Before the

Federal Communications Commission

Washington, D.C. 20554

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| In the Matter of                 | * | CC Docket No. 96-61          |
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| Policy and Rules Concerning the  | ) | CC Docket No. 98-183         |
| Interstate, Interexchange        | * |                              |
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REPORT AND ORDER

**Adopted:** March 22, 2001 **Released:** March 30, 2001

By the Commission:

**TABLE OF CONTENTS**

Paragraph

I. INTRODUCTION 1

II\. BACKGROUND 2

III\. DISCUSSION 9

> A. Overall Benefits of Bundling CPE and Enhanced Services With
> Telecommunications Services 14

B.CPE Bundling

1\. CPE Bundling With Interstate, Domestic, Interexchange Service 19

a\. Competitiveness of the CPE Market 20

b\. Competitiveness of the Interstate, Domestic, Interexchange Market 22

c\. Likelihood of Anticompetitive Conduct 23

2\. CPE Bundling With Local Exchange Service 30

a\. Competitiveness of Local Exchange Market 31

b\. Likelihood of Anticompetitive Conduct

\(i\) Nondominant LECs 32

\(ii\) Incumbent LECs 33

C. Enhanced Services Bundling 39

1\. Existing Requirements for Nondominant Carriers 40

2\. Existing Requirements for Dominant Carriers 42

D. Universal Service Allocation 47

E. Impact of Bundling on Network Disclosure and Part 68 Requirements

1\. CPE Bundling 55

2\. Enhanced Services Bundling 58

IV\. Final Regulatory Flexibility analysis 59

V. ORDERING CLAUSES 65

APPENDIX A: List of Parties

APPENDIX B: Final Rules

# INTRODUCTION

1.  In this proceeding, we eliminate the bundling restriction, adopted
    in the Commission's *Computer II* proceeding,[^1] that limits the
    ability of common carriers to offer consumers bundled packages of
    telecommunications services and customer premises equipment (CPE) at
    a discounted price. We also clarify that under our rules, all
    facilities-based carriers may offer bundled packages of enhanced
    services and basic telecommunications at a single price, subject to
    existing safeguards. Our decision furthers the three goals that we
    identified in the Further Notice of Proposed Rulemaking in this
    docket:[^2] it will benefit consumers by enabling them to take
    advantage of innovative and attractive packages of services and
    equipment; foster increased competition in the markets for CPE,
    enhanced, and telecommunications services; and allow us to repeal
    regulatory requirements that no longer make sense in light of
    current technological, market, and legal conditions. Moreover, the
    actions we take in this order further Congress' directive in the
    Telecommunications Act of 1996 Act (1996 Act) that we repeal or
    modify any regulation we determine to be no longer in the public
    interest.[^3]

# bACKGROUND

2.  In 1980, the Commission released its *Computer II Order* in which it
    addressed regulatory issues associated with the convergence of
    telecommunications and "computer and data processing."[^4] The
    cornerstone of the decision is that it distinguished between the
    common carrier offering of basic transmission service, which
    provides a communications path for the movement of information, and
    the offering of enhanced services, which then consisted primarily of
    data processing services.[^5] Enhanced services are now referred to
    as "information services" in the 1996 Act and comprise services such
    as voice mail, e-mail and other Internet services, interactive voice
    response, audiotext information services, and protocol processing,
    among others.[^6]

3.  In the *Computer II Order*, the Commission determined that it would
    not serve the public interest to subject enhanced service providers
    to traditional common carriage regulation under Title II because,
    among other things, the enhanced services market was "truly
    competitive."[^7] The Commission was concerned, however, that
    carriers providing both basic telecommunications services and
    enhanced services could discriminate against competitive enhanced
    service providers that sought to purchase underlying transmission
    capacity from the carrier.[^8] It stated that enhanced services are
    dependent upon the common carrier offering of basic services and
    that a basic service is the "building block" upon which enhanced
    services are offered.[^9] The Commission said an essential thrust of
    *Computer II* was to provide a mechanism whereby non-discriminatory
    access can be had to basic transmission services by all enhanced
    service providers.[^10]

4.  The Commission implemented enhanced services unbundling requirements
    to ensure such nondiscriminatory access to basic services. For the
    Bell Operating Companies, which the Commission found to have
    sufficient market power on a national scale to engage in
    anticompetitive activity, it required that they establish a separate
    subsidiary to provide enhanced services. It also required the
    subsidiary to acquire its transmission capacity from the parent
    company pursuant to tariff.[^11] The Commission explained that this
    meant that the same transmission facilities or capacity provided the
    subsidiary by the parent must be made available to all enhanced
    service providers under the same terms and conditions.[^12] For
    other facilities-based carriers that lacked market power and
    therefore were not subject to the separate subsidiary requirement,
    the Commission required them to "acquire transmission capacity
    pursuant to the same prices, terms, and conditions reflected in
    their tariffs when their own facilities are utilized."[^13] The
    Commission has interpreted this requirement to mean that "carriers
    that own common carrier transmission facilities and provide enhanced
    services must unbundle basic from enhanced services and offer
    transmission capacity to other enhanced service providers under the
    same tariffed terms and conditions under which they provide such
    services to their own enhanced service operations."[^14] The
    Commission has not changed this requirement for these carriers. The
    Commission did replace the separate subsidiary requirements for the
    BOCs with nonstructural safeguards established in the *Computer III*
    proceeding because it found that they would perform as well as
    structural safeguards in combating discrimination by the BOCs and be
    less costly.[^15] In doing so, it affirmed and strengthened the
    requirement that the BOCs acquire transmission capacity for their
    own enhanced services operations under the same tariffed terms and
    conditions as competitive enhanced service providers.[^16]

5.  The Commission also deregulated CPE in the *Computer II Order*. It
    determined that the CPE market was becoming increasingly competitive
    and that in order to increase further the options that consumers had
    in obtaining equipment, it would require common carriers to separate
    the provision of CPE from the provision of telecommunications
    services. It found that the continued bundling of telecommunications
    services with CPE could force customers to purchase unwanted CPE in
    order to obtain necessary transmission services, thus restricting
    customer choice and retarding the development of a competitive CPE
    market.[^17] The Commission determined that by separating the
    provision of CPE from a carrier's provision of monopoly
    telecommunications services, consumers would benefit not only
    through competitive sources of supply for CPE, but also through the
    option of leasing or owning equipment, competitive pricing and
    payment options, and improved maintenance.[^18] It codified this "no
    bundling" requirement in rule section 64.702(e), which requires all
    common carriers to sell or lease CPE separate and apart from such
    carriers' regulated communications services, and to offer CPE solely
    on a deregulated nontariffed basis.[^19] As the Commission pointed
    out in the *Further Notice*, this rule does not prohibit carriers
    from offering "one-stop shopping for CPE and telecommunications
    services, but requires only that the goods or services be priced
    separately.[^20]

6.  Although it imposed bundling restrictions in *Computer II*, the
    Commission recognized that bundling can benefit consumers if the
    markets for the components of the bundle are "workably
    competitive."[^21] For example, bundling may reduce the "transaction
    costs" of assembling a desired package of goods and services. When
    the markets for both bundled and unbundled commodities are
    sufficiently competitive, consumers can decide whether the benefits
    of a package exceed the potential benefits of buying the components
    of the bundle individually.[^22] The Commission reaffirmed these
    benefits when it allowed cellular CPE and cellular service to be
    offered on a bundled basis. It found, in particular, that the price
    of cellular CPE represented the greatest barrier to inducing
    subscription to cellular service and that bundling could be used as
    an "efficient distribution mechanism" and an "efficient promotional
    device" that allows consumers to obtain service and equipment "more
    economically than if it were prohibited."[^23]

7.  In light of the increasing competitiveness of the CPE and enhanced
    services markets, the Commission, on several occasions, has sought
    to reexamine the need for the bundling restrictions. It first sought
    comment in 1996 in the *Interexchange Notice* on its tentative
    conclusion to revise the CPE restriction by allowing nondominant
    interexchange carriers to bundle CPE with interstate, domestic,
    interexchange telecommunications services.[^24] In response to the
    *Interexchange Notice*, AT&T suggested that the Commission also
    allow nondominant interexchange carriers to bundle enhanced services
    with interexchange services, while SBC asserted that the Commission
    should eliminate the CPE bundling restriction for all carriers,
    including incumbent local exchange carriers (LECs).[^25] The
    bundling restrictions were among many issues raised in the
    *Interexchange Notice*, and although AT&T, SBC and other commenters
    addressed bundling, most focused their comments on other issues. In
    the *Interexchange Second Report and Order*, the Commission
    therefore deferred action on its tentative decision to modify the
    CPE bundling restriction, stating that it would issue a *Further
    Notice* addressing the continued application of both the CPE and
    enhanced services bundling restrictions.[^26]

8.  On October 9, 1998, the Commission released a *Further Notice*
    seeking comment on the economic, competitive, and regulatory
    implications of eliminating our CPE and enhanced services bundling
    rules for nondominant interexchange carriers, and nondominant and
    incumbent local exchange carriers seeking to offer packages of
    transmission services, CPE, and enhanced services.[^27] The
    Commission also explained in the *Further Notice* that in accordance
    with the requirement in section 161 of the 1996 Act, it had begun a
    comprehensive biennial review of telecommunications and other
    regulations to promote "meaningful deregulation and streamlining
    where competition or other considerations warrant such action," and
    therefore sought comment on the extent to which the continued
    application of both the CPE and enhanced services bundling
    restrictions are "no longer necessary in the public interest"
    pursuant to section 161(a)(2).[^28]

# DISCUSSION

9.  In light of the record developed in response to the *Further
    Notice*, we now conclude that it is appropriate to eliminate the CPE
    bundling restriction in its entirety and clarify, but not eliminate,
    the enhanced services requirement so that all carriers may offer
    consumers packages of equipment, enhanced services, and
    telecommunications services at a single price. We find that
    consumers can benefit significantly by relying on the competitive
    markets that exist for the components contained in a bundle, and
    that as a result of this competition, and existing safeguards that
    are applicable in certain instances, we no longer need to rely on
    the CPE bundling regulation to ensure that carriers do not restrict
    consumers from taking advantage of competitive suppliers of CPE. We
    also clarify that under our existing rules, carriers may offer
    consumers bundles of enhanced and basic telecommunications services,
    subject to existing safeguards, thereby encouraging further options
    for consumers.

10. We discuss initially the public interest benefits of bundling, and
    find, in particular, that offering consumers the choice of
    purchasing packages of products and services at a single low-rate
    will encourage them to subscribe to new, advanced, or specialized
    services by reducing the costs that they have to pay up-front to
    purchase equipment, or by giving them a choice of relying on one
    provider instead of having to assemble the desired combinations on
    their own. Price bundling also eliminates the transaction costs that
    carriers have to absorb in order to comply with the bundling rules,
    thereby enabling them to offer better prices whenever possible.
    Indeed, facilitating consumer choice is what compels us to take
    action in this proceeding. The state of competition in the CPE and
    enhanced services markets and in the telecommunications markets is
    drastically different from the state of competition in these markets
    in 1980. Unlike in 1980, we now have no doubt that consumers who
    choose to purchase CPE or enhanced services on a stand-alone basis
    may do so from a myriad of suppliers. Coupled with this wide choice
    of CPE and enhanced services suppliers is now a wide choice of
    interexchange telecommunications carriers and a growing choice of
    local exchange carriers. Eliminating and clarifying our bundling
    restrictions will allow the suppliers of each of these components to
    compete more freely, making consumers the beneficiaries of
    deregulation, as we believe Congress intended when it passed the
    1996 Act.

11. It is also compelling to us that all carriers, both incumbent and
    nondominant carriers, in all markets, demonstrate a desire to
    compete for customers through bundled service offerings. We find
    that it is appropriate to grant bundling relief to all of them, and
    address the ability of these carriers to provide specific service
    combinations. We find first that nondominant carriers should be able
    to offer packages of service that include CPE, enhanced services,
    and interstate, domestic, interexchange services at one price.
    Because these markets are competitive, the risk of anticompetitive
    conduct that the Commission cited originally in enacting the
    bundling restrictions has been virtually eliminated. We also find
    that it is in the public interest to allow nondominant carriers to
    bundle CPE and enhanced services with local exchange service.
    Although the local exchange market is not substantially competitive,
    the 1996 Act eliminated barriers for carriers seeking to enter this
    market. Competitive carriers have made steady progress in doing so,
    increasing their market size by 53 percent during the first half
    of 2000. Because these carriers have no market power in the local
    exchange market, it is undisputed in the record that they cannot
    engage in anticompetitive conduct if we grant them the flexibility
    to respond to consumer demand for packages that contain local
    exchange service.

12. We further find that incumbent local exchange carriers should be
    able to offer packages of service that include CPE, enhanced
    services, and local exchange service at one price. We acknowledge
    that because the local exchange market is not substantially
    competitive and because incumbent LECs have market power, we must
    balance the risk that the incumbents can act anticompetitively with
    the public interest benefits associated with bundling. After
    undertaking this analysis, we conclude that the risk of
    anticompetitive behavior by the incumbent LECs is low, not only
    because of the economic difficulty that even dominant carriers face
    in attempting to link forcibly the purchase of one component to
    another, but also because of the safeguards that currently exist to
    protect against this behavior. In particular, incumbent LECs will,
    under state law, offer local exchange service separately on an
    unbundled tariffed basis if they bundle such service with CPE. We
    also require them to offer exchange access service and any other
    service for which the Commission considers them to be dominant
    separately on nondiscriminatory terms if they bundle such service
    with CPE. We go on to conclude that the risk is also outweighed by
    the consumer benefits of allowing bundling. In the case of enhanced
    services, we emphasize that we are not eliminating at this time the
    fundamental provisions contained in our *Computer II* and *Computer
    III* proceedings that facilities-based carriers continue to offer
    the underlying transmission service on nondiscriminatory terms, and
    that competitive enhanced services providers should therefore
    continue to have access to this critical input.

13. Finally, we address the impact of bundling on our universal service
    requirements, and we suggest methods that carriers may use to
    determine their universal service obligations. We also find that
    permitting carriers to bundle will not impact our Part 68
    requirements that attached CPE not cause harm to the public switched
    network, and that our network disclosure rules in Part 51 will
    ensure that competitive CPE suppliers continue to obtain access to
    network information they require from the incumbent carriers.

## Overall Benefits of Bundling CPE and Enhanced Services With Telecommunications Services

14. We conclude that allowing all carriers to bundle products and
    services is generally procompetitive and beneficial to consumers.
    Bundling encourages competition by giving carriers flexibility both
    to differentiate themselves from their competitors and to target
    segments of the consumer market with product offerings designed to
    meet the needs of individual customers.

15. We view bundling as the offering of two or more products or services
    at a single price, typically less than the sum of the separate
    prices.[^29] This is different from "one-stop" shopping arrangements
    in which consumers may purchase the components of a bundle, priced
    separately, from a single supplier.[^30] While "one-stop" shopping
    is convenient for consumers, we conclude that they can benefit even
    more from bundled packages offered at a price discount. We agree, in
    particular, with the commenters who point out that consumers benefit
    from bundling because it eliminates the need for carriers to
    separately provision, market, and bill services, and therefore
    reduces the transaction costs that carriers pass on to
    consumers.[^31] Indeed, we have recognized that bundling provides
    benefits that packages of separately priced services do not, finding
    in the case of two merged companies that by offering products "as a
    package at a price below that of the individual prices of the
    package's components when sold separately, the merged firm would
    both lower costs and pass at least some of those cost savings on to
    consumers."[^32] Bundling can further reduce costs for consumers by
    eliminating the time and effort needed to find products and services
    in the market, negotiate appropriate purchase terms, and assemble
    the desired combinations. This is particularly important for
    enhanced services and CPE, package components that many consumers
    may perceive to be complex.[^33]

16. We also agree with the commenters who assert that allowing carriers
    to bundle transmission services with CPE and enhanced services will
    enable them to offer innovative packages of goods and services that
    will provide customers with efficiencies and pricing that they
    demand,[^34] and find that the Commission's rules should not
    unnecessarily restrict consumer choice in this area. As far back as
    1980, the Commission recognized that "trends in technology enable
    CPE to function as an enhancement to basic common carrier services
    and many enhanced service applications involve interaction with
    sophisticated terminal equipment."[^35] Today, we believe that
    eliminating and clarifying our bundling restrictions will encourage
    the competitive deployment of telecommunications services, enhanced
    services, and CPE. The record shows that consumers want the option
    to purchase bundled packages of products and services, and that
    carriers facing competition in various service markets seek the
    ability to respond to this demand.[^36]

17. In particular, commenting carriers want the ability to bundle
    Digital Subscriber Line (DSL) service with CPE and enhanced Internet
    services for residential customers and provide other sophisticated
    service bundles to business customers that offer voice, frame relay
    services, enhanced Internet-protocol (IP) services, and other types
    of basic and enhanced services.[^37] MCI WorldCom explains that
    there is a growing number of customers that are seeking service
    packages at a single per minute rate in order to achieve the lowest
    per-unit cost of service available, as well as the ability to rely
    on a single provider to implement and maintain advanced
    telecommunications networks.[^38] Other commenters assert that they
    can reduce start-up costs for consumers by bundling specialized CPE
    and internet access with advanced services, thereby stimulating
    consumer demand for these services.[^39] As we found in the
    *Cellular Bundling Order*, the influx of new subscribers due to the
    bundling of advanced telecommunications services with enhanced
    services and CPE may cause the fixed costs of providing service to
    be spread over a larger population of users, achieving economies of
    scale and lowering the cost of providing service to each
    subscriber.[^40]

18. We emphasize that the benefits associated with allowing carriers to
    bundle products and services at one price do not exist where the
    provider maintains sufficient market power to require that a
    customer purchase multiple goods or services in order to obtain one
    of the components in the package.[^41] Antitrust laws particularly
    prohibit unlawful tying arrangements in which the seller has enough
    market power to force a customer to purchase a component of the
    package that he or she would not otherwise purchase in a competitive
    market.[^42] Indeed, one of the primary reasons the Commission
    adopted the *Computer II* CPE bundling restrictions was to prevent
    carriers from forcing consumers to buy unwanted carrier-supplied CPE
    in order to obtain transmission service.[^43] On the other hand,
    allowing carriers to market products and services together at a
    single price, but requiring them to offer the components of the
    bundle to consumers separately, ensures that carriers cannot
    restrain competition or impede consumer choice.[^44] As we explain
    below, the separate availability of the components of a package on
    nondiscriminatory terms, whether through the functioning of a
    competitive market for each component or through existing regulatory
    requirements, is essential to prevent the improper extension of
    market power.

## CPE Bundling

### CPE Bundling with Interstate, Domestic, Interexchange Service

19. We adopt our tentative conclusion to eliminate the bundling
    restriction codified in section 64.702(e) of our rules in order to
    allow nondominant interexchange carriers to bundle CPE with their
    interstate, domestic, interexchange services. We conclude that both
    the CPE market and the interstate, domestic, interexchange market
    are sufficiently competitive such that it is extremely unlikely that
    interexchange carriers could engage in anticompetitive behavior if
    we permit them to provide packages of services and CPE bundled at a
    single price. Competition has therefore supplanted the need for the
    bundling restriction, and we accordingly repeal it, as Congress
    intended.[^45] We find that doing so will promptly allow consumers
    to pick and choose among service and equipment providers that offer
    packages best suited to their needs.

#### Competitiveness of the CPE Market

20. The Commission explained in the *Further Notice* that the basis for
    its tentative conclusion in the *Interexchange Notice* to allow
    nondominant interexchange carriers to bundle CPE with interstate,
    domestic, interexchange services is that both the CPE and
    interstate, domestic, interexchange markets are substantially
    competitive and that nondominant interexchange carriers do not
    possess market power in the interstate, interexchange market. Thus,
    the Commission tentatively concluded in the *Interexchange Notice*
    that allowing such carriers to bundle CPE with interstate, domestic,
    interexchange services is unlikely to lead to the anticompetitive
    conduct that led the Commission to prohibit the bundling of CPE with
    telecommunications services. The Commission stated in the *Further
    Notice* that it would continue to apply this analysis when
    determining whether or not to eliminate the CPE bundling
    restriction.[^46]

21. It is undisputed in the record that the CPE market is highly
    competitive.[^47] The bundling restrictions were adopted, in part,
    in recognition that competition was only beginning to emerge in the
    CPE market. In the *Computer II Order*, the Commission found that
    the CPE market faced "an increasing amount of competition as new and
    innovative types of CPE are constantly introduced into the
    marketplace."[^48] The Commission observed subsequently in the
    *Interexchange Notice* that the CPE market is widely recognized to
    be competitive, [^49] and we agree with the commenters who point out
    that this competition has intensified.[^50] Indeed, the Commission's
    goal in *Computer II* to increase consumer choice for innovative CPE
    and open equipment markets to full and fair competition[^51] has
    been achieved. CPE is so widely available that it has been described
    as a "commodity industry" in that CPE is available from a diversity
    of vendors and prices have been declining steadily for many types of
    CPE.[^52] AOL asserts that there has been a proliferation of CPE
    available to residential and business consumers that offer them
    increased control and functionality, and that the broad availability
    of CPE has been an important factor in allowing information service
    providers (ISPs) to deliver increasingly sophisticated multimedia
    content to their customers.[^53] The CPE industry also reported that
    it expected record sales growth in 2000, especially in the area of
    computer modems used to access the Internet.[^54] Indeed, CEMA
    summarizes that the bundling restrictions have been highly
    successful in contributing to the development of a fully competitive
    CPE market.[^55]

#### Competitiveness of the Interstate, Domestic, Interexchange Market

22. It is also undisputed that the interstate, domestic, interexchange
    market is competitive. In 1995, the Commission reclassified AT&T as
    a nondominant interexchange carrier based on its finding that AT&T
    lacked unilateral market power in the long distance market, which it
    stated was subject to "substantial competition."[^56] It concluded
    that competitors in the long distance market had enough readily
    available excess capacity to constrain other competitors' pricing
    behavior, and that both residential and business customers were
    highly price sensitive and would switch among competitors to obtain
    price reductions and desired features.[^57] When the Commission
    approved the merger of MCI and WorldCom in 1998, it found that these
    competitive market trends continued, and that since AT&T had been
    reclassified as nondominant, AT&T's market share had continued to
    decline as the number of carriers offering long distance services
    had risen.[^58] These trends have continued and, indeed, accelerated
    since that time. The Commission has also authorized Bell Atlantic to
    provide in-region long distance service in New York and authorized
    SBC to provide the same service in Texas, Kansas, and Oklahoma.[^59]
    Finally, in light of the overall competitiveness of the market, the
    Commission has ordered the complete detariffing of interstate,
    domestic, interexchange service by nondominant carriers in order to
    avoid hindering them from responding competitively to the needs of
    customers.[^60] In sum, we have previously found the interstate,
    domestic, interexchange market to be highly competitive and continue
    to do so.

#### Likelihood of Anticompetitive Conduct

23. In light of our findings that both the CPE and interstate, domestic,
    interexchange markets are competitive, we conclude that section
    64.702(e) of our rules is no longer "necessary in the public
    interest" under section 11 of the Communications Act[^61] to the
    extent that it prohibits nondominant interexchange carriers from
    bundling CPE and interstate, domestic, interexchange service. The
    competition in both the CPE and interstate, interexchange service
    markets makes it extremely unlikely that nondominant interexchange
    carriers could restrict consumer choice for components of a bundle,
    as the Commission feared when it adopted the CPE restriction
    in 1980. To be sure, the Commission was concerned that a carrier
    could refuse to sell one product that a customer desired unless the
    customer also agreed to purchase a second product from the
    carrier.[^62] It is a well established economic principle, however,
    that in order for a buyer to be harmed by such an arrangement, the
    seller must have market power over the desired product such that the
    buyer has no choice but to purchase it from the seller.[^63]
    Nondominant interexchange carriers have no market power in either
    the CPE or interstate, domestic, interexchange markets, making it
    virtually impossible for them to require consumers to purchase one
    bundled product in order to obtain the other.[^64]

24. We disagree with the few commenters who argue that bundling would
    allow carriers to offer packages that combine telecommunications
    service with "free" CPE in a manner that would injure competition in
    the CPE market.[^65] Nondominant interexchange carriers are unable
    to harm competition by offering products below cost. For instance,
    if a carrier lacks market power, it cannot raise the rates of its
    transmission service in order to support below-cost pricing of
    CPE.[^66] We agree, in particular, with the commenters who argue
    that whatever pricing advantage an interexchange carrier could offer
    by selling service and CPE at a bundled discounted price would have
    to be cost-based or the carrier could not offer profitably such a
    bundled discount in the long run.[^67] This inability to engage in
    anticompetitive pricing is also inconsistent with the arguments of
    the few commenters that claim that a nondominant interexchange
    carrier would discriminate unreasonably against customers who agreed
    to use carrier-provided CPE by offering them transmission service at
    a lower price than that offered to non-CPE customers.[^68] To the
    contrary, eliminating the bundling restriction should allow these
    carriers to compete vigorously and fairly in the CPE and
    interexchange markets by offering bundles of service and equipment
    that meet demonstrated customer demand.

25. We do not agree with CEMA that eliminating the bundling restrictions
    for nondominant interexchange carriers is somehow inconsistent with
    the procompetitive intent of Congress, as demonstrated by section
    629 of the Communications Act, which relates to the creation of a
    competitive retail market for multichannel video programming
    distribution system "navigation devices."[^69] The purpose of
    section 629 is to expand opportunities for consumers to purchase
    programming equipment from sources other than the service
    provider.[^70] As the Commission stated when it promulgated the
    rules implementing section 629, competition in the market for
    navigation devices is "in the early stage of development and the
    enormous technological change resulting from the movement from
    analog to digital communications is underway."[^71] The Commission's
    rules were designed to facilitate the emergence of a competitive
    marketplace for navigation devices. The statute specifically
    provides, moreover, that regulations adopted under section 629 will
    cease to apply when, *inter alia*, the Commission determines that
    the market for multichannel video programming distributors and the
    market for navigation devices are fully competitive.[^72] We also
    note that a cable operator will not be subject to the related
    restrictions on cable equipment pricing contained in section 623 of
    the Act and section 76.923(b) of the Commission's rules, where the
    Commission finds that the cable operator is subject to effective
    competition.[^73] The CPE market is already fully competitive, in
    large part as a result of the Commission's bundling policies, and it
    is therefore unnecessary to retain the bundling restriction for
    nondominant interexchange carriers.[^74]

26. We decline to adopt an "unbundled option" requirement that
    interexchange carriers offer interstate, domestic, interexchange
    services separately on an unbundled basis if they offer packages of
    CPE and interexchange service.[^75] In a competitive market,
    carriers have an incentive to offer bundles or stand-alone offerings
    that a customer needs or the customer will switch to another
    carrier.[^76] The extensive choice of stand-alone CPE provided by
    competitive suppliers and the availability of interexchange service
    from many competitive carriers makes it highly unlikely that
    consumers would be forced to purchase high-cost interexchange
    service just because they declined to use carrier-supplied CPE.[^77]
    Requiring nondominant interexchange carriers to offer interstate,
    domestic, interexchange service on an unbundled basis is therefore
    unnecessary and would be contrary to the goal of section 11 of the
    Act to eliminate regulations that are no longer "necessary in the
    public interest" as a result of meaningful competition.[^78] It
    would also be inconsistent with the Commission's *Detariffing Order*
    in which it found that market forces, as opposed to a tariffing
    regime, will ensure that carriers offer services at the prices and
    on the terms and conditions that consumers demand.[^79]

27. Contrary to IDCMA's concern,[^80] allowing nondominant interexchange
    carriers to bundle CPE with interstate, domestic, interexchange
    services will not require the Commission to "re-regulate" CPE by
    ensuring that bundles of CPE and transmission service comply with
    the tariff and pricing requirements under Title II of the Act. In
    the *Computer II Order*, the Commission found that CPE was not a
    common carrier activity and that charges for CPE provided by
    carriers no longer needed to be regulated because of competition in
    the CPE market.[^81] Nothing in this Order changes the non common
    carrier nature of CPE. Rather, as argued by U S West, the Commission
    is not extending the reach of its common carrier regulation to CPE
    by allowing bundling because, in effect, the CPE that a carrier
    offers would continue to be priced separately from the basic
    transmission service, but a package discount is applied when
    customers purchase both products.[^82] More significantly, the
    Commission has found that it should forbear from the requirement
    that nondominant interexchange carriers file tariffs pursuant to
    section 203 of the Act for interstate, domestic, interexchange
    service, and in fact will not permit nondominant interexchange
    carriers to file interstate tariffs for this service.[^83]
    Accordingly, interexchange carriers will be unable to tariff such
    services whether or not it is bundled with CPE.

28. We adopt our tentative conclusion that to the extent the BOCs'
    section 272 affiliates, as well as independent incumbent LECs'
    affiliates, are classified as nondominant in the provision of
    interstate, domestic, interexchange services, these carriers may
    bundle CPE with such services to the same extent as other
    nondominant carriers.[^84] As we explained in the *Further Notice*,
    the Commission has concluded that the requirements established by,
    and the rules implemented pursuant to, sections 271 and 272 of the
    Act, together with other Commission rules, limit sufficiently the
    ability of a BOC's section 272 affiliate to use the BOC's market
    power in the local exchange or exchange access market to raise and
    sustain prices of interstate, interLATA services above competitive
    levels.[^85] It has therefore determined that a BOC entering the
    in-region interLATA market through a section 272 affiliate will be
    regulated as a nondominant interexchange carrier. BOCs providing
    out-of-region interstate, domestic, interexchange service are also
    nondominant. We agree with BellSouth that these findings demonstrate
    that, once a BOC that has satisfied the requirements of sections 271
    and 272 of the Act, its long distance affiliate has the same market
    characteristics as any other nondominant interexchange carrier and
    that there is no basis for denying them the same bundling relief
    that we grant to those other carriers.[^86] AT&T is the only
    commenter that argued that we should exclude BOC section 272
    affiliates from bundling relief, stating that we need not decide
    this issue until BOCs obtain approval to provide in-region interLATA
    service pursuant to section 271 of the Act.[^87] We have now, of
    course, approved section 271 applications for several states,[^88]
    making AT&T's argument moot.

29. Similarly, the Commission has also classified independent incumbent
    LECs' affiliates as nondominant in the provision of in-region,
    interstate, interexchange services, and has required independent
    incumbent LECs that provide this service solely on a resale basis to
    do so through a separate corporate division as opposed to a separate
    legal entity.[^89] The Commission found that independent LECs that
    provide in-region long distance services solely on a resale basis
    are less likely to engage in anticompetitive activity than
    facilities-based independent providers, thus eliminating the need
    for a separate affiliate that is a separate legal entity.[^90]
    Facilities-based independent LECs that provide in-region long
    distance services must do so through separate affiliates that
    satisfy the requirements established in the *Competitive Carrier
    Fifth Report and Order*.[^91] We conclude that our nondominant
    classification of independent LECs that provide in-region,
    interstate, interexchange service and the separate entity and
    affiliate requirements ensure that these incumbent LECs have the
    same market characteristics as other nondominant interexchange
    carriers, and that allowing them to bundle interstate, domestic,
    interexchange service with CPE is in the public interest.[^92]

### CPE Bundling with Local Exchange Service

30. We further conclude that it is in the public interest to remove the
    bundling restriction to allow all nondominant LECs, or competitive
    LECs, and incumbent LECs to bundle CPE and local exchange
    service.[^93] We recognize that the competitiveness of the local
    market has increased only a limited amount during the time since the
    Commission imposed the CPE bundling restriction in the *Computer II
    Order* and that incumbent LECs have market power in the provision of
    local exchange services. We find, however, that the consumer
    benefits of bundling outweigh the risk that incumbent LECs can use
    this power to harm competition. Our risk-benefit analysis is
    informed by other factors, such as the removal of barriers to entry
    in the local market contained in the 1996 Act and the subsequent
    increase in local competition, as well as the Commission's decision
    to lift similar bundling restrictions in the cellular markets, that
    tip the balance in favor of lifting the bundling restriction on the
    incumbent LECs' provision of local exchange service and CPE.

#### Competitiveness of Local Exchange Market

31. We recognize that the local exchange market is not substantially
    competitive and that incumbent LECs remain the dominant providers in
    this market. Yet, competitive carriers have made steady progress in
    entering the local exchange market since we issued the *Further
    Notice* in 1998. The Commission's December 2000 report on local
    competition shows that competitive LECs provided 6.7 percent of the
    total nationwide end user telephone lines as of June 30, 2000. This
    represents a 53 percent growth in market size during the first six
    months of this year.[^94] The Commission's data also indicate that
    the rate at which competitive LECs are providing service using
    unbundled network elements from the incumbent LECs is increasing.
    The number of lines that incumbent LECs provided as unbundled
    network elements doubled in the first half of 2000 from about 1.5
    million to 3 million lines.[^95] The Commission has also approved
    the entry of Bell Atlantic and SBC into the in-region long distance
    markets in New York, Texas, Kansas, and Oklahoma, marking the first
    time that the Commission has found that the local markets in those
    states are open to competition as required by section 271 of the
    1996 Act.[^96] Overall, the local exchange market is clearly more
    competitive than the cellular market was at the time that the
    Commission allowed carriers to bundle CPE with cellular service. At
    that time, the Commission's rules allowed no more than two
    facilities-based cellular carriers in each market, and the
    Commission had determined that resellers did not compete effectively
    with these carriers.[^97]

#### Likelihood of Anticompetitive Conduct

##### Nondominant LECs

32. For most of the same reasons discussed in connection with
    nondominant interexchange carriers, we conclude that it is extremely
    unlikely that any nondominant LEC would be able to restrict
    competition if it were permitted to bundle CPE with local exchange
    service.[^98] By definition, nondominant carriers do not have market
    power. Customers will switch carriers if nondominant LECs attempt to
    make them purchase bundles that contain undesirable CPE product
    offerings.[^99] At the same time, bundling offers consumers the
    benefits that we have identified, and may encourage them to seek
    competitive alternatives for local exchange service if competitors
    can offer this service as part of a package. No commenter seriously
    challenges this conclusion. Accordingly, we find it in the public
    interest and consistent with the purposes of section 11 of the Act
    to eliminate our restriction on the bundling of CPE with local
    exchange service by nondominant LECs.

##### Incumbent LECs

33. We also conclude that incumbent LECs may bundle CPE with local
    exchange service. Compared to our prior determinations, an
    evaluation of whether to eliminate the restriction on bundling CPE
    with local exchange service by incumbent LECs requires a more
    difficult analysis, and ultimately, a balancing of interests.
    Despite the inroads made by competitors into the local exchange
    market that we described above, incumbent LECs retain market power
    in the provision of local service within their respective
    territories. Thus, unlike our previous analysis of the interexchange
    market or nondominant LECs, incumbent LECs possess one of the
    essential characteristics for engaging in anticompetitive behavior
    -- market power with respect to one of the components in the bundle.
    Nonetheless, we conclude, in light of the existing circumstances in
    these markets, that the risk of anticompetitive behavior by the
    incumbent LECs in bundling CPE and local exchange service is low and
    is outweighed by the consumer benefits of allowing such
    bundling.[^100] We view the risk as low not only because of the
    economic difficulty that even dominant carriers face in attempting
    to link forcibly the purchase of one component to another, but also
    because of the safeguards that currently exist to protect against
    this behavior.

34. We look first at the particular benefits associated with allowing
    carriers to bundle CPE with local exchange service. Although we
    believe that these benefits accrue equally to consumers regardless
    of whether a nondominant LEC or incumbent LEC provides service, we
    highlight them here as part of our incumbent LEC analysis. In
    particular, incumbent LECs have asserted that the high price of CPE
    is one of the greatest barriers to inducing customers to subscribe
    to a new service.[^101] Bundling can reduce this barrier by allowing
    carriers to offer new customers CPE and local exchange service more
    economically than if it were prohibited. We are particularly
    persuaded that bundling can promote the deployment of advanced
    telecommunications services. For example, as several commenters
    explain, many advanced telecommunications services require
    specialized CPE that customers would otherwise need to buy
    separately because they represent new technologies that traditional
    CPE does not support.[^102] By providing the necessary equipment as
    part of a discounted package, possibly including leasing or
    amortizing the purchase of the equipment, a carrier can eliminate
    some of the up-front investment cost that inhibits customers from
    subscribing to the service.[^103]

35. Indeed, the Commission has recognized that giving consumers the
    option of avoiding high up-front expenditures by bundling service
    and equipment was one of the factors that contributed to the
    significant growth in the cellular market.[^104] Deregulation in the
    wireline CPE market can offer the same potential to encourage
    customers to purchase new services. An increase in demand for
    transmission service has the secondary benefit of expanding the
    market for related CPE. For example, the Commission concluded in the
    *Cellular Bundling Order* that bundling would assist the conversion
    from analog to digital cellular service. It stated that because
    digital handsets, at the time, would be larger, heavier, and more
    expensive than analog models, allowing carriers to market
    attractively priced packages of new service and equipment would
    speed the deployment of digital cellular service and
    equipment.[^105] Similarly, equipment that customers need to
    purchase today to access certain advanced services may be costly,
    appear technically complicated, and be subject to frequent design
    changes or upgrades. We believe that bundling can encourage demand
    for these CPE products and the services they support. In particular,
    bundling can reduce the initial costs of new technology until
    sufficient demand for it develops, thereby driving down prices for
    equipment and services to competitive levels.

36. In conjunction with these benefits, we recognize risks associated
    with incumbent LEC bundling of CPE with local exchange service. As
    we stated in the *Computer II Order*, there is the risk that an
    incumbent LEC with market power in the local exchange market could
    force a customer to purchase CPE in order to obtain local exchange
    service.[^106] We must now take into account, however, that the 1996
    Act changed dramatically the telecommunications landscape by, among
    other things, removing entry barriers in the local market. For
    instance, section 251 imposes a duty on LECs possessing market power
    in the local exchange market to negotiate in good faith and provide
    interconnection to competitive carriers, and provides a list of
    minimum standards that the incumbent LEC must offer, including
    unbundled access to its network and interconnection that is at least
    equal in type, quality, and price that the incumbent LEC provides to
    itself or any other party.[^107] Incumbent LECs must also offer for
    resale at wholesale rates any retail telecommunications
    service.[^108] Section 253 of the Act also mandates that states may
    not enact any requirement that prohibits or has the effect of
    prohibiting any entity from providing interstate or intrastate
    telecommunications service, and requires states and localities to
    manage rights-of-way to which competitors need access in a
    competitively-neutral and non-discriminatory manner.[^109] As a
    result, local competition has begun to grow as we indicated above.
    As this competition increases, we believe that incumbent LECs will
    either offer bundled or unbundled packages as consumers demand or
    risk losing ground to more responsive competitors. In addition, we
    note that since the Commission lifted restrictions on bundling
    cellular service and cellular equipment, sales of cellular
    telephones and overall subscribership to cellular service have
    increased dramatically.[^110] While we recognize that this growth is
    due to many factors, we view bundling, as we stated above, as one of
    the positive factors that encouraged it. We find all of these
    changed circumstances to be persuasive in our decision to allow
    incumbent LECs to bundle CPE with local exchange service.

37. There are also other factors that we take into account in evaluating
    the ability of incumbent LECs to act anticompetitively. In order to
    harm the vitality of competition in the CPE market by forcing
    consumers to purchase a package of CPE and local exchange service,
    the incumbent LEC must preempt so many consumers from purchasing
    competitively-supplied CPE that not enough remain to support a
    competitive number of CPE suppliers.[^111] For example, there is a
    risk that incumbent LECs could harm CPE competition by requiring
    customers that purchase local exchange service from them to also
    purchase CPE. Yet, as Professor Areeda explains, a seller only has
    an incentive to act in such an anticompetitive manner if by bundling
    the product (in this case, CPE) it can reduce costs or otherwise
    gain by pricing the product above competitive levels. If a seller
    can not do either because the product is subject to highly
    competitive prices, then there is little reason to worry about
    impairing competition for that product.[^112] Overall, we believe
    that incumbent LECs do not have the ability to engage in sustained
    anticompetitive practices with regard to CPE because even if an
    incumbent were to attempt to corner the local retail CPE market and
    began charging high CPE prices, other CPE providers could supply
    retailers with affordable CPE. Customers would then be able to
    purchase the lower-priced CPE and obtain local exchange service at
    the same rates as if the customer had bought the CPE from the
    carrier because local exchange service will remain available on an
    unbundled, non-discriminatory basis.[^113] To ensure such
    availability, incumbent LECs assert that they are required by state
    law to offer local exchange service separately on an unbundled
    tariffed basis if they bundle such service with CPE.[^114] We also
    require incumbent LECs to offer exchange access service and any
    other service for which the Commission considers them to be dominant
    separately on nondiscriminatory terms if they bundle such service
    with CPE. As competition increases, customers will also have the
    ability to switch local providers if the incumbent LEC offers
    unattractive bundled offerings.

38. An incumbent LEC that seeks to bundle CPE with any regulated
    transmission service could potentially offer low-priced CPE by
    recovering the cost of the CPE through its regulated rates. Again,
    several factors help balance this risk. Importantly, as we stated
    above, where local competition exists, incumbent LECs have a strong
    incentive to keep local rates low, not to increase them to support
    sales of other products or services.[^115] There are also several
    existing regulatory safeguards that are in place to address this
    concern. The Commission's Part 64 cost allocation rules require
    large incumbent LECs to separate their regulated costs from
    nonregulated costs and contain multiple provisions, including
    mandatory audits, that require them to demonstrate how they are
    allocating costs between regulated and unregulated activities.[^116]
    Consistent with our findings in the *Cellular Bundling Order*,
    incumbent LECs that are subject to price cap regulation in both the
    state and federal jurisdictions do not have an incentive to shift
    unregulated CPE costs because absent a guaranteed rate-of-return on
    their local exchange investment, these carriers cannot expect to
    recover CPE discounts by including them in their regulated rate
    base.[^117] There is an increased risk of cross-subsidization by
    incumbent LECs still subject to rate-of-return regulation, but the
    requirement that incumbent LECs file tariffs and cost support at the
    state level restricts their ability to lower prices
    uneconomically.[^118] As local exchange service becomes more
    competitive, we also expect the risk associated with
    cross-subsidization to decrease. Overall, we find that the potential
    anticompetitive impact of allowing incumbent LECs to bundle local
    exchange service with CPE is outweighed by the public interest
    benefits associated with bundling.

## Enhanced Services Bundling

39. In this section, we clarify that there is currently no prohibition
    on the bundling of basic telecommunications service and enhanced
    service at a single, discounted price for any carrier. This
    clarification will allow carriers to offer innovative packages of
    enhanced services bundled with basic telecommunications service and
    CPE. In order to ensure that competitive enhanced service providers
    continue to have non-discriminatory access to the underlying
    transmission capacity, we do not eliminate the existing requirement
    that facilities-based carriers offer such capacity to these
    providers on the same terms and conditions under which they provide
    such service to their own enhanced service operations.

### Existing Requirements for Nondominant Carriers

40. We clarify that the requirement in *Computer II*, that carriers not
    subject to the separate subsidiary requirement acquire transmission
    capacity pursuant to the same prices, terms, and conditions
    reflected in their tariffs when their own facilities are used, does
    not prohibit them from offering packages of telecommunications
    service, including interstate, domestic, interexchange service or
    local exchange service, and enhanced services at a single
    price.[^119] As long as they comply with the requirement to make
    their underlying transmission capacity for the enhanced service
    available on nondiscriminatory terms, it is consistent with the
    Commission's reasoning in *Computer II* to clarify that these
    carriers may offer bundled packages. In particular, the Commission
    found in *Computer II* that carriers that had no control over local
    bottleneck facilities, and therefore no market power, would not be
    in a position to act anticompetitively if they had integrated basic
    and enhanced services operations.[^120] It pointed out specifically
    that any advantages from anticompetitive conduct "would be
    short-lived, as customers could readily avail themselves of
    alternative suppliers."[^121] The Commission also found that the
    potential for these carriers to offer innovative services to a
    broader range of customers would increase if they were not subject
    to the structural separation requirements.[^122] We conclude that a
    natural outcome of allowing these carriers to operate on an
    integrated basis is that they would be able to offer packages of
    telecommunications and enhanced services at a single price, and
    indeed, there is no restriction against such packaging for these
    carriers in *Computer II*, provided that they comply with the
    safeguard to make available the underlying transmission capacity for
    the enhanced service.[^123]

41. We also clarify the scope of the bundling that carriers may
    undertake. While nearly all commenters agree that nondominant
    carriers should be permitted to bundle enhanced services with
    telecommunications services,[^124] there is some confusion in the
    record regarding the extent to which carriers already bundle these
    services. In particular, MCI WorldCom states that in the
    *Non-Accounting Safeguards Order*, the Commission explained that
    interLATA information service already includes a bundled interLATA
    telecommunications element because information service, itself, is a
    bundling of telecommunications service and the computer processing
    that is necessary to offer the information-based portion of the
    service. In that sense, it points out, all enhanced services are
    "bundled" services.[^125] It suggests that carriers should be
    permitted a greater degree of enhanced service bundling than simply
    the bundling that is inherent in the provision of any interLATA
    enhanced service.[^126] For example, it states that nondominant
    interexchange carriers should be able to bundle enhanced services,
    such as voice mail, with other separate interexchange
    services.[^127] We agree. The benefits of bundling come from
    allowing consumers to purchase an all-inclusive bundle at a single
    price that consists of interstate, domestic, interexchange
    transmission services combined with their choice of enhanced service
    and CPE.

### Existing Requirements for Dominant Carriers

42. Unlike nondominant carriers, dominant carriers are restricted under
    *Computer II* from offering enhanced services and basic
    telecommunications services at a single price. This is because
    dominant carriers that choose to operate pursuant to *Computer II*,
    as opposed to *Computer III*, are required to maintain a fully
    separate subsidiary for the provision of enhanced services with the
    separate subsidiary having its own operating, marketing,
    installation, and maintenance personnel for the services it
    offers.[^128] The Commission stated that because of the difficulties
    that it believed existed in allocating joint and common costs
    between such regulated an unregulated entities, it eliminated the
    allocations by prohibiting any joint activities in the areas of
    provisioning or marketing.[^129] The carrier is then also required
    to offer its underlying transmission facilities to all competitive
    enhanced service providers, including its own subsidiary, on an
    equal basis.[^130] Under such a regime, the dominant carrier could
    not bundle an enhanced service and a basic telecommunications
    service at a single price.

43. In *Computer III*, the Commission replaced the structural safeguards
    established in *Computer II* with nonstructural safeguards, which it
    found would perform as well in combating discrimination by the BOCs
    and be less costly. In doing so, it allowed BOCs to integrate their
    enhanced and basic service operations, but affirmed the requirement
    that they acquire transmission capacity under the same tariffed
    terms and conditions as competitive enhanced service
    providers.[^131] This unbundling is accomplished primarily through
    CEI and ONA requirements. The Commission recognized specifically
    that this integration would permit the BOCs to "engage in joint
    marketing of enhanced and basic services."[^132] It is clear,
    however, that although BOCs are permitted to market
    telecommunications services jointly with enhanced services, they
    remain obligated to offer the telecommunications service component
    separately. We therefore agree with U S West that BOCs can already
    jointly market basic and enhanced services under our existing
    requirements, but must continue to offer the basic service
    separately pursuant to tariff.[^133] Indeed, the BOCs do not
    advocate that the Commission eliminate this requirement, but argue
    instead that we make it clear that they already may bundle enhanced
    services with local exchange service at one price in the same manner
    that CPE can be bundled. As we stated above, we agree with this
    interpretation of *Computer III*.[^134]

44. There are other existing safeguards that are applicable to incumbent
    LECs that seek to bundle. There is no dispute in the record that the
    BOCs and all incumbent LECs are required to offer basic local
    exchange service on an unbundled, tariffed, nondiscriminatory basis.
    Indeed, there is no evidence in the record that these carriers are
    relieved of this obligation in any state in which they provide local
    exchange service. Customers would therefore be able to purchase
    enhanced services from competitive providers and still obtain local
    service from the incumbent pursuant to the tariff. This prevents the
    incumbent carriers from discriminating against customers who
    purchase enhanced service from competitive suppliers. As the
    Commission found in the *Cellular Bundling Order*, the separate
    availability of the transmission service is fundamental to ensuring
    that dominant carriers cannot discriminate against customers who do
    not purchase all the components of a bundle from the carriers,
    themselves.[^135] Incumbent LECs are also subject to specific
    safeguards in sections 260, 274 and 275 of the Act for the provision
    of telemessaging, electronic publishing and alarm monitoring
    services.[^136]

45. In addition, our cost-accounting rules reduce significantly the
    BOCs' incentive and ability to misallocate costs between their
    regulated and unregulated service operations. We reject the
    unsubstantiated arguments of the commenters who contend that our
    cost allocation rules will not prevent cross-subsidization.[^137]
    These rules consist of detailed cost allocation requirements and
    related cost accounting safeguards that separate nonregulated
    enhanced service costs from regulated service costs, cost accounting
    mechanisms to enforce the joint cost rules (including the filing and
    approval of cost allocation manuals), and the requirement that
    carriers submit to independent audits.[^138] The Commission has also
    found that these cost allocation safeguards provide sufficient
    information for the states to protect against cross-subsidies at the
    intrastate level.[^139] It explained that the operation of the joint
    cost and jurisdictional separations rules result in a BOC intrastate
    assignment of basic service costs. To protect against cross-subsidy
    of enhanced services by intrastate ratepayers, which is an important
    issue if BOCs can bundle interstate enhanced services with local
    exchange service, a state need only use its normal regulatory
    mechanisms to ensure that intrastate rates are not too high in light
    of that assignment.[^140]

46. We also emphasize that section 202 applies equally to all carriers,
    both dominant and nondominant, that provide transmission service to
    competitive enhanced service providers. In particular, Internet
    Service Providers have raised issues regarding their ability to
    obtain DSL service on nondiscriminatory terms.[^141] The internet
    service providers require DSL service to offer competitive internet
    access service. We take this issue seriously, and note that all
    carriers have a firm obligation under section 202 of the Act to not
    discriminate in their provision of transmission service to
    competitive internet or other enhanced service providers. Indeed,
    the Commission has already found that where there is an incentive
    for a carrier to discriminate unreasonably in its provision of basic
    transmission services used by competitors to provide enhanced
    services, section 202 acts as a bar to such discrimination.[^142] In
    addition, we would view any such discrimination in pricing, terms,
    or conditions that favor one competitive enhanced service provider
    over another or the carrier, itself, to be an unreasonable practice
    under section 201(b) of the Act. We also note that the Commission's
    Title II resale requirements mandate that wireline common carriers
    provide telecommunication services to competitors.[^143]

## Universal Service Allocation

47. Section 254 of the Act requires every telecommunications carrier
    that provides interstate telecommunications service to "contribute,
    on an equitable and non-discriminatory basis, to the specific,
    predictable, and sufficient mechanisms established by the Commission
    to preserve and advance universal service."[^144] The Commission's
    rules require entities with interstate end-user revenues to
    contribute to the universal service fund.[^145] Further,
    contributions are based solely on end-user telecommunications
    revenue, and thus exclude enhanced services and CPE.[^146]

48. When carriers generate revenues from stand-alone service or product
    offerings, the calculation of their universal service contributions
    is relatively straightforward. Carriers report revenues from
    telecommunications services and revenues from non-telecommunications
    offerings (including CPE and enhanced services revenues) in separate
    sections of the Commission's revenue worksheet, which is submitted
    semi-annually.[^147] Carriers are assessed universal service
    contributions only on their revenues from telecommunications
    services. If carriers generate revenues from bundled packages of
    telecommunications services and CPE/enhanced services, however, the
    calculation of their universal service contributions becomes more
    complicated. Thus, we sought comment in the *Further Notice* on how
    to allocate revenue when telecommunication services and CPE/enhanced
    services are offered as a bundled package, for purposes of
    calculating a carrier's universal service contribution.[^148] Only
    two carriers commented on this issue. MCI Worldcom asked the
    Commission to defer a decision on this matter to another
    proceeding,[^149] while GTE did not address the funding issues
    raised by bundling.[^150]

49. In this Order, we suggest two methods that contributors may use to
    allocate revenue when telecommunication services and CPE/enhanced
    services are offered as a bundled package. Our primary goal is to
    have a framework that deters carrier gaming while being
    competitively neutral, easy to administer, and simple to understand.
    Our existing rule requires carriers to contribute to the universal
    service support mechanism based on interstate end-user
    telecommunications revenue.[^151] We recognize that carriers may
    bundle goods and services in a multitude of ways that cannot be
    anticipated, and thus we afford carriers the needed flexibility to
    determine the appropriate allocation of revenues for universal
    service support purposes. In reporting revenues, carriers should
    remain mindful of their contribution obligation under our current
    rule and are expected to exercise good faith in reporting revenues.
    Detailed below are two ways carriers could report revenues that
    would afford them "safe harbor" protection under the rule. The
    overriding intent is to maintain stability and predictability in
    funding the universal service support mechanisms.

50. First, contributors may elect to report revenues from bundled
    telecommunications and CPE/enhanced service offerings based on the
    unbundled service offering prices,[^152] with no discount from the
    bundled offering being allocated to telecommunications services. For
    example, assume that a carrier offers voice-mail service, an
    enhanced service, as a stand-alone offering for \$6.00, and also
    offers basic phone service, a telecommunications service, for
    \$20.00. The carrier offers the two services for the bundled price
    of \$22.00, resulting in a discount of \$4.00. Under this approach,
    the carrier would report telecommunications service revenue of
    \$20.00 per month (the stand-alone price for the phone service) and
    non-telecommunications revenue of \$2.00 per month (the stand-alone
    price for voice-mail minus the discount from the bundled offering).
    As we note in this Order, carriers will likely continue to offer
    both bundled and unbundled telecommunications service
    offerings.[^153] Because incumbent local exchange carriers will
    continue to tariff services separately and nondominant carriers will
    likely continue to offer unbundled pricing to meet the needs of
    consumers, this method provides carriers with an easily
    ascertainable method of allocating revenues for purposes of
    calculating universal service contributions.

51. Alternatively, contributors may elect to treat all bundled revenues
    as telecommunications service revenue for purposes of determining
    their universal service obligations. For example, assume that a
    carrier offers a bundled package of voice-mail and basic phone
    service to end-users at \$25.00 per month. The carrier decides that
    it cannot distinguish revenue for the basic service (the
    telecommunications service) from voice-mail (the
    non-telecommunications service). This carrier would report
    telecommunications revenue of \$25.00 per month. This option would
    permit those contributors that are unable or unwilling to separate
    end-user telecommunications revenues from non-telecommunications
    revenue to comply with their universal service obligations when they
    generate revenues from bundled telecommunications services and
    CPE/enhanced service offerings.

52. These allocation methods are "safe harbors" and will be afforded a
    presumption of reasonableness in an audit or enforcement
    context.[^154] Both of the above-described methods enable carriers
    to allocate revenues for purposes of universal service contributions
    in an easily ascertainable and reasonable manner. These methods also
    decrease the investigative burden in an audit or other enforcement
    proceeding because the necessary information is easily obtained and
    verified. Thus, these allocation methods provide certainty to both
    carriers and the Commission, and we encourage their use.

53. Carriers may choose to use allocation methods other than the two
    described above. Carriers should realize, however, that any other
    allocation methods may not be considered reasonable, and will be
    evaluated on a case-by-case basis in an audit or enforcement
    context. In evaluating the reasonableness of any alternative
    methods, we will apply the standards underlying the safe harbors
    described above. For example, carriers should not apply discounts to
    telecommunications services in a manner that attempts to circumvent
    a carrier's obligation to contribute to the universal service
    support mechanisms. Should an audit or enforcement proceeding be
    initiated, carriers will need to provide evidence that the amount of
    reported telecommunication revenues that they report reflects
    compliance with the carrier's obligation to contribute to the
    universal service support mechanism based on interstate end-user
    telecommunications revenue. [^155]

54. As explained above, the methods outlined in this Order are examples
    of how carriers may report revenues for universal service purposes,
    and carriers may choose to use a different method altogether. We
    adopt this approach in recognition of the fact that, at this time,
    we cannot anticipate the various ways in which carriers may choose
    to bundle their goods and services. We conclude that this flexible,
    simple, and easily administered approach will continue to maintain
    stability and predictability in the universal service fund, while
    granting carriers considerable freedom in deciding how to bundle
    their offerings. Finally, we note that as we gain experience with
    carrier practices,[^156] we may in the future seek comment on
    whether we need to adopt additional rules.

## Impact of Bundling on Network Disclosure and Part 68 Requirements

### CPE Bundling

55. We conclude that our existing network disclosure policy and rules
    ensure that carriers that bundle CPE and transmission services will
    continue to provide CPE suppliers with access to information about
    the carriers' networks that the suppliers require to offer
    competitive products. The Commission sought comment in the *Further
    Notice* on whether the network disclosure requirement promulgated in
    *Computer II* that was referred to as the "all-carrier" rule would
    provide competitive CPE suppliers with adequate disclosure of a
    carrier's network interfaces.[^157] In 1999, the Commission
    eliminated the "all carrier" rule in a separate proceeding.[^158] It
    found that interexchange carriers are not likely to gain the
    individual market power that would allow them profitably to withhold
    information about their network interfaces that competitive CPE
    suppliers require, and that the rule, as it applied to interexchange
    carriers, was therefore no longer necessary.[^159] We also
    emphasized that sections 201 and 202 of the Communications Act
    impose nondiscrimination requirements that prohibit carriers that
    manufacture CPE from favoring their own CPE over that of competitive
    suppliers.[^160] We continue to believe that normal market forces
    pressure interexchange carriers to provide CPE suppliers with
    necessary network information, and that sections 201 and 202 of the
    Act safeguard against anticompetitive conduct in this area. We
    therefore do not find that any additional public disclosure
    requirements are necessary for interexchange carriers that bundle
    CPE with interstate, domestic, interexchange services.

56. Our rules require incumbent LECs to disclose network changes that
    could affect the manner in which CPE is attached to their
    networks.[^161] When the Commission eliminated the *Computer II*
    "all-carrier" rule, it extended the disclosure requirements in
    section 51.325(a) of our rules to require incumbent LECs to provide
    public notice of any network changes that will affect CPE
    manufacturers.[^162] This rule applies to all interconnected CPE
    whether or not the incumbent LEC provides the CPE as part of a
    bundled offering. It is necessary because failure to disclose
    network changes that affect CPE could give incumbent LECs a
    significant head start in providing fully compatible equipment and
    could thereby adversely affect competition in the CPE market.[^163]
    While we believe that incumbent LECs, like other carriers, should
    have a business incentive to make interconnection to their networks
    available to all customers regardless of the type of CPE they use,
    this rule requires incumbent LECs to provide the specifications that
    competitive CPE suppliers need to provide compatible equipment.

57. We also conclude that allowing carriers to bundle CPE with
    transmission services will not affect the Commission's requirement
    that CPE not cause harm to the network. We sought comment in the
    *Further Notice* on whether the "demarcation point" between
    telephone company communications facilities and terminal equipment,
    as defined in section 68.3 of the Commission's rules,[^164] would
    change if CPE and interexchange carriers' network offerings were
    bundled and what effect, if any, this would have on the Commission's
    Part 68 program.[^165] In November 2000, the Commission adopted an
    Order eliminating certain portions of the Part 68 regulations
    governing the development of technical criteria and registration
    procedures for CPE.[^166] It found that the highly competitive
    nature of the CPE market makes it no longer necessary for the
    Commission to establish technical criteria for CPE or approve the
    use of new CPE.[^167] The Commission stated that eliminating these
    regulations should bring innovative equipment to the marketplace
    faster, thereby increasing choices available to consumers.[^168]
    Accordingly, our action with regard to Part 68 should enhance
    further the ability of consumers to secure new and innovative CPE
    separately or as part of a bundled offering. Allowing carriers to
    bundle CPE with transmission service does not affect the technical
    criteria that the telecommunications industry will now establish on
    its own to ensure that CPE does not cause harm to the network, and
    we agree, in particular, with KMC that the *Further Notice* did not
    contemplate allowing carriers to technically bundle CPE and
    telecommunications service in such a way as to contravene the
    requirement that CPE not cause harm to the network.[^169] Moreover,
    as the Commission noted in the *Part 68 Streamlining Order*,
    providers of telecommunications have an inherent interest in
    preventing harm to the public switched network,[^170] and therefore
    also have an incentive to ensure that bundled CPE does not cause
    such harm.

### Enhanced Services Bundling

58. We find that the Commission's network disclosure rules will also act
    as an important safeguard to prevent incumbent LECs that bundle
    enhanced services with local exchange service from acting in an
    anticompetitive manner. The Commission found, as several commenters
    assert in this proceeding,[^171] that enhanced service providers
    remain dependent on incumbent LECs for local access to their
    customers, and that we must ensure that these carriers do not
    withhold network information that enhanced service providers need to
    interconnect with the incumbent LECs' networks.[^172] We recognize
    that incumbent LECs may be able to leverage control over their local
    exchange facilities into market power over new or existing services
    if they are allowed to modify network interfaces without disclosing
    the changes to competitors. Our network disclosure rules therefore
    require all incumbent LECs to disclose publicly, at a minimum,
    "complete information about network design, technical standards and
    planned changes to the network."[^173] These rules will continue to
    apply to incumbent LECs that bundle enhanced services with local
    exchange service.

# FINAL REGULATORY FLEXIBILITY ACT ANALYSIS

59. The Regulatory Flexibility Act (RFA)[^174] requires that regulatory
    flexibility analyses 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."[^175] The RFA generally defines the term
    "small entity" as having the same meaning as the terms "small
    business," "small organization," and "small governmental
    jurisdiction."[^176] The RFA defines a "small business" to be the
    same as a "small business concern" under the Small Business
    Act.[^177] Under the Small Business Act, a "small business concern"
    is one that: (1) is independently owned and operated; (2) is not
    dominant in its field of operation; and (3) meets any additional
    criteria established by the Small Business Administration
    (SBA).[^178]

60. Consistent with the effort to reduce regulation wherever conditions
    warrant,[^179] this Report and Order reviews the state of
    competition in the CPE and enhanced services market to determine if
    such competition warrants amending the bundling restrictions adopted
    in the *Computer II Order*. It also reviews the state of competition
    in the interstate, domestic interexchange, and local exchange
    markets to determine the likelihood that nondominant and incumbent
    carriers in these markets could engage in anticompetitive behavior
    if they are permitted to bundle such telecommunications services
    with CPE or enhanced services. In undertaking this analysis, the
    Report and Order acknowledges that because the local exchange market
    is not fully competitive and because incumbent LECs have market
    power, the Commission must balance the risk that incumbents can act
    anticompetitively with the public interest benefits of bundling. In
    light of the significant benefits of bundling outlined in the record
    developed in response to the *Further Notice* and the state of
    competition in the various component markets, the Report and Order
    finds that it is appropriate to eliminate the CPE bundling
    restriction for all carriers. In the case of enhanced services, it
    retains the requirement that facilities-based carriers continue to
    offer the underlying transmission service component of an enhanced
    service on nondiscriminatory terms, and clarifies that as long as
    the carriers meet this requirement, they may bundle enhanced
    services with telecommunications services at a single price.

61. We considered the potential impact of the Report and Order on three
    categories of entities: "small interexchange carriers;" "small
    incumbent LECs;" and "small non-incumbent LECs." The Report and
    Order will not have a significant economic impact on a substantial
    number of these entities because it relieves them of regulations
    that have prohibited them from offering consumers packages of
    telecommunications services and CPE at a single price. Removal of
    these rules will provide small entities the necessary flexibility to
    market services and CPE in a less restricted manner. In addition,
    these small entities will not have to incur certain transactional
    costs associated with separately offering and billing consumers for
    the components of a service package. In fact, it is expected that
    any economic impact will be a positive one. The Report and Order
    clarifies that small interexchange carriers, small incumbent LECs
    and small non-incumbent LECs may offer packages of enhanced services
    and telecommunications services at a single price, provided that
    they continue to comply with the existing requirements to offer
    competitive enhanced service providers access to the underlying
    transmission service component of an enhanced service on
    non-discriminatory terms. By clarifying this requirement, the Report
    and Order provides regulatory certainty. Therefore, there is no
    significant economic impact on such entities.

62. In addition, we considered the impact of the proposed rule revisions
    on information service providers (ISPs) and other competitive
    enhanced service providers. ISPs that described themselves as small
    businesses indicated in the record that they could suffer an
    economic impact from the rules proposed in the *Further Notice* if
    the Commission did not maintain the requirement that they be able to
    acquire underlying transmission capacity to provide enhanced
    services from the incumbent LECs on nondiscriminatory terms.[^180]
    We have maintained this requirement for all incumbent LECs. ISPs
    also indicated that they could not acquire the transmission service
    on nondiscriminatory terms if incumbent LECs were permitted to
    bundle CPE with telecommunications services.[^181] The Report and
    Order confirms that the transmission service component of CPE
    bundles will be separately available from the incumbent LECs on a
    non-discriminatory basis. Therefore, there is no significant
    economic impact on small ISPs and small competitive enhanced service
    providers.

63. Accordingly, we certify that the Report and Order will not have a
    significant economic impact on a substantial number of small
    entities.

64. The Commission will send a copy of this Report and Order, including
    a copy of this final certification, in a report to Congress pursuant
    to the Small Business Regulatory Enforcement Fairness Act of
    1996.[^182] In addition, the Report and Order and this final
    certification will be sent to the Chief Counsel for Advocacy of the
    Small Business Administration, and will be published in the Federal
    Register.[^183]

# ORDERING CLAUSES

65. Accordingly, IT IS ORDERED that pursuant to sections 1, 2, 4, 10,
    11, 201-205, 215, 218, 220, and 303(r) of the Communications Act of
    1934, as amended, 47 U.S.C. §§ 151, 152, 154, 160, 161, 201-205,
    215, 218, 220, and 303(r), this REPORT AND ORDER IS ADOPTED.

66. IT IS FURTHER ORDERED that section 64.702(e) of the Commission's
    Rules, 47 C.F.R. § 64.702(e), as set forth in Appendix B hereto, is
    effective 30 days after publication in the Federal Register.

67. IT IS FURTHER ORDERED that the Commission's Consumer Information

    Bureau, Reference Information Center, SHALL SEND a copy of this
    REPORT AND ORDER, including the Final Regulatory Flexibility
    Certification, to the Chief Counsel for Advocacy of the Small
    Business Administration.

    FEDERAL COMMUNICATIONS COMMISSION

> Magalie Roman Salas

Secretary

APPENDIX A-LIST OF PARTIES

(CC Docket Nos. 96-61; 98-183)

Parties are listed and referred to by the name under which they
submitted their comments:

AT&T Corp. (AT&T)

American Petroleum Institute (API)

America Online, Inc. (AOL)

Ameritech

Bell Atlantic

BellSouth

Cincinnati Bell Telephone Company (CBT)

Commercial Internet eXchange Association (CIX)

Competitive Telecommunications Association (CompTel)

Consumer Electronics Manufacturers Association (CEMA)

Enterprise Networking Technologies Users Association (ENTUA)

GTE Service Corporation (GTE)

Information Technology Association of America (ITAA)

Internet Service Providers' Consortium (ISP/C)

KMC Telecom, Inc. (KMC)

MCI WorldCom, Inc. (MCI WorldCom)

Mitel, Inc. (Mitel)

Network Plus, Inc. (Network Plus)

Next Level Communications (Next Level)

Public Utilities Commission of Ohio (Ohio PUC)

Nationwide Business Telephone Systems, L.L.C. d/b/a Team Centrex (Team
Centrex)

Telecommunications Resellers Association (TRA)

U S West Communications, Inc. (U S West)

SBC Communications Inc. (SBC)

Saco River Telegraph and Telephone Company (Saco River)

Sprint Corporation (Sprint)

Tandy Corporation (Tandy)

United States Telephone Association (USTA)

APPENDIX B-FINAL RULES

For the reasons discussed in the preamble, 47 CFR Part 64 is amended as
follows:

**PART 64 -- MISCELLANEOUS RULES RELATING COMMON CARRIERS**

1\. The authority citation for Part 64 continues to read as follows: 47
U.S.C. 154, 47 U.S.C. 225, 47 U.S.C. 251(e)(1).151, 154, 201, 202, 205,
218-220, 254, 302, 303, and 337 unless otherwise noted. Interpret or
apply sections 201, 218, 225, 226, 227, 229, 332, 48 Stat. 1070, as
amended. 47U.S.C. 201-204, 208, 225, 226, 227, 229, 332, 501 and 503
unless otherwise noted.

2\. Section 64.702 by revising paragraph (e) is amended to read as
follows:

\* \* \* \* \*

\(e\) Except as otherwise ordered by the Commission, the carrier
provision of customer premises equipment used in conjunction with the
interstate telecommunications network may be offered in combination with
the provision of common carrier communications services, except that the
customer premises equipment shall not be offered on a tariffed basis.

[^1]: *Amendment of Section 64.702 of the Commission's Rules and
    Regulations*, CC Docket No. 20828, Final Decision, 77 FCC 2d 384
    (1980) (*Computer II Order*), *recon*. 84 FCC 2d 50 (1980)
    (*Computer II Reconsideration Order*), *further recon*., 88 FCC 2d
    512 (1981), *aff'd sub nom*., *Computer and Communications Indus.
    Ass'n v FCC,* 693 F.2d 198 (D.C. Cir. 1982), *cert. denied*, 461
    U.S. 938 (1983).

[^2]: *Policy and Rules Concerning the Interstate, Interexchange
    Marketplace; Implementation of Section 254(g) of the Communications
    Act of 1934, as amended; 1998 Biennial Review -- Review of Customer
    Premises Equipment and Enhanced Services, Unbundling Rules in the
    Interexchange, Exchange Access and Local Exchange Markets,* CC
    Docket Nos. 96-61, 98-183, Further Notice of Proposed Rulemaking, 13
    FCC Rcd 21531, 21534, para. 5 (1998) (*Further Notice*). A list of
    the parties commenting on the *Further Notice* is attached to this
    Report and Order.

[^3]: 47 U.S.C. § 161(a)(2).

[^4]: *Computer II Order*, 77 FCC 2d at 386, para. 2. The Commission
    stated that it must promulgate rules addressing this convergence "in
    the context of rapid technological and market developments affecting
    communications and data processing services, the ever-increasing
    reliance upon common carrier transmission facilities in the movement
    of all kinds of information, and the need to tailor
    communications-related services to individual user requirements."
    *Id*. at para. 84.

[^5]: *Computer II Order,* 77 FCC 2d at 418-28, paras. 92-113. The
    Commission stated that enhanced service "combines basic service with
    computer processing applications that act on the format, content,
    code, protocol or similar aspects of the subscriber's transmitted
    information or provide the subscriber additional, different, or
    restructured information, or involve subscriber interaction with
    stored information." *Id.* at para. 5. *See also* 47 C.F.R. §
    64.702(a).

[^6]: *Implementation of the Non-Accounting Safeguards of Section 271
    and 272 of the Communications Act of 1934, as amended*, CC Docket
    No. 96-149, First Report and Order and Further Notice of Proposed
    Rulemaking, 11 FCC Rcd 21905, 21955-56, para. 102 (1996)
    (*Non-Accounting Safeguards Order*). To avoid confusion, and to be
    consistent with the terminology in the *Further Notice*, we will
    continue to use the term "enhanced services" to refer to the
    restrictions adopted in *Computer II*. *Further Notice*, 13 FCC Rcd
    at 21549, para. 32. The Commission has concluded that Congress
    sought to maintain the basic/enhanced distinction in its definition
    of "telecommunications services" and "information services," and
    that "enhanced services" and "information services" should be
    interpreted to extend to the same functions. *See* *Federal-State
    Joint Board on Universal Service*, CC Docket No. 96-45, Report to
    Congress, 13 FCC Rcd 11501, 11516-17, 11520, 11524, paras. 33, 39,
    45-46 (1998).

[^7]: *Computer II Order*, 77 FCC 2d at 430-33, paras. 119, 124, 128.

[^8]: Basic communications services are regulated under Title II of the
    Communications Act. Basic services, such as "plain old telephone
    services (POTS)," provide pure transmission capability over a
    communications path that is virtually transparent in terms of its
    interaction with customer-supplied information. *Id.* at 420.

[^9]: *Id.* at 474-75, para. 231.

[^10]: *Id.*

[^11]: *Id.* at 466-74, paras. 215-230.

[^12]: *Id.* at 474, para. 229.

[^13]: *Id.* at 474-75, para. 231. The Commission reemphasized this
    requirement in the *Computer II Reconsideration Order*. *Computer II
    Reconsideration Order,* 84 FCC 2d at 75 n.19 ("Those carriers not
    subject to the separate subsidiary requirement, when employing their
    own common carrier transmission facilities in the provision of
    enhanced services, must obtain transmission capacity pursuant to the
    terms and conditions embodied in their tariff.").

[^14]: *Independent Data Communications Manufacturers Association, Inc.
    Petition for Declaratory Ruling and American Telephone and Telegraph
    Company Petition for Declaratory Ruling*, Memorandum Opinion and
    Order, 10 FCC Rcd 13717, 13719 (1995) (*Frame Relay Order*);
    *Competition in the Interstate Interexchange Marketplace*, CC Docket
    No. 90-132, Memorandum Opinion and Order on Reconsideration, 10 FCC
    Rcd 4562, 4580 (1995).

[^15]: *Amendment of Section 64.702 of the Commission's Rules and
    Regulations (Computer III)*, Report and Order, CC Docket No. 85-229,
    Phase I, 104 FCC 2d 958 (1986) (*Phase I Order*), *recon*., 2 FCC
    Rcd 3035 (1987) (*Phase I Recon. Order*), *further recon.*, 3 FCC
    Rcd 1136 (1988) (*Phase I Further Recon. Order*); *second further
    recon*., 4 FCC Rcd 5927 (1989) (*Phase I Second Further Recon*.),
    *Phase I Order and Phase I Recon. Orders, vacated, California v.
    FCC,* 905 F.2d 1217 (9^th^ Cir. 1990) (*California I)*; Phase II, 2
    FCC Rcd 3072 (1987) (*Phase II Order*), *recon.*, 3 FCC Rcd 1150
    (1988) (*Phase II Recon. Order*), *further recon.*, 4 FCC Rcd 5927
    (1989) (*Phase II Further Recon. Order*), *Phase II Order vacated*,
    *California I*, 905 F.2d 1217 (9^th^ Cir. 1990); *Computer III
    Remand Proceedings*, 5 FCC Rcd 7719 (1990) (*ONA Remand Order*),
    *recon.*, 7 FCC Rcd 909 (1992), *pets. for review denied, California
    v. FCC*, 4 F.3d 1505 (9^th^ Cir. 1993) (*California II*); *Computer
    III Remand Proceedings; Bell Operating Company Safeguards and Tier I
    Local Exchange Company Safeguards,* 6 FCC Rcd 7571 (1991) (*BOC
    Safeguards Order*), *recon. dismissed in part*, Order, CC Docket
    Nos. 90-623 and 92-256, 11 FCC Rcd 12513 (1996); *BOC Safeguards
    Order vacated in part and remanded, California v. FCC*, 39 F.3d 919
    (9^th^ Cir. 1994) (*California III*), *cert. denied*, 115 S.Ct. 1427
    (1995); *Computer III Further Remand Proceedings: Bell Operating
    Company Provision of Enhanced Services; 1998 Biennial Review --
    Review of Computer III and ONA Safeguards and Requirements*, CC
    Docket Nos. 95-20; 98-10; Further Notice of Proposed Rulemaking, 13
    FCC Rcd 6040 (1998) (*Computer III 1998 FNPRM*); Report and Order,
    14 FCC Rcd 4289 (1999) (*Computer III March 1999 Order*)(addressing
    part of *Computer III 1998 Further Notice*), *recon*., 14 FCC Rcd
    21628 (1999) (referred to collectively as the *Computer III*
    proceeding).

[^16]: Computer *III Phase I Order*, 104 FCC 2d at 1011-13. *Computer
    III* established Comparably Efficient Interconnection (CEI) and Open
    Network Architecture (ONA) requirements. CEI is a nonstructural
    safeguard that requires that if a BOC offers enhanced service, it
    must offer network interconnection opportunities to competitive
    enhanced service providers that are comparably efficient to the
    interconnection that its own enhanced service operation enjoys.
    *See* *Computer III Phase I Order*, 104 FCC 2d at 1019, para. 112.
    Both the BOCs and AT&T were initially subject to CEI requirements.
    *Id*. at 1026-27, paras. 129-31. In subsequent orders, the
    Commission first modified, and then relieved, AT&T of the CEI
    requirements. *See Computer III March 1999 Order*, 14 FCC Rcd at
    4294-95, n.17-18 (and cases cited therein). The Commission has never
    imposed CEI requirements on GTE or any other independent LEC. ONA is
    the overall design of a carrier's basic network services to permit
    all users of the basic network, including the enhanced service
    operations of the carrier and its competitors, to interconnect to
    specific basic network functions and interfaces on an unbundled and
    equal access basis. The Commission initially applied the ONA
    requirements to both AT&T and the BOCs, but later relieved AT&T of
    most of the requirements. *Computer III Phase I Order*, 104 FCC 2d
    at 1026-27, paras. 127-31. AT&T remains subject, however, to a
    modified ONA plan that the Commission approved in 1988, and must
    submit an annual affidavit that affirms that it has not
    discriminated in the quality of network services provided to
    competing enhanced service providers. *See Filing and Review of Open
    Network Architecture Plan*, CC Docket No. 88-2, Memorandum Opinion
    and Order, 4 FCC Rcd 2449 (1988). In 1994, the Commission extended
    ONA requirements to GTE. *Application of ONA and Nondiscrimination
    Safeguards to GTE Corporation*, CC Docket No. 92-256, 9 FCC Rcd 4922
    (1994). The Commission has not applied ONA requirements to any other
    local exchange carriers.

[^17]: *Computer II Order*, 77 FCC 2d at 442-43, para 149.

[^18]: *Id.* at 439, para 141 (citing *Carterfone*, 13 FCC 2d 420
    (1968)).

[^19]: 47 C.F.R. § 64.702(e).

[^20]: *Further Notice*, 13 FCC Rcd at 21533, n.5.

[^21]: *Computer II Order*, 77 FCC 2d at 443, n.52.

[^22]: *Id.*

[^23]: *Bundling of Cellular Customer Premises Equipment and Cellular
    Service*, CC Docket No. 91-34, Report and Order, 7 FCC Rcd 4028,
    4030-31, para. 19 (1992) (*Cellular Bundling Order*).

[^24]: *Policy and Rules Concerning the Interstate, Interexchange
    Marketplace, Implementation of Section 254(g) of the Communications
    Act of 1934, as amended*, CC Docket No. 96-61, Notice of Proposed
    Rulemaking, 11 FCC Rcd 7141, 7184-87, paras. 84-91 (1996)
    (*Interexchange Notice*).

[^25]: *Further Notice*, 13 FCC Rcd at 21535-36, paras. 7, 9.

[^26]: *Policy and Rules Concerning the Interstate, Interexchange
    Marketplace, Implementation of Section 254(g) of the Communications
    Act of 1934, as amended*, CC Docket No. 96-61, Second Report and
    Order, 11 FCC Rcd 20730, 20732, 20790-93, paras. 113-18 (1996)
    (*Interexchange Second Report and Order*), recon., 12 FCC Rcd 15014
    (1997).

[^27]: *Further* Notice, 13 FCC Rcd at 21537, 21553, paras. 11-42.

[^28]: *Id.* at 21535, para. 8 (citing 47 U.S.C. § 161(a)(2); *1998
    Biennial Review of FCC Regulations Begun Early*, FCC News Release
    (rel. Nov. 18, 1997); *FCC Staff Proposes 31 Proceedings as Part of
    1998 Biennial Regulatory Review*, FCC News Release, Report No. GN
    98-1 (rel. Feb. 5, 1998).

[^29]: *See* Letter from Charles E. Griffin, Government Affairs
    Director, AT&T, to Magalie Roman Salas, Secretary, FCC, CC Docket
    Nos. 96-61 and 98-183 (filed June 21, 2000), Attachment, *Ex Parte*
    Declaration of Janusz A. Ordover and Robert D. Willig on Behalf of
    AT&T Corp. (*AT&T Ordover/Willig Decl*.) at 6.

[^30]: The Commission explained in the *Further Notice* that the
    *Computer II* CPE bundling restriction does not prohibit carriers
    from offering "one-stop" shopping for CPE and telecommunications
    services; the rule requires only that the goods and services be
    priced separately. For example, some carriers jointly market CPE,
    such as a modem, and a telecommunications service. Because of the
    CPE bundling restriction, however, these carriers are required to
    price separately each item in the package and often have to either
    offer the tariffed telecommunications service at a discounted
    promotional rate, or offer a discounted price or rebate on the CPE,
    in order to sell the total package at an attractive price. *Further
    Notice*, 13 FCC Rcd at 21533, para. 5.

[^31]: Network Plus Comments at 21; KMC Comments at 3. *See* *also*
    Letter from Charles E. Griffin, Government Affairs Director, AT&T,
    to Magalie Roman Salas, Secretary, FCC (filed Dec. 17, 1999),
    Attachment at 5 (bundling allows carriers to streamline operations
    and reduce advertising, marketing, and billing costs). *See also*
    GTE Comments at 4-6 and Attachment 1 (Aff. of Gregory M. Duncan)
    (*GTE Duncan Aff.*) at 5-8 (bundling allows service providers to
    mitigate risks associated with introducing new services and
    products, promotes innovation and spurs consumer interest in new
    goods and services that can allow the carrier to spread the fixed
    cost of providing service over a larger population of users).

[^32]: *Applications for Consent to the Transfer of Control of Licenses
    and Section 214 Authorizations from Tele-Communications, Inc.,
    Transferor, to AT&T Corp., Transferee*, CC Docket No. 99-178,
    Memorandum Opinion and Order, 14 FCC Rcd 3160, 3219, para. 125
    (1999).

[^33]: *AT&T Ordover/Willig Decl*. at 11-12.

[^34]: *See, e.g.*, Ohio PUC at 2-3; AT&T Comments at 4-5, Bell Atlantic
    Comments at 12-13.

[^35]: *Computer II* *Order,* 77 FCC 2d at 447, para. 160.

[^36]: *See* *GTE Duncan Aff.* at para. 13 (stating that one of the most
    important ways in which carriers seek to compete is by
    differentiating their product offerings through bundling.).

[^37]: *See, e.g*., API Comments at 4-6; Bell Atlantic Comments at
    15-16.

[^38]: Letter from Karen T. Reidy, Attorney, Federal Law and Public
    Policy, MCI Worldcom, CC Docket Nos. 96-61 and 98-183, Attachment at
    1-2 (filed Apr. 10, 2000).

[^39]: *See, e.g*., Ameritech Comments at 2; Bell Atlantic Comments at
    16; Next Level Comments at 3-5.

[^40]: *See Cellular Bundling Order*, 7 FCC Rcd at 4031, para. 20.

[^41]: *See* *Further Notice*, 13 FCC Rcd at 21538-39, para. 13, n.37
    (citing *Jefferson Parish Hospital District No. 2 v. Hyde*, 466 U.S.
    2, 12-14, 16-18 (1984) (*Jefferson Parish Hospital*); *Digidyne
    Corp. v. Data General Corp*., 734 F.2d 1336, 1341 (9^th^ Cir. 1984),
    *cert. denied*, 473 U.S. 908 (1985)).

[^42]: Section 3 of the Clayton Act, 15 U.S.C. § 14. *See also* *Further
    Notice*, 13 FCC Rcd at 21538-39, n.37; *Interexchange Notice*, 11
    FCC Rcd at 7186, para. 87 (*citing Jefferson Parish Hospital*, 466
    U.S. at 12; Michael D. Whinston, *Tying, Foreclosure, and
    Exclusion*, 80 Am. Econ. Rev. 837, 837 (1990)).

[^43]: *Computer II* *Order*, 77 FCC 2d at 442-43, paras. 149-50.

[^44]: *See* *GTE Duncan Aff.* at para. 8 ("Mixed bundling allows the
    consumer to select either the bundle or individual components . . .
    Further, it is intuitively obvious that mixed bundling is the
    superior option from a customer's perspective. A mixed bundling
    strategy enhances welfare by allowing both high and low-demand users
    to satisfy their preferences by joining the appropriate consumption
    groups. Mixed bundling provides consumers with a choice, which is
    something that consumers both want and need.").

[^45]: 47 U.S.C. § 161(a)(2).

[^46]: *Further Notice*, 13 FCC Rcd at 21546, para. 28.

[^47]: *See, e.g*., AOL Comments at 4; API Comments at 7; AT&T Comments
    at 6-7; CompTel Comments at 5; SBC Comments at 5; Sprint Comments at
    2.

[^48]: *Computer II Order*, 77 FCC 2d at 439, para. 141.

[^49]: *Interexchange Notice*, 11 FCC Rcd at 7185, para. 86 (citing
    *Price Cap Performance Review for Local Exchange Carriers*, CC
    Docket No. 94-1, First Report and Order, 10 FCC Rcd 8961, 9122
    (1995); *Procedures for Implementing the Detariffing of Customer
    Premises Equipment and Enhanced Services (Second Computer Inquiry)*,
    CC Docket No. 81-893, Memorandum Opinion and Order, 8 FCC Rcd 3891,
    3891 (1993)).

[^50]: *See, e.*g., AT*&T Ordover/Willig Decl*. at 24-25; Bell Atlantic
    Comments at 7-10, CompTel Comments at 3; SBC Comments at 5.

[^51]: *See Computer II* *Order,* 77 FCC 2d at 453, para. 180.

[^52]: Bell Atlantic Comments at 8 (citing Multimedia Telecommunications
    Association and Telecommunications Industry Association, 1998
    Multimedia Telecommunications Market Review and Forecast at 113).

[^53]: AOL Comments at 4.

[^54]: Consumer Electronics Association, 2000 Growth Projection at 1
    (rel. Jan. 6, 2000) at http://www.ce.org (stating that in addition
    to computer modems, it expects to sell 80 million corded and
    cordless telephones at total dollar sales of \$2.4 billion).

[^55]: CEMA Comments at 5-6.

[^56]: *Motion of AT&T Corp. to be Reclassified as a NonDominant*
    Carrier, 11 FCC Rcd 3271, 3288, para. 26 (1995) (*AT&T Nondominance
    Order*).

[^57]: *Id.* at 3305-06 (citing *Competition in the Interstate
    Interexchange Marketplace*, Report and Order, 6 FCC Rcd 5880, 5887
    (1991)).

[^58]: *Application of WorldCom, Inc. and MCI Communications Corporation
    for Transfer of Control of MCI Communications Corporation to
    WorldCom, Inc*., CC Docket No. 97-211, Memorandum Opinion and Order,
    13 FCC Rcd 18025, 18050-51 (1998). *See also* *Trends in Telephone
    Service*, Industry Analysis Division, Common Carrier Bureau, FCC,
    issued Mar. 2000, at 11-10, Table 11.5; *Long Distance Market
    Shares*, Industry Analysis Division, Common Carrier Bureau, FCC,
    issued Mar. 31, 1999, at 16, Table 3.2.

[^59]: *Bell Atlantic-New York Authorization Under Section 271 of the
    Communications Act to Provide In-Region InterLATA Service in the
    State of New York,* 15 FCC Rcd 3953 (1999); *Application by SBC
    Communications Inc., Southwestern Bell Telephone Company, and
    Southwestern Bell Communications Services, Inc. d/b/a Southwestern
    Bell Long Distance, Pursuant to Section 271 of the
    Telecommunications Act of 1996, to Provide In-Region, InterLATA
    Services in Texas*, CC Docket No. 00-65, Memorandum Opinion and
    Order, 15 FCC Rcd 18354 (2000); *Joint Application by SBC
    Communications Inc., Southwestern Bell Telephone Company, and
    Southwestern Bell Communications Services, Inc. d/b/a Southwestern
    Bell Long Distance for Provision of In-Region, InterLATA Services in
    Kansas and Oklahoma*, CC Docket No. 00-217, Memorandum Opinion and
    Order, FCC 01-29 (rel. Jan. 22, 2001).

[^60]: *Policy and Rules Concerning the Interstate, Interexchange
    Marketplace*, Second Report and Order, 11 FCC Rcd 20730 (1996)
    (*Detariffing Order*), *aff'd*, *MCI WorldCom, Inc. v. Competitive
    Telecommunications Association, et al*., No. 96-1459 (Apr. 28,
    2000). Interexchange carriers have until July 31, 2001 to complete
    the process of detariffing mass market consumer services. They were
    required to complete the process of detariffing domestic
    contract-type services by January 31, 2001. *Common Carrier Bureau
    Extends Transition Period for Detariffing Consumer Domestic Long
    Distance Services*, Public Notice, CC Docket No. 96-61, DA 01-282
    (rel. Feb. 5, 2001).

[^61]: 47 U.S.C. § 160(a)(2).

[^62]: *See Computer II Order*, 77 F.C.C.2d at 443, n.52.

[^63]: Phillip E. Areeda, *Antitrust Law*, Vol. IX, para. 1700(d)(3)
    (1991) (*Areeda Vol. IX)*.

[^64]: *AT&T Ordover/Willig Decl*. at 25-26; MCI Comments at 6-7; Sprint
    Comments at 4. *See also* *Areeda Vol. IX* at para. 1702 (stating
    that two of the conditions that define an illegal tying arrangement
    are that "the customer takes the second ('tied') product not because
    he prefers it on its own merits but only because he must take it in
    order to obtain a desired ('tying') product, either at all or on
    favorable terms" and "the supplier possesses substantial economic
    power over the tying product."). IDCMA's reference to *Eastman Kodak
    Company v. Image Technical Services, Inc.* to argue that firms
    without market power in one market can force customers to buy
    products in another market is misplaced. *Further Notice*, 13 FCC
    Rcd at 21538-39, para. 13 (citing IDCMA Comments at 33-36 and
    *Eastman Kodak Company v. Image Technical Services, Inc.*, 504 U.S.
    451 (1992) (*Eastman Kodak*)). The Supreme Court in *Kodak* found
    that although Kodak may not have had market power in the photocopier
    market, it did have market power for replacement parts for
    photocopiers, and on that basis it refused to grant Kodak summary
    judgment on the claim that it had abused that market power by tying
    replacement parts and repair service. *Eastman Kodak*, 504 U.S. at
    462. Eastman *Kodak* is consistent with the Supreme Court's holding
    in *Jefferson Parish* *Hospital* that the essential characteristics
    of an invalid tying arrangement lie in the seller's exploitation of
    its control, or market power, over the tying product to force the
    buyer into the purchase of a tied product that the buyer either did
    not want at all, or might have preferred to purchase elsewhere on
    different terms. *Jefferson Parish Hospital*, 466 U.S. at 12-14,
    16-18. *See* *also* AT&T Comments at 10-11; MCI WorldCom Comments at
    8. Nondominant interexchange carriers, by definition, lack market
    power in the interexchange market, which would be the tying market
    under IDCMA's argument, and therefore cannot force customers to
    purchase service and CPE through an anticompetitive arrangement.

[^65]: *See, e.g*., Letter from Jerome R. Karl, President, Jencom, Inc.,
    to Chairman Reed Hundt, FCC, CC Docket No. 96-61 (filed Oct. 6,
    1996); Letter from Mel Sarowitz, President, Datatran Network
    Systems, Inc., to Chairman Reed Hundt, FCC, CC Docket No. 96-98
    (filed Oct. 17, 1996); Mitel Comments at 1.

[^66]: *Cf*. *Policy and Rules Concerning Rates for Competitive Common
    Carrier Services and Facilities Authorizations Therefor*, CC Docket
    No. 79-252, First Report and Order, 85 FCC 2d 1 (1980)
    (distinguishing between dominant and nondominant interexchange
    carriers and determining that nondominant carriers could not charge
    rates that contravene the Communications Act of 1934). *See also*
    Sprint Comments at 5.

[^67]: MCI WorldCom Comments at 7.

[^68]: *See Further Notice*, 13 FCC Rcd at 21540, para. 16.

[^69]: *See id.* at 21539-40, para. 15 (citing 47 U.S.C. § 629); CEMA
    Comments 3-4.

[^70]: *Implementation of Section 304 of the Telecommunications Act of
    1996*, *Commercial Availability of Navigation Devices*, CS Docket
    No. 97-80, 13 FCC Rcd 14775, 14775, para. 1 (1998) (*Navigation
    Devices Order*).

[^71]: *Id.* at 14775, para. 3.

[^72]: 47 U.S.C. § 549(e)(1), (2); 47 C.F.R. § 79.923(b).

[^73]: 47 U.S.C. § 543(a)(2); 47 C.F.R. § 76.923(b).

[^74]: Allowing nondominant interexchange carriers to bundle interstate,
    domestic, interexchange service with CPE, without having to offer
    the transmission component of the bundle separately, is consistent
    with the U.S. Government's obligations concerning the
    interconnection of terminal equipment with the public transport
    network under the General Agreement on Trade in Services (GATS) and
    North American Free Trade Agreement (NAFTA). GATS requires the U.S.
    to allow suppliers from other countries to "purchase or lease and
    attach terminal or other equipment which interfaces with the
    \[public telecommunications transport\] network and which is
    necessary to supply \[their\] services." *Further Notice*, 13 FCC
    Rcd at 21543, para. 22 (citing GATS Annex of Telecommunications, at
    para. 5(b). The GATS is Annex 1B of the Marrakesh Agreement
    Establishing the World Trade Organization, 33 I.L.M. 1167 (1994)).
    NAFTA contains a similar requirement. *Further Notice*, 13 FCC Rcd
    at 21543, para. 22 (citing NAFTA, Dec. 17, 1992, U.S.-Ca.-Mex., Art.
    1302(2), H.R. Treaty Doc. 159, 103d Cong., 1^st^ Sess. (1993)). To
    the extent that these agreements encompass CPE provided by
    competitive foreign suppliers, and for the reasons explained above,
    we agree with AT&T that allowing nondominant interexchange carriers
    to offer bundled products in no way restricts the interconnection of
    such equipment with the carriers' networks. AT&T Comments at 12.

[^75]: *See* *Further Notice*, 13 FCC Rcd at 21542-42, para. 21.

[^76]: *See* *AT&T Ordover/Willig Decl*. at 7 ("If consumers do not
    value bundles, market participants \[in competitive markets\] will
    have every incentive to offer unbundled components on a stand-alone
    basis."); ENTUA Comments at 2.

[^77]: *See* MCI WorldCom Comments at 9-10.

[^78]: 47 U.S.C. § 161(a)(2).

[^79]: *Detariffing Order*, 11 FCC Rcd at 20742-43, para. 21

[^80]: *See* *Further Notice*, 13 FCC Rcd at 21540, para. 17 (citing
    IDCMA Comments at 22-24).

[^81]: *See Computer II Order*, 77 FCC 2d at 446-47, paras. 159-60.

[^82]: U S West Comments at 7.

[^83]: *Detariffing Order*, 11 FCC Rcd at 20732, para. 3.

[^84]: *Further Notice*, 13 FCC Rcd at 21544, para. 24 (citing 47 U.S.C.
    §§ 271, 272 that permit BOCs to provide in-region, interLATA service
    once the requirements of those sections are met). BOCs are
    classified as nondominant carriers for their provision on both
    out-of-region and in-region interexchange service. They have to
    comply with the safeguards contained in section 272 for in-region
    long distance service. Independent LECs are required to provide
    in-region interexchange service through separate affiliates that
    satisfy the requirements in the *Competitive Carrier Fifth Report
    and Order*. *Id*. at 21545, n. 69 (citing *Competitive Carrier Fifth
    Report and Order*, CC Docket No. 79-252, 98 FCC 2d 1191 (1984)).

[^85]: *Further Notice*, 13 FCC 21544-45, para. 24 (citing *Regulatory
    Treatment of LEC Provision of Interexchange Services Originating in
    the LEC's Local Exchange Area and Policy and Rules Concerning the
    Interstate, Interexchange Marketplace*, CC Docket Nos. 96-149,
    96-61, Second Report and Order in CC Docket No. 96-149 and Third
    Report and Order in CC Docket No. 96-61, 12 FCC Rcd 15756, 15802
    (1996) (*BOC 272 Affiliate Classification Order*), Order on
    Reconsideration, 12 FCC Rcd 8730 (1997)).

[^86]: BellSouth Reply Comments at 4.

[^87]: AT&T Comments at 15.

[^88]: *See supra* note 59.

[^89]: *Regulatory Treatment of LEC Provision of Interexchange Services
    Originating in the LEC's Local Exchange Area and Policy and Rules
    Concerning the Interstate, Interexchange Marketplace*, CC Docket
    Nos. 96-149, 96-61, Second Order on Reconsideration and Memorandum
    Opinion and Order, 14 FCC Rcd 10771 (1999) (*LEC Classification
    Second Reconsideration Order*).

[^90]: *Id.* at 10787-10793, paras. 22-28.

[^91]: *Further Notice*, 13 FCC Rcd at 21544-45, para. 24 (citing
    *Competitive Carrier Fifth Report and Order*, 98 FCC 2d 1191). *See
    also* 47 C.F.R. § 64.1903.

[^92]: We do not address the issue contained in the *Further Notice* of
    whether there are anticompetitive effects of allowing nondominant
    interexchange carriers to bundle CPE with interstate, domestic,
    interexchange service, when such services, in turn, are packaged
    with international services. *Further Notice*, 13 FCC Rcd at
    21543-44, para. 23. The Commission received virtually no comments on
    this issue, and there is therefore no information in the record
    regarding the extent to which bundling international services with
    CPE would be in the public interest. We have just found that the
    statutory requirement that nondominant common carriers file tariffs
    for their international interexchange service is no longer necessary
    for the majority of international services as a result of
    competition in the market for international interexchange services,
    and we ordered the complete detariffing of these services subject to
    a transition period. *2000 Biennial Review: Policy and Rules
    Concerning the International Interexchange Marketplace*, IB Docket
    No. 00-202, Report and Order, FCC 01-93, para. 7 (rel. Mar. 20,
    2001). We will develop a more complete record on international
    bundling and address this issue in the future .

[^93]: The *Further Notice* sought comment on the effects of allowing
    carriers to "offer local exchange and exchange access services in
    conjunction with the bundled offering of CPE and interstate,
    domestic, interexchange service." *Further Notice*, 13 FCC Rcd at
    21546, para. 27. Carriers have not sought the ability to bundle
    exchange access service, by itself, with interexchange service, and
    therefore, for purposes of this order, we will consider local
    exchange service and exchange access service to be a single
    component of a package of service, and will refer to them as local
    exchange service.

[^94]: *Local Telephone Competition Status as of June 30, 2000*,
    December 2000, Industry Analysis Division, Common Carrier Bureau,
    FCC, at 1 (*December 2000 Local Competition Report*).

[^95]: *Id.* at 2.

[^96]: *See supra* note 59.

[^97]: *Cellular Bundling Order*, 7 FCC Rcd at 4029, para. 11.

[^98]: We note that we have jurisdiction to allow carriers to bundle CPE
    with local exchange service. *See* 47 U.S.C. §§ 152(a), 153(52);
    *Computer and Communications Industry Association*, 693 F.2d at
    214-18 (affirming the Commission's authority to deregulate CPE in
    accordance with the *Computer II Order* and citing *North Carolina
    Utilities Comm'n. v. FCC*, 552 F.2d 1036 (4^th^ Cir. 1977)).

[^99]: Section 251(b)(2) of the Act places a duty on all LECs to provide
    number portability so that customers may switch local service
    providers without changing their existing telephone number, a
    requirement that Congress determined will lower barriers to entry
    and promote competition in the local exchange market. *See* 47
    U.S.C. § 251(b)(2); *Telephone Number Portability*, CC Docket No.
    95-116, First Report and Order and Further Notice of Proposed
    Rulemaking, 11 FCC Rcd 8352, 8352, para. 2 (1996).

[^100]: *Cellular Bundling Order*, 7 FCC Rcd at 4030-31, paras. 19-21.

[^101]: *See, e.g*., Bell Atlantic Comments at 2, 12-16; BellSouth
    Comments at 11; BellSouth Reply Comments at 7; Next Level Comments
    at 5.

[^102]: Bell Atlantic Comments at 15-16, GTE Reply Comments at 6-7. *See
    also* SBC Comments at 9 (stating that bundling allows carriers to
    address technical issues associated with CPE that new customers may
    have by, for example, allowing it to offer preprogrammed CPE that
    allows customers to more easily use different services).

[^103]: Bell Atlantic Comments at 15. *See also* Next Level Comments at
    4; GTE Reply Comments at 6-8.

[^104]: See Navigation *Devices Order*, 13 FCC Rcd at 14810-11, 14813,
    paras. 87, 94 (citing *Cellular Bundling Order*, 2 FCC Rcd at 4028).

[^105]: *Cellular Bundling Order*, 7 FCC Rcd at 4031, para. 20.

[^106]: *Computer II Order*, 77 FCC 2d at 442-43, paras. 149-50.

[^107]: 47 U.S.C. § 251; Joint Statement of Managers, S. Conf. Rep. No.
    104-230, 104^th^ Cong., 2d Sess., at 117-18 (1996).

[^108]: 47 U.S.C. § 251(c)(4).

[^109]: 47 U.S.C. § 253.

[^110]: *See* *Trends in Telephone Service*, FCC Common Carrier Bureau
    Industry Analysis Division, December 2000, at 12-1, 12-4 (stating
    that wireless telephone subscribers increased from approximately 8.8
    million in June 1992 to over 97 million in June 2000). Consumer
    Electronics Association, "2000 Will Ring in Record Growth in
    Consumer Electronics Sales -- Digital Technologies and Workstyle
    Products Continue to Drive Sales," at 1 (rel. Jan. 6, 2000); Bell
    Atlantic Comments at 7 (stating that the number of wireless CPE
    manufacturers increased from 17-25 in 1992 to more than 100 in 1998
    and that wireless handsets are redesigned and updated frequently);

[^111]: *Areeda Vol. IX* at para. 1704(a).

[^112]: *Id.* at para. 1704(b). We also note that the BOCs are unlikely
    to have lower costs than competing suppliers because they are
    prohibited from manufacturing CPE except as permitted under section
    273 of the 1996 Act. Section 273 allows the BOCs to do so if the
    Commission authorizes them to provide interLATA services pursuant to
    section 271(d). Upon gaining manufacturing relief, a BOC will enter
    a highly competitive market with zero percent market share, making
    it difficult to leverage a bundled offering in an anticompetitive
    manner. *See* BellSouth Comments at 5, n.5.

[^113]: *See Cellular Bundling Order*, 7 FCC Rcd at 4030, para. 13.

[^114]: *See* Ameritech Comments at 6; Bell Atlantic Reply Comments at
    4; BellSouth Reply Comments at 11-13; GTE Comments at 13.

[^115]: The *December 2000 Local Competition Report* states that as of
    June 30, 2000, at least one competitive LEC was serving customers in
    54 percent of the nation's zip codes. In California, New York, and
    Texas, more than one-fifth of zip codes have seven or more
    competitive LECs that reported service in response to the
    Commission's reporting requirements. *December 2000 Local
    Competition Report* at 3.

[^116]: 47 C.F.R. §§ 64.901-904.

[^117]: *See* Ameritech Comments at 12-13; GTE Reply Comments at 13-14.
    We do not find that price cap regulation eliminates all possible
    incentive to shift costs. Rather, the incentives under price caps
    are much less significant than under rate-of-return regulation
    because the carriers are no longer entitled to increase rates to
    recoup cost increases. *See* *BOC Safeguards Order*, 6 FCC Rcd at
    7571, 7596-97, n.95.

[^118]: *See GTE Duncan Aff*. at 13.

[^119]: Dominant facilities-based carriers must also acquire the
    underlying transmission capacity for an enhanced service in the same
    manner as other competitive enhanced services providers. This
    requirement stems primarily from having to provide enhanced services
    through a fully separate subsidiary under *Computer II*. *Computer
    II Order*, 77 FCC 2d at 474, para. 229; para. 42 *infra*.

[^120]: *See id.* at 466-69, paras. 215-222.

[^121]: *See id.* at 468-69*,* para. 221.

[^122]: *See id.* at 469*,* para. 222.

[^123]: *See Frame Relay Order*, 10 FCC Rcd at 13723, para. 46 (finding
    that AT&T was free to continue its practice of packaging CPE and
    enhanced protocol processing services with basic frame relay
    service, so long as the underlying basic service is separately
    offered under tariff.).

[^124]: *See, e.g.*, API Comments at 9; AT&T Comments at 5-8; CompTel
    Comments at 5-7; Sprint Comments at 2-3.

[^125]: MCI WorldCom Comments at 33-34 (citing *Non-Accounting
    Safeguards Order*, 11 FCC Rcd at 21971-72, para. 136). *See also*
    BellSouth Comments at 13 (stating that there is a presumptive
    "resale" model for the carrier provision of enhanced services under
    which a carrier offers an enhanced service that incorporates an
    underlying transmission service to the customer as a single
    "bundled" offering).

[^126]: MCI WorldCom Comments at 33-34.

[^127]: *Id.* at 34.

[^128]: *Computer II Order*, 77 FCC 2d at 477, para. 239.

[^129]: *Id.* at 477, para. 238.

[^130]: *Id.* at 474, para. 229. *See also Frame Relay Order*, 10 FCC
    Rcd at 13725, para. 59.

[^131]: *Computer III Phase I Order*, 104 FCC 2d at 1011-13.

[^132]: *Id.* at 1012, para. 99.

[^133]: U S West Comments at 7-9. *See also* BellSouth Comments at
    13-14; Letter from Linda L. Kent, Associate General Counsel, USTA,
    to Magalie Roman Salas, Secretary, FCC, CC Docket No. 98-183, at 2
    (filed Feb. 15, 2001). We note that in the *Computer III 1998
    FNPRM*, the Commission, in response to a petition, raised the issue
    of whether BOCs should be prohibited from using the same personnel
    and facilities to jointly market basic services and information
    services even though they are allowed to provide such services on an
    integrated basis under the *Computer III* requirements. *Computer
    III 1998 FNPRM*, 13 FCC Rcd at 6114, para. 129. Should the
    Commission's requirements change to an extent that it would impact
    our bundling decision, we will address the issue at that time.

[^134]: *See* Ameritech Comments at 18-19; BellSouth Comments at 13-14;
    U S West Comments at 7-9.

[^135]: *Cellular Bundling Order*, 7 FCC Rcd at 4028, 4030-31, paras. 1,
    13, 23.

[^136]: 47 U.S.C. §§ 260, 274, 275.

[^137]: *See, e.g*., Letter from Charles E. Griffin, AT&T, to Magalie
    Roman Salas, Secretary, FCC, CC Docket Nos. 96-61 and 98-183 (filed
    Sept. 18, 2000) at 2.

[^138]: *BOC Safeguards Order*, 6 FCC Rcd at 7576-77, para. 11 (citing
    47 C.F.R. Parts 31, 43, 67 and 69). In its review of the *Computer
    III* proceeding, the U.S. Court of Appeals for the Ninth Circuit
    found that the Commission's cost allocation rules would reduce
    significantly the BOCs' ability to misallocate costs between
    enhanced and basic services. *California v. FCC*, 39 F.3d at 926. It
    also found that mandatory price cap regulation for the BOCs
    decreases their incentive to shift costs from nonregulated
    activities to regulated ones because they are not able to increase
    regulated rates to recapture the costs associated with enhanced
    services. *Id.*

[^139]: *BOC Safeguards Order*, 6 FCC Rcd at 7592-93, n.86.

[^140]: *Id.* at 7592-93, n.86.

[^141]: *See* Letter from Mark J. O'Connor, Donna N. Lampert Associates,
    P.C., on behalf of EarthLink, to Magalie Roman Salas, Secretary,
    FCC, CC Docket No. 98-183 (filed Dec. 22, 2000); Letter from Donna
    N. Lampert and Mark J. O'Connor, Lampert & O'Connor, P.C., on behalf
    of EarthLink, Inc., to Dorothy Attwood, Chief, Common Carrier
    Bureau, FCC, CC Docket No. 98-183 (filed Jan. 3, 2001).

[^142]: *Frame Relay Order*, 10 FCC Rcd at 13719, para. 13. *See also*
    *Deployment of Wireline Service Offering Advanced Telecommunications
    Capability*, CC Docket No. 98-147, Second Report and Order, FCC
    99-330, para. 21 (rel. Nov. 9, 1999) (stating that bulk DSL services
    sold to internet service providers as an input component to the
    internet service provider's high-speed Internet service offering,
    which is an information service, must be provided by incumbent LECs
    on just, reasonable, and nondiscriminatory terms.).

[^143]: *See* *Resale and Shared Use*, 60 FCC 2d 261(1976), *aff'd sub
    nom. AT&T v. FCC*, 572 F.2d 17 (2d Cir.), *cert. denied*., 439 U.S.
    895 (1978); *Resale and Shared Use of Domestic Public Switched
    Network Services*, 83 FCC 2d 167 (1980) *recon. denied*, 86 FCC 2d
    820 (1981).

[^144]: 47 U.S.C. § 254(d).

[^145]: 47 C.F.R. § 54.706.

[^146]: 47 C.F.R. § 54.709. The Commission has stated that merely
    combining telecommunications service with an enhanced service does
    not automatically deem the combined service enhanced. Rather, "the
    issue is whether, functionally, the consumer is receiving two
    separate and distinct services." *Federal-State Joint Board on
    Universal Service*, Fourth Order on Reconsideration, CC Docket No.
    96-45, *Access Charge Reform, Price Cap Performance Review for Local
    Exchange Carriers, Transport Rate Structure and Pricing, End User
    Common Line Charge*, Report and Order, CC Docket Nos. 96-262, 94-1,
    91-213, 95-72, 13 FCC Rcd 5318, 5474-75, para. 282 (1997) (*Fourth
    Order on Reconsideration*).

[^147]: *See* Form 499, available at
    \<http://www.fcc.gov/formpage.html\>. Form 499 sets forth the
    information that contributors must submit so that the administrator
    of the universal service mechanism may calculate and assess
    contributions.

[^148]: *Further Notice*, 13 FCC Rcd. at 21541, para. 18.

[^149]: MCI Worldcom Comments at 10.

[^150]: GTE Comments at 18-20 (GTE's comments focused on issues
    pertaining to provision of universal service support).

[^151]: 47 C.F.R. §§ 54.706, 54.709.

[^152]: For interexchange carriers, this rate would be determined by
    their standard business offerings, whereas for local exchange
    carriers, it would be determined based on their tariffed rates.

[^153]: *See supra* para. 26.

[^154]: Carriers will be asked to check a box on Form 499 that indicates
    whether they have reported revenues based on one of the safe harbor
    approaches. The Certification Statement in Form 499 will apply to
    this information.

[^155]: 47 C.F.R. §§ 54.706, 54.709.

[^156]: We remind filers that USAC monitors carrier filings for
    compliance with the reporting requirements and advises the
    Commission on any enforcement issues that arise. *See* 47 C.F.R. §
    54.711 (a).

[^157]: *Further Notice*, 13 FCC Rcd at 21542, para. 20. The
    "all-carrier" rule required that all carriers owning basic
    transmission facilities disclose to the public all information
    relating to network design "insofar as such information affects
    either intercarrier interconnection or the manner in which
    interconnected CPE operates."

[^158]: *Computer III March 1999 Order*, 14 FCC Rcd at 4320-23, paras.
    48-53.

[^159]: *Id.* at 4320-22, paras. 48-50. The Commission retained
    requirements for incumbent LECs to disclose network information to
    CPE suppliers that are codified at 47 C.F.R. § 51.325(a). *Id*. at\
    4322-23, paras. 52-53.

[^160]: *Id.* at 4322-23, paras. 51-52.

[^161]: 47 C.F.R. § 51.325(a)(3). *See also Computer III March 1999
    Order,* 14 FCC Rcd at 4322-23, paras. 52-53. BOCs that manufacture
    equipment are also subject to the CPE safeguards contained in 47
    U.S.C. § 273.

[^162]: *Computer III March 1999 Order*, 14 FCC Rcd at 4323, para. 53
    (citing 47 C.F.R. § 51.325(a)).

[^163]: *Id.* at 4322-23, para. 52.

[^164]: 47 C.F.R. § 68.3.

[^165]: *Further Notice*, 13 FCC Rcd at 21541-42, para. 19.

[^166]: *See 2000 Biennial Review of Part 68 of the Commission's Rules
    and Regulations*, CC Docket No. 99-216, Report and Order, FCC
    00-00-400, para. 2 (rel. Dec. 21, 2000) (*Part 68 Streamlining
    Order*). In this Order, we retain our rules prohibiting harms to the
    public switched telephone network. *Id.* at paras. 15, 69. In
    addition, we retain in our rules the technical criteria relating to
    inside wiring, hearing aid compatibility and volume control, and
    consumer protection provisions. We also maintain enforcement
    procedures for terminal equipment. *Id*. at paras. 4, 68-70, 115-26.

[^167]: *See id.* at paras. 11, 20-23.

[^168]: *See id.* at para. 21.

[^169]: KMC Comments at 7.

[^170]: *Part 68 Streamlining Order* at para. 119. We continue to permit
    providers to discontinue temporarily service to subscribers that
    connect harmful equipment. *See* 47 C.F.R. § 68.108.

[^171]: *See, e.g*., CIX Comments at 2-3; ISPC Comments at 5-7.

[^172]: *Computer III March 1999 Order*, 14 FCC Rcd at 4321, para. 49.

[^173]: *See id.* at 4317-18, para. 43 (citing *Implementation of the
    Local Competition Provisions of the Telecommunications Act of* 1996,
    CC Docket No. 96-98, Second Report and Order and Memorandum Opinion
    and Order, 11 FCC Rcd 19392 (1996)); 47 C.F.R. § 51.327.

[^174]: The RFA, *see* 5 U.S.C. § 601 *et. seq*., has been amended by
    the Contract With America Advancement Act of 1996, Pub. L. No.
    104-121, 110 Stat. 847 (1996) (CWAAA). Title II of the CWAAA is the
    Small Business Regulatory Fairness Act of 1996 (SBREFA).

[^175]: 5 U.S.C. § 605(b).

[^176]: 5 U.S.C. § 601(6).

[^177]: 5 U.S.C. § 601(3) (incorporating by reference the definition of
    "small business concern" in 5 U.S.C. § 632).

[^178]: 15 U.S.C. § 632.

[^179]: *See* 47 U.S.C. § 161.

[^180]: *See* ISP/C Comments at 5-7.

[^181]: *See* CIX Comments at 7-8.

[^182]: 5 U.S.C. § 801(a)(1)(A).

[^183]: 5 U.S.C. § 605.