********************************************************    
                         NOTICE
********************************************************

This document was converted from
WordPerfect to ASCII Text format.

Content from the original version of the document such as
headers, footers, footnotes, endnotes, graphics, and page numbers
will not show up in this text version.

All text attributes such as bold, italic, underlining, etc. from the
original document will not show up in this text version.

Features of the original document layout such as
columns, tables, line and letter spacing, pagination, and margins
will not be preserved in the text version.

If you need the complete document, download the
WordPerfect version or Adobe Acrobat version, if available.

*****************************************************************

                           Before the
               FEDERAL COMMUNICATIONS COMMISSION
                     Washington, D.C. 20554
                                                                 
In the Matter of                )
                                )  
National Exchange Carrier       )       
Association, Inc.               )       AAD 95-135
                                )
Request for Authorization to    )
Engage in Additional Activities )
                                 

                   MEMORANDUM OPINION AND ORDER


      Adopted:  March 17, 1997  Released:  March 17, 1997
 


By the Chief, Common Carrier Bureau:

                         I.  INTRODUCTION

     1.   On September 7, 1995, the National Exchange Carrier Association, Inc. ("NECA"
or "the association") requested authorization to engage in four activities beyond those already
authorized by the Commission's rules or orders.  Specifically, NECA requests authorization: (1) to
offer assistance to international entities; (2) to conduct telecommunications-related training; (3) to
evaluate the feasibility of providing additional services and activities incidental to core operations;
and (4) to provide, through its nonregulated affiliate, Independent NECA Services, Inc. ("INS"),
agent and administrative services for marketing the services of local exchange carriers ("LECs") and
for advertising the services of third-party vendors through LECs.

     2.   In this Memorandum Opinion and Order, the Common Carrier Bureau ("the Bureau")
grants NECA's requests to engage in the additional activities under certain conditions.

                         II.  BACKGROUND

     3.   NECA was established in 1983 as an association of incumbent local exchange carriers
("ILECs") to administer the interstate access tariff and revenue distribution processes.  NECA
currently administers several Commission programs, including the pools for the common line and
traffic sensitive elements, the Universal Service Fund, the Lifeline Assistance program, the Long
Term Support program, and the Telecommunications Relay Services program.  Section 69.603(a)
of the Commission's rules precludes NECA from engaging in "any activity that is not related to the
preparation of access charge tariffs or the collection and distribution of access charge revenues . .
. unless such activity is expressly authorized by order of the Commission."

     4.   NECA previously has received Commission approval to perform certain activities
in addition to those authorized by Section 69.603(a).  Upon the detariffing of billing and collection
services in 1986, the Commission authorized NECA to provide nonregulated billing and collection
services for those ILECs that did not want, or were unable, to provide these services.  In 1987, the
Bureau further authorized NECA to perform specified activities relating to intrastate tariffs and
revenue pools on a compensatory basis.  The following year the Bureau granted NECA's request
to provide non-ILECs with on-line and magnetic tape access to its Tariff FCC No. 4 ("Tariff No. 4")
database.  In February 1996, the Bureau further approved NECA's request to include non-NECA
member access data in the Tariff No. 4 database.  NECA's provision of these non-tariffed services
is expressly conditioned upon its not recovering any of the costs of these services through interstate
tariff charges.  

     5.   As a condition of engaging in the intrastate tariff and revenue pool activities, the
Bureau required NECA to submit, and receive approval for, a cost accounting and procedures
manual ("CAM") to ensure that NECA would not recover costs of intrastate activities through
interstate tariff charges.  The CAM divides NECA's activities into two groups: Category I
activities, which consist of NECA's mandated operations, and Category II activities, which consist
of all other NECA operations not classified as Category I.  NECA voluntarily engages independent
auditors on an annual basis to audit its Annual Report of Cost Allocation Results, which applies the
methodology in NECA's CAM.

     6.   On September 10, 1993, NECA requested Commission authorization to expand
NECA's training program, to share telecommunications information with foreign countries, and to
provide to LECs, through INS, agency and administrative services for such programs as customized
marketing packages.  Forty-four parties submitted comments on the request in response to a Public
Notice issued by the Commission on October 22, 1993.  NECA withdrew its request on June 8,
1995; the Bureau's Accounting and Audits Division dismissed the request on June 19, 1995.

     7.   On September 7, 1995, NECA filed the letter addressed in this Order.   NECA's
current request defines more clearly the three services proposed in 1993.  NECA also seeks
authorization to perform business evaluations of potential Category II and incidental Category I
activities to determine the feasibility of performing additional activities.  The Accounting and
Audits Division issued a Public Notice on September 25, 1995 inviting public comment.

                      III.  NECA'S REQUEST

     8.   First, NECA requests authorization to provide assistance to international entities,
which may include foreign nations, international corporations, and international organizations. This
assistance would consist of providing information and analysis related to telecommunications access
charges, tariffs, revenue distribution, universal service, interconnection, and other activities in which
NECA has been authorized to engage.  NECA would give potential clients written notice that it is
a private corporation and is not an arm of the United States government.  NECA claims that sharing
its expertise would accelerate the opening of foreign markets to competition.
 
     9.   Second, NECA requests permission to provide members and non-members of NECA
with "telecommunications-related" training on business management and emerging
telecommunications technologies.  NECA states that the business management training would
encompass courses on interviewing and job performance techniques and written and oral
presentation skills.  Courses on emerging telecommunications technology would focus on such
topics as SONET, frame and cell relay, fiber optics, ISDN, and wireless technologies, as well as on
associated customer applications and related public policy issues.  NECA states that these courses
would satisfy a growing industry need.

     10.  Third, NECA seeks express authorization to evaluate potential Category II services
and potential activities incidental to Category I operations.  An evaluation of potential Category II
services may include a business case, market research, and testing.  Each evaluation would typically
be completed within a one-year period and annual aggregate expenses for all evaluations would not
exceed one percent of NECA's annual operating expenses.  NECA would also evaluate potential
incidental activities that it might want to undertake, examples of which are short-term research
projects for "think tanks" studying industry trends and the sale of non-proprietary NECA
publications assistance. 
 
     11.  Fourth, NECA requests authorization so that its nonregulated affiliate, INS, can
provide additional agent and administrative services to LECs by acting as a centralized point of
contact between LECs and third-party vendors for marketing and advertising programs.  INS would
negotiate with vendors on behalf of groups of LECs to procure marketing strategies and materials
customized to sell the services of LECs.  INS would also negotiate with vendors seeking to advertise
services through LECs using vehicles such as bill inserts, promotional offerings, and phone booths
posters.  NECA states that these activities would give small LECs access to customized services that
are currently unavailable, and would create efficiencies for both  ILECs and third-party vendors.

     12.  NECA proposes to classify the expenses associated with all of these activities as
Category II, with the exception of the expenses associated with the evaluation of potential activities
incidental to Category I activities, which it proposes be classified as Category I expenses.  NECA
would recover the costs of these activities through contracts or specific charges made to entities
receiving the services.  NECA asserts that if the Commission authorized these additional activities,
NECA's fixed costs would be spread over more activities, thereby reducing the level of fixed costs
assigned to Category I activities.

     13.  Anticipating the concerns of the Commission and commenters, NECA proposes that
several restrictions be imposed on each of the requested authorizations, as applicable.  First, NECA
suggests that the Commission limit all Category II expenses to a fixed percentage of total NECA and
INS operating expenses in a calendar year.  With current Category II expenses at ten percent of total
expenses, NECA argues that a ceiling of 25 percent would allow reasonable growth in Category II
activities.  Second, NECA proposes that it be prohibited from using proprietary information obtained
through Category I operations for Category II activities unless the information's source gives prior
written permission and the information is made available to all interested parties on the same terms. 
Third, NECA proposes to give potential customers for Category II services written disclosure that
purchase of the service will not confer an advantage in their Category I dealings with the
association.

                          IV.  COMMENTS
     14.  The majority of commenters, especially independent ILECs, support NECA's
proposal to provide additional services on a compensatory basis.  They argue that expansion of
NECA's telecommunications-related training will help ILECs prepare for future technological,
marketplace, and regulatory developments.  Several commenters contend that NECA has unique
expertise to provide training in these areas.  Other commenters maintain that NECA can provide
"unbiased" training that is otherwise not readily affordable or available to independent ILECs. 
Several commenters also support NECA's request to provide additional INS-administered
programs.  They contend that NECA can offer these services with greater operational and financial
efficiencies than the individual independent ILECs.  In support of NECA's request to provide
international assistance, a number of commenters assert that there is a need among international
entities for NECA's special expertise.  USAID states that NECA has already provided valuable
advice in a USAID-funded project, and that further telecommunications assistance will help foster
economic growth and democracy in many countries.  

     15.   Certain commenters give conditional support to NECA's request to engage in
additional activities.  AT&T asserts that NECA acquired its telecommunications expertise as a result
of its role as administrator of the interstate access tariff and revenue distribution processes that are
supported by interexchange carriers ("IXCs") through revenues the ILECs derive from the provision
of access services to the IXCs.  AT&T argues that authorization to perform any additional activities
should be conditioned upon the contribution of some of the profits from the activities being used to
reduce interexchange access charges.  GVNW conditions its support of NECA's request on
Commission-approved accounting safeguards to prevent cross-subsidization of new activities with
pool administration revenues.  GVNW also states that the Commission should prohibit NECA from
providing consulting services to individual ILECs and bar NECA's use of proprietary information
obtained as a result of its Category I responsibilities because NECA will inevitably have access to
this information before its competitors in the consulting services market.  

     16.  Other commenters, notably MCI and certain consultants, oppose NECA's proposal
to provide additional services.  These commenters contend that Commission approval of NECA's
request would create conflicts between NECA's current role as impartial pool administrator and its
proposed role as service provider for hire to individual ILECs, and would increase NECA's
incentive to subsidize expenses of additional activities with access charge revenues.  Opponents
to NECA's request also contend that the Commission's authorization of these additional services
would divert resources from NECA's necessary core functions and permit NECA to operate beyond
its traditional areas of expertise.  These commenters argue that a government-created entity should
not compete in the provision of for-profit services already offered by private companies and
associations.  Many commenters question who will bear the risk of loss from these competitive
offerings.  CHA asserts that NECA's status as a Commission-created administrator of the interstate
access tariff and revenue distribution processes gives it an unfair competitive advantage by providing
it with credibility, contacts, and access to proprietary information.  CHA argues that unless NECA
structurally separates its Category I and II operations, the Commission should allow the association
to engage in an additional activity only when it can show that the existing market fails to meet an
industry need and that NECA has unique qualifications to address that need.  USIN distinguishes
previously authorized activities from those presented in the current request in that the authorized
activities relate more closely to NECA's core functions and arguably promote the public interest by
facilitating the provision of necessary services in an efficient manner.  Staurulakis argues that the
Commission should require NECA to show a quantitative analysis of its member companies' need
for NECA to provide these services before proceeding with the request. 

     17.  In its reply, NECA argues that its existing and proposed safeguards will ensure that
it has no competitive advantage over its competitors.  NECA claims that it actually faces a
competitive disadvantage because it must publicly file its business plan each time it requests
authorization to provide a new service.
                                
                         V.  DISCUSSION

     A.   Introduction

     18.  We authorize NECA to engage in the requested activities provided that NECA meets
the following criteria: first, costs must not be misallocated between Category I and Category II
activities; second, NECA's performance of an activity must have no anti-competitive effect; and
third, NECA's performance of the activity must be consistent with the public interest. 

     19.  We decline to impose an additional substantive threshold that NECA must meet to
perform future additional activities.  In the past, we have authorized NECA to perform additional
activities that have been outgrowths of core functions specifically mandated by the Commission. 
 CHA urges that the Commission authorize additional activities only if an "unmet" need exists for
which NECA is "uniquely qualified" to provide, while Staurulakis asks that NECA provide a
"quantitative analysis" demonstrating a demand for the requested services.  These commenters
appear to have underlying concerns about potential anti-competitive behavior, particularly about the
risk of cross-subsidization.  We find that NECA should be able to fully compete with other
organizations in providing the requested activities as long as NECA's performance of Category I
activities does not confer an unfair advantage.

     20.  Cost Misallocation:  To minimize the risk of cross-subsidization resulting from the
misallocation of costs between Category I and Category II discussed by some commenters, we
condition our authorization of the additional activities as discussed in paragraphs 21 and 22.  We
find that the accounting requirements we now impose, in addition to those to which NECA is already
subject, will enable auditors to determine whether the costs of competitive Category II activities are
being misallocated to Category I, which must include only the costs of activities funded by interstate
access charges.  These safeguards meet the first criterion for authorizing additional activities.  Our
analysis of each of the requested activities will therefore address only the two remaining criteria.

     21.  NECA has voluntarily engaged independent auditors to audit its Annual Report of
Cost Allocation Results ("Cost Allocation Report") since 1989.  We find that, as a condition of our
authorization of the requested additional activities, NECA must engage an independent auditor to
perform an annual audit of the Cost Allocation Report that will be conducted in accordance with the
Professional Standards of the American Institute of Certified Public Accountants ("AICPA") and
such additional procedures as the Common Carrier Bureau may require.  Prior to each audit, NECA
(or an independent auditor on behalf of NECA) must submit proposed audit procedures to the Bureau
and receive affirmative approval of the procedures.  The Bureau may require additions to the
proposed procedures before approving them.  The audit procedures must allow the independent
auditor to conclude whether NECA's cost allocations as reported in the Cost Allocation Report are
in conformity with, and an accurate application of, the Commission's existing requirements,
including those reflected in NECA's CAM.  The annual audit report must be filed with the Cost
Allocation Report annually, on or before April 1 of the following year.  These requirements will
enable the Bureau to target areas of risk and will enhance its ability to monitor NECA's activities. 


     22.  With respect to the activities approved in this Order, NECA must comply with the
following conditions that have been imposed in previous authorizations of Category II activities: (1)
NECA must maintain all records of the costs and revenues of the activities; (2) NECA's annual cost
apportionment report must reflect the results of the activities; (3) with the exception of the business
evaluation project, each of NECA's activities must cover its own costs fully; and (4) expenses
relating to the activities must not be recovered through interstate access charges.

     23.  Unfair Competition:  To address the suggestions by commenters that NECA's status
as a quasi-governmental entity may confer an unfair competitive advantage, we require NECA to
give all potential customers for its Category II services written notice that NECA is a private
corporation and not an arm of the United States government.  This notification must be contained
in the first correspondence or set of materials conveyed to potential clients, and must be included
in all contracts for the provision of Category II services. 

     24.  Impartiality:  A number of commenters expressed concern that NECA's performance
of additional Category II activities may create an appearance of impropriety and may undermine
NECA's impartiality in carrying out its core functions.  While we agree that NECA's competitive
activities must not jeopardize the integrity of its core functions, commenters do not explain how the
additional activities may compromise NECA's neutrality.  To provide clarification for NECA's
membership, however, we adopt NECA's proposal to give those potential customers of Category II
services that have contact with NECA as a result of its Category I activities written disclosure that
purchase of the service will confer no advantage to the purchasers in Category I activities.  This
disclosure must be contained in the first correspondence or set of materials conveyed to potential
Category II clients that are NECA members, and must be included in all contracts for the provision
of services to Category II customers that are NECA members. 

     25.  Reducing Category I operating expenses:  NECA represents that revenues resulting
from Category II activities that exceed Category II costs will be used to reduce Category I operating
expenses.  We require that as a condition of performing the additional Category II activities, NECA
act consistently with this representation to ensure that NECA's membership, interexchange carriers,
and ultimately ratepayers will benefit from authorization of these additional activities. 

     B.   International Assistance

     26.  NECA requests authorization to provide to international entities on a compensatory
basis information and analysis relating to telecommunications access charges, tariffs, revenue
distribution, universal service, interconnection, and other activities in which NECA has been
authorized to engage.  NECA has developed expertise in these areas through its performance of
Category I activities, and several commenters have stated that there is a demand for this service
among international entities.  We therefore find that NECA's provision of international assistance
is consistent with the public interest.  

     27.  Some consultants suggest that the proprietary information collected by NECA
through its Category I activities may confer an unfair competitive advantage.  While NECA's
ability to provide such information to international entities would arguably confer an unfair
competitive advantage, NECA is prohibited from releasing proprietary information without an
ILEC's written permission, according to the terms of agreements between NECA and ILECs
submitting proprietary information.  Furthermore, NECA is prohibited from using such information
for any purpose other than the distribution of access charge revenues.  NECA's Financial Policy
and Practice statement provides that proprietary information gained through Category I or TRS
activities may not be made available for use in Catgory II activities unless permission is obtained
from ILECs submitting such information to NECA and the information is made available to all
interested parties.  We therefore find that NECA's access to proprietary information will not
enhance its competitive position in providing international assistance.  We thus grant NECA's
request to provide international assistance because NECA has satisfied the three criteria necessary
for obtaining our authorization to engage in the requested activity.
     
     C.   Telecommunications-related Training

     28.  NECA requests authorization to provide, on a compensatory basis,
telecommunications-related training on emerging technologies and business management.  NECA's
performance of this activity is consistent with the public interest because keeping ILECs informed
of changes in technology and updating telecommunications-related management techniques will
enable ILECs to offer their customers new technologies and improved services.  For the reasons
discussed in paragraph 27, we find that NECA's access to proprietary information will not enhance
its competitive position in providing telecommunications-related training.  We do not agree with
commenters who argue that training will distract NECA from its primary mission, and find instead
that the activity may enable NECA to make efficient use of its core operations by drawing on the
existing knowledge of NECA personnel.  We therefore grant NECA's request to provide
telecommunications-related training because NECA has satisfied the three criteria necessary for
obtaining our authorization to engage in the requested activity.

     D.   Evaluation of Potential Activities

     29.  NECA requests authorization to evaluate potential Category II activities and activities
incidental to Category I activities.  As proposed by NECA, each evaluation will typically be
completed within a one-year period, and annual aggregate expenses for all evaluations should not
exceed one percent of annual NECA and INS operating expenses.  In addition, no costs incurred
by NECA for evaluating potential Category II activities or incidental Category I activities should
be recovered through interstate access charges.  We therefore require NECA to treat all such costs
as Category II expenses.  

     30.  One commenter has asserted that funding research and development for NECA is
difficult to justify because NECA lacks shareholders to bear the risks of loss in competitive areas
and therefore has an unfair competitive advantage.  We find that NECA does not have an unfair
competitive advantage because, like its potential competitors, NECA must fund its evaluation of
competitive Category II activities either through the revenues of other Category II activities or
through loans.  We will, however, evaluate potential anti-competitive advantages in a specific
context if and when NECA requests authorization to engage in a particular activity.  Because
NECA's performance of additional activities may be consistent with the public interest, as we have
determined with regard to the activities addressed in this order, we find that evaluating the feasibility
of performing such activities is also consistent with the public interest.  We therefore grant NECA's
request to evaluate potential Category II activities and activities incidental to Category I activities
because NECA has satisfied the three criteria necessary for obtaining our authorization to engage
in the requested activities.

     31.  In our Joint Cost Order, we established four quantitative and qualitative tests for
determining when we would permit carriers to account for incidental activities as regulated
activities.  Activities meeting these tests are determined to pose little threat of harm from cross-
subsidization and create such minimal financial impact that requiring them to be accounted for as
nonregulated would be unnecessarily burdensome.  Applying the reasoning of the Joint Cost Order,
we conclude that NECA should apply the following criteria to its incidental activities: each activity
must be an outgrowth of NECA's Category I operations and must not constitute a separate line of
business.  To ensure that the incidental activities are sufficiently minor, the aggregate costs of all of
the incidental activities must not exceed one percent of total NECA and INS operating expenses. 
We do not apply an additional test established in the Joint Cost Order, the requirement that the
activity historically has been treated as incidental for accounting purposes, because unlike the
carriers subject to the Joint Cost Order, NECA does not have a long history of engaging in activities
that have been treated as incidental.  We may determine at a future date, however, that the threat of
harm from cross-subsidization merits the application of other criteria to particular incidental
activities.

     E.   INS Agent and Administrative Activities
     
     32.  NECA requests authorization to provide, on a compensatory basis through INS,
additional agent and administrative services relating to the marketing of the services of both ILECs
and third-party vendors.  Many ILECs state that they have a need for these services.  We therefore
find that INS's provision of additional agent and administrative services is consistent with the public
interest.  

     33.  We also find that as a result of its Category I operations, NECA has access to
financial and operational information about individual LECs that could confer a direct, significant
advantage on INS in these marketing activities.  INS could use this proprietary information, which
is not available to its competitors, to determine the needs of specific LECs and develop specialized
marketing services.  Rather than barring INS from all use of proprietary information, as urged by
GVNW, however, we ensure that access to such information is protected and is made available
only on a competitively neutral basis by imposing the following requirement.  Employees of INS
may not have access to proprietary information received or obtained from any company as a result
of NECA's Category I or TRS operations unless prior affirmative written consent is obtained from
that company, and the information is made available to any interested parties on reasonable and
nondiscriminatory terms.  We therefore grant NECA's request to perform the additional agent and
administrative services proposed by NECA because NECA has satisfied the three criteria necessary
for obtaining our authorization to engage in the requested activities.

                     IV.  ORDERING CLAUSES

     34.  Accordingly, IT IS ORDERED, pursuant to Sections 1, 4(i), 4(j), 201-205 and 218-
220 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 154(j), 201-205 and
218-220; and Sections 0.91, 0.291 and 69.603 of the Commission's rules, 47 C.F.R.  0.91, 0.291
and 69.603, that the request for authorization to perform additional services filed by the National
Exchange Carrier Association, Inc. IS GRANTED in accordance with the above discussion.

                              FEDERAL COMMUNICATIONS COMMISSION


                              Regina M. Keeney 
                              Chief, Common Carrier Bureau