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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** DA 97-1662 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of) ) NYNEX Long Distance Co., et al.) ) Application for Authority Pursuant to)ITC-96-125 Section 214 of the Communications Act)ITC-96-272 of 1934, as amended, to Provide )ITC-96-181 International Service from Certain ) Parts of the United States to) International Points through Resale of ) International Switched Services) ) GTE Telecom Incorporated) ) Application for Authority Pursuant to)ITC-95-443 Section 214 of the Communications Act) of 1934, as amended, and Section 63.01 of the) Commission's Rules and Regulations for ) International Resale Switched Service and ) Facilities-based Service to Various Countries) MEMORANDUM, OPINION AND ORDER Adopted: August 1, 1997Released: August 4, 1997 By the Chief, International Bureau: I. Introduction 1.In this order, we remove the interim separation safeguards that we imposed on Bell Operating Companies (BOCs) and independent local exchange carriers (LECs) as a condition of non-dominant treatment of their international telecommunications services originating from points outside their local exchange areas. This action is consistent with the policy recently adopted by the Commission governing the BOCs' and independent LECs' provision of interstate, domestic interexchange services originating in out-of-region areas. II. Background 2.The International Bureau (Bureau) issued the international Section 214 authorizations that are the subject of this order after passage of the Telecommunications Act of 1996 (1996 Act). The Bureau issued these authorizations to numerous BOC affiliates and incumbent independent LECs. 3.Upon enactment, the 1996 Act permitted the BOCs to provide interLATA services, including international services, that originate outside of their regions. BOC affiliates subsequently filed numerous international Section 214 applications, which raised the issue of whether, and under what circumstances, the BOCs should be regulated as dominant in their provision of out-of-region international services because of their market power in local exchange and exchange access markets in the United States. 4.In granting authority to BOC affiliates for the provision of out-of-region international services, the International Bureau imposed as an interim condition of non-dominant treatment the same separation safeguards that the Commission earlier imposed as an interim condition of non-dominant treatment of BOC affiliates' provision of out-of-region, interstate, domestic interexchange services in the BOC Domestic Interim Out-of-Region Order. The BOC Domestic Interim Out-of-Region Order did not address the appropriate regulatory treatment of the BOCs' provision of out-of-region international services, but the Bureau concluded in the NYNEX LD/BACI/Ameritech Order that there are "no practical distinctions between a BOC's ability and incentive to improperly allocate costs, discriminate against, or otherwise disadvantage unaffiliated domestic interexchange as opposed to international service competitors." 5.Thus, in the NYNEX LD/BACI/Ameritech Order, the International Bureau required as an interim measure that the BOCs' international service affiliates: (1) maintain separate books of account from their affiliated LECs; (2) not jointly own transmission or switching facilities with their affiliated LECs; and (3) acquire any tariffed services from the affiliated LECs at the rates, terms, and conditions of the LECs' generally applicable tariffs. As in the BOC Domestic Interim Out-of-Region Order, the Bureau also required that the BOCs treat their international service affiliates as non-regulated affiliates for the purpose of BOC accounting under the Commission's joint cost and affiliate transaction rules. The Bureau imposed these interim conditions on all subsequent grants of authority allowing BOC affiliates to provide out-of-region international services. The Bureau stated that the interim safeguards would remain in place at least until the Commission adopted final rules governing the BOC's provision of out-of-region, interstate, domestic interexchange services. 6.Following adoption of the NYNEX LD/BACI/Ameritech Order, we issued numerous international Section 214 authorizations to affiliates of incumbent independent LECs to originate international services from both in-region and out-of-region points. In the GTE Telecom Order and all subsequent actions granting independent LECs authority to provide international services, we imposed the same interim separation requirements for non-dominance that we imposed on the BOCs' provision of out-of-region international services. These interim separation requirements applied to the independent LECs' provision of both in-region and out-of- region international services. 7.We noted in the GTE Telecom Order that the Commission had imposed these separation requirements more than ten years earlier in the Competitive Carrier Fifth Report and Order as a condition of non-dominant treatment of independent LECs' provision of interstate, domestic interexchange services. We concluded that there was "no basis for distinguishing" between an independent LEC's ability and incentive to act anticompetitively against a domestic interexchange competitor as opposed to an international services competitor. We also noted that the Commission had recently reached the tentative conclusion that it should apply the same regulatory approach that it adopts for an independent LEC's provision of in-region, interstate, domestic interexchange services to an independent LEC's provision of in-region international services. We imposed these interim safeguards at least until the Commission adopted final rules governing independent LECs' provision of in-region international services and out-of- region, interstate, domestic interexchange services. III. Discussion 8.In the NYNEX LD/BACI/Ameritech Order, the Bureau "reserve[d] the right to modify the conditions of the applicants' authorizations, as necessary, upon adoption of final rules for the BOCs' provision of out-of-region domestic interstate, interexchange services." The Bureau included similar language in subsequent actions authorizing BOCs and independent LECs to provide out-of-region international services subject to the interim conditions. In light of the Commission's adoption of final rules governing the BOCs' and independent LECs' provision of out-of-region, interstate, domestic interexchange services in the Classification of LEC Long Distance Service Report and Order, we find that it is appropriate to revisit these interim safeguards. 9.In the Classification of LEC Long Distance Service Report and Order, the Commission concluded that the BOCs and independent LECs do not have, upon entry or soon thereafter, the ability to raise the price of out-of-region, interstate, domestic interexchange services by restricting their output of such services, even if they were to offer such services on an integrated basis with their local exchange and exchange access services. Specifically, the Commission found that the traditional factors of market power (excluding bottleneck facilities) -- market share, supply and demand substitutability, and cost structure, size, and resources -- indicate that the BOCs and independent LECs should not be classified as dominant providers in the provision of out-of-region, interstate, domestic interexchange services. 10.The Commission also concluded that the BOCs and independent LECs would not be able to use their control over bottleneck local exchange and exchange access facilities to engage in discrimination, improper allocation of costs, or a price squeeze to such an extent that they would gain the ability to raise prices of their domestic long distance services by restricting their own output of those services. The Commission therefore classified BOCs and independent LECs as non-dominant in the provision of those services and concluded that "it is not necessary to require the BOCs or independent LECs to maintain the Competitive Carrier Fifth Report and Order separation requirements as a condition for non-dominant regulatory treatment for the provision of out-of-region, interstate, interexchange services." Moreover, the Commission concluded that the Competitive Carrier Fifth Report and Order separation requirements are not necessary to prevent the BOCs and independent LECs from raising the costs of their interexchange rivals' services that originate outside their regions. 11.The Classification of LEC Long Distance Service Report and Order did not address the regulatory treatment of the BOCs' and independent LECs' provision of out-of-region international services. The Commission, however, specifically examined the appropriate regulatory treatment of these carriers' in-region international services. The Commission found "no practical distinctions" between a BOC's or independent LEC's ability and incentive to use its market power in the provision of local exchange and access services to improperly allocate costs, discriminate against, or otherwise disadvantage unaffiliated domestic interexchange competitors as opposed to international service competitors. As a result, the Commission concluded that the same regulatory treatment should be applied to the BOCs' and independent LECs' provision of in-region international services as is applied to these carriers' provision of in-region, interstate, domestic interexchange services. 12.We reach the same conclusions in the out-of-region context. The critical issue is whether a BOC or independent LEC can use its market power in local exchange and exchange access services to act anticompetitively in its provision of out-of-region international services. We find no practical distinctions between a BOC's or independent LEC's ability and incentive to use its market power in the provision of local exchange and access services to improperly allocate costs, discriminate against, or otherwise disadvantage unaffiliated domestic interexchange competitors as opposed to international service competitors. As a result, we find that the BOCs and independent LECs do not have, upon entry or soon thereafter, the ability to raise the price of out-of-region international services by restricting their output of such services, even if they were to offer such services on an integrated basis with their local exchange and exchange access services. We therefore find that these carriers should be treated as non- dominant in the provision of out-of-region international services. Consistent with the policy articulated in the Classification of LEC Long Distance Service Report and Order, we also remove the interim separation requirements imposed on any BOC affiliate's Section 214 authorization to provide out-of-region international service. We remove these requirements from Section 214 authorizations issued to independent LECs as well, but only with respect to their provision of international services originating from out-of-region areas. We note that the BOCs and independent LECs that provide out-of-region international services, even on an integrated basis, must continue to treat these activities as non-regulated for purposes of our cost allocation rules. 13.The Commission concluded in the Classification of LEC Long Distance Service Report and Order that incumbent independent LECs should be classified as non-dominant in the provision of in-region international services but that they may only provide such services through an affiliate that fulfills the separation requirements of the Competitive Carrier Fifth Report and Order. Our interim conditions, therefore, will continue to apply to independent LECs' provision of in-region international services until the Classification of LEC Long Distance Service Report and Order becomes effective, at which time our interim conditions will be superseded by the rules adopted in that order. In addition, we note that the Commission also modified the third of the Competitive Carrier Fifth Report and Order separation requirements so that independent LEC affiliates may acquire unbundled elements from their affiliated LECs, subject to the same terms and conditions as provided in an agreement approved under Section 252 to which the independent LEC is a party. 14.As a final matter, we reiterate the Commission's conclusion in the Classification of LEC Long Distance Service Report and Order maintaining the separate framework regulating U.S. international carriers (including BOCs, independent LECs, or their affiliates) as dominant on routes where an affiliated foreign carrier has the ability to discriminate in favor of its U.S. affiliate through control of bottleneck services or facilities in the foreign destination market. IV. Ordering Clauses 15.In view of the foregoing, IT IS HEREBY ORDERED that the interim safeguards imposed as a condition of non-dominant treatment of BOCs' and independent LECs' provision of out-of-region international services are removed. 16.This order is issued under Section 0.261 of the Commission's rules and is effective upon adoption. Petitions for reconsideration under Section 1.106 or applications for review under Section 1.115 of the Commission's rules may be filed within 30 days of the date of the public notice of this order (see Section 1.4(b)(2) of the Commission's rules). FEDERAL COMMUNICATIONS COMMISSION Peter F. Cowhey Chief, International Bureau