Second Computer Inquiry/Final Decision/3

A. Network Services
37. As expected, the Tentative Decision evoked a tremendous response. Almost fifty parties filed comments. Reply comments were filed by approximately thirty parties.

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Comments were filed by: New York Public Service Commission (NYPSC); Honeywell, Inc. (Honeywell); American Telephone & Telegraph Company (AT&T); Walter R. Hinchman (Hinchman); GTE Service Corporation (GTE); Computer & Business Equipment Manufacturers Association (CBEMA); Delphi Communications Corporation (Delphi); U.S. Telephone & Telegraph Corporation (UST&T); Central Telephone & Utilities Corporation (CENTEL); Rochester Telephone Corporation (Rochester); Sperry Univac Division-Sperry Corporation (Sperry Univac); Xerox Corporation (XEROX); Western Union International, Inc. (WUI); American Newspaper Publishers Association (ANPA); Satellite Business Systems (SBS); Plexus Corporation (Plexus); COMSAT General Corporation (COMSAT); American Satellite Corporation (ASC); United States Independent Telephone Association (USITA); The National Burglar and Fire Alarm Association and The Alarm Industry Telecommunications Committee (NBFAA & AITC); Citicorp; GTE Telenet; RCA Global Communications, Inc. (RCA Globcom); North American Telephone Association (NATA); Central Committee on Telecommunications of the American Petroleum Institute (API); Bunker Ramo Corporation (Bunker Ramo); Southern Pacific Communications Corporation (SPC); MCI Telecommunications Corporation (MCI); General Electric Information Services Company (GEISCO); TRT Telecommunications Corporation (TRT); ISA Communications Services, Inc. (ISACOMM); United Telecom Service, Inc. (U.T.); Securities Industry Automation Corporation (SIAC); Aeronautical Radio, Inc. (ARINC); Tymnet, Inc. (Tymnet); Computer & Communications Industry Association (CCIA); Association of Data Processing Service Organization, Inc. (ADAPSO); Independent Data Communications Manufacturers Association, Inc. (IDCMA); Western Union Telegraph Company (Western Union); Control Data Corporation (Control Data); National Telecommunications & Information Administration (NTIA); General Instruments Corporation (GIC); Computer Corporation of America (CCA); American Banking Association (ABA) and Department of Justice (DOJ). Reply comments were filed by: Honeywell; AT[T] GTE; CBEMA; UST[T] XEROX; WUI; Plexus Corp.; USITA; NBFAA & AITC; Citicorp.; GTE Telenet; RCA Globecom; NATA; Bunker Ramo; SPC; IBM; GEISCO; SBS; TRT; ARINC; Tymnet; CCIA; ADAPSO; IDCMA; WU; Control Data; NTIA; ABA; Hazeltine Corporation (Hazeltine) TDX Systems, Inc. (TDX). Motions to Accept Late Filed Comments were filed by RCA GLOBCOM, GIC, DOJ and ABA. These motions are hereby granted.

38. With respect to network services, the comments focus on whether the basic/enhanced dichotomy is appropriate, the viability of the proposed definitional structure for distinguishing the communications or data processing nature of enhanced services, and whether ENV services should be subject to regulation. Concerning carrier participation in the provision of ENV services, the comments address whether the resale structure is appropriate, whether it should be applied to all carriers owning transmission facilities, and the appropriate degree of corporate separation required for those carriers that must offer ENV services through a separate subsidiary. The comments also address the extent to which the decision should be applicable to the international arena. Insofar as customer-premises equipment is concerned the comments address whether the "basic media conversion" distinction is appropriate, whether all CPE should be treated alike, and whether carrier provided CPE should be offered on a tariffed basis. Relative to both network services and CPE, the comments address various legal considerations, the implications of the 1956 AT&T consent decree, and the need for a transition period if the current regulatory scheme is significantly altered.

Basic/Enhanced Dichotomy
39. There appears to be a general consensus that a regulatory structure distinguishing between basic and enhanced services is appropriate, However, concern is expressed that in establishing the three categories of service--voice, BNV, and ENV--an artificial distinction is being made between voice and non-voice services. It is argued by various parties that any such distinction is unworkable and should be rejected since there is no fundamental distinction between voice and non-voice communications services. These parties argue that there should only be two classes of communications services--basic and enhanced--each capable of providing voice and non-voice communications indiscriminantly.

40. AT&T recommends that the definition of "voice" services be modified to include recorded and simulated voice services. It fears that, as drafted, the definition of "voice" services will exclude services which it feels to be within the voice category such as the Public Announcement Services and Automatic Intercept System. Other parties think the voice category should be more limited and that it should be made clear that human to computer services fall into the ENV category. Arguing that there should be a deliberate overlap between ENV communications and BNV services, GTE requests that

the definition of a "basic non-voice service" be modified to include any function which affects or facilitates the transfer of information. Additionally, GTE asserts that the definition of a "data processing service" should only be used to identify what unregulated firms can do without coming under regulation, and should not prohibit underlying carriers from providing data bank or information retrieval services which are related to a carrier's communications function or preclude underlying carriers from providing energy management and emergency systems.

Data Processing/Communications Definitional Structure
41. Our proposed definitional approach to the data processing-communications dilemma evoked considerable discussion. There is uniform disagreement and confusion as to the regulatory implications of the proposed definitional terms. Parties worry that the definitions, as drafted, will either foreclose carriers from offering legitimate communications services or unduly enlarge the scope of regulation and force unregulated data processing vendors to seek regulated status to offer the same degree of service as resale carriers. Parties also comment that the proposed approach will eliminate neither regulatory uncertainty nor the need for ad hoc determinations. Other parties reject the proposed definitional approach as not representing any improvement and recommend that the present rules be retained.

42. According to AT&T, the Commission's proposed definition of "data processing" should be amended to include the processing of information for the purpose of transforming or altering its content or meaning. AT&T states that the definition of a "data processing service" is overbroad and recommends that it be deleted as it includes aspects of information retrieval and process control, and would preclude some innovative carrier communications offerings. AT&T also suggests that Part (b) of the proposed rule be modified to make explicit that carriers may perform data processing as part of a tariffed service consistent with the application of the primary purpose test.

43. IBM and others express concern that the proposed scheme for distinguishing enhanced non-voice communications and data processing services is unworkable and will unnecessarily expand the scope of regulation. IBM states that marketplace forces are bound to frustrate and quickly render obsolete any attempt to draw a regulatory boundary based on technical distinctions between enhanced communications and data processing services. It comments that the Commission's

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See, e.g., comments of AT&T, GTE and USITA.

See, e.g., comments of Honeywell, Delphi, IBM, CBEMA, ABA, Bunker Ramo, CCA, NBFAA-AITC, Citicorp, and ARINC.

See, e.g., comments of Hinchman and Western Union.

See, e.g., comments of the DOJ and Western Union. Avoiding this controversy, somewhat, NBFFA-AITC urged the Commission to hold that alarm services were neither communications nor data processing.

definition of a "data processing service" is inadequate as it does not include classic data processing of customer information and suggests that the Commission not define data processing because any definition would become rapidly obsolete and difficult to apply. Bunker Ramo, supported by ADAPSO, recommends that the alteration of all data, not just customer-provided data, should be considered a data-processing service. NTIA disparages the Commission's reliance on the definition of a data processing service to distinguish between enhanced communications and data processing. In the appendix to its comments NTIA proposes a mathematical entropy criterion for distinguishing data communications and data processing functions. The merits of the proposed definition of a "hybrid data processing service" are also debated by the parties. AT&T recommends that the Commission continue to define a hybrid data processing service to underscore the fact that unregulated entities may offer computer processing capabilities for hire on an unregulated basis, utilizing carrier communications facilities where the primary purpose is to provide date processing as a service. The general consensus of the other parties is that the proposed definition of a "hybrid data processing service" is in reality an inaccurate description of remote access data processing and should be amended to include the component of incidental message switching.

44. Various parties criticized AT&T's proposals concerning the definitions of a "voice service," "data processing" and a "data processing service" as being an attempt to expand the scope of regulated common carrier services to permit the offering of data processing by underlying carriers. CBEMA and ADAPSO claim AT&T is seeking to exempt the direct provision of future data processing services by underlying carriers from the resale structure requirements. According to NTIA, the redefinition of voice services is not necessary since services such as directory assistance, itemized billing, speed calling and call forwarding are basic and underlying carriers should be free to offer them as part of a voice service.

Resale Structure
45. The commenting parties generally support the application of the resale structure to the provision of enhanced non-voice services. AT&T supports a resale approach, but argues for internal organizational separation as opposed to the establishment of a separate subsidiary. Recommending in the alternative either a modified resale approach or reliance on a revised system of accounts, GTE asserts that the application of a separate corporation requirement to the service and equipment offerings of the GTE telephone companies would be tantamount to precluding the provision of such offerings by these companies.

46. There is a great diversity of opinion, however, with regard to

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See, e.g., comments of ADAPSO and ARINC.

whether the resale structure should be imposed upon all communications common carriers. AT&T argues that imposing varying degrees of regulation on carriers providing the same service is inconsistent with the Communications Act, and suggests that the resale approach should be applied equally to all carriers. However, a number of parties supporting the resale approach suggest that the requirement only be imposed upon the provision of enhanced non-voice services by large monopoly or dominant carriers. They submit that while the imposition of the resale structure on enhanced services provided by dominant carriers is logical, it is not required for non-dominant carriers since they do not have the potential to engage in the anticompetitive practices that the resale approach is designed to prevent. For example, SBS, MCI and GTE-Telenet state that non-dominant carriers and the specialized common carriers (SCCs) operate in a competitive marketplace and have no monopoly power or profits with which to engage in anticompetitive behavior; furthermore, users of basic services offered by SCCs at rates intended to cross-subsidize other services have competitive alternatives. USITA points out that even with the one million dollar exemption, the resale requirement will affect 503 of the nation's 1,527 independent telephone companies. Asserting that the majority of these companies do not have the potential to engage in cross-subsidization, it urges that the resale concept be limited to those instances where, without it, appropriate regulation in the public interest would be impossible. For its part, NTIA states that any requirement that non-dominant carriers establish separate subsidiaries will result in unnecessary costs, inefficiencies, and may inhibit the entry of smaller firms and block innovative efforts.

47. There is disagreement among the parties as to which carriers should be deemed to be dominant. NTIA, GTE-Telenet, ASC, and CCA argue that the separation requirement should only be applied to AT&T. NTIA submits, based on what it describes as a "dominant market power test," that only AT&T poses a threat to fair competition in the enhanced non-voice market. According to NTIA, the

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See, e.g., comments of Western Union, USITA, UST&T, SBS, ASC, COMSAT General, SPC, Hinchman, NTIA.

Western Union maintains that since it is not achieving a fair rate of return, has no excess revenue, and its public offerings are subject to competition, the resale requirement should not be applicable to it. It seeks an amendment to the proposed Section 64.702 to exempt carriers whose operations depend in large measure on circuits and facilities leased from other carriers. Western Union also seeks an exemption from the proposed rules so that it may continue to offer TWX and Telex services as it does at present.

NTIA would define a dominant carrier as one that both 1) furnishes telecommunications service in a substantial percentage of the total number of markets for interexchange telecommunications services, and 2) has the ability, in a substantial percentage of those markets in which the carrier furnishes such services, to either raise or lower prices without significantly affecting the amount of service demanded by its customers.

magnitude of AT&T's monopoly revenues creates the clear possibility that AT&T could engage in substantial cross-subsidization of competitive services which would result in substantial injury to AT&T's monopoly ratepayers and to its competitors. In contrast, NTIA argues, other monopoly communications common carriers obtain much smaller revenues from monopoly services, and most do not provide interstate monopoly services or have substantial interstate monopoly revenues. Tymnet argues that, contrary to the proposals of GTE and GTE-Telenet, the separation requirement should be equally applicable to GTE and other entities possessing similar market power. UST&T suggests that the proposed rules should be amended to define dominant carriers as those controlling at least fifty percent of the relevant market. Xerox urges that Digital Termination Systems (DTS) carriers not be considered dominant carriers and states that the application of the separation requirement to DTS carriers will hinder their offering of new and innovative services.

48. Other parties reject the proposed dominant/non-dominant carrier distinction and urge the FCC to require all underlying carriers to establish separate subsidiaries for the provision of enhanced services. CBEMA states that the potential abuse of network ownership is no less compelling when the carrier is a "competitive" underlying carrier. ADAPSO asserts that basic transmission facilities are a limited national resource that cannot be easily or economically replicated by users or non-facility owning carriers. This limitation, according to ADAPSO, permits an underlying carrier to exercise market power well beyond that indicated by the size of its revenues; as a result, all underlying carriers, not just AT&T, have the power to engage in anti-competitive activity. Taking a similar position, NATA states that smaller monopoly carriers will simply affect a smaller percentage of users and exclude a smaller number of competitors. It is suggested by these parties that a waiver procedure be established whereby underlying carriers claiming undue hardship could petition to be exempted from the separation requirement.

Degree of Separation
49. The parties take sharply divergent viewpoints on the degree of organizational separation that should be required under the resale structure. AT&T, rejecting the need for stringent separation, recommends the establishment of internal resale organizations, separated by an internal accounting system, to provide enhanced non-voice services and sophisticated customer premises equipment. Pursuant to this

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See, e.g., comments of CBEMA, CCIA, ADAPSO, and IDCMA.

The American Newspaper Publishers Association (ANPA) did not support a general set of rules applicable to all carriers. Instead it recommended either an ad hoc approach to the maximum separation requirements or the development of a range of regulatory approaches applicable in different contexts.

Similarly, GTE and Centel state that the Commission's objectives can be met by measures other than complete separation, such as an improved Uniform System of Accounts or implementation of the resale concept without the separate subsidiary requirement.

proposal, carrier facilities used by the resale organization to provide enhanced services would be available on a non-discriminatory resale basis to all carriers providing enhanced services. If a fully separated subsidiary is to be established, AT&T proposes that the subsidiary be allowed to construct its own facilities.

50. Additionally, AT&T recommends a number of guidelines for any organizational changes. It suggests that the resale organization be able to offer basic services and equipment, that no restrictions be placed on the technology that may be employed with enhanced services and sophisticated equipment, and that there should be no condition which would either require or prohibit interconnection between providers of enhanced services. In line with this, it argues that a carrier should have the flexibility to group products and services in as many, or as few, resale organizations as it desires. Likewise, a resale organization should be free to have access to, and to fund, the research, development, and manufacturing of the underlying carrier without any obligation to share information or products with competitors. Finally, AT&T urges that there should be no restrictions on the purchase of equipment by the resale organization from an affiliated manufacturer or other suppliers, or on the acquisition of services, including administrative services from the carrier by its resale organization, or vice versa, on an appropriate cost basis.

51. Citing the enormous benefits and cost savings of its integrated structure, AT&T suggests that any conditions which separate the Bell resale entity from Bell's centralized resources will be detrimental to the entity and its customers, and will not benefit, but instead burden, subscribers of the underlying services. In particular, AT&T notes that an arm's length relationship, rather than full participation in an integrated system with Bell Labs and Western Electric, will deprive the resale entity of cost savings at all levels of the enterprise and all stages of the production process. In making this argument AT&T stresses that the integrated Bell System is a valuable source of innovation.

52. NTIA advocates a somewhat more stringent separation. NTIA's proposal would require AT&T to establish a separate entity to provide equipment performing more than a basic conversion function and services other than pure communications. It recommends that the subsidiary have separate books and accounts. Further, it proposes

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NTIA's recommendations are tentative and dependent upon the resolution of the issue of economic parity in regard to access charges. In any event, its proposal is severely criticized by ADAPSO and IDCMA. ADAPSO charges that NTIA's recommendations are skewed by its preoccupation with cross-subsidization and will create opportunities for tying and other anticompetitive activities as well as retard innovation. IDCMA contends that NTIA's proposals reflect a lack of awareness of AT&T's long, anticompetitive history.

53. Taking a more rigid position than did NTIA, a variety of parties, representing a wide range of interests, support the concept of full maximal separation. They argue that the parent and subsidiary should be required to have separate officers, directors, personnel and books of accounts. Joint ventures and shared facilities and equipment, they state, should be prohibited; all basic transmission services should be acquired from the parent under tariff. Moreover, they contend that the subsidiary should not be able to obtain services relating to planning, marketing, operations, consulting, customer billing and maintenance from either the parent or an affiliate. SPC maintains that if any services or facilities are made available to the subsidiary they must be made available to non-affiliates on equivalent, non-discriminatory terms. CCIA requests that the Commission prohibit the procuring by the parent of any enhanced services from its resale affiliate except through competitive bids. These parties generally agree that all transactions between parent and subsidiary should be conducted on an arm's length basis. This includes restrictions on joint research and development efforts, limitations on the general financing and capitalization of the subsidiary by the parent or an affiliate, and restrictions on the exchange of proprietary information.

54. In support of their position, the parties advocating maximum separation argue that full and complete separation will limit both the incentive and opportunity for anticompetitive practices, and that the benefits of separation would outweigh the costs. Various commenters, such as ADAPSO, reject AT&T's economies of scale argument contending that such economies are not important in data processing technologies and that technological development is not necessarily spurred by vertical integration. As an example, they claim that AT&T, with its integrated structure and massive resources has lagged behind the data processing industry in terms of innovation. The parties

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See, e.g., comments of Western Union, UST&T, SBS, Tymnet, SPC, Honeywell, Plexus, ADAPSO, CCIA, CBEMA and IDCMA.

further state that no showing has been made that the use of structural separation will result in the unavailability of service, more costly service, diseconomies of scale, or inefficiencies. In line with this, NATA argues that even if AT&T were correct with respect to the economies of integration, the competitive advantage conferred by those artificial savings would secure for monopoly carriers the same type of monopoly power in the enhanced market as they enjoy in the basic market.

55. AT&T's organizational separation proposal is sharply criticized by the proponents of maximum separation who characterize the proposal as representing no change from the present situation and charge that it will engender problems similar to the ones the Commission is currently concerned with. For example, GTE-Telenet argues that given its anti-competitive history and integrated structure, AT&T's suggestion that accounting measures represent an adequate substitute for separation is wrong. Parties such as UST&T and IDCMA claim that AT&T's accounting approach is impractical in light of the problems with the Uniform System of Accounts, that the accounting approach ignores anticompetitive problems other than cross-subsidy, and that, at a minimum, revised accounting procedures must be accompanied by effective structural measures. They assert that the requirement that AT&T establish a fully separate resale affiliate is critical in order to minimize the potential for anticompetitive activity on AT&T's part as well is to prevent market entrants from experiencing a chilling effect.

International
56. In the Tentative Decision at para. 165 we indicated that we would consider extending the resale structure to the International Record Carriers (IRCs). This proposed option has evoked a strong negative response from the IRCs joined by UST&T and ADAPSO. RCA Globcom argues the international market is different from the domestic market in that it is competitive and there is no dominant underlying carrier and its accompanying danger of unfair competitive advantage. Additionally, international satellite facilities are already obtained by IRCs on a resale basis pursuant to tariff and, unlike the domestic area, there is little leasing or other non-ownership acquisition of international cable circuits. The IRCs also assert that all user needs are being met.

57. In further opposition various parties comment that the Commission should not and cannot unilaterally extend the resale structure to the IRCs. They note that not only do CCITT recommendations preclude resale and shared use of facilities but almost all of the foreign administrations are opposed to the unrestricted resale and shared use of international facilities.

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See, e.g., the comments of WUI, RCA Globcom and TRT.

58. The option of extending the resale structure to the IRCs is supported by NTIA and several other parties. Citing what it sees as problems of entry, NTIA recommends that the Commission institute a separate inquiry into the applicability of the Resale decision to the international arena. It also recommends that the IRCs be required to provide enhanced non-voice services through separate subsidiaries, that AT&T be allowed to provide enhanced non-voice services internationally, and that if COMSAT enters the enhanced non-voice market, it should only do so through a separate resale entity. In reply, WUI states that it perceives no relationship between the proposed resale structure and the problems sought to be remedied.

59. Responding to the comments of various IRCs, SPC states that the argument that the IRC industry is already competitive is not supportable in the absence of a market test. SPC rejects the arguments that the resale structure should not be imposed because equal access already exists and it would place an intolerable burden on smaller IRCs. SPC points out that the contention based on the opposition of foreign administrations to resale has been rejected in past situations where the FCC has held that jurisdiction over the charges and practices of IRCs does not require foreign agreement.

Regulatory and Legal Considerations
60. A number of parties suggest that the offering of enhanced non-voice communications services should be completely deregulated. IBM questions whether the Commission possesses jurisdiction under Title II to regulate anything more than pure transmission services. Further, it argues that enhanced services are offered under highly competitive conditions and should not be regulated regardless of any features. CBEMA maintains that regulation should be limited to the provision of basic services by underlying carriers with no regulation of either resale services or the offering of enhanced non-voice services. It argues that resale carriers are "private carriers," not "common carriers," and are outside the Commission's jurisdiction under Title II. To the extent that resellers might be subject to Commission jurisdiction generally, CBEMA states that the Commission has the legal authority to forbear from regulating resale services.

61. Many parties comment that while the Commission is either required by the Act to regulate or on policy grounds should continue to regulate certain enhanced non-voice offerings, it has the authority to and should forbear from regulating enhanced offerings by non-dominant carriers. GTE-Telenet states that pursuant to our Resale decision, the offering of resale communications services constitutes common carriage, not private carriage, and as a result the Commission lacks discretion to totally exempt resale entities from Title II regulation.

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See, e.g., the comments of ARINC and SIAC.

However, GTE-Telenet maintains that the Commission may limit the scope of its regulation of certain classes of carriers and it proposes that needless and counterproductive incidents of regulation of enhanced service carriers be eliminated. IDCMA, citing the Commission's comprehensive mandate under the Act, states that the Commission has the authority to and should exercise its power to forbear from the regulation of resale carriers not affiliated with underlying carriers. It states that the affiliates of underlying carriers should remain subject to supervision at least during a transition period. ADAPSO takes the position that although the FCC should consider the option of varying degrees of forbearance depending upon whether the resale carrier is affiliated with an underlying carrier, minimal regulation of resale carriers is needed. It suggests that affiliated resale carriers should offer separately, pursuant to cost-based tariff, the communications component of their "enhanced non-voice" services.

62. NTIA proposes that the Commission forbear from regulation of all ENV services whether offered by non-dominant carriers or by its proposed AT&T resale subsidiary. Citing a number of Commission proceedings, NTIA argues that we have traditionally recognized that economic and structural differences exist between common carriers and that these distinctions justify disparate treatment. There is, according to NTIA, ample legal authority for the Commission to decline to regulate enhanced non-voice communications services even though it retains Title II jurisdiction over these services. Forbearance, NTIA declares, is necessary to allow the full development of the extremely competitive enhanced non-voice market and should market dominance develop the Commission could always reassert jurisdiction. NTIA also recommends that the states should be preempted from imposing any regulation over ENV communications services.

63. AT&T contends that regulation under Title II of the Act is mandatory; an agency cannot decline to regulate. It argues that providers of enhanced non-voice service are clearly common carriers and therefore subject to regulation. While AT&T supports the Commission's objective of removing regulatory constraints over competitive enhanced non-voice services and customer premises equipment, it contends that deregulation of communications services requires an amendment of the Communications Act and consent decree relief. AT&T proposes a number of steps the Commission could take toward achieving its goal of more flexible regulation in the absence of legislation and modification of the Decree. AT&T is also concerned that any deregulation by the Commission would deprive state regulatory bodies of important powers in conflict with Sections 2(b) and 221(b) of the Communications Act. Taking a similar position on the question of regulation, GTE argues that the Commission must apply the requirements of Sections 201-205 of the Act to any interstate common

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See also the comments of UST&T.

carrier communications service. USITA aruges that the Act requires that a common carrier communications service be regulated.

B. Customer-Premises Equipment (CPE)
64. The Commission's proposal to classify CPE has garnered little support. The dichotomy that the Tentative Decision establishes between equipment which performs a "basic media conversion" (BMC) function and that which performs more than a BMC is uniformly criticized. AT&T submits that the BMC function criterion is too narrow a demarcation point between basic and sophisticated non-voice customer premises equipment and requests that the criterion be located to ensure that underlying carriers may provide traditional basic functions. GTE recommends that the Commission take a fresh look at the BMC concept charging that it would establish an arbitrary classification which would interfere with economic design of equipment, limit carrier flexibility and deny valuable options to users.

65. Centel comments that it is not appropriate for the FCC to distinguish between types of customer-premises equipment. The definitions are not clear and the technology changing. Any distinctions, it argues, should be made on the basis of whether the equipment controls the entire network as the central computer once did, not on the basis of the existence or non-existence of data processing. It submits that restrictions should be determined on an ad hoc basis and be limited to media conversion devices equal in influence to distributed computer networks.

66. Other parties are equally disturbed by the proposed distinction. CCIA, IBM and CBEMA argue that the distinction between equipment performing a BMC function and that doing more is artificial and not justified. They state that the proposed distinction is unworkable, could unnecessarily expand the scope of regulation, and would increase the risk of improper cross-subsidization. IBM criticizes AT&T for never adequately defining its proposal that the category of basic CPE be expanded to include equipment that provides traditional basic telecommunications functions in addition to media conversion.

67. IDCMA recommends that the Commission classify CPE on the basis of whether it is offered in a competitive environment. According to IDCMA, the line between BMC devices and other types of equipment is not precise; it is not clear what auxiliary functions, if any, a "basic media conversion" device may perform and continue to be offered as part of a carrier's basic "voice" service. In IDCMA's opinion, the fundamental difficulty with the Commission's classification of CPE is that it attempts to deal with an economic problem in engineering terms and fails to take into account the potential for anticompetitive practices and economic considerations.

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The optional tariffing approach which would have left the decision of whether a service should be regulated to the service vendor drew little support. It was generally contended that this proposal would not add to regulatory certainty.

68. The other primary areas of controversy are whether CPE should be tariffed and regulated, and whether underlying carriers should be required to establish separate entities for the provision of CPE. AT&T states that the Commission has an obligation to regulate carrier offerings of instrumentalities, apparatus or services incidental to transmission regardless of whether similar items are offered on a non-tariffed basis by non-carriers. Also, AT&T suggests that because of the difficulty of classifying sophisticated customer-premises equipment as primarily "communications" or data processing, any equipment with a communications purpose should be tariffable and any data processing capabilities it possesses should be considered irrelevant.

69. AT&T's proposal to allow carriers or their resale affiliates to tariff any kind of customer premises equipment "with a communications purpose" is opposed by CBEMA. It argues that, contrary to the intention of the Tentative Decision, this proposal would allow carriers to provide any type of equipment, including that which would be classified as primarily data processing under the current rules, so long as it performs any communications function.

70. NATA finds unobjectionable the notion that carriers may participate in the terminal equipment market by offering equipment pursuant to tariffs associated with their traditional voice and basic non-voice services. It states that under the Consent Decree and the Act, tariff regulation of all carrier communications services (especially those of AT&T) is mandatory. However, it submits that Docket 20828 is not the appropriate vehicle to decide the proper scheme of regulation for "conventional" terminal gear and that the issues raised in RM 3308 should not be considered here. In the absence of Commission regulation, it foresees no possibility for the development of a genuinely competitive equipment market. Market forces, NATA states, will not be sufficient to control anticompetitive activities because of carrier monopoly power in equipment and transmission markets.

71. Several of the comments suggest that the Commission limit its regulation to the provision of either basic or non-competitive customer-premises equipment. NTIA recommends that the Commission exclude the offering of all equipment performing more than a BMC function from regulation. IDCMA suggests that the Commission should not regulate the competitive equipment offerings of carriers unaffiliated with underlying carriers. IDCMA and others argue that the FCC should, at least initially, continue to regulate the terminal equipment offerings of affiliates of dominant underlying carriers until the Commission implements the resale structure. They submit that such regulation is proper even though comparable offerings would be unregulated. From a slightly different perspective, Xerox and USITA recommend that non-dominant carriers and competitive DTS carriers have the option of offering equipment on a tariffed or a non-tariffed basis.

72. A number of parties recommend that customer-premises

equipment not be tariffed and further that the Commission not regulate its provision. IBM and CBEMA assert that the Tentative Decision would impose burdensome and costly regulation in a robustly competitive marketplace. IBM recommends that the Commission deregulate all customer-premises equipment and not permit carriers to offer any such equipment under tariff as part of a basic transmission service or otherwise. To permit such an offering as part of basic service would, it states, undermine the ability to prevent cross-subsidization. According to CBEMA, the lack of competition with respect to "basic" customer-premises equipment, such as the telephone, has been attributable not to inherent monopoly characteristics but to artificial constraints imposed by carrier tariff restrictions. It submits that there is no corollary in the equipment market to the "basic" and resale services distinctions; instead there is a basic fungibility in equipment with respect to adaptability to either "pipeline" or resale services.

73. Taking a position contrary to those above, the Justice Department states that there is no need for additional FCC action regarding deregulation of terminal equipment since at present the Commission does not regulate the non-carrier majority of firms offering terminal equipment. DOJ reasons that deregulation by the FCC would in effect mean deregulation of AT&T. In opposition to this it states that AT&T's basic terminal equipment offerings are subject to state and federal regulation, and AT&T's intelligent terminal offerings are not only a minority of those otherwise available but also are currently subject to economic regulation in addition to state and federal regulation. Further, since provision of terminal equipment is not characterized by pervasive scale economies, it concludes that there is no legitimate reason to change the present deregulatory status quo that prevails in respect of most terminal equipment vendors.

74. The opinions of the parties regarding whether a carrier should be required to offer customer-premises equipment through a separate resale entity, and if so, what degree of separation should be required are similar to the opinions they expressed on these issues with respect to enhanced non-voice services. AT&T supports the resale proposal and the principle that the provision of basic equipment should be separated from the provision of sophisticated equipment; provided, however, that the resale mechanism is accomplished by means of internal organizational separation. It suggests that the organization which provides sophisticated non-voice customer-premises equipment should be permitted to offer basic equipment as well and that the Commission should not impair the ability of underlying carriers to offer under tariff a full range of customer-premises equipment in the voice category. NTIA recommends that only AT&T be required to form a separate subsidiary for the provision of sophisticated customer-premises

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GTE submits that in order to effectively compete, the GTE telephone companies should be allowed to provide customer-premises equipment on an unregulated basis.

equipment and that AT&T be allowed to provide such equipment through the same subsidiary that provides enhanced services. Other parties, such as Xerox, request that the Commission require not just AT&T, but any dominant carrier, to establish a separate entity for the provision of intelligent customer-premises equipment.

75. ADAPSO and IDCMA recommend that the Commission require all underlying carriers to offer competitive customer-premises equipment through a maximally separated affiliate. CBEMA and IBM make a similar request with respect to all customer-premises equipment, while NATA argues for such a requirement with respect to all untariffed customer-premises equipment. Both CCIA and IDCMA urge that the manufacturing and marketing of competitive customer-premises equipment be fully separated from monopoly carrier activities. Further, arguing that there are no significant economies of scale, IDCMA suggests that underlying carriers should have to establish separate subsidiaries to manufacture competitive customer-premises equipment as well as separate subsidiaries to market it. IDCMA suggests that until maximum separation can be fully implemented, the FCC should require the Bell Operating Companies to purchase at least one-third of their terminal, switching and transmission equipment from suppliers unaffiliated with AT&T. NATA submits that the FCC should continue to regulate interconnection standards, and Xerox recommends that all carriers be required to make public interface specifications and protocols in a timely fashion. Finally, Xerox and other parties state that the unbundling of equipment is essential.

C. Consent Decree
76. The comments exhibit a noted disagreement among the parties regarding the Commission's interpretation of the consent decree and its proposed approach towards resolving the various related issues. While several parties, including AT&T, agree with the Commission's interpretation and proposed approach, others, such as the Department of Justice, disagree with both. Still other parties argue that even if the Commission were correct in its interpretation and proposed approach, it should adopt a policy unconstrained by the Decree and should rely instead on the judgment court or Congress to resolve the various issues.

77. DOJ states that it would regard any Commission determination that AT&T's diversification into the unregulated data processing field is permissible as without determinative effect. DOJ further submits that the Tentative Decision erroneously states that the limitations the decree imposed on AT&T were adopted at a time when there was no perceived distinction between data processing and communications. The Department rejects the interpretation of the "incidental to" savings provision of the decree put forth in the Tentative Decision. It

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See, e.g., comments of MCI, CCIA, ADAPSO, and IDCMA.

maintains that the decree restricts AT&T to the provision of regulated communications services and that Paragraph V(g) of the decree cannot be interpreted as creating an exception which would render the general prohibition in the judgment meaningless. Moreover, it submits that the Commission has no authority to render definitive interpretations of or to modify the decree. DOJ suggests that if the Commission believes the decree should be modified, the appropriate action would be to formally request such a modification from the judgment court. The Justice Department concludes its comments by stating affirmatively that, if on the basis of facts submitted in this Inquiry it is evident that the 1956 decree should be modified or rescinded to facilitate more effective competition, it is prepared to take the necessary action.

78. For its part, AT&T takes the position that the Commission is correct in concluding that it is in public interest for Bell to compete in the provision of integrated solutions to user needs and that the decree should not be permitted to preclude the Bell System from participation on an unregulated basis in the arena in which data processing and communications technologies converge. It argues that there is a strong basis for modification of the decree. AT&T supports the Commission's proposal to apply the provision of Paragraph V(g) of the decree to unregulated services as consistent with the language and spirit of the decree. However, since the interpretation by DOJ reflects a narrower view, AT&T is uncertain about relying on the Commission's interpretation and committing resources. It states that, absent remedial legislation or a conclusive interpretation of the decree similar to that the Commission advanced, a modification of the decree will be necessary to permit Bell to offer services of the character and in a manner suggested by the Commission.

79. NTIA generally supports the Commission's interpretation of the decree. It states that the decree would not preclude and AT&T subsidiary from offering unregulated customer premises equipment as long as it is of a type which the subsidiary manufactures for the use of the Bell Operating Companies. However, NTIA is uncomfortable with the Commission's interpretation of the "incidental to" language. It is NTIA's belief that even if the Commission forbears from regulating enhanced non-voice communications services, AT&T can market enhanced non-voice services on an unregulated basis since these services would still be subject to regulation. Furthermore, if a service were not subject to regulation because it is a data processing service, the Commission, in its opinion, could then consider whether the service is "incidental to" the furnishing of a common carrier communications service as defined in the decree. If the service were incidental to the furnishing of a common carrier service, NTIA submits that AT&T may offer it in compliance with the terms of the decree. Similarly, NTIA reasons, the provision of customer-premises equipment may be incidental to the furnishing of a common carrier service although it is excluded from regulation.

80. A number of other parties argue for various reasons that the Commission should adopt a policy unconstrained by the consent decree. For instance, although castigating DOJ for its "wooden" interpretation of the decree and supporting modification of the decree, IBM urges the Commission not to forego a sound regulatory approach and institute needless regulation because of the decree. Parties such as GIC, CCA and SPC submit that having no valid record before it to support modification of the decree, the Commission should forego treatment of the decree in any final decision.

81. In response to the assorted comments, CBEMA states that to the extent that neither AT&T nor DOJ believes that the Commission's proposed interpretation of Paragraph V(g) of the Decree is adequate, there is no valid reason for the FCC to pursue the matter further. Taking AT&T's comments to task, CCIA maintains that AT&T's market dominance in communications, and the extent to which such market dominance would allow it to confer monopoly power on a CPE subsidiary, must also be taken into consideration. Moreover, CCIA accuses AT&T of overlooking the fact that if the decree were modified to permit AT&T's entry, it would be the non-IBM segment of the data processing market which would be injured by anticompetitive AT&T practices, thereby increasing economic concentration in the two industries.

D. Transition Period
82. The commenting parties agree that a transitional period will be necessary prior to the Commission's implementation of any resale structure. AT&T recommends that a significant transitional period will be needed because of the large number of complex legal, financial and logistical problems which would have to be resolved. Being more specific, IBM and Hinchman suggest timetables which set an outside limit of between three to five years before any resale structure would be fully implemented.