# Second Computer Inquiry/Final Decision

| In the Matter of Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry) | Docket No. 20828 |
Final Decision
(Adopted: April 7, 1980; Released May 2, 1980)
By the Commission: Commissioners Ferris, Chairman and Brown issuing separate statements; Commissioner Quello concurring and issuing a statement; Commissioner Washburn approving in part and concurring in part and issuing a statement; Commissioners Fogarty and Jones dissenting in part and issuing statements.

## Table of Contents

| | | Paragraphs |
| I. | Introduction | 1 |
| II. | Summary of Decision | 2-13 |
| III. | Background | |
| | A. First Computer Inquiry | 14-18 |
| | B. Second Computer Inquiry | 19-24 |
| | C. Tentative Decision | 25-36 |
| IV. | Comments | |
| | A. Network Services | 37-63 |
| | B. Customer-Premises Equipment (CPE) | 64-75 |
| | C. 1956 AT&T Consent Decree | 76-81 |
| | D. Transition Period | 82 |
| V. | Discussion | |
| | A. Introduction | 83-85 |
| | B. Network Services | |
| | Basic and Enhanced Services | 86-101 |
| | Enhanced Services: Classification | 102-113 |
| | Regulatory Scheme | 114-118 |
| | Legal Considerations | 119-132 |
| | C. Customer-Premises Equipment | |
| | Basic Media Conversion Criterion | 133-139 |
| | Regulatory Scheme | 140-161 |
| | Legal Considerations | 162-167 |
| | D. Carrier Provision of Enhanced Services and CPE | |
| | 1. Structural Separation: Introduction | 190-200 |
| | 2. Separation: Cost/Benefit | |
| | Applicability, Degree and Timing | 201-207 |
| | Cost and Benefits of Separation | 208-214 |
| | Applicability | 215-232 |
| | Degree of Separation | 233-264 |
| | Transition Period | 265-266 |
| | International | 267-270 |
| | E. AT&T and the 1956 Consent Decree | 271-281 |
| | F. Conclusion | 282-285 |
| | G. Ordering Clauses | 286-292 |
| Appendix | Amended Section 64.702 | |

## I. Introduction

1. Under consideration are issues addressed in the Notice of Inquiry and Proposed Rulemaking (Notice), 61 FCC 2d 103 Supplemental Notice of Inquiry and Enlargement of Proposed Rulemaking (Supplemental Notice), 64 FCC 2d 771; and Tentative Decision and Further Notice of Inquiry and Rulemaking (Tentative Decision), 72 FCC 2d 358 adopted in this proceeding. Commonly referred to as the "Second Computer Inquiry," this proceeding focuses on regulatory issues emanating from the greater utilization of computer processing technology and its varied market applications. The thrust of this proceeding is threefold: a) to determine whether enhanced services which are provided over common carrier telecommunication facilities
should be subject to regulation and, if so, to what extent; b) to examine the competitive and technological evolution of customer premises equipment, with a view toward determining whether the continuation of traditional regulation of terminal equipment is in the public interest; and c) to determine, consistent with the statutory mandate set forth in the Communications Act of 1934, as amended, 47 U.S.C. §151, the role of communication common carriers in the provision of enhanced services and customer-premises equipment.

## II. Summary of Decision
### Network Services

2. In addressing the regulatory problems raised by the confluence of communications and data processing, we concluded in the Tentative Decision that a revised definitional structure standing alone would not adequately resolve the issues before us. We thought it necessary to address the structure under which competitive computer processing services are provided. In so doing we distinguished three categories of service—voice, "basic non-voice" (BNV) and "enhanced non-voice" (ENV). We proposed a resale structure for the carrier provision of ENV services under which carriers owning transmission facilities would be required to provide ENV services through a separate corporate entity that would acquire the necessary transmission facilities pursuant to tariff. At the same time we proposed new definitions for distinguishing the communications or data processing nature of ENV services and proposed to eliminate our "maximum separation" policy for resale carriers, thereby allowing them to offer both ENV communications and ENV data processing services through common computer facilities. It was thought that the need to artificially structure or limit services provided to consumers would be substantially reduced under this structure. Any ENV data processing service could be provided by a resale carrier on a non-tariffed basis.
3. In setting forth this resale structure, we also identified various regulatory implications that we perceived flowing from this structure and discussed alternative means of alleviating certain regulatory constraints. We set forth specific options for consideration in reaching a final decision, and sought comment on the public interest considerations relevant to adoption of the different options.
4. In response to the resale structure and the various options put forth for consideration, the comments focused on the appropriateness of establishing three categories of service (voice, BNV and ENV), the viability of the proposed definitional structure for distinguishing the communications or data processing nature of ENV services, and whether ENV services should be subject to regulation. Concerning carrier participation in the provision of ENV services, the comments addressed whether the resale structure is appropriate, whether it must necessarily be applied to all carriers owning transmission facilities, and the appropriate degree of corporate separation required for those carriers that must offer ENV services through a separate subsidiary.
5. Based on the voluminous record compiled in this proceeding, we adopt a regulatory scheme that distinguishes between the common carrier offering of basic transmission services and the offering of enhanced services. Although more simplified terminology is employed, this basic/enhanced dichotomy for network services is consistent with the approach taken in the Tentative Decision. We find that basic service is limited to the common carrier offering of transmission capacity for the movement of information, whereas 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.
6. As the Tentative Decision recognizes, it is in the provision of enhanced services that uncertainty as to the communications or data processing nature of a service is significant. In the course of this proceeding we have made several attempts to adopt a definitional scheme that would provide an adequate regulatory demarcation between regulated communications services and unregulated data processing services. We conclude that the record does not support adoption of the definitional scheme proposed in the Tentative Decision and that any attempt to so categorize enhanced services is unnecessary under our statutory mandate and would be contrary to the public interest. Such use of a definitional scheme to classify various types of enhanced services would not result in regulatory certainty in the marketplace and would most likely result in the direct or indirect expansion of unnecessary regulation over currently unregulated vendors of enhanced services and deprive consumers of increased opportunities to have these services tailored to their individual needs.
7. The decision sets forth the regulatory scheme for basic and enhanced services. The common carrier offering of basic transmission services are communications services and regulated as such under traditional Title II concepts. Consistent with the determinations made in the First Computer Inquiry, we find that regulation of enhanced services is not required in furtherance of some overall statutory objective. In fact, the absence of traditional public utility regulation of enhanced services offers the greatest potential for efficient utilization and full exploitation of the interstate telecommunications network. Significant public benefits accrue to the Commission's regulatory process, providers of basic and enhanced services, and consumers under this approach.

### Customer-Premises Equipment

8. In the Tentative Decision we proposed a regulatory scheme for carrier-provided customer-premises equipment (CPE) based on whether the CPE performed more than a basic media conversion (BMC) function. We attempted to set forth a structure under which carriers
could, separate from their basic transmission services, provide CPE that incorporated various computer processing applications. We sought comment, however, as to whether any regulatory distinction should be made between the various kinds of CPE offered by carriers, and whether all such equipment should be deregulated. We find that the public interest would not be served by classifying CPE based on whether or not more than a basic media conversion function is performed. We conclude that, in light of increasing sophistication of all types of CPE and the varied uses to which CPE can be put while under the user's control, it is likely that any given classification scheme would impose an artificial, uneconomic constraint on the design and use of CPE. In general, no regulatory distinction should be made between various types of carrier-provided CPE.
9. As to the appropriate regulatory scheme for CPE, we find that the tariffing of CPE in conjunction with regulated communications services has a direct effect on rates charged for interstate services. To the extent rates for interstate services bear costs attributable to carrier-provided CPE regulation serves to thwart the competitive provision of CPE. The continuation of tariff-type regulation over carrier-provided CPE neither recognizes the role of carriers as competitive providers of CPE, nor does it reflect the severability of CPE from transmission services. We conclude that CPE is a severable commodity from the provision of transmission services and that regulation of CPE under Title II is not required and is no longer warranted.
10. We appreciate that implementation of our decision to exclude carrier-provided CPE from regulation requires the eventual removal of CPE related costs from a carrier's rate base and its ultimate exclusion from the jurisdictional separations process. A transition period is established to allow for the orderly removal of CPE investment and other CPE related costs from the jurisdictional separations process. During this transition period, a Federal-State Joint Board will consider whether modifications to the separations process are warranted in light of the removal of CPE.
11. We consider as well whether it is necessary to apply the resale structure set forth in the Tentative Decision to all carriers owning transmission facilities. We address whether certain carriers should be required to offer enhanced services on a resale basis through a separate corporate entity and whether CPE should likewise be marketed through an entity separate from that providing basic services.
12. Weighing the public interest benefits of our objectives and the economic tradeoffs inherent in a separate subsidiary requirement, we have determined that limited imposition of the requirement will best serve the communications ratepayer and the public interest more generally. There is little need to subject carriers to the resale structure if such entities lack significant potential to cross-subsidize or to engage
in other anticompetitive conduct. We find that only AT&T and GTE present a sufficiently substantial threat such that they should be required to establish separate corporate entities for the provision of enhanced services and customer-premises equipment. We will not require any other underlying carrier to form separate entities for the provision of these services and CPE. Accordingly, we are removing the maximum separation requirements for all carriers except those under direct or common control of AT&T or GTE. In reaching this conclusion we recognize that a reasonable balance can be struck only following a weighing of all appropriate circumstances bearing upon the risks that largely captive monopoly ratepayers will be burdened by anti-competitive conduct on the one hand and that opportunities for economic efficiencies redounding to their benefit may be lost on the other. The locus of the balance changes with circumstances. Because we have the flexibility under the Communications Act to adjust the balance as circumstances change or additional evidence is brought to light, we opt for a solution in which only AT&T and GT&E must form separate subsidiaries to offer ENHANCED service or CPE. Similarly, in establishing guidelines governing the relationship of the separated entities with their affiliates, we opt for a pragmatic approach which we can adjust when and if necessary.
13. Finally, we believe that our action does not preclude AT&T from offering enhanced services and CPE under the provisions of the 1956 Western Electric consent decree.
This work is in the public domain in the United States because it is a work of the United States federal government (see 17 U.S.C. 105).
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