Cybertelecom
Federal Internet Law & Policy
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Notes: Computer I & II

Notes: Computer I & Computer II

These notes are not complete and there is no guarantee that they are accurate. They are presented simply as notes. Feel free to use them but as with all material on the Cybertelecom, you should consider them a beginning to your research and not an end.

Telephone Carrier Entrance into Enhanced Services Market

AT&T Consent Decree and MFJ

Purpose / Concerns

Dangers

Advantages

Structural Separation

Goals, Objectives

Outright Prohibition

Competitive Disadvantage

Computer I Maximum Separation (All Carriers above threshold)

Minimum Threshold

Carrier's Computers

Cross Promotion

Services to Carriers by Affiliate

Discrimination

Hybrid Service

Computer II Structural Separation

Structural Separation (BOCs)

Not Small Telcos

Purpose

Application to AT&T (BOCS) and GTE

Unbundling (All Facilities Based Carriers)

Telephone Carriers Entrance into Enhanced Services Market

In the Further Notice, we observed that, under our current rules, a BOC may provide an intraLATA information service either on an integrated basis pursuant to an approved CEI plan, or on a structurally separate basis pursuant to the Commission's Computer II rules.
-- In the Matter of Computer III Remand Proceeding: Bell Operating Company Provision of Enhanced Services, CC Docket No. 95-20, CC Docket No. 98-10, Report and Order, ¶ 29 (March 10, 1999).

The Commission has long sought to maintain appropriate safeguards for the provision by the BOCs of enhanced services.[9] Since its Computer I proceeding, the Commission has adopted a variety of regulatory tools to prevent improper cost allocation and access discrimination against ESPs in the provision of enhanced services, both by the BOCs, and, before divestiture, by their predecessor in interest, AT&T.[10] In the Computer II proceeding, the Commission required the then-integrated Bell System to establish structurally separate affiliates for the provision of enhanced services in order to address the concern over AT&T's incentive and ability to engage in anticompetitive activity.[11] Following the divestiture of AT&T in 1984,[12] the Commission extended the structural separation requirements of Computer II to the BOCs.[13] In Computer III, after reexamining the telecommunications marketplace and the effects of structural separation during the six years since Computer II, the Commission determined that the costs of structural separation outweighed the benefits, and that nonstructural safeguards could protect competitive ESPs from improper cost allocation and discrimination by the BOCs while avoiding the inefficiencies associated with structural separation.[14]

    [9] Basic services, such as Aplain old telephone service@ (POTS), are regulated as tariffed services under Title II of the Communications Act. Enhanced services use the existing telephone network to deliver services that provide more than a basic transmission offering. Examples of enhanced services include, among other things, voice mail, electronic mail, electronic store-and-forward, facsimile store-and-forward, data processing, and gateways to online databases. See, e.g. Bell Operating Companies' Joint Petition for Waiver of Computer II Rules, Memorandum Opinion and Order, 10 FCC Rcd 1724 n.3 (1995) (Interim Waiver Order); 47 C.F.R. ' 64.702(a); Amendment of Section 64.702 of the Commission's Rules and Regulations (Computer III), Report and Order, CC Docket No. 85-229, Phase I, 104 FCC 2d 958 (1986) (Phase I Order), recon., 2 FCC Rcd 3035 (1987) (Phase I Recon. Order), further recon., 3 FCC Rcd 1135 (1988) (Phase I Further Recon. Order), second further recon., 4 FCC Rcd 5927 (1989) (Phase I Second Further Recon.), Phase I Order and Phase I Recon. Order, vacated, California v. FCC, 905 F.2d 1217 (9th Cir. 1990) (California I); Phase II, 2 FCC Rcd 3072 (1987) (Phase II Order), recon., 3 FCC Rcd 1150 (1988) (Phase II Recon. Order), further recon., 4 FCC Rcd 5927 (1989) (Phase II Further Recon. Order), Phase II Order vacated, California I, 905 F.2d 1217 (9th Cir. 1990); Computer III Remand Proceedings, 5 FCC Rcd 7719 (1990) (ONA Remand Order), recon., 7 FCC Rcd 909 (1992), pets. for review denied, California v. FCC, 4 F.3d 1505 (9th Cir. 1993) (California II); Computer III Remand Proceedings: Bell Operating Company Safeguards and Tier 1 Local Exchange Company Safeguards, 6 FCC Rcd 7571 (1991) (BOC Safeguards Order), recon. dismissed in part, Order, CC Docket Nos. 90-623, 11 FCC Rcd 12513 (1996); BOC Safeguards Order vacated in part and remanded, California v. FCC, 39 F.3d 919 (9th Cir. 1994) (California III), cert. denied, 115 S.Ct. 1427 (1995) (referred to collectively as the Computer III proceeding); Filing and Review of Open Network Architecture Plans, 4 FCC Rcd 1 (1988) (BOC ONA Order), recon., 5 FCC Rcd 3084 (1990) (BOC ONA Reconsideration Order); 5 FCC Rcd 3103 (1990) (BOC ONA Amendment Order), erratum, 5 FCC Rcd 4045 (1990), pets. for review denied, California v. FCC, 4 F.3d 1505 (9th Cir. 1993), recon., 8 FCC Rcd 97 (1993) (BOC ONA Amendment Reconsideration Order); 6 FCC Rcd 7646 (1991) (BOC ONA Further Amendment Order); 8 FCC Rcd 2606 (1993) (BOC ONA Second Further Amendment Order), pet. for review denied, California v. FCC, 4 F.3d 1505 (9th Cir. 1993).
    [10] Regulatory and Policy Problems Presented by the Interdependence of Computer and Communication Services and Facilities (Computer I), 28 FCC 2d 291 (1970) (Tentative Decision); 28 FCC 2d 267 (1971) (Final Decision), aff'd in part sub nom. GTE Service Corp. v. FCC, 474 F.2d 724 (2d Cir. 1973), decision on remand, 40 FCC 2d 293 (1973).
    [11] Amendment of Section 64.702 of the Commission's Rules and Regulations (Computer II), 77 FCC 2d 384,475-486, && 233-60. (1980) (Computer II Final Decision), recon., 84 FCC 2d 50 (1980) (Computer II Reconsideration Order), further recon., 88 FCC 2d 512 (1981) (Computer II Further Reconsideration Order), affirmed sub nom. Computer and Communications Industry Ass'n v. FCC, 693 F.2d 198 (D.C. Cir. 1982), cert. denied, 461 U.S. 938 (1983).
    [12] United States v. AT&T, 552 F. Supp. 131 (DDC 1982), affirmed sub nom. Maryland v. United States, 460 U.S. 1001 (1983).
    [13] Policy and Rules Concerning the Furnishing of Customer Premises Equipment, Enhanced Services and Cellular Communications Equipment by the Bell Operating Companies, CC Docket No 83-115, Report and Order, 95 FCC 2d 1117, 1120, & 3 (1984) (BOC Separation Order), affirmed sub nom. Illinois Bell Telephone Co. v. FCC, 740 F.2d 465 (7th Cir. 1984), affirmed on recon., FCC 84-252, 49 Fed. Reg. 26056 (1984) (BOC Separation Reconsideration Order), affirmed sub nom. North American Telecommunications Ass'n v. FCC, 772 F.2d 1282 (7th Cir. 1985).
    [14] Computer III Phase I Order, 104 FCC 2d at 964-965, && 3-6. We discussed in detail the history of the Computer III proceeding in the Computer III Further Remand Notice, 10 FCC Rcd at 8362-8369, && 3-10.

--In the Matter of Computer III Remand Proceeding: Bell Operating Company Provision of Enhanced Services, CC Docket No. 95-20, CC Docket No. 98-10, Report and Order, ¶ 7 (March 10, 1999).

AT&T - Consent Decree - Modified Final Judgment

"The Modified Final Judgment ("MFJ") originally prohibited the BOCs from providing information services, providing interLATA services, or manufacturing and selling telecommunications equipment or manufacturing customer premises equipment. United States v. AT&T, 552 F.Supp. 131 (DDC 1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983), vacated sub nom. United States v. Western Elec. Co., slip op. CA 82-0192 (DDC Apr. 11, 1996). The theory behind this prohibition in the MFJ was that the BOCs could leverage their market power in the local market to impede competition in the interLATA services, manufacturing, and information services markets. The information services restriction was modified in 1987 to allow BOCs to provide voice messaging services and to transmit information services generated by others. SeeUnited States v. Western Elec. Co., 673 F.Supp. 525 (DDC 1987); United States v. Western Elec. Co., 714 F.Supp. 1 (DDC 1988); United States v. Western Elec. Co., 767 F.Supp. 308 (DDC 1991). In 1991, the restriction on BOC ownership of content-based information services was lifted. United States v. Western Elec. Co., 767 F.Supp. 308 (DDC 1991), stay vacated, United States v. Western Elec. Co., 1991-2 Trade Cases (CCH) & 69,610 (D.C.Cir. 1991)."
--In the matter of Accounting Safeguards Under the Telecommunications Act, Docket 96-150, ¶ 3 n. 11 (December 24, 1996)

The Modified Final Judgment (the MFJ), the antitrust consent decree which compelled AT & T to divest the BOCs, originally prohibited the BOCs from offering any "information services," a class of services that apparently is similar to enhanced services. United States v. AT & T, 552 F.Supp. 131 (DDC1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983). On March 7, 1988, the U.S. District Court for the District of Columbia that oversees the MFJ (the MFJ Court) issued an order removing that restriction for certain types of information services for which the BOCs subsequently filed CEI plans. U.S. v. Western Electric Co., Inc., No. 82-0192 (DDC filed Mar. 7, 1988) (March 7 Order).
-- In the Matter of Filing and Review of Open Network Architecture Plans, CC Docket No. 88-2, Phase I, MEMORANDUM OPINION AND ORDER ¶ 29 n 60 (December 22, 1988)

"For the reasons stated, the Court will exempt from the information services restriction the transmission of information generated by others in the manner and to the extent described above." United States v. Western Elec. Co., 673 F.Supp. 535, 597 (DDC 1987), affirmed in parted, reversed in part, 900 F.2d 283 (DC Cir 1990), cert denied MCI v. US, 498 U.S. 911 (1990).

B. Information Services
    The proposed decree prohibits the Operating Companies from providing information services, an umbrella description of a variety of services including electronic publishing and other enhanced uses of telecommunications. [237] This prohibition is necessary for reasons similar to those justifying the restriction on interexchange services, as well as for additional reasons not relevant to the interexchange problem.
    All information services are provided directly via the telecommunications network. The Operating Companies would therefore have the same incentives and the same ability to discriminate against competing information service providers that they would have with respect to competing interexchange carriers. Here, too, the Operating Companies could discriminate by providing more favorable access to the local network for their own information services than to the information services provided by competitors, and here, too, they would be able to subsidize the prices of their services with revenues from the local exchange monopoly. [238]
    There is also the effect on the configuration of the local networks to consider. Many of the competitive problems in the interexchange market resulted from the fact that competition was introduced after AT & T had designed the local networks to service only its own Long Lines department. If the Operating Companies are excluded from the information services market, they will have an incentive, as time goes on, to design their local networks to accommodate the maximum number of information service providers, since the greater the number of carriers the greater will be the Operating Companies' earnings from access fees. Thus, competition will be encouraged from the outset. If, however, the Operating Companies were permitted to provide their own information services, their incentive would be the precise opposite: it would be to design their local networks to discourage competitors, and thus to thwart the development of a healthy, competitive market. [239]
    The restriction on the provision of information services by the Operating Companies has been attacked on the ground that it will remove their incentive to upgrade the local networks and will cause them to become technological backwaters. [240] This claim underrates the role of the Operating Companies under the proposed decree. These companies will carry traffic between the information service providers and their subscribers; their networks will therefore have to be capable of carrying these technologically advanced services; and they will have a financial incentive to create this capability because they will earn access charges for providing this service. [241]
    For all of these reasons, the imposition of this restriction is fully consistent with the antitrust laws.

    FN237. For a full discussion of the meaning of this term see Part VI supra.
    FN238. For similar reasons, the Court rejects the argument that the Operating Companies can most efficiently provide information services by taking advantage of various economies (such as using the same equipment for exchange telecommunications and for information services). It would be impossible to determine at any time whether the Operating Companies' advantages were due to inherent efficiencies, or to efficiencies created by structuring the network so as to hinder competition. The experience with AT & T's activities with regard to interexchange competition indicates that the latter is a possibility which would be difficult to detect or prevent.
    FN239. The reasons underlying the ban on provision of electronic publishing services by AT & T provide further support for restricting the Operating Companies from this activity. See Part VI supra.
    FN240. It cannot be claimed that this restriction will result in rate increases: the Operating Companies do not now provide such services on any large scale, and it is not at all clear that they would be a great source of profit to them in the future.
    FN241. Entry of the Operating Companies into this market is not necessary to provide competition for AT & T. The large amount of interest generated by this growing industry indicates that there will be a number of competitors. See Part V(A) supra.

-- United States v. AT&T, 552 F.Supp. 131, 189-90 (DDC 1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983), vacated sub nom. United States v. Western Elec. Co., slip op. CA 82-0192 (DDC Apr. 11, 1996).

24. In 1974, the United States Department of Justice (DOJ) filed an antitrust complaint against AT & T, alleging that AT & T had monopolized, or attempted to monopolize, a number of markets for telecommunications equipment and services in violation of Section 2 of the Sherman Act. ⁶² In 1982, AT & T and DOJ settled the complaint by agreeing to the entry of a consent decree, which, after some significant modifications were made, was adopted by the United States District Court for the District of Columbia as a Modification of Final Judgment (MFJ). ⁶³ The MFJ required AT & T to divest itself of its wholly- owned operating companies, the BOCs, and most of the assets held by the BOCs. Pursuant to the MFJ, AT & T filed a Plan of Reorganization, which the Court also approved, that provided for this divestiture and the reorganization of the 22 BOCs into seven regional holding companies. ⁶⁴ As a result of divestiture, which took place on January 1, 1984, AT & T no longer provides local exchange service and, in some states, intra-LATA ⁶⁵ toll service. It does, however, continue in its other major lines of business. AT & T retained its CPE and enhanced services businesses as well as its research, manufacturing, and inter-LATA toll facilities. The BOCs, as owners of local exchange facilities, were prohibited from manufacturing CPE or providing inter- LATA transmission services and were subjected to general line-of-business restrictions that limit the services and products they may provide.
25. The MFJ treated AT & T and the BOCs in different ways with regard to the provision of "information services", which it defined as follows:
The offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information which may be conveyed via telecommunications, except that such service does not include any use of any such capability for the management, control or operation of a telecommunications system or the management of a telecommunications service. ⁶⁶
With respect to AT & T, the MFJ considered two general classes of information services: 1) "electronic publishing," in which AT & T would control the content of transmitted information, and 2) data processing and other computer- related services, which would involve no AT & T control of content other than for transmission purposes. ⁶⁷ The MFJ prohibited AT & T from engaging in electronic publishing for a period of seven years from the date of entry of the decree. The Court concluded that such a restriction is necessary to avoid potential dangers to competition and First Amendment values. ⁶⁸ However, the MFJ formally freed AT & T from the general restrictions on its provision of data processing and other computer-related services imposed by the 1956 Decree, ⁶⁹ since the Court found that AT & T's unrestricted entry into such markets would likely "benefit the American consumer, American foreign trade, and national defense". ⁷⁰
26. However, the MFJ prohibited the BOCs from providing any information services. The Court found that such a prohibition would not only guard against potential discrimination and cross-subsidization, but also would motivate the BOCs to design their local networks to accommodate the maximum number of information service providers. According to the Court, if the BOCs were permitted to provide information services, they would have incentives to design the local networks to discourage competition, ⁷¹ but with the prohibition in place, their incentives to increase their earnings from network access fees will lead them to implement network designs that encourage competitive entry into information services.
--In the Matters of: Amendment of Sections 64.702 of the Commission's Rules and Regulations (Third Computer Inquiry); and Policy and Rules Concerning Rates for Competitive Common Carrier Services and Facilities Authorizations Thereof Communications Protocols under Section 64.702 of the Commission's Rules and Regulations, CC Docket No. 85-229, Report and Order (June 16, 1986)

277. While it has been argued by various parties that AT&T is foreclosed from engaging in activities which are not regulated, it is by no means clear that this is in fact so. We note that Section IV of the decree describes permissible activities of Western Electric and Section V describes the permissible business activities of AT&T and all of its subsidiaries, except Western Electric and Western Electric's subsidiaries. [FN117] Based on our reading of these sections we stated in the Tentative Decision, at para. 142, our belief that excluding CPE from tariff-type regulation would not foreclose Bell System participation in the CPE market. We read Section IV of the decree as permitting Western Electric to sell or lease any type of equipment to the general public which it sells or leases to Bell System companies either for service to others or for their own use. In addition, we perceived enhanced services as being incidental to the provision of common carrier communications services under Section V(g) of the decree. Nothing has been presented to us in the course of this proceeding which would lead us to conclude otherwise. Nothing in Section V(g) requires that the incidental service be provided by the same entity which owns the underlying transmission facilities. Indeed, we have found that the record supports our belief that both enhanced services and CPE are within our subject matter jurisdiction although that jurisdiction is of the 'reasonably ancillary' type rather than Title II jurisdiction. As such, these services and equipment reasonably fall within the 'incidental to common carrier communications' language of the consent decree. We therefore affirm our earlier conclusions. See Tentative Decision at paras. 135-148. But we do not believe it necessary to rely upon this 'incidental' proviso to Section V of the decree. That Section plainly permits AT&T to furnish 'common carrier communications services' which are defined in Section II(i) as 'communications services and facilities . . . the charges for which are subject to public regulation under the Communications Act of 1934 . . .' (Emphasis added.) Section II(i) does not require that the 'regulation' to which it refers take any particular form other than that it be 'public' and that it be 'under the Communications Act of 1934.' Both criteria are satisfied by the regulatory regime which we impose in this decision. The obvious purpose of the 'regulation' requirement is to ensure, through the scrutiny of an independent body, that AT&T neither destroys competition nor charges consumers excessive prices. These purposes are fully achieved here, in our view, without the necessity for strict, tariff-type regulation. Moreover, we believe that these purposes can be more fully realized under the separation structure and through the medium of competition than if AT&T were allowed to offer enhanced services as part of its regulated common carrier offerings.
278. We do not believe that the reference to 'communications' in the defined phrase 'common carrier communications services' was intended to have any separate prohibitory function so long as the services and facilities remain 'subject to' regulation under the Communications Act. If the services and facilities are a proper regulatory subject of that Act in the eyes of the expert agency charged with enforcing that Act, it should make no difference to an antitrust court, inclined to avoid duplicating or interfering with that agency's judgment, that some of the services 'subject to' regulation may include a larger element of data processing than basic transmission. So long as the service is not wholly data processing and devoid of any communications elements, the Commission's jurisdiction reaches it. GTE Service Corp. v. FCC, 474 F.2d 724 (2d Cir. 1973).
279. In coming to these conclusions we are guided by the principles of consent decree construction. We understand that the 1956 AT&T consent decree is to be construed as one would a written contract, such that any command of the decree must be found within its four corners. See United States v. Armour & Co., 402 U.S. 673 (1971); United States v. ITT Continental Baking Co. 420 U.S. 223 (1975). We have previously indicated that DOJ's reliance on the 'regulation' criterion as a benchmark for permissible activity does not comport with actual practices of the Bell System. [FN118] The courts have previously refused to accept any 'strained construction' by the Government that is inconsistent with the 'normal meaning' of the language used. United States v. Atlantic Refining Co., 360 U.S. 19, 22-23 (1959). In effect, DOJ would read 'tariff regulation' into Section II(i) of the decree in place of 'public regulation,' the term actually employed. We believe our interpretation is the more consistent with the learning of Armour and ITT Continental. We believe our reading of the decree is similarly compatible with fundamental antitrust principles--the laws under which the judgment court took jurisdiction--which favor open entry. See Northern Pacific Railway v. U.S., 356 U.S. 1, 4 (1958). Moreover, such principles have increasingly gained critical significance in the communications regulatory environment. See United States v. FCC, F.2d, slip op. at 73. (D.C. Cir. No. 77-1249, Mar. 7, 1980). Further, we believe that the prohibition in the consent decree should be narrowly construed, because an expansive reading would be restrictive of a free economy. Cf. United States v. McKesson & Robbins, 351 U.S. 305, 316 (1956). [FN119]
280. We recognize that companies of the Bell System are faced with making corporate decisions in the presence of uncertainty. We obviously cannot guarantee that the consent decree does not impose some constraint on their activities in these areas. At the same time, however, removal of the uncertainty rests primarily with AT&T, should AT&T deem it necessary. As we perceive the situation, the choice rests with AT&T either to seek clarification from the judgment court as to the limits of permissible activity in these areas, or, weighing the risks, to proceed with its marketing plans for various types of CPE and enhanced services.
281. We believe that the purposes of both our regulatory statute and the antitrust laws are furthered by our adoption of a regulatory scheme requiring separation of basic telecommunication services and enhanced ancillary services and equipment so that customers in both markets are given the benefit of the best service and the lowest cost. It is a regulatory scheme that is conducive to the fullest exploitation of this county's telecommunications networks, and will best serve all segments of society. Even though uncertainty may exist for the Bell System under this structure due to the consent decree, we believe that the costs to society in general would be too great were there to be regulation in these areas. It would be far worse to subject CPE and enhanced services to regulation. However, should a decision of the judgment court disagree with our reading of the decree and foreclose AT&T from the provision of enhanced services or CPE, we would feel compelled to reassess the situation to ascertain whether any revision to decisions made here would be warranted in light of our statutory mandate. See Geller v. FCC, 610 F.2d 973 (D.C. Cir. 1979).
--In re Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry), Docket No. 20828, Final Decision, 77 FCC2d 384 (May 2, 1980) (Computer II Final Decision)

135. A basic question which must be addressed is the extent to which AT&T will be able to participate on an unregulated basis in the provision of customer-premises equipment and/or 'enhanced non-voice' services under the 1956 AT&T consent decree. The possible effect the decree may have on AT&T's ability to offer certain types of equipment and services is a factor to consider in reaching a final decision. Our basic premise is that the consent decree should not constrain this Commission in its adoption of regulatory policies which are in the public interest and necessary for carrying out our mandate under the Communications Act. Our fundamental concern is the availability of services and equipment to the communications consumer and, to that end, creation of an environment wherein regulation does not artificially restrict the diversity of services or equipment available to the public. There is considerable uncertainty as to the limits of permissible Bell System activities under the decree. Because of the practical role this Commission plays in determining permissible activity under the decree through a classification scheme which distinguishes between regulated 'communications' and unregulated data processing services, the decree has been an underlying source of contention in various proceedings, including this one. It is important for us to set forth our position as to the extent of permissible activity under the decree in order to make clear the effect of our decision. Accordingly, in the following paragraphs we will set forth a) the regulatory dilemma created by the 1956 consent decree as presently construed by DOJ; b) permissible activity under the decree, as evidenced in the actual practices of the Bell System and with DOJ's acquiescence, and c) the role of this Commission in determining permissible activity under the decree as it affects AT&T's provision of 'enhanced non- voice' services and customer-premises equipment, given the industry structure we are proposing for the provision of such services and equipment.
136. Sections IV and V of the decree have particular relevance to this proceeding. Section V describes the permissible business activities of AT&T and all of its subsidiaries, except Western Electric and Western Electric's subsidiaries. Subject to seven exceptions Section V prohibits these companies from engaging in any business activity 'other than the furnishing of common carrier communications services.' The decree contains its own definition of 'common carrier communications services.' Section II(I) of the decree defines 'common carrier communications services' as:

. . . communications services and facilities, other than message telegram service, the charges for which are subject to public regulation under the Communications Act of 1934, or any amendment thereof, or would be subject to such regulation thereunder if such service or facility were furnished in interstate commerce; and shall also include any communications service or facility, other than message telegram service, the charges for which are or became subject to regulation under existing or future laws of any state, territory, or the District of Columbia, but only in the jurisdiction or jurisdictions in which the charges for such service or facility are subject to regulation.

One of the seven exemptions is stated in V(g), which exempts 'business or services incidental to the furnishing by AT&T or such subsidiaries of common carrier communications services.' Section IV of the decree describes the permissible business activities of Western Electric. Section IV(b) permits Western Electric to engage in any business 'of a character or type engaged in by Western or its subsidiaries for companies of the Bell System . . .' The decree contains a separate provision with respect to manufacturing activities. Section IV(A) of the decree enjoins Western Electric and AT&T from manufacturing any kind of equipment for sale or lease 'which is not of a type sold or leased or intended be sold or leased to Companies of the Bell System, for use in furnishing common carrier communications services, . . .'¹¹¹
     137. To place these restrictions into historical perspective, we note that the decree was issued in 1956 in order to settle a civil antitrust case which the Department of Justice had instituted in 1949. Thus its adoption was ten years before we initiated our First Computer inquiry. It is implicit, therefore, that at that time there was no perceived distinction between unregulated 'data processing' as opposed to regulated 'communications' services provided over common carrier facilities. Yet the decree imposes restrictions which limit AT&T to the provision of common carrier communications services i.e. '. . . communications services and facilities, other than message telegram service, the charges for which are subject to public regulation under the Communications Act of 1934 . . ..' In a static technological, economic and regulatory environment this definition would have allowed AT&T great flexibility. So long as all services rendered via common carrier facilities were communications services (as defined) and regulated there would be no conflict. However, fifteen years later, in 1971, the determination was made that there were non-communication offerings, such as 'data processing' services, which could be offered over common carrier communication facilities free from the strictures of the Communications Act of 1934, as amended. When this dichotomy was established in the First Computer Inquiry, it was assumed that AT&T would be restricted to the offering of 'communications' or 'hybrid Communications' services because of the constraints imposed by the decree. As a result, our maximum separation rules specifically did not apply to companies of the Bell System on the assumption that if an offering of the Bell System constituted a data processing service the Bell System would be foreclosed from its provision by the terms of the decree, because the service would not be 'subject to regulation.'
     138. The inherent deficiency of the First Computer Inquiry was the implication that a clear and stable dichotomy could be established between regulated and unregulated services with the necessary computer processing applications provided through separate computer facilities. This belief was based on existing market applications of computer processing technology, which were then limited to central host computers. Moreover, the definitional structure and maximum separation policy were adopted according to our perceptions at that time. However, microprocessor technology and large-scale integrated circuitry have since transformed the market applications of computer processing services and applications. The strict separation rules adopted in the First Computer Inquiry must yield to the forces of technology. Demand for and the appearance of new services have exposed the difficulties inherent in a regulatory scheme which forces such a complete separation.
     139. While we intend to adopt a flexible regulatory scheme for this dynamic environment, we believe that the practical implications of current constructions of the 1956 consent decree may impede our efforts. Such is the case because of the attention focused on the ability or inability of AT&T to offer 'enhanced non-voice' services and customer-premises equipment, rather than on the structure under which they are provided. From an analysis of the history of the decree, we are led to conclude that it is based on the assumption that AT&T possessed significant market power which should be confined to communications common carrier services and, once so confined, be regulated. One element in such an assumption may have been that AT&T would use its monopoly power to secure an unearned but advantageous position in any competitive market into which it might enter. A second assumption underlying the decree seems to be that the benefits to the public from containing the firm outweigh the costs in terms of foregone products and services available to the public. Consideration should be given to the continued validity of these assumptions, particularly to the implicit cost/benefit judgment, in light of the industry structure we are proposing.
     140. As a practical matter we are currently faced with a dilemma. The Department of Justice has taken the position that '[i]n order to constitute a permissible activity under the judgment, the offering must be both a communications service or facility and be subject to public regulation.'¹¹² This would mean that AT&T may provide only common carrier communications services 'the charges for which are subject to regulation'. That position requires that if the Commission believes the public interest is served by having AT&T provide a particular service or piece of equipment such an activity must be classified as 'communications' and regulated irrespective of other market structure considerations. When faced with the dilemma of classifying a given activity as communications and regulating it or depriving the consumer of beneficial services, the incentive is to classify such activity as regulated communications so as not to deprive the consumer of the benefits of the service. However, this scenario has less than optimal implications from a regulatory perspective, primarily because the boundary between communications and data processing is perceived as jurisdictional. To the extent that an activity is classified as communications, the limits of permissible activity outside the scope of regulation is correspondingly narrowed. The net result is that regulation may be unnecessarily expanded to accommodate beneficial services of AT&T if a prerequisite to their provision is 'regulation'.
     141. The potential distortion of the marketplace through the imposition of regulatory constraints where market realities do not require them must be eliminated if we are to evaluate accurately the relative merits of the various options (discussed infra) put forth for final decision. With the exception of the Bell System, these options would minimize the impact of any determination as to the communications or data processing nature of an offering by specifically providing for the integration of various processing operations.¹¹³ Unless AT&T is allowed to offer on a non-regulated basis terminal equipment and enhanced non-voice processing applications which we find to be in the public interest, the current pressures to distort the regulatory boundary are not alleviated. Moreover, if AT&T is foreclosed from offering unregulated services or equipment, we may not be in a position to exercise a given 'deregulatory' option even if we conclude that the public would be better served by AT&T's participation. While we believe that a regulatory scheme should not be devised merely to accommodate the unique circumstances of AT&T, we must foster an environment conducive to the availability of diverse, high quality services and equipment to the public. In this context the research and development capacity of the Bell System and its ability to come forth with new and innovative services cannot be simply discarded. The question arises, therefore whether AT&T can market enhanced non-voice services and customer premises equipment on a non-regulated basis, where the Commission believes such offerings would be in the public interest.
142. Rather than being guided by the interpretations of the decree advanced by DOJ or AT&T (which may reflect their own limited interests),¹¹⁴ we believe that current activities of the Bell System may provide a more accurate guideline. In the area of customer-premises equipment for example, the Bell System is currently able to manufacture and market a wide range of terminal equipment through Western Electric. Section IV(B) of the decree seems to permit Western Electric to sell or lease any type of equipment to the general public which it sells or leases to Bell System companies either for service to others or for their own use. The Bell System companies are likely to utilize a wide variety of devices for their internal communications and processing requirements. Thus, the consent decree may not create any barrier to the marketing through Western Electric of customer-premises equipment which combines communications and information processing functions. A literal reading of Section IV(A) would permit Western Electric to manufacture any kind of equipment used by Bell System companies in conducting business operations which the decree classifies as 'common carrier communications services.' The decree provides no guidance as to what types of 'use' might be considered relevant to the furnishing of common carrier communications services.¹¹⁵ Moreover it is clear that equipment manufactured by Western Electric need not be offered on a tariffed basis. In point of fact, Teletype Corporation, a wholly-owned subsidiary of Western Electric, directly markets and sells equipment manufactured by Western Electric on a non-regulated basis the charges for which are in no way subject to public regulation. Thus, its present conduct indicates that AT&T can market terminal equipment on an unregulated basis through Teletype Corporation without being in violation of the consent decree. Accordingly, we believe that any determination to exclude customer- premises equipment from tariff-type regulation would not foreclose AT&T's continued participation in this market through Teletype Corporation.¹¹⁶
143. Western Electric has also begun marketing numerous computer software programs developed by the Bell System for its own internal use.¹¹⁷ AT&T has taken the position that it is entirely appropriate for the Bell System to make such programs available to commercial entities at reasonable fees and that this in no way contravenes any provision of the 1956 consent decree. There does not appear to be any limitation on the types of 'in house' programs that the Bell System may develop under this scenario, and correspondingly there does not appear to be any limitation on the marketing of such programs by Western Electric.¹¹⁸ In this regard it must be kept in mind that the information processing requirements inherent in controlling the operations and needs of the Bell System are more or less comparable to the information processing requirements of other large corporations or institutions. Any computer software programs developed by the Bell System for its 'own use' will undoubtedly have applications for a broad sector of users. Accordingly, we could conclude that the Bell System now is in the computer software business. Yet, the marketing of these computer software programs is in no way presently subject to regulation. Course of conduct indicates, therefore, that AT&T is able to market computer software programs outside the scope of a tariffed communications service and free from any degree of public regulation without violating the consent decree.
144. With respect to network services actual AT&T practices in the marketplace are less obvious insofar as it ability to offer services on a non- regulated basis. There are instances, however, where AT&T provides specialized services on a contractual basis outside the scope of tariff type regulation. For example, if a large corporate user desires specialized billing procedures to track communications costs by individual telephones, departments, divisions, or whatever, AT&T will provide this service on a contractual basis. These charges are not now subject to regulation. In certain respects these specialized billing services are analogous to other computer based services tailored to individual user needs. There may be instances of other services provided on a contractual basis, but the point to be made is that we do not believe we should be bound by DOJ's construction of the decree in ruling on future AT&T service offerings. DOJ's construction of the decree does not comport with actual practices of the Bell System which negate 'regulation' as a prerequisite for permissible activity under the decree.¹¹⁹
145. We believe that the terms of the decree contain sufficient flexibility to allow both significant deregulation of terminal equipment and enhanced non- voice services yet continued participation--with appropriate structural safeguards--by AT&T in these markets. Moreover, we believe the time has come to focus on the exception in Section V(g) of the decree which exempts from its constraints 'businesses or services incidental to the furnishing by AT&T or such subsidiaries of common carrier communications services'.¹²⁰
146. Throughout this proceeding we have recognized the confluence of technologies and the convergence of various computer processing applications-- whether they be denoted as 'communications' or 'data processing'. It is precisely this convergence which compels that a strict dichotomy must fall of its own weight. The rationale for separating out 'enhanced non-voice' services is predicated on the belief that regulation should not compel any artificial structuring of services where the public interest requires otherwise. This is merely a recognition of the practical realities associated with advancements in computer processing applications. Moreover, it can hardly be argued that a contrary result was intended under the decree, since the major advancements in microprocessor and LSI technology which make these processing applications possible on a broad basis have come about only within the last ten years.¹²¹ Likewise, in the terminal equipment area we have specifically rejected the notion of classifying devices as either communications or data processing. Yet, it would by no means be accurate to say that such equipment could not be used in conjunction with or to enhance the utility of a communications service. We specifically recognize that many terminal devices with computer processing applications can be used in both regulated and unregulated services depending on the use to which they are put by the customer.
     147. In those cases where controversy exists, we believe that this Commission should decide whether the offering of customer-premises equipment or an 'enhanced non-voice' service is 'incidental' to the provision of a communications service under Section V(g) for the purpose of establishing permissible activity under the decree. See 47 U.S.C. s 153(a) & (b). Accordingly, where market forces promise to be adequate and where full regulation is therefore not required, but the offering by AT&T of a particular processing activity associated with the provision of an 'enhanced non-voice' service would be in the public interest, it is our intent to resolve our public interest determinations based on the assumption that such activity would fall within Section V(g) of the decree and would therefore constitute permissible activity. Such an approach would likewise be applicable to the provision of customer-premises equipment offered by AT&T. In this way we will be able to resolve the dilemma caused by the decree insofar as it may foster unnecessary regulation at the risk of foreclosing equipment and service options to the consumer. Just as DOJ has deferred to the expertise of this Commission in determining what constitutes 'communications' as opposed to 'data processing' for purposes of determining permissible activity under the decree, we believe that the changes in the market place since 1956 dictate that similar deference be accorded our determinations affecting whether these activities are 'incidental' to communications insofar as the public interest requires the provision of such services or equipment. While we seek comment in this regard, absent substantial arguments to the contrary it is our intent to pursue this course of action.
     148. We recognize that the court with jurisdiction over the decree is the proper body to render any definitive construction of the decree. Absent a definitive construction, the approach detailed here seems reasonable and consistent with current Bell System practices. If DOJ defers to this agency's determination relative to Section V(g) of the decree for the limited purpose of addressing the issues raised in this proceeding, modification of the decree would not be necessary. In any event we seek comments on the need for modification of the decree.
--In re Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry), Docket No. 20828, Tentative Decision And Further Notice Of Inquiry And Rulemaking, 72 FCC2d 358 (July 2, 1979)

This conclusion has a significant impact on the major common carrier, the American Telephone and Telegraph present competitive structure, such services should not be subject to a consent judgment which, with exceptions not applicable hereto, prohibits AT&T and its affiliated companies from engaging in any business other than the furnishing of regulated common carrier services.² It follows then that these companies cannot furnish data processing services.

²United States v. Western Electric Co., Inc., and American Telephone and Telegraph Company. (consent judgment). 13 RR 2143; 1956 Trade Cases 71,134 filed January 24, 1956, D.C.N.J. (See also Paragraph 43 herein.)

--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Tentative Decision, ¶ 24 (April 3, 1970)

Purpose / Concerns

First, a major regulatory concern of the Commission was the appropriateness of a carrier utilizing part of its communications switching plant of offer a data processing service. Further, there was the issue of whether communication common carriers should be permitted to sell data processing services and, if so, what safeguards should be imposed to insure that the carriers would not engage in anti-competitive or discriminatory practices. There was also concern as to the extent to which data processing organizations should be permitted to sell communications as part of a data processing package not subject to regulation.
-- In The Matter Of Amendment Of Section 64.702 Of The Commission's Rules And Regulations, Docket No. 20828, Notice Of Inquiry And Proposed Rulemaking, 61 FCC2d 103 para 3 (August 9, 1976)

30.It should be made clear that we are not seeking to regulate data processing as such, nor are we attempting to regulate the substance of any carrier's offerings of data processing. Rather, we are limiting regulation to requirements respecting the framework in which a carrier may publicly offer particular non-regulated services, the nature and characteristics of which require separation before predictable abuses are given opportunity to arise. Additionally, the success of our regulatory scheme is dependent upon a uniform application of our safeguards irrespective of the technical legal status of any carrier or the particular geographic community which it serves.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order (March 18, 1971) (Computer I).

9. In our Tentative Decision, we identified specifically the following areas of regulatory concern:
(a) That the sale of data processing services by carriers should not adversely affect the provision of efficient and economic common carrier services;
(b) That the costs related to the furnishing of such data processing services should not be passed on, directly or indirectly, to the users of common carrier services;
(c) That revenues derived from common carrier services should not be used to subsidize any data processing services; and
(d) That the furnishing of such data processing services by carriers should not inhibit free and fair competition between communication common carriers and data processing companies or otherwise involve practices contrary to the policies and prohibitions of the anti-trust laws. (Tentative Decision, para. 34).
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order, ¶ 9 (March 18, 1971) (Computer I).

Dangers

24. We turn now to the problems posed by the provision of data processing services by common carriers. We have already concluded that so long as the data processing industry continues to retain its present competitive structure, such services should not be subject to common carrier regulation. This conclusion has a significant impact on the major common carrier, the American Telephone and Telegraph present competitive structure, such services should not be subject to a consent judgment which, with exceptions not applicable hereto, prohibits AT&T and its affiliated companies from engaging in any business other than the furnishing of regulated common carrier services. [FN2] It follows then that these companies cannot furnish data processing services. Other than this we know of no provision of law which prohibits or bars any other non-regulated service subject to certain safeguards. [FN3] To the contrary, our rules contemplate that other services may be furnished by such carriers and prescribe the methods of accounting for the reporting with respect to such services. [FN4]
25. We recognize, however, that the provision of other services and, particularly data processing services by common carriers, may give rise to critical problems of unfair competition and cross-subsidy. In fact, one of the major concerns raised by many respondents to our Notice of Inquiry relates to the participation of communications common carriers in the provision of data processing services without essential protection against such unfair competition. These concerns stem from the potential of common carriers to subsidize their data processing operations with revenues and resources available from their regulated services thereby enabling them to dominate the data processing market by underpricing their data processing services. A further concern arises from the fact that carriers engaging in remote access data processing will be providing the communications component of the service to themselves, as well as to their computer service competitors in the same business. Here it is feared that the carriers may favor their own interests and discriminate against their competitors in the prices and practices established for data processing services by a carrier can result in burdening or impairing the carrier's provision of its other regulated services, including increasing the costs of those services to the public.
26. Because of these concerns, many of the respondents advocate that carriers be either totally barred from providing data processing services or that they be subjected to strict safeguards designed to prevent possible discrimination or anti-competitive practices.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Tentative Decision (April 3, 1970)

Reasons to Permit Carrier Offering of Enhanced Services

38. It was prior to the development of these very different legal, technological and market circumstances that the Commission initiated its Computer Inquiry line of cases. In Computer I, the Commission addressed the questions of whether data processing services should be subject to regulation under Title II of the Act, and whether, and under what conditions, all common carriers should be permitted to compete in the market for data processing services. Finding that the computer data services industry "is one characterized by open competition and relatively free entry," the Commission concluded that it "should not, at this point, assert regulatory authority over data processing as such." Moreover, the Commission found that allowing common carriers to provide computer data services would likely benefit the public through "new and improved services and lower prices." Yet the Commission also recognized that common carriers might be able to "favor their own data processing activities by discriminatory services, cross-subsidization, improper pricing of common carrier services, and related anticompetitive practices and activities." Thus, the Commission required common carriers to furnish data processing services through a separate corporate entity that could not use regulated communications facilities to provide unregulated services. Finally, the Commission prohibited common carriers from discriminating in favor of their data processing affiliates.
--In Re Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, CC Docket No. 02-33, CC Dockets Nos. 95-20, 98-10, NPRM (February 15, 2002) http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-02-42A1.doc

30. Having determined the scope and extent of our powers, we turn now to the question of how they should be exercised herein. In this connection we have the benefit of the SRI study made for us. This study analyzed the potential benefits which might flow from the provision of data processing services by carriers, as well as the potential dangers involved.
31. Three possible benefits which SRI felt might be expected to flow from permitting carriers to enter data processing were: greater competition and innovation therein; exploitation of possible significant economies, both technical and managerial, of integrated operation; and provision of an opportunity for diversification by The Western Union Telegraph Company. SRI concludes that all but the last of the aforementioned possible benefits seem remote and hypothetical at the present time. It identifies two possible costs associated with permitting carriers to enter data processing service. One is that the task of regulating carriers in their communications markets would be complicated. The other is that the carrier might, through predatory price cutting, come to dominate or monopolize the data processing industry. SRI concludes that the danger of regulatory complication seems real but is difficult to quantify, that there is no real danger of predatory price cutting by Western Union since it has no reserve or monopoly power to support a period of below-cost pricing without bankruptcy, and that the danger of such predatory price cutting by the non-Bell telephone companies is less clear, but should not be altogether excluded.
32. SRI suggests three possible regulatory alternatives: free entry; absolute prohibition against entry; and entry under regulatory safeguards that could include (a) subjecting a carrier's data processing services to minimum rate regulation by the Commission, and (b) requiring carriers to segregate their accounting for communications and local data processing services. Essentially, however, SRI recommends that, for the immediate future, we should adopt a wait- and-see policy coupled perhaps with permission to Western Union to offer local data processing service subject to reasonable safeguards. In this connection. SRI makes reference to the contract arrangements between Western Union and the Bell System telephone companies whereby these companies exchange facilities at payments allegedly lower than the public tariff charges would be for similar service. SRI, therefore, suggests that, if Western Union is permitted to engage in remote access data processing, the Commission should perhaps require the Bell System to provide facilities to other data processors on the same terms and conditions.
33. The dangers identified by respondents and by the SRI study relate primarily to the alleged ability of common carriers to favor their own data processing activities by discriminatory services, cross subsidization, improper pricing of common carrier services, and related anticompetitive practices and activities. We recognize that these dangers may be real and could have substantial adverse effects on noncarrier data processing companies. We are confident, however, that the steps we are taking herein will provide adequate protection against possible abuses. On the other hand, the additional competitive spur provided by carrier participation in data processing can and should, with the specific safeguards, promote innovation, efficiency, economy, and diversity with resulting new and improved services at lower prices to the users of data processing.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Tentative Decision (April 3, 1970)

Maximum Separation / Structural Separation

Goals, Objectives

18. As to the issue of carrier participation, we recognized that provision of data processing services by common carriers might give rise to certain regulatory problems. Primarily, we were concerned with the possibility that common carriers might favor their own data processing activities through cross-subsidization, improper pricing of common carrier services, and related anti-competitive practices which could result in burdening or impairing the carrier's provision of its other regulated services. We therefore adopted a policy of 'maximum separation' whereby a communications common carrier had to furnish data processing services through a separate corporate entity. ²

² 47 C.F.R. ss 64.702(c) and (d) require that a carrier establish a separate data processing entity having separate books of accounts, separate officers, separate operating personnel and separate equipment and facilities devoted exclusively to rendition of data processing services; and the carrier is prohibited from promoting the data processing services offered by the separate subsidiary. Carriers with annual revenue less than one million dollars were exempt from the maximum separation requirement.

--Final Decision, In re Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry), 77 FCC2d 384, ¶ 18 (1980)

We recognized, however, that provision of data processing services by common carriers might give rise to certain regulatory problems. Primarily, we were concerned about the possibility that common carriers might favor their own data processing activities through cross- subsidization, improper pricing of common carrier services, and related anti- competitive practices which could result in burdening or impairing the carrier's provision of its other regulated services. We therefore adopted a policy of maximum separation whereby communications common carriers would be required to furnish data processing services only through separate corporate entities. Section 64.702 of the Commission's Rules and Regulations was adopted to implement this maximum separation policy.
--In re Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry), Docket No. 20828, Tentative Decision And Further Notice Of Inquiry And Rulemaking, 72 FCC2d 358 para 4 (July 2, 1979)

124. The maximum separation policy was adopted to:

. . . assure (a) that such services will not adversely affect the provision of efficient and economic common carrier services; (b) that the costs related to the furnishing of such services will not be passed on directly or indirectly, to the users of common carrier services; (c) that revenues derived from common carrier services will not be used to subsidize any data processing services; and (d) that the furnishing of such services will not inhibit free and fair competition between communication common carriers and data processing companies or otherwise involve practices contrary to the policies and prohibitions of the antitrust laws. Tentative Decision at para 34.

In adopting this policy, however, we made clear that

. . . we are not seeking to regulate data processing as such, nor are we attempting to regulate the substance of any carrier's offerings of data processing. Rather we are limiting regulation to requirements respecting the framework in which a carrier may publicly offer particular non-regulated services, the nature and characteristics of which require separation before predictable abuses are given opportunity to arise. Final Decision at para 30.

125. The objectives of the maximum separation policy are still valid today. Carriers should not be permitted to burden their regulated communication services with costs properly allocable to their unregulated ventures to the detriment of users of communications common carriage facilities; nor should carriers be able to impose on the users of common carrier services the risks of loss that attend ventures in competitive areas, or sacrifice quality or efficiency in their regulated services. However, the specific rules which implement these objectives were formulated based on the market applications of computer technology prevalent at that time. With the advent of distributed processing the present rules may well inhibit the flexibility and availability of services designed to meet the unique communications needs of particular users or a class of users. This situation can be remedied by addressing in a different manner the concerns which gave rise to the need for a complete separation between a carrier's regulated and unregulated activities.
.....
127. The existing maximum separation rules require a degree of corporate separation in the provision by carriers of unregulated services. This separation is maintained insofar as we are requiring that a carrier having an ownership interest in transmission facilities used in the provision of interstate 'voice' or 'basic non-voice' services, can provide 'enhanced' non- voice services only through a separate corporate resale entity.¹⁰⁵ Because the transmission component of any 'enhanced non-voice' service must be acquired pursuant to tariff, the terms and conditions of which are subject to the requirements of Section 201-205 of the Act, we can control the potential for underlying carriers to support their 'enhanced' services with revenues derived from their 'basic' service offerings or to engage in other anticompetitive practices. The exercise of our regulatory responsibilities with respect to the marketing of 'enhanced non-voice' services can be addressed, if need be, through accounting procedures rather than through maintenance of the 'separate facilities' requirement of the maximum separation policy. This structure provides an adequate safeguard against significant anticompetitive behavior and allows resale carriers to provide services without restriction as to the nature of the processing application offered.
--In re Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry), Docket No. 20828, Tentative Decision And Further Notice Of Inquiry And Rulemaking, 72 FCC2d 358 para 4 (July 2, 1979)

10. As discussed in our Tentative Decision, appropriate regulatory treatment of these concerns requires 'a maximum separation of activities which are subject to regulation from non-regulated activities involving data processing.' (Tentative Decision, para. 35). Such a degree of separation, we concluded, would enable us, as well as state regulatory agencies, to discharge regulatory responsibilities with respect to maintaining adequate and efficient communications services at reasonable and non-discriminatory rates and practices. It would also be conducive, we stated, to removing foreseeable anti- competitive carrier practices and avoiding the necessity of taking corrective measures that might otherwise be called for. (Tentative Decision, para. 37). Nothing has been brought to our attention, either by written comment or in oral argument, or in market developments, that provides us with any rational basis for abandoning our tentative conclusions in this respect.⁵ Consequently, we consider the concept of 'maximum separation' central to our regulatory scheme, and shall require such separation to insure that the public is offered efficient and economical communication services.
In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order, ¶ 10 (March 18, 1971) (Computer I).

34. It is our view that any regulatory safeguards promulgated with respect to the sale of data processing services by communications common carriers should seek to assure (a) that such services will not adversely affect the provision of efficient and economic common carrier services; (b) that the costs related to the furnishing of such services will not be passed on, directly or indirectly, to the users of common carrier services; (c) that revenues derived from common carrier services will not be used to subsidize any data processing services; and (d) that the furnishing of such services will not inhibit free and fair competition between communication common carriers and data processing companies or otherwise involve practices contrary to the policies and prohibitions of the anti-trust laws.
35. We believe that these objectives will be achieved best by a maximum separation of activities which are subject to regulation from nonregulated activities involving data processing. Because, of the increasing involvement of interstate communications facilities and services in the provision of data transmission, the need for such separation is apparent and urgent. This need exists whether or not at the present time the carrier is engaged in the sale of local or remote access data processing. In either instance, there is a potential for abuse in the form of a commingling of costs associated with the rendition of communication and data processing services, which can give rise to the above-discussed problems of cross-subsidization and other unfair competitive practices in the pricing of regulated and nonregulated services. Also, such commingling of operations and related costs will unduly complicate the task of effective regulation of the communication rates and services of common carriers. It will tend to obscure, if not defeat, the ready identification and allocation for accounting and ratemaking purposes of the costs associated with each activity.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Tentative Decision (April 3, 1970)

Outright Prohibition

11. We turn now to the questions which have been raised as to the manner in which this concept should be implemented. Several parties have urged an outright prohibition against the furnishing of computer services by any communications common carrier, any affiliate of such a carrier, or any entity under common ownership with a carrier. Such a sanction would be extreme. It would be contrary to our policy of permitting the common carrier, directly or through affiliates, to engage in non-regulated activities so long as such activities are not repugnant to or in derogation of the economic and social objectives of the Act. (See Tentative Decision, para. 24). Furthermore, as we found in our Tentative Decision, the computer service industry is one characterized by open competition and relatively free entry. (See para. 19-23). These characteristics, in fact, provide a major basis for our conclusion that we should not, at this point, assert regulatory authority over data processing, as such. Under these circumstances, and in view of our expectation that the competition afforded by carriers in the provision of computer services could and would provide benefits in such matters as new and improved services and lower prices, we cannot find the necessary social, economic or policy consideration which would require or even justify an outright prohibition against the furnishing of data processing services by common carriers. We shall, therefore, reaffirm our Tentative Decision in its respect and permit the data processing industry to evolve with carrier participation therein under conditions designed to obviate foreseeable abuses. At the same time, we stress our intention to reconsider this conclusion should future experience indicate that any of the premises underlying this conclusion have not materialized or that in spite of our prescribed safeguards carrier abuses are developing.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order, ¶ 11 (March 18, 1971) (Computer I).

Competitive Disadvantage

16. In order to implement our concept of 'maximum separation', we have sought to establish requisites affecting the mode of operation of common carriers and their data processing affiliates. (See Tentative Decision, para. 36; Section 64.702 of the Commission's Rules, 47 C.F.R. 64.702, as proposed). Several carriers contend that the extent of separation we would require therein is 'unfair' and, if adopted as formulated, would place carrier data processors at a competitive disadvantage as compared to counterparts not affiliated with common carriers. We find this contention without merit. As we stated in our Tentative Decision:

For a relatively small capital investment, a service firm can be formed, computer equipment can be leased, and programmers can be hired. The factors which mark the difference between service bureau success or failure are imaginative innovation, quality programming, and useful service features, rather than the size of the staff or the computing installation. (para. 21).

Consequently, we believe that our restrictions herein respecting corporate arrangements are neither onerous nor burdensome but reflect, rather, the market conditions confronted by those 800 or more noncarrier-related firms with whom
carrier data affiliates will be competing.
17. We also take note of the fact that major carrier enterprises have already taken steps voluntarily to effect a corporate and physical separation of their communications and data processing activities. We have carefully considered the extensive record in this proceeding and have concluded that the requirements respecting the maintenance of separate books of account, separate facilities, and separate officers and operating personnel are not 'unfair' but, rather, constitute a reasonable means of establishing a framework in which carriers may offer data processing services.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order (March 18, 1971) (Computer I).

Maximum Separation (Computer I) (All Carriers)

9. The regulatory issues spawned by the technical confluence of regulated communications services and unregulated data processing services have been among the most important matters this Commission has dealt with over the past 20 years. Indeed, during this period, we have addressed these issues, in one proceeding or another, on a virtually continuous basis, as we have sought to revise and refine our regulatory approach in light of rapidly changing technological and marketplace developments. We initially attempted to establish an appropriate regulatory framework for the provision of communications and data processing services in the First Computer Inquiry (Computer I). [17] In that proceeding, we established a three-part classification of computer and telecommunications services, based on their technical and functional characteristics, with a different regulatory treatment for each classification. [18] We determined not to regulate "data processing" services, which we found were being offered on a highly competitive basis. We regulated "communications" as common carrier offerings under Title II of the Communications Act. "Hybrid" services, which we defined as offerings that combine "[r]emote [a]ccess data processing and message-switching to form a single integrated service," [19] were to be treated as either data processing or communications services based on Commission determinations as to which of the two functions were predominant in the particular hybrid service. We permitted common carriers other than AT & T and its Bell System subsidiaries to provide data processing services subject to a structural separation requirement; this requirement was designed to prevent such carriers from engaging in anticompetitive behavior such as discrimination or cross- subsidization of unregulated operations by regulated services. We did not establish requirements for AT & T and its subsidiaries based on our assumption that they were precluded from offering any type of data processing services by the terms of an antitrust consent decree then in effect (the 1956 Decree). [20]
----In re Amendment of Sections 64.702 of the Commission's Rules and Regulations (Third Computer Inquiry); and Policy and Rules Concerning Rates for Competitive Common Carrier Services and Facilities Authorizations Thereof Communications Protocols under Section 64.702 of the Commission's Rules and Regulations, REPORT AND ORDER, CC Docket No. 85-229, 104 FCC.2d 958, ¶ 9 (1986).

We recognized, however, that the provision of data processing services by common carriers might give rise to certain regulatory problems. Primarily, we were concerned about the possibility that common carriers might favor their own data processing activities by discriminatory services, cross subsidization, improper pricing of common carrier services, and related anticompetitive practices and activities which could result in burdening or impairing the carrier's provision of its other regulated services. We therefore adopted a policy of maximum separation whereby communication common carriers would be required to furnish data processing services only through separate corporate entities.
-- In The Matter Of Amendment Of Section 64.702 Of The Commission's Rules And Regulations, Docket No. 20828, Notice Of Inquiry And Proposed Rulemaking, 61 FCC2d 103 para 5 (August 9, 1976)

123. The First Computer Inquiry set forth a structure under which carriers could compete in the provision of data processing services. It was decided that there should be a complete separation of a carrier's regulated services from its unregulated data processing ventures. This came to be known as the 'maximum separation policy.' In GTE Service Corp. v. FCC the court affirmed our authority to promulgate rules regulating the entrance of communications common carriers into the non-regulated field of data processing services.¹⁰⁰ Section 64.702 implements our maximum separation policy and essentially 'prescribes the conditions under which common carriers may engage in the offering of data processing services to others.'¹⁰¹ The rules we adopted in the First Computer Inquiry were designed to ensure the continued provision of efficient and economic communications service to the public.¹⁰² In affirming the existing computer rules the court noted that 'the expansive power of the Commission in the electronic communications field includes the jurisdictional authority to regulate carrier activities in an area as intimately related to the communications industry as that of computer services, where such activities may substantially affect the efficient provision of reasonably priced communications service.'¹⁰³ The court affirmed our application of the maximum separation requirements to all carriers, including carriers falling within Section 2(b) of the Act. It noted that connecting carriers are subject to Sections 201-205 of the Communications Act, and therefore the Commission has 'jurisdiction over the connecting carrier's services, charges and practices which are part of the uninterrupted and indivisible national system of telephone service.'¹⁰⁴
-- In re Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry), Docket No. 20828, Tentative Decision And Further Notice Of Inquiry And Rulemaking, 72 FCC2d 358 (July 2, 1979)

IT IS FURTHER ORDERED, That, (a) all common carriers providing data processing services, as of May 8, 1973, either directly or through established data processing affiliates, which carriers are not exempted from the provisions of Section 64.702(c) by the application of Section 64.702(b), shall within six months from May 8, 1973 comply fully with the provisions of Section 64.702(c) of the Commission's Rules. All such carriers shall, during this six month period, comply fully with all other provisions of our Rules, and shall submit reports every 60 days of progress made toward complete compliance with Section 64.702(c). The initial report shall contain a complete description of the existing or proposed organization, facilities and operations of the data processing (affiliates), together with copies of all agreements and memoranda or other arrangements between carrier and (affiliates); (b) any common carrier not furnishing data processing services on the effective date of this Order, either directly or through previously established data processing affiliates, which carrier is not exempted from the provisions of Section 64.702(c) by the application of Section 64.702 (b) of the Commission's Rules, shall not inaugurate such services except in full compliance with our Rules including Section 64.702(c), and shall, within 60 days after it commences such services, submit to the Commission a written report setting forth a complete description of the organization facilities and operations of the data processing (affiliates), together with copies of all agreements and memoranda or other arrangements between carrier and (affiliates).
6. IT IS FURTHER ORDERED, That, ITT and RCA, within 30 days from May 8, 1973, shall file tariffs covering their ARX and AIRCON services, respectively.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Order (April 3, 1973) (Computer I).

12. Having determined not to impose outright prohibitions against carrier provision of data processing services, we now turn to a consideration of the questions raised regarding those safeguards we have proposed in order to obviate any derogation of carrier communication service obligations to the public, or to prevent any abuse or limitation with respect to free competition because of the carrier's access to customers as a provider of communication services. As we stated in our Tentative Decision:

The dangers... relate primarily to the alleged ability of common carriers to favor their own data processing activities by discriminatory services, cross- subsidization, improper pricing of common carrier services, and related anticompetitive practices and activities. (para. 22).

We proposed that common carriers desiring to provide data processing services be permitted to do so only through affiliates utilizing separate books of account, separate officers, separate operating personnel and separate equipment and facilities devoted exclusively to the rendition of data processing services.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order, ¶ 12 (March 18, 1971) (Computer I).

Summary on separation of carriers and affiliates
24. In summation, our rules reflecting the implementation of the concept of maximum separation shall be adopted, as proposed, except for the modifications and clarifications indicated herein. In addition to those requirements delineated in the Tentative Decision, a carrier shall be precluded from disposing of any capacity on computer systems utilized by that carrier for the provision of common carrier communications services. Further, a carrier shall be prohibited from obtaining any data processing services from its data affiliate. Carrier-related data entities shall be required to employ a corporate name or symbol other than that employed by its carrier affiliate, and such entities are forbidden to promote their products or services through or by association with the carrier affiliate. Our proposed rules shall be amended accordingly.
. . . . .
Accordingly, IT IS ORDERED, That pursuant to Section 4(i) of the Communications Act, 47 U.S.C. s 154(i), and Section 5(d) of the Communications Act, 47 U.S.C. s 155(d), the rules set forth in Appendices A and B hereto ARE ADOPTED effective April 30, 1971.
IT IS FURTHER ORDERED, That, (a) all common carriers currently providing data processing services, either directly or through previously established data processing affiliates, which carriers are not exempted from the provisions of Section 64.702(c) by the application of Section 64.702(b), shall within six months of the effective date of this Order, comply fully with the provisions of Section 64.702(c) of the Commission's Rules. All such carriers shall, during this six month period, comply fully with all other provisions of our Rules, and shall submit reports every 60 days of progress made toward complete compliance with Section 64.702(c). The initial report shall contain a complete description of the existing or proposed organization, facilities and operations of the data processing (affiliates), together with copies of all agreements and memoranda or other arrangements between carrier and (affiliates); (b) any common carrier not furnishing data processing services on the effective date of this Order, either directly or through previously established data processing affiliates, which carrier is not exempted from the provisions of Section 64.702(c) by the application of Section 64.702(b) of the Commission's Rules, shall not inaugurate such services except in full compliance with our Rules including Section 64.702(c), and shall, within 60 days after it commences such services, submit to the Commission a written report setting forth a complete description of the organization facilities and operations of the data processing (affiliates), together with copies of all agreements and memoranda or other arrangements between carrier and (affiliates).
IT IS FURTHER ORDERED, That, ITT and RCA file, within 30 days from the effective date of this Decision, tariffs covering their ARX and AIRCON services, respectively.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order (March 18, 1971) (Computer I).

36. Accordingly, we are hereby adopting a policy that communications common carriers shall furnish data processing services only through separate corporate entities. This requirement shall be applicable to all communications common carriers engaged in interstate or foreign communications services, including connecting carriers within the meaning of Section 2(b)(2)(3) and (4) of the Communications Act, where any such carrier itself has annual operating revenues exceeding $1,000,000 or any such carrier is directly or indirectly controlled by or is under common control with another carrier or carriers and the combined annual operating revenues of all such carriers exceed $1,000,000. [FN5] Each such data processing entity shall be staffed with separate officers and operating personnel and shall use equipment and facilities devoted exclusively to the rendition of data processing and other non-common carrier services. We shall also require that the data processing affiliate maintain its own books of account and file with the Commission separate annual and other reports as may be prescribed by the Commission pursuant to Section 218 of the Communications Act. Further, we shall require the submission by the carrier (whether the carrier be a parent or subsidiary) of all inter-corporate agreements and memoranda of any arrangements between the carrier and its affiliate. When such separate corporate entity obtains communications facilities or services from its affiliated common carrier, (whether parent or subsidiary) it will be required to do so pursuant to the same tariff terms, conditions, and practices as are applicable to any other customer of the carrier, and specifically, on terms and conditions no more favorable than those offered to other unaffiliated entities. Moreover, we shall require that no carrier subject to the aforementioned conditions engage in the sale or promotion of data processing activities on behalf of its data processing affiliate. Finally, we will expect any affiliate of a common carrier to permit reasonable interconnection with facilities of the customer.
37. The foregoing conditions, in our judgment, will enable this Commission, as well as regulatory agencies of the several states to discharge their regulatory responsibilities with respect to the maintenance of adequate and efficient common carrier communications services at reasonable and non- discriminatory rates and practices. They will also, in our judgment, be conducive to removing possible anti-competitive practices and avoid the invocation of corrective measures that might otherwise be called for. Separate books of account, managerial and operating personnel and physical facilities will facilitate a more efficient identification and tracing of costs and revenue flows than would be possible if the common carrier communications and data processing activities were combined in one corporate entity. The furnishing of communications services and facilities by the carrier to its data processing affiliate would, in all cases, be pursuant to a tariff, and thus made available on the same terms and conditions applicable to like services or facilities furnished to any other purveyor or user of data processing services, thereby minimizing the risks of undue discrimination in violation of Section 202(a) of the Communications Act. We expect that under no circumstances will carriers give any preferential treatment to their data processing affiliates and that carriers will scrupulously administer the terms and conditions of tariffs in making their facilities and services available to affiliates and non-affiliates on a non-discriminatory and non-preferential basis. These constraints will also meet the concern expressed by SRI that the Bell System companies provide no preferential treatment to Western Union not available to all other processors since the data processing affiliate of Western Union will be required to pay the same tariff rates for common carrier services as will its competition. The Bell System, subject as it is to the proscriptions of the Western Electric consent judgment, supra Note 2, is, of course, foreclosed from the sale of data processing services since such services will not be tariffed. Finally, the separation of accounts and activities required herein, including the prohibition against any carrier marketing data processing services on behalf of its affiliate, will mitigate any unfair competitive advantage that might otherwise enure to the data processor by virtue of its affiliation with a communications common carrier.
38. It is noteworthy that, in varying degrees, the safeguards provided for above, have already been implemented by the larger interstate common carrier systems. Western Union, General Telephone and Electronics and United Utilities have organized or acquired separate affiliates for the promotion and sale of data processing services. We intend to conduct a full and comprehensive review of those affiliated organizations and their operations to insure that they are in full compliance with policies promulgated herein. We shall require in this regard that each such company, within sixty days from the effective date of the final decision herein, submit in writing a full description of the organization, facilities and operations of their data processing affiliates, together with copies of all agreements and memoranda or other arrangements between carrier and affiliate. Other carriers, who may not have already established such arrangements to separate their communications activities from the sale of data processing services shall do so within 6 months from the effective date of any rules adopted to implement this policy.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Tentative Decision (April 3, 1970)

Minimum Threshold

The FCC determined that only "maximum separation" could prevent common carriers from engaging in cross subsidization, predatory pricing, and unfair competition. The FCC determined that it was only necessary to apply this maximum separation policy to common carriers earning over one million dollars a year, but only the American Telephone & Telegraph Co. (AT&T) fell into this category. However, such line drawing was irrelevant since AT&T and the Bell Operating Companies (BOCs) were already prohibited from providing competitive, non-common carrier services under a 1956 consent decree (Consent Decree).
--Ann E. Rendahl, California v. FCC: a Victory for the States, 13 HASTINGS COMM/ENT L.J. 233, 238-39 (Winter 1991)

23. It is contended that we lack the jurisdictional base to impose our safeguards upon connecting carriers within the meaning of Section 2(b)(2), (3) and (4) of the Communications Act; that our authority over such connecting carriers is specifically limited to matters respecting regulation of interstate and foreign communications services and charges through Sections 201-205 of the Act. This Commission's jurisdictional warrant extends to all communication common carriers insofar as they are participants in the provision of interstate communications services. And insofar as any connecting carrier's participation in interstate service provision may foreseeably be adversely affected by its non-regulated undertakings, we believe it is incumbent upon us to impose such rules as are necessary to preserve the integrity of those services. We have, however, exempted from our safeguards those common carriers not directly or indirectly controlled by or under common control with another carrier or carriers wherein the combined annual operating revenues of all such carriers does not exceed $1,000,000.⁷ (See Tentative Decision, para. 36). In so doing we have sought to avoid imposing the burdens of maximum separation upon smaller carriers. In balancing the public interest factors, we have concluded that the requirements of separation for these carriers would inhibit or preclude their participation in data processing and would thereby frustrate or eliminate a source of anticipated competition in the data processing market. We recognize the contention that irrespective of the size of any carrier, its influence is considerable within its operating franchise. However, we believe that both the potential and motives for abuse by these smaller carriers is minimal at this time. We shall retain jurisdiction in the matter, and upon an instance or instances wherein an exempted carrier's data processing activities derogate from its primary obligation of serving communication needs, or wherein it improperly utilizes its position to adversely influence the data processing market in its operating territory, we shall appropriately modify our rules herein.
--In re Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order, ¶ 23 (March 18, 1971) (Computer I).

International Carriers

41. We have reviewed the arguments of the international carriers who seek to provide data processing services that they be treated differently from domestic common carriers. There is no doubt that many of the potential abuses we foresee relate primarily to domestic carriers. However, there is a substantial potential for impact upon the communication services of the international carriers particularly in view of the rapid growth of both communication and data processing services. In addition, the international carriers maintain direct relations with many large users who could become data processing customers and are, therefore, in a position to affect adversely the free and unfettered competitive atmosphere in the provision of such services. We shall, therefore, affirm our conclusion that international carriers be fully subjected to this Decision and the Rules we are adopting.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order (March 18, 1971) (Computer I).

Carrier's Computers

40. We turn now to the question respecting data processing services that the Bell System Companies perform for themselves and for independent telephone companies in connection with inter-carrier arrangements and traffic. In view of Bell's and the independent's position in oral argument, and the fact that there was voiced no opposition to such arrangements, we find that no need presently exists to interrupt this practice. We hasten to add that the above decision is premised, in part, upon the understanding that charges to the independent telephone companies for these data processing services are designed to and are fixed at levels sufficient to compensate only for actual costs. Accordingly, so long as the data services performed by the Bell System Companies are incidental to the inter-carrier provision of communication services, and so long as costs associated therewith are shared proportionately by the participating carriers, such practices may be continued.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order (March 18, 1971) (Computer I).

13. Western Union contends that certain economies and consequential public benefits would flow from the public sale, lease or other disposition of a common carrier's 'off-peak' or 'back-up' computing system capacity. While it may be true that costs allocated to the sale of such capacity would reduce the revenues required from communications services, we believe that the potential abuses inherent in operations of this nature outweigh whatever benefits might be achieved. First of all, a carrier's 'back-up' system should be designed to meet foreseeable breakdowns of equipment dedicated to public service and it should be available instantly for that purpose without the conflicting claims of other users. With respect to 'off-peak' capacity, it is clear, assuming sound systems analyses were employed by carrier personnel, that such capacity exists only during those hours when the communications flow is light, and that during peak hours, the systems' capacity approaches full utilization for communication services provision. It is characteristic of common carrier service that normal peaks shift and that abnormal or non-recurring peaks eventuate from time to time. The use of 'off-peak' capacity for data processing would derogate from the carrier's ability to accommodate these occurrences. Such arrangements could result in an unacceptable conflict with the vital public functions for which the carriers are licensed.
14. Aside from these considerations, there are also other problems inherent in joint use of facilities or personnel. Our experiences with attempting to allocate investment and costs between and among communication services provided by fungible plant and operated by the same personnel of a common carrier convince us of the great difficulties which could be involved in allocation procedures between communications and data processing activities. The potential for abuse and the difficulty of preventing or promptly remedying improprieties convince us that we should not alter our tentative conclusions as to the desirability of the type of separation contemplated by or Tentative Decision.
15. Under these circumstances, any economic benefits that might accrue to the carrier or its customers by permitting the commingling of regulated and data processing activities are, in our judgment, more than offset by the potential adverse effects of such an arrangement. We conclude that a carrier's computer system or systems should be dedicated exclusively to its public communication services or to its 'inhouse' data processing requirements incidental thereto.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order, ¶ 11 (March 18, 1971) (Computer I).

Cross Promotion

18. We further stated in our Tentative Decision that no carrier subject to our proposed rules shall be permitted to 'engage in the sale or promotion of data processing activities on behalf of its data processing affiliate.' (Para. 36; Section 64.702(b)(3) of the Commission's Rules, 47 C.F.R. 64.702(b)(3)), as proposed. We consider such restriction consonant with our regulatory scheme of maximum separation. Several parties have indicated that, implicit in such restriction, is an extension which would prohibit the data affiliate from using the corporate name of the common carrier in its promotional activities. It is further urged that the carrier data affiliate should have a different name from the common carrier. It is argued, in essence, that if the above practices are not proscribed by Commission rule, the same coercive effect as with the carrier's solicitation of sales can be attained indirectly. Upon consideration of these contentions, we have decided to modify our rules to prohibit a data affiliate from using the name of its related common carrier in its promotions and, further, to prohibit such affiliate from using, in its corporate name, any words or symbols contained in the name of its affiliated carrier. [FN6] We recognize that, as a practical business matter, such improper promotions may occur in personal dealings between a data affiliate and its prospective customer. However, we admonish that we shall retain continuing jurisdiction over this matter and shall react appropriately if circumstances indicate that such wrongful promotional activity is taking place. Accordingly, we shall direct our rule against the use of name and symbols of the carrier affiliate toward any holding company owning or jointly owning a common carrier and a data processing entity, and toward any common carrier with an interest, direct or indirect, in a data processing affiliate.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order, ¶ 18 (March 18, 1971) (Computer I).

Services to Carriers by Affiliate

19. It has urged by several parties to this proceeding that the safeguards be extended to include a proviso that would prohibit a common carrier from obtaining that services of its data processing affiliate. It is contended that such arrangements between a carrier and its affiliate would be conducive to the development of the very substantive ills that our concept of maximum separation is designed to inhibit or, at least, to minimize. That is, such arrangements could result in the subsidization of the data processing affiliate, with the carrier's communications customers eventually absorbing the cost of inflated data processing charges through an extended rate base. Furthermore, it is urged that exclusive transactions between a carrier and its affiliate for data processing services would substantially impact the competitive market in which hundreds of small competing service bureau firms would be unable to obtain and retain the patronage of so significant a data processing customer. Additionally, it is contended, a significant burden would be placed upon the Commission to police the propriety of arrangements between a carrier and its data processing affiliate. Any improprieties in such dealings would be difficult to detect and rectify in view of the fact that data processing service offerings, and the charges made therefor, are neither fixed nor stable, but may vary considerably among customers.
20. The fundamental question raised by these contentions in whether the extent of required separation between a carrier and its data affiliate, as set forth in the Tentative Decision, suffices to prevent any arbitrary manipulation in the allocation of revenues and expenses between a carrier's regulated and unregulated service offerings. The specialized and variant nature of the data processing services, particularly with reference to costs and charges therefor, is conducive to improprieties which are difficult to detect. Such improprieties could translate into inflated charges to customers of a carrier's regulated services which, in turn, could lead to lengthy administrative proceedings and other litigation. At the same time, such improprieties could cause irreparable harm to a carrier affiliate's data processing competitors and, thus, to the essentially competitive market within which data processing service offerings currently exist. In other words, excessive payments by carriers to data processing affiliates would enable the affiliates to unfairly underprice their own competitors in the data processing market. Since the basic objective of our policy herein is the deterrence of foreseeable abuse from indirect carrier entry into data processing, we shall amend our rules to include a provision prohibiting a common carrier from obtaining any data processing service from its data affiliate. In so doing, we recognize that a carrier with data processing requirements has available to it the option of utilizing an 'in- house' system to accommodate its particular computing needs, of turning to and bargaining with any non-affiliated service firm for computer services, or, with respect to intercarrier arrangements (e.g. billing information, settlement data, traffic studies and other communications service-related operations data) between the Bell System Companies and various independent telephone companies, of accommodating such data processing requirements to the extent possible on a shared cost basis. See para. 40, infra. We consider the above restriction a logical and necessary extension of the concept of 'maximum separation,' one amply supported by our regulatory experiences and by the record in this proceeding, and one which imposes no unreasonable burden upon common carriers.
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order (March 18, 1971) (Computer I).

Service to Affiliate from Carrier

42. It has been pointed out that the Tentative Decision requires that carrier data affiliates file reports with us, that carrier data affiliates obtain communication services and facilities under tariff rates and conditions, and that carrier data affiliates offer reasonable customer interconnection options; but that none of these measures are to be made a requirement of our rules. See Tentative Decision, para. 36. With respect to the filing of affiliate reports, we are of the opinion that, at this time, except as provided in paragraph 36 supra and Section 64.702(f) of our Rules, it would be premature to prescribe rules requiring such separate affiliate reports. We feel that we should first observe developments under our policy and rules herein before addressing ourselves further to the question of what annual or other reports, if any, may be necessary from a carrier data affiliate in order to enable us to perform our statutory duties. With respect to tariff dealings between a carrier and its affiliate, we find no need to regulate such dealings by additional rule. For under the Communications Act and existing Commission Rules, a carrier data affiliate which leases communication facilities from its affiliated carrier is to be treated on the same basis as any non-affiliated lease of like or similar communication services. Should any carrier discriminate in favor of its data affiliate, this Commission possesses extensive authority under Title II of the Act to remedy the situation. Finally, with respect to the expectation of reasonable customer interconnection options, we are of the opinion that the keen competitive forces of the market place will best resolve this problem. It appears to us that if any data processor, carrier affiliated or otherwise, refuses to interconnect a device or system at the reasonable request of the customer, the latter can obtain relief by subscribing to a like service from a more competitive data offeror. If, however, our expectation is not borne out by actual developments and serious problems result from a refusal on the part of carrier data affiliates to permit reasonable interconnection or the attachment of customer devices to their data processing networks, we shall re-examine our position herein, including our present conclusion respecting the exercise of jurisdiction over data processing (See para. 4, supra).
--In The Matter Of Regulatory And Policy Problems Presented By The Interdependence Of Computer And Communication Services And Facilities, Docket No. 16979, Final Decision and Order (March 18, 1971) (Computer I).

Discrimination

21. One of the more difficult policy problems we must further address in this proceeding concerns the circumstances in which a common carrier is the supplier of communication facilities and services to a competitor of its data processing affiliate. As we stated in our Tentative Decision:

We expect that under no circumstances will carriers give any preferential treatment to their data processing affiliates and that carriers will scrupulously administer the terms and conditions of tariffs in making their facilities and services available to affiliates and non-affiliates on a non- discriminatory and non-preferential basis. (Tentative Decision, par. 37.)

It has been suggested that both motive and opportunity are present in the above situation for a carrier to render favorable treatment to its affiliate to the expense of the latter's competitors. We are aware that such preferences may be suitable in nature and may include, among others, the provision of superior equipment, installation and maintenance, as well as more timely response to
initial orders and request for outage corrections. This is the gravamen of the pending formal complaint filed with us by Bunker-Ramo against Western Union alleging that it has suffer