Cybertelecom Federal Internet Law & Policy An Educational Project

Section 272

Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act

• BIENNIAL REVIEW - REVIEW OF ACCOUNTING AND COST ALLOCATION REQUIREMENTS - Text. Released: 06/30/1999.
• Docket 96-149
• In the Matter of the Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended, Third Order on Reconsideration, Docket 96-149  (October 1, 1999) | Text | Wordperfect |
• In the Matter of the Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended, Order on Recon and Petition for Forbearance, Docket 96-149  (Sept 3, 1999) (dealing with CPNI)
• In the Matter of the Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended, Second Order on Reconsideration, Docket 96-149  (June 24, 1997) (considering in-region interlata service)
• In the Matter of the Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended, Order on Reconsideration, Docket 96-149, 1997 WL 71143 (FCC), 12 FCCR. 2297, 12 FCC Rcd. 2297, 6 Communications Reg. (P&F) 972  (Feb 19, 1997)
• In the Matter of the Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended, First Report and Order and NPRM, Docket 96-149, 1996 WL 734160 (FCC), 11 FCCR. 21,905, 13 FCCR. 11,230, 11 FCC Rcd. 21,905, 13 FCC Rcd. 11,230, 5 Communications Reg. (P&F) 696 (Dec 24, 1996)
• Docket 96-150
• FCC Press Release:  COMMISSION IMPLEMENTS ACCOUNTING SAFEGUARDS PROVISIONS OF THE TELECOMMUNICATIONS ACT OF 1996 (CC Docket No. 96-150).
• Accounting Safeguards Order Docket No. 96-150 (Dec 24, 1996). | Text | Wordperfect|

"In this Report and Order ("Order") we address the accounting safeguards necessary to satisfy the requirements of sections 260 and 271 through 276 of the Communications Act of 1934, as amended by the Telecommunications Act of 1996.  This Order prescribes the way incumbent local exchange carriers, including the Bell Operating Companies ("BOCs"), must account for transactions with affiliates involving, and allocate costs incurred in the provision of, both regulated telecommunications services and nonregulated services, including telemessaging, interLATA telecommunications, information, manufacturing, electronic publishing, alarm monitoring and payphone services, to ensure compliance with the Act.  In particular, the Order adopts the tentative conclusion in the Notice of Proposed Rulemaking ("NPRM") in this proceeding that our current cost allocation rules generally satisfy the Act's accounting safeguards requirements when incumbent local exchange carriers, including the BOCs, provide services permitted under sections 260 and 271 through 276 on an integrated basis (i.e., within the telephone operating companies).  The Order also adopts the tentative conclusion in the NPRM that our current affiliate transactions rules generally satisfy the Act's accounting safeguards requirements when incumbent local exchange carriers, including the BOCs, are required to, or choose to, use an affiliate to provide services permitted under sections 260 and 271 through 276.  The Order adopts most of the NPRM's proposed modifications to the affiliate transactions rules to provide greater protection against subsidization of competitive activities by subscribers to regulated telecommunications services." Para. 1.

1. The Telecommunications Act


Congress recognized, in passing the 1996 Act, that competition will not immediately supplant monopolies and therefore imposed a series of safeguards to prevent the BOCs from using their existing market power to engage in improper cost allocation and discrimination in their provision of interLATA information services, among other things. These statutory safeguards seek to address many of the same anticompetitive concerns as, but do not explicitly displace, the safeguards established by the Commission in the Computer II, Computer III, and ONA proceedings. -- In The Matter Of Computer III Further Remand Proceedings: Bell Operating Company Provision Of Enhanced Services, CC Docket No. 95-20, 1998 Biennial Regulatory Review -- Review of Computer III and ONA Safeguards and Requirements, CC Docket No. 98-10, FCC 98-8, Further Notice of Proposed Rulemaking, ¶ 5 (January 30, 1998)

We also concluded in the Non-Accounting Safeguards Order that the Commission's Computer II, Computer III, and ONA requirements are consistent with section 272 of the Act, and continue to govern the BOCs' provision of intraLATA information services, since section 272 only addresses BOC provision of interLATA services.

-- In The Matter Of Computer III Further Remand Proceedings: Bell Operating Company Provision Of Enhanced Services, CC Docket No. 95-20, 1998 Biennial Regulatory Review -- Review of Computer III and ONA Safeguards and Requirements, CC Docket No. 98-10, FCC 98-8, Further Notice of Proposed Rulemaking, ¶ 20 (January 30, 1998)

1. Section 272 of the Comm Act as Amended

1. Separate Affiliate Required for Competitive Activities-

1. In General - A Bell operating company (including any affiliate) which is a local exchange carrier that is subject to the requirements of section 251(c) may not provide any service described in paragraph (2) unless it provides that service through one or more affiliates that -

1. are separate from any operating company entity that is subject to the requirements of section 251(c); and
2. meet the requirements of subsection (b).

1. Services for which a separate affiliate is required by paragraph (1) are:

1. InterLATA information services, other than electronic publishing (as defined in section 274(h)) and alarm monitoring services (as defined in section 275(e)).

47 U.S.C. § 272(f) Sunset

. . . . .

(2) InterLATA information services

The provisions of this section (other than subsection (e) of

this section) shall cease to apply with respect to the interLATA

information services of a Bell operating company 4 years after

February 8, 1996, unless the Commission extends such 4-year

period by rule or order.
 
 
 
 

Sec. 272. Separate affiliate; safeguards

(a) Separate affiliate required for competitive activities

(1) In general

A Bell operating company (including any affiliate) which is a

local exchange carrier that is subject to the requirements of

section 251(c) of this title may not provide any service

described in paragraph (2) unless it provides that service

through one or more affiliates that -

(A) are separate from any operating company entity that is

subject to the requirements of section 251(c) of this title;

and

(B) meet the requirements of subsection (b) of this section.

(2) Services for which a separate affiliate is required

The services for which a separate affiliate is required by

paragraph (1) are:

(A) Manufacturing activities (as defined in section 273(h) of

this title).

(B) Origination of interLATA telecommunications services,

other than -

(i) incidental interLATA services described in paragraphs

(1), (2), (3), (5), and (6) of section 271(g) of this title;

(ii) out-of-region services described in section 271(b)(2)

of this title; or

(iii) previously authorized activities described in section

271(f) of this title.

(C) InterLATA information services, other than electronic

publishing (as defined in section 274(h) of this title) and

alarm monitoring services (as defined in section 275(e) of this

title).

(b) Structural and transactional requirements

The separate affiliate required by this section -

(1) shall operate independently from the Bell operating

company;

(2) shall maintain books, records, and accounts in the manner

prescribed by the Commission which shall be separate from the

books, records, and accounts maintained by the Bell operating

company of which it is an affiliate;

(3) shall have separate officers, directors, and employees from

the Bell operating company of which it is an affiliate;

(4) may not obtain credit under any arrangement that would

permit a creditor, upon default, to have recourse to the assets

of the Bell operating company; and

(5) shall conduct all transactions with the Bell operating

company of which it is an affiliate on an arm's length basis with

any such transactions reduced to writing and available for public

inspection.
 
 

47 CFR § 53.201

"We do not find convincing the arguments put forth in the CIX/ITAA Petition. Rather, based on the record before us, we find that there are several safeguards that will limit adequately BOCs' ability to discriminate against nonaffiliated information service providers even after section 272(f)(2) takes effect. For example, there are nonstructural safeguards that will limit the BOCs' ability to discriminate against nonaffiliated information service providers. Accordingly, we conclude that the CIX/ITAA Petition does not provide a basis for the Commission to extend beyond February 8, 2000, pursuant to section 272(f)(2) of the Act, the structural, nondiscrimination, and other behavioral safeguards contained in section 272 of the Act as they pertain to BOC provision of in-region, interLATA information services. We therefore deny the CIX/ITAA petition. Thus, by operation of section 272(f)(2) of the Act, the safeguards contained in section 272 of the Act, as they apply to BOC provision of interLATA information services, expire on February 8, 2000." -- In the Matter of Request for Extension of the Sunset Date of the Structural, Nondiscrimination, and Other Behavioral Safeguards Governing Bell Operating Company Provision of In-Region, InterLATA Information Services, CC Docket No. 96-149, Order, ¶ 3 (February 8, 2000).

See In The Matter Of Computer III Further Remand Proceedings: Bell Operating Company Provision Of Enhanced Services, CC Docket No. 95-20, 1998 Biennial Regulatory Review -- Review of Computer III and ONA Safeguards and Requirements, CC Docket No. 98-10, FCC 98-8, Further Notice of Proposed Rulemaking, ¶ 66 et seq. (January 30, 1998) (discussing 272 and future of Computer III).
 
 

121. Remote Databases/Network Efficiency. BOCs may not provide interLATA services in their own regions, either over their own facilities or through resale, before receiving authorization from the Commission under section 271(d). Therefore, we conclude that BOCs may not provide interLATA information services, except for those designated as incidental interLATA services under section 271(g), in any of their in-region states prior to obtaining section 271 authorization. Section 271(g)(4) designates as an incidental interLATA service the interLATA provision by a BOC or its affiliate of "a service that permits a customer that is located in one LATA to retrieve stored information from, or file information for storage in, information storage facilities of such company that are located in another LATA." Because BOCs were able to provide incidental interLATA services immediately upon enactment of the 1996 Act, they may provide interLATA information services that fall within the scope of section 271(g)(4) without receiving section 271(d) authorization from the Commission. Since section 271(g)(4) services are not among the incidental interLATA services exempted from section 272 separate affiliate requirements, however, they must be provided in compliance with those requirements. To the extent that parties have argued in the record that centralized data storage and retrieval services that fall within section 271(g)(4) either are not interLATA information services, or are not subject to the section 272 separate affiliate requirements, we specifically reject these arguments.

-In the Matter of the Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended, Order on Reconsideration, Docket 96-149, 1997 WL 71143 (FCC), 12 FCCR. 2297, 12 FCC Rcd. 2297, 6 Communications Reg. (P&F) 972, ¶ 3 (Feb 19, 1997) (revising para 121).

In the Matter of the Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended, Order on Reconsideration, Docket 96-149, 1996 WL 734160 (FCC), 11 FCCR. 21,905, 13 FCCR. 11,230, 11 FCC Rcd. 21,905, 13 FCC Rcd. 11,230, 5 Communications Reg. (P&F) 696, ¶ 51 (Dec 24, 1996) (stating "We further stated that, where the 1996 Act draws distinctions between in-region and out-of-region 'interLATA services,' these distinctions do not apply to interLATA information services.").

Based on the record before us and our own statutory analysis, we hereby adopt our tentative conclusion that BOCs must provide out-of-region interLATA information services through a section 272 separate affiliate. Although we concluded above that "interLATA information services" are included within the term "interLATA services" as used in section 271(b), that determination does not alter the conclusion that BOCs must provide out-of-region interLATA information services through a section 272 separate affiliate. [FN184] Section 271(b)(2) permits a BOC or its affiliate to provide interLATA services, including interLATA information services, that originate outside its in-region states, immediately upon enactment of the 1996 Act. Section 271, however, does not address whether such services must be provided through a separate affiliate; that issue is addressed in section 272(a). -- In the Matter of the Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended, Order on Reconsideration, Docket 96-149, 1997 WL 71143 (FCC), 12 FCCR. 2297, 12 FCC Rcd. 2297, 6 Communications Reg. (P&F) 972, ¶ 85 (Feb 19, 1997).

"7. On February 8, 1996, the Telecommunications Act of 1996 (1996 Act) became law. Section 272 of the 1996 Act addresses the provision by BOCs of, inter alia, interLATA information services. On December 24, 1996, the Commission adopted rules to implement the non-accounting separate affiliate and nondiscrimination safeguards of sectifons 271 and 272. In the Non-Accounting Safeguards Order, the Commission concluded that the Computer II, Computer III, and ONA requirements are consistent with the 1996 Act and continue to govern BOC provision of intraLATA information services. The Commission also concluded that, as used in section 272, the term "interLATA information service" refers to an information service that incorporates as a necessary, bundled element an interLATA telecommunications transmission component, provided to a customer for a single charge." -- In the Matter of Ameritech's Comparably Efficient Interconnection Plan for Electronic Vaulting Service CCBPol 97-03 Order ¶ 7 (December 31, 1997)

In the Matter of the Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended, Third Order on Reconsideration, Docket 96-149 ¶ 8 (October 1, 1999) (stating "We affirm the conclusion in the Non-Accounting Safeguards Order that section 272(a)(2)(C) does not exclude out-of-region interLATA information services from the separate affiliate requirement.")
 
 

1. Unbundling

 

 
 
 

[The Commisions has offered guidance on what constitutes "bundling." Non-Accounting Safeguards of Sections 271 and 272 of the Communications Act, First Report and Order, 11 FCC Rcd. 21905, n. 276 (1996) ("special discounts or incentives to take both services . . . would constitute sufficient evidence of bundling" ("Non-Accounting Safeguards Order")' id., at ¶ 277 ("We define 'bundling' to mean offering BOC resold local exchange services and interLATA services as a package under an integrated pricing schedule." FNPRM, at ¶ 1 ("Bundling means selling different goods and/or services together in a single package.").]
 
 

2. Discrimination

 

 
 
 

47 U.S.C. § 272

(c) Nondiscrimination safeguards

In its dealings with its affiliate described in subsection (a) of

this section, a Bell operating company -

(1) may not discriminate between that company or affiliate and

any other entity in the provision or procurement of goods,

services, facilities, and information, or in the establishment of

standards; and

(2) shall account for all transactions with an affiliate

described in subsection (a) of this section in accordance with

accounting principles designated or approved by the Commission.

. . . . .

(e) Fulfillment of certain requests

A Bell operating company and an affiliate that is subject to the

requirements of section 251(c) of this title -

. . . . .

(2) shall not provide any facilities, services, or information

concerning its provision of exchange access to the affiliate

described in subsection (a) of this section unless such

facilities, services, or information are made available to other

providers of interLATA services in that market on the same terms

and conditions;
 
 

3. Timely Provisioning

 

 
 
 

47 USC § 272(e) Fulfillment of certain requests

A Bell operating company and an affiliate that is subject to the

requirements of section 251(c) of this title -

(1) shall fulfill any requests from an unaffiliated entity for

telephone exchange service and exchange access within a period no

longer than the period in which it provides such telephone

exchange service and exchange access to itself or to its

affiliates;
 
 

4. Accounting Safeguards

 

 
 
 

47 U.S.C. § 272(d) Biennial Audit

(d) Biennial audit

(1) General requirement

A company required to operate a separate affiliate under this

section shall obtain and pay for a joint Federal/State audit

every 2 years conducted by an independent auditor to determine

whether such company has complied with this section and the

regulations promulgated under this section, and particularly

whether such company has complied with the separate accounting

requirements under subsection (b) of this section.

(2) Results submitted to Commission; State commissions

The auditor described in paragraph (1) shall submit the results

of the audit to the Commission and to the State commission of

each State in which the company audited provides service, which

shall make such results available for public inspection. Any

party may submit comments on the final audit report.

(3) Access to documents

For purposes of conducting audits and reviews under this

subsection -

(A) the independent auditor, the Commission, and the State

commission shall have access to the financial accounts and

records of each company and of its affiliates necessary to

verify transactions conducted with that company that are

relevant to the specific activities permitted under this

section and that are necessary for the regulation of rates;

(B) the Commission and the State commission shall have access

to the working papers and supporting materials of any auditor

who performs an audit under this section; and

(C) the State commission shall implement appropriate

procedures to ensure the protection of any proprietary

information submitted to it under this section.
 
 

"The Commission has adopted a comprehensive system of accounting safeguards now found in Parts 32 and 64 of our rules. Computer III Remand Proceedings: Bell Operating Company Safeguards and Tier 1 Local Exchange Company Safeguards, CC Docket No. 90-623, 6 FCC Rcd 7571,7591-7605 paras. 46-74 (1991) ("Computer III Remand"). See 47 C.F.R. '' 64.901-903. These requirements apply not only to the BOCs, but to all incumbent local exchange carriers with annual operating revenue greater than the applicable interim revenue threshold. Id." -- In the matter of Accounting Safeguards Under the Telecommunications Act, Docket 96-150, ¶ 1 n. 8 (December 24, 1996)
 
 

5. Cross Subsidization

 

 
 
 

"A subsidy occurs when the reasonable costs associated with a service are not covered by the revenues generated by that service, but are instead covered by revenues generated by one or more other services." -- In the matter of Accounting Safeguards Under the Telecommunications Act, Docket 96-150, ¶ 1 n. 10 (December 24, 1996).
 
 

6. Joint Marketing

 

 
 
 

47 USC § 272(g).
 
 

7. Bundling Interlata services

-- In the matter of 1998 Biennial Regulatory Review -- Review of Customer Premises Equipment and Enhanced Services Unbundling Rules in the Interexchange, Exchange Access and Local Exchange Markets, CC Docket No. 98-183, Further Notice of Proposed Rulemaking, para 36 (October 9, 1998) (footnote numbering off)
 
 

1. Accounting Safeguards