WPCX 2a BKf Z CG Times3|X  7Xw PE37XP",tB^ f ^ENluuNNNuNNNNuuuuuuuuuuNNhN[}NNNuuNhuhuhNuuAAuAuuuuV[Auuuuhhuhu=uuuuuNuuuuuuuuuAhhhhhhhhhhNANANANAuuuuuuuuuuhuuuuuuguggguuguuguuuuuuuNAuuuuNuuuuATuAAuuuuuTTu~Y~Y~Y}uTAuuuuuuuuggguuu}uuuNuuNNNWxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNuuuNh__uuuuuuRuuuuRNNyyu<<uuuuuNyuR"uyuCuNNNuuuuNuhulcuhhNNNNh[huhNAhhuhuuuhhNuhNNuuuuuuuNuhN /;k  PP9~~+k~~KkKk&&pYHP LaserJet 5SiHPLAS5SI.PRSXw PE37\y!uXP2   Zq3|X  "i~'K2^18PSS888S8888SSSSSSSSSS88Sddoxd`xx8Jo]oxdxdS]xdd]]888SS8SSJSJ.SS..J.xSSSS??.SJoJJ?JSJS+SSSSS8SSSSSSSSS.dSdSdSdSdSooJdJdJdJdJ8.8.8.8.oSxSxSxSxSxSxSxSxS]JdSxSxSxS]JxSdSdSdSdSnInIoSoSxddIdSdSdIxSxSxSxSxSxSxS9/SSSS8SSSSoS]/]<]S]/]/nSdnSoSxSxSod?d?dSS?S?S?SS]<]/]SxSxSxSxSxSxSo]S]?]?]?xS]SoSSS]S]Sd8SS888WxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNxxxSSS8SMMSSSSSS;SSSS;88SSS..SSddSSxSYSS8SS;"xxSxSxxS哓0S88xdxxxxxxxxxx8SdS]SxoS8SxJS`xkxxxxxxxxxxMxxxxxxodxGcxxxxxxxSxxxxxxxJxxxxJxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx8xxx8xxx8xxx8xxxxxxxxxxxxxddd]d]oJd?]JxSxJ8.oJo]]oJoSxJxddSdSS]J]Jodd]dddddx8Sx]]dJddddz88SSSSdxSSS]]]d8`SJ8Muu]daqqZZnn{{xu{{M{aZZ5M5M҅P?kHP LaserJet 5SiHPLAS5SI.PRSX\  P6G;\y!uP2#EKBKK yO-#X\  P6G;ɒP#"i~'^09CSS999S]+9+/SSSSSSSSSS//]]]Ixnnxg]xx9?xgxx]xn]gxxxxg9/9MS9ISISI9SS//S/SSSS9?/SSxSSIP!PZ9+ZM999+999999S9S/xIxIxIxIxIlnIgIgIgIgI9/9/9/9/xSxSxSxSxSxSxSxSxSxSxIxSxRxSxSxS]SxIxIxInInInZnIxigIgIgIgIxSxSxSxZxSxZxS9/9S999Su]ZZxSg/gCg9g9g/xSbxSxSxSxSxn9n9n9]?]?]?]ZgFg/gMxSxSxSxSxSxSxxZgIgIgIxSg9xS]?g9xSi+SS88WuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxN8HH"&H>XHH8HB8>HH^HH>"".2",2,2,"222N2222"&22H22,006"6."""""""""2"2H,H,H,H,H,XAB,>,>,>,>,""""H2H2H2H2H2H2H2H2H2H2H,H2H1H2H2H282H,H,H,B,B,B6B,H?>,>,>,>,H2H2H2H6H2H6H2""2"""2F866H2>>(>">">H2;H2H2H2H2XHB"B"B"8&8&8&86>*>>.H2H2H2H2H2H2^HH6>,>,>,H2>"H28&>"H2?22!!WFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFFxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxN$<<$.2",2222`2 LL2 LL2L"",,2d""+bDocument 3Document 3; Right Par 3Right Par 3<` hp x (#X` P hp x (#X` P hp x (#` hp x (#Right Par 4Right Par 4=` hp x (#X` hp x (#0X` hp x (#0` hp x (#Right Par 5Right Par 5>` hp x (#X` hp x (#X` hp x (#` hp x (#2l?{d@fAhB(jRight Par 6Right Par 6?` hp x (#X` hp x (#0X` hp x (#0` hp x (#Right Par 7Right Par 7@` hp x (#X` hp x (#X` hp x (#` hp x (#Right Par 8Right Par 8A` hp x (#X` hp x (#0X` hp x (#0` hp x (#Document 1Document 1B` hp x (#X` hp x (#X` hp x (#` hp x (#2OrC$/mD$SoElwqFlqTechnical 5Technical 5C` hp x (#X` hp x (# X` hp x (#` hp x (#Technical 6Technical 6D` hp x (#X` hp x (# X` hp x (#` hp x (#Technical 2Technical 2E Technical 3Technical 3F 2YyG$rHltI$uJ$5wTechnical 4Technical 4G` hp x (#X` hp x (# X` hp x (#` hp x (#Technical 1Technical 1H Technical 7Technical 7I` hp x (#X` hp x (# X` hp x (#` hp x (#Technical 8Technical 8J` hp x (#X` hp x (# X` hp x (#` hp x (#2c{KvyLvzMvwzNvzheading 3heading 3K heading 4heading 4L heading 5heading 5M heading 6heading 6N 2P~Ov{Pv |Q|R}heading 7heading 7O heading 8heading 8P LetterDirect Dial Font (CG Times - 8pt)Q`oWI `F  XXXX * ddsn #O P7{P#у  XX  sndd #x6X@8QwX@#Default Para@6WDefault Paragraph Font8Fb*?/o6F.ER;;#Xx6X@QX@##d6X@Q@#26S~TPU$V|_Equation Ca@6W_Equation Caption?/8Fb+*?/o6F.ES;; #Xx6X@QX@##d6X@Q@#endnote refe@6Wendnote reference?/8Fb,*?/o6F.ET>!>"#Xx6X@QX@##d6X@Q@#footnote ref@6Wfootnote reference/8Fb-*?/o6F.EU>#$#Xx6X@ QX@#footnote tex V$ d\  PC 2KhKKcI"i~'^:DTddDDDd4D48ddddddddddDDd||||DXp||dp||ppL8LTdDddXdX8dd88X8ddddLL8dXXXLP8PlD4lTDDD4DDDDDDdDd8|d|d|d|d|dX|X|X|X|XD8D8D8D8dddddddddpX|ddddpXd|d|d|d|dXXlXx|X|X|X|XdddldldD8DdDDDddllXp8pHpDp@p8dtdddd|L|L|LdLdLdLllpHp8pTddddddplpLpLpLdpDddLpDpdx4ddC,CWddddddddddddddddddddddddddddddddddddddddNHxxHhdLdddddd8@d<@d<DDppdDDxddxHxxHkddDpd<"dxtldxxd"i~'^09]SS999S]+9+/SSSSSSSSSS99]]]Sxnxxng?Snxgx]nxxxxn9/9aS9S]I]I9S]/9]/]S]]I?9]SxSSIC%CW9+Wa999+999999S9]/xSxSxSxSxSxxInInInInI>/>/>/>/x]SSSSx]x]x]x]xSxSx]SSxSxSf]xSxSxSxIxIxWxIx{nInInInISSSWS]a?/?]?9?]]WW]n/nKn9nCn/x]xx]x]SSxxIxIxI]?]?]?]WnUn9nax]x]x]x]x]x]xxWnInInIx]n9x]]?n9xSz+SS8-8WuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuuxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNA.SSxSSJJSJS+SSSSS8SSSSSSSSS.xJxJxJxJxJorJiJiJiJiJ8.8.8.8.{SxSxSxSxS{S{S{S{SxSxJ{SxSxSxS{S`SxIxSxIqIqIrSrS{dgIiSiSgIxSxSxSxSxS{S{S8.SSSS8Sz]SSuSg/g,?2?2>,H2H2H2H2H2J2J2!2222!2I822F2>>$?2>>J2:J2J2H2H2YHB$B$C26&6&6&62>$>?2J2J2J2J2J2J2^HH2@,@,@,J2?2J262?2H2<!22!!!WddddddddddddddddddddddddddddddddddddddddddddddddxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNHHH222!,))22X222YY2#2222Y#!!442Ydd22<><q*"xxxxWWxxxWWkkxxx\4  pG;\{,W80,%BZW*f9 xr G;Xx/c81,< c PE37P  Dy.f81,Ef_ pi78wC;,<|Xw PE37XP  D7zC;,EEXz_ pi7XH<!,<,< PE37,PV"G($,<}hG PE37hP6uC;,SE;Xu&_ x7XXz-b81,Sub&_ x7X",tB^ f ^;C`ddCCCdCCCCddddddddddCCdxxxsCYoxxdoxxooCCCddCddYdY8dd88Y8ddddLL8dYYYLYdYd4dddddCddddddddd8xdxdxdxdxdYxYxYxYxYC8C8C8C8dddddddddoYxddddoYdxdxdxdxdXXddxxXxdxdxXdddddddD8ddddCdddddp8pHodp8p8dxddddxLxLxddLdLdLddpHp8odddddddodpLpLpLdoddddododxCddCCCWxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNdddCd]]ddddddFddddFCCddd88ddxxdddkddCddF"ddd9dCCxCdxdoddCdYds]xUvdYYCCCCxxxoxoYxLoYdYC8YooYdYxxdxddoYoYxxoxxxxxCdooxYxxxxCCddddxdddoooxCsdYC\   pxtll\tll@\@\`L2*WXY6Z^HeadingChapter HeadingWJ d  ) I. ׃  Right ParRight-Aligned Paragraph NumbersX>a݅@  I.   X(# SubheadingSubheadingY0\ E A.  FOOTNOTEFootnote - AppearanceZP2[d\\]^XmHIGHLIGHT 1Italics and Boldldedd[+. DRAFT ONHeader A Text = DRAFT and Date\ X =8` (#FDRAFTă r  ` (#=D3 1, 43 12pt (Z)(PC-8))T2Dă  ӟDRAFT OFFTurn Draft Style off]@@    HEADERHeader A - Appearance^2_1`1(a1Yb1LETTER LANDLetter Landscape - 11 x 8.5_ 3'3'Standard'3'3StandardLetter Portrait - 8.5 x 11 ;   LEGAL LANDLegal Landscape - 14 x 8.5`f 3'3'Standard'A'AStandardZ K e6VE L"nu;   LETTER PORTLetter Portrait - 8.5 x 11aL 3'3'Standard3'3'StandardZ K e6VE L"nU9   LEGAL PORTLegal Portrait - 8.5 x 14b 3'3'StandardA'A'StandardLetter Portrait - 8.5 x 119   2cndX[efd4TITLETitle of a DocumentcK\ * ăFOOTERFooter A - AppearanceddBLOCK QUOTESmall, single-spaced, indentedeN X HIGHLIGHT 2Large and Bold LargefB*d. 2gjh4iESj-HIGHLIGHT 3Large, Italicized and Underscoredg V -qLETTERHEADLetterhead - date/marginshu H XX  3'3'LetterheadZ K e VE L"n3'3'LetterheadZ K e VE L"nE9    * 3'3'LetterheadZ K e VE L"n3' II"n"Tv3'StandarddZ K e VE L"nU9 Ѓ   INVOICE FEETFee Amount for Math Invoicei ,, $0$0  MEMORANDUMMemo Page FormatjD.   ! M E M O R A N D U M ă r  y<N dddy   2`k8l8/mgnXINVOICE EXPSEExpense Subtotals for Math Invoicek:A ,p, $0$00INVOICE TOTTotals Invoice for Math Macrolz 4p, $0$00INVOICE HEADRHeading Portion of Math Invoicem+C`*   4X 99L$0 **(  ӧ XX NORMALReturn to Normal Typestylen2o[p[q[Hr[SMALLSmall TypestyleoFINEFine TypestylepLARGELarge TypestyleqEXTRA LARGEExtra Large Typestyler2s[0tuXvXfVERY LARGEVery Large TypestylesENVELOPEStandard Business Envelope with Headert+w ,,EnvelopeZ K e VE L"n,,EnvelopeLarge, Italicized and Under;    ,, 88+  `   MACNormalu,.1vdf2{wxy0zlStyle 14Swiss 8 Pt Without Marginsw$$D Co> PfQ  )a [ PfQO Style 12Dutch Italics 11.5x$$F )^ `> XifQ  )a [ PfQO Style 11Initial Codes for Advanced IIyJ )a [ PfQK  dddn  #  [ X` hp x (#%'b, oT9 ! )^ `> XifQ ` Advanced Legal WordPerfect II Learning Guide   x )^ `> XifQ Advanced Legal WordPerfect II Learning Guide   j-n )^ `> XifQ    Copyright  Portola Systems, Inc. 1987, 1988`6 >Page  jBX )^ `> XifQ    Page ` Copyright  Portola Systems, Inc. 1987, 1988 Style 3oDutch Roman 11.5 with Margins/Tabsz )a [ PfQO  ddn  # c0*b, oT9 !2{|I}|~QStyle 4 PSwiss 8 Point with Margins{Dq Co> PfQ  dddd  #  Style 1.5Dutch Roman 11.5 Font|4h )a [ PfQO  dddn Style 2Dutch Italic 11.5}$ )^ `> XifQ Style 5Dutch Bold 18 Point~$RH$L T~> pfQ_  )a [ PfQO 2q#cjStyle 7Swiss 11.5$$V )ao> PfQ ]  )a [ PfQO Style 6Dutch Roman 14 Point$$N w [ PfQ   )a [ PfQO Style 10oInitial Codes for Advanced U )a [ PfQK  dddn  ##  [[ b, oT9 !b, oT9 !n )^ `> XifQ ` Advanced Legal WordPerfect Learning Guide   f )^ `> XifQ Advanced Legal WordPerfect Learning Guide   Q" )^ `> XifQ    Copyright  Portola Systems, Inc. 1987, 1988`6 >Page  QN~ )^ `> XifQ    Page ` Copyright  Portola Systems, Inc. 1987, 1988 Style 8PfInitial Codes for Beginninggi )a [ PfQK  dddn  # X` hp x (#%'b, oT9  [ &e )^ `> XifQ ` Beginning Legal WordPerfect Learning Guide   d )^ `> XifQ Beginning Legal WordPerfect Learning Guide   jH )^ `> XifQ    Copyright  Portola Systems, Inc. 1987, 1988`6 >Page  j )^ `> XifQ    Page ` Copyright  Portola Systems, Inc. 1987, 1988 2}=Style 9Initial Codes for Intermediate )a [ PfQK  dddn  # X` hp x (#%'b, oT9 Њ [ e )^ `> XifQ ` Intermediate Legal WordPerfect Learning Guide   3 )^ `> XifQ Intermediate Legal WordPerfect Learning Guide   jf )^ `> XifQ    Copyright  Portola Systems, Inc.`+ >Page  jX )^ `> XifQ    Page ` Copyright  Portola Systems, Inc. 1987, 1988 UpdateInitial Codes for Update Module )a [ PfQK  dddn  #  [ X` hp x (#%'b, oT9 !n )^ `> XifQ ` Legal WordPerfect 5.0 Update Class Learning Guide   f )^ `> XifQ Legal WordPerfect 5.0 Update Class Learning Guide   Q" )^ `> XifQ    Copyright  Portola Systems, Inc. 1987, 1988`7 CPage  jN~ )^ `> XifQ    Page ` Copyright  Portola Systems, Inc. 1987, 1988 head1 #'d#2p}wC@ #a1Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrf$ 2Nta2Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrf/` ` ` a3Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrf:` ` `  a4Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrfE` ` `  a5Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrfP  ` ` ` hhh 2 4a6Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrf[   a7Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrff  a8Paragraph R!1. a. i. (1) (a) (i) 1) a)D )DDDFrfq para numnumbered indented paragraphs' Y- 1.(i) 1) 1.#Xw P7[hXP# 1. 1.Ҳ2f p q+ e e Document[8]C^iDocument StyleNeF2CC -2( -Ct )B` ` ` Document[4]C^iDocument StyleNeF2CCW -2( -Ct )B  . Document[6]C^iDocument StyleNeF2CCe -2( -Ct )B  Document[5]C^iDocument StyleNeF2CCs -2( -Ct )B  2  p+  - Document[2]C^iDocument StyleNeF2CC -2( -Ct )B*    Document[7]C^iDocument StyleNeF2CC -2( -Ct )B  ` ` ` Right Par[1]C^iRight-Aligned Paragraph Numbers -2( -Ct )B8@  Right Par[2]C^iRight-Aligned Paragraph Numbers -2( -Ct )BA@` ` `  ` ` ` 2 3Document[3]C^iDocument StyleNeF2CC -2( -Ct )B0     Right Par[3]C^iRight-Aligned Paragraph Numbers -2( -Ct )BJ` ` ` @  ` ` ` Right Par[4]C^iRight-Aligned Paragraph Numbers -2( -Ct )BS` ` `  @  Right Par[5]C^iRight-Aligned Paragraph Numbers -2( -Ct )B\` ` `  @hhh hhh 2O Right Par[6]C^iRight-Aligned Paragraph Numbers -2( -Ct )Be` ` `  hhh@ hhh Right Par[7]C^iRight-Aligned Paragraph Numbers  -2( -Ct )Bn` ` `  hhh@  Right Par[8]C^iRight-Aligned Paragraph Numbers -2( -Ct )Bw ` ` `  hhh@ppp ppp Document[1]C^iDocument StyleNeF2CCE -2( -Ct )BF34   ׃  2G Technical[5]C^iTechnical Document StyleCCS -2( -Ct )B&56  . Technical[6]C^iTechnical Document StyleCCa -2( -Ct )B&78  . Technical[2]C^iTechnical Document StyleCCo -2( -Ct )B*9:    Technical[3]C^iTechnical Document StyleCC} -2( -Ct )B';<   2y BTechnical[4]C^iTechnical Document StyleCC -2( -Ct )B&=>   Technical[1]C^iTechnical Document StyleCC -2( -Ct )B4?$@     Technical[7]C^iTechnical Document StyleCC -2( -Ct )B&AB  . Technical[8]C^iTechnical Document StyleCC -2( -Ct )B&CD  . 2/}vParagraph[1]C^i1. a. i. (1) (a) (i) 1) a)C -2( -Ct )B$ab Paragraph[2]C^i1. a. i. (1) (a) (i) 1) a)C -2( -Ct )B/cd` ` ` Paragraph[3]C^i1. a. i. (1) (a) (i) 1) a)C -2( -Ct )B:ef` ` `  Paragraph[4]C^i1. a. i. (1) (a) (i) 1) a)C -2( -Ct )BEgh` ` `  2Ga }Paragraph[5]C^i1. a. i. (1) (a) (i) 1) a)C -2( -Ct )BPij` ` ` hhh Paragraph[6]C^i1. a. i. (1) (a) (i) 1) a)C -2( -Ct )B[kl Paragraph[7]C^i1. a. i. (1) (a) (i) 1) a)C -2( -Ct )Bfmn Paragraph[8]C^i1. a. i. (1) (a) (i) 1) a)C -2( -Ct )Bqop 2G qyeeO2S&C6C^fDocument StyleNF2CC -2( -Ct )s t . 3S&C7C^fDocument StyleNF2CC -2( -Ct ) uv 4S&C8C^fDocument StyleNF2CC! -2( -Ct ) wx 5S&C9C^fDocument StyleNF2CC/ -2( -Ct )*yz   2"py  {!"6S&C:C^fDocument StyleNF2CC= -2( -Ct ){|` ` ` 7S&C;C^fRight-Aligned Paragraph NumbersK -2( -Ct )8}~@  8S&C<C^fRight-Aligned Paragraph NumbersY -2( -Ct )A@` ` `  ` ` ` 9S&C=C^fDocument StyleNF2CCg -2( -Ct )0    2%"#.$$10S&C>C^fRight-Aligned Paragraph Numbersu -2( -Ct )J` ` ` @  ` ` ` 11S&C?C^fRight-Aligned Paragraph Numbers -2( -Ct )S` ` `  @  12S&C@C^fRight-Aligned Paragraph Numbers -2( -Ct )\` ` `  @hhh hhh 13S&CAC^fRight-Aligned Paragraph Numbers -2( -Ct )e` ` `  hhh@ hhh 2(%&n'((14S&CBC^fRight-Aligned Paragraph Numbers -2( -Ct )n` ` `  hhh@  15S&CCC^fRight-Aligned Paragraph Numbers -2( -Ct )w` ` `  hhh@ppp ppp 16S&CDC^fDocument StyleNF2CC -2( -Ct )F   ׃  17S&CEC^fTechnical Document StyleCC -2( -Ct )&  . 2)+(d)**18S&CFC^fTechnical Document StyleCC -2( -Ct )&  . 19S&CGC^fTechnical Document StyleCC -2( -Ct )*    20S&CHC^fTechnical Document StyleCC -2( -Ct )'   21S&CIC^fTechnical Document StyleCC -2( -Ct )&   2-[+ ,,}-22S&CJC^fTechnical Document StyleCC -2( -Ct )4$     23S&CKC^fTechnical Document StyleCC+ -2( -Ct )&  . 24S&CLC^fTechnical Document StyleCC9 -2( -Ct )&  . 25S&CMC^f1. a. i. (1) (a) (i) 1) a)CG -2( -Ct )$ 2&0-L..}/26S&CNC^f1. a. i. (1) (a) (i) 1) a)CU -2( -Ct )/` ` ` 27S&COC^f1. a. i. (1) (a) (i) 1) a)Cc -2( -Ct ):` ` `  28S&CPC^f1. a. i. (1) (a) (i) 1) a)Cq -2( -Ct )E` ` `  29S&CQC^f1. a. i. (1) (a) (i) 1) a)C -2( -Ct )P` ` ` hhh 2 3X0 11v230S&CRC^f1. a. i. (1) (a) (i) 1) a)C -2( -Ct )[ 31S&CSC^f1. a. i. (1) (a) (i) 1) a)C -2( -Ct )f 32S&CTC^f1. a. i. (1) (a) (i) 1) a)C -2( -Ct )q endnote textendnote text 24v=3Z3d 4pq4footnote textfootnote text 1, 2, 3,?@65NumbersO@/"=(1*1÷$t ?.E1.A, B,t ?@65Uppercase Letters1 ?*1÷$t ?.E .33`O5hT(G2PDocument Style&^aO5h.K+&,$@`O5Bȗ+&>` ` ` 26q5e5e5N634`O5iT(G2PDocument Style&^aO5i.K+&,$@`O5Bȗ+&>  . 35`O5jT(G2PDocument Style&^aO5j.K+&,$@`O5Bȗ+&>  36`O5kT(G2PDocument Style&^aO5k.K+&,$@`O5Bȗ+&>  37`O5lT(G2PDocument Style&^aO5l.K+&,$@`O5Bȗ+&>*   2E9p778838`O5mT(G2PDocument Style&^aO5m.K+&,$@`O5Bȗ+&>` ` ` 39`O5nT(G2PRight-Aligned Paragraph NumbersK+&,$@`O5Bȗ+&>8@   40`O5oT(G2PRight-Aligned Paragraph NumbersK+&,$@`O5Bȗ+&>A@` `  ` ` ` 41`O5pT(G2PDocument Style&^aO5p.K+&,$@`O5Bȗ+&>0    2=<w9::~;42`O5qT(G2PRight-Aligned Paragraph NumbersK+&,$@`O5Bȗ+&>J` ` @  ` `  43`O5rT(G2PRight-Aligned Paragraph NumbersK+&,$@`O5Bȗ+&>S` `  @  44`O5sT(G2PRight-Aligned Paragraph NumbersK+&,$@`O5Bȗ+&>\` `  @hh# hhh 45`O5tT(G2PRight-Aligned Paragraph NumbersK+&,$@`O5Bȗ+&>e` `  hh#@( hh# 2G?o<7=>>46`O5uT(G2PRight-Aligned Paragraph NumbersK+&,$@`O5Bȗ+&>n` `  hh#(@- ( 47`O5vT(G2PRight-Aligned Paragraph NumbersK+&,$@`O5Bȗ+&>w` `  hh#(-@pp2 -ppp 48`O5wT(G2PDocument Style&^aO5w.K+&,$@`O5Bȗ+&>F *  ׃  49`O5xT(G2PTechnical Document Stylex.K+&,$@`O5Bȗ+&>&  . 2Ay??@/A50`O5yT(G2PTechnical Document Styley.K+&,$@`O5Bȗ+&>&  . 51`O5zT(G2PTechnical Document Stylez.K+&,$@`O5Bȗ+&>*    52`O5{T(G2PTechnical Document Style{.K+&,$@`O5Bȗ+&>'   53`O5|T(G2PTechnical Document Style|.K+&,$@`O5Bȗ+&>&   2,DAB*C}C54`O5}T(G2PTechnical Document Style}.K+&,$@`O5Bȗ+&>4$     55`O5~T(G2PTechnical Document Style~.K+&,$@`O5Bȗ+&>&  . 56`O5T(G2PTechnical Document Style.K+&,$@`O5Bȗ+&>&  . 57`O5T(G2P1. a. i. (1) (a) (i) 1) a).K+&,$@`O5Bȗ+&>$ 2F^DDyEF58`O5T(G2P1. a. i. (1) (a) (i) 1) a).K+&,$@`O5Bȗ+&>/` ` ` 59`O5T(G2P1. a. i. (1) (a) (i) 1) a).K+&,$@`O5Bȗ+&>:` ` `  60`O5T(G2P1. a. i. (1) (a) (i) 1) a).K+&,$@`O5Bȗ+&>E` ` `  61`O5T(G2P1. a. i. (1) (a) (i) 1) a).K+&,$@`O5Bȗ+&>P` ` ` hhh 2%JFGeH/I62`O5T(G2P1. a. i. (1) (a) (i) 1) a).K+&,$@`O5Bȗ+&>[ 63`O5T(G2P1. a. i. (1) (a) (i) 1) a).K+&,$@`O5Bȗ+&>f 64`O5T(G2P1. a. i. (1) (a) (i) 1) a).K+&,$@`O5Bȗ+&>q 65`O5T(G2PDefault Paragraph Font5.K+&,$@`O5Bȗ+&>OO#P P##P P#2MWJMKILL66`O5T(G2P_Equation Caption^aO5.K+&,$@`O5Bȗ+&>OO#PP##PP#67`O5T(G2Pendnote reference^aO5.K+&,$@`O5Bȗ+&>RR#PP##PP#68`O5T(G2Pfootnote reference^aO5.K+&,$@`O5Bȗ+&>R#PP#69 _5(_>7footnote text _5dK+b70t _5xŗ+tZP2Op'NqNeOemO70 _5(_>7Document Style _5dK+b70t _5xŗ+t` ` ` 71 _5(_>7Document Style _5dK+b70t _5xŗ+t  . 72 _5(_>7Document Style _5dK+b70t _5xŗ+t  73 _5(_>7Document Style _5dK+b70t _5xŗ+t  24RPpPQQ74 _5(_>7Document Style _5dK+b70t _5xŗ+t*   75 _5(_>7Document Style _5dK+b70t _5xŗ+t` ` ` 76 _5(_>7Right-Aligned Paragraph NumbersK+b70t _5xŗ+t8@   77 _5(_>7Right-Aligned Paragraph NumbersK+b70t _5xŗ+tA@` `  ` ` ` 2bfRF[Xy.X80,ɒX\  P6G;P7jC:,ynXj\  P6G;XP7nC:,\4  pG;\{,W80,%BZW*f9 xr G;Xx/c81,< c PE37P  Dy.f81,Ef_ pi78wC;,<|Xw PE37XP  D7zC;,EEXz_ pi7XH<!,<,< PE37,PV"G($,<}hG PE37hP6uC;,SE;Xu&_ x7XXz-b81,Sub&_ x7XANE,<-8 PE37PDAwDADn6wD66w6RwDwwwuR?ROAnOOODO Y4  *b X4w #XP PynXP# Federal Communications Commission`(#VFCC 97142   yxdddy *#Xw PE37 |XP#  Y4(a Before the  Federal Communications Commission  X4*Washington, D.C. 20554 ă ) In the Matter of) )  YI4Regulatory Treatment of LEC Provision)ppCC Docket No. 96149 of Interexchange Services Originating in the ) LEC's Local Exchange Area) ) and) )  Y 4Policy and Rules Concerning the)ppCC Docket No. 9661 Interstate, Interexchange Marketplace)  Xc4 SECOND REPORT AND ORDER IN CC DOCKET NO. 96149  XL4oAND THIRD REPORT AND ORDER IN CC DOCKET NO. 9661 \  Y4X` hp x (#%'0*,.8135@8:"(# 1 X\II. BACKGROUND p"(# 11 X\III. MARKET DEFINITION p"(# 16  X4XX` ` A.` ` General Application ` p"(# 16  X 4XX` ` B.` ` Product Market Definition ` p"(# 31  X!4XX` ` X ` ` 1. General Approach to Product Market Definition p"(# 31  X"4XX` ` X ` ` 2. Product Market Definition for BOC InterLATA Affiliates and Independent LECs p"(# 45  Xk$4XX` ` X ` ` 3. International Product Market for BOC InterLATA Affiliates and Independent LECs p"(# 52  X=&4XX` ` C.` ` Geographic Market ` p"(# 56"=&0*''ZZ'"Ԍ X4XX` ` X ` ` 1. Geographic Market in General p"(# 56  X4XX` ` X ` ` 2. Geographic Market for BOC InterLATA Affiliates and Independent LECs p"(# 70  X4XX` ` X ` ` 3. International Geographic Market for BOC InterLATA Affiliates and Independent LECs p"(# 79 X\IV. CLASSIFICATION OF BOC INTERLATA AFFILIATES AND INDEPENDENT  LECS AS DOMINANT OR NONDOMINANT CARRIERS IN THE PROVISION OF INREGION LONG DISTANCE SERVICESp"(# 81  X14XX` ` A.` ` Classification of BOC InterLATA Affiliates ` p"(# 82  X 4XX` ` X ` ` 1. Definition of Market Power and the Limits of Dominant Carrier Regulation p"(# 83  X 4XX` ` X ` ` 2. Classification of BOC InterLATA Affiliates in the Provision of InRegion, Interstate, Domestic, InterLATA Services p"(# 93  X 4XX` ` X ` ` 3. Classification of BOC InterLATA Affiliates in the Provision of InRegion, International Services p!(# 135  X4XX` ` B.` ` Classification of Independent LECs ` p!(# 143  Xy4XX` ` X ` ` 1. Classification of Independent LECs in the Provision of InRegion, Interstate, Domestic, Interexchange Services p!(# 144  XK4XX` ` X ` `  2.XApplication of Fifth Report and Order Separation Requirements to Incumbent Independent LECs p!(#176  X4XX` ` X ` ` 3. Application of Fifth Report and Order Separation Requirements to Small or Rural Incumbent Independent LECs p!(#180  X4XX` ` X ` ` 4. Classification of Independent LECs' Provision of InRegion, International Services p!(#184  X4XX` ` X ` ` 5. Sunset of Separation Requirements for Independent LECs p!(#193 X\V. CLASSIFICATION OF BOCS AND INDEPENDENT LECS AS DOMINANT  OR NONDOMINANT IN THE PROVISION OF OUTOFREGION INTERSTATE, DOMESTIC, INTEREXCHANGE SERVICESp!(#197 X\VI. FINAL REGULATORY FLEXIBILITY ANALYSIS p!(#214  X 4XX` ` A.` ` Need for and Objectives of this Report and Order and the Regulations Adopted Herein ` p!(#215  X4XX` ` B.` ` Analysis of Significant Issues Raised in Response to the IRFA ` p!(#217  X4XX` ` X ` ` 1. Treatment of Small LECs p!(#219  X 4XX` ` C.` ` Description and Estimates of the Number of Small Entities Affected by this Report and Order ` p!(#221  X"4XX` ` D.` ` Summary Analysis of the Projected Reporting, Recordkeeping, and Other Compliance Requirements ` p!(#225  Xh$4XX` ` E.` ` Steps Taken to Minimize the Significant Economic Impact of this"h$0*%%ZZ"" Report and Order on Small Entities and Small Incumbent LECs, Including the Significant Alternatives Considered and Rejected ` p!(#227 X\VII. FINAL PAPERWORK REDUCTION ANALYSIS p!(#235 X\VIII. ORDERING CLAUSES p!(#237  X_4APPENDIX A List of Commenters  XH4APPENDIX B Final Rules  Y 4#c PE37 P#X1*Í ÍX0*Í Í#Xw PE37 |XP# $J:\POLICY\LECDOM\ORDER\INTRO$   X 4 B8I. INTRODUCTION ׃  Y 41.` ` In February 1996, the "Telecommunications Act of 1996" became law.X  xP7'ԍTelecommunications Act of 1996, Pub. L. No. 104104, 110 Stat. 56 (1996 Act), codified at 47  xP'U.S.C.  151 et seq. (Hereinafter, all citations to the 1996 Act will be to the 1996 Act as it is codified in the United States Code.) The 1996 Act amended the Communications Act of 1934 (Communications Act). The intent of this legislation is "to provide for a procompetitive, deregulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening  Yb4all telecommunications markets to competition."OXb xP'ԍSee Joint Statement of Managers, S. Conf. Rep. No. 104230, 104th Cong., 2d Sess. Preamble (1996)  xP'(Joint Explanatory Statement); see also 47 U.S.C.  706(a) (encouraging the deployment of advanced telecommunications capability to all Americans).O In this rulemaking and related proceedings, the Commission is adopting policies necessary to achieve the procompetitive, deregulatory goals of the 1996 Act.  Y42.` ` Upon enactment, the 1996 Act permitted the Bell Operating Companies  Y4(BOCs) xP'ԍFor purposes of this proceeding, we adopt the definition of the term "Bell Operating Company" contained in 47 U.S.C. 153(4). to provide interLATA services that originate outside of their regions. x `  xP 'ԍSee 47 U.S.C.  271(b)(2). The Modification of Final Judgment (MFJ), which ended the government's antitrust suit against AT&T, and which resulted in the divestiture of the BOCs from AT&T, prohibited the  xP!'BOCs from providing interLATA services. See United States v. Western Elec. Co., 552 F. Supp. 131, 214  xPX"'n.316 (D.D.C. 1982); United States v. Western Elec. Co., 552 F. Supp. 131 (D.D.C. 1982), aff'd sub nom.  xP #'Maryland v. United States, 460 U.S. 1001 (1983); see also United States v. Western Elec. Co., Civil Action No. 820192 (D.D.C. Apr. 11, 1996) (vacating the MFJ). For purposes of this proceeding, we adopt the definition of the term "inregion state" that is contained in 47 U.S.C.  271(i)(1). We note that section 271(j)"$0*%%$" provides that a BOC's inregion services include 800 service, private line service, or their equivalents that terminate in an inregion state of that BOC and that allow the called party to determine the interLATA carrier,  xP 'even if such services originate outofregion. Id.  271(j). The 1996 Act defines "interLATA services" as "telecommunications between a point located in a local access and transport area and a point located outside such area." 47 U.S.C.  153(21). Under the 1996 Act, a "local access and transport area" (LATA) is "a contiguous geographic area (A) established before the date of enactment of the [1996 Act] by a [BOC] such that no exchange area includes points within more than 1 metropolitan statistical area, consolidated metropolitan statistical area, or State, except as expressly permitted under the AT&T Consent Decree; or (B) established or modified by a [BOC] after such date of enactment and approved by the Commission." 47 U.S.C.  153(25).  xP'LATAs were created as part of the MFJ's "plan of reorganization." United States v. Western Elec. Co., 569  xP` 'F. Supp. 1057 (D.D.C. 1983), aff'd sub nom. California v. United States, 464 U.S. 1013 (1983). Pursuant to the MFJ, "all BOC territory in the continental United States [was] divided into LATAs, generally centering  xP 'upon a city or other identifiable community of interest." United States v. Western Elec. Co., 569 F. Supp. 990, 993 (D.D.C. 1983). On March" 0*%%ZZ9" 25, 1996, the Commission released a Notice of Proposed Rulemaking initiating a review of its regulation of interstate, domestic, interexchange telecommunications services in light of the passage of the 1996 Act and the increasing competition in the interexchange market over  Y4the past decade.^X  xP'ԍPolicy and Rules Concerning the Interstate, Interexchange Marketplace; Implementation of Section  xP'254(g) of the Communications Act of 1934, CC Docket No. 9661, Notice of Proposed Rulemaking, 11 FCC  xP|'Rcd 7141 (rel. Mar. 25, 1996) (Interexchange NPRM).^ Among other things, the Commission asked whether it should modify or eliminate the separation requirements imposed on independent local exchange carriers (LECs) (exchange telephone companies other than the BOCs) as a condition for nondominant treatment of their interstate, domestic, interexchange services originating outside their local  Y_4exchange areas._ xP'ԍId. at 7174,  61. We use the term "independent LECs" to refer to both the independent LECs and their affiliates. The Commission also sought comment on whether, if it modifies or eliminates these separation requirements for independent LECs, it should apply the same  Y14requirements to BOC provision of outofregion interstate, domestic, interexchange services.1 xP'ԍId. In a recent order addressing BOC provision of interLATA services originating outofregion, we considered whether, on an interim basis, BOC provision of outofregion services should remain subject to  xPj'dominant carrier regulation. See Bell Operating Company Provision of OutofRegion Interstate, Interexchange  xP2'Services, CC Docket No. 9621, Report and Order, FCC 96288 (rel. July 1, 1996) (Interim BOC Outof xP'Region Order) recon. pending. We concluded, inter alia, that, on an interim basis, if a BOC provides outofregion domestic, interstate, interexchange services offered through an affiliate that satisfies the separation  xP 'requirements imposed on independent LECs in the Competitive Carrier Fifth Report and Order, we would  xPR!'remove dominant carrier regulation for such services. Id.Ġat  2. Thus, we currently apply the same regulatory treatment to the BOCs' provision of outofregion, domestic, interstate, interexchange services as we apply to the independent LECs' provision of those services. The Commission also proposed to revise the relevant product and geographic market definitions for purposes of determining whether a carrier should be regulated as dominant or" 0*%%ZZ "  Y4nondominant in the provision of interstate, domestic, interexchange services. h xPy'ԍ STAYFOR Interexchange NPRM, 11 FCC Rcd at 716465,  4142. In the Interexchange NPRM, the Commission also raised issues relating to: implementation of the rate averaging and rate integration requirements in section 254(g) of the Communications Act; detariffing for domestic services of nondominant interexchange carriers; and the current prohibition against bundling customer services equipment with the provision of interstate, interexchange services by nondominant interexchange carriers. On August 7, 1996, we  xPa'issued a Report and Order implementing the rate averaging and rate integration requirements. SeeĠPolicy and Rules Concerning the Interstate, Interexchange Marketplace; Implementation of Section 254(g) of the  xP'Communications Act of 1934, as amended, CC Docket No. 9661, Report and Order, 11 FCC Rcd 9564 (1996)  xP'(Rate Integration Order). On October 31, 1996, we issued a Second Report and Order which eliminates  203 tariff filing requirements for interstate, domestic, interexchange services by nondominant interexchange carriers and orders all nondominant interexchange carriers to cancel their tariffs for those services within nine months  xP 'from the effective date of the Order. Policy and Rules Concerning the Interstate, Interexchange Marketplace;  xP 'Implementation of Section 254(g) of the Communications Act of 1934, CC Docket No. 9661, Second Report  xP 'and Order, FCC 96424 (rel. Oct. 31, 1996) (Tariff Forbearance Order), stayed pending judicial review, MCI  xPi 'Telecom. Corp. v. FCC, No. 961459 (D.C. Cir. Feb. 13, 1997). See also Policy and Rules Concerning the Interstate, Interexchange Marketplace: Guidance Concerning Implementation as a Result of the Stay Order of  xP'the U.S. Court of Appeals for the D.C. Circuit, CC Docket No. 9661, Public Notice, DA 97493 (rel. March  xP'6, 1997). In the Tariff Forbearance Order, we stated our intent to issue a Further Notice of Proposed Rulemaking that will address the continued applicability of the prohibitions against the bundling of both CPE  xPQ'and enhanced services with interstate, interexchange services by nondominant interexchange carriers. Id. at  118.  Y43.` ` The 1996 Act conditions the BOCs' entry into inregion, interLATA service on their compliance with certain provisions of section 271 of the Act. Under section 271, we must determine, among other things, whether the BOC has complied with the safeguards  Y4imposed by section 272 and our rules promulgated thereunder.  xP6'ԍ47 U.S.C.  271(d)(3)(B). The Commission also must find that the interconnection agreements or statements approved by the appropriate state commission under section 252 satisfy the competitive checklist contained in section 271(c)(2)(B), and that the BOC's entry into the inregion interLATA market is "consistent  xP'with the public interest, convenience and necessity." Id.  271(d)(3)(A), (d)(3)(C). For purposes of section 271, such interconnection agreements must be made with a facilitiesbased competitor that meets specified  xP'criteria. Id.  271(c)(1)(A). In acting on a BOC's application for authority to provide inregion interLATA services, the Commission must consult with the Attorney General and give substantial weight to the Attorney  xP'General's evaluation of the BOC's application. Id.  271(d)(2)(A). In addition, the Commission must consult with the applicable state commission to verify that the BOC complies with the requirements of section 271(c).  xP>'Id.  271(d)(2)(B). Section 272 requires, among other things, that a BOC provide inregion, interLATA service through a separate affiliate  Y_4that meets the requirements of section 272(b).J _ xP"'ԍ47 U.S.C.  272(a)(1).J  Y144. ` ` On July 18, 1996, we released a Notice of Proposed Rulemaking in which we"1  0*%%ZZ" sought comment on the nonaccounting separate affiliate and nondiscrimination safeguards in  Y4section 272.  xPb'ԍImplementation of the NonAccounting Safeguards of Sections 271 and 272 of the Communications Act of 1934, as amended; and Regulatory Treatment of LEC Provisions of Interexchange Services Originating in the  xP'LEC's Local Exchange Area, CC Docket No. 96149, Notice of Proposed Rulemaking, FCC 96308 (rel. July  xP'18, 1996) (NonAccounting Safeguards NPRM). We also sought comment on whether we should alter the dominant carrier classification that under our current rules would apply to inregion, interstate, domestic, interLATA services provided by the BOCs' section 272 interLATA affiliates (BOC  Y4interLATA affiliates).  xP 'ԍAFFILIATEId. at  142. For convenience, we use the term "BOC interLATA affiliates" to refer to the separate affiliates established by the BOCs, in conformance with section 272(a)(1), to provide inregion, interLATA services. Although we referred to these affiliates as "BOC affiliates" in the Notice, our findings in this Order apply only to affiliates established in conformance with section 272(a)(1). Further, we sought comment on whether we should modify our existing rules for regulating the provision of inregion, interstate, domestic, interexchange  Yv4services by an independent LEC.L v xP'ԍId. at  15758. For purposes of this proceeding, we have defined an independent LEC's "inregion services" as telecommunications services originating in the independent LEC's local exchange areas or 800 service, private line service, or their equivalents that: (1) terminate in the independent LEC's local exchange areas, and (2) allow the called party to determine the interexchange carrier, even if the service originates  xP'outside the independent LEC's local exchange areas. Id. at  4 n.12 L Finally, we invited comment on whether we should apply the same regulatory treatment to the BOC interLATA affiliates' and independent LECs' provision of inregion, international services that we apply to their provision of inregion, interstate, domestic, interLATA services and inregion, interstate, domestic interexchange  Y 4services, respectively.Q H  xP'ԍId. at  150, 160. Q We recently adopted rules to implement the section 272 non Y 4accounting separate affiliate and nondiscrimination safeguards.  xP'ԍImplementation of the NonAccounting Safeguards of Sections 271 and 272 of the Communications Act  xPT'of 1934, as amended, CC Docket No. 96149, First Report and Order and Further Notice of Proposed  xP'Rulemaking, FCC 96489 (rel. Dec. 24, 1996) (NonAccounting Safeguards Order); recon. pending; petition for  xP'review pending sub nom., Bell Atlantic v. FCC, No. 97106 (D.C. Cir. filed Jan. 31, 1997), vacated and  xP'remanded in part (Mar. 31, 1997); petition for review pending sub nom., SBC Communications v. FCC, No. 971118 (D.C. Cir. filed Mar. 6, 1997). On the same day, we  Y 4adopted rules to implement the accounting safeguards in sections 260 and 271 through 276.BX P xP 'ԍImplementation of the Telecommunications Act of 1996: Accounting Safeguards Under the  xP!'Telecommunications Act of 1996, CC Docket No. 96150, Report and Order, FCC 96490 (rel. Dec. 24, 1996)  xP}"'(Accounting Safeguards Order).B  Y 45.` ` This Order addresses the market definition and dominant/nondominant" p0*%%ZZ "  Y4classification issues raised in the Interexchange NPRM and the NonAccounting Safeguards  Y4NPRM. With respect to market definition, we adopt the approach proposed in the Notices. Specifically, we revise our current product and geographic market definitions in accordance  Y4with the 1992 Merger Guidelines. xP4'ԍ1992 Department of Justice/Federal Trade Commission Merger Guidelines, 4 Trade Reg. Rep. (CCH)  xP' 13,104, at 20,569 (1992 Merger Guidelines). We conclude that we should define as a relevant product market any interstate, domestic, long distance service for which there are no close  Y4substitutes, or a group of services that are close demand substitutesyX  xP^ 'ԍDemand substitutability identifies all of the products or services that consumers view as substitutes for each other, in response to changes in price. For example, if, in response to a price increase for orange juice, consumers instead purchase apple juice, apple juice would be considered a demand substitute for orange juice.y for each other, but for  Yv4which there are no other close demand substitutes.CXv@ xPg 'ԍIn places where we use the term "long distance services," we mean interstate, domestic or international, interLATA services provided by the BOC interLATA affiliates and interstate, domestic or international, interexchange services provided by independent LECs, respectively.C We define the relevant geographic market for interstate, domestic, long distance services as all possible routes that allow for a connection from one particular location to another particular location (i.e., a pointtopoint market). We conclude, however, that when a group of pointtopoint markets exhibit  Y 4sufficiently similar competitive characteristics (i.e., market structure), we can aggregate such markets, rather than examine each individual pointtopoint market separately. Therefore, if we conclude that the conditions for a particular service in any pointtopoint market are sufficiently representative of the conditions for that service in all other domestic pointtopoint markets, then we will examine aggregate data, rather than data particular to each domestic pointtopoint market. With respect to the BOC interLATA affiliates and independent LECs, however, we conclude that we should analyze pointtopoint markets that originate inregion separately from those pointtopoint markets that originate outofregion to determine whether the BOC affiliates' or independent LECs' market power in local exchange and exchange access services results in market power in the interexchange market. We note that, in some cases, it may be necessary to focus specifically on the termination point because the local exchange carrier that serves the enduser customer will necessarily have market power with regard to that customer.  Y46.` ` We also conclude that a BOC interLATA affiliate should be classified as dominant only if we find that it has the ability profitably to raise and sustain prices of inregion, interstate, domestic, interLATA services significantly above competitive levels by restricting its own output. Dominant carriers are subject to more stringent regulation than nondominant carriers, including price cap regulation, when specified by Commission order,"~` 0*%%ZZ+"  Y4and tariff filing notice periods of 14, 25 or 120 days. xPy'ԍSee supra  DOMREQ12 for more detail on the regulatory distinctions between dominant and nondominant interexchange carriers. In light of the requirements established by, and pursuant to, sections 271 and 272, together with other existing Commission rules, we conclude that the BOCs will not be able to use, or leverage, their market power in the local exchange or exchange access markets to such an extent that their section 272 interLATA affiliates could profitably raise and sustain prices of inregion, interstate, domestic, interLATA services significantly above competitive levels by restricting the affiliate's own output. We also conclude that regulating BOC inregion interLATA affiliates as dominant carriers generally would not help to prevent improper allocations of costs, discrimination by the BOCs against rivals of their interLATA affiliates, or price squeezes by the BOCs or the BOC interLATA affiliates. Although certain aspects of dominant carrier regulation may address these concerns, we conclude that the burdens they would impose on competition, competitors, and the Commission outweigh any potential benefits. As a result, we classify the BOC interLATA affiliates as nondominant in the provision of inregion, interstate, domestic, interLATA services.  Y 47.` ` We also classify the independent LECs as nondominant in the provision of inregion, interstate, domestic, interexchange services, because the independent LECs do not have the ability profitably to raise and sustain prices of inregion, interstate, domestic, interexchange services above competitive levels by restricting their own output of these services. We conclude, however, that the independent LECs' control of local exchange and exchange access facilities potentially enables them to misallocate costs from their inregion, interexchange services, discriminate against rivals of their interLATA affiliates, and engage in other anticompetitive conduct. We therefore require the independent LECs to provide their inregion, interstate, domestic, interexchange services through separate affiliates that  Y4satisfy the separation requirements adopted in the Competitive Carrier Fifth Report and  Y4Order.  xP'ԍPolicy and Rules Concerning Rates for Competitive Common Carrier Services and Facilities  xPZ'Authorizations Therefor, CC Docket No. 79252, Fifth Report and Order, 98 FCC 2d 1191, 1198,  9 (1984)  xP"'(Competitive Carrier Fifth Report and Order). Nevertheless, we give companies providing inregion, interexchange services on an integrated basis one year from the date of release of this order to comply with the  xP'Competitive Carrier Fifth Report and Order separation requirements. See infra section II.B.  Y48.` ` In addition, we adopt the same regulatory treatment of the BOC interLATA affiliates' and independent LECs' provision of inregion, international services, as we adopt for their provision of inregion, interstate, domestic, interLATA and inregion, interstate, domestic, interexchange services, respectively. Accordingly, we will classify each BOC interLATA affiliate or independent LEC affiliate as nondominant in the provision of inregion, international services, unless it (or its parent) is affiliated within the meaning of" 0*%%ZZ" section 63.18(h)(1)(i) of the rules, with a foreign carrier that has the ability to discriminate against rivals of its U.S. affiliate through control of bottleneck services or facilities in a foreign market. In that case, we will apply section 63.10(a) of the rules to determine whether to regulate the BOC interLATA affiliate or independent LEC affiliate as a dominant  Y4carrier in its provision of service between the United States and that foreign market.  xP'ԍIn doing so, we emphasize that there is more than one basis for finding a U.S. carrier dominant in the provision of international services. The separate issue of whether a BOC interLATA affiliate, an independent LEC affiliate, or any other U.S. carrier should be regulated as dominant in the provision of international services because of the market power of an affiliated foreign carrier in a foreign destination market was  xP= 'addressed by the Commission last year in the Foreign Carrier Entry Order. Market Entry and Regulation of  xP 'Foreignaffiliated Entities, IB Docket No. 9522, RM8355, RM8392, Report and Order, 11 FCC Rcd 3873  xP '(1995) (Foreign Carrier Entry Order), recon. pending. See also Regulation of International Common Carrier  xP 'Services, CC Docket No. 91360, Report and Order, 7 FCC Rcd 7331, 7334,  1924 (1992) (International  xP] 'Services Order). The Foreign Carrier Entry Order maintained a separate framework adopted in the  xP% 'International Services Order for regulating U.S. international carriers (including BOCs or independent LECs ultimately authorized to provide inregion international services) as dominant on routes where an affiliated foreign carrier has the ability to discriminate in favor of its U.S. affiliate through control of bottleneck services or facilities in the foreign destination market. No carriers are exempt from this policy to the extent they have foreign affiliations. Section 63.10(a) of the Commission's rules provides that: (1) carriers having no affiliation with a foreign carrier in the destination market are presumptively nondominant for that route; (2) carriers affiliated with a foreign carrier that is a monopoly in the destination market are presumptively dominant for that route; (3) carriers affiliated with a foreign carrier that is not a monopoly on that route receive closer scrutiny by the Commission; and (4) carriers that serve an affiliated destination market solely through the resale of an unaffiliated U.S. facilitiesbased carrier's switched services are presumptively nondominant for that route. We will require the independent LECs to provide inregion international services through  Yv4separate affiliates that satisfy the Competitive Carrier Fifth Report and Order separation requirements, consistent with the requirements we apply to their provision of inregion,  YH4interstate, domestic, interexchange services.Hh xPa'ԍIn the NonAccounting Safeguards Order, we concluded that the section 272 safeguards apply to the  xP)'BOCs' provision of inregion, international services. NonAccounting Safeguards Order at  58.  Y 49.` ` Finally, we consider whether we should modify or eliminate the separation requirements imposed on the BOCs and independent LECs as a condition for nondominant treatment of their provision of outofregion interstate, domestic, interexchange services. We conclude that those requirements are unnecessary, and we therefore eliminate the separation requirements as a condition for nondominant treatment of the BOCs' and independent LECs' provision of outofregion, interstate, domestic, interexchange services.  Yy4 10.` ` The actions we take in this proceeding will further the procompetitive, deregulatory objectives of the 1996 Act by eliminating unnecessary regulation that is currently imposed on interexchange carriers affiliated with BOCs and independent LECs. Although we are classifying these carriers as nondominant with respect to their provision of"4 0*%%ZZf" inregion and outofregion long distance services, as summarized above, we recognize that, as long as these carriers retain market power in providing local exchange and exchange access services, they will have some incentive and ability to misallocate costs to local exchange and exchange access services, to discriminate against their long distance competitors, and to engage in other anticompetitive conduct. We conclude, however, that the regulatory structure we adopt today will continue the process of enhancing competition in all telecommunications markets as envisioned by the 1996 Act.  X14 ]:II. BACKGROUND ׃  Y 4 11.` ` Between 1979 and 1985, the Commission conducted the Competitive Carrier proceeding, in which it examined how its regulations should be adapted to reflect and  Y 4promote increasing competition in telecommunications markets.`  xPN'ԍPolicy and Rules Concerning Rates for Competitive Common Carrier Services and Facilities  xP'Authorizations Therefor, CC Docket No. 79252, Notice of Inquiry and Proposed Rulemaking, 77 FCC 2d 308  xP'(1979); First Report and Order, 85 FCC 2d 1 (1980) (Competitive Carrier First Report and Order); Further Notice of Proposed Rulemaking, 84 FCC 2d 445 (1981); Second Further Notice of Proposed Rulemaking, FCC 82187, 47 Fed. Reg. 17,308 (1982); Second Report and Order, 91 FCC 2d 59 (1982); Order on Reconsideration, 93 FCC 2d 54 (1983); Third Further Notice of Proposed Rulemaking, 48 Fed. Reg. 28,292 (1983); Third Report and Order, 48 Fed. reg. 46,791 (1983); Fourth Report and Order, 95 FCC 2d 554 (1983)  xP'(Competitive Carrier Fourth Report and Order), vacated, AT&T v. FCC, 978 F.2d 727 (D.C. Cir. 1992), cert.  xP'denied, MCI Telecommunications Corp. v. AT&T, __ U.S. __, 13 S. Ct. 3020 (1993); Competitive Carrier  xPV'Fifth Report and Order, 98 FCC 2d 1191 (1984); Sixth Report and Order, 99 FCC 2d 1020 (1985), vacated,  xP'MCI Telecommunications Corp. v. FCC, 765 F.2d 1186 (D.C. Cir. 1985) (Competitive Carrier Sixth Report  xP'and Order) (collectively referred to as the Competitive Carrier Proceeding). In a series of orders, the Commission distinguished between two kinds of carriers those with market power  Y 4(dominant carriers) and those without market power (nondominant carriers).5X  xPH'ԍCompetitive Carrier First Report and Order, 85 FCC 2d 1; Competitive Carrier Fourth Report and  xP'Order, 95 FCC 2d 554; Competitive Carrier Fifth Report and Order, 98 FCC 2d 1191. See also 47 C.F.R.  61.3(o).5 In the  Y4Competitive Carrier Fourth Report and Order, the Commission defined market power alternatively as "the ability to raise prices by restricting output" and as "the ability to raise and maintain price above the competitive level without driving away so many customers as to  YK4make the increase unprofitable."`K xP !'ԍCompetitive Carrier Fourth Report and Order, 95 FCC 2d at 558,  78 (citing inter alia A. Areeda &  xP!'D. Turner, Antitrust Law 322 (1978) and W.M. Landes & R.A. Posner, Market Power in Antitrust Cases, 94 Harv. L. Rev. 937, 937 (1981)). The 1992 Department of Justice/Federal Trade Commission Merger Guidelines similarly define market power as "the ability profitably to maintain prices above competitive levels  xP,$'for a significant period of time." 1992 Merger Guidelines, at 20,570. ` The Commission recognized that, in order to assess whether a carrier possesses market power, one must first define the relevant product and"4 0*%%ZZs"  Y4geographic markets.~ xPy'ԍCompetitive Carrier Fourth Report and Order, 95 FCC 2d at 562,  13.~ In the Competitive Carrier proceeding, the Commission relaxed its tariff filing and facilities authorization requirements for nondominant carriers and focused its  Y4regulatory efforts on constraining the ability of dominant carriers to exercise market power.X xP'ԍId. at 57580,  3138; Competitive Carrier Fifth Report and Order, 98 FCC 2d at 11951200,  6 xP'11; Competitive Carrier Six Report and Order, 99 FCC 2d at 1028 n.29,  12.  Y4 12.` `  DOMREQ Our rules define a dominant carrier as one that possesses market power, and a nondominant carrier as a carrier not found to be dominant (i.e., one that does not possess  Yv4market power).Uv xP 'ԍ47 C.F.R.  61.3(o), 61.3(u).U Under our rules, nondominant carriers are not subject to rate regulation, and currently may file tariffs that are presumed lawful on one day's notice and without cost  YH4support. H@ xP9'ԍTariff Filing Requirements for Nondominant Carriers, CC Docket No. 9336, Order, 10 FCC Rcd 13,653 (1995). As previously discussed, we adopted mandatory detariffing for nondominant interexchange  xP'carriers in the Tariff Forbearance Order, but that Order has been stayed pending judicial review. See supra n.  xP'STAYFOR8. Nondominant carriers are also subject to streamlined section 214 requirements.^H(  xP!'ԍSee 47 C.F.R.  63.71, 63.07(a).^ In contrast, dominant interexchange carriers are subject to price cap regulation, when specified by Commission order, and must file tariffs on 14, 45, or 120 days' notice, with cost support data for abovecap and outofband tariff filings, and with additional information  Y 4for new service offerings.? x  xPU'ԍSee id.  61.41, 61.58(c). We note that effective February 1997, a local exchange carrier may file with the Commission a new or revised charge, classification, regulation, or practice on a streamlined basis. Unless the Commission takes action under 47 U.S.C.  204(a)(1), any charge, classification, regulation, or practice shall be deemed lawful and shall be effective 7 days (in the case of a rate reduction) or 15 days (in the  xPu'case of a rate increase) after the date on which it is filed with the Commission. 47 U.S.C.  204(a)(3). See  xP='also Implementation of Section 402(b)(1)(A) of the Telecommunications Act of 1996, CC Docket No. 96187, Report and Order, FCC 9723 (rel. Jan. 31, 1997). ? Dominant domestic carriers must also obtain specific prior Commission approval to construct a new line or to acquire, lease or operate any line, as well  Y 4as to discontinue, reduce, or impair service.!xx  xPg 'ԍ47 C.F.R.  63.01 et seq. We note that the Commission has simplified this process to permit a  xP/!'carrier to file an annual "blanket" Section 214 application for all construction planned for the year. See id.  63.06. Moreover, pursuant to section 402(b)(2)(A) of the 1996 Act, the Commission is required to "permit any common carrier . . . to be exempt from the requirements of Section 214 of the 1934 Act for the extension of any line." We are addressing the implementation of section 402(b)(2)(A), including the issue of what constitutes  xPO$'an "extension of any line," in a separate proceeding. See Implementation of Section 402(b)(2)(A) of the  xP%'Telecommunications Act of 1996, CC Docket No. 9711, Notice of Proposed Rulemaking, FCC 976 (rel."% 0*%%T%" January 13, 1997). Finally, we note that the Commission has eliminated prior approval requirements to add, modify, or delete circuits on authorized international routes as they apply to U.S. international carriers that are regulated as dominant for reasons other than having foreign carrier affiliations. In addition, such dominant carriers are required to obtain prior Commission approval to discontinue, reduce, or impair service on a  xP'particular route and notify the Commission of the conveyance of international cable capacity. See Streamlining  xPx'the International Section 214 Authorization Process and Tariff Requirements, IB Docket No. 95118, Report and  xP@'Order, FCC 9679,  50, 77, 8081 (rel. Mar. 13, 1996) (Streamlining Order).  " !0*%%ZZ "Ԍ Y4ԙ 13.` ` In the Competitive Carrier First Report and Order, the Commission classified LECs and predivestiture AT&T as dominant, with respect to both local exchange and interstate long distance services, and therefore subject to the "full panoply" of thenexisting  Y4Title II regulation.S" xPt 'ԍCompetitive Carrier First Report and Order, 85 FCC 2d at 23,  63. In light of increasing competition in the interstate, domestic, interexchange telecommunications market, and evidence that AT&T no longer possessed the ability to control price unilaterally, the Commission reclassified AT&T as a nondominant carrier  xP 'in that market. Motion of AT&T Corp. to be Reclassified as a NonDominant Carrier, Order, 11 FCC Rcd  xP'3271 (1996) (AT&T Reclassification Order), recon. pending. S In contrast, the Commission classified MCI, Sprint, and other  Y4"specialized common carriers" as nondominant carriers.q#  xP 'ԍCompetitive Carrier First Report and Order at 29,  81.q  Yv4 14.` ` CONDITIONSIn the Competitive Carrier Fourth Report and Order, the Commission determined that interexchange carriers affiliated with independent LECs would be regulated  YH4as nondominant interexchange carriers.$HH  xPA'ԍCompetitive Carrier Fourth Report and Order, 95 FCC 2d at 57579,  3137. In the Competitive Carrier Fifth Report and  Y14Order, the Commission clarified that an "affiliate" of an independent LEC was "a carrier that is owned (in whole or in part) or controlled by, or under common ownership (in whole or in  Y 4part) or control with, an exchange telephone company."}%  xP'ԍCompetitive Carrier Fifth Report and Order, 98 FCC 2d at 1198,  9.} The Commission further clarified that, in order to qualify for nondominant treatment, the affiliate providing interstate, interexchange services must: (1) maintain separate books of account; (2) not jointly own transmission or switching facilities with its affiliated exchange telephone company; and (3) acquire any services from its affiliated exchange telephone company at tariffed rates, terms  Y4and conditions.M&Xh xP 'ԍId. The Commission noted that "[a]n affiliate qualifying for nondominant treatment is not necessarily  xPq!'structurally separated from an exchange telephone company in the sense ordered in the Second Computer  xP9"'Inquiry . . . ." Id.M The Commission added that any interstate, interexchange services offered directly by an independent LEC (rather than through a separate affiliate) or through an affiliate that did not satisfy the specified conditions would be subject to dominant carrier"b &0*%%ZZ"  Y4regulation.N' xPy'ԍId. at 119899,  9.N  Y415.` ` In the Competitive Carrier Fifth Report and Order, the Commission also addressed the possible entry of the BOCs into interstate, interLATA services in the future: XThe BOCs currently are barred by the [MFJ] from providing interLATA services . . . . If this bar is lifted in the future, we would regulate the BOCs' interstate, interLATA services as dominant until we determined what degree of separation, if any, would be necessary for the BOCs or their affiliates to  Y14qualify for nondominant regulation.(1X xP: 'ԍId. at n.23 (citing United States v. Western Elec. Co., 552 F. Supp. 131 (D.D.C. 1982) (subsequent history omitted)).  In this Order, we revisit the question of the appropriate regulatory treatment of BOCs and independent LECs in the provision of long distance services. $J:\POLICY\LECDOM\ORDER\INTRO$ )J:\POLICY\LECDOM\ORDER\MKTDEF.SEC)  X 4 III. MARKET DEFINITION א\  X4 A.XGeneral Application (#  Xb4X 1.` ` Background (#  Y4416.` ` In order to determine that a particular carrier or group of carriers possesses  Y4market power,)  xP~'ԍThe 1992 Merger Guidelines define market power as "the ability profitably to maintain prices above  xPF'competitive levels for a significant period of time." 1992 Merger Guidelines at 20,57071. "Sellers with market power also may lessen competition on dimensions other than price, such as product quality, service, or  xP'innovation." Id. at 20,571, note 6. it is first necessary to define the relevant product and geographic markets.  Y4In the Competitive Carrier proceeding, the Commission found, for purposes of assessing the market power of interexchange carriers, that: "(1) interstate, domestic, interexchange telecommunications services comprise the relevant product market, and (2) the United States (including Alaska, Hawaii, Puerto Rico, U.S. Virgin Islands, and other U.S. offshore points) comprises the relevant geographic market for this product, with no other relevant  Y4submarkets."* xP"'ԍCompetitive Carrier Fourth Report and Order, 95 FCC 2d at 563,  13 . In the Interexchange NPRM, the Commission proposed to reexamine and" ( *0*%%ZZ "  Y4refine the market definitions adopted in the Competitive Carrier proceeding.g+ xPy'ԍInterexchange NPRM, 11 FCC Rcd at 7164,  40.g In the Non Y4Accounting Safeguards NPRM, the Commission proposed to apply this new approach to market definition in assessing the market power of BOC interLATA affiliates and  Y4independent LECs in their provision of interstate, domestic, long distance services.b,X xP'ԍNonAccounting Safeguards NPRM at  115.b  Y417.` ` In the Interexchange NPRM, the Commission asked whether it should adopt  Yv4more sharply focused market definitions than those adopted in the Competitive Carrier proceeding to provide us with a more refined analytical tool for evaluating market power. To establish a more narrowlyfocused approach that more accurately reflects the realities of the marketplace and is flexible enough to accommodate unique market situations, the Commission tentatively concluded that it should follow the approach for defining relevant  Y 4markets contained in the 1992 Merger Guidelines.g-  xP'ԍInterexchange NPRM, 11 FCC Rcd at 7164,  41.g As the Commission noted in the  Y 4Interexchange NPRM, the market definition approach taken in the 1992 Merger Guidelines has been recognized increasingly by courts and scholars as an important tool in assessing  Y 4market power.".@ x xP'ԍId. at 716465,  41. See, e.g., Werden, Market Delineation Under the Merger Guidelines: A Tenth  xP'Anniversary Retrospective, 38 Antitrust Bull. 517, 51819 (1993) (citing Olin Corp. v. FTC, 986 F.2d 1295,  xPw'12991301 (9th Cir. 1993); United States v. Country v. ArcherDanielsMidland Co., 866 F.2d 242, 246 (8th  xP?'Cir. 1988); United States v. Country Lake Foods, Inc., 754 F. Supp. 669, 67273 (D. Minn. 1990); FTC v.  xP'R.R. Donnelley & Sons Co., 19902 Trade Cas. (CCH)  69,239, at 64,854 (D.D.C. 1990); United States v.  xP'Rank Organization Plc, 19902 Trade Cas. (CCH)  69,257 (C.D. Cal. 1990)); Werden, The History of  xP'Antitrust Market Delineation, 76 Marq. L. Rev. 123, 199201 (1992); Pitofsky, New Definitions of Relevant  xP_'Market and the Assault on Antitrust, 90 Colum. L. Rev. 1805, 1808 (1990)."  X4X 2.` ` Comments (#  Yb418.` ` Several commenters agree with our proposal to reexamine the product and  YK4geographic market definitions adopted in the Competitive Carrier proceeding./K  xP|'ԍSee e.g., America's Carriers Telecommunications Association (ACTA) April 19, 1996 Comments at 13; General Communications, Inc. (GCI) April 19, 1996 Comments at 2; Pennsylvania Public Utilities Commission (PaPUC) April 19, 1996 Comments at 45; LDDS WorldCom (LDDS) April 19, 1996 Comments  xP!'at 23; GCI April 19, 1996 Comments at 2; see also GTE April 19, 1996 Comments at 45, May 3, 1996 Reply at 3. Some emphasize that redefining the market would aid in determining whether BOC interLATA affiliates and independent LECs possess market power with respect to their provision of long"0/0*%%ZZ"  Y4distance services.0 xPy'ԍACTA April 19, 1996 Comments at 34; MCI April 19, 1996 Comments at 67; LDDS April 19, 1996 Comments at 34. Other commenters recognize the more general benefit in providing the Commission with a more refined and flexible analytical tool to evaluate whether any carrier  Y4possesses market power in the long distance marketplace.1  xP'ԍPaPUC April 19, 1996 Comments at 45; Telecommunications Resellers Association (TRA) April 19, 1996 Comments at 31; LDDS May 3, 1996 Reply at 23.  Y419.` ` Although it generally supports a reexamination of the relevant market definitions, Sprint argues that it is not readily apparent whether more particularized definitions would represent an improvement over the broader definitions adopted in the  Y_4Competitive Carrier proceeding.W2_x xP 'ԍSprint April 19, 1996 Comments at 56.W Sprint urges the Commission to continue to use the  YH4definitions adopted in the Competitive Carrier proceeding and to examine the issue, in light  Y14of the 1992 Merger Guidelines, on a casebycase basis only.@31 xP'ԍId. at 6.@  Y 420.` ` In general, the BOCs oppose the Commission's proposal to redefine the  Y 4product and geographic markets adopted in the Competitive Carrier proceeding. They argue that BOC entry into interLATA services should not serve as a basis to reconsider the relevant market definitions and that it would be unreasonable to isolate portions of the national market to analyze the market power of new entrants when a single national market has been used to  Y4assess the market power of incumbent interexchange carriers.k4  xP'ԍSee e.g., NYNEX April 19, 1996 Comments at 56; BellSouth April 19, 1996 Comments at 912, 1516, BellSouth August 15, 1996 Comments at 4748; SBC May 3, 1996 Reply at 12; Bell Atlantic April 19, 1996 Comments at 56; Ameritech May 3, 1996 Reply at 18; Bell Atlantic August 15, 1996 Comments at 1214.k BellSouth cautions that any change in the market definitions will also require the Commission to reconsider previous  Yb4decisions based on the existing definitions.X5b  xP'ԍBellSouth April 19, 1996 Comments at 9.X SBC and U S West assert that the fastchanging telecommunications marketplace may render modifications in the market definitions quickly  Y44obsolete.64 xP!'ԍU S West April 19, 1996 Comments at 23; see also Missouri Office of Public Counsel May 3, 1996 Reply at 23. SBC claims that the 1992 Merger Guidelines were never intended to serve as a basis for determining whether or how to regulate a market or to establish a rationale for"h60*%%ZZ"  Y4disparate regulation of market participants.T7 xPy'ԍSBC April 19, 1996 Comments at 34.T USTA argues that a market definition based only on demand conditions, omitting supply factors and competitive conditions, could result  Y4in an inaccurate finding of significant market power.8X xP'ԍUnited States Telephone Association (USTA) Aug. 15, 1996 Comments (Hausman Appendix at 5).  Y421.` ` Although Ameritech does not disagree with the Commission's proposal to use  Y4the 1992 Merger Guidelines to define relevant markets, it claims that it would be impractical  Yv4and unnecessary to define each and every product and geographic market.\9v xP 'ԍAmeritech April 19, 1996 Comments at 1213.\ If the Commission adopts its proposed approach, however, Ameritech asks that the Commission  YH4clarify that the 1992 Merger Guidelines will be used to assess market power for other  Y14services, including interstate access services.A:1x xPZ'ԍId. at 14.A  Y 422.` ` AT&T argues that the definitions adopted in the Competitive Carrier proceeding are appropriate for determining whether carriers, other than those that control the local bottleneck, possess market power in interexchange services because supply substitutability and the widespread pervasiveness of ubiquitous calling plans demonstrate that  Y 4there is a single, national market for such services.r;X  xP`'ԍAs discussed infra at   AT&T47 , AT&T argues that the Commission's current market definitions are irrelevant in assessing the market power of BOC interLATA affiliates or independent LECs because market power can be proven directly through the BOCs' or independent LECs' control of bottleneck facilities.r AT&T emphasizes that the 1992  Y4Merger Guidelines provide support for the existing market definitions, rather than the  Yy4Commission's proposed new approach, because the 1992 Merger Guidelines recognize the importance of supply substitutability in defining relevant markets and advocate aggregate market descriptions where production substitution among a group of products is nearly universal among the firms selling one or more of those products, as is the case in the  Y4telecommunications industry.Z<(  xP'ԍAT&T April 19, 1996 Comments at 5, 1617.Z  Y423.` ` The Department of Justice (DOJ) contends that it is not necessary for the Commission to adopt a precise definition of the relevant markets involved in the provision of a BOC interLATA affiliate's interLATA services and that the Commission should refrain  Y4from doing so at this time.V=  xP%'ԍDOJ Aug. 30, 1996 Reply at 1718, 22.V To the extent the Commission chooses to define markets in this"H =0*%%ZZd" proceeding, however, DOJ urges the Commission to be mindful of the different objectives of  Y4defining markets for purposes of regulation and antitrust enforcement.F> xPb'ԍId. at 18 n.10.F DOJ asserts that,  Y4while the approach proposed by the Commission in the Interexchange NPRM for defining relevant markets is "not unreasonable," changes in the telecommunications industry may require the Commission to define markets more precisely in the future and that it may be  Y4inappropriate to address this issue at this time.? X xP'ԍId. at 20. Although DOJ, like AT&T, believes that the market definition is irrelevant in assessing the market power of BOC interLATA affiliates, its conclusion is based on its assessment that the BOC interLATA affiliates will not be able to exercise, at least in the near term, the type of market power targeted by dominant  xP 'carrier regulation. Id. at 1617.  Y_424.` ` MFS argues that the 1992 Merger Guidelines are too generic to apply to the telecommunications industry and should not be used to redefine the appropriate product and  Y14geographic markets.w@1@ xP"'ԍMFS Communications Company, Inc. (MFS) April 19, 1996 Comments at 34.w MFS argues, for example, that while the 1992 Merger Guidelines contemplate industries in which goods are substitutable, the telecommunications services market is made up of services that are not substitutes, but rather essential inputs used by  Y 4competitors.@A  xPm'ԍId. at 4.@ In addition, MFS claims that the 1992 Merger Guidelines are not wellsuited to highly segmented industries, such as the telecommunications industry, which is segmented into residential, business, peak, offpeak, local, toll and access services. This market segmentation, MFS claims, makes it possible for dominant firms to engage in predatory  Y4crosssubsidization between market segments.:B`  xP'ԍId.: MFS further contends that, while the 1992  Yy4Merger Guidelines focus on geographic factors and pricing issues, measuring market power in the telecommunications industry requires consideration of such nonpricing issues as  YK4physical collocation, interconnection, and the allocation of telephone numbers.@CK  xP'ԍId. at 5.@ Finally,  Y44MFS argues that the focus on demand substitutability in the 1992 Merger Guidelines results in an inaccurate measurement of market power in the telecommunications industry because the monopolists or nearmonopolists that control the local exchange and exchange access market may foreclose competition by raising the price of an essential facility they provide to  Y4competitors without also raising the price of the service they sell to endusers.LD  xP $'ԍMFS May 3, 1996 Reply at 3.L "D0*%%ZZz"Ԍ X4X 3.` ` Discussion (#  Y425.` ` We conclude that the 1992 Merger Guidelines provide an appropriate analytical framework for defining relevant markets in order to assess market power in the interstate, domestic, long distance marketplace. We disagree with those commenters that  Y4claim that the 1992 Merger Guidelines are inapplicable in a regulatory setting or are based on generalized market concepts that are inapplicable to the telecommunications industry. We  Y_4find that the 1992 Merger Guidelines are based on fundamental and widelyapplicable  YH4economic principles, such as principles of demand and supply substitution.E@H xP 'ԍSupply substitutability identifies all productive capacity that can be used to produce a particular good, whether it is currently being used to produce that good or to produce some other, even unrelated, good. For example, if a factory that is producing desks could be converted quickly and inexpensively to the production of wheelbarrows, then the owner of that factory should be considered a potential producer of wheelbarrows. That does not mean, however, that desks and wheelbarrows are in the same relevant product market. As previously noted, demand substitutability identifies all of the products or services that consumers view as substitutes for each other, in response to changes in price. For example, if, in response to a price increase for orange juice, consumers instead purchase apple juice, apple juice would be considered a demand substitute for orange juice. Accordingly,  Y14we reject MFS's contention that the telecommunications industry is so unique that the 1992  Y 4Merger Guidelines are inapplicable.F   xP'ԍMFS's concern that, by relying on the 1992 Merger Guidelines, the Commission will only consider  xPc'demandbased factors in assessing market power is unfounded. As discussed supra, although we will rely on demand substitutability in defining relevant markets, market definition is only one component in assessing market power. The 1992 Merger Guidelines are intended to guide DOJ and the FTC in their analysis of mergers taking place in any industry, not only mergers  Y 4in particular industries.G   xPU'ԍ"These guidelines outline the present enforcement policy of the Department of Justice and the Federal Trade Commission (the "Agency") concerning horizontal acquisitions and mergers ("mergers") subject to section  xP'7 of the Clayton Act, to section 1 of the Sherman Act, or to section 5 of the FTC Act." 1992 Merger  xP'Guidelines at p. 20,5693. The economic principles contained in the 1992 Merger Guidelines are not limited to an analysis of particular types of markets, but rather are broadly drawn to  Y 4accommodate virtually all marketplace characteristics. H  xP'ԍWe note that there is a recognition in the 1992 Merger Guidelines that they will be applied to "a broad  xP'range of possible factual circumstances." 1992 Merger Guidelines at p. 20,5693.  In fact, DOJ agrees that "[t]he Commission's market definition, like market definition under the antitrust laws, should be guided by the basic economic principles that inform competitive analysis and market  Yy4definitions under the DOJ Merger Guidelines."XIy xP"#'ԍDOJ Aug. 30, 1996 Reply at 18, note 10.X We acknowledge that, in its comments, DOJ notes that the different objectives of regulation and antitrust enforcement may affect the"bI0*%%ZZ"  Y4application of the market definition in those contexts.;J xPy'ԍ Id.; We agree and realize that the markets defined in a particular antitrust suit may reach different results. DOJ does not  Y4argue, however, that the fundamental concepts and principles espoused in the 1992 Merger  Y4Guidelines apply only in the merger context.  Y426.` ` We conclude that we should revise our product and geographic market  Yv4definitions to follow the approach taken in the 1992 Merger Guidelines. Most commenters do not appear to articulate serious disagreements with the fundamental economic principles on which we base our revised approach to defining the relevant product and geographic markets. Rather, they appear to focus their concerns on the impact that this new approach may have on specific assessments of market power. We believe that our market power analysis, including our approach to defining the relevant product and geographic markets, should not be formulated by focusing on endresults, but instead should be focused on the application of sound economic principles and analysis. As a result, we conclude that the  Y 4product and geographic market definitions defined in the Competitive Carrier proceeding  Y 4should be refined to follow the approach taken in the 1992 Merger Guidelines in order to ensure that our market power assessments are based on the most accurate, uptodate, and generally accepted economic principles relating to market analysis. As new carriers enter the long distance marketplace and as the telecommunications marketplace changes in the face of increased competition, the flexibility inherent in our new approach to defining the relevant product and geographic markets enables us to make a more accurate measurement of market power than before by accounting for unique carrier characteristics that could impact the  Y4dynamics of the marketplace.KXX xP'ԍFor example, potential new entrants to the long distance marketplace, such as BOCs, utility companies,  xP'and cable companies, possess different characteristics that could impact, inter alia, the types of services offered in the long distance marketplace and the method in which long distance services are priced. For example, many new carriers have begun entering the long distance market by targeting particular types of customers or by targeting customers in particular areas, suggesting that carriers do not view the interstate, domestic, long distance market as a single national market or as a single market of interchangeable and substitutable services.  Y|427.` ` In contrast to some commenters,L|x xP 'ԍSee e.g., USTA Aug. 15, 1996 Comments (Hausman Appendix at 5); AT&T April 19, 1996 Comments at 5, 1516; BellSouth May 3, 1996 Reply at 3. we find that supply substitutabilityMX| xP"'ԍAs previously noted, supply substitutability identifies all productive capacity that can be used to produce a particular good, whether it is currently being used to produce that good or to produce some other, even unrelated, good. should"| M0*%%ZZ" not be used to define relevant markets, but rather should be used to determine which providers are currently serving, or potentially could be serving, a relevant market only after  Y4that market has been identified./N xPK'ԍAs the 1992 Merger Guidelines note, "[o]nce defined, a relevant market must be measured in terms of its participants and concentration. Participants include firms currently producing or selling the market's products in the market's geographic area. In addition, participants may include other firms depending on their likely supply responses to a 'small but significant and nontransitory' price increase. A firm is viewed as a participant if, in response to a 'small but significant and nontransitory' price increase, it likely would enter rapidly into production or sale of a market product in the market's area, without incurring significant sunk costs of entry and exit. Firms likely to make any of these supply responses are considered to be 'uncommitted' entrants because their supply response would create new production or sale in the relevant market and because  xP 'that production or sale could be quickly terminated without significant loss." 1992 Merger Guidelines at p. 20,572./ We conclude that our market definitions should be based  Y4solely on demand substitutability considerations.O`  xP 'ԍAs previously noted, demand substitutability identifies all of the products or services that consumers view as substitutes for each other, in response to changes in price. This conclusion accords with the 1992  Y4Merger Guidelines, which state that, "market definition focuses solely on demand substitution factors i.e., possible consumer responses. Supply substitution factors i.e., possible production responses are considered elsewhere in the Guidelines in the identification of  Y_4firms that participate in the relevant market and the analysis of entry."[P_  xP'ԍ1992 Merger Guidelines at p. 20,571.[  Y1428.` ` Under the 1992 Merger Guidelines, market power is determined by delineating both the product and geographic market in which power may be exercised and, then, identifying those firms that are current suppliers and those firms that are potential suppliers in that particular market. Therefore, in determining whether a carrier is able to exercise market power in the provision of a particular service or group of services or within a particular area, we must consider two issues. First, in the case of the relevant product market, we must consider whether, if all carriers raised the price of a particular service or group of services, customers would be able to switch to a substitute service offered at a lower price. With respect to the relevant geographic market, we must consider whether, if all carriers in a specified area raised the price of a particular service or group of services, customers would be able to switch to the same service offered at a lower price in a different area. Second, with respect to supply substitutability, we must consider whether, if a carrier raised the price of a particular service or group of services, other carriers, currently not offering that service or group of services, would have the incentive and the ability to begin provisioning a substitute service quickly and easily. For example, if we were assessing the market power of a carrier providing long distance service from Miami, and determined that another carrier currently providing service in Los Angeles would also begin providing service from Miami if the price of the service in Miami were to increase, we would consider"H P0*%%ZZ=" the impact of the Los Angeles carrier's potential entry into Miami in assessing the market power of the Miami carrier. This does not mean, however, that customers in Miami consider long distance service offered in Los Angeles as a substitute for service offered in Miami. Therefore, long distance service offered in Miami and long distance service offered in Los Angeles would not be considered as services in the same relevant geographic market.  Y4By following the approach taken in the 1992 Merger Guidelines, we will continue to weigh supply substitutability as an important factor in assessing market power, but we will not use it as a factor in defining the relevant product and geographic markets.  Y1429.PROCEEDING` ` We acknowledge that the approach to defining relevant markets that we adopt  Y 4in this proceeding departs from the approach adopted in the Competitive Carrier proceeding  Y 4and applied in the AT&T Reclassification Order.Q  xP| 'ԍIn the Matter of Motion of AT&T Corp. to be Reclassified as a NonDominant Carrier, 11 FCC Rcd  xPD '3271 (1995) (AT&T Reclassification Order). For the reasons discussed herein, we believe these more refined definitions are now necessary. To the extent that various parties  Y 4argue that our new approach is contrary to our decision in the AT&T Reclassification  Y 4Order,R  xP'ԍSee e.g., BellSouth April 19, 1996 Comments at 9, Aug. 15, 1996 Comments at 43. it is wellestablished that the Commission may change approaches as long as it  Y 4provides a reasoned explanation for doing so.zS  xP'ԍSee California v. FCC, 39 F.3d 919, 925, 930 (9th Cir. 1994).z Should any modifications be necessary to  Y4decisions reached in the AT&T Reclassification Order, they will be addressed, as necessary,  Yy4in further proceedings.Ty@ xPj'ԍIn this regard, we note that the State of Hawaii, General Communications, Inc. and Total  xP2'Telecommunications Services, Inc. have filed petitions for reconsideration of the AT&T Reclassification Order. We emphasize, however, that, because market definition is only one step in assessing market power, changes made in the approach to defining relevant markets will not necessarily produce different assessments of market power.  Y430.` ` We also reject the argument that we should not revise the product and geographic market definitions because of the dynamic changes taking place in the long  Y4distance marketplace.U xP8'ԍSee e.g., U S West April 19, 1996 Comments at 23; Missouri Office of Public Counsel May 3, 1996 Reply at 23; DOJ Aug. 30, 1996 Reply at 20. To the contrary, we believe that these changes in the long distance marketplace provide a compelling reason to modify our approach to defining the relevant product and geographic markets. Our new approach to defining relevant markets will be consistently applied, yet contain inherent flexibilities, so that our assessment of market power will always be based on a particular carrier's or group of carriers' unique market situation. For example, in recognition that certain carriers may control discrete facilities in specific"| U0*%%ZZE" geographic areas, target particular types of customers, or provide specialized services, our new market definitions allow us to examine the relevant product and geographic markets at the level of detail necessary to make a more accurate assessment of market power than under  Y4the Competitive Carrier definitions. We find that the definitions developed in the  Y4Competitive Carrier proceeding would not provide us with sufficient flexibility to account for the impact such unique market situations may have on assessing market power because these definitions are too broad to analyze markets at the necessary level of detail. At the time the  Y_4Commission defined the relevant product and geographic markets in the Competitive Carrier proceeding, telecommunications services were provided primarily by a single national carrier. Under such a regulatory model, the use of a simplified definition of relevant markets did not significantly hinder our analysis of market power. Today, in light of the dramatic changes that have been occurring in the long distance marketplace, particularly those brought on by the passage of the Telecommunications Act of 1996, with many firms competing to provide more specialized and regionalized long distance services to different types of customers, more detailed market definitions are needed to assess market power more accurately and to pinpoint the particular markets where that power is or could be exercised.  Xy4 B.Product Market Definition   XK4X 1.X` ` General Approach to Product Market Definition (#`  X4XX` ` a. Background (#`  Y431.` ` In the Competitive Carrier proceeding, the Commission defined the relevant product market as "all interstate, domestic, interexchange telecommunications services . . .  Y4with no relevant submarkets."~V xP:'ԍCompetitive Carrier Fourth Report and Order, 95 FCC 2d at 563,  13.~ In the Interexchange NPRM, we tentatively concluded that we should refine our analysis and define as a relevant product market any domestic, interstate, interexchange service for which there are no close demand substitutes or any group of services that are close substitutes for each other but for which there are no other  Ye4close demand substitutes.gWeX xPn'ԍInterexchange NPRM, 11 FCC Rcd at 7167,  46.g Recognizing, however, that delineating all relevant product markets would be administratively burdensome and that the Commission has previously found that there is substantial competition with respect to most interstate, domestic, interexchange services, the Commission tentatively concluded that we generally should address the question of whether a specific domestic, interstate, interexchange service, or group of services, constitutes a separate product market only where there is credible evidence suggesting that there is or could be a lack of competitive performance with respect to a"W0*%%ZZ!"  Y4particular service or group of services.DX xPy'ԍId.,  47.D We asked commenters to evaluate this new  Y4approach and to suggest any other possible approaches.:YX xP'ԍId.:  X4XX` ` b. Comments (#`  Y432.` ` Several commenters support the proposed approach to redefining the relevant  Yv4product market.Zv xP 'ԍGTE April 19, 1996 Comments at 4; PaPUC April 19, 19/96 Comments at 45; TRA April 19, 1996 Comments at 32. Many commenters agree that the Commission should rely on demand  Y_4substitutability in defining relevant product markets.[_@ xPP'ԍPaPUC April 19, 1996 Comments at 79; TRA April 19, 1996 Comments at 32; cf. Sprint April 19, 1996 Comments at 67. A number of commenters argue, however, that the Commission should continue to recognize supply substitutability in defining the relevant product market and, therefore, should not modify the relevant product market  Y 4definition adopted in the Competitive Carrier proceeding.\  xPc'ԍSee, e.g., NYNEX April 19, 1996 Comments at 56; SBC May 3, 1996 Reply at 12.  Y 4 33.` ` GTE concedes that the definition proposed in the Interexchange NPRM would provide the Commission with the flexibility to accommodate a rapidlyevolving, technologydriven environment and would enable the Commission to assess a particular service  Y 4provider's ability to exert market power over new products.T] (  xP'ԍGTE April 19, 1996 Comments at 45.T GTE claims, however, that the certainty of the Commission's standard would diminish if different market evaluations were applied to particular carriers or groups of carriers absent a relatively strong basis for  Yb4distinguishing them.N^b  xP'ԍGTE May 3, 1996 Reply at 37.N Although it generally supports the revised approach to defining the relevant product market, the Florida Public Service Commission warns that logical sets of substitutable services will likely intersect with one another, which could render the  Y4Commission's approach to defining relevant product markets unworkable in practice._H  xP"'ԍFlorida Public Service Commission (Florida PSC) April 19, 1996 Comments at 78.  Y4!34.` ` AT&T opposes the approach proposed in the Interexchange NPRM. It  Y4emphasizes that the 1992 Merger Guidelines support an aggregate product market definition"_0*%%ZZ" where "production substitution among a group of products is nearly universal among the  Y4firms selling one or more of the products," as in the telecommunications industry.` xPb'ԍAT&T April 19, 1996 Comments at 16 (quoting 1992 Merger Guidelines at p. 20,5734 n.14).  xP*'AT&T, as noted supra at   AT&T47 , claims that market definition is irrelevant in analyzing the market power of BOCs and argues against modifying the current product market definition. It further claims that supply substitutability considerations lead to the conclusion that there is a single product market in interexchange services. AT&T claims that, due to pervasive supply substitutability, a product market defined by a single service would yield the same market share and market power results as the single product  Y4market approach adopted in the Competitive Carrier proceeding.Wax xP 'ԍAT&T April 19, 1996 Comments at 1718.W Because there is no difference between the facilities used to provide different services, AT&T argues that there is ample capacity for carriers to attract customers from any carrier that attempts to exercise  Y_4market power with respect to a particular service.Ob_ xP'ԍAT&T May 3, 1996 Reply at 78.O AT&T further claims that the Commission's recent analysis of AT&T's 800 directory assistance and analog private line  Y14offerings provide no basis to abandon the single product market definition.Tc1 xPz'ԍAT&T April 19, 1996 Comments at 21.T AT&T contends that the Commission recognized that AT&T's pricing of 800 directory assistance is constrained by supply substitutability principles, and that the migration of analog private line customers to digital and virtual private line services demonstrates that these services are  Y 4substitutable and, therefore, in the same market.Dd (  xP'ԍId. at 2123.D  Y 4"35.` ` The BOCs generally oppose the product market definition proposed in the  Y4Interexchange NPRM.eX  xP'ԍSee, e.g., NYNEX April 19, 1996 Comments at 56; U S West April 19, 1996 Comments at 26; BellSouth April 19, 1996 Comments at 912, 20; SBC May 3, 1996 Reply at 12; Bell Atlantic April 19, 1996 Comments at 5. BellSouth supports retention of the current product market definition on the grounds that there is high crosselasticity of demand among virtually all interexchange services, most of which are interchangeable services that are packaged differently, and that the distinctions between services can be easily erased by entities such as  Y44resellers.\f4 xP"'ԍBellSouth April 19, 1996 Comments at 1314.\ For example, BellSouth argues that, if a sole supplier of any particular interexchange service raised its prices by five percent or more, most customers would turn to"hf0*%%ZZ"  Y4a different service as an alternative.Ag xPy'ԍId. at 14.A BellSouth disputes the Commission's suggestion that market power over discrete fringe services may warrant redefinition of the relevant product  Y4market.hX xP'ԍBellSouth Aug. 15, 1996 Comments at 43 (citing its April 19, 1996 Comments at 1215). It further asserts that delineating relevant product markets would be administratively burdensome and might cause carriers without market power to be regulated  Y4as dominant carriers.\i xP= 'ԍBellSouth April 19, 1996 Comments at 1415.\ BellSouth claims that the Commission's proposed approach would be  Y4inconsistent with the Commission's decision in the AT&T Reclassification Order, in which AT&T was classified as nondominant even though it was found to control two discrete  Y_4services in the overall product market.Dj_x xP 'ԍId. at 1213.D BellSouth also contends that the Commission's proposed approach seems to signal a return to the "allservices" methodology of assessing  Y14dominance, which was expressly rejected in the AT&T Reclassification Order.[k1 xP'ԍBellSouth Aug. 15, 1996 Comments at 4344.[  Y 4#36.` ` PacTel agrees that the product market definition turns on whether there are sufficiently close substitutes for a product or group of products. PacTel contends, however, that because services, such as MTS, discount plans, WATS, 800 service, foreign exchange service, wireless and even "carrier" access services, are highly substitutable options for consumers to place or receive long distance calls, the relevant product market should include  Y4all interstate, long distance services.ml xP'ԍPacific Telesis Group (PacTel) Aug. 15, 1996 Comments at 50.m USTA questions the Commission's use of a demandelasticity methodology to define the relevant domestic product market, especially when the Commission proposes to continue to emphasize supply substitutability in defining the  YK4international product market.VmK(  xP$'ԍUSTA Aug. 15, 1996 Comments at 4142.V USTA asserts that the Commission has consistently and continually recognized a single relevant product market, and contends that the Commission should not abandon this longsettled definition in favor of numerous, fragmented  Y4submarkets.En  xPo!'ԍId. at 4042. E  Y4$37.` ` A number of commenters support our proposal in the Interexchange NPRM to delineate separate product markets only if there is credible evidence demonstrating that there is or could be a lack of competitive performance with respect to a particular service or group"H n0*%%ZZ~"  Y4of services.o xPy'ԍMCI April 19, 1996 Comments at 6; GTE May 3, 1996 Reply at 3; TRA April 19, 1996 Comments at 32. MCI claims that, although some interexchange services may have characteristics indicative of discrete product markets, there is no lack of competitive performance with respect to a particular service or group of services that would warrant the  Y4Commission's delineating the boundaries of specific product markets.Rp  xP'ԍMCI Aug. 15, 1996 Comments at 59.R The Pennsylvania Commission cautions that state commissions and consumer advocacy groups may not have access to the information necessary to determine whether credible evidence exists, especially  Yv4if the Commission detariffs nondominant carriers.Vqv xP 'ԍPaPUC April 19, 1996 Comments at 67.V Sprint states that the Commission  Y_4should reexamine various product markets if circumstances require.Ur_@ xPP'ԍSprint Aug. 15, 1996 Comments at 60.U  Y14%38.` ` ACTA suggests that a separate relevant market should be established where the  Y 4Commission finds that a carrier possesses market power over a particular market segment.Ss  xP'ԍACTA April 19, 1996 Comments at 1.S In delineating product markets, ACTA believes that the Commission should consider many factors including such customer classifications as residential, small/medium businesses, and large businesses, but cautions that product markets based on discrete offerings may not  Y 4adequately account for products offered as a package of services.@t `  xP'ԍId. at 2.@  Y4&39.` ` Two commenters identify particular services that, they contend, should be classified as separate product markets. The Pennsylvania Commission recommends that the Commission define three separate product markets: (1) MTS or residential long distance; (2) WATS/800 service; and (3) virtual networktype services (all services provided within  Y44software defined networks).Tu4  xP'ԍPaPUC April 19, 1996 Comments at 7.T SNET argues that the Commission should treat interstate toll free directory assistance as a separate product market because there are no substitutes and  Y4structural barriers make entry impossible.Wv  xP7"'ԍSNET April 19, 1996 Comments at 1920.W  X4XX` ` c. Discussion (#` "v0*%%ZZ"Ԍ Y4'40.` ` We conclude that the product market definition adopted in the Competitive  Y4Carrier proceeding should be revised to reflect the 1992 Merger Guidelines' approach to  Y4defining relevant markets.wx xPK'ԍThe 1992 Merger Guidelines define the relevant product market as "a product or group of products such that a hypothetical profit maximizing firm that was the only present and future seller of those products ('monopolist') likely would impose at least a 'small but significant and nontransitory' increase in price." Accordingly, in defining the relevant product market, one must examine whether a "small but significant and nontransitory" increase in the price of the relevant product would cause enough buyers to shift their purchases to a second product, so as to make the price increase unprofitable. If so, the two products should be considered  xP'in the same product market. 1992 Merger Guidelines at p. 20,572. As explained above, we find that this new approach to defining the relevant product market will provide us with a more refined and narrowlyfocused tool that more accurately reflects marketplace realities. We, therefore, adopt our tentative  Y4conclusion in the Interexchange NPRM that we should define as a relevant product market any interstate, domestic, long distance service for which there are no close demand substitutes, or a group of services that are close substitutes for each other, but for which  YH4there are no other close demand substitutes.xH xP'ԍAs previously noted, demand substitutability identifies all of the products or services that consumers view as substitutes for each other, in response to changes in price. We also adopt our tentative conclusion that we need not delineate the boundaries of specific product markets, except where there is credible evidence suggesting that there is or could be a lack of competitive performance with respect to a particular service or group of services.  Y 4(41.` ` Unlike the approach to product market definition adopted in the Competitive  Y 4Carrier proceeding, our new approach will rely exclusively on demand considerations to  Y 4define the relevant product market, rather than supply substitutability.yX `  xP'ԍAs previously noted, supply substitutability identifies all productive capacity that can be used to produce a particular good, whether it is currently being used to produce that good or to produce some other, even unrelated, good. As discussed above, supply substitutability will continue to be a relevant factor in assessing market power, but  Yy4will not be used as a factor in defining the relevant market.0zy  xP'ԍWe disagree with USTA that our approach to defining the relevant market in the international services  xPr'market is inconsistent with our approach in the domestic context. See discussion infra at  INTL53, 80.0 Although this distinction may be subtle, we believe that it is important in order to ensure that each step we take in assessing market power is grounded in fundamental economic principles and marketplace realities. Our new approach, however, does not reflect an "allservices" methodology of assessing dominance, in which a carrier must be deemed dominant with respect to all services if it is found to have market power over any single service. Rather, our new approach allows us, where warranted, to focus our analysis on particular services and limit our assessment of market power with regard to only those particular services."z0*%%ZZ\"Ԍ Y4ԙ)42.` ` We further adopt our tentative conclusion that we need not delineate any particular product markets to analyze the market power of a particular carrier or group of carriers unless there is credible evidence suggesting that there is or could be a lack of  Y4competitive performance with respect to a particular service or group of services.{X xP4'ԍFor example, if the price/cost ratio for a particular interexchange service is four times that of the price/cost ratio for all other interexchange services, that may constitute credible evidence of a lack of competitive performance. We recognize that the various services available in the interstate, domestic, long distance  Y4marketplace are changing.|  xP& 'ԍFor example, we noted in the Interexchange NPRM that "our finding [in the AT&T Reclassification  xP 'Order] that the prices of 800 directory assistance and analog private line services could profitably be raised  xP 'above competitive levels may imply these services constitute distinct relevant product markets." Interexchange  xP~ 'NPRM, 11 FCC Rcd at 7166,  44. Patterns of consumer demand and the forces of competition spur continual innovation and force carriers constantly to reevaluate current services, remove outdated services, and add new services to the marketplace. In light of these marketplace dynamics, we conclude it is best to establish a consistent approach to defining the relevant product market that maintains the flexibility to recognize separate product markets only when there is credible evidence indicating that there is or could be a lack of competitive performance with respect to a particular service or group of services.  Y 4*43.` ` Despite two commenters' recommendations that we identify for all purposes, in this proceeding, particular services as separate product markets, we decline to do so at this  Y 4time.{}  xP('ԍPaPUC April 19, 1996 Comments at 7; SNET April 19, 1996 Comments at 1920.{ We conclude that such a determination should only be made in the context of  Y4assessing the market power of a particular carrier or group of carriers.o~`  xP'ԍIn this proceeding, we only assess the market power of BOC interLATA affiliates and independent  xPi'LECs. As noted supra at  PROCEEDING29, any modifications that we may make to decisions reached in the AT&T  xP1'Reclassification Order will be addressed, as necessary, in further proceedings. We emphasize, however, that because market definition is only one step in assessing market power, changes made in the approach to defining relevant markets will not necessarily produce different assessments of market power.o Unless there is credible evidence suggesting that there is or could be a lack of competitive performance with respect to a particular service or group of services, we will treat these services together, by analyzing aggregate data that encompasses all long distance services, rather than information  Y44particular to specific services.4 xP!'ԍSuch data may include, but not be limited to, price level of services, the number of competitors, the share of sales by competitors, and the ease with which potential entrants can provide these services. Recognizing that we have previously found that there is substantial competition with respect to most interstate, long distance services, such an approach allows us to avoid the burdensome task of delineating separate product markets"h0*%%ZZ{" when there is no other credible evidence suggesting that a particular carrier or group of carriers is exercising or has the ability to exercise market power, with respect to a particular service or group of services. Therefore, we will refrain from examining narrower relevant  Y4product markets except when such credible evidence has come to our attention." xP4'ԍAs we conclude infra at  BOCLEC50, for purposes of assessing the market power of BOC interLATA affiliates and independent LECs in their provision of domestic, interstate, long distance services, we need not delineate separate product markets because there is no credible evidence in the record that indicates that there is or will be a lack of competitive performance associated with any particular long distance service offered by BOC interLATA affiliates or independent LECs."  Y4+44.` ` We conclude that the approach we adopt here will not impose an undue burden on parties seeking to have the Commission define narrower relevant product markets in order to assess the market power of a particular carrier or group of carriers. Such parties will not have to prove that there is an actual lack of competitive performance with respect to a particular service or group of services. Rather, they must only present credible evidence that  Y 4there is or could be a lack of competitive performance.T x xPC'ԍPaPUC April 19, 1996 Comments at 6.T Credible evidence should include information sufficient to identify services that are likely substitutes and the carrier or group of carriers that allegedly possesses market power. Contrary to the concerns of the Pennsylvania Public Utilities Commission, because information suggesting a lack of competitive performance, such as availability of service from a single provider, is easily observable, we need not require data from proprietary sources for this purpose. Moreover,  Y4as we recognized in the Tariff Forbearance Order, even in the absence of tariffs for interstate, domestic, interexchange services offered by nondominant carriers, we conclude that information concerning the rates, terms and conditions for such services will still be readily accessible to consumers and other interested parties because customers will continue  Y44to receive this information through, inter alia, the billing process, notifications required by service contracts or state consumer protection laws, and marketing materials, such as  Y4advertisements.e xP'ԍSee Tariff Forbearance Order at  25.e  X4 2.` ` Product Market Definition for BOC InterLATA Affiliates and Independent  X4LECs (#`  X4XX` ` a. Background (#`  Ye4,45.` ` In the NonAccounting Safeguards NPRM, we tentatively concluded that if we  YN4adopt the market definition approach proposed in the Interexchange NPRM, we should treat all interstate, domestic, long distance services as the relevant product market for purposes of"70*%%ZZ" determining whether BOC interLATA affiliates have market power in their provision of inregion domestic, interstate, interLATA services and whether independent LECs have market  Y4power in their provision of inregion domestic, interstate, interexchange services.b xPK'ԍNonAccounting Safeguards NPRM at  119.b  X4XX` ` b. Comments (#`  Yv4-46.` ` Although commenters disagree over whether the Commission should adopt the  Y_4approach to the product market definition proposed in the Interexchange NPRM, most  YH4commenters agree with the Commission's tentative conclusion in the NonAccounting  Y14Safeguards NPRM that interstate, domestic, long distance services should be treated as a single product market for purposes of assessing whether BOC interLATA affiliates and  Y 4independent LECs have market power.X X xP 'ԍSee e.g., BellSouth Aug. 15, 1996 Comments at 4041; Sprint Aug. 15, 1996 Comments at 60; TRA Aug. 15, 1996 Comments at 24; USTA Aug. 15, 1996 Comments at 4041; MCI Aug. 15, 1996 Comments at 5859.  Y 4.47. AT&T ` ` AT&T argues that the interexchange product market definition is irrelevant to whether the BOCs could abuse their power in the local market to impede interexchange competition. Instead, AT&T contends that the proper markets to analyze are the local  Y4exchange and exchange access service markets, rather than the interexchange market.Vx xP'ԍAT&T Aug. 15, 1996 Comments at 6162.V DOJ also argues that the product market definition is irrelevant to whether BOC interLATA affiliates could exercise market power in the interLATA marketplace because BOC  YK4interLATA affiliates clearly do not have the ability to raise prices by restricting output.OK xP'ԍDOJ Aug. 30, 1996 Reply at 17.O  Y4/48.` ` BellSouth contends that since the Commission did not redefine the product market in order to evaluate whether AT&T was a dominant carrier, it need not reconsider the definition in order to evaluate the competitive effects of BOC entry into the interexchange  Y4market.\ xP! 'ԍBellSouth April 19, 1996 Comments at 1213.\ USTA and GTE agree with the Commission's tentative conclusion that all interstate, domestic, interexchange services should be considered the relevant product market  Y4for independent LECs.(  xP#'ԍUSTA Aug. 29, 1996 Comments (Spulber Aff. at 5); GTE Aug. 29, 1996 Comments at 7. " 0*%%ZZ["Ԍ Y4049.` ` The Independent Telephone Telecommunications Alliance (ITTA) contends that the Commission should adopt a product market defined as "all telecommunications services," that encompasses such services as interexchange, local, access and wireless services, in recognition of the new market structure envisioned by the 1996 Act in which firms will be  Y4providing a broad range of services.T xP'ԍITTA Aug. 29, 1996 Comments at 69.T The Competitive Telecommunications Association (CTA) contends that the relevant product market should include those services that rely on or  Yv4utilize the BOCs' local network.RvX xP 'ԍCTA Aug. 15, 1996 Comments at 33.R  XH4XX` ` c. Discussion (#`  Y 4150. BOCLEC ` ` We are aware of no evidence, nor has any commenter presented any such evidence in the record, that suggests that there is a particular interexchange service or group of services that will be provided by BOC interLATA affiliates or independent LECs with respect to which there is or could be a lack of competitive performance. Moreover, we have found previously that there is substantial competition with respect to most interstate,  Y 4domestic, interexchange service offerings.  xP@'ԍSee AT&T Reclassification Order, 11 FCC Rcd at 330935,  74116. As a result, we conclude that we need not conduct any particularized product market inquiry in order to evaluate the market power of BOC interLATA affiliates and independent LECs for interexchange services. We conclude that, at this time and for purposes of determining whether BOC interLATA affiliates or independent LECs have market power in the provision of domestic, interstate, long distance services, our assessment of market power will remain the same, regardless of whether we examine each individual long distance service, different groupings of long distance services, or aggregate data that encompasses all long distance services. Therefore, in assessing the market power of BOC interLATA affiliates and independent LECs in the provision of domestic, interstate, long distance services, we find it is appropriate at this time to evaluate their market power with respect to all interstate, domestic, long distance services, rather than conducting a separate analysis of each individual service.  Y|4251.` ` We disagree with AT&T's assertion that the product market definition is irrelevant in assessing whether BOC interLATA affiliates or independent LECs possess market power in the domestic, interstate, long distance market. As discussed above, we believe that a relevant product market must be defined before we can evaluate whether a particular carrier or group of carriers possesses market power. While we agree with AT&T that other factors are important in making our overall assessment of market power, we conclude that we must define the relevant product market in order to reach an accurate"x0*%%ZZ " assessment of whether BOC interLATA affiliates or independent LECs possess market power in the domestic, interstate, long distance marketplace.  X4X 3.X` ` International Product Market for BOC InterLATA Affiliates and  X4Independent LECs (#`  Yv4352.` ` In the NonAccounting Safeguards NPRM, we tentatively concluded that we should apply the current international product market definition, which recognizes international message telephone service (IMTS) and nonIMTS as separate product markets, for purposes of determining whether BOC interLATA affiliates and independent LECs  Y 4possess market power in the provision of international long distance services.b  xP 'ԍNonAccounting Safeguards NPRM at  121.b  Y 4453. INTL ` ` MCI and NYNEX generally agree with the Commission's tentative conclusion that IMTS and nonIMTS should be treated as the relevant product markets for international  Y 4services.y X xP'ԍMCI Aug. 15, 1996 Comments at 5860; NYNEX Aug. 15, 1996 Comments at 61.y USTA supports treating international services as a product market separate from domestic services, because international agreements and regulation create different conditions  Y4than exist for domestic interexchange services.c xP)'ԍUSTA Aug. 15, 1996 Comments (Hausman Aff. at 56).c Questioning the wisdom of dividing international services into two distinct product markets, Sprint argues that the Commission should retain flexibility to reflect the rapid changes taking place in the product market for  YK4international communications.UKx xPt'ԍSprint Aug. 15, 1996 Comments at 61.U Sprint asserts, for example, that, where providers engage in the resale of international private lines interconnected to the public switched network at both  Y4ends, the distinctions between IMTS and nonIMTS are blurred.X xP'ԍSprint Aug. 15, 1996 Comments at 6061.X  Y4554.` ` We conclude that, for purposes of determining whether BOC interLATA affiliates and independent LECs possess market power in the provision of international long distance services, we will modify our tentative conclusion and examine aggregate data that encompasses all international long distance services. Because our approach to defining relevant markets is based on fundamental economic principles, we find that it is applicable for assessing market power in both the domestic and international long distance markets. Although we recognize that international agreements and regulation distinguish international long distance service from domestic long distance service, we conclude that, while these distinctions may affect our assessments of market power, they do not change our approach to"7 0*%%ZZ*" defining relevant markets. Therefore, we find that we should define the relevant product market, in the international context, as any international long distance service for which there are no close substitutes or a group of services that are close substitutes for each other, but for which there are no other close substitutes. We need only delineate specific product markets, however, when there is credible evidence suggesting that there is or could be a lack of competitive performance with respect to a particular service or group of services.  Y_4655.` ` Although traditionally we have recognized IMTS and nonIMTS as separate international long distance product markets, we conclude, similar to our conclusion in the domestic context, that this distinction is not necessary for purposes of assessing whether BOC interLATA affiliates and independent LECs possess market power in the international long distance marketplace in this Order because our assessment of market power will not change whether we examine IMTS and nonIMTS separately as individual product markets or analyze aggregate data that encompasses both IMTS and nonIMTS. Our decision to analyze aggregate data that encompasses IMTS and nonIMTS, in this particular context, does not modify our treatment of IMTS and nonIMTS as separate product markets under the existing framework for regulating U.S. carriers as dominant in the provision of international services  Yy4because of the market power of an affiliated foreign carrier.My xP'ԍSee n. 21 supra.M  XK4 C.Geographic Market   X4X 1.X` ` Geographic Market in General (#`  X4XX` ` a. Background (#`  Y4756.` ` In the Competitive Carrier proceeding, the Commission defined the relevant geographic market as "the United States (including Alaska, Hawaii, Puerto Rico, U.S. Virgin  Y4Islands, and other U.S. offshore points) . . . with no relevant submarkets."~X xP'ԍCompetitive Carrier Fourth Report and Order, 95 FCC 2d at 563,  13.~ In the  Y|4Interexchange NPRM, the Commission tentatively concluded that we should refine this analysis and define a relevant geographic market for interstate, domestic, interexchange  YN4services as all calls, in the relevant product market, between two particular points.wN xP 'ԍInterexchange NPRM 11 FCC Rcd at 7165, 716768,  42, 49.w For purposes of market power analysis, however, the Commission tentatively concluded that, in general, we should treat domestic, interstate, interexchange calling as a single, national market because geographic rate averaging, in conjunction with the pervasiveness of ubiquitous calling plans, should reduce the likelihood that a carrier could exercise market"!x0*%%ZZ " power in a single pointtopoint market, and because price regulation of access services and excess capacity in interstate transport should reduce the likelihood that an interexchange  Y4carrier could exercise market power in most pointtopoint markets.V xPK'ԍId. at 716870,  5152.V If there is credible evidence suggesting that there is or could be a lack of competition in a particular pointtopoint market or group of pointtopoint markets and there is a showing that geographic rate averaging will not sufficiently mitigate the exercise of market power in that market or group of markets, we proposed to examine the individual market or group of markets for the  Y_4presence of market power.L_X xPh 'ԍId. at 7170,  53.L We asked commenters to evaluate this new approach and to  YH4suggest any other possible approaches.VH xP 'ԍId. at 717071,  5455.V  X 4XX` ` b. Comments (#`  Y 4857.` ` Many commenters oppose the Commission's proposal to define a relevant geographic market for interstate, domestic, interexchange services as all calls between two  Y 4points, although some commenters concede its conceptual validity. x xP'ԍSee e.g., BellSouth April 19, 1996 Comments at 1620; Florida PSC April 19, 1996 Comments at 7. Those parties opposing the pointtopoint market definition generally advocate the retention of the single national  Y4market definition adopted in the Competitive Carrier proceeding. Several commenters claim that demand patterns based on the widespread use of ubiquitous calling plans favor a national  Yb4market.^Xb xP'ԍAT&T April 19, 1996 Comments at 19 (citing Competitive Carrier Fourth Report and Order, 95 FCC 2d at 574); BellSouth May 3, 1996 Reply at 4; Florida PSC April 19, 1996 Comments at 89; USTA Aug. 15, 1996 Comments at 43; PacTel Aug. 15, 1996 Comments at 51; NYNEX Aug. 15, 1996 Comments at 5254.^ Other commenters indicate that it may be too early to define relevant geographic markets with lasting precision and that pointtopoint markets would not be administrably viable because of the impracticality of conducting a market power analysis in each pointto Y4point market.(  xP'ԍACTA April 19, 1996 Comments at 67; USTA Aug. 15, 1996 Comments at 43 (Hausman Aff. at 67); DOJ Aug. 30, 1996 Reply at 19. A number of parties support our proposal to treat interstate, interexchange calling as a single national market unless there is credible evidence suggesting that there is or could be a lack of competition in a particular pointtopoint or group of pointtopoint markets, and there is a showing that geographic rate averaging will not sufficiently mitigate"" 0*%%ZZv"  Y4the exercise of market power.8X xPy'ԍSee e.g., Ameritech April 19, 1996 Comments at 13; SBC April 19, 1996 Comments at 45; GTE April 19, 1996 Comments at 5, May 3, 1996 Reply at 3; MCI April 19, 1996 Comments at 6; LDDS Aug. 15, 1996 Comments at 47; TRA April 19, 1996 Comments at 31328  Y4958.` ` AT&T disagrees with the Commission's pointtopoint market analysis and argues that a single national market definition reflects the way that competitors have built and  Y4conducted their business.W xP= 'ԍAT&T April 19, 1996 Comments at 1821.W AT&T also notes that the Commission has rejected pointto Y4point markets on several previous occasions. x xP 'ԍAT&T May 3, 1996 Reply at 67 (citing Competitive Carrier Fourth Report and Order, 95 FCC 2d at  xP~ '57374; Application of MCI Communications Corp. & S. Pac. Telecommunications Corp. for Consent to  xPF 'Transfer Control of Quest Communications, Inc., Memorandum Opinion and Order, 10 FCC Rcd 1072, 1075 (1994)).  AT&T, BellSouth, USTA and NYNEX emphasize that supply substitutability demonstrates that the market is national because several carriers have national networks with capacity to provide alternate routing and the ease of constructing new facilities or to resell services allows carriers to enter the market and expand  Y14service rapidly.1`  xPB'ԍAT&T April 19, 1996 Comments at 1920; BellSouth May 3, 1996 Reply at 4; NYNEX Aug. 15, 1996 Comments at 53.  Y 4:59.` ` Several commenters contend that the geographic rate averaging and rate integration requirements in the 1996 Act and the regulatory regime overseeing access rates point to the existence of a single, national market because together they ensure that the  Y 4benefits of competition in one market will be passed on to customers in other markets.  xP''ԍAmeritech April 19, 1996 Comments at 13; BellSouth April 19, 1996 Comments at 1718; PacTel April 19, 1996 Comments at 58. Bell Atlantic supports a single national market because, as long as customers select a carrier for nationwide coverage, national pricing schemes will drive the market, whether or not  Yy4certain carriers offer services originating only in a particular region.^y xP:'ԍBell Atlantic April 19, 1996 Comments at 67.^ PacTel claims that the trend toward uniform, distanceinsensitive pricing demonstrates that the interexchange  YK4market remains a national one.WK xP"'ԍPacTel April 19, 1996 Comments at 56.W USTA asserts that if pointtopoint markets are appropriate, AT&T should not have been classified as a nondominant interexchange carrier"4#00*%%ZZ"  Y4because it is the sole carrier serving a number of different cities.Y xPy'ԍUSTA Aug. 15, 1996 Comments at 43 n. 17.Y  Y4;60.` ` PacTel and GTE submit that a single nationwide geographic market is  Y4supported by economic theory, Commission precedent, the AT&T Reclassification Order,  Y4and the 1996 Act.vX xP'ԍGTE Aug. 29, 1996 Comments at 8; PacTel April 19, 1996 Comments at 5.v GTE acknowledges, however, that certain service providers may be able to take advantage of their market power in some pointtopoint markets, despite geographic rate averaging, regulated access pricing and excess transmission capacity. In such situations, GTE recognizes that a narrower geographic market may be appropriate to measure market power if there is credible evidence of a lack of competition in a particular  Y14market.1 xP 'ԍGTE April 19, 1996 Comments at 5, May 3, 1996 Reply at 4; GTE Aug. 29, 1996 Comments at 8. GTE adds that, if the Commission does adopt a pointtopoint approach, this  Y 4analysis should apply to IXCs as well as LECs.m x xPC'ԍGTE May 3, 1996 Reply at 5; GTE Aug. 29, 1996 Comments at 8.m  Y 4<61.` ` Ameritech does not oppose the possibility of identifying smaller markets than  Y 4the national market, but claims that it is unable to identify any such markets at this time.Y  xP'ԍAmeritech April 19, 1996 Comments at ii.Y DOJ acknowledges that the relevant geographic market theoretically could be defined as all calls between two particular points, but argues that examining markets at such a level of  Y4detail would be impractical.O xP'ԍDOJ Aug. 30, 1996 Reply at 19.O  Yb4=62.` ` LDDS claims that, although, for most purposes, the appropriate relevant geographic market for interstate, interexchange services is national, the division between local and long distance will blur as competition develops in the local market and the Commission must be able to employ an appropriate geographic market definition to reflect  Y4these changes.U(  xP'ԍLDDS April 19, 1996 Comments at 45.U ACTA and GCI oppose the Commission's proposal to treat interstate,  Y4interexchange services generally as a single national market.w  xPX"'ԍACTA April 19, 1996 Comments at 4; GCI April 19, 1996 Comments at 34.w According to ACTA, such a definition would overlook routespecific pricing schemes designed to defeat competitive"$H 0*%%ZZ"  Y4entry.S xPy'ԍACTA April 19, 1996 Comments at 4.S GCI argues that certain obvious characteristics, such as a de facto or de jure monopoly in the provision of a service or a shortage of capacity in interstate transport, should provide adequate justification for examining a particular market for the presence of  Y4market power.cX xP'ԍ ALASKA GCI April 19, 1996 Comments at 34.c GCI cites AT&T/Alascom's facilities monopoly in rural Alaska and the limited fiber optic capacity linking Alaska to the continental United States as such  Y4examples.Q xP( 'ԍ ALASKA Id. at 34.Q  Ya4>63.` ` A few commenters propose alternative approaches for defining relevant geographic markets, including markets based on state boundaries or local exchange boundaries and markets based on Metropolitan Statistical Areas (MSAs), Basic Trading Areas  Y 4(BTAs) or Major Trading Areas (MTAs). x xPE'ԍSee, e.g., Frontier April 19, 1996 Comments at 12; PaPUC April 19, 1996 Comments at 1011; Missouri Public Counsel May 3, 1996 Reply at 3. We note that Rand McNally & Company is the copyright owner of the Basic Trading and Major Trading Area Listings, which list the counties contained in each BTA, as embodied in Rand McNally's Trading Area System Diskette and Atlas & Marketing Guide. Rand McNally has licensed the use of its copyrighted MTA/BTA listings and maps for certain wireless telecommunications  xP-'services. See Amendment of Parts 2 and 90 of the Commission's Rules to Provide for the Use of 200 Channels Outside the Designated Filing Areas in the 896901 MHz and the 935940 MHz Bands Allotted to the  xP'Specialized Mobile Radio Pool, PR Docket No. 89553, Second Report and Order and Second Further Notice of Proposed Rulemaking, 10 FCC Rcd 6884, 689596 (1995). GCI asserts that, because market power does not follow any preestablished lines, the Commission should conduct a market power analysis  Y 4for any area for which there is a nonfrivolous allegation of market power.p H  xP'ԍGCI April 19, 1996 Comments at 34; GCI May 3, 1996 Reply at 2.p  X 4XX` ` c. Discussion (#`  Y4?64.` ` We conclude that the geographic market definition adopted in the Competitive  Y{4Carrier proceeding should be revised to reflect the approach to defining relevant markets  Yd4contained in the 1992 Merger Guidelines.d xP 'ԍThe 1992 Merger Guidelines define the relevant geographic market as the "region such that a hypothetical monopolist that was the only present or future producer of the relevant product at locations in that region would profitably impose at least a 'small but significant and nontransitory' increase in price, holding constant the terms of sale for all products produced elsewhere." Accordingly, in defining the relevant geographic market, one must examine whether a "small but significant and nontransitory" increase in the price of the relevant product at a particular location would cause a buyer to shift his purchase to a second location, so"$0*%% %" as to make the price increase unprofitable. If so, the two locations should be considered to be in the same  xPX'geographic market. 1992 Merger Guidelines at pp. 20,573 20,5733. In accordance with the principles enunciated in"d% 0*%%ZZ"  Y4the 1992 Merger Guidelines, we believe that long distance calling, at its most fundamental level, involves a customer making a connection from one specific location to another specific  Y4location. As we stated in the Interexchange NPRM, "[w]e believe that most telephone customers do not view interexchange calls originating in different locations to be close substitutes for each other." Therefore, we further conclude that we will follow the revised  Y4approach to the geographic market definition proposed in the Interexchange NPRM and define a relevant geographic market for interstate, domestic, long distance services as all possible routes that allow for a connection from one particular location to another particular  YH4location (i.e., a pointtopoint market).  Y 4@65.` ` Contrary to a number of commenters, we find that defining the relevant geographic market as a pointtopoint market, rather than as a single national market, more accurately reflects the fact that most customers use long distance services by purchasing ubiquitous calling plans. A pointtopoint connection is a constituent element of all types of  Y 4interstate, domestic, long distance services,   xP'ԍAs we described in the Interexchange NPRM, "residential interexchange services can be thought of as a bundle of all possible interexchange calls originating from a single point and terminating anywhere, and 800 service as a bundle of interstate, interexchange calls originating from a certain geographic region and  xP'terminating at a specific point." Interexchange NPRM, 11 FCC Rcd at 7168,  50. including purely pointtopoint services,p  xPy'ԍPrivate line service is an example of a pointtopoint service.p as  Y 4well as pointtoallpoints services  xP'ԍResidential long distance service is an example of a pointtoallpoints service. Pointtoallpoints services can be viewed as a bundle of pointtopoint connections all originating at the same point. and allpointstopoint services.;X  xPJ'ԍToll free 800 or 888 numbers that are accessible from all domestic geographic locations would be examples of an all pointstopoint service. An allpointstopoint service can be viewed as a bundle of pointtopoint connections that all terminate at the same point.; Ubiquitous calling plans encompass pointtoallpoints services or allpointstopoint services, which are essentially a bundle of pointtopoint connections serving a common point. Although ubiquitous calling allows customers to make multiple pointtopoint connections from or to a common point via a single source, it does not change the nature of interstate, domestic, long distance calling. From the customer's perspective, while the calling plan itself may be "ubiquitous" in that it offers nationwide coverage from or to a common point, the market to purchase that plan is a localized market, not a national one. For example, customers located in Miami generally purchase calling plans that offer long distance service originating from Miami. Any calling plan that provides service originating from Los Angeles, even if it is "ubiquitous" service, would not be a viable substitute for customers located in Miami. "&0*%%ZZ9" Accordingly, we believe that defining the relevant geographic market as a pointtopoint market is a more accurate approach to assessing market power than a single national market definition, even assuming that most long distance customers purchase ubiquitous calling plans.  Y4A66.` ` We recognize, however, that assessing market power in each individual pointtopoint market would be administratively impractical and inefficient. Therefore, we clarify  Y_4our proposal in the Interexchange NPRM to treat, in general, interstate, long distance calling as a single national market unless there is credible evidence indicating that there is or could be a lack of competition in a particular pointtopoint market, and there is a showing that geographic rate averaging will not sufficiently mitigate the exercise of market power. We conclude that when a group of pointtopoint markets exhibit sufficiently similar competitive  Y 4characteristics (i.e., market structure), we will examine that group of markets using aggregate data that encompasses all pointtopoint markets in the relevant area, rather than examine each individual pointtopoint market separately. Therefore, if we conclude that the competitive conditions for a particular service in any pointtopoint market are sufficiently representative of the competitive conditions for that service in all other domestic pointtopoint markets, then we will examine aggregate data, rather than data particular to each  Yd4domestic pointtopoint market.d xP'ԍFor example, we could analyze national market share data, rather than market share data for particular pointtopoint markets. Such a finding would require that there be no credible evidence that there is or could be a lack of competitive performance in any pointtopoint  Y64market for that service. As noted in the Interexchange NPRM, we believe that geographic rate averaging, price regulation of exchange access services, and the excess capacity in interstate transport currently cause carriers to behave similarly in each domestic pointtopoint market and reduce the likelihood that carriers could exercise market power in most  Y4pointtopoint markets.q  xP'ԍInterexchange NPRM, 11 FCC Rcd at 716870,  5152.q  Y4B67.` ` Unless there is credible evidence suggesting that there is or could be a lack of competition in a particular pointtopoint market or group of pointtopoint markets, and there is a showing that geographic rate averaging will not sufficiently mitigate the exercise of market power, we will refrain from employing the more burdensome approach of analyzing separate data from each pointtopoint market. We believe that, in most cases, statistics, such as market shares, are most usefully calculated based on aggregate data covering all  Y"4domestic pointtopoint markets.(X" xP#'ԍIn many pointtopoint markets (e.g., one home to another home), one long distance carrier will have 100 percent market share. This does not imply, however, that this particular long distance carrier has market power. Therefore, in using market share as one factor in assessing market power, it is important that we"%0*%%0%" examine market share in the broadest geographic group of pointtopoint markets in which competitive conditions are reasonably homogeneous.(""' 0*%%ZZ"Ԍ Y4ԙC68.` ` In the Interexchange NPRM, we also sought comment on how narrowly we should define the points of origination and termination when examining a pointtopoint  Y4market.x  xP'ԍLDDS contends that the Commission should group relevant pointtopoint markets according to metropolitan statistical areas because they roughly approximate the geographic area in which buyers can practically turn for alternative sources of supply or in which there are sellers that can act to restrain the prices charged to buyers. LDDS April 19, 1996 Comments at 67. NYNEX and GTE assert that none of the  xP 'geographic areas identified in the Interexchange NPRM, such as local exchange areas, major trading areas, and MSAs, are relevant to the interexchange marketplace. NYNEX April 19, 1996 Comments at 8; GTE April 19, 1996 Comments at 56. The relevant point in a pointtopoint market is the location of a particular telephone or other telecommunications device. For example, with regard to residential long distance service, the relevant point is each individual customer's residence. We recognize that assessing market power at such a level of detail would be administratively impractical. We conclude, however, that there is no need to define larger points because, when assessing the market power of a particular carrier or group of carriers, we will treat together all pointtopoint markets within a boundary such that all transactions carried out within that boundary are subject to the same competitive conditions. Therefore, for all practical purposes, we fully expect that the relevant geographic area for assessing market power will usually consist of multiple pointtopoint connections that exhibit the same competitive conditions. Because we will invariably analyze a group of pointtopoint markets, there is no practical need to also redefine the individual points.  Y 4D69.` ` Although GCI has suggested that we treat Alaska as a separate geographic market in assessing the market power of AT&T/Alascom, we do not do so in this  Yy4proceeding.dy`  xP'ԍAs noted supra at notes ALASKA170, 171, GCI identified the Alaska market as a separate geographic market.  xPR'We also note that GCI has filed a petition seeking reconsideration of the AT&T Reclassification Order, in which it argues that the reclassification of AT&T does not apply to AT&T/Alascom, Inc. because AT&T/Alascom is  xP'still dominant in the Alaska market. See GCI petition for reconsideration or clarification of AT&T  xP'Reclassification Order (filed Nov. 22, 1995).d As noted above, any modifications to decisions reached in the AT&T  Yb4Reclassification Order that may be necessary as a result of our decision here will be  YK4addressed, as necessary, in further proceedings.iK xP !'ԍSee supra  PROCEEDING29.i We emphasize, however, that, because market definition is only one step in assessing market power, changes made in the approach to defining relevant markets will not necessarily produce different assessments of market power. "(0*%%ZZX"Ԍ X4 2.` ` Geographic Market for BOC InterLATA Affiliates and Independent LECs   X4` ` a. Background (#`  Y4E70.` ` In the NonAccounting Safeguards NPRM, we tentatively concluded that, if we  Y4adopt the approach proposed in the Interexchange NPRM, we should evaluate a BOC's pointtopoint markets in which calls originate inregion separately from its pointtopoint markets in which calls originate outofregion, for purposes of determining whether BOC interLATA  YH4affiliates have market power in the provision of interstate, domestic, interLATA services.bH xP 'ԍNonAccounting Safeguards NPRM at  126.b Similarly, we tentatively concluded that we should evaluate an independent LEC's pointtopoint markets in which calls originate in its local exchange areas separately from its markets in which calls originate outside those areas, for the purpose of determining whether an independent LEC possesses market power in the provision of interstate, domestic,  Y 4interexchange services.: X xP'ԍId.:  X 4` ` X b.Comments (#  Yy4F71.` ` Several commenters support the Commission's tentative conclusion that it should evaluate a BOC's pointtopoint markets in which calls originate inregion separately from its pointtopoint markets in which calls originate outofregion in order to determine  Y44whether a BOC interLATA affiliate possesses market power inregion.4 xP'ԍSee e.g., Sprint Aug. 15, 1996 Comments at 6162; TRA Aug. 15, 1996 Comments at 24; CTA Aug. 15, 1996 Comments at 34; MCI Aug. 15, 1996 Comments at 59; LDDS Aug. 30, 1996 Reply at 12. CTA and LDDS argue that this approach is supported by the fact that Congress legislated different treatment  Y4for inregion and outofregion BOC services.u@ xP'ԍCTA Aug. 15, 1996 Comments at 34; LDDS Aug. 30, 1996 Reply at 1213.u Although LDDS agrees with the Commission's proposal to identify particular markets only where credible evidence of a lack of competition and a failure of geographic rate averaging to mitigate market power exists, LDDS argues that the Commission should find that, in light of BOC control over the origination and termination ends of nearly all interstate, long distance calls, the relevant geographic market for a BOC interLATA affiliate will be the entire region from which it provides long distance services, regardless of whether it is part of the region in which the  Ye4BOC provides local exchange and exchange access service.Se xP#'ԍLDDS April 19, 1996 Comments at 6.S MCI contends that the  YN4approach proposed in the NonAccounting Safeguards NPRM recognizes that there are"N)` 0*%%ZZ3" greater opportunities for crosssubsidization and anticompetitive conduct for interLATA  Y4service originating in a BOC's service region.R xPb'ԍMCI Aug. 15, 1996 Comments at 59.R Regardless of the market definition, DOJ states that it is "not unreasonable" in this proceeding for the Commission to distinguish a BOC's provision of interexchange service outside its region from provision of such service  Y4within its region.OX xP'ԍDOJ Aug. 30, 1996 Reply at 21.O Sprint and the New York Public Service Department urge the Commission to recognize that mergers, acquisitions, and similar combinations by BOCs may  Yv4require consideration of geographic markets more extensive than a BOC's own region.v xP 'ԍSprint Aug. 15, 1996 Comments at 6163; New York State Department of Public Service (NYDPS) Aug. 30, 1996 Comments at 7.  YH4G72.` ` The BOCs generally oppose the approach proposed in the NonAccounting  Y14Safeguards NPRM and contend that the Commission should treat domestic, interstate, interexchange services as a single national market for purposes of determining whether a  Y 4BOC interLATA affiliate possesses inregion market power.X @ xP'ԍAmeritech Aug. 15, 1996 Comments at 5; Bell Atlantic Aug. 15, 1996 Comments at 12; BellSouth Aug. 15, 1996 Comments at 4041; NYNEX Aug. 15, 1996 Comments at 5152; PacTel Aug. 15, 1996 Comments at 5051. BellSouth and USTA contend that all competing carriers should be subject to the same standards, including the same  Y 4relevant market definitions, absent compelling reasons for disparate treatment. `  xP'ԍBellSouth April 19, 1996 Comments at 13, 16; BellSouth Aug. 15, 1996 Comments at 48; see USTA Aug. 29, 1996 Comments at 3. BellSouth and USTA argue that, given the BOCs' zero market share, the structural separation requirements and regulatory safeguards that apply to a BOC's provision of long distance services, and the comprehensive regulation of the BOCs' bottleneck facilities, the Commission's assumption that BOC interLATA affiliates may have market power over inregion interexchange services and therefore those services may need to be examined  YK4separately from outofregion services is flawed.K  xP'ԍBellSouth Aug. 15, 1996 Comments at 4546; USTA Aug. 15, 1996 Comments (Hausman Aff. at 7)  Y4H73.` ` NYNEX contends that the fact that the BOCs are not likely to begin offering interexchange services with nationwide networks does not justify redefining the geographic market because many interexchange carriers also concentrate their offerings in particular  Y4regions.VH  xP$'ԍNYNEX April 19, 1996 Comments at 67.V NYNEX also asserts that the 1992 Merger Guidelines support a single,"*0*%%ZZv" nationwide geographic market definition regardless of whether interexchange services  Y4provided by BOC interLATA affiliates originate inregion or outofregion.S xPb'ԍNYNEX Aug. 15, 1996 Comments at 52S Bell Atlantic, BellSouth, and NYNEX argue that geographic rate averaging will prevent the BOCs from being able to raise prices selectively in targeted areas. Moreover, these parties allege that even if a BOC attempted to raise rates on any given route, other carriers would respond by offering lower rates because they would have sufficient capacity available on their existing networks to be able to carry the BOC customers that they would attract through lower  Y_4prices._X xPh 'ԍBellSouth April 19, 1996 Comments at 17; Bell Atlantic April 19, 1996 Comments at 7; Bell Atlantic Aug. 15, 1996 Comments at 1314; NYNEX Aug. 15, 1996 Comments at 53.  Y14I74.` ` USTA argues that the Commission should not change the single, national geographic market definition in assessing the market power of independent LECs because: (1) the national scope of major telecommunications companies has increased over the years, not lessened, with the four largest IXCs controlling over 85 percent of the market; and (2) the national market is the relevant market for independent LECs, their competitors and the public, because interexchange service offerings are generally ubiquitous, not local or  Y 4regional, and pricing, marketing, and networks are all national in scope.j  xP'ԍUSTA Aug. 29, 1996 Comments at 23 (Spulber Aff. at 58).j USTA adds that customers generally purchase interexchange services under ubiquitous calling plans, not on a  Yy4pointtopoint basis.Ry@ xPj'ԍId. (Spulber Aff. at 67). R According to USTA, although independent LECs provide local exchange services that are regional or local in scope, this does not change the national nature of the interexchange market because customers can choose from national, regional or local  Y44providers of long distance service.O4 xP'ԍId. (Spulber Aff. at 7).O  Y4J75.` ` As noted above, AT&T asserts that the geographic market definition is irrelevant in determining whether the BOCs or independent LECs could abuse their power in  Y4the local market to impede interexchange competition.`  xP 'ԍAT&T Aug. 15, 1996 Comments at 61; see generally General Services Administration (GSA) April 19, 1996 Comments at 2, May 3, 1996 Reply at 3. AT&T contends that market definitions and market share analyses are unnecessary when the presence of market power can be proven directly, as it can here because of the BOCs' control of the local bottleneck,  Y4or where undisputed power in one market (i.e., local services) can be leveraged to impede"+ 0*%%ZZ["  Y4competition in a second market (i.e., long distance). xPy'ԍAT&T Aug. 15, 1996 Comments at 61; see generally GSA April 19, 1996 Comments at 2, May 3, 1996 Reply at 3. AT&T also asserts, however, that "while interexchange services originating in a particular BOC's service area generally could not be a separate geographic market, a determination of the appropriate regulatory treatment of a BOC's (or independent LEC's) inregion interLATA services should focus on these  Y4areas."XX  xPw'ԍAT&T Aug. 15, 1996 Comments at 62. USTA contends that AT&T's focus on the local exchange market is incorrect and would lead to the illogical conclusion that the BOCs should be dominant in the provision of information services, CPE, and cellular. USTA Aug. 30, 1996 Reply (Hausman Aff. at 13).X  Xx4` ` c. Discussion (#`  YJ4K76.` ` In evaluating whether BOC interLATA affiliates and independent LECs possess market power in the interstate, domestic, long distance market, we conclude that we  Y 4generally will follow the approach proposed in the NonAccounting Safeguards NPRM. As discussed above, we disagree with those commenters that advocate using a single national geographic market definition. We conclude that a local exchange carrier's control of the local bottleneck constitutes credible evidence that there could be a lack of competitive performance in pointtopoint markets that originate inregion. Because we expect that competitive conditions will be different for those pointtopoint markets that originate inregion than for those pointtopoint markets that originate outofregion, we find that our  Y{4analysis of market power should reflect this expectation.]X{@ xPl'ԍInregion, a BOC's control over the local bottleneck may give it a competitive advantage that it does not have outofregion, causing the BOC to compete differently inregion than outofregion. Therefore, the competitive conditions inregion are likely to be different inregion than outofregion.] Therefore, in determining whether BOC interLATA affiliates have market power in the provision of interstate, domestic, interLATA services, we conclude that calls originating from inregion pointtopoint markets should be analyzed separately from calls originating from outofregion pointtopoint markets. Similarly, in determining whether independent LECs have market power in the provision of interstate, domestic, interexchange services, we conclude that calls originating in pointtopoint markets within their local service areas should be analyzed separately from calls originating in pointtopoint markets outside those areas.  Y4L77.` ` We adopt this bifurcated analysis to determine whether a BOC or independent LEC, through improper cost allocation or discrimination, could use its market power in local exchange and exchange access services to disadvantage longdistance rivals of the BOC interLATA affiliate or independent LEC. Such improper cost allocation or discrimination might enable a BOC interLATA affiliate or independent LEC to obtain the ability profitably"P,` 0*%%ZZ" to raise and sustain its price for inregion, interstate, domestic, long distance services above competitive levels by restricting its output of long distance services. We are not persuaded, moreover, that geographic rate averaging of interstate long distance services alone will necessarily suffice to offset the potential anticompetitive effects of a BOC's or independent LEC's use of the market power resulting from its control over local access facilities because if a BOC interLATA affiliate's or independent LEC's long distance customers are concentrated in one region, it may be profitable to raise prices above competitive levels, even if geographic rate averaging might cause it to lose market share outside that region.  Y14M78.` ` We reject AT&T's contention that the geographic market definition is irrelevant in assessing whether BOC interLATA affiliates or independent LECs possess  Y 4market power.V  xP| 'ԍAT&T Aug. 15, 1996 Comments at 6162.V As discussed above, we conclude that a relevant geographic market must be defined in order to conduct an accurate assessment of market power. While we agree with AT&T that other factors are important in making our overall assessment of market power, we do not agree that we can avoid defining the relevant geographic market if we wish to achieve an accurate assessment of whether BOC interLATA affiliates or independent LECs possess market power in the long distance marketplace. Moreover, we further note that, in some cases, it may be necessary to focus specifically on the termination point because the local exchange carrier that serves the enduser customer will necessarily have market power with regard to that customer.  X4X 3.X` ` International Geographic Market for BOC InterLATA Affiliates and  X4Independent LECs (#`  Y4N79.` ` In the NonAccounting Safeguards NPRM, we tentatively concluded that, for purposes of assessing whether BOC interLATA affiliates or independent LECs could exercise market power in the international long distance marketplace, market power should be measured on a worldwide, rather than routebyroute, basis, except for routes on which the  Y|4carriers are affiliated with foreign carriers in the destination market.b|X xP'ԍNonAccounting Safeguards NPRM at  129.b MCI, NYNEX and  Ye4USTA agree with the Commission's tentative conclusion.e xP'ԍMCI Aug. 15, 1996 Comments at 5960; NYNEX Aug. 15, 1996 Comments at 61; USTA Aug. 15, 1996 Comments at 4344, n. 18.  Y74O80. INTL ` ` In assessing whether BOC interLATA affiliates and independent LECs possess market power in the international long distance marketplace, we adopt our tentative conclusion, but clarify that we will examine aggregate data that encompasses all international" -@0*%%ZZ" pointtopoint markets, unless there is credible evidence suggesting that there is or could be a lack of competition in one or more international pointtopoint markets. Of course, as discussed above, we will examine international pointtopoint markets that originate inregion separately from international pointtopoint markets that originate outofregion. We acknowledge that myriad factors, including whether a carrier controls 100 percent of the capacity of the U.S. half of a particular international pointtopoint market, may affect our determination of whether each international pointtopoint market has competitive characteristics that are sufficiently similar to other pointtopoint markets in the international  YH4marketplace.H xP 'ԍIn classifying AT&T as nondominant in the provision of IMTS, we generally analyzed AT&T's market power on a worldwide basis as a surrogate for a routebyroute analysis, except a routebyroute analysis was employed to scrutinize those markets that have not supported entry by competing U.S. carriers. A routebyroute approach also was used to analyze the competitive impact of AT&T's affiliations and alliances with  xP 'foreign carriers on particular U.S. international routes. In the Matter of Motion of AT&T Corp. to be Declared  xP 'NonDominant for International Service, Order, FCC 96209, at  32 (rel. May 14, 1996). In such cases, it may be necessary to conduct a more particularized analysis and examine certain individual international pointtopoint markets or groups of pointtopoint markets separately. Because no such factors currently apply or, we believe, are likely to apply to any BOC interLATA affiliate or independent LEC, however, we find that each individual international pointtopoint market exhibits similar competitive characteristics to all other international pointtopoint markets. Therefore, it is unnecessary for us to conduct a separate analysis for each international pointtopoint market, given the administrative burdens associated with such an inquiry. Our decision here to examine aggregate data that encompasses all international pointtopoint markets does not modify our existing routebyroute approach to consider whether U.S. carriers affiliated with a foreign carrier should be regulated as dominant in the provision of international services because they are affiliated with a foreign carrier that exercises market power in a foreign market. )J:\POLICY\LECDOM\ORDER\MKTDEF.SEC) 'J:\POLICY\LECDOM\ORDER\BOCINRGN'  X4 CIV. CLASSIFICATION OF BOC INTERLATA AFFILIATES AND INDEPENDENT LECS AS DOMINANT OR NONDOMINANT CARRIERS  X4~IN THE PROVISION OF INREGION LONG DISTANCE SERVICES ă  Y4P81.` ` In this section, we consider whether we should continue the dominant carrier classification that under our rules would apply to the BOC interLATA affiliates in the  Y4provision of inregion, interstate, domestic, interLATA services.XX@ xP 'ԍAs previously discussed, for convenience, we use the term "BOC interLATA affiliates" to refer to the separate affiliates established by the BOCs, in conformance with section 272(a)(1), to provide inregion,  xP"'interLATA services. See supra n. AFFILIATE12.X In order to reclassify the BOC interLATA affiliates as nondominant, our rules require us to conclude that they will not possess market power in the provision of those interLATA services in the relevant"e.` 0*%%ZZ!"  Y4product and geographic markets.  xPy'ԍOur analysis of whether the BOC interLATA affiliates should be classified as dominant or nondominant in the provision of inregion, interstate, domestic, interLATA services has no bearing on the determination of whether a BOC interLATA affiliate has satisfied the requirements of section 271(d)(3), and it should not to be interpreted as prejudging such determinations in any way. We also consider whether we should modify the  Y4regulatory regime adopted in the Competitive Carrier Fifth Report and Order for the regulation of inregion, interstate, domestic, interexchange services provided by independent LECs. Finally, we consider whether we should apply the same regulatory classification to the BOC interLATA affiliates' and independent LECs' provision of inregion, international services as we adopt in this proceeding for their provision of inregion, interstate, domestic,  Yv4long distance services.fv xP 'ԍThis proceeding does not modify the Commission's separate framework, adopted in the International  xP 'Services Order and Foreign Carrier Entry Order, for regulating United States international carriers (including BOC interLATA affiliates or independent LECs) as dominant on routes where an affiliated foreign carrier has the ability to discriminate in favor of its U.S. affiliate through control of bottleneck services or facilities in the  xP'foreign destination market. See infra  FOREIGN139.f  X14 A.XClassification of BOC InterLATA Affiliates (#  Y 4Q82.` ` We conclude that the requirements established by, and the rules implemented pursuant to, sections 271 and 272, together with other existing rules, sufficiently limit a BOC's ability to use its market power in the local exchange or exchange access markets to enable its interLATA affiliate profitably to raise and sustain prices of inregion, interstate, domestic, interLATA services significantly above competitive levels by restricting the affiliate's own output. We therefore classify the BOCs' section 272 interLATA affiliates as nondominant in the provision of these services. We also conclude that we should apply the same regulatory classification to the BOC interLATA affiliates' provision of inregion, international services as we adopt for their provision of inregion, interstate, domestic, interLATA services.  X4 1.` ` Definition of Market Power and the Limits of Dominant Carrier  X4Regulation (#`  X4` ` a. Background (#  Y4R83.` ` In the NonAccounting Safeguards NPRM, we noted that there are two ways in which a carrier can profitably raise and sustain prices above competitive levels and"|/` 0*%%ZZ"  Y4thereby exercise market power. xPy'ԍNonAccounting Safeguards NPRM at  131. For convenience, we refer, as we did in the Notice, to a carrier's ability to engage in such a strategy as the ability to "raise prices." First, a carrier may be able to raise prices by restricting its own output (which usually requires a large market share); second, a carrier may be able to raise prices by increasing its rivals' costs or by restricting its rivals' output through the carrier's control of an essential input, such as access to bottleneck facilities, that its rivals  Y4need to offer their services.  xPu'ԍId. We also noted that economists have recognized these different ways to exercise market power by distinguishing between "Stiglerian" market power, which is the ability of a firm profitably to raise and sustain its price significantly above the competitive level by restricting its own output, and "Bainian" market power, which is the ability of a firm profitably to raise and sustain its price significantly above the competitive level by raising its rivals' costs and thereby causing the rivals to restrain their output. T.G. Krattenmaker, R.H. Lande,  xP] 'and S.C. Salop, Monopoly Power and Market Power in Antitrust Law, 76 Geo. L.J. 241, 24953 (1987). We sought comment on whether the BOC interLATA affiliates should be classified as dominant carriers in the provision of inregion, interstate, domestic, interLATA services under our rules only if we find that the affiliates have the ability to raise prices of those services by restricting their own output, or whether we should also classify the affiliates as dominant if the BOCs have the ability to raise prices by raising  Y14the costs of their affiliates' interLATA rivals.b1 xPz'ԍNonAccounting Safeguards NPRM at  132.b  X 4` ` b. Comments (#  Y 4S84.` ` Most commenters that address this issue, including DOJ, argue that the BOC interLATA affiliates should be classified as dominant only if they have the ability to raise the  Y 4prices of interLATA services by restricting their own output.X (  xP'ԍDOJ Aug. 30, 1996 Reply at 16; USTA Aug. 15, 1996 Comments at 47; USTA Aug. 30, 1996 Reply, Hausman Aff. at 2; U S West Aug. 15, 1996 Comments at 46; Citizens for a Sound Economy Foundation (CSE) Aug. 30, 1996 Reply at 68. MCI and AT&T contend, however, that we should also classify a BOC interLATA affiliate as dominant if it (or its BOC parent) has the ability to raise the costs or restrict the output of the affiliate's rivals through control of an essential input, such as exchange access, or the ability to raise the  YK4prices paid by the affiliate and its rivals for exchange access.yKH  xPD 'ԍMCI Aug. 15, 1996 Comments at 6061; AT&T Aug. 15, 1996 Comments at 65. y MCI claims that, even if consumer prices are not raised immediately, a BOC's ability to impose excessive costs on or to restrict essential inputs to its interexchange rivals presents a longrun harm to competition because it will make the BOC's rivals weaker competitors, and thereby reduce their output"00*%%ZZ{"  Y4and make consumer price increases inevitable.U xPy'ԍMCI Aug. 15, 1996 Comments at 6162.U MCI asserts that raising rivals' costs is, in fact, likely to result in an increase in the BOC interLATA affiliate's rates, which could be  Y4prevented by dominant carrier regulation.DX xP'ԍId. at 6263.D  X4` ` c. Discussion (#  Yv4T85.` `  PURPOSE We conclude that the BOC interLATA affiliates should be classified as dominant carriers in the provision of inregion, interstate, domestic, interLATA services only if the affiliates have the ability to raise prices of those services by restricting their own output of those services. As we stated in the Notice, we believe that our dominant carrier regulations are generally designed to prevent a carrier from raising prices by restricting its  Y 4output rather than to prevent a carrier from raising its prices by raising its rivals' costs.{  xP'ԍNonAccounting Safeguards NPRM at  132. Accord NYNEX Aug. 15, 1996 Comments at 51; USTA Aug. 15, 1996 Comments at 47; DOJ Aug. 30, 1996 Reply at 16. As noted in the NPRM, the definitions of  xP,'market power cited by the Commission in the Competitive Carrier Fourth Report and Order referred to the  xP'concept of a carrier raising price by restricting its own output. NonAccounting Safeguards NPRM at  132  xP'(citing Competitive Carrier Fourth Report and Order, 95 FCC 2d at 558,  7, 8).{ In fact, these regulations were adopted at a time when AT&T was essentially a monopoly  Y 4provider of domestic long distance services.p  xP'ԍAT&T Reclassification Order, 11 FCC Rcd at 3308,  69.p As discussed below, application of these regulations to a carrier that does not have the ability to raise long distance prices by  Y 4restricting its own output could lead to incongruous results. (  xP'ԍBell Atlantic Aug. 15, 1996 Comments at 19 (dominant carrier regulation would not address any of the concerns raised in the Notice); USTA Aug. 30, 1996 Reply at 2324.  Yy4U86.` ` Even AT&T acknowledges that at least some of the dominant carrier regulations, such as price ceilings and more stringent section 214 requirements, are not designed to address the potential problems associated with BOC entry into competitive  Y44markets.4  xPe 'ԍAT&T Aug. 15, 1996 Comments at 6566. Accord DOJ Aug. 30, 1996 Reply at 27. For example, although we recognize, as discussed below, that there are circumstances in which price cap regulation (including price floors) of a BOC interLATA  Y4affiliate's rates might decrease a BOC's ability to engage in anticompetitive conduct,0 xP#'ԍWe also conclude below that price cap regulation of the BOCs' exchange access services will reduce  xP$'the BOCs' incentive to misallocate the costs of their affiliates' interLATA services. See infra  PRICECAP106.0 we"1h0*%%ZZ" believe that in this situation the disadvantages of price cap regulation outweigh its benefits. Similarly, we question whether more stringent section 214 requirements would be an efficient means of addressing the concerns raised by BOC entry. Congress enacted the facilitiesauthorization requirements in section 214 and subsequent amendments primarily to prevent investment in unnecessary new plant by ratebase regulated common carriers and to bar  Y4service discontinuance in areas served by a single carrier.  xP'ԍSee Competitive Carrier First Report and Order, 85 FCC 2d at 39,  114. See also H. Averch and L.  xP'L. Johnson, Behavior of the Firm under Regulatory Constraint, 52 Amer. Econ. Rev. 1053 (1962) (a firm under rate of return regulation has an incentive to invest in more than the efficient amount of plant in order to increase the value of its rate base).  Because we previously have found that markets for long distance services are substantially competitive in most areas, marketplace forces should effectively deter carriers that face competition from engaging in the practices that Congress sought to address through the section 214 requirements. For example, a carrier facing competition lacks the incentive to invest in unneeded facilities, because it cannot extract additional revenue from its long distance customers to recoup the  Y 4cost of those facilities.J  xPd'ԍId. at 39, 114.J If such a carrier discontinues service in an area where it faces competition, its customers could turn to the carrier's competitors for service. Because marketplace forces generally eliminate the need for regulatory requirements imposed by section 214, we have granted a blanket section 214 authorization to nondominant carriers such that they no longer must obtain prior approval to provide domestic long distance service or add new facilities and we impose less stringent requirements on nondominant carriers that  Yy4are discontinuing service.vy@ xPj'ԍ47 C.F.R.  63.07, 63.71. Section 63.07 requires nondominant carriers to report the acquisition or construction of initial or additional circuits to the Commission on a semiannual basis, while section 63.71 imposes certain notification requirements on nondominant carriers that plan to reduce, impair, or discontinue service. We recognize that, for certain areas, such as those served by a single interexchange carrier or where equal access has not been implemented, it may still be appropriate for the Commission to review a carrier's proposal to discontinue service. v  YK4V87.` ` We recognize that certain aspects of dominant carrier regulation might constrain a BOC's ability to raise the costs of its affiliate's interLATA rivals or engage in  Y4other anticompetitive conduct.X  xP 'ԍSee also Time Warner Aug. 15, 1996 Comments at 3940 (classifying BOC interLATA affiliates as dominant would provide a means to monitor BOC compliance with nondiscrimination requirements and the section 271 checklist). For example, requiring a BOC interLATA affiliate to file its tariffs with advance notice and cost support data might help to detect and prevent predatory pricing, particularly if coupled with a price floor on the affiliate's interLATA"20*%%ZZe"  Y4services. xPy'ԍAT&T Aug. 15, 1996 Comments at 66; MCI Aug. 15, 1996 Comments at 6465; Time Warner Aug. 15, 1996 Comments at 39. Price cap regulation of a BOC interLATA affiliate's interLATA services may deter a BOC from raising the costs of its affiliate's rivals through discrimination or other anticompetitive conduct by limiting the profit the affiliate could earn as a result of the  Y4anticompetitive conduct.  xP'ԍAs we stated in the Notice, however, price cap regulation of a BOC interLATA affiliate's interLATA services generally would not prevent a BOC from raising its affiliate's rivals costs through discrimination or  xP 'other anticompetitive conduct. NonAccounting Safeguards NPRM at  132. It also would not prevent the  xP 'affiliate from profiting from the BOC's raising rivals' costs through increased market share. Id. See also DOJ Aug. 30, 1996 Reply at 28 (impact of price cap regulation on affiliate pricing, and therefore its deterrence effect, is not so clear). Nevertheless, the fact that these measures might help to deter a BOC or its interLATA affiliate from engaging in certain types of anticompetitive conduct is not, by itself, a sufficient basis for imposing dominant carrier regulations on the BOC interLATA affiliates. We should also consider whether and to what extent these regulations would dampen competition and whether other statutory and regulatory provisions would accomplish the same objectives while imposing fewer burdens on the carriers and the Commission. Dominant carrier regulation should be imposed on the BOC interLATA affiliates only if the benefits of such regulation outweigh the burdens that would be imposed  Y 4on competition, service providers, and the Commission.X  xPL'ԍForeign Carrier Entry Order, 11 FCC Rcd at 3973 (finding that the benefits derived from requiring the submission of cost support data were, as a general rule, outweighed by the burden imposed by the filing requirement).  Y 4W88.` `  BURDENS1 The Commission has long recognized that the regulations associated with  Y 4dominant carrier classification can dampen competition.  xP''ԍCompetitive Carrier First Report and Order, 85 FCC 2d at 3444,  99129; AT&T Reclassification  xP'Order, 11 FCC Rcd at 3288,  27. For example, advance notice periods for tariff filings can stifle price competition and marketing innovation when applied  Y4to a competitive industry.[ xPQ'ԍTariff Forbearance Order at  53.[ In the Tariff Forbearance Order, we eliminated tariff filing requirements for nondominant carriers pursuant to our forbearance authority under the Communications Act and ordered all nondominant interexchange carriers to cancel their tariffs for interstate, domestic, interexchange services within nine months from the effective  Y44date of the Order.4 xP#'ԍTariff Forbearance Order at  3. As previously noted, the Tariff Forbearance Order is currently  xPM$'subject to a judicial stay. See supra n. STAYFOR8. We concluded that a regime without nondominant interexchange"430*%%ZZ" carrier tariffs for interstate, domestic, interexchange services will be the most procompetitive, deregulatory system. We also found that not permitting nondominant interexchange carriers to file tariffs with respect to interstate, domestic, interexchange services will enhance competition among providers of such services, promote competitive  Y4market conditions, and achieve other objectives that are in the public interest.[ xP'ԍTariff Forbearance Order at  52.[ We further concluded that continuing to require nondominant interexchange carriers to file tariffs for interstate, domestic, interexchange services would reduce incentives for competitive price discounting, constrain carriers' ability to make rapid, efficient responses to changes in demand and cost, impose costs on carriers that attempt to make new offerings, and prevent customers from seeking out or obtaining service arrangements specifically tailored to their  Y 4needs.F X xP# 'ԍId. at  53.F  Y 4X89.` ` Requiring the BOC interLATA affiliates to file tariffs on advance notice and with cost support data would impose even more significant costs and burdens on the interLATA affiliates than the oneday notice period formerly required of nondominant  Y 4carriers and would adversely affect competition.x  xP@'ԍSee AT&T Reclassification Order, 11 FCC Rcd at 3288,  27. Accord Ameritech Aug. 15, 1996 Comments at 34 (advance notice of pricing and service initiation would deny BOC interLATA affiliates firstmover advantage that they would otherwise obtain and make them a step slower in the marketplace); PacTel Aug. 15, 1996 Comments at 6768 (whatever the BOC interLATA affiliates' final prices, competitors would undercut them by a penny or two and thereby preserve their market share); SBC Aug. 15, 1996 Comments at 17 (lengthy tariff proceedings would allow competitors to access valuable cost and planning information, decreasing the opportunity for more effective competition); DOJ Aug. 30, 1996 Reply at 29. Moreover, these requirements could undermine at least some of the benefits otherwise gained by eliminating tariff filing by non Yy4dominant domestic interexchange carriers. In the Tariff Forbearance Order, we found that tacit coordination of prices for interstate, domestic, interexchange services, to the extent it exists, would be more difficult if we eliminate tariffs, because price and service information about such services provided by nondominant interexchange carriers would no longer be  Y4collected and available in one central location.[(  xP'ԍTariff Forbearance Order at  52.[ Upon full implementation of that Order, no interexchange carrier will be obligated (or permitted) to file tariffs for interstate, domestic,  Y4interexchange services.  xPX"'ԍUpon full implementation of this Order, all domestic interexchange carriers will be regulated as non xP #'dominant carriers. See infra section IV.B. If we were to require BOC interLATA affiliates to file tariffs for interstate, domestic, interexchange services, the ready availability of that information might facilitate tacit coordination of prices. We also believe that such requirements would impose"40*%%ZZ`" significant administrative burdens on the Commission and the BOC interLATA affiliates, particularly to the extent they encourage the affiliates' interLATA competitors to challenge  Y4the affiliates' interLATA rates in order to impede the affiliates' ability to compete.X xPK'ԍDOJ Aug. 30, 1996 Reply at 29. See also Ameritech Aug. 15, 1996 Comments at 35 (incumbent interexchange carriers would routinely challenge tariffs of BOC interLATA affiliates on the "most flimsy of grounds").  Y4Y90.` `  BURDENS2 We find that the other regulations associated with dominant carrier classification can also have undesirable effects on competition. Although a price floor might help prevent a BOC interLATA affiliate from pricing below its cost, a price floor, if set too high, could prevent consumers from enjoying lower prices resulting from real efficiencies. The required cost support data can also discourage the introduction of innovative new service  Y14offerings, because it requires a carrier to reveal its financial information to its competitors.IX1 xP 'ԍDOJ notes that our rules would require the BOC interLATA affiliates, if classified as dominant, to report costs incurred from sources independent of their parent companies, which would be of little or no relevance to any cost misallocation problem. DOJ Aug. 30, 1996 Reply at 28.I  Y 4Z91. CONCERN ` ` As we discussed in the Notice, we believe that other regulations applicable to the BOCs and their interLATA affiliates will address the anticompetitive concerns raised in the Notice in a less burdensome manner. For example, a BOC's ability to engage in a "price  Y 4squeeze" by raising its prices for access services  xPw'ԍUnder this scenario, a BOC would raise the price of access to all interexchange carriers, including its affiliate. This would cause competing interLATA carriers either to raise their retail interLATA rates in order to maintain the same profit margins or to attempt to preserve their market share by not raising their prices to reflect the increase in access charges, thereby reducing their profit margins. If the competing inregion interLATA service providers raised their prices to recover the increased access charges, the BOC interLATA  xP_'affiliate could seek to expand its market share by not matching the price increase. See infra  SQUEEZE125. (as opposed to a BOC affiliate's lowering its long distance prices even when the BOC has not lowered its access prices) is limited by price cap regulation of those services. The nondiscrimination and structural separation requirements set forth in section 272 and our rules thereunder, price cap regulation of the BOCs' exchange access services, and the Commission's affiliate transaction rules sufficiently reduce the risk of successful anticompetitive discrimination and improper allocation of  Y44costs.4  xPe 'ԍSee infra  MISALLOCATE1103שDISCRIMINATE2119. We agree with DOJ that applying dominant carrier regulation to an affiliate in a downstream market would be "at best a clumsy tool for controlling vertical leveraging of  Y4market power by the parent, if the parent can be directly regulated instead."O xP#'ԍDOJ Aug. 30, 1996 Reply at 27.O In the Non Y4Accounting Safeguards Order and Accounting Safeguards Order, we adopted regulations to"50*%%ZZr" constrain the BOCs' ability to use their market power in local exchange and exchange access services to engage in anticompetitive conduct in competitive markets. We therefore reject AT&T and MCI's contention that a BOC's ability to engage in such conduct would provide a legitimate basis for classifying its affiliate as dominant in the provision of inregion, interstate, domestic, interLATA services.  Yv4[92.` ` We find that the entry of the BOC interLATA affiliates into the provision of interLATA services has the potential to increase price competition and lead to innovative new  YH4services and marketing efficiencies.sH xP 'ԍSee Bell Atlantic Aug. 15, 1996 Comments, Taylor Aff. at 12.s We see no reason to saddle the BOC interLATA affiliates with regulations that are not wellsuited to prevent the risks associated with BOC entry into inregion, interstate, domestic, interLATA services. We, therefore, conclude that the BOC interLATA affiliates should be classified as dominant carriers only if they have the ability to raise prices by restricting their own output.  X 4 2.` ` Classification of BOC InterLATA Affiliates in the Provision of InRegion,  X4Interstate, Domestic, InterLATA Services (#`  Xb4` ` a. Traditional Market Power Factors (other than control of bottleneck facilities)(#  X4` `  i.Background  Y4\93.` ` In the NonAccounting Safeguards NPRM, we noted that, in determining whether a firm possesses market power, the Commission has previously focused on certain wellestablished market features, including market share, supply and demand substitutability,  Y4the cost structure, size or resources of the firm, and control of bottleneck facilities.bX xP'ԍNonAccounting Safeguards NPRM at  133.b We sought comment on the application of these factors in determining whether the BOC interLATA affiliates should be classified as dominant or nondominant.  XN4` `  ii.Comments  Y 4]94.` ` Most commenters that address the issue agree that each of the traditional" 60*%%ZZ" market factors weighs in favor of classifying the BOC interLATA affiliates as non Y4dominant.o xPy'ԍSee e.g., Ameritech Aug. 15, 1996 Comments at 812; BellSouth Aug. 15, 1996 Comments at 50; PacTel Aug. 15, 1996 Comments at 52; U S West Aug. 15, 1996 Comments at 45; USTA Aug. 15, 1996 Comments at 44. According to Ameritech, it is inconceivable that a BOC interLATA affiliate "could bring AT&T to its knees quickly" because the affiliates will enter the longdistance market with no customers, no traffic, no revenues, and no presubscribed lines and will be competing against some 500 incumbent carriers, including AT&T, MCI and Sprint, all of  Y4which are wellestablished in the market.W xP= 'ԍAmeritech Aug. 15, 1996 Comments at 8.W Ameritech and U S West also claim that, in considering whether to classify the BOC interLATA affiliates as dominant, the Commission should consider only whether the BOC interLATA affiliates will have market power upon  YH4entry, not whether they will "quickly gain" such market power.CXH xP 'ԍAmeritech Aug. 15, 1996 Comments at 910; U S West Aug. 15, 1996 Comments at 4748. Compare Ameritech Aug. 15, 1996 Comments at 9 (if "quickly" means within a period of time longer than a year, regulating a BOC interLATA affiliate as dominant now would be premature).C  Y 4^95.` ` The California Cable Television Association (CCTA) contends, however, that a BOC interLATA affiliate's initial zero market share should not dissuade the Commission from retaining dominant carrier regulation because, as an entity affiliated with the dominant provider in the state, it will have enormous advantages particularly in terms of brand identification. CCTA further argues that it is likely that these affiliates will seek to capitalize on their parental lineage by using some or all of the BOCs' logos or other branding  Y4mechanisms.V xP'ԍCCTA Aug. 15, 1996 Comments at 1314.V LDDS asserts that market share in and of itself is not a measure of market power, but rather is one of many possible indications that market power may exist in a  Yb4certain market.Lb?  xPR'ԍLDDS Aug. 30, Reply at 11. L  X44` `  iii.Discussion  Y4_96.` `  OUTPUT TRADITIONALWe find that each of the traditional market factors (excluding bottleneck control) supports a conclusion that the BOC interLATA affiliates will not have the ability to raise price by restricting their output upon entry or soon thereafter. As stated in the Notice, the fact that each BOC interLATA affiliate initially will have zero market share in the provision of inregion, interstate, domestic, interLATA services suggests that the affiliate"7 0*%%ZZW"  Y4will not initially be able to raise price by restricting its output.0X xPy'ԍNonAccounting Safeguards NPRM at  133. Accord Ameritech Aug. 15, 1996 Comments at 8; BellSouth Aug. 15, 1996 Comments at 50; PacTel Aug. 15, 1996 Comments at 52; U S West Aug. 15, 1996 Comments at 45; USTA Aug. 15, 1996 Comments at 44. 0 As discussed in the Notice, however, we find that this factor is not conclusive in determining whether a BOC interLATA affiliate should be classified as dominant, because the affiliate's zero market share results from its exclusion from the market until now, and, the affiliate potentially could gain significant market share upon entry or shortly thereafter, because of its brand identification with inregion customers, possible efficiencies of integration, and the BOC's ability potentially to raise the costs of its affiliate's interLATA rivals.  YH4`97.` ` As to supply substitutability, we note that the Commission has previously found that the excess capacity of AT&T's competitors is sufficient to constrain AT&T's  Y 4exercise of market power.j  xP'ԍAT&T Reclassification Order, 11 FCC Rcd at 330305.j In light of that finding, we conclude that AT&T and its competitors, which currently serve all interLATA customers, should be able to expand their capacity sufficiently to attract a BOC interLATA affiliate's customers if the affiliate attempts  Y 4to raise its interLATA prices. x xP'ԍAmeritech Aug. 15, 1996 Comments at 10; Bell Atlantic Aug. 15, 1996 Comments at 15; PacTel Aug. 15, 1996 Comments at 52. As we discussed in the Notice, the Commission also recently found that the purchasing decisions of most customers of domestic interexchange services are sensitive to changes in price, and customers would be willing to shift their traffic  Y4to an interexchange carrier's rival if the carrier raises its prices. xP'ԍNonAccounting Safeguards NPRM at  133 (citing AT&T Reclassification Order, 11 FCC Rcd at  xP'330507); accord SBC Aug. 15, 1996 Comments at 18. The existence of such demand substitutability supports the conclusion that the BOC interLATA affiliates will not have the ability to raise prices by restricting their output. Finally, given the presence of existing interexchange carriers, including such large well established carriers as AT&T, MCI, Sprint, and LDDS, we find that the cost structure, size, and resources of the BOC interLATA affiliates are not likely to enable them to raise prices above the competitive level  Y4for their domestic interLATA services.x(  xP'ԍAccord NYNEX Aug. 15, 1996 Comments at 54; BellSouth Aug. 15, 1996 Comments at 50;  xP 'Ameritech Aug. 15, 1996 Comments at 11. See also AT&T Reclassification Order, 11 FCC Rcd at 3309 (finding that AT&T's cost structure, size and resources did not constitute "persuasive evidence" of market  xP7"'power). In the AT&T Reclassification Order, the Commission noted that the issue is whether a carrier's "lower costs, sheer size, superior resources, financial strength, and technical capabilities . . . `are so great to preclude  xP#'the effective functioning of a competitive market.'" Id. 11 FCC Rcd at 3309,  73 (quoting Competition in the  xP$'Interstate Interexchange Marketplace, CC Docket No. 90132, Report and Order, 6 FCC Rcd 5880, 589192). Although the BOCs' brand identification and"8h0*%%ZZn" possible efficiencies of integration may give the BOC interLATA affiliates certain cost advantages in attracting customers, their lack of nationwide facilitiesbased networks would appear to put them at a disadvantage relative to the four largest interexchange carriers, as noted by Ameritech, particularly because the cost of resold long distances services will  Y4generally exceed the marginal cost of providing those services.X xP'ԍAmeritech Aug. 15, 1996 Comments at 12.X  Xv4` ` b. BOC Control of Bottleneck Access Facilities  XH4` `  i.Background  Y 4 a98.` ` In the NonAccounting Safeguards NPRM, we noted that, in assessing whether a BOC interLATA affiliate would possess market power in the provision of inregion, interstate, domestic, interLATA services, we must also consider the significance of the  Y 4BOCs' current control of bottleneck exchange access facilities. X xP'ԍNonAccounting Safeguards NPRM at  134 (citing Competitive Carrier First Report and Order, 85 FCC 2d at 21,  58 (control of bottleneck facilities is "prima facie" evidence of market power)). We noted the concern that a BOC's control of bottleneck access facilities would enable it to allocate costs improperly from its affiliate's interLATA services to the BOC's regulated exchange or exchange access services, discriminate against its affiliate's interLATA competitors, and potentially engage in  Yy4a price squeeze against those competitors.Ny xP'ԍId. at  13541.N We therefore sought comment on whether the statutory and regulatory safeguards currently imposed on the BOCs and their affiliates are sufficient to prevent a BOC from engaging in such activities to such an extent that the BOC  Y44interLATA affiliates would quickly gain the ability to raise price by restricting output.G4@ xP%'ԍId. at  142.G  X4` `  ii.Comments  Y4b99.` ` Some of the BOCs dispute the Commission's assumption that the BOCs have and will maintain control of bottleneck access facilities. These commenters argue that any control the BOCs may have once had in the exchange access market has been dissipated by the Commission's expanded interconnection initiatives, the 1996 Act and the Commission's  Y|4implementing regulations, and the actions of various states.| xP"'ԍAmeritech Aug. 15, 1996 Comments at 1317; PacTel Aug. 15, 1996 Comments at 5354; U S West Aug. 15, 1996 Comments at 4849. In contrast, AT&T contends that the BOCs' monopoly control over local bottleneck facilities gives them market power in"e9( 0*%%ZZ<"  Y4the interexchange market.U xPy'ԍAT&T Aug. 15, 1996 Comments at 62. U Similarly, LDDS asserts that the BOCs will continue to possess market power in both the local exchange and exchange access markets, which translates into  Y4market power in the inregion interLATA market.QX xP'ԍLDDS Aug. 30, 1996 Reply at 12. Q Many commenters also specifically address the three types of anticompetitive conduct listed above.  X4` `  iii.Discussion  Y_4c100.` `  PROBLEMS As noted in the NonAccounting Safeguards NPRM, BOCs currently provide an overwhelming share of local exchange and exchange access services in areas where they provide such services approximately 99.1 percent of the market as measured by  Y 4revenues.oX  xP'ԍIndustry Analysis Division, Telecommunications Industry Revenue: TRS Worksheet Data, (Com. Car. Bur. Dec. 1996). Tables 18 and 15 show that BOC local and access revenues in 1995 were $65.6 billion, while CAPs and Competitive LECs local and access revenues both in and out of BOC regions were only $595 million.o Although the 1996 Act establishes a framework for eliminating entry barriers and thereby fostering local competition, the evidence to date indicates that such competition is still in its infancy. As a result, we conclude, solely for purposes of this proceeding, that the BOCs currently possess market power in the provision of local exchange and exchange access services in their respective regions, and we therefore must consider whether they can use that market power to give their interLATA affiliates the ability to raise the prices of inregion, interstate, domestic, interLATA services by restricting their own output of those services.  XK4` ` c. Improper Allocation of Costs  X4 ` `  i.Comments  Y4d101.` ` The BOCs and USTA assert that statutory and regulatory safeguards should prevent any improper cost allocations from occurring, particularly because all BOCs are  Y4subject to pricecap regulation, and a majority have adopted the nosharing option.< X xPz'ԍ See e.g., Bell Atlantic Aug. 15, 1996 Comments at 16; Ameritech Aug. 15, 1996 Comments at 19; BellSouth Aug. 15, 1996 Comments at 5153; PacTel Aug. 15, 1996 Comments at 5557; NYNEX Aug. 15, 1996 Comments at 5556; USTA Aug. 15, 1996 Comments at 4546.< PacTel asserts that the concern over improper cost allocation ignores current regulation of the BOCs  Y4and presumes the incompetence of both state and federal regulators.[ (  xPl$'ԍPacTel Aug. 15, 1996 Comments at 5556. [ AT&T counters that": 0*%%ZZA" price cap regulation cannot eliminate the incentive to allocate costs improperly because both the initial caps and subsequent adjustments are generally set at least in part on the basis of  Y4the BOCs' profits during the preceding years.Z  xPK'ԍAT&T Aug. 15, 1996 Comments at 64 n.56. Z The Economic Strategy Institute asserts that  Y4cost accounting methodologies and models leave room for manipulation and interpretation.d X xP'ԍEconomic Strategy Inst. Aug. 30, 1996 Reply at 4. d It also claims that improper cost allocation can lead to substantial cost advantages and  Y4facilitate a price squeeze.A  xP& 'ԍ Id. at 5.A  Y_4e102.` ` The BOCs and USTA contend that it defies economic sense to expect any of the BOC interLATA affiliates to drive AT&T, MCI, or Sprint from the longdistance market. Even if they could, these commenters assert, the facilities of that carrier would  Y 4remain intact, ready for another firm to buy at distress sale prices.? x xPC'ԍSee, e.g., Bell Atlantic Aug. 15, 1996 Comments at 16; PacTel Aug. 15, 1996 Comments at 5758; Ameritech Aug. 15, 1996 Comments at 20; U S West Aug. 15, 1996 Comments at 50; USTA Aug. 15, 1996 Comments at 4647. Bell Atlantic also argues that if predation would not drive out the major competitors, there is no way for a BOC to recoup predatory prices by charging prices above a competitive level, and therefore predatory pricing against any competitor makes no sense. Bell Atlantic Aug. 30, 1996 Reply at 2122.? AT&T, CTA, and DOJ argue, however, that the concerns expressed in the NPRM regarding improper cost allocation are too narrow. In addition to raising the possibility of predatory pricing, improper cost allocation may cause substantial harm to consumers, competition, and  Y 4production efficiency. (  xP'ԍAT&T Aug. 15, 1996 Comments at 63; CTA Aug. 15, 1996 Comments at 35; DOJ Aug. 30, 1996 Reply at 24. For example, improper cost allocation could lead to higher prices for local exchange and exchange access services and could shift market share and profits to a BOC interLATA affiliate, even if the affiliate is less efficient than its competitors, thereby  Yy4resulting in a loss of production efficiency. y  xP'ԍDOJ Aug. 30, 1996 Reply at 2425; AT&T Aug. 30 Reply at 35. AT&T also contends that discrimination itself produces another form of cost misallocation because an affiliate that receives favored treatment is essentially being undercharged for those services and the BOC is improperly bearing the extra costs. AT&T Aug. 15, 1996 Comments at 6364. AT&T asserts that such a strategy would be costless to the BOC, for it would recover its losses in the competitive market through contemporaneous higher rates in the noncompetitive market. As a result, no subsequent  Y44recoupment would be necessary.Q4h xPM$'ԍAT&T Aug. 30, 1996 Reply at 36. Q According to DOJ, the Commission must consider"4;0*%%ZZ" whether applicable regulation would prevent improper cost allocation that would result in these adverse effects on consumers, competition, and production efficiency. DOJ argues that regulation alone will not prevent competitively significant improper cost allocations. The incentives to engage in such practices, according to DOJ, will be eliminated only when the  Y4local exchange market is subject to robust competition.P xP'ԍDOJ Aug. 30, 1996 Reply at 25. P  Xv4` `  ii.Discussion  YH4f103.` ` MISALLOCATE1As noted in the NonAccounting Safeguards NPRM, improper allocation of costs by a BOC is of concern because such action may allow a BOC to recover costs from subscribers to its regulated services that were incurred by its interLATA affiliate in providing competitive interLATA services. In addition to the direct harm to regulated ratepayers, this practice can distort price signals in those markets and may, under certain circumstances, give  Y 4the affiliate an unfair advantage over its competitors.b X xP'ԍNonAccounting Safeguards NPRM at  135.b Recognizing this concern, Congress  Y 4established safeguards in section 272, which we have implemented in the NonAccounting  Y 4Safeguards Order and Accounting Safeguards Order. For purposes of determining whether the BOC interLATA affiliates should be classified as dominant, however, we must consider only whether the BOCs could improperly allocate costs to such an extent that it would give the BOC interLATA affiliates, upon entry or soon thereafter, the ability to raise prices by restricting their own output. We conclude that, in reality, such a situation could occur only if a BOC's improper allocation enabled a BOC interLATA affiliate to set retail interLATA prices at predatory levels (i.e., below the costs incurred to provide those services), drive out its interLATA competitors, and then raise and sustain retail interLATA prices significantly  Y4above competitive levels. xP'ԍId. In so concluding, we do not dismiss cost misallocation as a potential problem. We recognize that the BOCs may have an incentive to misallocate the costs of their interLATA affiliates' interLATA services.  Y4g104.` ` INDEPENDENTLYSAFEGUARDSMISALLOCATEWe conclude that applicable statutory and regulatory safeguards are likely to be sufficient to prevent the BOCs from improperly allocating costs between their monopoly local exchange and exchange access services and their affiliates' competitive interLATA services to such an extent that their interLATA affiliates would be able to eliminate other interLATA service providers and subsequently earn supracompetitive profits by charging monopoly prices. Section 272(b) includes a number of structural safeguards that constrain a BOC's ability to allocate costs improperly. For example, the provision requires a BOC  Y 4interLATA affiliate to "operate independently" from the BOC,J @ xP%'ԍ47 U.S.C.  272(b)(1).J maintain separate books," <0*%%ZZ"  Y4records, and accounts from the BOC,J xPy'ԍ47 U.S.C.  272(b)(2).J and have separate officers, directors, and  Y4employees.JX xP'ԍ47 U.S.C.  272(b)(3).J Section 272 also requires each BOC "to obtain and pay for a joint Federal/State audit every 2 years conducted by an independent auditor to determine whether such company has complied with [section 272] and the regulations promulgated under this  Y4section . . . ."DX xP= 'ԍ47 U.S.C.  272(d)(1). The results of such audits must be submitted to the Commission and the state commissions in each State in which the BOC provides services, which shall make such results available for  xP 'public inspection. Id.  272(d)(2).D As noted by Ameritech and Bell Atlantic, the structural separation and audit requirements mandated in section 272 should reduce the risk of improper allocation of  Yv4costs by minimizing the amount of joint costs that could be improperly allocated.v xP/'ԍAmeritech Aug. 15, 1996 Comments at 20; Bell Atlantic Aug. 15, 1996 Comments at 17; see also PacTel Aug. 15, 1996 Comments at 56. In the  Y_4NonAccounting Safeguards Order, we adopted rules to implement and clarify these provisions. For example, we concluded that the requirement that the BOC and its affiliate operate independently precludes the joint ownership of transmission and switching facilities by a BOC and its interLATA affiliate, as well as the joint ownership of the land and  Y 4buildings where those facilities are located.  `  xP'ԍNonAccounting Safeguards Order at 158. We noted that prohibiting joint ownership of transmission and switching facilities would ensure that an affiliate must obtain any such facilities pursuant to the arm's length requirements of section 272(b)(5), thereby facilitating monitoring and enforcement of the section 272  xPl'requirements. Id. at  160. We also concluded that operational independence precludes a section 272 affiliate from performing operating, installation, and maintenance functions associated with the BOC's facilities. Likewise, it bars a BOC or any BOC affiliate, other than the section 272 affiliate itself, from performing operating, installation, or maintenance functions associated with the facilities that the section 272  Y4affiliate owns or leases from a provider other than the BOC with which it is affiliated.@H  xP'ԍId. at  158. We concluded, however, consistent with these requirements and those established pursuant to sections 272(b)(5) and 272(c)(1), a section 272 affiliate may negotiate with an affiliated BOC on an arm's length and nondiscriminatory basis to obtain transmission and switching facilities, to arrange for  xP'collocation of facilities, and to provide or to obtain services such as administrative and marketing services. Id. We also clarified that section 272(b)(1) does not preclude a BOC or a section 272 affiliate from providing telecommunications services to one another, so long as each entity performs itself, or obtains from an unaffiliated third party, the operating, installation, and maintenance functions associated with the facilities that it  xP#'owns or leases from an entity unaffiliated with the BOC. Id. at  164. As noted by BellSouth, the separate employee requirement should ensure that the cost of each"y=P0*%%ZZ"  Y4employee will be attributed directly to the appropriate entity.X xPy'ԍBellSouth Aug. 15, 1996 Comments at 52.X  Y4h105.` ` Section 272 also requires a BOC interLATA affiliate to conduct all transactions with the BOC on an arm's length basis, and all such transactions must be  Y4reduced to writing and made available for public inspection.JX xP'ԍ47 U.S.C.  272(b)(5).J In the Accounting Safeguards  Y4Order, we concluded that, to satisfy this requirement, a section 272 affiliate must, at a minimum, provide a detailed written description of the asset or service transferred and the terms and conditions of the transaction on the Internet within 10 days of the transaction  YH4through the company's Internet home page.H xP 'ԍAccounting Safeguards Order at  122. This information also must be made available for public  xP 'inspection at the principal place of business of the BOC. Id. We conclude that these safeguards will constrain a BOC's ability to allocate costs improperly and make it easier to detect any improper allocation of costs that may occur.  Y 4i106.` `  PRICECAP We further find that price cap regulation of the BOCs' access services reduces the BOCs' incentive to allocate improperly the costs of their affiliates' interLATA services. As the Commission previously explained, "[b]ecause price cap regulation severs the direct link between regulated costs and prices, a carrier is not able automatically to recoup improperly allocated nonregulated costs by raising basic service rates, thus reducing the  Yy4incentive for the BOCs to shift nonregulated costs to regulated services."Xy@ xPj'ԍAmendment of Section 64.702 of the Commission's Rules and Regulations, CC Docket No. 85229,  xP2'BOC Safeguards Order, 6 FCC Rcd 7571, 7596,  55 (1991), vacated in part and remanded on other grounds,  xP'California v. FCC, 39 F.3d 919 (9th Cir. 1994), cert. denied, 115 S. Ct. 1427 (1995). We recognize that under our current interim LEC price cap rules, a BOC can select an Xfactor option that requires it to share interstate earnings with its customers that exceed specified benchmarks and permit the BOC to make a lowend adjustment if interstate earnings fall below a  Y4specified threshold. `  xP.'ԍThe Xfactor is a component of the price cap formula that is used to adjust the price cap index for a LEC's access services each year to account for changes in telephone companies' costs per unit of output. Consequently, in certain circumstances, a BOC may have an incentive to allocate costs from interLATA services to access services in order to reduce the amount of profits the BOC is required to share with its interstate access service customers or become  Y4eligible for a lowend adjustment.c!X  xPA#'ԍTime Warner Aug. 15, 1996 Comments at 1213. Similarly, the possibility of future recalibration of price cap levels or outofband filings also implies that price cap regulation does not fully sever the link between  xP$'regulated costs and prices. See 47 C.F.R.  61.49(e), (f).c We note, however, that only one of the BOCs currently">!0*%%ZZi"  Y4has adopted a sharing option." xPy'ԍU S West is the only BOC currently subject to a sharing option. Data based on 1996 Annual Access  xPA'Tariff Filings filed on April 2, 1996. See also USTA Aug. 15, 1996 Comments, Hausman Aff. at 8. We also  xP 'note that the Commission has sought comment on whether the sharing option should be eliminated. Price Cap  xP'Performance Review for Local Exchange Carriers, Fourth Further Notice of Proposed Rulemaking, 10 FCC  xP'Rcd 13659, 13679 (1995). Also, in the Access Charge Reform NPRM, we sought comment on whether we  xPa'should reinitialize price cap indices and increase the Xfactor. See Access Charge Reform; Price Cap Performance Review for Local Exchange Carriers; Transport Rate Structure and Pricing; Usage of the Public  xP'Switched Network by Information Service and Internet Access Providers, CC Docket Nos. 96262, 941, 91213, 26263, Notice of Proposed Rulemaking, Third Report and Order, and Notice of Inquiry, FCC No. 96 xP 'XX, at  22335 (rel. Dec. 24, 1996) (Access Charge Reform NPRM). Our affiliate transaction rules, which apply to transactions  Y4between the BOCs and their interLATA affiliates,i#`  xP 'ԍSee Accounting Safeguards Order at  176.i should make it more difficult for a BOC to allocate improperly the costs of its affiliates' interLATA services. We also recognize that, if a state does not impose price cap regulation on a BOC's local exchange services, the BOC may have an incentive to allocate costs from interLATA services to its local exchange services. It appears, however, that many states have adopted price cap regulation or some  Yv4other alternative form of regulation for the BOCs' local exchange services.$v  xP'ԍSee National Association of Regulatory Utility Commissioners, Utility Regulatory Policy in the United States and Canada: Compilation 19951996 at 253, 268 (1997). Moreover, we are not persuaded that dominant carrier regulation of the BOC interLATA affiliates' interLATA services would prevent such improper cost allocation.  Y 4j107.` ` PREDATIONPREDATIONFurthermore, even if a BOC were able to allocate improperly the costs of its affiliate's interLATA services, we conclude that it is unlikely that a BOC interLATA affiliate  Y 4could engage successfully in predation.%  H  xP'ԍSee Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 589 (1986) ("[P]redatory  xP'pricing schemes are rarely tried, and even more rarely successful.") See also Bell Atlantic Comments at 16; PacTel Aug. 15, 1996 Comments at 5758; Ameritech Aug. 15, 1996 Comments at 20; U S West Aug. 15, 1996 Comments at 50; USTA Aug. 15, 1996 Comments at 4547.  At least four interexchange carriers AT&T, MCI, Sprint, and LDDS WorldCom have nationwide, or nearnationwide, network  Y 4facilities that cover every BOC region.w& 0 xP'ԍAT&T Reclassification Order, 11 FCC Rcd at 3304,  6061.w These are large wellestablished companies with millions of customers throughout the nation. It is unlikely, therefore, that a BOC interLATA  Y4affiliate, whose customers are likely to be concentrated in the BOC's local service region,q'X xP#'ԍWe recognize that action taken in concert by two or more BOCs could have a more significant impact on interLATA competitors, but believe that the antitrust laws and our enforcement process will sufficiently limit  xP$'the risk of such concerted activity. NonAccounting Safeguards Order at  70.q"?'0*%%ZZ" could drive one or more of these national companies from the market. Even if it could do so, it is doubtful that the BOC interLATA affiliate would later be able to raise prices in  Y4order to recoup lost revenues.*(X xPK'ԍSee, e.g., Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993) ("Recoupment is the ultimate object of an unlawful predatory pricing scheme; it is the means by which a predator profits from predation.") * As Professor Spulber has observed,"[e]ven in the unlikely event that [a BOC interLATA affiliate] could drive one of the three large interexchange carriers into bankruptcy, the fiberoptic transmission capacity of that carrier would remain intact, ready for another firm to buy the capacity at distress sale and immediately undercut  Yv4the [affiliate's] noncompetitive prices.")v xP 'ԍDaniel F. Spulber, Deregulating Telecommunications, 12 Yale J. on Reg. 25, 60 (1995).  YH4k108.` ` We acknowledge that improper cost allocation may raise concerns beyond the risk of predatory pricing. As AT&T and DOJ assert, exploiting improper cost allocation to divert business to BOC interLATA affiliates from other, more efficient suppliers would be  Y 4anticompetitive even if the latter suppliers remained in the market.o* x xP,'ԍAT&T Aug. 30, 1996 Reply at 35; DOJ Aug. 30, 1996 Reply at 25.o DOJ contends that this strategy would produce inefficiencies and wasted resources and reduce future investment by competitors to improve or expand their networks and to develop innovative technologies and  Y 4services.O+  xPw'ԍDOJ Aug. 30, 1996 Reply at 25.O AT&T claims that such a strategy would be costless to the BOC, for it would recover its losses in the competitive market through contemporaneous higher rates in the non Y4competitive market, and, consequently, subsequent recoupment would be unnecessary.Q, xP'ԍAT&T Aug. 30, 1996 Reply at 36. Q As previously stated, although we agree that these are serious concerns, we find that they do not establish a persuasive basis for classifying the BOC interLATA affiliates as dominant in the provision of inregion, interstate, domestic, interLATA services. Rather, such concerns are best addressed through enforcement of the section 272 requirements. We also note that DOJ contends that dominant carrier regulation will not prevent the BOCs from improperly allocating their affiliates' interLATA costs. In fact, DOJ asserts that the incentives to engage in such practices will be eliminated only when the local exchange market is subject to robust  Y4competition.O-(  xP!'ԍDOJ Aug. 30, 1996 Reply at 25.O As previously discussed, we conclude that dominant carrier regulation  Y4generally would not help prevent a BOC from improperly allocating costs..  xP*$'ԍAmeritech Aug. 15, 1996 Comments at 33; Bell Atlantic Aug. 15, 1996 Comments at 1516; PacTel Aug. 15, 1996 Comments at 55. "@.0*%%ZZm"Ԍ X4ԙ` ` d. Unlawful Discrimination  X4` `  i.Comments   Y4l109.` ` The BOCs suggest that concerns over the BOCs' incentives to discriminate are grossly exaggerated, given increasing competition in exchange and exchange access services (particularly after a BOC has satisfied the competitive checklist and other requirements in section 271) and the potential problem that customers would attribute degradation in service  YH4quality to the BOCs, rather than their interLATA affiliates' competitors./ H xP 'ԍSee, e.g., Ameritech Aug. 15, 1996 Comments at 2223; Bell Atlantic Aug. 15, 1996 Comments at 1718. Ameritech points to the cable television industry as an example of how the threat of imminent competition has forced firms to improve customer goodwill immediately in recognition that they would lose market share quickly once competition arrives. Ameritech Aug. 15, 1996 Comments at 23.  The BOCs further contend that, even if they did have the incentive to discriminate, they lack the ability to do so because of the nondiscrimination requirements in the 1996 Act and because of  Y 4engineering obstacles to such selective degradation of service quality.0   xPd'ԍ See, e.g., Ameritech Aug. 15, 1996 Comments at 2425; Bell Atlantic Aug. 15, 1996 Comments at 17; PacTel Aug. 15, 1996 Comments at 60; SBC Aug. 15, 1996 Comments at 1920; USTA Aug. 15, 1996 Comments at 4950. USTA asserts that no commenter provided examples or even anecdotal evidence that undetected selective degradation of access is possible. USTA Aug. 30, 1996 Reply at 28.  Several BOCs also argue that discrimination is unlikely to be effective unless it is apparent to customers. According to the BOCs, if it is apparent to customers, however, it also is likely to be apparent to their long distance carrier and regulators that have the authority to enjoin any  Y 4illegal practices.t1  xP'ԍAmeritech Aug. 15, 1996 Comments at 2627; Bell Atlantic Aug. 15, 1996 Comments at 17; PacTel Aug. 15, 1996 Comments at 5859; SBC Aug. 15, 1996 Comments at 1920; NYNEX Aug. 15, 1996 Comments at 5657. PacTel claims that not only must the degraded quality of the BOC interLATA affiliate's competitors be obvious to consumers, but they must also believe that the quality of the interLATA affiliate's service is better than anyone else's, which would require a massive advertising campaign touting the interLATA affiliate's superior service. PacTel Aug. 15, 1996 Comments at 59.t BellSouth and SBC contend that BOCs have a significant disincentive to provide inferior access to IXCs or otherwise jeopardize their relationship because the access charges paid by IXCs are a major source of revenue for the BOCs, and the IXCs increasingly will have the option of moving their exchange access traffic to alternative LECs  YK4and CAPs.}2K xP !'ԍBellSouth Aug. 15, 1996 Comments at 54; SBC Aug. 15, 1996 Comments at 1920.} Bell Atlantic and USTA claim that the BOCs have a long history of operating in other markets related to their local exchange and exchange access services without any adverse economic effects. They claim that, in each of the businesses that the BOCs have been allowed to enter since divestiture cellular, voice messaging, customer premises equipment, and limited interLATA services output has grown, prices have fallen and"A20*%%ZZe"  Y4competitors have thrived. 3 xPy'ԍBell Atlantic Aug. 15, 1996 Comments at 18; USTA Aug. 15, 1996 Comments, Hausman Aff. at 11.  xPA'See also PacTel Aug. 15, 1996 Comments at 5960, 6467; NYNEX Aug. 15, 1996 Comments at 5657.  PacTel asserts that, if such discriminatory behavior could  Y4happen, it would already have happened.i4X  xP'ԍPacTel Aug. 15, 1996 Comments at 59. According to PacTel, it has competed with interexchange carriers in the provision of intraLATA toll services and with enhanced services providers since the 1980s, and it  xPJ'has not been subject to complaints of discrimination for these services. Id.i  Y4 m110.` ` A number of parties contend that, despite passage of the 1996 Act, BOCs have the incentive and ability to discriminate against their interLATA affiliates' long distance  Y4competitors.5@ xP~ 'ԍSee e.g., Excel Aug. 15, 1996 Comments at 9; Frontier Aug. 15, 1996 Comments at 8; Time Warner  xPF 'Aug. 30, 1996 Reply at 2223; DOJ Aug. 30, 1996 Reply at 16. See also LDDS Comments at 20. AT&T argues that the BOCs can discriminate against interexchange  Yv4competitors in numerous and subtle ways that would be difficult to police.S6v xP'ԍAT&T Aug. 15, 1996 Comments at 63.S According to DOJ and Time Warner, the BOCs will retain the incentive and ability to discriminate against competitors until they are subject to actual, sustained competition in local telephone  Y14markets.v71(  xP 'ԍTime Warner Aug. 30, 1996 Reply at 24; DOJ Aug. 30, 1996 Reply at 16.v  X 4` `  ii.Discussion  Y 4n111.` ` DISCRIMINATIONIn the NonAccounting Safeguards NPRM, we noted that a BOC potentially could use its market power in the provision of local exchange and exchange access services to discriminate against its interLATA affiliate's interLATA competitors to gain an advantage  Y4for its interLATA affiliate.b8  xP'ԍNonAccounting Safeguards NPRM at  139.b We noted that there are various ways in which a BOC could attempt to discriminate against unaffiliated interLATA carriers, such as through poorer quality interconnection arrangements or unnecessary delays in satisfying its competitors'  YK4requests to connect to the BOC's network.:9KH  xPD 'ԍId.: Certain forms of discrimination may be difficult to police, particularly in situations where the level of the BOC's "cooperation" with unaffiliated interLATA carriers is difficult to quantify. To the extent customers value "onestop shopping," degrading a rival's interexchange service may also undermine the attractiveness of the rival's interexchange/local exchange package and thereby strengthen the"B90*%%ZZ"  Y4BOC's dominant position in the provision of local exchange services.:: xPy'ԍId.: We continue to be concerned that a BOC could attempt to discriminate against unaffiliated interLATA carriers. For purposes of determining whether the BOC interLATA affiliates should be classified as dominant, however, we need to consider only whether a BOC could discriminate against its affiliate's interLATA competitors to such an extent that the affiliate would gain the ability to raise prices by restricting its own output upon entry or shortly thereafter.  Y_4o112.` ` The 1996 Act contains a number of nondiscrimination safeguards, which we  YH4have implemented in the NonAccounting Safeguards Order and Accounting Safeguards  Y14Order. For example, section 272(c)(1) prohibits a BOC, in its dealings with its section 272 affiliate, from "discriminat[ing] between that company or affiliate and any other entity in the provision or procurement of goods, services, facilities, and information, or in the  Y 4establishment of standards."J; X xP'ԍ47 U.S.C.  272(c)(1).J In the NonAccounting Safeguards Order, we concluded that section 272(c)(1) requires a BOC to provide unaffiliated entities the same goods, services, facilities, and information that it provides to its section 272 affiliate at the same rates, terms,  Y 4and conditions.c<  xP@'ԍNonAccounting Safeguards Order at  202.c We also concluded that a prima facie case of discrimination would exist under section 272(c)(1) if a BOC does not provide unaffiliated entities the same goods, services, facilities, and information that it provides to its section 272 affiliate at the same  Yb4rates, terms, and conditions.= bx xP'ԍNonAccounting Safeguards Order at  212. To rebut the complainant's case, the BOC may demonstrate, among other things, that rate differentials between the section 272 affiliate and unaffiliated entity reflect differences in cost, or that the unaffiliated entity expressly requested superior or less favorable treatment  xP'in exchange for paying a higher or lower price to the BOC. Id. In addition, we concluded that, to the extent a BOC develops new services for or with its section 272 affiliate, it must develop new services for or with  Y44unaffiliated entities in the same manner.G>4`  xPE'ԍId. at  210.G  Y4p113.` ` Section 272(e) also includes a number of specific nondiscrimination requirements. For example, section 272(e)(1) requires a BOC to "fulfill any requests from an unaffiliated entity for telephone exchange service and exchange access within a period no longer than the period in which it provides such telephone exchange service and exchange  Y4access to itself or its affiliates."J?  xPK$'ԍ47 U.S.C.  272(e)(1).J In the NonAccounting Safeguards Order, we concluded"C ?0*%%ZZW" that the term "requests" includes, but is not limited to, initial installation requests, subsequent requests for improvement, upgrades or modifications of service, or repair and maintenance of  Y4these services.c@ xPK'ԍNonAccounting Safeguards Order at  239.c We also concluded that BOCs must disclose to unaffiliated entities information regarding service intervals in which BOCs provide service to themselves or their  Y4affiliates.3AX xP'ԍId. at  241. In the Order, we sought further comment on specific information disclosure requirements  xPu'that were proposed by AT&T in an ex parte letter filed after the official pleading cycle closed. Id. at  244.3 This disclosure requirement should promote compliance with section 272(e)(1) and allow competitors to resolve disputes informally rather than using the Commission's  Yv4formal complaint process.GBv xP 'ԍId. at  243.G  YH4q114.` ` Section 272(e)(2) restricts the ability of a BOC to provide "facilities, services, or information concerning its provision of exchange access to [its affiliate,] unless [it makes] such facilities, services, or information . . . available to other providers of interLATA  Y 4services in that market on the same terms and conditions."JC @ xP'ԍ47 U.S.C.  272(e)(2).J Coupled with existing equal access and network disclosure requirements, this provision will limit the BOCs' ability to discriminate in the provision of such facilities, services, and information.  Y 4r115.` ` Section 272(e)(3) requires that a BOC charge its affiliate "an amount for access to its telephone exchange service and exchange access that is no less than the amount  Yy4[that the BOC charges] any unaffiliated interexchange carriers for such service."JDy xP'ԍ47 U.S.C.  272(e)(3).J In the  Yb4NonAccounting Safeguards Order, we recognized that this provision serves to constrain a BOC's ability to engage in discriminatory pricing of its exchange and exchange access  Y44service.cE4`  xPE'ԍNonAccounting Safeguards Order at  256.c  Y4s116.` ` We also find that the structural separation requirements of section 272(b) will constrain a BOC's ability to discriminate against its affiliate's interLATA competitors. As previously noted, we have interpreted the section 272(b)(1) requirement that a section 272 affiliate "operate independently" from the BOC to prohibit the joint ownership of  Y4transmission and switching facilities by the BOC and its affiliate.gF  xPK$'ԍSee supra  INDEPENDENTLY104.g This requirement"D F0*%%ZZd" ensures that an affiliate must obtain any such facilities on an arm's length basis pursuant to section 272(b)(5), thereby increasing the transparency of transactions between a BOC and its  Y4affiliates.MGX xPK'ԍNonAccounting Safeguards Order at  160. Section 272(b)(5) requires a BOC interLATA affiliate to "conduct all transactions with the [BOC] on an arm's length basis with any such transactions reduced to writing and available for public inspection." 47 U.S.C.  272(b)(5).M As we observed in the NonAccounting Safeguards Order, "[t]ogether, the prohibition on joint ownership of facilities and the nondiscrimination requirements should ensure that competitors can obtain access to transmission and switching facilities equivalent  Y4to that which section 272 affiliates receive."cH xP& 'ԍNonAccounting Safeguards Order at  160.c  Y_4t117.` ` We recognize that the nondiscrimination requirements in the Communications Act are effective only to the extent that they are enforced. To this end, the 1996 Act gives the Commission specific authority to enforce the requirements of section 272 and the other  Y 4conditions for inregion, interLATA entry incorporated in section 271(d)(3).LI x xPC'ԍ47 U.S.C.  271(d)(6). L Section 271(d)(6) provides that "[i]f at any time after the approval of a [BOC application under section 271(d)(3)], the Commission determines that a [BOC] has ceased to meet any of the conditions required for such approval, the Commission may, after notice and opportunity for a hearing (i) issue an order to such company to correct the deficiency; (ii) impose a penalty  Y 4on such company pursuant to title V; or (iii) suspend or revoke such approval."MJ  xP`'ԍ47 U.S.C.  271(d)(6)(A).M In the  Y4NonAccounting Safeguards Order, we concluded that this authority augments the  Yy4Commission's existing enforcement authority.dKy xP'ԍNonAccounting Safeguards Order at  333. d Section 271(d)(6) also specifies that the Commission must act within 90 days on a complaint alleging that a BOC has failed to meet a  YK4condition required for inregion, interLATA approval under section 271(d)(3).MLK(  xP$'ԍ47 U.S.C.  271(d)(6)(B).M  Y4u118.` ` In light of the 90day deadline to act upon a 271(d)(6) complaint, we adopted  Y4certain measures in the NonAccounting Safeguards Order to expedite the processing of these  Y4complaints.M   xPX"'ԍWe also recently initiated a separate proceeding addressing the expedited complaint procedures  xP #'mandated by this subsection as well as those mandated by other provisions of the 1996 Act. See Amendment of  xP#'Rules Governing Procedures to be Followed When Formal Complaints are Filed Against Common Carriers, CC Docket No. 96238, Notice of Proposed Rulemaking, FCC 96460 (rel. Nov. 27, 1996). For example, once a complainant has demonstrated a prima facie case that a"EM0*%%ZZ" defendant BOC has ceased to meet the conditions of entry, the burden of production (i.e.,  Y4coming forward with evidence) will shift to the BOC defendant.cN xPb'ԍNonAccounting Safeguards Order at  345.c By shifting this burden of production, we have placed on the BOC an affirmative obligation to produce evidence and  Y4arguments necessary to rebut the complainant's prima facie case or face an adverse ruling.OX xP'ԍThe complainant, however, will have the ultimate burden of persuasion throughout the proceeding; that  xP'is, to show that the "preponderance of the evidence" produced in the proceeding weighs in its favor. Id.  Y4In the NonAccounting Safeguards Order, we also concluded that, in addressing complaints alleging that a BOC has ceased to meet the conditions required for the provision of inregion interLATA services, we will not employ a presumption of reasonableness in favor of the BOC interLATA affiliate, regardless of whether the BOC or BOC interLATA affiliate is  YH4regulated as a dominant or nondominant carrier.PH xP 'ԍId. at  351. The presumption of lawfulness given to nondominant carrier rates and practices is employed in the context of complaints alleging violations of sections 201(b) and 202(b), where the complaint must demonstrate that the defendant's rates and practices are "unjust and unreasonable." We found that a presumption of reasonableness is an irrelevant concept in the context of complaints alleging violations of the conditions of interLATA approval in section 271(d)(3), particularly given our interpretation of section 272(c)(1)  xP'as an unqualified prohibition on discrimination. Id.Ģ We believe that these enforcement mechanisms will allow us to adjudicate complaints against the BOCs and BOC interLATA affiliates in a timely manner.  Y 4v119.` ` DISCRIMINATE2We conclude that the statutory and regulatory safeguards discussed above will prevent a BOC from discriminating to such an extent that its interLATA affiliate would have the ability, upon entry or shortly thereafter, to raise the price of inregion, interstate,  Y 4domestic, interLATA services by restricting its output.VQ (  xP'ԍUSTA Aug. 15, 1996 Comments at 4851.V We also conclude that imposing dominant carrier regulation on the BOC interLATA affiliates would not significantly aid in  Yy4the prevention of most types of discrimination.tRXy  xP'ԍAlthough the advance tariff filing requirement might help detect certain types of price discrimination, the marginal benefit of such regulation would be outweighed by the burdens such regulation would impose, as  xPr'discussed above. See supra  BURDENS188שBURDENS290.t Although AT&T expresses concern about the risk of discrimination, it suggests that the Commission should impose stringent nondiscrimination requirements and reporting obligations in order to combat this problem. It  Y44does not contend that dominant carrier regulation would help to prevent discrimination.aS4 xP"'ԍ See AT&T Aug. 15, 1996 Comments at 6566.a We are not persuaded by Time Warner's assertion that dominant carrier regulation is necessary to ensure that the BOCs comply with their statutory obligation to charge affiliates"FhS0*%%ZZ" rates equal to those charged unaffiliated carriers for telephone exchange and exchange access  Y4services.WT xPb'ԍTime Warner Aug. 30, 1996 Reply at 23.W Rather, as discussed above, we conclude that the section 272 safeguards, coupled with the expedited enforcement mechanism, should provide an adequate means of ensuring that the BOCs comply with this requirement.  X4` ` e. Price Squeeze  X_4` `  i.Comments  Y14w120.` ` The BOCs generally argue that they do not have the ability to engage in a  Y 4price squeeze by raising prices because their access prices are regulated.U X xP# 'ԍSee, e.g., Ameritech Aug. 15, 1996 Comments at 3031; PacTel Aug. 15, 1996 Comments at 62. They also note that section 272(e)(3) requires BOCs to charge their affiliates the same access rates they  Y 4charge unaffiliated carriers.V  xP'ԍAmeritech Aug. 15, 1996 Comments at 3031; PacTel Aug. 15, 1996 Comments at 62; USTA Aug. 15, 1996 Comments at 5051, Hausman Aff. at 12. PacTel claims that a true price squeeze would occur only if the price charged by the BOC interLATA affiliate was less than the BOC's marginal cost of access, plus the foregone contribution from that access, plus the affiliate's cost of providing  Y 4the long distance service.ZW @ xP'ԍPacTel Aug. 15, 1996 Comments at 6162. Z PacTel contends that it would be irrational for a BOC interLATA affiliate to price below this level unless its object was predation, which is not a  Yy4plausible strategy.UXy xP'ԍPacTel Aug. 15, 1996 Comments at 62.U On the other hand, according to PacTel, a BOC interLATA affiliate's acceptance of little or no profit in order to expand its market share, by itself, would not be a  YK4price squeeze and would not be anticompetitive.AYK`  xP\'ԍId. at 61.A NYNEX claims that significant changes  Y44to local exchange service and access markets initiated by the Local Competition First Report  Y4and Order make it unreasonable to fear that BOC access pricing could result in its affiliate's attaining long distance market power, particularly in light of the Commission's commitment  Y4to undertake and complete access reform within the next year.xZ  xP!'ԍNYNEX Aug. 15, 1996 Comments at 5758; NYNEX Aug. 30, 1996 Reply at 32.x  Y4x121.` ` NonBOC commenters generally contend that the BOCs will have the incentive and ability to engage in a price squeeze, despite price cap regulation of the BOCs' access"G Z0*%%ZZq" services and other applicable safeguards. The Economic Strategy Institute asserts that antitrust and economic literature generally supports the need for regulatory intervention in  Y4cases of price squeezes.a[ xPK'ԍEcon. Strategy Inst. Aug. 30, 1996 Reply at 2. a MCI contends that the BOCs are most likely to exercise market power by assessing excessive prices for exchange access services for all carriers (including  Y4the BOCs' interLATA affiliates),R\X xP'ԍMCI Aug. 15, 1996 Comments at 63.R and price cap regulation will not prevent this tactic  Y4because access rates are already excessive.A] xP& 'ԍId. at 64.A MFS argues that, as long as a BOC is allowed to provide both essential services and competitive services, and as long as those essential services are priced above cost, a "vertically integrated" BOC can drive even more efficient  YH4rivals out of the market.t^Hx xPq'ԍMFS Aug. 15, 1996 Comments at 4; MFS Aug. 30, 1996 Reply at 2324. t MFS and MCI further assert that a price squeeze would not be limited to price increases in access services, but could also arise from the contribution BOCs earn on stimulated demand for access services created by competitors' forced price  Y 4reductions to match a BOC interLATA affiliate price reduction.n_  xP'ԍMFS Aug. 30, 1996 Reply at 25; MCI Aug. 30, 1996 Reply at 35.n MCI claims that such a strategy could seriously harm competition. According to MCI, even if rivals remain in the market, they will be weakened by the cost increases they are forced to absorb, thereby  Y 4reducing their output and the "vigors of competition."R`  xP'ԍMCI Aug. 30, 1996 Reply at 3637.R  Y4y122.` ` LDDS asserts that the structural separation, accounting, and imputation requirements in the Communications Act do not adequately address the BOCs' access cost advantage because: (1) there is no way to ensure that a BOC interLATA affiliate's costs, other than for access, are reflected in its prices; (2) to the extent customers buy bundled local exchange, long distance, and other services from a BOC interLATA affiliate, the BOC interLATA affiliate could effectively evade imputation requirements by passing on its access cost advantage in reduced prices for services not subject to the Commission's direct jurisdiction, such as local exchange and information services; (3) a BOC will have the incentive and ability to favor its interLATA affiliate over its competitors in the provision of bundled local exchange and interLATA services; and (4) a BOC has the ability to  Y4discriminate against its affiliate's interLATA competitors on terms other than price.Va(  xP#'ԍLDDS Aug. 15, 1996 Comments at 2324.V "H a0*%%ZZh"Ԍ Y4z123.` ` MCI and AT&T argue that requiring cost support data and advance notice periods for tariff filings is important to ensure that the BOC interLATA affiliates are pricing  Y4their services above their costs.ub xPK'ԍMCI Aug. 15, 1996 Comments at 65; AT&T Aug. 15, 1996 Comments at 66.u MFS, however, questions whether regulating BOC interLATA affiliates as dominant firms would be effective in preventing price squeezes. It contends that the only effective mechanisms for preventing this behavior are pricing BOC essential services at economic cost and developing competitive alternatives to the BOCs'  Yv4essential services.ScvX xP 'ԍMFS Aug. 15, 1996 Comments at 45.S  YH4{124.` ` Ameritech disputes arguments that access charges are priced above economic costs and therefore will enable BOC interLATA affiliates to set interLATA rates below cost without incurring a loss. According to Ameritech, any subsidies in access are real costs that the BOC must recover in some manner in order to remain "whole." Ameritech also claims that price squeeze arguments ignore the fact that BOC interLATA affiliates will pay access charges to unaffiliated carriers when they originate or terminate long distance calls outof Y 4region and that facilitiesbased incumbent carriers actually have significant cost advantages.Xd  xPW'ԍAmeritech Aug. 30, 1996 Reply at 34. X Finally, Ameritech disputes the relevance of the price squeeze arguments. According to Ameritech, a BOC interLATA affiliate's ability to gain market share by setting rates below the cost of access would not constitute a basis for classifying the BOC interLATA affiliate as  Yb4dominant.Bebx xP'ԍId. at 2. B Ameritech is aware of no legal theory under which such a practice could be considered unreasonable or otherwise unlawful, since consumers would suffer no harm unless  Y44the BOC interLATA affiliate could somehow acquire market power from its action.<f4 xP'ԍId. < Bell Atlantic and NYNEX claim that advance notice periods for tariff filings and cost support requirements are unnecessary to ensure compliance with the section 272 imputation requirement because the 1996 Act already provides for a biennial audit, which is intended to serve specifically as a check on compliance with the section 272 separation requirements,  Y4including the imputation requirement.MgX xP !'ԍBell Atlantic Aug. 30, 1996 Reply at 20; NYNEX Aug. 30, 1996 Reply at 33; see also PacTel Aug. 30, 1996 Reply at 32; USTA Aug. 15, 1996 Comments, Hausman Aff. at 1213 (asserting that imputation has worked well in intraLATA long distance markets, such as those in California). M  X4` `  ii.Discussion "I g0*%%ZZ["Ԍ Y4ԙ|125.` `  SQUEEZE1  SQUEEZE In the NonAccounting Safeguards NPRM, we noted that, absent appropriate safeguards, a BOC potentially could raise the price of access to all interexchange carriers,  Y4including its affiliate.ah xPK'ԍNonAccounting Safeguards NPRM at 141.a This would cause competing interLATA carriers either to raise their retail interLATA rates in order to maintain the same profit margins or to attempt to preserve their market share by not raising their prices to reflect the increase in access charges, thereby  Y4reducing their profit margins.iX xP'ԍSee United States v. Aluminum Co. of America, 148 F.2d 416, 43738 (2d Cir. 1945); Town of  xP^ 'Concord v. Boston Edison Co., 915 F.2d 17, 18 (1st Cir. 1990). If the competing inregion interLATA service providers raised their prices to recover the increased access charges, the BOC interLATA affiliate could seek to expand its market share by not matching the price increase. In that event, although the BOC interLATA affiliate would achieve lower profit margins than its rivals, all other things being equal, the BOC corporate entity as a whole would receive additional access revenues from unaffiliated carriers due to the access price increase and greater revenues from the affiliate's interLATA services caused by its increased share of interLATA traffic. If the BOC were to raise its access rates high enough, it would be impossible for interexchange competitors to compete effectively. Thus, the entry of a BOC's affiliate into the provision of inregion, interstate, domestic, interLATA services might give the BOC an incentive to raise its price for access services in order to disadvantage its affiliate's rivals,  Y4increase its affiliate's market share, and increase the profits of the BOC overall.j  xP'ԍNonAccounting Safeguards NPRM at  141. In the Notice, we recognized that the same situation could occur if a BOC failed to pass through to interexchange carriers a reduction in the cost of providing access services, and that price cap regulation would not be effective in eliminating the effect of a price squeeze  xPI'initiated under these circumstances. Id. at  141 n.272.  Yb4}126.` ` We conclude, as discussed in the Notice, that price cap regulation of the BOCs' access services sufficiently constrains a BOC's ability to raise access prices to such an extent that the BOC affiliate would gain, upon entry or soon thereafter, the ability to raise prices of interLATA services above competitive levels by restricting its own output of those  Y4services.0kX xPO'ԍSee NYNEX comments at 57. We also note that the emergence of competition in the provision of  xP'exchange access service may also constrain a BOC's ability to raise access prices. See id.; SBC Aug. 30, 1996 Reply at 27.0 Although a BOC may be able to raise its access rates to some extent if those rates are currently below the applicable price cap and could fail to pass along reductions in  Y4the cost of access if the productivity factor is too low,l  xPA#'ԍNonAccounting Safeguards NPRM at  141 n.272. But see Ameritech Aug. 15, 1996 Comments at 30 (noting that the Commission recently substantially increased the productivity index). we conclude that such an increase would not give a BOC affiliate the ability to raise prices of interLATA services above"Jl0*%%ZZ`"  Y4competitive levels by restricting its own output of those services.mX xPy'ԍSee USTA Aug. 15, 1996 Comments at 5051 (BOCs would not likely be able to manipulate their access charges enough, within the parameters of the price cap, so as to drive competitors of the BOC interLATA affiliate out of business).  We will consider the impact of such a potential increase on competition in the pending access charge reform proceeding. We also note that the ability of competing carriers to acquire access through the purchase of unbundled elements enables them to avoid originating access charges and thus  Y4partially protect themselves against a price squeeze.ynX xP= 'ԍSee 47 U.S.C.  252(d)(1)(A)(i). The Commission's pricing rules interpreting section 252(d)(1)(A)(i)  xP 'are currently under stay by the 8th Circuit Court of Appeals. Iowa Utilities Board v. FCC, No. 963321, 1996 WL 589284 (8th Cir. Oct. 15, 1996) (order granting stay pending judicial review).y To the extent that access charges are  Y4reformed to more closely reflect economic cost,bo xPF 'ԍSee Ameritech Aug. 15, 1996 Comments at 31.b as is being considered in the access charge  Yv4reform proceeding, the potential for a price squeeze should be further mitigated.fpv xP'ԍSee Access Charge Reform NPRM at  14.f  YH4~127.` `  BELOW Some commenters assert, however, that a BOC could engage in a price squeeze without raising the price of its access services. These commenters suggest that, because access services are currently priced above economic cost, a BOC interLATA affiliate  Y 4could set its interLATA prices at or below the BOC's access prices and still be profitable.q (  xP'ԍMFS Aug. 15, 1996 Comments at 45; MCI Aug. 15, 1996 Comments at 6364; MFS Aug. 30, 1996 Reply at 2425. The affiliate's interLATA competitors would then be faced with the choice of setting their prices at unprofitable levels or losing market share. Several BOCs respond that this would not be a profitmaximizing strategy because the increased revenues they would receive from the affiliate's interLATA services would be offset by a reduction in the access revenues  Y4received from unaffiliated carriers.r  xP'ԍSee PacTel Aug. 15, 1996 Comments at 6364; Ameritech Aug. 15, 1996 Comments at 30 (if the BOCs had the ability to raise access prices substantially, they would have every incentive to do so now). If the affiliate's reduction in interLATA rates sufficiently increased demand, however, it is possible the BOC interLATA affiliate's higher interLATA revenues would more than offset lost access revenues, assuming the affiliate's  YK4interLATA competitors do not match the affiliate's price reduction.s K xP!'ԍSee, e.g., MFS Aug. 15, 1996 Comments, attach. 1 (providing numerical illustration purporting to show that a BOC could engage in a price squeeze despite price cap regulation of the BOCs' access services or  xPd#'the imputation requirement); MCI Aug. 30, 1996 Reply at 35. But see USTA Aug. 30, 1996 Reply at 2627, Hausman Aff. at 5 (claiming MFS' illustration fails to impute access prices at tariffed rates, and that when properly modified, the model indicates that the IXC with the lowest cost structure will have the lowest price"$r0*%%!%" structure, regardless of any affiliation with the BOC); Bell Atlantic Aug. 30, 1996 Reply at 22 (asserting that MFS' illustration ignores section 272(e)(3), which requires that an interLATA affiliate pay the same for access that unaffiliated carriers do and the potential that the competitor could provide exchange and exchange access service). If, in the alternative,"KKs0*%%ZZ" the competitors reduce their interLATA rates to match the BOC interLATA affiliate's reductions, the BOC would receive increased access revenues. In the extreme, such a situation could drive the affiliate's rivals from the market. MCI claims that, even if such a predatory strategy is not successful, the rivals would be weakened by the cost increases they  Y4absorb, thereby reducing their output and their ability to compete effectively.Rt xP 'ԍMCI Aug. 30, 1996 Reply at 3637.R  Yv4128.` ` COMPLAINTWe conclude that imposing advance tariffing and cost support data requirements on the BOC interLATA affiliates would not be an efficient means of preventing  YH4the BOCs from engaging in such a predatory price squeeze strategy.uH@ xP9'ԍSee AT&T Aug. 15, 1996 Comments at 66; MCI Aug. 15, 1996 Comments at 6465. As previously discussed, advance notice periods for tariff filings could reduce the BOC interLATA affiliates' incentives to reduce their interLATA rates. Furthermore, requiring the BOC interLATA affiliates to file cost support data could discourage them from introducing  Y 4innovative new service offerings.zv  xPm'ԍSee supra  BURDENS188שBURDENS290.z We also conclude that imposing advance tariff filing and cost support data requirements on the BOC interLATA affiliates would not address LDDS' concern that the BOC interLATA affiliates could effectively evade imputation requirements by passing on their access cost advantage in reduced prices for services not subject to the Commission's jurisdiction, such as local exchange and information services. In addition, we believe that, if the predatory behavior described above were to occur, it could be adequately addressed through our complaint process and enforcement of the antitrust laws, coupled with  YK4the biennial audits required by section 272(d),wK`  xP\'ԍ47 U.S.C.  272(d). See Bell Atlantic Aug. 30, 1996 Reply at 20; NYNEX Aug. 30, 1996 Reply at 33; PacTel Aug. 30, 1996 Reply at 32. such that the benefits of any protections offered by advance tariffing and cost support data requirements would be outweighed by the  Y4enormous administrative burden those requirements would impose on the Commission.mx  xP 'ԍSee NonAccounting Safeguards Order at  258.m A BOC interLATA affiliate that charges a rate for its interLATA services below its incremental cost to provide service would be in violation of sections 201 and 202 of the Communications"LH x0*%%ZZr"  Y4Act, if such a rate were sustained for an extended period.y xPy'ԍNonAccounting Safeguards Order at  258. See also AT&T Communications Tariff F.C.C. No. 1;  xPA'PRO America Optional Calling Plan; Alascom, Inc. Tariff F.C.C. No. 1; BlockofTime Call America, Memorandum Opinion and Order, 103 FCC 2d 134, 136,  3 (1985) (finding that AT&T's calling plan would violate sections 201(b) and 202(a) because AT&T had failed to demonstrate that the plan's revenues would cover its costs).  Y4129.` ` We also note that other factors constrain the ability of a BOC or BOC interLATA affiliate to engage in a predatory price squeeze. For example, a BOC interLATA affiliate's apparent cost advantage resulting from its avoidance of access charges may be offset by other costs it must incur, such as the cost of interLATA transport, which, at least initially, may be greater than the true marginal cost of interLATA transport for facilities Y_4based interLATA carriers.Zz_x xP 'ԍAmeritech Aug. 15, 1996 Comments at 31. Z In addition, a BOC interLATA affiliate will have to pay terminating access charges to LECs other than its BOC parent for calls terminating outside the BOC's region and to competing LECs in the BOC's inregion states. Having to pay such access charges reduces the cost disparity between the BOC interLATA affiliate and competing interexchange carriers. Finally, we note that a price squeeze strategy would give a BOC interLATA affiliate the ability to raise price by restricting its own output only if it is able to drive competitors from the market. As discussed previously, the existence of four nationwide, or nearnationwide, network facilities makes it unlikely that a BOC interLATA  Y 4affiliate could successfully engage in a predatory strategy.c{  xP`'ԍSee supra  PREDATION107.c As a result, we conclude that the BOCs or BOC interLATA affiliates will not be able to engage in a price squeeze to such an extent that the BOC interLATA affiliates will have the ability, upon entry or soon thereafter, to raise price by restricting their own output. Thus we do not believe that classifying a BOC's interLATA affiliate as a dominant carrier is necessary or appropriate to constrain the BOC and its affiliate from attempting to execute a predatory price squeeze.  Y4130.` `  SQUEEZE2  ACCESS We agree with commenters that assert that the risk of the BOCs engaging in a price squeeze will be greatly reduced when interLATA competitors gain the ability to purchase access to the BOCs' networks at or near cost, and as competition develops in the  Y4provision of exchange access services.H|X xP !'ԍSee, e.g., MFS Aug. 15, 1996 Comments at 5; MCI Aug. 15, 1996 Comments at 64. See also PacTel Aug. 15, 1996 Comments at 62 (if price cap regulation is not working, Commission should revise it, not impose dominant regulation on BOC interLATA affiliates).H As noted, we believe that the ability of competing carriers to acquire access through the purchase of unbundled elements enables them to avoid originating access charges and thus partially protect themselves against a price squeeze. "M |0*%%ZZA" Moreover, to the extent that access charges are reformed to more closely reflect economic cost, as is being considered in the access charge reform proceeding, the potential for a price  Y4squeeze should be further mitigated.f} xPK'ԍSee Access Charge Reform NPRM at  14.f  Y4` ` f. Mergers or Joint Ventures Between Two or More BOCs  Xw4` `  i.Background and Comments  YI4131.` ` In the NonAccounting Safeguards NPRM, we sought comment on what effect, if any, a merger of or joint venture between two or more BOCs should have on our determination whether to classify the interLATA affiliate of one of those BOCs as dominant  Y 4or nondominant.b~ X xP 'ԍNonAccounting Safeguards NPRM at  148.b Bell Atlantic, contends that the prospect of mergers between BOCs should not have any impact on whether the BOCs are treated as dominant because both parties to such a merger would be entering the long distance market with zero market share and in competition with well established competitors and because the merged company's access business would remain subject to all the same market and regulatory constraints as  Y4nonmerged BOCs.\ xP*'ԍBell Atlantic Aug. 15, 1996 Comments at 20.\ Sprint and the New York State Department of Public Service (NYPDS) contend that mergers, acquisitions, and similar combinations by BOCs may require  Yc4consideration of geographic markets more expansive than a particular BOC's region.{cx xP'ԍSprint Aug. 15, 1996 Comments at 6263; NYPDS Aug. 15, 1996 Comments at 7.{  X54` `  ii.Discussion  Y4132.` ` We conclude that a merger of or joint venture between two or more BOCs should have no direct effect on our determination of whether to classify the interLATA affiliates of one of those BOCs as dominant or nondominant. Bell Atlantic notes that, even though a merged company's territory would grow, it would continue to be subject to the same regulation currently imposed on the individual companies prior to the merger or joint  Y4venture. In the NonAccounting Safeguards Order, we concluded that, upon completion of a merger between or among BOCs, the inregion states of a merged entity shall include all of  Yf4the inregion states of each of the BOCs involved in the merger.6Xf xP#'ԍNonAccounting Safeguards Order at  69. We declined, however, to adopt a general rule that would treat the regions of merging BOCs as combined prior to completion of the merger, for the purposes of applying the section 272 separate affiliate and nondiscrimination safeguards. We found that adequate protections against"$0*%%$" discriminatory and anticompetitive conduct already applied to mergers, acquisitions, and joint ventures among  xPX'BOCs. Id.6 Thus, the merged entity"fN 0*%%ZZ/" would be required to satisfy the requirements of sections 271 and 272 in providing interLATA services originating in those inregion states. We also note that DOJ is currently considering the implications of such mergers and joint ventures from an antitrust  Y4perspective.  xP'ԍSee Justice Clears 2 Mergers Involving Phone Firms, Wash. Post, Nov. 6, 1996, at C11.  X4` ` g. Conclusion  Y_4133.` ` Based on the preceding analysis, we conclude that the BOCs' interLATA affiliates will not have the ability, upon entry or soon thereafter, to raise the price of inregion, interstate, domestic, interLATA services by restricting their own output, and, therefore, that the BOC interLATA affiliates should be classified as nondominant in the provision of those services. We note, however, that we retain the ability to impose some or all of the dominant carrier regulations on one or more of the BOC interLATA affiliates if  Y 4this proves necessary in the future.Y  xP6'ԍSee DOJ Aug. 30, 1996 Reply at 17.Y As discussed in the Notice, our experience with regulating the independent LECs' provision of interstate, domestic, interexchange services and the BOCs' provision of enhanced services suggests that our existing safeguards have worked reasonably well and generally have been effective, in conjunction with our regular  Yy4audits, in deterring the improper allocation of costs and unlawful discrimination.y@ xPj'ԍNonAccounting Safeguards NPRM at  146; PacTel Aug. 15, 1996 Comments at 6566 (noting that PacTel has lost significant market share in intraLATA toll services and that Bell Atlantic and NYNEX have not gained significant market share in the provision of interLATA corridor services). We acknowledge, however, that there have been instances in which individual BOCs may have not complied with our nonstructural  xP'safeguards in providing nonregulated services. See id. n. 284. See also MCI Aug. 15, 1996 Comments at 67  xPR'(referring to the MemoryCall case). We are  Yb4not persuaded by MCI's argument that the Ninth Circuit's decision in California IIIb  xP'ԍCalifornia v. FCC, 39 F.3d 919, 923 (9th Cir. 1994) (California III). In its Computer III decisions, the Commission removed the separate affiliate requirements applicable to AT&T and the BOCs, provided that they complied with certain nonstructural safeguards intended to guarantee that they offered their regulated network services to competing enhanced service providers on an equal and nondiscriminatory basis. The U.S.  xP 'Court of Appeals for the Ninth Circuit vacated portions of the Commission's Computer III decisions in three  xP!'separate decisions. Amendment of Section 64.702 of the Commission's Rules and Regulations, CC Docket No.  xP{"'85229, Phase I, 104 FCC 2d 958 (1986) (Phase I Order), recon., 2 FCC Rcd 3035 (1987) (Phase I  xPC#'Reconsideration Order), further recon., 3 FCC Rcd 1135 (1988), second further recon., 4 FCC Rcd 5927  xP $'(1989); Phase I Order and Phase I Reconsideration Order vacated, California v. FCC, 905 F.2d 1217 (9th Cir.  xP$'1990) (California I); Phase II, 2 FCC Rcd 3072 (1987) (Computer III Phase II Order), recon., 3 FCC Rcd 1150"$0*%%(%"  xP'(1988), further recon., 4 FCC Rcd 5927 (1989); Phase II Order vacated, California I, 905 F.2d 1217 (9th Cir.  xPX'1990); Computer III Remand Proceeding, 5 FCC Rcd 7719 (1990), recon., 7 FCC Rcd 909 (1992), pets. for  xP 'review denied, California v. FCC, 4 F.3d 1505 (9th Cir. 1993); BOC Safeguards Order, 6 FCC Rcd 7571  xP'(1991), vacated in part and remanded, California III, 39 F.3d 919 (9th Cir. 1994), cert. denied, 115 S. Ct. 1427 (1995).  leads"bOx0*%%ZZ" to the conclusion that we should impose dominant carrier regulation on the BOC interLATA  Y4affiliates.\x xP'ԍSee MCI Aug. 15, 1996 Comments at 67.\ As discussed above, section 272 requires the BOCs to provide inregion, interLATA services through structurally separate affiliates. Since section 272's structural  Y4separation requirements are akin to those in Computer II, the Ninth Circuit's discussion of  Y4whether the Commission had adequately justified its elimination of the Computer II structural separation requirements for BOC enhanced services is not relevant here.  Y_4134.` ` We believe that the entry of the BOC interLATA affiliates into the provision of inregion, interLATA services has the potential to increase price competition and lead to innovative new services and market efficiencies. We recognize that, as long as the BOCs retain control of local bottleneck facilities, they could potentially engage in improper cost allocation, discrimination, and other anticompetitive conduct to favor their affiliates' inregion, interLATA services. We conclude, however, that, to the extent dominant carrier regulation addresses such anticompetitive conduct, the burdens imposed by such regulation outweighs its benefits. We therefore see no reason to impose dominant carrier regulation on the BOC interLATA affiliates, given that section 272 contains numerous safeguards designed to prevent the BOCs from engaging in improper cost allocation, discrimination, and other  Yy4anticompetitive conduct.y xP2'ԍSection 272(f)(1) of the Communications Act provides that the BOC safeguards set out in section 272, other than those prescribed in section 272(e), shall sunset three years after the date that the BOC affiliate is authorized to provide interLATA telecommunications services unless the Commission extends such threeyear period by rule or order. We cannot now predict how competition will develop in local exchange markets nor can we determine at this time what accounting and nonaccounting safeguards, if any, will be needed at that time. Accordingly, we recognize that it will be necessary for the Commission to determine what accounting and nonaccounting safeguards, if any, are necessary and appropriate upon expiration of those section 272 safeguards subject to sunset, and whether BOC interLATA affiliates should be classified as dominant or nondominant in the provision of inregion, interstate, domestic, interLATA services. We emphasize that our decision to accord nondominant treatment to the BOCs' provision of inregion, interLATA services is predicated upon their full compliance with the structural, transactional, and nondiscrimination requirements of section 272 and our implementing rules. We believe that these safeguards, coupled with other statutory and regulatory safeguards, are sufficient to prevent the BOC interLATA affiliates from gaining the ability, upon entry or shortly thereafter, to raise prices by restricting their output. "P0*%%ZZB"Ԍ X4 3.` ` Classification of BOC InterLATA Affiliates in the Provision of InRegion,  X4International Services (#`  X4` ` a. Background (#  Y4135.` ` In the NonAccounting Safeguards NPRM, we tentatively concluded that we should apply the same regulatory treatment to a BOC interLATA affiliate's provision of inregion, international services as we apply to its provision of inregion, interstate, domestic, interLATA services, assuming the BOC or BOC interLATA affiliate does not have an affiliation with a foreign carrier that has the ability to discriminate against the rivals of the  Y 4BOC or its affiliate through control of bottleneck facilities in a foreign destination market.cX  xP 'ԍNonAccounting Safeguards NPRM at  150; see also Market Entry and Regulation of Foreign xP[ 'affiliated Entities, IB Docket No. 9522, Report and Order, 11 FCC Rcd 3873, 391720 (1995) (Foreign Carrier  xP# 'Entry Order), recon. pending.c Under this proposal, our current framework for addressing issues raised by foreign carrier  Y 4affiliations would apply to the BOCs' provision of U.S. international services.b  xP'ԍNonAccounting Safeguards NPRM at  151.b  X 4` ` b. Comments  Y4136.` ` Most commenters support the Commission's proposal to apply the same regulatory treatment to the BOC interLATA affiliates' provision of inregion, international  Yb4services as it applies to inregion, interstate, domestic interLATA services.bx xP'ԍSee, e.g., AT&T Aug. 15, 1996 Comments at 6667, n.59; BellSouth Aug. 15, 1996 Comments at 56; NYNEX Aug. 15, 1996 Comments at 61; Excel Aug. 15, 1996 Comments at 89. PacTel and U S West agree that if the BOC interLATA affiliates should be nondominant for inregion domestic services, they should be nondominant for inregion international services, but they further claim that differences in the domestic and international markets suggest that BOC interLATA affiliates should be classified as nondominant for international interLATA  Y4services regardless of their classification for domestic services.x xPp'ԍPacTel Aug. 15, 1996 Comments at 68; U S West Aug. 30, 1996 Reply at 31 n.85. According to PacTel, the international market is different from the domestic market in three respects: (1) the U.S. international telecommunications market is far more concentrated than the domestic market, with only a small number of facilitiesbased carriers; (2) while access costs are the major expense for domestic interLATA calls, access to satellite or fiber facilities are the largest single expense for international services; and (3) BOCs are likely to procure most of their international facilities from consortiums led by AT&T. PacTel Aug. 15, 1996 Comments at 6869. PacTel agrees that the existing rules governing dominance based on foreign market affiliations should apply to BOC interLATA affiliates as they do to all other international carriers. PacTel suggests, however,"Q0*%%ZZS" that the Commission should ensure that routebyroute dominance filings, based on foreign  Y4affiliations, be concluded no later than the grant of a section 271 entry petition.GX xPb'ԍPacTel Aug. 15, 1996 Comments at 69. PacTel states that this could be accomplished by beginning the process before section 271 applications are filed or by streamlining any required parallel section 214 filings of BOC interLATA affiliates. PacTel Aug. 15, 1996 Comments at 69.G  Y4137.` ` MCI generally agrees with the Commission that a BOC's inregion international service should be treated in a manner similar to its inregion domestic  Y4interLATA service.R xP& 'ԍMCI Aug. 15, 1996 Comments at 68.R It contends, however, that the BOCs have unique advantages in the international services market as a result of their "regional focus." MCI expresses concern that the BOCs will enter into special arrangements with foreign carriers under which return  YH4traffic would be "groomed" i.e., the foreign carrier would give the BOC's interLATA  Y14affiliate the return traffic that terminates in the BOC's region.:1x xPZ'ԍId.: MCI contends that, by contrast, nonBOC interexchange carriers would be required to take return traffic to destinations all over the United States and thereby incur higher costs in terminating such traffic. MCI notes that a disproportionate amount of international traffic terminates in the NYNEX and Pacific Bell regions and argues that these BOCs would have an especially  Y 4lucrative opportunity to obtain groomed traffic.D  xPw'ԍId. at 6869.D MCI notes that such arrangements may result in lower costs for terminating U.S. inbound traffic, but characterizes these arrangements as "anticompetitive." It urges the Commission, at a minimum, to impose on the BOC interLATA affiliates the same safeguards that it imposed on MCI in the order  Yb4approving British Telecom's (BT's) initial 20 percent investment in MCI. b xP'ԍId. at 6971. See MCI Communications Corp. British Telecommunications plc: Joint Petition for  xPs'Declaratory Ruling Concerning Section 310(b)(4) and (d) of the Communications Act of 1934, as amended, File No. ISP93013, Declaratory Ruling and Order, 9 FCC Rcd 3960 (rel. July 25, 1994) (approving initial 20 percent investment). A number of the  YK4BOCs respond that such additional requirements are unnecessary and inappropriate.aK  xP|'ԍPacTel Aug. 30, 1996 Reply at 35 (claiming that MCI's objection to regionallysorted traffic is contrary to efficiency and thus flatly anticompetitive); SBC Aug. 30, 1996 Reply at 2829 (contending that there is no evidence to suggest that existing rules adopted to handle the regulatory treatment of U.S. carriers on international routes are insufficient, and that such situations should, instead, be handled on a casebycase basis); NYNEX Aug. 30, 1996 Reply at 3435 (asserting that additional conditions imposed on MCI were based on unique circumstances).a "4R0*%%ZZ"Ԍ X4` ` c. Discussion  Y4138.` ` INTERNATIONALWe adopt our tentative conclusion that we should apply the same regulatory treatment to a BOC interLATA affiliate's provision of inregion, international services as we apply to its provision of inregion, interstate, domestic, interLATA services. As discussed in the Notice, the relevant issue in both contexts is whether the BOC interLATA affiliate can exploit its market power in local exchange and exchange access services to raise prices by restricting its own output in another market (the domestic interLATA or international market). We also note that the section 272 safeguards apply equally to the BOCs' inregion,  Y14domestic, interLATA and inregion, international services.b1 xP 'ԍNonAccounting Safeguards Order at  58.b We find no practical distinctions between a BOC's ability and incentive to use its market power in the provision of local exchange and access services to improperly allocate costs, discriminate against, or otherwise disadvantage unaffiliated domestic interexchange competitors as opposed to  Y 4international service competitors.  X xP'ԍSee AT&T Aug. 15, 1996 Comments at 6667, n.59 (the ability and incentive of a BOC to use its market power for the purpose of raising its rivals' costs in the longdistance market does not depend on whether its competitors are domestic or international); BellSouth Aug. 15, 1996 Comments at 56; NYNEX Aug. 15, 1996 Comments at 61.   Y 4139.` `  FOREIGN In light of our classification of the BOC interLATA affiliates as nondominant in the provision inregion, interstate, domestic, interLATA services, we accordingly will classify each BOC interLATA affiliate as nondominant in the provision of inregion, international services, unless it is affiliated, within the meaning of section 63.18(h)(1)(i) of our rules, with a foreign carrier that has the ability to discriminate against the rivals of the BOC or its affiliate through control of bottleneck services or facilities in a foreign destination market. We will apply section 63.10(a) of our rules to determine whether to regulate a BOC interLATA affiliate as dominant on those U.S. international routes where an affiliated foreign carrier has the ability to discriminate against unaffiliated U.S. international carriers through  Y4control of bottleneck services or facilities in the foreign destination market.t@ xP'ԍSee Foreign Carrier Entry Order, 11 FCC Rcd at 391720.t The safeguards that we apply to carriers that we classify as dominant based on a foreign carrier affiliation are contained in Section 63.10(c) of our rules and are designed to address the incentive and ability of the foreign carrier to discriminate against the rivals of its U.S. affiliate in the provision of services or facilities necessary to terminate U.S. international"|S0*%%ZZ+"  Y4traffic.@ xPy'ԍSection 63.10(a) of the Commission's rules provides that: (1) carriers having no affiliation with a foreign carrier in the destination market are presumptively nondominant for that route; (2) carriers affiliated with a foreign carrier that is a monopoly in the destination market are presumptively dominant for that route; (3) carriers affiliated with a foreign carrier that is not a monopoly on that route receive closer scrutiny by the Commission; and (4) carriers that serve an affiliated destination market solely through the resale of an  xPa'unaffiliated U.S. facilitiesbased carrier's switched services are presumptively nondominant for that route. See  xP)'also Regulation of International Common Carrier Services, CC Docket No. 91360, Report and Order, 7 FCC Rcd 7331, 7334,  1924 (1992). This framework for addressing issues raised by foreign carrier affiliations will apply to the BOCs' provision of U.S. international services as an additional component of our regulation of the U.S. international services market.  Y4140.` `  GROOMING We reject MCI's suggestion that we should impose additional safeguards on  Y4the BOC's inregion, international services._ xP'ԍSee MCI Aug. 15, 1996 Comments at 6871._ We observe, as an initial matter, that all U.S. international carriers are subject to the same prohibition against accepting "special concessions" from foreign carriers that we imposed on MCI in the order approving BT's initial 20 percent investment in MCI. The grooming described by MCI would constitute a special concession prohibited by the terms of Section 63.14 of the Commission's rules to the extent the U.S. carrier entered into a grooming arrangement that the foreign carrier did not  Y 4offer to similarly situated U.S. carriers.  `  xP'ԍSee 47 C.F.R. Section 63.14 ("[a]ny carrier authorized to provide international communications service . . . shall be prohibited from agreeing to accept special concessions directly or indirectly from any foreign carrier or administration with respect to traffic or revenue flows between the United States and any foreign country served . . . and from agreeing to enter into such agreements in the future. . . ." ).  A U.S. carrier that negotiates a grooming arrangement with a foreign carrier on a particular route would be required to submit the arrangement to the Commission for public comment and review in circumstances where the arrangement deviates from existing arrangements with other U.S. carriers for the routing  Y 4and/or settlement of traffic on that route.]X H  xP'ԍSee 47 C.F.R.  43.51(d) (to be renumbered 47 C.F.R.  43.51(e) as provided in Regulation of  xPh'International Accounting Rates, CC Docket No. 90337, Third Report and Order and Order on Reconsideration, 11 FCC Rcd 12498 (rel. May 20, 1996)); 47 C.F.R.  64.1001.]  Yy4141.` ` We are not prepared to rule on this record, however, that the grooming of return traffic (i.e., giving a U.S. carrier the return traffic that terminates in a particular region) in a manner that may ultimately reduce U.S. carrier costs and rates is anticompetitive  Y44per se. We recently adopted guidelines for permitting in certain circumstances flexible settlement arrangements between U.S. and foreign carriers that do not comply with the"Th0*%%ZZw"  Y4International Settlements Policy (ISP). xPy'ԍRegulation of International Accounting Rates, CC Docket No. 90337, Phase II, Fourth Report and  xPA'Order, FCC 96459 (rel. Dec. 3, 1996) (Accounting Rate Flexibility Order). The ISP requires: (1) the equal division of accounting rates; (2) nondiscriminatory treatment of U.S. carriers; and (3) proportionate return of U.S.bound traffic. The ISP is designed to prevent foreign carriers with market power from obtaining  xP'discriminatory accounting rate concessions from competing U.S. carriers. See generally Policy Statement on  xPa'International Accounting Rate Reform, Policy Statement, 11 FCC Rcd 3146 (rel. Jan. 31, 1996). MCI will have ample opportunity to make its arguments, with proper economic support, in the event a BOC interLATA affiliate or any other U.S. international carrier seeks to establish an arrangement for grooming return  Y4traffic.c@ xP 'ԍSee Accounting Rate Flexibility Order.c  Y4142.` ` BTWe are also unpersuaded that the other conditions imposed in the 20 percent BT investment in MCI are useful or necessary in this case. MCI has not explained how those conditions are relevant to the BOC interLATA affiliates' provision of inregion international service on routes where they have no investment interest in or by a foreign carrier. The conditions imposed on MCI apply to its operations only on the U.S.U.K. route, where we found that BT controlled bottleneck local exchange and exchange access facilities on the U.K. end, and they were targeted to limiting the potential risks of undue discrimination between a U.S. carrier (MCI) and a foreign carrier with which the U.S.  Y 4carrier has an equity relationship (BT).   xPV'ԍWe note that MCI and BT have requested Commission approval of the transfer of control to BT of licenses and authorization held by MCI subsidiaries, which would occur as a result of the proposed merger of  xP'MCI and BT. See MCI Communications Corporation and British Telecommunications PLC Seek FCC Consent  xP'for Proposed Transfer of Control, GN Docket No. 96245, Public Notice, DA 962079 (rel. Dec. 10, 1996). To the extent a BOC has an equity interest in a foreign carrier or the foreign carrier has such an interest in a BOC on a particular U.S. international route, it is of course subject to Section 63.10 of our rules. This rule sets forth the framework for imposing certain safeguards on U.S. carriers that are affiliated with foreign carriers that have the ability to discriminate in the favor of their U.S. affiliate  Yb4through the control of bottleneck services or facilities.sb  xP'ԍSee NonAccounting Safeguards NPRM at  18, 51.s 'J:\POLICY\LECDOM\ORDER\BOCINRGN' 'J:\POLICY\LECDOM\ORDER\LECINRGN'  X44 B.XClassification of Independent LECs (#  Y4143.` ` For the reasons discussed below, we conclude that the requirements established  Y4in the Fifth Report and Order, together with other existing rules, sufficiently limit an independent LEC's ability to exercise its market power in the local exchange and exchange access markets so that the LEC cannot profitably raise and sustain the price of inregion, interstate, domestic, interexchange services by restricting its own output. We, therefore,"UH 0*%%ZZH" classify independent LECs as nondominant in the provision of these services. We recognize, however, that an independent LEC conceivably could use its control over local bottleneck facilities to allocate costs improperly, engage in unlawful discrimination, or  Y4attempt to price squeeze. We, therefore, impose the Fifth Report and Order separation requirements on all incumbent independent LECs that provide inregion, interstate, domestic, interexchange services. We further conclude that we should apply the same regulatory classification to the independent LECs' provision of inregion, international services that we adopt for their provision of inregion, interstate, domestic, interexchange services.  X14 1.` ` Classification of Independent LECs in the Provision of InRegion, Interstate, Domestic, Interexchange Services(#`  Y 4  X 4 ` ` a. Background  Y 4144.` `  LIST In the Competitive Carrier Fourth Report and Order, the Commission determined that interexchange carriers affiliated with independent LECs would be regulated  Y4as nondominant carriers.q xP 'ԍFourth Report and Order, 95 FCC 2d 57579,  3136.q In the Competitive Carrier Fifth Report and Order, the  Yy4Commission clarified the definition of "affiliate"gXyX xP'ԍThe Commission defined a carrier affiliated with an independent LEC as "a carrier that is owned (in whole or in part) or controlled by, or under common ownership (in whole or in part) or control with, an  xP'exchange telephone company." Fifth Report and Order, 98 FCC 2d at 1198,  9.g and identified three separation requirements that the affiliate must meet in order to qualify for nondominant treatment. These requirements are that the affiliate: (1) maintain separate books of account; (2) not jointly own transmission or switching facilities with the LEC; and (3) acquire any services  Y4from its affiliated exchange company at tariffed rates, terms, and conditions.:x xPF'ԍId.: The Commission further concluded that, if the LEC provides interstate, interexchange service directly, rather than through an affiliate, or if the affiliate fails to satisfy the three  Y4requirements, those services would be subject to dominant carrier regulation.H xP'ԍId. at  910.H The Commission observed that these separation requirements would provide some "protection against costshifting and anticompetitive conduct" by an independent LEC that could result  Y4from its control of local bottleneck facilities.E xP"'ԍId. at  9.E  Ye4145.` ` In the NonAccounting Safeguards NPRM, we sought comment on how we"eV( 0*%%ZZ<" should classify independent LECs' provision of inregion, interstate, interexchange services.  Y4We also sought comment on whether, absent the Fifth Report and Order separation requirements, an independent LEC would be able to use its market power in local exchange and exchange access services to disadvantage its interexchange competitors to such an extent that it would quickly gain the ability profitably to raise and sustain the price of inregion, interstate, domestic interexchange service significantly above competitive levels by restricting  Yv4its output.jv xP'ԍNonAccounting Safeguards NPRM at  156157.j We suggested that, regardless of our determination of whether independent LECs should be classified as dominant or nondominant, some level of separation may be necessary between an independent LEC's interstate, domestic, interexchange operations and its local exchange operations to guard against cost misallocation, unlawful discrimination, or  Y 4a price squeeze.G X xP# 'ԍId. at  158.G In addition, we sought comment on whether the existing Fifth Report and  Y 4Order requirements are sufficient safeguards to apply to independent LECs to address these  Y 4concerns.G  xP'ԍId. at  158.G  X 4 ` ` b. Comments  Y4146. ABILITY1 ` ` Commenters generally suggest two different schemes for regulating independent LECs' provision of inregion, interstate, interexchange services. First, independent LECs and others argue that the Commission should find that independent LECS are nondominant in their provision of inregion, interstate, interexchange services, and that  Y44the Fifth Report and Order requirements are no longer necessary. According to these  Y4commenters, the Commission should eliminate the existing Fifth Report and Order separate  Y4affiliate requirement as a precondition for nondominant classification. x xP/'ԍGTE Aug. 29, 1996 Comments at 2; SNET Aug. 29, 1996 Comments at 12; Citizens Aug. 29, 1996 Comments at 3; Independent Telephone & Telecommunications Alliance (ITTA) Aug. 29, 1996 Comments at 34; USTA Aug. 29, 1996 Comments at 1113; NTCA Aug. 29, 1996 Comments at 4; Independent Coalition (Ind. Coalition) Sept. 13, 1996 Reply at 2. In support of their contention that independent LECs should be regulated as nondominant in their provision of inregion, interstate, interexchange services, these commenters argue that: (1) independent LECs do not have market power in the inregion, interstate, interexchange market based on the market power factors that the Commission applied in reclassifying AT&T as a nondominant interexchange carrier; (2) dominant carrier regulation would reduce competition in  Y|4the long distance market; (3) imposition of the Fifth Report and Order separations requirements on independent LECs' provision of inregion, interstate, interexchange service is inconsistent with the 1996 Act; and (4) the real costs of requiring any level of separation"NW` 0*%%ZZ&" for independent LECs far outweighs the speculative benefits of separation.  Y4147. ABILITY2 ` ` In addition, these commenters assert that independent LECs have neither the ability nor the incentive to leverage the market power resulting from their control over local  Y4facilities to impede competition in the interexchange market. xP'ԍSee USTA Aug. 29, 1996 Comments at 59. See also GTE Aug. 29, 1996 Comments at 1535; Citizens Aug. 29, 1996 Comments at 10. These commenters argue that their inability to leverage control over local facilities is attributable to several factors, including provisions of the 1996 Act that are designed to open the local market to competition; the geographic dispersion and largely rural nature of independent LEC service  YH4territories; H  xP 'ԍGTE Aug. 29, 1996 Comments at 2832. See also Sprint Aug. 29, 1996 Comments at 45. NTCA asserts that the average size of its members and of REA borrowers in general is evidence that the companies do not have the ability to leverage size or massive resources to the detriment of rival interexchange carriers. NTCA Aug. 29, 1996 Comments at 3. cost accounting safeguards, price caps on access services, and regulations to  Y14prevent nonprice discrimination in the quality of access services provided;Y@1 xP'ԍCommenters also point to several other regulatory tools, including: independent audits that attest every year that each class A LEC's books and records conform with all applicable FCC regulations; the ARMIS system; the nondiscriminatory provisions of access to a LEC's facilities through equal access and expanded  xPB'interconnection; and the Commission's tariff process and compliant procedures. See GTE Aug. 29, 1996 Comments at 1624; USTA Aug. 29, 1996 Comments at 56; NTCA Aug. 29, 1996 Comments at 4; Bell Atlantic Sept. 13, 1996 Reply Comments at 23; Ind. Coalition Sept. 13, 1996 Reply Comments at 56; ITTA Sept. 13, 1996 Reply Comments at 56; Sprint Sept. 13, 1996 Reply Comments at 2; SNET Aug. 29, 1996 Comments at 2125; Citizens Aug. 29, 1996 Comments at 45 and 10.Y and the interexchange carriers' increasing emphasis on constructing their own facilities.  Y 4148.GTE` ` GTE contends that the Commission is legally prohibited from imposing separation requirements on independent LECs in general, and specifically on GTE. GTE argues that section 601(a)(2) of the 1996 Act, which removes the restrictions and obligations imposed by the GTE Consent Decree, prohibits the Commission from imposing any separate  Y4affiliate requirements on GTE.U xPQ'ԍGTE Aug. 29, 1996 Comments at 2527.U In addition, GTE asserts that section 271 and 272 added by the 1996 Act, apply only to BOCs, therefore, these sections reflect Congress' determination that there is no need to extend the separation requirements of section 272 to independent  YK4LECs or GTE.RK xP"'ԍGTE Aug. 29, 1996 Comments at 27.R Moreover, GTE maintains that, if the Commission continues to require  Y44separate affiliates, it should modify the Fifth Report and Order requirements to allow the affiliate to take exchange access services not only by tariff, but also on the same basis as"X00*%%ZZ"  Y4other carriers that have negotiated interconnection agreements pursuant to section 251.P xPy'ԍGTE Sept. 13, 1996 Reply at 15.P  Y4149.` ` Sprint argues that the Fifth Report and Order separation requirements are no longer necessary because those requirements have been incorporated into the Commission's  Y4cost allocation rules.x X xP'ԍSprint Aug. 29, 1996 Comments at 6. Sprint notes that, if this interpretation is incorrect, the Commission may prohibit the sharing of switching and transmission plant used to provide local service by interexchange services by modifying the cost allocation rules in 47 C.F.R.  64.901. Sprint Aug. 29, 1996 Comments at 7. x  Yv4150.` ` In contrast, interexchange carriers, except Sprint, and competing access  Y_4providers generally argue that the Commission not only should retain the Fifth Report and  YH4Order separation requirements as a condition for nondominant treatment of independent LEC provision of inregion, interstate, interexchange services, but also should impose additional safeguards to prevent independent LECs from engaging in anticompetitive behavior by virtue  Y 4of their control over bottleneck facilities. @ xP'ԍTeleport Aug. 29, 1996 Comments at 23; AT&T Aug. 29, 1996 Comments at 710; MCI Aug. 29, 1996 Comments at 57. Commonwealth of Northern Mariana Islands (CNMI) also asks the Commission to impose additional safeguards on Micronesia Telephone Company (MTC) which provides telecommunications services in the Commonwealth. MTC is owned by GTE Hawaiian Telephone Company Incorporated (GTE Hawaiian Tel.). CNMI Aug. 29, 1996 Comments at 8.  Y 4151.` ` Teleport argues that the Commission should impose quarterly reporting requirements that will enable competitors and the Commission to analyze objectively the independent LEC's service record and to compare service to competitors with service to  Y4itself or its affiliates.X  xP1'ԍTeleport Aug. 29, 1996 Comments at 35.X Teleport also recommends that the Commission implement an  Yy4expedited complaint process to address service quality complaints by competing carriers.Vy  xP'ԍTeleport Aug. 29, 1996 Comments at 6.V  YK4152.DOMINANT1` ` AT&T argues that the Fifth Report and Order and our dominant carrier requirements are inadequate to address independent LECs' potential abuse of market  Y4power.R xP"'ԍAT&T Aug. 29, 1996 Comments at 7.R AT&T contends that the Commission should, therefore, impose the same structural separation and nondiscrimination requirements on independent LECs that we impose on BOCs, as well as a modified form of dominant carrier regulation. AT&T also asks the"Y0*%%ZZ" Commission to make clear that equal access requirements apply to independent LECs, including the requirement that a customer seeking local service from such carriers be offered  Y4the options for interexchange service in a neutral fashion.=X xPK'ԍPICFREEZEAT&T Aug. 29, 1996 Comments at 910. AT&T notes, for example, that SNET has instituted a "PICfreeze" which requires a subscriber to contact SNET directly when he or she wishes to switch longdistance carriers. AT&T Aug. 29, 1996 Comments at 1011.= AT&T asserts that the Fifth  Y4Report and Order allows joint and integrated design, planning, and provisioning of exchange and interexchange services, which inherently discriminates against other carriers and permits  Y4the costs of long distance operations to be misallocated to monopoly ratepayers.S xP& 'ԍAT&T Aug. 29, 1996 Comments at 8. S In addition, AT&T, challenging SNET's claim that geographic rate averaging would mitigate the effects of any unilateral increase in access charges, asserts that access charges are far above cost, and that this enables LECs to impose a price squeeze in the interexchange  Y14market.Q1x xPZ'ԍAT&T Sept. 13, 1996 Reply at 12.Q  Y 4153.DOMINANT2` ` MCI asserts that, given the types of abuses that control over bottleneck facilities allows, it is necessary to review independent LECs' inregion, interexchange rates  Y 4to ensure that they fully cover independent LEC tariffed access and other costs.U  xP'ԍMCI Aug. 29, 1996 Comments at 57. U MCI further contends that enforcement of the imputation requirement is necessary to protect  Y 4against an independent LEC's adopting a price squeeze strategy,S  xP'ԍMCI Aug. 29, 1996 Comments at 56.S and maintains that the Commission's cost accounting rules and afterthefact audits are insufficient to ensure that LEC interLATA rates cover imputed access costs. Like AT&T, MCI claims that, because an independent LEC's actual access costs are much lower than the tariffed rates, an independent LEC could adopt a successful pricesqueeze strategy against its interexchange  Y44rivals.Q4(  xP 'ԍMCI Sept. 13, 1996 Reply at 89.Q MCI adds that an independent LEC may be able to increase its total profits by reducing the price of its interLATA service, thereby increasing the demand for its switched  Y4access service.O  xPo!'ԍMCI Sept. 13, 1996 Reply at 9.O  Y4154.` ` The Commonwealth of the Northern Mariana Islands (CNMI) asserts that GTEowned Micronesian Telecommunications Corporation (MTC), which is the sole provider of both local exchange and exchange access services and a major provider of"ZH 0*%%ZZq" domestic and international offisland services in the Commonwealth, currently provides domestic, interexchange services on a nondominant basis, even though it lacks a separate subsidiary. CNMI asks the Commission to recognize explicitly that MTC must comply with  Y4the Fifth Report and Order separation requirements or comply with the Commission's  Y4dominant carrier requirements.U xP'ԍCNMI Aug. 15, 1996 Comments at 210.U CNMI also asks the Commission to devise specific safeguards applicable to MTC's monopoly operations in the Commonwealth, such as a  Yv4strengthened form of the Fifth Report and Order separation requirements.UvX xP 'ԍCNMI Aug. 15, 1996 Comments at 810.U GTE disputes CNMI's claims that MTC is providing domestic interexchange services directly as a non YH4dominant carrier contrary to the requirements of the Commission's Fifth Report and Order  Y14and 1985 International Competitive Carrier Order.S1 xP 'ԍGTE Sept. 13, 1996 Reply at 1516.S GTE asserts that, although MTC provides domestic exchange, exchange access and interexchange services on an integrated  Y 4basis, its domestic interexchange services are provided on a dominant basis.Q x xP,'ԍGTE Sept. 13, 1996 Reply at 16. Q GTE emphasizes that neither the Commission nor any court has found that MTC has engaged in  Y 4any misconduct of the nature alleged by CNMI.P  xP'ԍGTE Sept. 13, 1996 Reply at 19.P GTE also asserts that imposing additional regulatory requirements on MTC, which serves 16,000 access lines in a rural location, is  Y 4clearly contrary to the deregulatory spirit and intent of the 1996 Act.P  xP'ԍGTE Sept. 13, 1996 Reply at 17.P  Yy4155.` ` CNMI also asks the Commission to clarify that MTC's service between the Commonwealth and the U.S. mainland and other U.S. points is a domestic service, and thus  YK4requires domestic tariffing and compliance with the strengthened form of the Fifth Report  Y44and Order separation requirements.T4(  xP 'ԍCNMI Aug. 15, 1996 Comments at 58.T GTE responds that, because the Northern Mariana Islands have long been considered an international point for service to and from the United States, MTC currently tariffs its service to the U.S. mainland and other U.S. points in its  Y4international tariff.P  xPX"'ԍGTE Sept. 13, 1996 Reply at 16.P GTE contends that, pursuant to the Commission's Rate Integration  Y4Order,eH  xP$'ԍRate Integration Order, 11 FCC Rcd 9564.e the integration of the Islands into domestic rate schedules is not required to occur"[0*%%ZZ"  Y4until August 1, 1997.} xPy'ԍGTE Sept. 13, 1996 Reply at 1617. Rate Integration Order at  69.} GTE states that these offshore locations will continue to be tariffed  Y4as international points for rate purposes until that time.PX xP'ԍGTE Sept. 13, 1996 Reply at 17.P  X4  X4c.` ` Discussion  X4 ` `  i.XTraditional Market Power Factors (other than control of  Xv4bottleneck facilities) (#  YH4156.` ` As we noted above, dominant carrier regulation is generally designed to prevent a carrier from raising prices by restricting its own output of interexchange  Y 4services.`  xP'ԍSee supra  PURPOSE85.` An independent LEC, therefore, should be classified as dominant in the provision of inregion, interstate, interexchange services only if it has the ability to raise prices by restricting its output of these services.  Y 4157. RESTRICT ` ` We find that the traditional market power factors (excluding bottleneck control) suggest that independent LECs do not have the ability profitably to raise and sustain prices above competitive levels by restricting their output. Based on an analysis of these traditional market power factors market share, supply and demand substitutability, cost structure, size, and resources we conclude that independent LECs do not have the ability  YK4to raise prices by restricting their own output.Kx xPt'ԍSee GTE Aug. 29, 1996 Comments at 9; USTA Aug. 29, 1996 Comments at 5, and Statement of Daniel F. Spulber, Northwestern University (Spulber Appendix) at 822. First, independent LECs generally have minimal market share, compared with the major interexchange carriers, which suggests they could not profitably raise and sustain interexchange prices above competitive levels. Second, the same high supply and demand elasticities that the Commission found constrained AT&T's pricing behavior also apply to independent LECs. Finally, we find that low entry barriers in the interexchange market and widespread resale of interexchange services constrain independent LECs from exercising market power. We conclude, therefore, that in light of  Y4the Fifth Report and Order requirements independent LECs do not have the ability to raise prices above competitive levels by restricting their output of interexchange services.  Xe4` `  ii.` Control of Bottleneck Access Facilities (#   Y74158.` ` As we previously found with regard to the BOCs, traditional market power factors are not conclusive in determining whether independent LECs should be classified as" \0*%%ZZ"  Y4dominant in the provision of inregion, interstate, interexchange services.d xPy'ԍSee supra  TRADITIONAL96.d We noted in the  Y4NonAccounting Safeguards NPRM that an independent LEC may be able to use its control over local exchange and exchange access services to disadvantage its interexchange competitors to such an extent that it will quickly gain the ability profitably to raise the price  Y4of inregion, interstate, interexchange services above competitive levels.bX xP'ԍNonAccounting Safeguards NPRM at  157.b We therefore must examine whether an independent LEC could improperly allocate costs, discriminate against its inregion competitors, or engage in a price squeeze to such an extent that the independent LEC would have the ability to raise prices for interstate, interexchange services  YH4by restricting its output.bH xP 'ԍSee supra  PROBLEMS100.b We find, as we did with regard to BOCs, that independent LECs providing inregion, interstate, interexchange services do not have the ability to engage in these actions to such an extent that they would have the ability to raise prices by restricting output. For the reasons discussed with regard to the BOCs, we thus conclude that dominant carrier regulation of independent LEC provision of inregion, interstate, interexchange services is inappropriate.  Y 4159.` ` We disagree, however, with those commenters that assert that independent  Y4LECs have no ability to use their bottleneck facilities to harm interexchange competition.x xP'ԍSee supra  ABILITY2147. See also USTA Aug. 29, 1996 Comments at 59; GTE Aug. 29, 1996 Comments at 1524; Citizens Aug. 29, 1996 Comments at 10. We believe that, absent appropriate and effective regulation, independent LECs have the ability and incentive to misallocate costs from their inregion, interstate, interexchange services to their monopoly local exchange and exchange access services within their local  Y44service region.e4 xP'ԍSee supra  MISALLOCATE104.e Improper allocation of costs by an independent LEC is a concern because such action may allow the independent LEC to recover costs incurred by its affiliate in providing inregion, interexchange services from subscribers to the independent LEC's local exchange and exchange access services. As we stated previously, this can distort price signals in those markets and, under certain circumstances, may give the affiliate an unfair  Y4advantage over its competitors.b`  xP!'ԍNonAccounting Safeguards NPRM at  135.b We believe that the improper allocation of costs may  Y4cause substantial harm to consumers, competition, and production efficiency.  xPK$'ԍSee AT&T Aug. 15, 1996 Comments at 6365; CTA Aug. 15, 1996 Comments at 35; DOJ Aug. 30, 1996 Reply at 24. Such cost"]H 0*%%ZZd" misallocations may be difficult to detect and are not necessarily deterred by price cap regulation.  Y4160.` ` Furthermore, an independent LEC, like a BOC, potentially could use its market power in the provision of exchange access service to advantage its interexchange affiliate by discriminating against the affiliate's interexchange competitors with respect to the  Yv4provision of exchange and exchange access services.hv xP'ԍSee supra  DISCRIMINATION111.h This discrimination could take the form of poorer quality interconnection or unnecessary delays in satisfying a competitors'  YH4request to connect to the independent LEC's network.:HX xPQ 'ԍId.:  Y 4161.` ` We are also concerned that an independent LEC could potentially initiate a  Y 4price squeeze to gain additional market share.a  xP'ԍSee supra  SQUEEZE125.a Absent appropriate regulation, an independent LEC could potentially raise the price of access to all interexchange carriers which would cause competing inregion carriers to either raise their retail rates to maintain the same profit margins or attempt to maintain their market share by not raising their prices  Y 4to reflect the increase in access charges, thereby reducing their profit margins.` x xP'ԍSee supra  SQUEEZE73.` If the competing inregion, interexchange providers raised their prices to recover the increased access charges, the independent LEC could seek to expand its market share by not matching the price increase. The independent LEC could also set its inregion, interexchange prices at or below its access prices. The independent LEC's inregion competitors would then be faced with the choice of lowering their retail rates, thereby reducing their profit margins, or  Y4maintaining their retail rates at the higher price and risk losing market share._ xP'ԍSee supra  BELOW127._  Y4162.` ` As we explained earlier, the Fifth Report and Order identified three separation requirements with which an independent LEC must comply in order to qualify for nondominant treatment. These requirements are that the affiliate providing inregion, interstate, interexchange services must: (1) maintain separate books of account; (2) not jointly own transmission or switching facilities with the LEC; and (3) acquire any services from its  Y|4affiliated exchange companies at tariffed rates, terms, and conditions.i| xP#'ԍFifth Report and Order, 98 FCC 2d at 1198,  9.i "e^( 0*%%ZZI"Ԍ Y4163.` `  DETECT  RETAIN We conclude that, although an independent LEC's control of exchange and exchange access facilities may give it the incentive and ability to engage in cost  Y4misallocation, unlawful discrimination, or a price squeeze, the Fifth Report and Order requirements aid in the prevention and detection of such anticompetitive conduct. We,  Y4therefore, conclude that we should retain the Fifth Report and Order separation requirements. More specifically, separate books of account are necessary to trace and document improper allocations of costs or assets between a LEC and its longdistance affiliate as well as discriminatory conduct. In addition, the prohibition on jointlyowned facilities will reduce the risk of improper cost allocations of common facilities between the independent LEC and its interexchange affiliate. The prohibition on jointly owned facilities also helps to deter any discrimination in access to the LEC's transmission and switching facilities by requiring the affiliates to follow the same procedures as competing interexchange carriers to obtain access to those facilities. Finally, we conclude that requiring services to be taken at tariffed rates, or as discussed below, on the same basis as requesting carriers that have negotiated  Y 4interconnection agreements pursuant to section 251,i  xP7'ԍSee infra  INTERCONNECTION164.i aids in preventing a LEC from discriminating in favor of its long distance affiliate, and reduces somewhat the risk of a price squeeze to the extent that an affiliate's long distance prices are required to exceed their costs  Yy4for tariffed services.]yX xP'ԍSee MCI Aug. 29, 1996 Comments at 57.]  YK4164.INTERCONNECTION` ` We agree that we should modify the third Fifth Report and Order requirement to allow independent LECs to take exchange services not only by tariff, but also on the same basis as requesting carriers that have negotiated interconnection agreements pursuant to  Y4section 251.Z xP'ԍSee GTE Sept. 13, 1996 Reply at 15.Z GTE contends that, because under the Commission's current rules, LECs  Y4must make interconnection agreements available to other carriers,x xP'ԍ47 C.F.R.  51.809. Section 252(i) states as follows: XX` `  (i) Availability to Other Telecommunications Carriers. A local exchange carrier shall make available any interconnection, service, or network element provided under an agreement approved under this section to which it is a party to any other requesting telecommunications carrier upon the same terms and conditions as those provided in the agreement. 47 U.S.C  252(i).x` The Commission's pricing rules and interpretation of section 252(i) are currently under stay by the 8th Circuit  xPX"'Court of Appeals. Iowa Utilities Board v. FCC, No. 963321 (8th Cir. October 15, 1996) (Order granting stay pending judicial review). affiliated carriers should"_0*%%ZZX"  Y4be able to obtain services under such terms as well.P xPy'ԍGTE Sept. 13, 1996 Reply at 15.P In the NonAccounting  Y4Safeguards Order, we concluded that section 272 does not prohibit a BOC interLATA  Y4affiliate from providing local exchange services in addition to interLATA services.cX xP'ԍNonAccounting Safeguards Order at  312.c We also found in that Order that section 251 does not place any restrictions on which  Y4telecommunications carriers may qualify as requesting carriers.G xP= 'ԍId. at  313.G We concluded in the Non Y4Accounting Safeguards Order, therefore, that BOC section 272 affiliates should be permitted to purchase unbundled elements under section 251(c)(3) of the Communications Act and telecommunications services at wholesale rates under section 251(c)(4) from the BOC on the  YH4same terms and conditions as other competing local exchange carriers.:Hx xPq'ԍId.: We find no basis for concluding that Congress intended to treat an incumbent LEC differently from any other requesting telecommunications carrier. Accordingly, in addition to taking exchange services by tariff, the LEC may alternatively take unbundled network elements or exchange services for the provision of a telecommunications service, subject to the same terms and conditions as provided in an agreement approved under section 252 to which the independent LEC is a party.  Y4165.` ` As argued by many commenters, independent LECs have been providing inregion, interstate, interexchange services on a separated basis with no substantiated  Yb4complaints of denial of access or discrimination. The Fifth Report and Order separation requirements have been in place for over ten years. During that time, we have received few complaints from independent LECs about the requirements themselves. Moreover, we  Y4previously determined that the Fifth Report and Order requirements are not overly  Y4burdensome. As we stated in the Interim BOC OutofRegion Order, the separation  Y4requirements of the Fifth Report and Order require that the LEC interexchange affiliate be a  Y4separate legal entity. We do not, however, require actual "structural separation."b xP'ԍInterim BOC OutofRegion Order at  22.b Thus,  Y4as we stated in the Interim BOC OutofRegion Order, "except for the ban on joint ownership of transmission and switching facilities," the LEC and the interexchange affiliate  Y4"will be able to share personnel and other resources or assets.": xP"'ԍId.:  Ye4166. BURDEN1 ` ` We are not persuaded by the arguments made by Citizens and USTA that the"e`( 0*%%ZZI" separate affiliate requirement prevents independent LECs from realizing efficiency gains  Y4though the use of joint resources.X xPb'ԍCitizens Aug. 29, 1996 Comments at 6; USTA Sept. 13, 1996 Reply at 8. See GTE Aug. 29, 1996  xP*'Comments at 3638; see also Dec. 20, 1996 Ex Parte Letter from Charles D. Cosson, Regulatory Attorney,  xP'USTA, to William Caton, Secretary, FCC at attachment 1. See Interim BOC OutofRegion Order at  22. While joint ownership of transmission and switching facilities by a LEC and its affiliate is not permitted by our rules, the use of transmission and switching facilities by the other is permitted. The affiliate can contract for use of the LEC's transmission and switching facilities at tariffed rates or on the same basis as requesting  Y4carriers that have negotiated interconnection agreements pursuant to section 251,i xP& 'ԍSee supra  INTERCONNECTION164.i and thereby continue to benefit from economies of scope. Furthermore, we conclude that the separate books of account requirement and the requirement that the affiliate obtain LEC  YH4services at tariffed rates are not overly burdensome. As we explained in the Interim BOC  Y14OutofRegion Order, "the separate books of account requirement refers to the fact that, as a separate legal entity, the affiliate must maintain its own books of account as a matter of  Y 4course."b x xP,'ԍInterim BOC OutofRegion Order at  23.b Moreover, as we stated previously, in addition to taking exchange services by tariff, to the extent that the independent LEC affiliate meets the requirements of 251, the LEC affiliate may alternatively take unbundled network elements or exchange services subject to the same terms and conditions as provided in an agreement approved under section 252 to which the independent LEC is a party.  Yy4167. BURDEN2 ` ` While we recognize that the Fifth Report and Order requirements impose some regulatory burdens, we find that these burdens are not unreasonable in light of the benefits these requirements yield in terms of protection against improper cost allocation, unlawful  Y44discrimination, and price squeezes. We conclude that continued imposition of the Fifth  Y4Report and Order separation requirements is necessary to prevent and detect any anticompetitive conduct that may arise as a result of an independent LEC's control of bottleneck facilities.  Y4168.` ` We reject GTE's contention that the 1996 Act prohibits the Commission from  Y4imposing structural safeguards on GTE, or on any other independent LEC. xPc 'ԍSee supra   GTE148 ; GTE Aug. 29, 1996 Comments at 2527. We find no reasonable basis for inferring from section 601, or any other provision in the 1996 Act, that  Y|4Congress intended to eliminate the Fifth Report and Order requirements or to repeal by implication our authority to impose on independent LECs separation requirements that we deem necessary to protect the public interest consistent with our statutory mandates. To the contrary, section 601(c)(1) of the 1996 Act provides that we are not to presume that"7a0*%%ZZ"  Y4Congress intended to supersede our existing regulations unless expressly so provided.x xPy'ԍSection 601(c) provides as follows: ` ` (c) Federal, State and Local Law. x` XX` `  (1) No Implied Effect. This Act and the amendments made by this Act shall not be construed to modify, impair, or supersede Federal, State, or local law unless expressly so provided in such Act or amendments. Telecommunications Act of 1996, Pub. L. No. 104104, sec. 601(c), 110 Stat. 56, 143 (to be codified as a note following 47 U.S.C.  152).x`  Furthermore, section 601(a)(2) of the 1996 Act deals solely with a judicial decree, not the Commission's regulations; therefore, GTE's argument is frivolous.  Y4169.` ` We are also not persuaded by Sprint's arguments that the Fifth Report and  Y4Order requirements are no longer necessary because other Commission requirements, such as the Commission's access charge rules, imputation requirements, and cost allocation and affiliate transaction rules, prevent anticompetitive conduct by an independent LEC in  YH4providing inregion, interstate, interexchange services.VH xP'ԍSprint Aug. 29, 1996 Comments at 57.V While these other requirements have significant beneficial effects, we find that these regulations alone are not an adequate  Y 4substitute for the Fifth Report and Order separation requirements. As previously discussed, the prohibition against jointly owned transmission and switching facilities ensures that the affiliate obtains such facilities on an arm's length basis. This requirement also helps to ensure that all competing inregion providers have the same access to provisioning of transmission and switching as that provided to the independent LEC's affiliate. There is nothing in the Commission's rules that otherwise prohibits joint ownership of switching and transmission facilities. Although Sprint contends that we should impose this prohibition by  Yy4modifying the cost allocation rules,Ty xP'ԍSprint Aug. 29, 1996 Comments at 7.T such a prohibition is possible only if a LEC provides  Yb4interexchange service through a separate affiliate, as required by the Fifth Report and Order  YK4requirements. In addition, as stated previously, the Fifth Report and Order requirement that the affiliate maintain separate books of account is necessary to trace and document improper allocations of costs or assets between a LEC and its long distance affiliate and to detect  Y4unlawful discrimination in favor of the affiliate.`(  xP'ԍSee supra  RETAIN163.` The historical purpose for the requirement that the affiliate acquire any services from its affiliated exchange companies at tariffed rates, terms, and conditions was to prevent the LEC from discriminating in favor of its long  Y4distance affiliate.L  xP*$'ԍId.L The Commission recently reconfirmed the need for such a requirement when it applied the affiliate transaction rules to all transactions between incumbent LECs and"bH 0*%%ZZW"  Y4their affiliates.o xPy'ԍSee Accounting Safeguards Order at  256.o We believe that the Commission's access charge rules, imputation requirements, and cost allocation and affiliate transaction rules continue to serve important  Y4purposes. We conclude, however, that the Fifth Report and Order requirements are also necessary under these circumstances to safeguard further ratepayers against costshifting, discrimination, and price squeezes.  Yv4170. INDLECS ` ` We reject the arguments that we should impose additional requirements on independent LECs, including section 272 requirements, certain aspects of dominant carrier regulation, or any other requirements. Independent LECs tend to be more geographically dispersed and their service territories are largely rural in nature, therefore, they generally serve areas that are less densely populated than BOC services areas. In addition, because the service areas of independent LECs tend to be smaller than the service areas of the BOCs, on average, independent LECs have fewer access lines per switch than BOCs and provide  Y 4relatively little interexchange traffic that both originates and terminates in their region.Z X xP'ԍSee GTE Sept. 13, 1996 Reply at 14.Z We conclude, therefore, that independent LECs are less likely to be able to engage in anticompetitive conduct than the BOCs and that applying the section 272 requirements to  Y4independent LECs would be overly burdensome. The Fifth Report and Order requirements appear to balance these competing concerns; they address cost shifting and discrimination,  Yb4but do not appear to be overly burdensome.{b xP'ԍSee supra  BURDEN1166, BURDEN2167.{ Although the independent LECs assert that these requirements increase their costs, none of them has provided specific evidence to support this claim, much less to demonstrate that these additional costs outweigh the benefits.  Y4171.` ` As previously stated, we conclude that we should not apply dominant carrier regulation to independent LECs. The dominant carrier regulation that AT&T and MCI recommend is not necessary to prevent, nor effective in detecting improper cost allocation,  Y4unlawful discrimination, price squeezes, or other anticompetitive conduct.x xP'ԍSee supra  DOMINANT1152, DOMINANT2153. The benefits of  Y4dominant carrier regulation are outweighed by the burdens imposed on independent LECs.{ xPc 'ԍSee supra  BURDEN1166, BURDEN2167.{ We also reject MCI's argument that we should maintain full dominant carrier regulation in order to enforce effectively the Commission's imputation requirements and to prevent independent LECs from engaging in a price squeeze strategy. As we stated previously, we believe that such predatory behavior can be adequately addressed through our complaint"Nc0*%%ZZ3"  Y4process and enforcement of the antitrust laws.c xPy'ԍSee supra  COMPLAINT128.c Moreover, we note that the potential for a  Y4price squeeze will be further mitigated as access charges are reformed to reflect cost.X xP'ԍSee supra  ACCESS130 (citing First Interconnection Order at  724, 731).  Y4172.` ` Furthermore, we confirm that the equal access restrictions apply to  Y4independent LECs.] xP= 'ԍSee AT&T Aug. 29, 1996 Comments at 9. ] Under the MFJ the BOCs were required to "provide to all interexchange carriers and information service providers exchange access, information access and exchange services for such access on an unbundled, tariffed basis, that is equal in type,  Y_4quality, and price to that provided to AT&T and its affiliates."_x xP 'ԍMFJ  II(A), in United States v. Western Elec. Co., 552 F. Supp. 131, 227 (D.D.C. 1982) (subsequent history omitted). Equal access includes the nondiscriminatory provision of exchange access services, dialing parity, and presubscription  Y14of interexchange carriers.z1 xP'ԍMFJ  IV(F), 552 F. Supp. at 228 and MFJ, app. B, 552 F. Supp. at 233.z Exchange access services included, but were not limited to, "provision of network control signalling, answer supervision, automatic calling number identification, carrier access codes, directory services, testing and maintenance of facilities,  Y 4and the provision of information necessary to bill customers.": `  xP'ԍId.: GTE became subject to  Y 4similar requirements in 1984,  xPv'ԍUnited States v. GTE Corp., 603 F. Supp. 730 (D.D.C. 1984) (subsequent history omitted). and in 1985 the Commission imposed requirements on  Y 4independent LECs similar to those imposed on GTE.fX  xP'ԍMTS and WATS Market Structure Phase III, CC Docket No. 7872, Report and Order, 100 FCC 2d  xP'860, 874878,  4760 (1983) (subsequent history omitted). See also Michael K. Kellogg et al., Federal  xP'Telecommunications Law 27577,  5.5.1 (1992).f As we stated in the NonAccounting  Y 4Safeguards Order, section 251(g) added by the 1996 Act preserves the equal access requirements in place prior to the passage of the Act, including obligations imposed by the  Yy4MFJ and any commission rules.y xP 'ԍ47 U.S.C.  251(g). See also First Interconnection Order at  362. We do not decide at this time, however, whether the allegations AT&T raises regarding SNET's alleged presubscribed interexchange carrier  YK4(PIC) freeze constitutes a violation of the Commission's equal access requirements.fK0 xP,$'ԍSee supra n.PICFREEZE433.f AT&T or any other carrier, if it deems appropriate, can file a complaint with the Commission"4d0*%%ZZ"  Y4raising this allegation in the proper context.5@ xPy'ԍWe note that on July 24, 1996, MCI filed an informal complaint with the Commission against SNET regarding PICfreeze disputes. Letter from MCI to John Muleta, Chief, Enforcement Division, Common Carrier Bureau (July 24, 1996), Informal Complaint No. IC9609734 (requesting the Commission to conclude that SNET's solicitations authorizing SNET to protect long distance customers from being switched without express consent violate section 201(b) and 251 of the 1996 Act.) In addition, on September 27, 1996, AT&T filed a letter with the Enforcement Division requesting the Commission to establish procedures under which neutral third parties administer PIC protection. Letter from AT&T to John Muleta, Chief, Enforcement Division, Common Carrier Bureau (Sept. 27, 1996).5  Y4173. DOMINANT ` ` Based on the foregoing, we conclude that we should require independent LECs to provide inregion, interstate, interexchange services through a separate affiliate that  Y4satisfies the Fifth Report and Order separation requirements. We further conclude that, in light of our finding that independent LECs do not have the power to raise and sustain interexchange rates above competitive levels, it would be inconsistent with our analysis to allow independent LECs to choose whether to be regulated as a dominant carrier when providing inregion, interstate, domestic interexchange services. We are aware, however, of three independent LECs, Union Telephone Company (of Wyoming) (Union), GTE Hawaiian Tel., and MTC, that currently provide interexchange services on an integrated basis subject  Y 4to dominant carrier regulation. We recognize that the costs of complying with the Fifth  Y 4Report and Order separation requirements faced by a going concern could be greater than the costs of complying with these requirements for independent LECs that are currently providing these services on a separated basis. Accordingly, Union, GTE Hawaiian Tel., and  Y 4MTC shall have one year from the date of release of this Order to comply with the Fifth  Y4Report and Order separation requirements. zP'ԍThis does not affect the requirement that these providers integrate rates across their affiliates. See Rate  xP'Integration Order, 11 FCC Rcd 9598 ( 69). Until that time, the Commission will continue to regulate these independent LECs as dominant carriers. The record in this proceeding does not reflect special circumstances necessary for a waiver of one or more of these requirements. To the extent that special circumstances exist, however, independent LECs  Y44may petition us to establish the necessity of a waiver of the Fifth Report and Order requirements. WAIVER   Y4174.` ` Because section 3(40) of the Communications Act defines a state to include the "Territories and possessions" of the United States, CNMI is a state for purposes of domestic  Y4telecommunications regulation.H*  xP"'ԍ47 U.S.C.  153(40).H In our Rate Integration Order, we stated that, in making the section 254(g) of the Communications Act rate integration provision applicable to interstate interexchange services provided between the "states," as defined by section 153(40)"e 0*%%ZZ4" of the Communications Act, Congress made rate integration applicable to interexchange services provided between the contiguous fortyeight states and U.S. possessions and  Y4territories, including CNMI.k xPK'ԍRate Integration Order, 11 FCC Rcd at 9596,  66.k In the Rate Integration Order, we required providers of interexchange services between the Northern Mariana Islands and the contiguous fortyeight states to do so on an integrated basis with other interexchange services they provide by August 1, 1997. MTC and all other carriers providing offisland services between CNMI and other states are required to comply with these requirements. We find no basis in the record of this proceeding to amend these requirements. We further note that, although our  YH4Rate Integration Order does not require providers of interexchange service to integrate  Y14services offered to subscribers in the Commonwealth until August 1, 1997,k1X xP: 'ԍRate Integration Order, 11 FCC Rcd at 9596,  68.k this does not affect our finding that, if MTC continues to provide inregion, interstate, interexchange service directly, it must continue to comply with our dominant carrier requirements prior to that date.  Y 4175.` ` We find no basis on the record in this proceeding to impose additional requirements on MTC's provision of inregion, interstate, domestic, interexchange service, beyond those applied in this Order. To the extent that CNMI or any other petitioner can demonstrate that MTC has violated our rules, we encourage parties to file a petition asking the Commission to impose additional requirements through a petition for declaratory ruling or a complaint filed pursuant to section 208 of the Communications Act.  X4 2.` ` Application of Fifth Report and Order Separation Requirements to  X4Incumbent Independent LECs (#`  X4 ` ` a. Background  Y4176.` ` In the NonAccounting Safeguards NPRM, we tentatively concluded that, because an independent LEC's control of local exchange and exchange access facilities is our primary rationale for imposing a separate affiliate requirement on independent LECs, we should limit application of any separation requirements that we adopt in this proceeding to  YN4incumbent LECs that control local exchange and exchange access facilities.bN xP 'ԍNonAccounting Safeguards NPRM at  153.b For purposes of determining which independent LECs are "incumbent," we proposed to use the definition of "incumbent local exchange carrier" contained in section 251(h) of the Communications" fx0*%%ZZ"  Y4Act.: xPy'ԍId.: Section 251(h) provides that a LEC is an incumbent LEC, with respect to a particular area, if: (1) the LEC provided telephone exchange service in that area on the date of enactment of the 1996 Act (February 8, 1996), and (2) the LEC was deemed to be a member of NECA on the date of enactment or the LEC became a successor or assign of a NECA  Y4member after the date of enactment.X xP'ԍ47 U.S.C.  251(h)(1). Section 251(h)(2) also allows the Commission to provide, by rule, for the treatment of a LEC or category of LECs as incumbent in particular circumstances. 47 U.S.C.  251(h)(2).  Xv4 ` ` b. Comments  YH4177.` ` AT&T agrees with the tentative conclusion that only those independent LECs that control local exchange or exchange access facilities should be subject to the requirements adopted in this proceeding and that the Commission should rely on the definition of  Y 4"incumbent local exchange carrier" provided in 47 U.S.C.  251(h).S  xPd'ԍAT&T Aug. 29, 1996 Comments at 11.S  Y 4178.` ` NTCA, on the other hand, contends that the Commission should treat new entrants no differently than it treats small incumbent LECs because new LEC entrants that provide inregion interexchange services are free to, and have in fact, built or acquired  Y4control of local exchange access facilities.R@ xP'ԍNTCA Aug. 29, 1996 Comments at 3.R  Xb4 ` ` c. Discussion  Y44179.INCUMBENT` ` We adopt our tentative conclusion that the Fifth Report and Order separation requirements should be imposed only on incumbent independent LECs that control local exchange and exchange access facilities. We believe this conclusion is consistent with the 1996 Act, which provides different regulatory treatment for incumbent and nonincumbent  Y4LECs. xPY'ԍSee, e.g., 47 U.S.C.  251(c) (imposing additional obligations on incumbent local exchange carriers). This different treatment generally imposes fewer regulatory requirements on nonincumbent LECs, which we believe indicates Congress's view that such carriers are unable, at this time, to affect competition adversely, and therefore, are unable to generally harm consumers through unreasonable rates. We also believe that it would be premature to impose such regulation on competitive LECs when they possess little, if any, market power in the local exchange at this time. By limiting application of the separation requirements to incumbent independent LECs that control local exchange and exchange access facilities, we"Ng` 0*%%ZZ3" avoid imposing unnecessary regulation on new entrants in the local exchange market, such as neighboring LECs, interexchange carriers, cable television companies, and commercial mobile radio service providers, some of which may be small entities, thus facilitating market entry and the development of competition in the inregion, interstate, domestic, interexchange market.  Xv4 3.` ` Application of Fifth Report and Order Separation Requirements to Small or Rural Incumbent Independent LECs(#`  X14` ` a. Background  Y 4180.` ` In the NonAccounting Safeguards NPRM, we sought comment on whether there is some minimum size of independent LECs below which the separation requirements should not apply. We noted that, in principle, the size of a LEC will not affect its incentives to improperly allocate costs between its monopoly services and its competitive services, but that for small or rural independent LECs, the benefits to ratepayers of a separate affiliate requirement may be less than the costs imposed by such a requirement.  Xb4 ` ` b. Comments  Y44181.` ` Several commenters contend that we should exempt certain small or rural independent LECs (e.g., nonClass A LECs or LECs serving less than two percent of the  Y4nation's access lines) from any separation requirements that are retained,{  xP'ԍSNET Aug. 29, 1996 Comments at 3134; AT&T Aug. 29, 1996 Comments at 1112; NTCA Aug. 29, 1996 Comments at 4. NTCA argues that if the Commission does not completely eliminate the separation requirements, we should, at a minimum, exempt rural telecommunications companies as defined in the 1996  xP'Act. Id.{ because the costs of imposing the separations requirements on small carriers may outweigh the likely  Y4benefits.  xP9'ԍNTCA Aug. 29, 1996 Comments at 4; SNET Aug. 29, 1996 Comments at 3132. SNET, the largest independent LEC in this group, notes that it would be unable to force its inregion competitors to raise their interstate service prices by more than twotenths of one percent under worst case assumptions. SNET Aug. 29, 1996 Comments at 33 and Attachment B. Several commenters argue that small incumbent LECs lack the market power to  Y4engage in anticompetitive conduct that is harmful to their interexchange rivals. xP !'ԍSee NTCA Aug. 29, 1996 Comments at 34; Sprint Aug. 29, 1996 Comments at 34; Independent Coalition Sept. 13, 1996 Reply at 45. Sprint argues that its local operations have little ability and incentive to engage in anticompetitive"h 0*%%ZZ="  Y4conduct, since its service territories are widely dispersed and largely rural.` xPy'ԍSee Sprint Aug. 29, 1996 Comments at 45.`   Y4182.` ` GTE and Bell Atlantic argue that there is no economic basis for exempting small or rural independent LECs from the separation requirements imposed in this Order, especially given the increasing competition in local exchange and exchange access markets  Y4throughout the country.X xP'ԍBell Atlantic Sept. 13, 1996 Reply at 3 (arguing that there is no need for dominant regulation and that separation requirements should be minimized); GTE Sept. 13, 1996 Reply at 13. GTE argues that all independent LECs, small and large, generally serve areas that are less densely populated than BOC service areas, have fewer access lines per switch on average, and provide relatively small volumes of interexchange traffic that  YH4originates and terminates in their region.PH xP 'ԍGTE Sept. 13, 1996 Reply at 14.P  X 4 ` ` c. Discussion  Y 4183.` ` We conclude that we should not exempt any independent LECs from the Fifth  Y 4Report and Order requirements based on their size or rural service territory because neither a carrier's size nor the geographic characteristics of its service area will affect its incentives or ability to improperly allocate costs or discriminate against rival interexchange carriers. Commenters favoring such an exemption provide no persuasive evidence that small or rural independent LECs that are not currently providing inregion interexchange service on an integrated basis subject to dominant carrier regulation would be adversely affected by  YK4continuation of the Fifth Report and Order separation requirements or that the safeguards are  Y44unnecessary for such carriers.J4@ xP%'ԍAlthough suggested by several commenters, a rule that exempted all LECs with less than 2 percent of the nations access lines would essentially eviscerate our regulation of independent LECs because it would exempt all 1100 independent LECs except the GTE companies (approximately 12 percent) and the Sprint/United  xP}'companies (approximately 4 percent). Industry Analysis Division, Statistics of Communications Common  xPE'Carriers 1996/96, (Com. Car. Bur. Dec. 1996), Tables 1.1, 2.3, and 2.10.J Accordingly, we will continue to apply the Fifth Report and  Y4Order separation requirements to all independent LECs, regardless of size.rX  xP'ԍAs previously noted, an independent LEC may seek a waiver of the Fifth Report and Order  xP 'requirements on the basis of special circumstances. See supra  WAIVER173. We note, however, that a petitioner will face a heavy burden in demonstrating the need for such a waiver.r Finally, we note that, although NTCA argues that the separation requirements may cause small  Y4companies to lose benefits in the form of name recognition and good will, the Fifth Report  Y4and Order requirements do not preclude an independent LEC from taking advantage of its good will by providing interexchange services under the same or a similar name."i0*%%ZZ`"Ԍ X4ԙ 4.` ` Classification of Independent LECs' Provision of InRegion, International  X4Services (#`  X4 ` ` a. Background  Y4  Y4184.` ` In the NonAccounting Safeguards NPRM we tentatively concluded that we should apply the same regulatory treatment to an independent LEC's provision of international services originating within its local service area as we adopt for independent LEC provision of interstate, domestic, interexchange services originating within its local  Y14service area.a1 xP 'ԍNonAccounting Safeguards NPRM at 160.a  X 4  X 4` ` b. Comments  Y 4185.` ` Most commenters support our proposal to apply the same regulatory treatment that we adopt for an independent LEC's provision of inregion interstate, domestic, interexchange services to an independent LEC's provision of inregion international  Y4services.X xP'ԍSee, e.g., CNMI Aug. 15, 1996 Comments at 1112; Excel Aug. 15, 1996 Comments at 10. GTE argues that the Commission should not impose the Fifth Report and Order requirements on independent LECs providing either inregion domestic or international interexchange services because independent LECs do not have market power in the provision of domestic or international inregion interexchange services. GTE notes that it, and some other carriers, may be subject to dominant classification on particular routes pursuant to the  Y4Foreign Carrier Entry Order due to foreign carrier affiliations.R  xP'ԍGTE Aug. 29, 1996 Comments at 40.R  Y4186.` ` MCI, on the other hand, argues that the Commission should generally apply the same regulatory treatment to independent LECs' provision of inregion, international services, but impose additional requirements where the LEC has a foreign affiliation or other  Y4commercial relationship with a foreign carrier. x xP'ԍMCI Aug. 29, 1996 Comments at 8 (citing MCI Aug. 15, 1996 Comments at 6871). MCI urges the Commission, at a minimum, to impose on the independent LECs in such circumstances the same safeguards that it imposed on MCI in the Order approving British Telecom's (BT's) initial 20 percent  Ye4investment in MCI. e xP#'ԍId. See Order on MCI BT Joint Petition, 9 FCC Rcd 3960.ă  Y74187.` ` In addition, CNMI asks the Commission to clarify that MTC is a dominant"7j 0*%%ZZ*"  Y4carrier under the terms of the International Competitive Carrier Order.  xPy'ԍCNMI Aug. 15, 1996 Comments at 910(citing International Competitive Carrier Policies, CC Docket  xPA'No. 85107, Report and Order, 1022 FCC 2d 812 (1985) (International Competitive Carrier Order)). CNMI states that  Y4in the International Competitive Carrier Order, the Commission ruled that MTC's parent company, GTE Hawaii, and similarly situated carriers were dominant. CNMI claims, however, that MTC was not covered by these policies when the Commission issued this  Y4Order because CNMI did not become a U.S. commonwealth until November 3, 1986.% X  xPu'ԍCNMI Aug. 15, 1996 Comments at 10. CNMI states that prior to November 3, 1986, the Commonwealth was part of the United Nations Trust Territory of the Pacific Islands and was apparently  xP 'considered a foreign point. Id.% CNMI asserts that, now that MTC is a domestic carrier with significant market power and a lack of effective competition in exchange and exchange access markets, the Commission should declare MTC dominant in its provision of inregion, interstate, international,  YH4interexchange service.UH@ xP9'ԍCNMI Aug. 15, 1996 Comments at 10. U GTE replies that imposing dominant regulation on MTC's provision of inregion, interstate, international, interexchange service now, when MTC has  Y 4operated as nondominant for years,   xP'ԍGTE refers to two Commission decisions wherein the Commission classified GTE Hawaiian Tel and others as dominant in the provision of IMTS service, but did not include MTC in that classification. GTE states that the Commission has not disturbed these rulings, despite reexamining international dominance issues on  xP'numerous occasions. GTE Sept. 13, 1996 Reply at 17 (citing International Competitive Carrier Order).  would be contrary to the deregulatory goals of the  Y 41996 Act.P  xPl'ԍGTE Sept. 13, 1996 Reply at 17.P In any case, GTE asserts that independent LEC international and domestic interexchange services should be regulated in the same manner and that independent LECs have no market power in the international service market. GTE further claims that MTC's exchange access service in the Northern Mariana Islands cannot give it market power in the  Y 4international services market.P H  xP'ԍGTE Sept. 13, 1996 Reply at 18.P  Xy4 ` ` c. Discussion  YK4188.` ` We confirm our tentative conclusion that we should adopt the same rules in this proceeding for an independent LEC's provision of inregion, international, interexchange services as we adopt for its provision of inregion, interstate, domestic, interexchange services. As discussed above with regard to BOC provision of inregion, international services, the relevant issue, with respect to both domestic interexchange and international services, is whether an independent LEC can exercise its market power in local exchange and"k0*%%ZZv" exchange access services to raise and sustain prices of interexchange or international services  Y4above competitive levels by restricting its own output.g xPb'ԍSee supra  INTERNATIONAL138.g We find no practical distinctions between an independent LEC's ability and incentive to use its control over bottleneck facilities in the provision of local exchange and exchange access services to improperly allocate costs, unreasonably discriminate against, or otherwise engage in anticompetitive conduct against unaffiliated domestic interexchange competitors as opposed to international services competitors.  YH4189.` ` In light of our decision to classify independent LECs as nondominant in the  Y14provision of inregion, interstate, domestic, interexchange services and to impose the Fifth  Y 4Report and Order requirements, we will classify an independent LEC as nondominant in the provision of inregion, international services, unless it is affiliated with a foreign carrier that has the ability to discriminate in favor of the independent LEC through control of bottleneck  Y 4services or facilities in a foreign destination market.a X xP'ԍSee supra  FOREIGN139.a We will apply section 63.10(a) of our rules to determine whether to regulate a independent LECs as dominant on those U.S. international routes where an affiliated foreign carrier has the ability to discriminate against unaffiliated U.S. international carriers through control of bottleneck services or facilities in  Yy4the foreign destination market.ny xP'ԍSee Foreign Carrier Entry Order, 11 FCC Rcd 3873.n The safeguards that we apply to carriers that we classify as dominant based on a foreign carrier affiliation are contained in Section 63.10(c) of the our rules and are designed to address the incentive and ability of the foreign carrier to discriminate in favor of its U.S. affiliate in the provision of services or facilities necessary to  Y4terminate U.S. international traffic.Zxx xPF'ԍAs previously noted, section 63.10(a) of the Commission's rules provides that: (1) carriers having no affiliation with a foreign carrier in the destination market are presumptively nondominant for that route; (2) carriers affiliated with a foreign carrier that is a monopoly in the destination market are presumptively dominant for that route; (3) carriers affiliated with a foreign carrier that is not a monopoly on that route receive closer scrutiny by the Commission; and (4) carriers that serve an affiliated destination market solely through the resale of an unaffiliated U.S. facilitiesbased carrier's switched services are presumptively nondominant for  xP'that route. See also Regulation of International Common Carrier Services, 7 FCC Rcd at 7334,  1924.Z This framework for addressing issues raised by foreign carrier affiliations will apply to independent LECs' provision of U.S. international services as an additional component of our regulation of the U.S. international services market.  Y4190.` ` We reject MCI's suggestion that we should impose additional safeguards on"l 0*%%ZZJ"  Y4the independent LEC's inregion, international services. xPy'ԍSee MCI Aug. 29, 1996 comments at 8 (citing MCI Aug. 15, 1996 Comments at 6871). As we stated with regard to the BOCs, all U.S. international carriers are subject to the same prohibition against accepting "special concessions" from foreign carriers that we imposed on MCI in the Order approving  Y4BT's initial 20 percent investment in MCI.bX xP'ԍSee supra  GROOMING140.b The grooming described by MCI would constitute a special concession prohibited by the terms of Section 63.14 of the Commission's rules to the extent the U.S. carrier entered into a grooming arrangement that the foreign  Yv4carrier did not offer to similarly situated U.S. carriers. v xP 'ԍSee 47 C.F.R. Section 63.14 ("[a]ny carrier authorized to provide international communications service . . . shall be prohibited from agreeing to accept special concessions directly or indirectly from any foreign carrier or administration with respect to traffic or revenue flows between the United States and any foreign country served . . . and from agreeing to enter into such agreements in the future. . . . ").  A U.S. carrier that negotiates a grooming arrangement with a foreign carrier on a particular route would be required to submit the arrangement to the Commission for public comment and review in circumstances where the arrangement deviates from existing arrangements with other U.S. carriers for the  Y 4routing and/or settlement of traffic on that route.  xP'ԍSee supra  GROOMING140; see also   BT142 .  Y 4191.` ` We believe our decision will benefit small incumbent LECs and small entities, for many of the same reasons enumerated in our analysis of independent LEC provision of inregion, interstate, domestic, interexchange services. For instance, by establishing a regulatory regime for provision of international services that is less stringent for incumbent independent LECs than for BOCs, independent LECs, some of which may be small incumbent LECs, will benefit by not being subjected to regulations that may be burdensome and may hamper competition in the international market. In addition, by limiting application  YK4of the Fifth Report and Order separations requirements to incumbent independent LECs, new entrants, some of which may be small entities, will benefit from lower market entry costs.  Y4192.` ` We decline to address whether MTC should be regulated as a dominant carrier for the provision of international services because of the inadequate record in this proceeding. We note that CNMI or any other petitioner may petition us to initiate a proceeding regarding MTC's regulatory status. We reiterate, however, our conclusion that all independent LECs that are providing international interexchange service through an  Y4affiliate that satisfies the Fifth Report and Order separation requirements as of the date of release of this Order must continue to do so, and all other independent LECs providing  Ye4international interexchange service must comply with the Fifth Report and Order separation"em` 0*%%ZZ/"  Y4requirements no later than one year from the date of release of this Order.: xPy'ԍThe Commission's International Bureau recently granted GTE Hawaiian Tel.'s petition for reclassification as a nondominant carrier in the Hawaiian market for international message telephone service  xP '(IMTS), subject to implementation by GTE Hawaiian Tel. of the Fifth Report and Order separation  xP'requirements which the Bureau imposed on an interim basis pending the outcome of this proceeding. Petition of  xP'GTE Hawaiian Telephone Company, Inc. for Reclassification as a Nondominant IMTS Carrier, Order, DA 961748 (Int'l Bur. released Oct. 22, 1996). Our decision here does not modify the International Bureau's determination that GTE Hawaiian Tel. will remain a dominant IMTS carrier until it certifies to the Chief, International Bureau, that it is in compliance with the conditions of that Order. GTE Hawaiian Tel., must  xP'comply with the Fifth Report and Order separation requirements, however, within one year from January 1, 1997.:  X4 5.` ` Sunset of Separation Requirements for Independent LECs  Y4  X4 ` ` a. Background  Yv4193.` ` Section 272(f)(1) of the Communications Act provides that the BOC safeguards set out in section 272 shall sunset three years after the date that the BOC affiliate is authorized to provide interLATA telecommunications services, unless the Commission extends such threeyear period by rule or order. In the NPRM we requested comment on whether any regulation of independent LECs should be subject to some type of sunset.  X 4 ` ` b. Comments  Y 4194.` ` Frontier contends that we should eliminate any separation requirements applicable to independent LECs' provision of inregion, interstate, interexchange services no  Y4later than such time as section 272 requirements sunset.\`  xP'ԍFrontier Aug. 29, 1996 Comments at 10 & 12.\  Yb4195.` ` Excel and CNMI oppose the removal of the separate affiliate requirements  YK4applicable to independent LECs.kK  xP'ԍExcel Aug. 15 Comments at 10; CNMI Aug. 15 Comments at 12.k CNMI notes that the sunset provision in section 272 has no application to independent LECs. Moreover, CNMI states that in insular areas such as the Commonwealth, there is no evidence to suggest that effective local competition will  Y4develop in the near future.M  xP7"'ԍCNMI Aug. 15 Comments at 12.M  X4 ` ` c. Discussion "n0*%%ZZS"Ԍ Y4196.` ` We intend to commence a proceeding three years from the date of adoption of this Order to determine whether the emergence of competition in the local exchange and  Y4exchange access marketplace justifies removal of the Fifth Report and Order requirements. xPK'ԍSee 47 U.S.C.  272(f) (describing the sunsetting of section 272); see also NonAccounting Safeguards  xP'Order at  268271. We believe that three years should be a reasonable period of time in which to evaluate whether effective competition has developed sufficiently to reduce or eliminate an independent LEC's bottleneck control of exchange and exchange access facilities. 'J:\POLICY\LECDOM\ORDER\LECINRGN' )J:\POLICY\LECDOM\ORDER\OUTREG.SEC)  X_4  V. CLASSIFICATION OF BOCS AND INDEPENDENT / LECS AS DOMINANT OR NONDOMINANT IN  THE PROVISION OF OUTOFREGION 2 INTERSTATE, DOMESTIC, INTEREXCHANGE SERVICESא\  Y 4  Y 4197.` ` In this section, we consider whether the Competitive Carrier Fifth Report and  Y 4Order separation requirements that were applied to the provision of outofregion, interstate,  Y 4domestic, interexchange services by independent LECs in the Competitive Carrier proceeding  Y4and to the provision of such services by the BOCs in the Interim BOC OutofRegion Order are necessary as a condition for nondominant regulatory treatment. As discussed below, we conclude that BOCs and independent LECs do not have and will not gain the ability in the near term to use their market power in the provision of local exchange service in their inregion markets to such an extent that the BOCs or independent LECs could profitably raise and sustain prices for outofregion, interstate, domestic, interexchange services significantly above competitive levels by restricting their own output. We therefore classify the BOCs and independent LECs as nondominant in the provision of these services. We also conclude that, at this time, a BOC or an independent LEC will not be able to raise significantly its interexchange rivals' costs by improperly allocating costs from its outofregion interexchange services to its regulated exchange and exchange access services, unlawfully discriminating against its rivals, or engaging in a price squeeze in its provision of outofregion, interstate, domestic, interexchange services. We therefore eliminate the separation  Ye4requirements imposed in the Fifth Report and Order as a condition for nondominant regulatory treatment of the BOCs and independent LECs in the provision of these outofregion services.  X 4 A.XBackground (#  Y4198. ` ` As previously noted, the Commission determined in the Competitive Carrier proceeding that interexchange carriers affiliated with independent LECs would be regulated as nondominant carriers if they satisfied the three separation requirements identified in the"!o 0*%%ZZ)"  Y4Competitive Carrier Fifth Report and Order.  xPy'ԍSee supra   LIST144 . The three requirements are that an affiliate: (1) maintain separate books of account; (2) not jointly own transmission or switching facilities with the LEC; and (3) acquire any services from its  xP 'affiliated exchange company at tariffed rates, terms, and conditions. Competitive Carrier Fifth Report and  xP'Order, 98 FCC 2d at 1198,  9.  The Commission further concluded that, if the LEC provided the interstate, interexchange services directly, rather than through an  Y4affiliate, those services would be subject to dominant carrier regulation.:  xP3'ԍId.: Upon enactment of the 1996 Act, the BOCs were authorized to provide interLATA telecommunications  Y4services outside of their regions.J!@ xP 'ԍ47 U.S.C.  271(b)(2).J In the Interim BOC OutofRegion Order, the Commission determined that, on an interim basis, the BOCs' outofregion, interstate, domestic, interexchange services would be subject to the same regulatory treatment as the Commission applied to the independent LECs' interstate, domestic, interexchange services in  YH4the Fifth Report and Order." H xP'ԍInterim BOC OutofRegion Order at  1525. In other words, a BOC would be subject to nondominant treatment in the provision of outofregion, interstate, domestic, interexchange services if it provided  xPY'these services through a separate affiliate that satisfied the Fifth Report and Order separations requirements, but  xP!'would be regulated as dominant if it provided these services directly. Id. at  1925.  In the Interexchange NPRM, the Commission sought comment on whether it should modify or eliminate the separation requirements that are currently imposed on independent LECs and BOCs, in order to qualify for nondominant  Y 4treatment in the provision of outofregion interstate, interexchange services.g#  xPl'ԍInterexchange NPRM, 11 FCC Rcd at 7174,  61.g  X 4 B.Comments  Y 4199.` ` The BOCs and independent LECs generally argue that they cannot exercise market power if they provide directly outofregion, domestic, interstate, interexchange  Yy4services.$yH  xPr'ԍSee, e.g., Ameritech April 19, 1996 Comments at 5, May 3, 1996 Reply at 57; GTE May 3, 1996 Reply at 8. Specifically, Ameritech asserts that the Commission may impose requirements as a condition of nondominant treatment, such as a separate affiliate requirement, only if it can  YK4show that such a requirement is necessary to prevent the exercise of market power.V%K xP"'ԍAmeritech May 3, 1996 Reply at 5 n.6.V Ameritech further argues that the Commission cannot possibly show that a separate affiliate requirement is necessary to prevent the exercise of market power in outofregion"p0%0*%%ZZ"  Y4interexchange services, and thus cannot link this requirement to nondominant status.:& xPy'ԍId.: SBC argues that neither independent LECs nor newentrant BOCs have market power in the provision of outofregion interexchange services based on the market power factors listed in  Y4AT&T Reclassification Order.T'X xP'ԍSBC April 19, 1996 Comments at 89.T Furthermore, SNET asserts that the Competitive Carrier  Y4Fifth Report and Order separation requirements are not necessary for small independent  Y4LECs.S( xP& 'ԍSNET April 19, 1996 Comments at 3.S The Ohio Consumer Counsel argues, however, that rural carriers without a national presence should be subject to separation requirements if they receive suspensions or  Y_4modification of section 251(b) or (c) of the 1996 Act.L)_x xP 'ԍOCC May 3, 1996 Reply at 6.L  Y14200. ` ` In addition, the BOCs and independent LECs generally claim that they no  Y 4longer retain bottleneck control over exchange access services and that the Fifth Report and  Y 4Order separation requirements are not necessary to prevent crosssubsidization and  Y 4discrimination.*  xP'ԍSee, e.g., NYNEX April 19, 1996 Comments at 13, May 3, 1996 Reply at 714; U S West April 19, 1996 Comments at 1011; Ameritech April 19, 1996 Comments at 310, May 3, 1996 Reply at 714; Bell Atlantic April 19, 1996 Comments at 35, May 3, 1996 Reply at 36; BellSouth April 19, 1996 Comments at 24; GTE April 19, 1996 Comments at 1012, May 3, 1996 Reply at 813; SBC April 19, 1996 Comments at 67; SNET April 19, 1996 Comments at 916; USTA April 19, 1996 Comments at 812, May 3, 1996 Reply at 5 xP'7. See also Florida PSC April 19, 1996 Comments at 1112. Ameritech notes that the Commission has found that a firm or group of firms has "bottleneck control" when it has sufficient command over some essential  Y 4commodity or facility in its industry or trade to be able to impede new entrants.+  xP'ԍAmeritech May 3, 1996 Reply at 8 (citing Competitive Carrier First Report and Order, 85 FCC 2d 1). Ameritech asserts that no BOC could impede longdistance entry because any such effort would be a blatant violation of equal access obligations and the Communications Act, and  Yy4such an attempt would surely be discovered and punished.:,y xP:'ԍId.: Furthermore, several LECs argue that to the extent bottleneck control previously existed, the 1996 Act eliminates it by requiring interconnection and access to unbundled elements and resale, and by creating incentives for BOCs to implement these provisions in order to enter inregion long Y4distance.- xPn$'ԍSee, e.g., Ameritech May 3, 1996 Reply at 8; GTE May 3, 1996 Reply at 810. Several BOCs further respond that they have neither the incentive nor the"q0-0*%%ZZ"  Y4opportunity to cross subsidize their long distance services.. xPy'ԍSee, e.g., NYNEX April 19, 1996 Comments at 13; BellSouth April 19, 1996 Comments at 24. NYNEX, BellSouth and GTE contend that separation requirements are unnecessary because the BOCs' rates for access  Y4services are subject to price caps./X xP'ԍSee, e.g., NYNEX April 19, 1996 Comments at 13; BellSouth April 19, 1996 Comments at 24; GTE April 19, 1996 Comments at 1011, May 3, 1996 Reply at 8. NYNEX asserts that Commission's rules control the allocation of costs between interexchange and access services and require LECs to impute to their interexchange services the same access rates they charge to other carriers for inregion  Y4services.U0 xP 'ԍNYNEX April 19, 1996 Comments at 13.U Ameritech and Bell Atlantic argue that price caps (particularly without sharing)  Yv4and cost allocation rules will prevent cross subsidization.1v@ xPg 'ԍAmeritech April 19, 1996 Comments at 910, May 3, 1996 Reply at 14; Bell Atlantic April 19, 1996 Comments at 4. Bell Atlantic also contends that geographic separation between a BOC's local exchange operations and outofregion long  YH4distance services eliminates the potential for cost shifting.\2H xP'ԍBell Atlantic April 19, 1996 Comments at 3.\  Y 4201.` ` Numerous nonLEC commenters, on the other hand, contend that the Commission should treat BOCs and independent LECs as nondominant for outofregion,  Y 4interexchange services only so long as they satisfy the separation requirements in the Fifth  Y 4Report and Order.3 (  xP'ԍSee, e.g., MFS April 19, 1996 Comments at 8; Missouri Public Service Commission (MoPSC) April 19, 1996 Comments at 4; CompTel May 3, 1996 Reply at 6. CompTel argues that the focal point of any decision to classify a BOC as dominant or nondominant in interexchange services will not be the level of competition in the interexchange market, but the extent to which the BOC has lost its monopoly power in  Y4local exchange and exchange access services.4   xP'ԍCompTel May 3, 1996 Reply at 6. CompTel also contends that the Commission should treat the BOCs as dominant for outofregion interexchange services unless the BOCs provide outofregion services that are physically and administratively separate and the BOCs do not jointly market local and outofregion services.  xP'Id.  In addition, numerous commenters argue that the separation requirements are necessary to prevent crosssubsidization, unreasonable  Yb4discrimination or other anticompetitive conduct.J5 bh xP{"'ԍSee, e.g., MoPSC April 19, 1996 Comments at 4; Vanguard Cellular Systems (Vanguard) April 19, 1996 Comments at 38; Alabama PSC April 19, 1996 Comments at 67; GSA April 19, 1996 Comments at 34; MCI April 19, 1996 Comments at 1525, May 3, 1996 Reply at 713; CompTel May 3, 1996 Reply at 7; Sprint April 19, 1996 Comments at 8; TRA April 19, 1996 Comments at 79, May 6, 1996 Reply at 68; LDDS May"$40*%%$" 3, 1996 Reply at 89; MFS May 3, 1996 Reply at 89; AT&T May 3, 1996 Reply at 1518.J Sprint contends that the Fifth Report and"brX50*%%ZZ"  Y4Order requirements are the most, and perhaps the only, reliable tool at hand for detecting  Y4and preventing crosssubsidization and discrimination.W6X xP'ԍSprint April 19, 1996 Comments at 89.W The Missouri Commission claims that, unless LECs are required to maintain separate records for their LEC and IXC operations, it will be difficult, if not impossible, to determine whether any improper  Y4discrimination or cross subsidization has occurred.T7 xP= 'ԍMoPSC April 19, 1996 Comments at 4.T The Alabama Commission asserts that the separation requirements ensure that carriers can compete on an equal basis in the  Yv4interexchange market.[8vx xP 'ԍAlabama PSC April 19, 1996 Comments at 7. [ MCI argues that the continuing need for separate affiliate requirements is underscored by recent federal and state audits of BOC and LEC affiliate transactions, which uncovered improper cost allocations and demonstrated the ineffectiveness of the cost allocation regulations in preventing LEC crosssubsidies between regulated and  Y 4unregulated services.V9  xP'ԍMCI April 19, 1996 Comments at 2224.V  Y 4202.` ` In addition, several commenters claim that the BOCs and independent LECs have significant incentives to engage in improper cost allocation, discrimination, and other anticompetitive behavior, and are able to engage in such behavior due to their control of  Y 4bottleneck facilities.:  xP'ԍSee, e.g., Vanguard April 19, 1996 Comments at 3; MCI April 19, 1996 Comments at 1516; GSA April 19, 1996 Comments at 3. For example, MCI contends that the independent LECs' and BOCs' local bottleneck power can be exploited beyond their service areas by discriminating against an IXC dependent on the BOC or independent LEC for access in its region, thereby  Yb4damaging the IXC's reputation on a national basis.T;b  xP'ԍMCI April 19, 1996 Comments at 16. T MCI further asserts that the similarity, and in some cases identity, of facilities used for monopoly and interexchange services would greatly aggravate the risks of crosssubsidization and discrimination on the terminating end of  Y4such calls.S<  xPN!'ԍMCI April 19, 1996 Comments at 17.S Vanguard claims that, as suppliers of an essential input, BOCs are in a position  Y4to affect the cost structures of their competitors.W= xP#'ԍVanguard April 19, 1996 Comments at 4.W More specifically, Vanguard argues that any increase in charges for terminating traffic will raise the costs of nonaffiliated"s=0*%%ZZ" interexchange providers that terminate calls over the same route. Vanguard notes that these increases must be absorbed by competitors, but will not injure the BOC because raising  Y4access charges to its affiliate will merely result in an intracompany transfer.:> xPK'ԍId.: Commenters further contend that BOCs and independent LECs can discriminate in a variety of ways, such as slow service provisioning, delayed information about or rollout of new technologies, less  Y4responsive maintenance and customer service, and poorer connections.?X xP'ԍSee, e.g., MCI April 19, 1996 Comments at 18; CompTel May 3, 1996 Reply at 7. MCI asserts that LECs also can exploit information obtained in their capacity as local service providers to gain an advantage in outofregion interexchange marketing, including such information as validation databases, and that they can manipulate the price or other terms and conditions of  Y14terminating traffic, including limiting access to certain signalling information.V@1 xP 'ԍMCI April 19, 1996 Comments at 1819.V  Y 4203.` ` Several commenters contend that the cost and asset shifting techniques  Y 4available to incumbent LECs are hard to detect and are not deterred by price caps.A x xP'ԍSee, e.g., MCI April 19, 1996 Comments at 18; CompTel May 3, 1996 Reply at 7; TRA May 6, 1996 Reply at 910; MFS May 3, 1996 Reply at 89; AT&T May 3, 1996 Reply at 1617. MFS disputes BOC arguments that geographical separation between the BOCs' inregion exchange access and outofregion interexchange facilities and price cap regulation moot concerns about cost shifting. MFS asserts that a BOC's ability to fund anticompetitive pricing schemes in the interexchange market from local exchange market profits is not impeded just because these markets are not contiguous or because the BOC performs artificial cost allocations. MFS argues that price cap mechanisms do not perfectly reflect actual cost changes and can yield windfall unintended profits for BOCs which could be used to subsidize  Y44interexchange services.NB4 xP'ԍMFS May 3, 1996 Reply at 89.N AT&T contends that the BOCs' assertions that price cap regulation removes exchange carriers' ability and incentive to allocate costs improperly ignores the fact that not all LECs have elected price caps, and those that have may  Y4periodically elect a "sharing" option.QC`  xP 'ԍAT&T May 3, 1996 Reply at 1617.Q MCI asserts that "pure" price caps do not deter cross subsidization because the conferring of monopolyderived benefits upon a BOC's or independent LEC's interexchange operations at less than their economic value unfairly subsidizes those operations whether or not the BOC or LEC can raise its monopoly rates to"t C0*%%ZZd"  Y4absorb additional costs.ND xPy'ԍMCI May 3, 1996 Reply at 11. N  Y4204. ` ` In addition, numerous commenters contend that even if the Fifth Report and  Y4Order separation requirements for independent LECs are modified or eliminated, the Commission should maintain these requirements as a condition for nondominant treatment of  Y4the BOCs' provision of outofregion, interexchange services.5EXX xP'ԍSee, e.g., Office of the Ohio Consumer's Counsel (OCC) April 19, 1996 Comments at 3; Vanguard April 19, 1996 Comments at 5; Cable & Wireless April 19, 1996 Comments at 8; CompTel April 19, 1996 Comments at 3; LDDS April 19, 1996 Comments at 810. 5 Vanguard and GSA contend that the BOCs have greater opportunity to allocate costs improperly than the independent LECs because of their greater number of services, larger service territories, and more  YH4extensive interoffice facilities.{FHx xPq'ԍGSA April 19, 1996 Comments at 34; Vanguard April 19, 1996 Comments at 5.{ Vanguard notes, for example, that each BOC serves about oneeighth of all U.S. telephone subscribers in largely contiguous service territories, which means that the BOCs receive more calls than other LECs and have more opportunities to  Y 4manipulate the price and quality of terminating access than other companies.WG  xP'ԍVanguard April 19, 1996 Comments at 5.W Vanguard argues that the proposed BOC mergers would further widen the size differentials between the  Y 4BOCs and independent LECs.BH  xP'ԍId. at 56.B  Y 4205. ` ` Several nonLECs contend that the Competitive Carrier Fifth Report and Order separation requirements are insufficient to protect against abuses by BOCs and independent LECs, and, therefore, propose additional safeguards. These commenters urge the  Yb4Commission to: (1) impose full structural separation on the outofregion affiliate;Ib(  xP;'ԍSee, e.g., CompTel April 19, 1996 Comments at 4; LDDS April 19, 1996 Comments at 1011; TRA April 19, 1996 Comments at 2223 (2)  YK4prohibit joint marketing of local and outofregion, interexchange services;JK  xP|'ԍSee, e.g., CompTel April 19, 1996 Comments at 4; LDDS April 19, 1996 Comments at 1011; TRA April 19, 1996 Comments at 2324. (3) require that a LEC's outofregion affiliate have no preferential access to nonTitle II services offered by  Y4the LEC;K xP#'ԍSee, e.g., TRA April 19, 1996 Comments at 2324; LDDS April 19, 1996 Comments at 1011; Ohio PUC April 19, 1996 Comments at 4. (4) require that the LEC's affiliate transaction practices and cost allocation"u0K0*%%ZZ"  Y4procedures be subject to annual independent audit;kL xPy'ԍSee, e.g., LDDS April 19, 1996 Comments at 11.k and (5) prohibit the affiliate from receiving proprietary information unless it is made available to competitors on the same  Y4basis.MX xP'ԍSee, e.g., Ohio PUC April 19, 1996 Comments at 4; TRA April 19, 1996 Comments at 2224.  X4 C.Discussion  Yv4206. ` ` In Section IV, we concluded that a BOC affiliate or independent LEC should be classified as dominant in the provision of inregion, interstate, domestic, long distance services only if it has the ability to raise prices by restricting its output of those inregion services. We found that each of the traditional market factors (excluding bottleneck control) suggest that the BOC interLATA affiliates and independent LECs do not have the ability to raise the price of inregion, interstate, long distance services by restricting their output of  Y 4these services.zN  xP'ԍSee supra  OUTPUT96, RESTRICT157.z We recognized that a BOC's or independent LEC's control of local exchange and exchange access facilities potentially gives the BOC or independent LEC an incentive to disadvantage its interexchange competitor through improper allocations of costs, discrimination or other anticompetitive conduct. We concluded, however, that the statutory and regulatory safeguards currently imposed on the BOCs and independent LECs will prevent them from engaging in such anticompetitive conduct to such an extent that the BOC interLATA affiliates or independent LECs have, or will have upon entry or shortly thereafter, the ability to raise the price of inregion, interstate, domestic, long distance services by restricting their output of these services. Accordingly, we classified the BOC interLATA affiliates and independent LECs as nondominant in the provision of these inregion services.  Y4207. ` ` We conclude that we should apply a similar analysis in assessing whether to classify the BOCs and independent LECs as dominant in the provision of outofregion, interstate, domestic, interexchange services. We conclude that the traditional market power factors (excluding bottleneck facilities) market share, supply and demand substitutability, cost structure, size, and resources support a finding that the BOCs and independent LECs do not have, and will not gain the ability in the near term, to raise prices of outofregion interexchange services by restricting their output of these services. More specifically, we find, first, that the BOCs begin with an interexchange market share of zero while the market shares of the independent LECs are negligible when compared to the major interexchange carriers. Second, we find that the same high supply and demand elasticities that the Commission found constrained AT&T's price behavior also apply to the provision of outofregion interexchange services by the BOCs and independent LECs. Finally, we find that the"vxN0*%%ZZ " presence of existing interexchange carriers, including AT&T, MCI, Sprint, and LDDS, prevents the BOCs and independent LECs from using their cost structure, size, and resources to raise prices above the competitive level for their outofregion interstate, domestic, interexchange services.  Y4208.` ` With respect to discrimination concerns related to the provision of outofregion, interstate, interexchange services by the BOCs and independent LECs, we note that these carriers are not the dominant providers of originating exchange access services in outofregion areas. We also note that majority of the discrimination concerns raised by commenters focus on inferior interconnection to a LEC's network for originating exchange access. We therefore find that the BOCs' and independent LECs' lack of control over originating access for its competitors' calls originating outside its region significantly limits their ability to discriminate against their interexchange competitors and to engage in other anticompetitive conduct. Although it is possible that a LEC could damage an interexchange competitor's reputation on a national basis by discriminating against an interexchange carrier dependent on it for access in its region, we believe this is unlikely because the BOCs and  Y4independent LECs are subject to our equal access requirements.O xP 'ԍSee United States v. Western Elec. Co., 552 F. Supp. at 23233 (subsequent history omitted); United  xP'States v. GTE Corporation, 603 F. Supp. 730, 744 (D.D.C. 1984) (subsequent history omitted); MTS and  xP'WATS Market Structure, CC Docket No. 7872, Phase III, 100 FCC 2d 860 (1985), recon. denied, FCC 864,  xPa'59 Rad. Reg. 2d 1410 (rel. Jan. 4, 1986). See also 47 U.S.C.  251(g) (preserving the equal access requirements and nondiscrimination requirements that applied to local exchange carriers on the date of enactment, until such requirements are explicitly superseded by the Commission's regulations). In addition, as discussed in Section IV, we believe that the safeguards in place for the provision of inregion, interstate, interexchange services by BOCs and independent LECs further protect against  YK4originating exchange access discrimination.uPK@ xP<'ԍSee supra  CONCERN91, DETECT163.u We therefore conclude that our equal access provisions and safeguards established for inregion interstate, interexchange services provide sufficient protection to interexchange carriers for the provision of originating exchange access as well as for the quality of these services. Similarly, although a BOC or an independent LEC may control the facilities used to terminate its interexchange competitors calls in its inregion service area, we believe it has less opportunity to discriminate against competitors through its control of these facilities. In order to discriminate effectively through control of terminating exchange access, the BOCs and independent LECs would have to convince consumers that an inferior termination connection was the fault of their interexchange carrier, and that the only way to obtain efficient termination arrangements to this region would be through the BOCs' or independent LECs' interexchange services. In addition, to the extent such quality degradation is apparent to consumers, it is also likely to be apparent to  Y74regulators and interexchange competitors. We also note that the record in the Interexchange proceeding does not demonstrate that the BOCs and LECs have the technical ability to" wP0*%%ZZ" degrade selectively the quality of the interconnection for their interexchange competitors through their control of terminating exchange access. In addition, Section 222 of the Communications Act provides all telecommunications carriers with protection from the  Y4misuse of customer proprietary network information.NQ xP4'ԍSee 47 U.S.C.  222.N We, therefore, conclude that discrimination by a BOC or an independent LEC is unlikely in the context of outofregion, interstate, interexchange services.  Yv4209.` ` In addition, we agree with Bell Atlantic that the geographic separation between a LEC's inregion local exchange and exchange access operations and outofregion long  YH4distance operations mitigates the potential for undetected improper allocation of costs.\RHX xPQ 'ԍBell Atlantic April 19, 1996 Comments at 3.\ Because of this geographic separation, it is unlikely that the outofregion operation will be able to share any transmission or switching facilities, many employees, or other common costs with the inregion operation. Consequently, improper allocation of costs is less problematic with respect to a BOC's or independent LEC's provision of outofregion long distance services. We further conclude that statutory and regulatory safeguards, including our Part 64 rules, imposed on the BOCs and independent LECs sufficiently limit any residual ability to disadvantage their rivals by improperly allocating costs between their regulated  Y4local exchange and exchange access services and their outofregion interexchange services.}S xP)'ԍSee supra  SAFEGUARDS104, DETECT163.} Our cost allocation rules control the allocation of cost between interexchange and local services and require a BOC or an independent LEC to impute to its interexchange services  YK4the same access rates it charges other carriers.WTKx xPt'ԍSee 47 C.F.R.  64.901(b)(1).W Furthermore, in the Accounting Safeguards  Y44Order, the Commission determined, solely for federal accounting purposes, that outofregion interLATA services provided by incumbent LECs on an integrated basis should be treated  Y4like nonregulated activities for purposes of our cost allocation rules.^U xP'ԍAccounting Safeguards Order at  75.^ We find that the existing statutory and regulatory safeguards, coupled with the geographical separation between the BOCs' and LECs' inregion and outofregion operations, are sufficient to  Y4prevent the BOCs and independent LECs from improperly allocating costs.EVX xP !'ԍ We therefore disagree with MFS' assertion that a LEC's ability to fund anticompetitive pricing schemes in the interexchange market from local exchange market profits exists even thought these markets are not contiguous or because the BOC performs artificial cost allocations.E Furthermore, we note that the exchange access services for all of the BOCs and most of the largest independent LECs are subject to our price cap regulations. As discussed in Section IV, price"x V0*%%ZZ[" cap regulation further serves to reduce the potential that the BOCs and independent LECs  Y4will improperly allocate the costs of their interexchange services.bW xPb'ԍSee supra  PRICECAP106.b Consequently, we conclude that the risk that the BOCs and independent LECs would be able to allocate improperly substantial costs from their outofregion interLATA services to their monopoly local exchange and exchange access services is not sufficient to warrant imposing separation requirements.  Y_4210. ` ` We also conclude that the BOCs and independent LECs will not be able to engage in a price squeeze with respect to their outofregion, interstate, domestic, interexchange services to such an extent that they will gain the ability to raise prices of long distance services by restricting their output of those services. We are not persuaded by arguments that, because BOCs and independent LECs have control over terminating exchange access, they will be able to effect a price squeeze to gain market share by raising the price of terminating access. We note that, because the BOCs and independent LECs do not have control over originating exchange access for outofregion, interstate, interexchange services, they will incur the same cost for originating access as their interexchange competitors. In addition, to the extent that a BOC or independent LEC offers outofregion long distance services on an integrated basis, our rules require the carrier to impute to itself  Yb4its tariffed terminating exchange access rate.XbX xPk'ԍ Under section 64.901(b)(1) of our rules, tariffed services, such as exchange access services, provided to a nonregulated activity must be charged to the nonregulated activity at the tariffed rates and credited to the  xP'regulated revenue account for that service. 47 C.F.R.  64.901(b)(1). See also 47 C.F.R.  32.5280 (explaining how carriers must account for the provision of tariffed services to nonregulated activities). As previously noted, outofregion interLATA services provided by incumbent LECs on an integrated basis are  xPS'treated as nonregulated activities for federal accounting purposes. Accounting Safeguards Order at  75.  If a BOC or independent LEC offers outofregion long distance services through an affiliate, the affiliate will have to pay the tariffed exchange access rate for long distance calls it terminates on the BOC's or independent LEC's  Y4inregion network.fY xP'ԍWe also note that section 272(e)(3) of the Communications Act requires a BOC to "charge [its section 272 interLATA affiliate], or impute to itself (if using the access for its provision of its own services), an amount for access to its telephone exchange service and exchange access that is no less than the amount charged  xP'to any unaffiliated interexchange carriers for such service." 47 U.S.C.  272(e)(3). See also NonAccounting  xP'Safeguards Order at  25658 (implementing section 272(e)(3)). f Also, price cap regulation of exchange access services mitigates the ability of a BOC or independent LEC to effect a price squeeze by increasing terminating  Y4exchange access rates.]ZX  xP #'ԍAll BOCs and most of the largest independent LECs are subject to price cap regulation. 1996 Annual Access Tariff Filings, DA 961022,  2 n.2 (rel. June 24, 1996). All but one BOC is subject to price caps without sharing. Data based on 1996 Annual Access Tariff Filings filed on April 2, 1996.] Moreover, we believe an attempted price squeeze would be less"yZ0*%%ZZX" likely to be effective, because it appears that typically a BOC's originating outofregion calls that terminate inregion will account for a small percentage of the BOC's total outofregion  Y4originating traffic.j[X xPK'ԍWe acknowledge, however, that some BOCs and independent LECs may market their outofregion interexchange services to customers who routinely terminate in the BOC's or independent LEC's inregion local  xP'exchange and exchange access area. See, e.g., AT&T Sept. 13 Reply, Appendix B.j Finally, we note that there are other adequate mechanisms to address such behavior. More specifically, a BOC or an independent LEC that charges a rate for interstate services below its incremental costs of providing service in the long term would be  Y4in violation of sections 201 and 202 of the Act.a\X xP& 'ԍNonAccounting Safeguards Order at  258. See also AT&T Communications Tariff F.C.C. No. 1;  xP 'PRO America Optional Calling Plan; Alascom, Inc. Tariff F.C.C. No. 1; BlockofTime Call America, Memorandum Opinion and Order, 103 FCC 2d 134, 136,  3 (1985). a In addition, Federal antitrust law also would apply to the predatory pricing of interstate services.  YH4211. ` ` Based on the foregoing, we conclude that the BOCs and independent LECs do not have, upon entry or soon thereafter, the ability to raise the price of outofregion, interstate, interexchange services by restricting their own output even if they are permitted to provide these services on an integrated basis. We therefore conclude that it is not necessary  Y 4to require the BOCs or independent LECs to maintain the Competitive Carrier Fifth Report  Y 4and Order separation requirements as a condition for nondominant regulatory treatment for  Y 4the provision of outofregion, interstate, interexchange services.]  xPw'ԍWe note, however, that because BOCs and independent LECs are required to offer inregion, interstate, interexchange services through a separate affiliate, some may provide their outofregion, interstate,  xP'interexchange services through the same affiliate rather than directly. We further note that, in the Accounting  xP'Safeguards Order, the Commission determined that affiliate transactions rules apply to all transactions between incumbent local exchange carriers and their affiliates providing any of the competitive services of the types  xP_'permitted under sections 260 and 271 through 276. Accounting Safeguards Order at  256.  Upon the effective date of this Order, the requirements established herein for the provision of outofregion, interstate, interexchange services by BOCs will supersede any conflicting requirements  Yy4established in the Interim BOC OutOfRegion Order.  YK4212. ` ` Contrary to the comments of GSA and Vanguard,{^K  xP|'ԍGSA April 19, 1996 Comments at 34; Vanguard April 19, 1996 Comments at 5.{ we find that the record in this proceeding does not demonstrate that a BOC is in a better position than an independent LEC to leverage its inregion monopoly power arising from its control of the local exchange to benefit its provision of outofregion long distance services. We therefore conclude that there is no persuasive reason to implement different regulatory schemes for the BOCs and independent LECs in the context of their provision of outofregion long distance services. "z^0*%%ZZS"Ԍ Y4213. ` ` We also conclude that the Fifth Report and Order separation requirements and  Y4the additional safeguards suggested in the record,_ xPb'ԍSee, e.g., CompTel April 19, 1996 Comments at 4; LDDS April 19, 1996 Comments at 1011; TRA April 19, 1996 Comments at 2224; Ohio PUC April 19, 1996 Comments at 4. are not necessary to prevent the BOCs and independent LECs from raising the costs of their interexchange rivals' services originating outside the BOC's or independent LEC's region. As discussed above, we believe that other applicable safeguards, coupled with the geographic separation between the BOCs' and independent LECs' inregion and outofregion operations will prevent a BOC or independent LEC from favoring its outofregion interexchange services through improper allocation of costs, discrimination, or other anticompetitive conduct. Further, we found in  YH4the Interim BOC OutofRegion Order that the commenters presented no persuasive evidence that showed additional safeguards were warranted to prevent improper allocation of costs and  Y 4discrimination.b`  xP 'ԍBOC OutofRegion Interim Order at  19.b In Section IV.B., we found that no party presented persuasive evidence in this proceeding that shows that it is necessary to impose additional safeguards on the independent LECs as a condition for nondominant regulatory treatment for the provision of  Y 4inregion, interstate, interexchange service.Pa  xP6'ԍSee supra  170.P Consequently, we conclude that the Fifth  Y 4Report and Order separation requirements and the proposed additional safeguards are  Y 4unnecessary in this context, and should therefore be eliminated.(bX @ xP'ԍWith respect to small independent LECs, we note that this decision may promote their expansion into  xP`'new telecommunications services and information services consistent with section 257 of the Act. See 47 U.S.C.  257.( )J:\POLICY\LECDOM\ORDER\OUTREG.SEC) 3J:\POLICY\LECDOM\ORDER\VERSIONS\REGFLEX.AMK3  Xy4  VI. FINAL REGULATORY FLEXIBILITY ANALYSIS    YK4\214.` ` As required by Section 603 of the Regulatory Flexibility Act (RFA), 5 U.S.C.  603, an Initial Regulatory Flexibility Analysis (IRFA) was incorporated in each of the two  Y4Notices of Proposed Rulemaking from which this Order issues.c`  xP.'ԍInterexchange NPRM at 719293,  103111; NonAccounting Safeguards NPRM at  165. The Commission sought written public comment on the proposals in the Notices. The Commission's Final Regulatory Flexibility Analysis (FRFA) in this Order conforms to the RFA, as amended by the Contract  Y4With America Advancement Act of 1996 (CWAAA).d  xPy"'ԍPub. L. No. 104121, 110 Stat. 847 (1996). Title II of the CWAAA is "The Small Business  xPA#'Regulatory Enforcement Fairness Act of 1996," codified at 5 U.S.C.  601 et seq.  X4 A.` ` Need for and Objectives of this Report and Order and the Regulations"{H d0*%%ZZb"  X4Adopted Herein (#`  Y4215.` ` In the 1996 Act, Congress sought to establish "a procompetitive, de Y4regulatory national policy framework" for the United States telecommunications industry.ge xP4'ԍS. Conf. Rep. No. 230, 104th Cong., 2d Sess. 1 (1996).g Three principal goals of the telephony provisions of the 1996 Act are: (1) opening local exchange and exchange access markets to competition; (2) promoting increased competition in telecommunications markets that are already open to competition, particularly long distance services markets; and (3) reforming our system of universal service so that universal service is preserved and advanced as local exchange and exchange access markets move from monopoly to competition.  Y 4216. ` ` The regulations adopted in this Order implement the second of these goals promoting increased competition in the interexchange market. The objective of the regulations adopted in this Order is to implement as quickly and effectively as possible the national telecommunications policies embodied in the 1996 Act and to promote the  Y 4development of competitive, deregulated markets envisioned by Congress.:f X xP'ԍId.: In doing so, we are mindful of the balance that Congress struck between this goal of bringing the benefits of competition to all consumers and its concern for the impact of the 1996 Act on small incumbent local exchange carriers.  X44 B.` ` Analysis of Significant Issues Raised in Response to the IRFA   Y4217.` ` As noted above, this Order issues from two separate Notices of Proposed Rulemaking. In March 1996, the Commission released a Notice asking, among other things, whether we should modify or eliminate the separation requirements imposed on independent LECs as a condition for nondominant treatment of their outofregion, interstate, domestic,  Y4interexchange services.ag xPC'ԍInterexchange NPRM at 7174,  61.a In July 1996, we released a Notice seeking comment on, in addition to other issues, whether to modify our existing regulations governing independent LECs' provision of inregion, interstate, domestic, interexchange services, and whether to  Ye4apply the same regulatory treatment to their provision of inregion, international services.hhex xP!'ԍNonAccounting Safeguards NPRM at  142.h  Y74218.` ` Summary of the Initial Regulatory Flexibility Analyses (IRFAs). In each of the  Y"4Notices, the Commission performed an IRFA. In the IRFA for the Interexchange NPRM,""|h0*%%ZZ" the Commission did not find that any of the issues that are addressed in this Order would have a significant economic impact on a substantial number of small businesses as defined by  Y4section 601(3) of the RFA. In the IRFA for the NonAccounting Safeguards NPRM, the Commission certified that its proposed regulations would not, if promulgated, have a significant economic impact on a substantial number of small businesses as defined by section  Y4601(3) of the RFA.Fi xP'ԍId. at  65.F We stated that our regulatory flexibility analysis was inapplicable to BOCs and other incumbent LECs because these entities are dominant in their field of operation.  X14` ` 1. Treatment of Small LECs   Y 4219. ` ` Comments. NTCA claims that its membership includes companies that  Y 4constitute "small business concerns" under the RFA.Rj X xP'ԍNTCA Aug. 29, 1996 Comments at 5.R NTCA argues that our IRFA in the  Y 4NonAccounting Safeguards NPRM incorrectly certifies that our proposed regulations will  Y 4not have a significant economic impact on a substantial number of small entities.:k  xPY'ԍId.: NTCA states that the Small Business Administration (SBA) establishes size standards for small businesses that "seek to ensure that a concern that meets a specific size standard is not  Y{4dominant in its field of operation."cl{x xP'ԍId. at 6 (citing 13 C.F.R.  121.102(b)).c NTCA states that the Commission cannot ignore SBA definitions and conclude that all incumbent LECs are dominant for purposes of the  YM4Regulatory Flexibility Analysis.@mM xP'ԍId. at 6.@ NTCA recommends that we "consider flexible regulatory proposals and analyze any significant alternatives that would minimize significant economic  Y4impacts" of our regulations on its members that are small companies.@n xPh'ԍId. at 5.@  Y4220. ` ` Discussion. NTCA essentially argues that we exceeded our authority under the RFA by certifying all incumbent LECs as dominant in their field of operation, and concluding on that basis that they are not small businesses under the RFA. We have found incumbent LECs to be "dominant in their field of operation" since the early 1980s, and we consistently have certified under the RFA that incumbent LECs are not subject to regulatory"}( n0*%%ZZ["  Y4flexibility analyses because they are not small businesses.o xPy'ԍSee, e.g., Implementation of the Local Competition Provisions in the 1996 Telecommunications Act of  xPA'1996, CC Docket No. 9668, First Report and Order, 11 FCC Rcd 15499 (1996) (citing Expanded  xP 'Interconnection with Local Telephone Company Facilities, Supplemental Notice of Proposed Rulemaking, 6  xP'FCC Rcd 5809 (1991), MTS and WATS Market Structure, Report and Order, 2 FCC Rcd 2953, 2959 (1987)  xP'(citing MTS and WATS Market Structure, Third Report and Order, 93 F.C.C.2d 241, 33839 (1983)). We have made similar  Y4determinations in other areas.#px xP'ԍSee, e.g., Implementation of Sections of the Cable Television Consumer Protection Act of 1992: Rate  xP'Regulation, Sixth Report and Order and Eleventh Order on Reconsideration, 10 FCC Rcd 7393, 7418 (1995).# While we recognize SBA's special role and expertise with regard to the RFA, we are not fully persuaded on the basis of this record that our prior practice has been incorrect. Nevertheless, in light of NTCA's concerns, we will conduct an analysis on the impact of our regulations in this Order on small incumbent LECs, in order to remove any possible issue of RFA compliance. We therefore need not address NTCA's argument that many of its members are "small business concerns" for purposes of the  Y_4RFA.Rq_ xP'ԍNTCA Aug. 29, 1996 Comments at 5.R  X14 C.` ` Description and Estimates of the Number of Small Entities Affected by this  X 4Report and Order (#`  Y 4221. ` ` In this FRFA, we consider the impact of this Order on two categories of entities, "small incumbent LECs" and "small nonincumbent LECs." Consistent with our prior practice, we shall continue to exclude small incumbent LECs from the definition of a small entity for the purpose of this FRFA. Accordingly, our use of the terms "small entities" and "small businesses" does not encompass "small incumbent LECs." We use the  Yy4term "small incumbent LECs" to refer to any incumbent LECsry`  xP'ԍAs discussed in  INCUMBENT179 supra, for purposes of this Order we adopt the definition of "incumbent LEC" in section 251(h). that arguably might be  Yb4defined by SBA as "small business concerns."]sb  xP'ԍSee 13 C.F.R.  121.201 (SIC 4813).] We include "small nonincumbent LECs"  YK4in our analysis, even though we believe that we are not required to do so.BtKH  xPD 'ԍSee MidTex Electric Cooperative, Inc. v. FERC, 773 F.2d 327, 340343 (D.C.Cir. 1985) (holding that "an agency may properly certify that no regulatory flexibility analysis is necessary when it determines that the rule will not have a significant economic impact on a substantial number of small entities that are subject to the requirements of the rule," and rejecting SBA's argument that the RFA is intended to apply to all rules that affect small entities, whether the small entities are directly regulated or not).B "4~t0*%%ZZ"Ԍ Y4222. ` ` For the purposes of this Order, the RFA defines a "small business" to be the same as a "small business concern" under the Small Business Act, 15 U.S.C.  632, unless  Y4the Commission has developed one or more definitions that are appropriate to its activities.u xPK'ԍSee 5 U.S.C.  601(3) (incorporating by reference the definition of "small business concern" in 15 U.S.C.  632). Under the Small Business Act, a "small business concern" is one that: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) meets any  Y4additional criteria established by the SBA.Lv  xP^ 'ԍ15 U.S.C.  632. L SBA has defined a small business for Standard Industrial Classification (SIC) category 4813 (Telephone Communications, Except  Y_4Radiotelephone) to be a small entity when it has fewer than 1,500 employees.Hw_ xP 'ԍ13 C.F.R.  121.201.H  Y14223. ` ` Incumbent LECs. SBA has not developed a definition of small incumbent LECs. The closest applicable definition under SBA rules is for telephone communications companies other than radiotelephone (wireless) companies. The most reliable source of information regarding the number of LECs nationwide of which we are aware appears to be the data that we collect annually in connection with the Telecommunications Relay Service (TRS). According to our most recent data, 1,347 companies reported that they were engaged  Y 4in the provision of local exchange services.QxX @ xP'ԍFederal Communications Commission, CCB, Industry Analysis Division, Telecommunications Industry  xPb'Revenue: TRS Fund Worksheet Data, Tbl. 1 (Number of Carriers Reporting by Type of Carrier and Type of  xP*'Revenue) (Dec. 1996) (TRS Worksheet).Q Although it seems certain that some of these carriers are not independently owned and operated, or have more than 1,500 employees, we are unable at this time to estimate with greater precision the number of LECs that would qualify as small business concerns under SBA's definition. Consequently, we estimate that there are fewer than 1,347 small incumbent LECs that may be affected by the decisions and regulations adopted in this Order.  Y4224. NonIncumbent LECs. SBA has not developed a definition of small nonincumbent LECs. For purposes of this Order, we define the category of "small nonincumbent LECs" to include small entities providing local exchange services which do not fall within the statutory definition in section 251(h), including potential LECs, LECs which have entered the market since the 1996 Act was passed, and LECs which were not members of the exchange carrier association pursuant to section 69.601(b) of the Commission's  Y4regulations.Gy`  xP$'ԍ47 U.S.C.  251(h).G We believe it is impracticable to estimate the number of small entities in this" y0*%%ZZ8"  Y4category.Mz xPy'ԍSee 5 U.S.C.  607.M We are unaware of any data on the number of LECs which have entered the market since the 1996 Act was passed, and we believe it is impossible to estimate the number of entities which may enter the local exchange market in the near future. Nonetheless, we will estimate the number of small entities in a subgroup of the category of "small nonincumbent LECs." According to our most recent data, 57 companies identify themselves in  Y4the category "Competitive Access Providers (CAPs) & Competitive LECs (CLECs)."E{X xP'ԍTRS Worksheet.E A CLEC is a provider of local exchange services which does not fall within the definition of "incumbent LEC" in section 251(h). Although it seems certain that some of the carriers in  YH4this category are CAPs,|H xP 'ԍWhile the Commission has not prescribed a definition for the term "CAP," it is generally not used to refer to companies that provide local exchange services. are not independently owned and operated, or have more than 1,500 employees, we are unable at this time to estimate with greater precision the number of nonincumbent LECs that would qualify as small business concerns under SBA's definition.   X 4 D.` ` Summary Analysis of the Projected Reporting, Recordkeeping, and Other  X 4Compliance Requirements (#`  Y 4225. ` ` Under our current regulations, independent LECs are classified as nondominant interexchange carriers if they provide interstate, domestic, interexchange services  Yy4through an affiliate that satisfies the separation requirements established in the Fifth Report  Yb4and Order. Independent LECs offering interstate, domestic, interexchange services directly (rather than through a separate affiliate), or through an affiliate that does not satisfy the specified conditions, are subject to dominant carrier regulation. Independent LECs are permitted to provide international, interexchange services subject to nondominant or dominant regulation, as determined on a casebycase basis. Nondominant interexchange  Y4carriers are not subject to rate regulation, and currently may file tariffs that are presumed  Y4lawful on one day's notice and without cost support.}@ xP'ԍ Tariff Filing Requirements for NonDominant Carriers, CC Docket No. 9336, Order on Remand, 10  xP'FCC Rcd 13,653 (1995). As discussed in note 8 supra, the Commission recently determined, pursuant to section 10 of the Communications Act, to forbear from requiring nondominant interexchange carriers to file  xP! 'tariffs for interstate, domestic, interexchange services. The Commission therefore ordered, inter alia, nondominant interexchange carriers to cancel their tariffs for interstate, domestic, interexchange services on file  xP!'with the Commission within a ninemonth transition period and not to file any such tariffs thereafter. Tariff  xPy"'Forbearance Order at  8993, stayed pending judicial review, MCI Telecom. Corp. v. FCC, No. 961459  xPA#'(D.C. Cir. Feb. 13, 1997). See also Policy and Rules Concerning the Interstate, Interexchange Marketplace; Guidance Concerning Implementation as a Result of the Stay Order of the U.S. Court of Appeals for the D.C.  xP$'Circuit, CC Docket No. 9661, Public Notice, DA 97493 (rel. March 6, 1997).  Nondominant carriers are also"}0*%%ZZO"  Y4subject to streamlined section 214 requirements.^~ xPy'ԍSee 47 C.F.R.  63.71, 63.07(a).^ Compliance with these requirements may require small incumbent LECs to use accounting, economic, technical, legal, and clerical skills.  Y4226. SMALL ` ` In this Order, we have found that all incumbent independent LECs, including small incumbent independent LECs, must provide inregion, interstate, domestic,  Yv4interexchange services through a separate affiliate that satisfies the Fifth Report and Order requirements. We are aware of three companies currently providing interexchange services directly on dominant basis, Union Telephone Company (of Wyoming), GTE Hawaiian Tel., and MTC. We permit companies that are not currently providing interexchange services  Y 4through a separate affiliate that satisfies the Fifth Report and Order requirements one year  Y 4from January 1, 1997 to comply with the Fifth Report and Order separation requirements. We also extend this regulatory regime, which applies to domestic services, to international, interexchange services as well. Pursuant to this Order, all incumbent independent LECs, including small incumbent independent LECs, must provide inregion, interstate, domestic, interexchange services and international, interexchange services through a separate affiliate  Y4that satisfies the Fifth Report and Order separation requirements. Specifically, incumbent independent LECs must provide these services through a separate affiliate that must: (1)maintain separate books of account; (2) not jointly own transmission or switching facilities with its affiliated exchange companies; and (3) obtain any services from its affiliated  Y44exchange companies at tariffed rates and conditions.TX4X xP='ԍFifth Report and Order, 98 FCC 2d at 1198,  9. For purposes of these requirements, an "affiliate" of an independent LEC is "a carrier that is owned (in whole or in part) or controlled by, or under common control  xP'with, an exchange telephone company." Id.T In this Order, we have also  Y4eliminated the Fifth Report and Order separation requirements as a condition for nondominant treatment of incumbent independent LECs' provision of outofregion, interstate, domestic, interexchange services.  X4 E.` ` Steps Taken to Minimize the Significant Economic Impact of this Report and Order on Small Entities and Small Incumbent LECs, Including the  X4Significant Alternatives Considered and Rejected (#`  Ye4227. ` ` We believe that our actions eliminating dominant carrier regulation of independent LEC provision of inregion, interstate, domestic, interexchange services, yet  Y74maintaining all of the Fifth Report and Order separation requirements to guard against anticompetitive conduct in the form of cost misallocation or unreasonable discrimination, will facilitate the provision of inregion, interstate, domestic, interexchange services by independent LECs, many of which may be small incumbent LECs. We reject proposals to"x0*%%ZZ "  Y4remove the Fifth Report and Order requirements, for reasons set forth in Section IV.B.1.  Y4228. ` ` Our actions seem likely to benefit all incumbent independent LECs providing inregion, interstate, domestic, interexchange services on a nondominant basis, some of which may be small incumbent LECs, because any increase in costs of regulatory compliance can be amortized over a period of one year. As noted in Section IV.B.1, incumbent LECs that currently provide these services on an integrated basis subject to dominant carrier  Y_4regulation are given one year from the date of release of this Order to comply with the Fifth  YH4Report and Order separation requirements.  Y 4229. ` ` We decline to impose section 272 requirements, aspects of dominant carrier regulation, or any additional requirements on independent LECs' provision of inregion, interstate, domestic, interexchange services. Consistent with our belief that independent  Y 4LECs are less likely to be able to engage in anticompetitive conduct than the BOCs,[  xPN'ԍSee supra  INDLECS170.[ we therefore establish a less stringent regulatory regime for the independent LECs. This seems likely to benefit independent LECs, including small incumbent LECs, by not subjecting them to burdensome regulations that may serve only to hamper competition in the interexchange market. For the reasons set forth in Section IV.B.1, we reject alternatives to impose additional requirements on independent LECs' provision of inregion, interstate, domestic, interexchange services.  Y4230. ` ` We limit the scope of the separation requirements to incumbent independent  Y4LECs. By not imposing the Fifth Report and Order requirements on nonincumbent LECs, we avoid imposing unnecessary regulation on new entrants into the local exchange market that wish to provide inregion, interstate, domestic, interexchange services, and will not have control of incumbent local exchange and exchange access facilities. This seems likely to benefit all of these new entrants, some of which may be small entities, by lowering entry costs, lowering the disparity in market power between new entrants and incumbent LECs, minimizing the risk of being subjected to legal action, and decreasing administrative costs. We reject proposals to subject nonincumbent LECs to the same requirements as incumbent LECs, for the reasons set forth in Section IV.B.2.  Y 4231. ` ` We apply our regulations equally to all incumbent independent LECs, in view of our conclusion that the size of an independent LEC will not affect its incentives to engage in cost misallocation between its monopoly services and its competitive services. Our action is intended to foster competition in the inregion, interstate, domestic, interexchange marketplace nationwide by preventing all incumbent independent LECs, regardless of size, from using their control of bottleneck local exchange and exchange access facilities to thwart new entry. This seems likely to benefit all new entrants into the local exchange market that""X0*%%ZZ$" wish to provide inregion, interstate, domestic, interexchange services, some of which may be small entities, by helping to reduce entry costs and lower the disparity in market power between new entrants and other incumbent LECs. Moreover, our action will likely help to establish these favorable entry conditions uniformly nationwide, fostering increased certainty which will benefit all new entrants, including any small entities. We reject alternatives to exempt all incumbent LECs with less than two percent of the nation's access lines from our regulations, for the reasons stated in Section IV.B.3.  YH4232. ` ` We extend the regulatory regime described above, which governs independent LECs' provision of inregion, interstate, domestic, interexchange services, to independent LECs' provision of inregion, international services. We believe that this action will benefit incumbent LECs and nonincumbent LECs, some of which may be small incumbent LECs or small entities, for the same reasons enumerated in our analysis for inregion, interstate, domestic, interexchange services, such as helping to reduce market entry costs, decreasing the disparity in market power between new entrants and other incumbent LECs, and lowering administrative costs. We decline to treat independent LECs' provision of inregion, interstate, domestic, interexchange services and inregion, international services differently, for the reasons stated in Section IV.B.4.  YK4233.` ` As stated in Section IV.B.5, we intend to commence a proceeding three years from the date of adoption of this Order to determine whether the emergence of competition  Y4in the local exchange and exchange access marketplace justifies removal of the Fifth Report  Y4and Order requirements. We believe that three years should be a reasonable period of time in which to expect effective competition to develop in local exchange and exchange access markets. We reject proposals to decide in this proceeding whether to sunset separate affiliate requirements for independent LECs, for the reasons stated in Section IV.B.5.  Y4234.` ` Report to Congress: The Commission shall send a copy of this FRFA, along  Y|4with this Report and Order, in a report to Congress pursuant to the SBREFA, 5U.S.C.801(a)(1)(A). A copy of this analysis will also be provided to the Chief Counsel for Advocacy of the Small Business Administration, and will be published in the Federal  Y74Register.` `  X 4k  VII. FINAL PAPERWORK REDUCTION ANALYSIS    Y4\235.` ` Each of the two Notices of Proposed Rulemaking from which this Order issues proposed changes to the Commission's information collection requirements. As required by the Paperwork Reduction Act of 1995, Pub. L. No. 10413, the Commission sought written comment from the public and from the Office of Management and Budget (OMB) on the proposed changes. The collections described therein, however, are addressed in other"#0*%%ZZ%"  Y4proceedings. xPy'ԍ See e.g., Tariff Forbearance Order; NonAccounting Safeguards Order.  Y4236.` ` In this Order, we have decided to require independent LECs to comply with  Y4Fifth Report and Order separation requirements in order to provide international, interexchange services. Pursuant to the separation requirements, an independent LEC and its international, interexchange affiliate must maintain separate books of account. This requirement constitutes a new "collection of information" within the meaning of the Paperwork Reduction Act of 1995, 44 U.S.C.  35013520. Implementation of this requirement is subject to approval by the Office of Management and Budget as prescribed by the Paperwork Reduction Act.  X 4  X 4VIII. ORDERING CLAUSES ă  Y 4237.` ` Accordingly, IT IS ORDERED that pursuant to sections 1, 2, 4, 201, 202, 251, 271, 272 and 303(r) of the Communications Act of 1934, as amended, 47 U.S.C.  151, 152, 154, 201, 202, 251, 271, 272, and 303(r), the REPORT AND ORDER IS ADOPTED, and the requirements contained herein will become effective 30 days after publication of a summary in the Federal Register. The collection of information contained within is contingent upon approval by the OMB.  Y44238.` ` IT IS FURTHER ORDERED that Part 64, Subpart Q of the Commission's rules, 47 C.F.R.  64Q, is ADDED as set forth in Appendix B hereto.  Y4239.` ` IT IS FURTHER ORDERED that the Secretary shall send a copy of this REPORT AND ORDER, including the final regulatory flexibility analysis, to the Chief Counsel for Advocacy of the Small Business Administration, in accordance with paragraph  Y4605(b) of the Regulatory Flexibility Act, 5 U.S.C.  601 et seq. ` `  hhCFEDERAL COMMUNICATIONS COMMISSION ` `  hhCWilliam F. Caton ` `  hhCActing Secretary 3J:\POLICY\LECDOM\ORDER\VERSIONS\REGFLEX.AMK3 "X0*%%ZZ#"  X4 RAPPENDIX A Ã  X4 List of Commenters in CC Docket No. 96149 ă  Y4Ameritech` `  hhCqpp Association for Local Telecommunications Services (ALTS)  Yv4Association of Directory Publishers (ADP)pp Association of Telemessaging International (ATSI)  YH4AT&T Corp. (AT&T)hhCqpp  *xxX  Bell Atlantic Telephone Companies (Bell Atlantic)  Y 4Bell Communications Research, Inc. (Bellcore)pp  *xxX (#(#  Y 4BellSouth Corporation (BellSouth)hhCqpp California Cable Television Association (CCTA) California Public Utilities Commission (California Commission) Centra Health  Y 4Citizens for a Sound Economy Foundationqpp Citizens Utilities Companies Commercial Internet Exchange Association (CIX)  Yb4Commonwealth of the Northern Mariana Islands Competitive Telecommunications Association (CompTel)  Y44Economic Strategy Institute hhCqpp Excel Telecommunications, Inc. (Excel)  Y4Exco Noonan Inc.  hhC  Y4Florida Public Service Commission (Florida Commission)  Y4Frontier Corporation (Frontier)hhCq GST Telecom, Inc. (GST)  Y4GTE Service Corporation (GTE)hhC  Y4Hudson United Bank, Inc. Independent Data Communications Manufacturers Association (IDCMA) Independent Coalition  YN4Independent Telephone & Telecommunications Alliance (ITTA)   *xxX (#(#  Y74Information Industry Association (IIA)q Information Technology Association of America (ITAA)  Y 4Information Technology Industry Council (ITIC) Interactive Services Association (ISA) LCI International Telecommunications Corp. (LCI)  Y 4LDDS WorldCom Inc. (LDDS)hhCqpp  Y!4MCI Telecommunications Corporation (MCI)pp  *xxX (#(#  Y"4MFS Communications Company, Inc. (MFS)h(#  Y#4Michigan Public Service Commission (Michigan Commission)  Yh$4Missouri Public Service Commission (Missouri Commission) Nabisco  Y:&4National Association of Regulatory Utility Commissioners (NARUC)  *xxX ":&0*''ZZ("ԌNational Cable Television Association, Inc. (NCTA)   National Telephone Cooperative Association (NTCA)  Y4New Jersey Division of the Rate Payer Advocate (New Jersey Rate Payer Advocate)   Y4New York State Department of Public Service (New York Commission)xxX  NYNEX Telephone Companies (NYNEX)  Y4Owens & Minor hhCqpp Pacific Telesis Group (PacTel) PNC Bank, N.A.  YH4Prebon Yamane  Y14Public Utilities Commission of Ohio q SBC Communications Inc. (SBC) SmithKline Beecham  Y 4Southern New England Telephone Company (SNET)pp  *xxX   Y 4Sprint Corporation (Sprint)hhCq  Y 4Telecommunications Industry Association (TIA)pp Telecommunications Resellers Association (TRA)  Y4Telefonica Larga Distancia de Puerto Rico, Inc. (TLD)pp  * Teleport Communications Group, Inc. (Teleport)  Yb4Temple University hhCq  YK4Time Warner Cable (Time Warner)q  Y44UGI Utilities, Inc. hhCq  Y4United States Telephone Association (USTA)pp  *xxX U. S. Department of Justice (DOJ) U S West VoiceTel West Virginia Dept. of Administration  Y4Wisconsin Public Service Commission (Wisconsin Commission)  *xxX  Yellow Pages Publishers Association (YPPA)  Xe4  List of Commenters in CC Docket No. 9661, Phase II Đ\ Alabama Public Service Commission (Alabama PSC) ALLTEL Corporate Services, Inc. America's Carriers Telecommunication Association (ACTA) American Petroleum Institute (API) American Public Communications Council (APCC) Ameritech AMSC Subsidiary Corporation (AMSC) AT&T Corp. (AT&T) Bell Atlantic Telephone Companies (Bell Atlantic) BellSouth Corp. (BellSouth) Cable & Wireless, Inc. (Cable & Wireless) Citizens Utilities Company (Citizens Utilities)":&0*''ZZ("ԌColumbia Long Distance Service, Inc. (CLDS) Competitive Telecommunications Association (CompTel) Commonwealth of the Northern Mariana Islands Florida Public Service Commission (Florida PSC) Frank Collins Frontier Corporation (Frontier) General Communication, Inc. (GCI) General Services Administration (GSA) GTE Service Corp. (GTE) Governor of Guam & the Guam Telephone Authority Guam Public Utility Commission (Guam PUC) Harvey William Ward (Ward) Iowa Utilities Board IT&E Overseas, Inc. JAMA Corporation John Stauralakis, Inc. Kevin Loflin (Loflin) Kristine Stark (Stark) LDDS WorldCom (LDDS) Louisiana Public Service Commission (Louisiana PSC) MCI MFS Michael Sussman (Sussman) Missouri Public Service Commission (Missouri PSC) National Association of Regulatory Utilities Commissioners (NARUC) New York State Department of Public Service NYNEX Telephone Companies (NYNEX) Office of the Ohio Consumers' Counsel (Ohio Consumers' Counsel) Pacific Telesis Group (PacTel) Paul Lee (Lee) PCI Communications, Inc. Peggy Orlic (Orlic) Pennsylvania Office of Consumer Advocate Pennsylvania Public Utility Commission (Pennsylvania PUC) Public Utilities Commission of Ohio Rural Telephone Coalition Scherer Communications Group SBC Communications, Inc. (SBC) Southern New England Telephone Company (SNET) Sprint Corporation (Sprint) State of Alaska (Alaska) State of Hawaii (Hawaii) TCA, Inc.":&0*''ZZ("ԌTDS Telecommunications Corp. Telecommunications Resellers Association (TRA) United States Telephone Association (USTA) U.S. West, Inc. (U.S. West) Vanguard Cellular Systems, Inc. Washington Utilities & Transportation Commission Zankle Worldwide Telecom (ZWT) "_0*''ZZ"  Y4# Xw PE37 |XP#4  APPENDIX B Final Rules  X4| AMENDMENTS TO THE CODE OF FEDERAL REGULATIONS ă  Y4240.Part 64 of Title 47 of the Code of Federal Regulations (C.F.R.) is amended as follows:  X`4U PART 64 MISCELLANEOUS RULES RELATING TO COMMON CARRIERS\ Subpart Q Separate Affiliate Requirements For Incumbent Independent Local XExchange Carriers That Provide InRegion, Interstate Domestic Interexchange Services Or InRegion International Interexchange Services(#  Y 4   X 4 Sec.  X 4 64.1901` `  Basis and purpose.  X 4 64.1902` `  Terms and definitions.  Y4 64.1903 ` `  Obligations of all incumbent independent local exchange carriers .  Xd4_' Subpart Q Separate Affiliate Requirements For Incumbent Independent Local CExchange Carriers That Provide InRegion, Interstate Domestic Interexchange Services F Or InRegion International Interexchange Services  Y4 \  X4  64.1901` ` Basis and purpose.  Y4  Y4(a)` ` Basis. These rules are issued pursuant to the Communications Act of 1934, as amended.  Y4(b)` ` Purpose. The purpose of these rules is to regulate the provision of inregion, interstate, domestic, interexchange services and inregion international interexchange services by incumbent independent local exchange carriers.  X=4  64.1902` ` Terms and definitions. Terms used in this part have the following meanings:  Y4Books of Account. Books of account refer to the financial accounting system a company uses to record, in monetary terms the basic transactions of a company. These books of account reflect the company's assets, liabilities, and equity, and the revenues and expenses from operations. Each company has its own separate books of account.  Yp$4Independent Local Exchange Carrier (Independent LEC). Independent local exchange carriers are local exchange carriers, including GTE, other than the BOCs. "D&0*''ZZ("Ԍ Y4Incumbent Independent Local Exchange Carrier (Incumbent Independent LEC). The term incumbent independent local exchange carrier means, with respect to an area, the independent local exchange carrier that: (1) on February 8, 1996, provided telephone exchange service in such area; and (2) (i) on February 8, 1996, was deemed to be a member of the exchange carrier association pursuant to  69.601(b) of this title; or (ii) is a person or entity that, on or after February 8, 1996, became a successor or assign of a member described in clause (i) of this paragraph. The Commission may also, by rule, treat an independent local exchange carrier as an incumbent independent local exchange carrier pursuant to section 251(h)(2) of the Communications Act of 1934, as amended.  Y 4Independent Local Exchange Carrier Affiliate (Independent LEC Affiliate). An independent local exchange carrier affiliate is a carrier that is owned (in whole or in part) or controlled by, or under common ownership (in whole or in part) or control with, an  Y 4independent local exchange carrier.q  Y 4InRegion Service. Inregion service means telecommunications service originating in an independent local exchange carrier's local service areas or 800 service, private line service, or their equivalents that: (1) terminate in the independent LEC's local exchange areas, and (2) allow the called party to determine the interexchange carrier, even if the service originates outside the independent LEC's local exchange areas.  Y#4Local Exchange Carrier. The term local exchange carrier means any person that is engaged in the provision of telephone exchange service or exchange access. Such term does not include a person insofar as such person is engaged in the provision of a commercial mobile service under section 332(c), except to the extent that the Commission finds that such service should be included in the definition of that term.  Y4  64.1903 ` ` Obligations of all incumbent independent local exchange carriers . (a) Except as provided in paragraph (c) of this section, an incumbent independent LEC providing inregion, interstate, interexchange services or inregion international interexchange services shall provide such services through an affiliate that satisfies the following requirements: XX` ` (1) The affiliate shall maintain separate books of account from its affiliated exchange companies. Nothing in this section requires the affiliate to maintain separate books of account that comply with Part 32 of this title;(#` XX` ` (2) The affiliate shall not jointly own transmission or switching facilities with its affiliated exchange companies. Nothing in this section prohibits an affiliate from sharing personnel or other resources or assets with an affiliated exchange company; and (#` "C&0*''ZZ("ԌXX` ` (3) The affiliate shall acquire any services from its affiliated exchange companies for which the affiliated exchange companies are required to file a tariff at tariffed rates, terms, and conditions. Nothing in this section shall prohibit the affiliate from acquiring any unbundled network elements or exchange services for the provision of a telecommunications service from its affiliated exchange companies, subject to the same terms and conditions as provided in an agreement approved under section 252 of the Communications Act of 1934, as amended.(#` X(b) The affiliate required in paragraph (a) of this section shall be a separate legal entity from its affiliated exchange companies. The affiliate may be staffed by personnel of its affiliated exchange companies, housed in existing offices of its affiliated exchange companies, and use its affiliated exchange companies' marketing and other services, subject to paragraph (a)(3) of this section. (# X(c) An incumbent independent LEC that is providing inregion, interstate, domestic interexchange services or inregion international interexchange services prior to January 1, 1996, but is not providing such services through an affiliate that satisfies paragraph (a) of this section as of January 1, 1997 shall comply with the requirements of this section no later than January 1, 1998.(#"K0*''ZZU"  Y4SY#  PE37-8P##Xw PE37 |XP#April 18, 1997(#     X4? Separate Statement }vof  X_4'Commissioner Susan Ness Đ\  W 4X` hp x (#%'0*,.8135@8: