier Bureau contact: Radhika Karmarkar at (202) 418-1580.