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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Implementation of Section 254(k) ) of the Communications Act of 1934, ) as Amended ) ORDER Adopted: May 8, 1997 Released: May 8, 1997 By the Commission: I. INTRODUCTION 1. In conjunction with its overarching goal of promoting competition in the telecommunications industry, the 1996 Act specifically prohibits telecommunications carriers from subsidizing competitive services with services that are not. The Act also directs the Commission, with respect to interstate services, to "establish any necessary cost allocation rules, accounting safeguards, and guidelines to ensure that services included in the definition of universal service bear no more than a reasonable share of the joint and common costs of facilities used to provide those services." In this Order, we implement section 254(k) by codifying its prohibitions in Part 64 of our rules. As additional provisions of the 1996 Act are implemented and the telecommunications industry continues to evolve, we will, from time to time, re-evaluate our rules to determine whether additional rule changes are necessary to meet the requirements of section 254(k). II. BACKGROUND 2. Since the advent of private line competition in the mid-1960's, the Commission has focused its attention on the incentives that carriers may have to recover the costs of competitive services from subscribers to less competitive, regulated services by misallocating the costs of their competitive services. In a series of orders, the Commission established a distinction between carriers with market power and those without. The Commission concluded that carriers without market power could not charge rates or engage in practices that contravene the requirements of the Act because their customers could always switch to another provider. The Commission, therefore, gradually relaxed its regulation of carriers without market power. 3. For carriers with market power, the Commission's approach has evolved from structural separations requirements to accounting and non-accounting safeguards. The Commission now has in place a comprehensive system of accounting and non-accounting safeguards designed to discourage carriers from misallocating the costs of nonregulated activities and to ensure that ratepayers share in any efficiencies generated from joint use of the network by nonregulated activities. 4. The Commission's safeguards to protect the subscribers of incumbent local exchange carriers' (ILECs') services require the ILECs to record their costs and revenues in the Uniform System of Accounts (USOA). Next, these carriers must apply our Part 64 cost allocation rules to allocate costs between activities regulated under Title II and activities not regulated under Title II. To monitor this process, the Commission requires ILECs with annual operating revenue greater than the applicable indexed revenue threshold to file with the Commission cost allocation manuals (CAMs) that set forth their cost allocation procedures. In addition, these carriers must obtain an annual independent audit of their operations. Smaller ILECs, other than average schedule companies, must comply with our cost allocation standards and affiliate transactions rules but are exempt from the CAM filing and independent audit requirements. 5. After identifying their regulated costs, ILECs, other than average schedule companies, apply our Part 36 jurisdictional separations rules. These rules provide for the apportionment of certain regulated costs between the interstate and intrastate jurisdictions for use by the appropriate regulatory bodies that oversee rates in the respective jurisdictions. For ILECs, interstate telecommunications services generally include interstate access services and interstate, interexchange services. Our Part 69 access charge rules were designed to promote competition in the interstate, interexchange market by ensuring that all interexchange carriers would be able to originate and terminate their traffic over ILEC networks at just, reasonable and nondiscriminatory rates. Through these rules, ILECs apportion their regulated, interstate costs among the interexchange services and rate elements that form the cost basis for exchange access tariffs. The Commission has prescribed additional structural and nonstructural safeguards necessary to protect against cost misallocation and discrimination. III. DISCUSSION 6. To ensure that rates for interstate services are just and reasonable, the Commission established a uniform system of accounts, cost allocation standards, rules for recording transactions between ILECs and their corporate affiliates and accounting procedures, audit requirements, and other implementation and enforcement mechanisms. These rules were designed to inhibit carriers with market power in regulated service markets from imposing the costs and risks of nonregulated ventures on subscribers to regulated interstate services. The opening of the local exchange and exchange access markets to competition as well as the ability of the Bell Operating Companies (BOCs) to enter new markets and engage in previously proscribed activities creates the potential for ILECs to misallocate costs in ways that our current rules may not restrict because these rules are focused on the allocation of costs between regulated and nonregulated activities. New section 254(k), however, establishes two dichotomies that are not explicitly addressed by our existing rules. Section 254(k) requires additional scrutiny of the allocation of costs between competitive and noncompetitive activities, both regulated and nonregulated, and between universal services and all other services. 7. Section 254(k) states that "a telecommunications company may not use services that are not competitive to subsidize services that are subject to competition." We conclude that this provision of section 254(k) places an obligation on telecommunications carriers that supplements our existing rules. This provision of section 254(k) addresses the concern that ILECs may attempt to gain an unfair market advantage in competitive markets by allocating to their less competitive services, for which subscribers have no available alternative, an excessive portion of the costs incurred by their competitive operations. 8. Section 254(k) also directs the Commission, with respect to interstate services, to "establish any necessary cost allocation rules, accounting safeguards, and guidelines to ensure that services included in the definition of universal service bear no more than a reasonable share of the joint and common costs of facilities used to provide those services." In defining the services that will be supported by federal universal service support mechanisms, we have considered, inter alia, the extent to which telecommunications services included in the definition of universal service are "essential to education, public health or public safety." A telecommunications carrier will typically provide these services, together with numerous other telecommunications services, over a single network because the total cost of providing these services on shared facilities, under shared management, is less than the combined cost of providing these services on separate facilities particularly under separate management operations. A substantial portion of these costs of shared facilities and operations are joint and common costs; it is difficult, if not impossible, to approximate the actual portion of such costs for which each product or service is responsible. For these types of costs, considerations other than cost causation must prevail in determining how the costs should be allocated among various services. We conclude that the second provision of section 254(k) places a continuing obligation on the Commission to ensure that the treatment of joint and common costs prescribed by our accounting, cost allocation, separations, and access charge rules will safeguard the availability of universal services. 9. We find it unlikely that telecommunications carriers other than ILECs will have sufficient market power to engage in the behavior proscribed by section 254(k) and therefore do not adopt additional rules implementing section 254(k) with respect to nondominant carriers. We emphasize, however, that all telecommunications carriers remain subject to the statutory prohibition against cross-subsidy. For ILECs, we conclude that codifying section 254(k)'s prohibitions in Part 64 of our rules will give the fullest effect to the Act's prohibitions. In this way, our rules will reflect the intent of the Act and reinforce our commitment to enforcing this mandate. Because this rule change merely codifies the requirements of the Act and involves no discretionary action by the Commission, we find good cause to conclude that notice and comment procedures are unnecessary. The dynamic nature of the telecommunications industry means that safeguarding regulated ratepayers and subscribers and contributors to universal service is an evolving process and we will act as necessary to ensure that section 254(k)'s mandate continues to be effectuated and enforced. IV. ORDERING CLAUSES 10. Accordingly, IT IS ORDERED that, pursuant to sections 1, 4, 201-205, 218, 220, 251, 252 and 254(k)of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154, 201- 205, 218, 220, 251, 252 and 254(k), and section 553(b)(B) of the Administrative Procedure Act, 5 U.S.C.  553(b)(B), Part 64 of the Commission's rules, 47 C.F.R. Part 64, is amended, as described above. 11. IT IS FURTHER ORDERED that, pursuant to sections 1, 4, 201-205, 218, 220, 224, 251, 252 and 254(k) of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154, 201- 205, 218, 220, 251, 252 and 254(k), and section 553(b)(B) of the Administrative Procedure Act, 5 U.S.C.  553(b)(B), the amendment to Part 64 described above, SHALL BE EFFECTIVE UPON PUBLICATION of this Order in the Federal Register. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX A -- RULES PART 64 -- MISCELLANEOUS RULES RELATING TO COMMON CARRIERS 1. The authority citation for Part 64 is revised to read as follows: AUTHORITY: 47 U.S.C. 154, 254(k); secs. 403(b)(2)(B), (c), Pub. L. 104-104, 110 Stat. 56. Interpret or apply 47 U.S.C. secs. 201, 218, 226, 228, and 254(k) unless otherwise noted. 2. Section 64.901 is amended by adding paragraph (c) to read as follows:  64.901 Allocation of costs. * * * * * (c) A telecommunications carrier may not use services that are not competitive to subsidize services subject to competition. Services included in the definition of universal service shall bear no more than a reasonable share of the joint and common costs of facilities used to provide those services. * * * * *