35964 Federal Register / Vol. 61, No. 132 / Tuesday, July 9, 1996 / Rules and Regulations

been able to provide 20 years of data to

dispute the additional risk assumption.

The Coast Guard agrees that the data

does not support the presumption of

higher safety risks.

Instead, the reduction in the Great

Lakes load line certificate interval

caused an unnecessary increased

financial burden on the industry

without the benefit of an increase in the

level of safety. It created this increase in

costs by causing more frequent

drydockings and reducing the number

of days available to carry cargo. This

rule will avoid unnecessary costs to the

industry by providing for extensions of

Great Lakes load line certificate

intervals up to 365 days for qualifying

Great Lakes vessels.

Discussion of Rules

This rule revises 46 CFR Part 42 by

changing the limit on the number of

days that a Great Lakes load line

certificate may be extended from 90

days to 365 days. This expands the

Great Lakes load line certificate interval

to a maximum interval of 6 years,

including allowable extensions.

Regualtory Evaluation

This rule is not a significant

regulatory action under section 3(f) of

Executive Order 12866 and does not

require an assessment of potential costs

and benefits under section 6(a)(3) of that

order. It has not been reviewed by the

Office of Management and Budget under

that order. It is not significant under the

regulatory policies and procedures of

the Department of Transportation (DOT)

(44 FR 11040; February 26, 1979). The

Coast Guard expects the economic

impact of this rule to be so minimal that

a full Regulatory Evaluation under

paragraph 10e of the regulatory policies

and procedures of DOT is unnecessary.

This rule impacts only vessel owners

and operators in possession of a Great

Lakes Load Line Certificate, and will

result in cost savings to vessels

receiving an extension of this certificate

by allowing vessel owners and operators

greater flexibility in the coordination

and scheduling of required

examinations.

Small Entities

Under the Regulatory Flexibility Act

(5 U.S.C. 601 et seq.), the Coast Guard

must consider the economic impact on

small entities of a rule for which a

general notice of proposed rulemaking

is required. ‘‘Small entities’’ may

include (1) Small businesses and notfor-profit organizations that are

independently owned and operated and

are not dominant in their fields and (2)

governmental jurisdictions with

populations of less than 50,000.

This rule will create cost savings for

vessel owners and operators in

possession of a great Lakes load line

certificate without additional costs to

other small entities. Therefore, the Coast

Guard finds that this rule will not have

a significant economic impact on a

substantial number of small entities.

Any comments submitted in response to

this finding will be evaluated under the

criteria described earlier in the

preamble for comments.

Collection of Information

This rule contains no collection-ofinformation requirements under the

Paperwork Reduction Act (44 U.S.C.

3501 et seq.).

Federalism

The Coast Guard has analyzed this

rule under the principles and criteria

contained in Executive Order 12612 and

has determined that this rule does not

have sufficient federalism implications

to warrant the preparation of a

Federalism Assessment.

Environment

The Coast Guard considered the

environmental impact of this rule and

concluded that, under paragraph 2.B.2

of Commandant Instruction M16475.1B,

as revised by 59 FR 38654, July 29,

1994, this rule is categorically excluded

from further environmental

documentation. Section 2.B.2.e(34)(d) of

that instruction excludes ‘‘regulations

concerning manning, documentation,

admeasurement, inspection, and

equipping of vessels.’’ A ‘‘Categorical

Exclusion Determination’’ is available in

the docket for inspection or copying

where indicated under ADDRESSES.

List of Subjects in 46 CFR Part 42

Penalties, Reporting and record

keeping requirements, Vessels.

For the reasons set out in the

preamble, the Coast Guard amends 46

CFR part 42 as follows:

PART 42—DOMESTIC AND FOREIGN

VOYAGES BY SEA

1. The authority citation for part 42

continues to read as follows:

Authority: 46 U.S.C. 2103; 49 CFR 1.45,

1.46; section 42.01–5 also issued under the

authority of 44 U.S.C. 3507.

2. In § 42.07–45, paragraph (d)(2)

introductory text is revised to read as

follows:

§ 42.07–45 Loan line certificates.

* * * * *

(d) * * *

(2) A Great Lakes certificate is issued

for 5 years and may be extended by the

Commander, Ninth Coast Guard District,

up to 365 days from date of the—

* * * * *

Dated: July 2, 1996.

J.C. Card,

Rear Admiral, U.S. Coast Guard, Chief,

Marine Safety and Environmental Protection.

[FR Doc. 96–17461 Filed 7–8–96; 8:45 am]

BILLING CODE 4910–14–M

FEDERAL COMMUNICATIONS

COMMISSION

47 CFR Chapter I

[CC Docket No. 96–21, FCC 96–288]

Bell Operating Company Provision of

Out-of-Region Interstate,

Interexchange Services

AGENCY: Federal Communications

Commission.

ACTION: Interim rule.

SUMMARY: In this Report and Order, the

Commission facilitates the efficient and

rapid provision of out-of-region,

domestic, interstate, interexchange

services by the BOCs, as contemplated

by the Telecommunications Act of 1996

(1996 Act), while still protecting

ratepayers and competition in the

interexchange market, by removing

dominant regulation for BOCs that

provide such services through an

affiliate that complies with certain

safeguards. These safeguards are the

same as those that have applied for

more than ten years to affiliates of

independent local exchange companies

(LECs) (i.e., exchange telephone

companies, including GTE, other than

the BOCs) that are regulated as nondominant interexchange carriers under

the rules established in the Competitive

Carrier proceeding. These rules will

permit the rapid entry by the BOCs into

the provision of out-of-region interstate,

interexchange services while providing

protection against anticompetitive

conduct.

EFFECTIVE DATE: August 8, 1996.

FOR FURTHER INFORMATION CONTACT:

Michael Pryor (202) 418–0495 or

Melissa Waksman (202) 418–0913,

Common Carrier Bureau, Policy and

Program Planning Division.

SUPPLEMENTARY INFORMATION: This is a

synopsis of the Commission’s Report

and Order adopted on June 28, 1996,

and released on July 1, 1996, FCC 96–

288. The full text of this Report and

Order is available for inspection and

copying during normal business hours

in the FCC Reference Center (Room
Federal Register / Vol. 61, No. 132 / Tuesday, July 9, 1996 / Rules and Regulations 35965

239), 1919 M St., N.W., Washington, DC.

The complete text also may be

purchased from the Commission’s copy

contractor, International Transcription

Service, Inc., (202) 857–3800, 2100 M

St., NW., Suite 140, Washington, DC

20037.

Paperwork Reduction: Public burden

for this recordkeeping requirement is

estimated to average 6056 hours per

response, including the time for

reviewing instructions, searching

existing data sources, gathering and

maintaining the data needed, and

completing and reviewing the collection

of information. Send comments

regarding this burden estimate or any

other aspect of this recordkeeping

requirement, including suggestions for

reducing the burden, to the Federal

Communications Commission, Records

Management Branch, Paperwork

Reduction Project, Washington, D.C.

20554 and to the Office of Management

and Budget, Paperwork Reduction

Project, Washington, D.C. 20503.

Synopsis of Notice of Proposed

Rulemaking

I. Introduction

1. In enacting the

Telecommunications Act of 1996 (1996

Act), Pub. L. No. 104–104, 110 Stat. 56

(1996) codified at 47 U.S.C. §§ 151 et

seq, Congress sought to establish ‘‘a procompetitive, de-regulatory national

policy framework’’ for the United States

telecommunications industry. The 1996

Act, among other things, provided that

upon enactment the Bell Operating

Companies (BOCs) could provide

interLATA telecommunications services

originating outside of their in-region

states. In response to the new

legislation, the Commission released, on

February 14, 1996, a Notice of Proposed

Rulemaking, 61 FR 6607 (Feb. 21, 1996),

in which the Commission proposed an

interim regime to govern the BOCs’

provision of out-of-region domestic,

interstate, interexchange service. The

Notice addressed all ‘‘out-of-region’’

interstate, interexchange services

(including interLATA and intraLATA

services). Eighteen parties filed

comments and thirteen parties filed

reply comments.

2. Under our existing rules, BOC

provision of out-of-region, interstate,

interexchange services is subject to

dominant carrier regulation. In order to

facilitate the efficient and rapid

provision of out-of-region, domestic,

interstate, interexchange services by the

BOCs, as contemplated by the 1996 Act,

while still protecting ratepayers and

competition in the interexchange

market, we remove dominant regulation

for BOCs that provide out-of-region,

interstate, interexchange services

through an affiliate that complies with

certain safeguards. These safeguards are

the same as those that have applied for

more than ten years to affiliates of

independent local exchange companies

(LECs) that are regulated as nondominant interexchange carriers under

the rules established in the Competitive

Carrier proceeding. The safeguards

require that the affiliate: (1) maintain

separate books of account from the LEC;

(2) not jointly own transmission or

switching facilities with the LEC; and

(3) take any tariffed services from the

affiliated LEC pursuant to the terms and

conditions of the LEC’s generally

applicable tariff. We also conclude that

a BOC affiliate providing out-of-region,

domestic, interstate, interexchange

services should be treated, for purposes

of the BOCs’ accounting, as a

nonregulated affiliate under the

Commission’s joint cost and affiliate

transactions rules, just as independent

LEC affiliates are now treated.

3. The regime adopted in this Report

and Order is expressly designed as an

interim measure to facilitate the BOCs’

prompt provision of out-of-region,

domestic, interstate, interexchange

services. In March 1996, the

Commission sought comment in the

Interexchange NPRM, on whether to

modify or eliminate these affiliate

requirements as a condition for nondominant treatment of independent LEC

provision of out-of-region, interstate,

interexchange services. We also sought

comment on whether, if we modify or

eliminate these requirements for

independent LECs, we should also

eliminate or modify our treatment of

BOC out-of-region, interstate,

interexchange services. We will

establish final rules for BOC out-ofregion, interstate, interexchange services

in that proceeding.

II. Background

A. The Competitive Carrier Proceeding

4. Between 1979 and 1985, the

Commission conducted the Competitive

Carrier proceeding, in which it

examined how its regulations should be

adapted to reflect and facilitate the

increasing competition in

telecommunications markets. In a series

of orders, the Commission distinguished

between carriers with market power

(dominant carriers) and those without

market power (non-dominant carriers).

The Commission gradually relaxed its

regulation of non-dominant carriers

because it concluded that non-dominant

carriers lacked the incentive and ability

to engage in conduct that might be

anticompetitive or otherwise

inconsistent with the public interest.

5. In its First Report and Order, 45 FR

52453, November 18, 1980, the

Commission classified AT&T and its

then-affiliated local exchange

companies as well as independent local

exchange companies as dominant

carriers and concluded that these

dominant carriers should be subject to

the ‘‘full panoply’’ of Title II regulation.

Recently, in light of increasing

competition in the interstate, domestic,

interexchange telecommunications

market, and evidence that AT&T no

longer possesses the ability to control

prices unilaterally, the Commission

reclassified AT&T as a non-dominant

carrier in that market.

6. In its Fourth Report and Order, 48

FR 52452, November 1983, the

Commission considered how it should

regulate the provision of interstate,

interexchange services by independent

LECs. Because the Modification of Final

Judgment, United States v. Western

Elec. Co., 552 F. Supp. 131 (D.D.C.

1982), aff’d. sub nom., Maryland v.

United States, 460 U.S. 1001 (1983),

prohibited BOCs from offering

interLATA services, the Fourth Report

and Order addressed only the interstate,

interexchange offerings of independent

LECs. The Commission determined that

interexchange carriers affiliated with

independent LECs would be regulated

as non-dominant carriers. In the Fifth

Report and Order, 49 FR 34824,

September 4, 1984, the Commission

explained its definition of the term

‘‘affiliate’’ as ‘‘a carrier that is owned (in

whole or in part) or controlled by, or

under common ownership (in whole or

in part) or control with, an exchange

telephone company,’’ and identified

three separation requirements that the

affiliate must meet in order to qualify

for non-dominant treatment. These

requirements are that the affiliate: (1)

maintain separate books of account; (2)

not jointly own transmission or

switching facilities with the LEC; and

(3) if it uses the LEC’s services, it should

acquire them via the LEC’s tariffs. The

Commission further concluded that, if

the LEC provided interstate,

interexchange services directly, rather

than through an affiliate, those services

would be subject to dominant carrier

regulation.

7. The Fifth Report and Order also

addressed the regulation of the BOCs’

provision of interLATA services:

The BOCs currently are barred by the

[Modification of Final Judgment] from

providing interLATA services. . . . If this bar

is lifted in the future, we would regulate the

BOCs’ interstate, interLATA services as

dominant until we determined what degree
35966 Federal Register / Vol. 61, No. 132 / Tuesday, July 9, 1996 / Rules and Regulations

of separation, if any, would be necessary for

the BOCs or their affiliates to qualify for

nondominant regulation.

B. The 1996 Act and the BOC Out-ofRegion Notice of Proposed Rulemaking

10. Section 271(b)(2), added by the

1996 Act, provides:

A Bell operating company, or any affiliate

of that Bell operating company, may provide

interLATA services originating outside its inregion States after the date of enactment of

the Telecommunications Act of 1996, subject

to subsection (j).

Thus, the 1996 Act does not require a

BOC to obtain Commission

authorization prior to offering out-ofregion, interstate, interLATA services.

The 1996 Act, however, does not modify

the Commission’s determination in the

Fifth Report and Order that BOC

provision of interstate, interLATA

services initially would be subject to

dominant carrier regulation.

11. Immediately after the 1996 Act

became law, we issued the BOC Out-ofRegion NPRM, in which we proposed,

under certain conditions, to remove

dominant carrier regulation of the BOCs’

provision of out-of-region, interstate,

interexchange services. In our Notice,

we tentatively concluded that, as an

interim measure, if a BOC creates an

affiliate to provide out-of-region,

interstate, interexchange services

(including interLATA and intraLATA

services), and if the affiliate satisfies the

minimal separation requirements set

forth in the Fifth Report and Order that

apply to the interexchange affiliates of

independent LECs, then the BOC

affiliate’s provision of those

interexchange services would be

regulated on a non-dominant basis. We

also noted that LECs providing

interexchange services through affiliates

pursuant to the Fifth Report and Order

treat those affiliates as nonregulated

affiliates under the Commission’s joint

cost rules and affiliate transactions rules

for exchange carrier accounting

purposes. In our Notice, we sought

comment on whether a BOC affiliate

providing out-of-region, interstate,

interexchange services also should be

treated as a nonregulated affiliate for

BOC accounting purposes. Finally, we

tentatively concluded that, at least for

now, if a BOC provides out-of-region,

interstate, interexchange services

directly, or through an affiliate that fails

to comply with these minimal

separation requirements, then dominant

carrier regulation would be retained for

those services.

III. Discussion

A. The Purpose of the Interim Rules

12. This proceeding is necessary to

enable the BOCs to begin competing in

an out-of-region area in the

interexchange market on a nondominant basis. Currently, BOC

provision of interstate, interexchange

service is subject to dominant carrier

regulation until we determine the

degree of separation, if any, necessary

for non-dominant treatment. Thus, BOC

out-of-region services would be subject

to dominant regulation, whether those

services were offered directly by the

BOC or through another entity, no

matter how structurally separate from

the BOC. We take no position in this

proceeding on whether the structural

separation requirements, other

safeguards established by the 1996 Act,

and our existing regulations that would

apply to BOC provision of in-region

services are sufficient to allow us to

relax dominant carrier regulation for the

separate subsidiaries through which the

BOCs must provide in-region,

interLATA services. See 47 U.S.C. § 272.

We will address that issue in a separate

proceeding.

13. In our Notice, we tentatively

concluded that we could remove

dominant carrier regulation of BOC outof-region, interstate, interexchange

services by applying to the BOCs the

same rules that have worked well for

independent LECs. These rules were

specifically designed to impose minimal

burdens on the smaller, independent

LECs, and thus are less stringent than

the structural separation required under

our Computer II regime, and contain

fewer restrictions than imposed by the

1996 Act for BOC provision of in-region,

interLATA services. At the same time,

the Commission found in the Fifth

Report and Order that these separation

requirements provided some protection

against anticompetitive abuses that

could arise from the LECs’ control over

local bottleneck facilities.

14. Because we believe that we should

move expeditiously in order to advance

the goals of the 1996 Act, we

specifically stated in the Notice that the

actions we take in this proceeding

would be interim. By applying the wellestablished rules applicable to

independent LECs as an interim

measure, we are able to: remove

dominant carrier regulation for BOC

out-of-region, interstate, interexchange

services, thereby facilitating prompt and

competitive entry by the BOCs into

those services; have the same level of

assurance of protecting competition and

ratepayers as we have with independent

LECs and their interexchange affiliates;

and avoid engaging in a protracted

proceeding. We have already issued a

Notice in which we initiate a more

comprehensive review of the rules that

are applicable to both independent LECs

and the BOCs in the provision of out-ofregion, interstate, interexchange

services. In the Interexchange NPRM,

we sought comment on whether it may

be appropriate to modify or eliminate

the minimal separation requirements

applied to independent LEC affiliates

providing interstate, interexchange

services originating outside of their

local exchange areas. We also sought

comment on whether, if we do modify

or eliminate such requirements for

independent LECs, we should apply the

same requirements to BOC provision of

out-of-region, interstate, interexchange

services. We will finalize our rules

governing both BOC and independent

LEC provision of out-of-region,

interstate, interexchange services in that

proceeding.

B. Non-dominant Classification for BOC

Affiliates

15. The record does not dissuade us

from proceeding on an interim basis as

proposed in the Notice. NYNEX and

Pactel support, as an interim measure,

adoption of the BOC Out-of-Region

NPRM’s tentative conclusions,

including use of the Commission’s joint

cost and affiliate transactions rules.

NYNEX contends that the proposed

rules are ‘‘an excellent first regulatory

step that the Commission can take

promptly to enable BOC entry into the

long distance service markets.’’ Pactel

supports the rules as a method of

ensuring regulatory parity among all

exchange companies, BOCs and

independent LECs, even though Pactel

disputes that the BOCs have market

power in the interexchange market.

16. The remaining BOCs object to

removing dominant regulation only for

affiliates meeting the Fifth Report and

Order requirements and contend that

out-of-region, interstate, interexchange

services should be regulated as nondominant even if provided on an

unseparated basis. These commenters

raise essentially three arguments: (1)

BOCs do not have market power in the

interexchange market under the criteria,

such as market share, established in the

Competitive Carrier proceeding and

those applied in reclassifying AT&T as

a non-dominant interexchange carrier;

(2) BOCs have neither the ability nor the

incentive to leverage their control over

local facilities to impede competition in

the interexchange market, especially

given current regulations and the

provisions of the 1996 Act that are

designed to open the local market to
Federal Register / Vol. 61, No. 132 / Tuesday, July 9, 1996 / Rules and Regulations 35967

competition; and (3) the proposed

separation requirements for out-ofregion interexchange services are

inconsistent with the 1996 Act.

17. BellSouth additionally argues that,

by proposing to regulate BOCs as

dominant if they directly provide out-ofregion, interexchange services based on

their market power in the provision of

local services, we are resurrecting the

‘‘all services’’ approach. BellSouth

states that, in the Competitive Carrier

orders, the Commission adopted an ‘‘all

services’’ approach under which a

finding that a carrier was dominant in

the provision of one service subjected a

carrier to dominant regulation of all

services. BellSouth argues that, under

this ‘‘all services’’ approach, the

Commission ruled that bottleneck

facilities were prima facie evidence of

dominance in all markets. BellSouth

maintains that the Commission rejected

this approach in the AT&T

Reclassification Order. We reject this

analysis. The ‘‘all services’’ question

addressed in the AT&T Reclassification

Order was whether the Commission

could find AT&T non-dominant only if

‘‘AT&T lacks the ability to control the

price of every tariffed service in the

relevant market.’’ A very different

question is posed by the BOCs entry

into out-of-region, interstate,

interexchange services: whether a firm

with market power in one relevant

market (the local exchange and

exchange access market) can leverage

that power to gain market power or an

unfair advantage in another, related

market (the interexchange market).

18. As for the non-BOC commenters,

MCI and TRA argue that, given the

potential for the BOCs to engage in

anticompetitive conduct, the BOC

affiliate should be regulated as

dominant. Almost all of the other nonBOC commenters support non-dominant

regulation of BOC out-of-region services

if provided through a separate affiliate,

but contend that the safeguards

proposed in the Notice are insufficient

to protect against abuses by the BOCs.

Specifically, these parties claim that

without these additional safeguards the

BOCs could use their control over local

exchange facilities to unfairly

discriminate in pricing or service

quality against competing interexchange

carriers or could cross-subsidize their

long distance operations by shifting

costs to the local exchange and

exchange access operations. They urge

the Commission, therefore, to impose

full structural separation on the out-ofregion affiliate, including the

separations imposed by section 272 on

the in-region interexchange affiliate.

They also seek to bar joint marketing of

local and out-of-region services or, at

least, require that marketing personnel

and operations be separated. Some ask

the Commission to require that the BOC

provide all Title II services to its affiliate

at the generally applicable tariffed rates

and that all non-Title II services and

access to information obtained by the

BOC by virtue of its provision of local

exchange service be provided on a nondiscriminatory basis or that such

information not be shared at all. Finally,

non-BOC commenters dispute claims

that the Notice’s proposals are

inconsistent with the 1996 Act.

19. We adopt here the interim rules

proposed in the Notice, at least until

completion of our broader rulemaking

proceeding, the Interexchange NPRM.

The Fifth Report and Order safeguards

we adopt herein on an interim basis

have worked relatively well since 1984

to protect against potential abuses by

the independent LECs in their provision

of interexchange services and we

believe that they will provide adequate

interim protection as the BOCs begin

providing out-of-region interexchange

services. As the Commission noted in

the Fifth Report and Order, these

safeguards provide some protection

against ‘‘cost-shifting and

anticompetitive conduct.’’ These

safeguards have been applied to

independent LEC provision of

interexchange services originating in

and out of their regions and should

provide sufficient interim safeguards for

BOC provision of solely out-of-region

services. Additionally, these safeguards

will be supplemented with the

application of our cost allocation and

affiliate transaction rules, as explained

below, which provide further protection

against cost misallocations. Moreover,

no party has presented persuasive

evidence to show that, at this time,

these rules will not be effective interim

measures.

20. At the same time, we believe that

these minimal requirements should be

in place pending further analysis of

these issues. Not only has the

Commission adopted an NPRM to

address these specific issues, but we

also have launched various proceedings,

and are in the process of issuing further

rulemakings, relating to the

implementation of various aspects of the

1996 Act. These proceedings touch

upon issues raised in this proceeding,

such as the proper market definition

and the scope of various safeguards. We

believe it is prudent to assess the record

in those proceedings in order to assist

us in adopting a comprehensive and

cohesive framework that addresses the

myriad issues involving BOC provision

of services that the BOCs previously

have been barred from offering.

21. Thus we reject AT&T’s argument

that the proposed rules should not be

adopted because, AT&T contends, they

improperly depart from the use of a

single, nationwide, interexchange

market without submarkets without

providing a reasoned explanation. The

Notice proposed to apply, on an interim

basis, the same rules to BOC out-ofregion services that we apply to

independent LECs. We do not find that

AT&T has presented persuasive reasons

to depart from this prior precedent for

purposes of these interim rules.

Moreover, in the Notice, we explicitly

proposed to address only BOC provision

of out-of-region, interstate,

interexchange services. At the same

time, we made clear that we were

planning to adopt these rules on an

interim basis, pending a future

proceeding to consider more fully the

long-term issues raised by BOC entry

into out-of-region, interstate,

interexchange services. We note that on

March 25, 1996, we released the

Interexchange NPRM initiating that

proceeding. In proposing to look only at

BOC provision of out-of-region,

interstate, interexchange service here,

we sought to balance the goal of the

1996 Act to allow swift BOC entry into

the interexchange market, subject to

interim safeguards, with the need for a

comprehensive review of our rules. We

believe it is within our discretion to

conduct our proceedings in such a

manner as to accommodate these twin

purposes.

22. We find that our interim plan of

removing dominant carrier regulation

for BOC affiliates meeting the Fifth

Report and Order separation

requirements and retaining dominant

regulation for BOCs that provide out-ofregion services directly will not impose

an unreasonable burden on the BOCs.

Initially, we believe it is important to

clarify the scope of the Fifth Report and

Order separation requirements. Most

commenters refer to the Fifth Report

and Order requirements as structural

separation. This is true only in the sense

that the BOC or LEC non-dominant

interexchange affiliate is a separate legal

entity. In no other sense do we require

‘‘structural separation.’’ Indeed, in the

Fifth Report and Order, the Commission

specifically rejected arguments that

structural separation requirements

should be imposed between an

independent LEC and its interexchange

affiliate because the Commission found

that structural separation would impose

unreasonable burdens on smaller,

independent LECs. The Commission

specifically sought to avoid imposing
35968 Federal Register / Vol. 61, No. 132 / Tuesday, July 9, 1996 / Rules and Regulations

excessive burdens and noted that the

LEC affiliate qualifying for nondominant treatment ‘‘is not necessarily

structurally separated from the

exchange telephone company in the

sense ordered in the Second Computer

Inquiry * * * (e.g., fully-separated

personnel and marketing are not

necessary for nondominant treatment).’’

Thus, except for the ban on joint

ownership of transmission and

switching facilities, a restriction which

we believe should pose little, if any,

burden on the provision of out-ofregion, interstate, interexchange

services, the BOC and the interexchange

affiliate will be able to share personnel

and other resources or assets. The

affiliate may be staffed by BOC

personnel, housed in existing BOC

offices, and use BOC marketing or other

services. Providing interexchange

services through such an affiliate will

not impede the BOCs’ ability to realize

efficiencies gained through the use of

joint resources. To help ensure that the

BOCs properly allocate the costs of any

services provided to the interexchange

affiliate, however, we require that the

BOC treat this affiliate for accounting

purposes as a nonregulated affiliate and

therefore subject to our cost allocation

and affiliate transactions rules.

23. Additionally, we clarify the

separate books of account requirement

and the requirement that to the extent

the affiliate obtains BOC services it do

so under the terms of the BOC’s tariff.

We do not require that the

interexchange affiliate maintain separate

books of account that comply with our

Part 32 rules. Instead, the separate books

of account requirement refers to the fact

that, as a separate legal entity, the

affiliate must maintain its own books of

account as a matter of course. This is

consistent with the current accounting

treatment of the interexchange affiliates

of independent LECs. Books of account

refer to the financial accounting system

a company uses to record, in monetary

terms, the basic transactions of a

company. These books of account reflect

the company’s assets, liabilities, and

equity, and the revenues and expenses

from operations. Each company has its

own separate books of account. The

Commission’s Part 32 rules, the Uniform

System of Accounts (USOA), prescribe

the books of account for the telephone

companies. The Part 32 USOA,

however, is not required to be kept by

affiliates of a telephone company. These

affiliates maintain their own separate

books of account. We note that, if a

telephone company decides to conduct

out-of-region, interstate, interexchange

service within the telephone company

without using a separate affiliate, this

activity would be reflected in the

telephone company’s USOA accounts,

because the USOA reflects the

telephone company’s total operations.

As to the tariff requirement, we clarify

that this provision applies only to

services for which the BOC is required

to file a tariff, not to detariffed services

such as billing and collection. The

provision also only applies when the

affiliate obtains tariffed services from its

affiliated BOC.

24. Parties have offered no credible

evidence to support contentions that the

Fifth Report and Order separation

requirements constitute burdensome

regulation. Indeed, the entry of

interexchange carriers affiliated with

independent LECs over the past decade

serves as evidence that these conditions

will not prevent the BOCs from

competing effectively. Moreover, we

note that several BOCs have already

established, or plan to establish,

subsidiaries through which they will

provide interexchange services that

meet or exceed these separation

requirements. We believe that

separation requirements designed to

accommodate the resources of small

independent LECs will not impose an

unreasonable burden on the much larger

regional Bell companies, particularly on

an interim basis.

25. Finally, we conclude, as an

interim measure, that if a BOC chooses

to offer out-of-region interstate

interexchange services directly, it will

be subject to dominant carrier regulation

and to price cap regulation. Specifically,

we require that the BOCs include such

services in the price cap Basket for

interexchange services. See 47 CFR

§ 61.42(d)(4).

C. Consistency With the 1996 Act

26. Several BOC commenters argue

that the separate affiliate requirement,

even as an interim measure, is

inconsistent with the provisions of the

1996 Act. They contend that the 1996

Act specifically excluded out-of-region

services from the separate affiliate

requirement contained in new section

272. Some further argue that, because

dominant regulation is so onerous,

conditioning non-dominant treatment

on complying with the separation

requirements effectively requires BOCs

to establish a separate affiliate to

provide out-of-region interstate,

interexchange services in contravention

of the 1996 Act. They also argue, more

generally, that the proposed rules are

inconsistent with the overall

deregulatory emphasis of the new

legislation.

27. Bell Atlantic contends that the

proposed separation requirements are

inconsistent with the 1996 Act for two

reasons: (1) section 272(f) contains a

sunset provision for the in-region

affiliate whereas the proposed

separation requirements are openended; and (2) a BOC interexchange

affiliate providing out-of-region services

would be barred from jointly owning

transmission and switching facilities

with its operating company affiliate,

whereas Section 272 contains no such

restriction for the in-region separate

affiliate. Bell Atlantic concludes that it

would have to establish two

subsidiaries, one for in-region and one

for out-of-region services.

28. Non-BOC commenters dispute

these arguments. Some argue that,

because the 1996 Act is silent as to the

type of regulatory regime that the

Commission should impose on the

BOCs’ provision of out-of-region

interexchange services, the statute

contemplates that the Commission may

apply its existing dominant/

nondominant regulatory regime. These

parties further point out that the

separate subsidiary provisions of the

1996 Act contain a savings clause which

states that ‘‘[n]othing in this subsection

shall be construed to limit the authority

of the Commission under any other

section of this Act to prescribe

safeguards consistent with the public

interest, convenience and necessity.’’

Vanguard contends that the BOCs are

essentially arguing that the 1996 Act

repealed the Commission’s existing

statutory authority to apply its

dominant carrier rules to BOC

interexchange affiliates by implication.

Vanguard asserts that a statutory

construction that would repeal an

agency’s authority by implication is

‘‘highly disfavored’’ by the courts except

where there is an irreconcilable conflict

between the two statutes or where there

is compelling evidence that Congress

intended to repeal the prior statute.

Sprint and others contend that the

proposed safeguards are less

burdensome than the statutory separate

subsidiary requirement and note that,

while the 1996 Act mandates a separate

subsidiary to provide in-region services,

the Commission’s proposal permits the

BOCs to offer out-of-region services

through an affiliate or directly.

29. We reject the contention that

section 272(a)(2) prohibits us from

retaining the dominant/non-dominant

regulatory framework which the

Commission has applied to

interexchange carriers prior to passage

of the 1996 Act for BOC provision of

out-of-region, interstate, interexchange

services. More specifically, we do not
Federal Register / Vol. 61, No. 132 / Tuesday, July 9, 1996 / Rules and Regulations 35969

agree that, by excluding out-of-region

services from those services that a BOC

must provide through a structurally

separate affiliate, section 272(a)(2) bars

the Commission from according nondominant regulation of BOC out-ofregion, interstate, interexchange services

only to BOC affiliates that comply with

the separation requirements we adopt in

this Order. Section 272(a)(2), relied

upon by the BOC commenters, provides

in pertinent part that:

The services for which a separate affiliate

is required by paragraph (1) are:

* * * * *

(B) Origination of interLATA

telecommunications services, other than—

* * * * *

(ii) out-of-region services described in

section 271(b)(2).

As noted by MCI, the legislation is silent

on the issue of dominant/non-dominant

regulation of BOC interLATA services.

We conclude that Congress did not

intend by implication to repeal our

authority to impose dominant or nondominant regulatory treatment as we

deem necessary to protect the public

interest consistent with our statutory

mandates. To the contrary, Section

601(c) of the 1996 Act provides that we

are not to presume that Congress

intended to supersede our existing

regulations unless expressly so

provided.

30. Nor is there any inconsistency

between the separation requirements we

adopt by this Order as an interim

measure and the 1996 Act. We do not

mandate that the BOCs provide out-ofregion, interstate, interexchange services

through a separate affiliate. Instead, this

Order concludes that, on an interim

basis, BOCs will continue to be subject

to dominant carrier treatment if they

offer out-of-region interstate,

interexchange services directly. The

same requirement has applied to all

independent LECs since 1984. This

order, in effect, offers the BOCs a choice

of providing out-of-region, interstate,

interexchange services under dominant

regulation if they wish to furnish those

services directly or under non-dominant

regulation if they wish to offer those

services through a separate affiliate that

meets the separation requirements.

31. We also note that the 1996 Act’s

provisions for the structurally separate

in-region subsidiary contain more

restrictions than those that will apply to

the BOC affiliates’ provision of out-ofregion, interstate, interexchange services

as a non-dominant carrier. For example,

the 1996 Act requires that the separate

subsidiary that must be established to

provide in-region interLATA services

must have separate officers, directors,

and employees, and may not obtain

credit under any arrangement that

would permit recourse to the BOC. See

47 U.S.C. § 272(b). None of these

requirements applies to the BOCs’ outof-region affiliate.

32. Bell Atlantic contends, however,

that our proposed separation conditions

are, in fact, more rigorous than those

established by the 1996 Act for in-region

services because we have not suggested

a sunset date and have barred joint

ownership of transmission and

switching facilities. We are seeking

comment in the Interexchange NPRM on

whether to modify or eliminate the

separation requirements for

independent LECs in their provision of

out-of-region, interstate, interexchange

service as a condition for non-dominant

treatment. We are also seeking

comments on whether, if we modify or

eliminate these separation requirements

for independent LECs, we should apply

the same treatment to BOC provision of

out-of-region, interstate, interexchange

service. Bell Atlantic’s argument is more

appropriately addressed in that

proceeding. During the interim period

that will be covered by the rules we

promulgate today, a prohibition on joint

ownership of switching and

transmission facilities should cause no

hardship on the BOC provision of outof-region services because, as the BOCs

maintain, they initially will be using

other carriers’ facilities and because of

the geographic separation of in-region

facilities and out-of-region services.

Additionally, the fact that the 1996 Act

contains a sunset provision for certain

restrictions is not a basis for concluding

that our interim rules for BOC out-ofregion, interstate, interexchange services

are inconsistent with the 1996 Act.

D. Proposed Mergers

33. After the record in this proceeding

closed, SBC Communications Inc., and

Pacific Telesis Group announced, on

April 1, 1996, an agreement to merge

their operations. Three weeks later, on

April 21, 1996, Bell Atlantic and

NYNEX announced that they had

reached an agreement to merge. We

believe that mergers such as these raise

concerns with respect to the provision

of out-of-region services during the

pendency of the merger. Specifically,

they raise the concern that, in the period

prior to a merger’s consummation, one

partner to the merger may act in ways

to favor those out-of-region services of

its merger partner that originate in the

first partner’s service territory. For

example, BOC A may favor BOC B’s

long distance services originating in

BOC A’s territory because BOC A may

eventually share in BOC B’s profits. We

do not believe that the record in this

proceeding provides an adequate basis

on which to address the specific

concerns raised by such pending

mergers. Accordingly, we exclude from

the services covered by this Order, those

out-of-region services that originate in

the in-region states of a merger partner

during the period prior to the

consummation of the merger. Given the

interim nature of the rules we are

establishing in this Order, and the fact

that we are not aware of plans by any

of the potential merger partners to

provide out-of-region services

originating in their respective partners’

service territories, we believe that this

approach likely will not impose any

burdens on the affected parties. Should

such parties determine, however, to

provide such services, those parties

should request the Commission, on an

individual case basis, for a

determination of whether such services

can be provided on a non-dominant

basis. Because our concern relates to the

incentives of one party to favor the

operations of the other party during the

pendency of the merger, should an

announced merger not be consummated,

the interim rules established in this

Order for out-of-region services shall

apply to all out-of-region services

provided by the parties to the proposed

merger.

34. Nothing in this section on

proposed mergers should be construed

as indicating the Commission’s position

with respect to mergers in other sectors

of the telecommunications industry or

outside of this particular and unusual

context. A unique confluence of

circumstances lead us to conclude that

it is both reasonable and prudent to

postpone our determination of the

appropriate regulatory treatment for

BOC out-of-region services originating

in a potential merger partner’s territory.

These unique circumstances include: (1)

The announcement of mergers,

following the closure of the record in

this proceeding, involving four of the

seven regional Bell companies that

would be subject to the rules established

in this proceeding; (2) the concern that

a BOC, through its position in the local

telephone exchange market and its

bottleneck control over inputs into the

interexchange market, may have the

ability, along with the incentive, to

favor the out-of-region interexchange

services operations of a potential merger

partner; (3) the interim nature of these

rules; and (4) the 1996 Act’s

authorization for BOCs to begin

providing out-of-region services upon

enactment. Given these unique

circumstances, we emphasize that this
35970 Federal Register / Vol. 61, No. 132 / Tuesday, July 9, 1996 / Rules and Regulations

action is limited to the facts and

circumstances set forth in this

discussion of proposed mergers.

E. Joint Cost and Affiliate Transactions

Rules

35. In the BOC Out-of-Region NPRM,

we stated that independent LECs

providing interexchange services

through affiliates pursuant to the Fifth

Report and Order treat those affiliates as

nonregulated affiliates under the

Commission’s joint cost and affiliate

transactions rules for exchange carrier

accounting purposes. The BOC Out-ofRegion NPRM sought comment on

whether BOC out-of-region, interstate,

interexchange services should be treated

as nonregulated services for BOC

accounting purposes.

36. AT&T, Pactel, NYNEX, Comptel

and Vanguard support the treatment of

BOC out-of-region affiliates as nonregulated for accounting purposes.

AT&T and Comptel believe such rules

are necessary to constrain the BOCs’

ability to cross-subsidize and to ensure

that local monopoly assets are not used

unfairly to advantage long distance

operations. Vanguard asserts that the

rules would not impose a burden

because BOCs account for certain

services on this basis already and

because such treatment would merely

entail setting up the initial account for

service, not changing existing

procedures. NYNEX states that these

rules have been effective as applied to

independent LECs, and thus would not

be unreasonable to apply to BOCs

providing similar services. AT&T and

Comptel also contend that some type of

independent audit should be performed

periodically to certify that long distance

affiliates retain their financial

independence. Pactel supports

application of the affiliate transaction

rules as an interim measure.

37. Ameritech opposes application of

the affiliate transactions rules to BOC

interexchange affiliates. It contends that

the joint cost and affiliate transactions

rules are designed to allocate costs

between regulated and nonregulated

activities, not between two regulated

services and that, in any event,

application of those rules would be

unnecessary because the Part 69 rules

already require BOCs to identify

separately interexchange costs. At a

minimum, Ameritech argues that the

rules should not apply to any BOC

subject to pure price cap regulation at

the state and federal level. The Public

Utilities Commission of Ohio (PUCO)

also opposes treating the affiliate as

nonregulated because they contend that

accounting abuses are better detected by

treating the affiliate’s services as

regulated.

38. Our existing accounting

safeguards for affiliate transactions were

developed in the Joint Cost Order and

are codified in Parts 32 and 64 of our

Rules. The Part 64 cost allocation rules

prescribe how carriers separate the costs

of regulated activities from the costs of

nonregulated activities, where the

nonregulated activities are performed

directly by the carrier rather than

through an affiliate. The Part 32 affiliate

transactions rules prescribe the way

costs are recorded, for Title II

accounting purposes, when a regulated

carrier does business with its

nonregulated affiliates. These rules are

designed to prevent local exchange

carriers from imposing the costs and

risks of their competitive ventures on

local telephone ratepayers. These rules

do not require carriers or their affiliates

to charge any particular prices for assets

transferred or services provided; rather,

they require carriers to use certain

specified valuation methods in

determining the amounts to record in

their Part 32 accounts, regardless of the

prices charged.

39. Because the cost allocation and

affiliate transactions rules are an

important component of our accounting

safeguards, we find that these rules

should apply to BOCs providing out-ofregion, interstate, interexchange services

through a separate affiliate. Even though

interLATA services are regulated

services under Title II, under the rules

we adopt herein, the BOCs, for

accounting purposes, will treat the

services as nonregulated, so as to make

applicable our cost allocation and

affiliate transaction rules. The fact that

interLATA services are regulated

services in and of itself does not

eliminate the potential for cost

misallocation between the BOCs

competitive (interLATA) and

noncompetitive (local exchange and

exchange access) services. Thus, we

believe that application of our cost

allocation and affiliate transaction rules

is necessary to minimize the possibility

that a BOC could improperly shift the

costs of its interstate, interexchange

operations to its regulated local

exchange and exchange access

ratepayers. We also note that this

requirement is consistent with the

current practice of independent LECs

that treat their affiliates providing

interexchange services as nonregulated

for exchange carrier accounting

purposes.

40. We find that requiring BOCs to

treat affiliates providing out-of-region

services as nonregulated will not be

unduly burdensome. BOCs currently

have systems in place to account for

transactions between their nonregulated

affiliates (i.e., for transactions between a

BOC and any of its information services

which are not regulated under Title II).

Such a requirement will not entail

extensive modification of existing

company procedures for the provision

of interexchange services because, prior

to the passage of the 1996 Act, BOCs

were prohibited from providing

interstate, interexchange services.

IV. Additional Issues

A. Regulation of CMRS-Related

InterLATA Services

41. The BOC Out-of-Region NPRM

stated that ‘‘BOC provision to

commercial mobile radio service

customers, of interstate, interLATA

services originating outside any of the

BOC’s in-region states, is included in

the out-of-region services addressed in

this proceeding.’’

42. BellSouth argues that the language

in the Notice is susceptible to two

interpretations. According to BellSouth,

it may apply to: (1) The sale of out-ofregion, interexchange service by a BOC

to unaffiliated commercial mobile radio

service (CMRS) customers; or (2) the

provision of out-of-region,

interexchange CMRS service by a BOC.

BellSouth believes that the Commission

intended the first of these

interpretations—BOCs offering out-ofregion long distance to unaffiliated

CMRS customers on a stand alone basis,

not in conjunction with the BOC’s

provision of CMRS—and BellSouth

opposes applying the Notice’s proposed

rules to this service for all of the same

reasons it opposes any separation

requirements for out-of-region services.

BellSouth contends that the other

interpretation—BOC’s offering

interexchange, CMRS—constitutes

‘‘incidental’’ CMRS interLATA services

and is beyond the scope of this

proceeding. To the extent that a CMRS

provider offers interexchange services in

conjunction with its provision of CMRS,

the interexchange service is itself

incidental CMRS, and thus exempted

from section 272 separate affiliate

requirements, according to BellSouth.

Bell Atlantic and SBC also oppose any

restrictions on BOC provision of

incidental interLATA services,

including CMRS, because most of these

services were excluded from the

separate subsidiary requirement of 272.

43. MCI contends that the scope of

Section 272 is irrelevant because the

1996 Act does not prevent the

Commission from imposing its own

separation requirements. Vanguard

supports the proposed separation
Federal Register / Vol. 61, No. 132 / Tuesday, July 9, 1996 / Rules and Regulations 35971

requirements on the assumption that

they will be applied to BOC provision

of interLATA services to the customers

of its affiliated cellular companies.

Vanguard argues that the interest that a

BOC has in its cellular operations

increases the incentives to engage in

anticompetitive conduct because such

conduct can benefit both its long

distance operations and its cellular

operations. Comptel urges the

Commission to apply to all incidental

interLATA services the same rules

applied to out-of-region interexchange

services because they raise the same

concerns about discrimination and

cross-subsidization.

44. BellSouth’s interpretation of our

reference to CMRS in footnote two of

the BOC Out-of-Region NPRM is correct.

Our statement in the BOC Out-of-Region

NPRM was intended to clarify that a

BOC offering out-of-region long distance

service to unaffiliated CMRS customers

on a stand alone basis would be

considered ‘‘out-of-region’’ services for

purposes of this rulemaking. BOC

provision of interexchange services to

its affiliated CMRS customers is beyond

the scope of this proceeding. We also

reject as beyond the scope of this

proceeding Comptel’s request to apply

the separation requirements to all

‘‘incidental’’ services established under

section 272(g).

B. Definition of Certain Services as InRegion Services

45. Section 271(j) provides that

certain calls that originate out-of-region

will be deemed in-region traffic.

Specifically, this section provides that

‘‘a [BOC] application to provide 800

service, private line service, or their

equivalents that terminate in an inregion State of that [BOC], and allow the

called party to determine the interLATA

carrier, shall be considered an in-region

service subject to the requirements of

subsection (b)(1).’’

46. Comptel argues that the

Commission should declare collect and

third party billed calls to numbers

terminating in the BOC’s region and

BOC calling card calls to in-region

numbers as ‘‘equivalent’’ services and

thus be deemed in-region services.

Comptel’s rationale is that, like 800

number and private line services, the

party paying for the call selects the

interLATA carrier and thus is subject to

the BOCs’ local power. Comptel states

that the Commission should therefore

prohibit the BOC out-of-region affiliate

from completing collect calls, thirdparty billed calls, or BOC calling card

calls to terminating numbers located

within the BOC’s region. Ameritech

opposes Comptel’s interpretation, and

asserts that calling card, collect and

third party calls that are placed from

out-of-region do not fall within 271(j)

because the calling party, not the called

party, determines the long distance

carrier. Ameritech states that the calling

party decides whether to complete the

call on a 0+ basis or use access codes,

and if access codes are used, the calling

party decides which carrier to use.

47. The key factor in determining

whether a service falls within the scope

of section 271(j) as ‘‘equivalent’’ to 800

or private line service is whether the

called party determines the interLATA

carrier that is used. As Ameritech notes,

calling card, collect and third party

billed calls that originate out-of-region

and terminate in-region do not fall

within the scope of section 271(j)

because it is the calling party, not the

called party, that determines the

interLATA carrier. Because the called

party does not determine the interLATA

carrier that is used, there is no

justification for treating such calls as inregion services. Thus, we reject

Comptel’s proposal that we add calling

card, collect and third party calls to

those services classified as ‘‘in-region’’

under section 271(j).

V. Procedural Issues

A. Regulatory Flexibility Act Analysis

48. We certify that the Regulatory

Flexibility Act is not applicable to the

interim rules we are adopting in this

proceeding. These interim rules will not

result in a significant economic impact

on a substantial number of small

business entities, as defined by Section

601(3) of the Regulatory Flexibility Act.

Entities subject to the rule changes are

generally large corporations, affiliates of

large corporations, or are dominant in

their fields of operation, and, thus, are

not ‘‘small entities’’ as defined by the

Act. See 15 U.S.C. § 632(a)(1). We are

nevertheless committed to reducing the

regulatory burdens on small

communications services companies

whenever possible, consistent with our

other public interest responsibilities.

The Secretary shall send a copy of this

Report and Order to the Chief Counsel

for Advocacy of the Small Business

Administration in accordance with

Section 605(b) of the Regulatory

Flexibility Act, 5 U.S.C. §§ 601, et seq.

(1981).

B. Paperwork Reduction Act

49. The recordkeeping requirements

in this item are contingent upon

approval of the Office of Management

and Budget.

VI. Ordering Clause

50. Accordingly, it is ordered that,

pursuant to Sections 1, 4, 201–205, 215,

218, 220, and 271 of the

Communications Act of 1934, as

amended, 47 U.S.C. §§ 151, 154, 201–

205, 215, 218 and 220, the REPORT

AND ORDER is hereby ADOPTED. The

requirements adopted in this Report and

Order shall be effective 30 days after

publication in the Federal Register.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 96–17404 Filed 7–8–96; 8:45 am]

BILLING CODE 6712–01–P

DEPARTMENT OF COMMERCE

National Oceanic and Atmospheric

Administration

50 CFR Part 630

[I.D. 062796B]

Atlantic Swordfish Fishery; Drift Gillnet

Closure

AGENCY: National Marine Fisheries

Service (NMFS), National Oceanic and

Atmospheric Administration,

Commerce.

ACTION: Closure.

SUMMARY: NMFS closes the drift gillnet

fishery for swordfish in the Atlantic

Ocean, including the Gulf of Mexico

and Caribbean Sea. NMFS has

determined that the adjusted second

semiannual subquota for swordfish that

may be harvested by drift gillnet will be

reached on or before July 17, 1996. This

closure is necessary to prevent

exceeding the quota of swordfish caught

by drift gillnet vessels.

EFFECTIVE DATE: 2330 hours, local time,

July 17, 1996, through 2400 hours, local

time, November 30, 1996.

FOR FURTHER INFORMATION CONTACT:

Ronald G. Rinaldo, 301-713- 2347.

SUPPLEMENTARY INFORMATION: The

Atlantic swordfish fishery is managed

under the authority of the Magnuson

Fishery Conservation and Management

Act (16 U.S.C. 1801 et seq.) and the

Atlantic Tunas Convention Act (16

U.S.C. 971 et seq.).

The implementing regulations at 50

CFR 630.24(b)(3)(ii) establish a quota of

swordfish that may be harvested by drift

gillnet during the period July 1 through

November 30, each year. Under 50 CFR

630.25(a), NMFS is required to close the

drift gillnet fishery for swordfish when

its quota is reached, or is projected to

be reached, by filing a closure