Second Computer Inquiry/Final Decision/6

Basic Media Conversion Criterion
133. The technological advancements affecting developments in computer applications for consumer services are also dramatically altering the types of terminal equipment used in conjunction with these services. See Tentative Decision at paras. 91-98. In a distributed

processing environment computer processing applications can be performed anywhere--either within the offeror's network or within equipment located on the customer's premises. As a result, when carriers offer CPE with various information processing capabilities as part of their transmission services, we have been faced with determining whether the carrier is providing a regulated or unregulated service. Dataspeed 40, supra, n. 4.

134. In the Supplemental Notice we inquired into whether CPE with information processing capabilities should be offered as part of a common carrier service and the structure under which carriers should offer such equipment. In the Tentative Decision we concluded that CPE should not be subject to a definitional scheme which would classify either the device or its functions as communications or data processing. We recognized that "there simply is no design stability in the terminal equipment field ... [T]here is constant technological change, product innovation and refinement, and development of new markets and sub-markets in this field ..." Id. at para. 102. Additionally, "[t]erminal devices are taking on more functions and intelligence and are increasingly incorporating data processing characteristics." Id. at para. 103. Thus the rapid pace of technological evolution would quickly render obsolete any attempt to draw distinctions among customer-premises equipment based on processing functions. We concluded that classifying CPE as either communications or data processing could impede a vendor's ability to refine and adapt its equipment offerings to user requirements through various processing applications accomplished by simple "software" or "hardware" changes to existing equipment. Implicit in this is the recognition that the uses to which CPE may be put are under the user's, not the carrier's, control. In the extreme case, we thought such an arbitrary distinction might result in multiple devices performing separate processing applications which otherwise could and should be performed economically within a single piece of equipment.

135. We attempted instead to draw a demarcation based on a standard independent of the communications/data processing applications CPE may perform. In so doing, consideration was given to the fact that the scope of the proceeding at that point in time did not address "unintelligent" CPE, such as the standard telephone handset, key telephone or simple PBX. We proposed that a distinction be made between CPE which performs only a basic media conversion (BMC) function and that which performs more than a BMC function. Id; at paras. 108-11. We concluded that carriers could provide only BMC devices as part of a "voice" of "BNV" service; CPE which performed more than a BMC function, if provided on a tariffed basis, could only

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See Tentative Decision at paras. 91-107 for a discussion of the technological developments and regulatory concerns that militate against classifying CPE as either communications or data processing equipment.

be offered in conjunction with an ENV communications service under the separate subsidiary structure. There was no requirement, however, that a carrier tariff equipment which performs more than a BMC function. This proposal was designed to separate a carrier's provision of sophisticated CPE from its provision of basic services. This equipment was to be provided on a competitive basis, separate from a carrier's basic transmission services. The basic/enhanced dichotomy as proposed at that time would have allowed a carrier to provide sophisticated equipment on a tariffed basis if the carrier so desired. Sophisticated CPE could be marketed on a tariffed basis in conjunction with the offering of any enhanced services classified as communications.

136. While this approach would have addressed the issues raised by the incorporation of distrubuted processing applications into CPE, we indicated that it also would impose the need for regulatory determinations which would not otherwise be required if all terminal equipment were to be accorded uniform regulatory treatment. Because the BMC classification scheme was offered to reflect the fact that the Notice and Supplemental Notice did not address a carrier's provision of simple devices, such as the basic telephone, and because over time this scheme would result in more equipment being offered on an unbundled basis, separate from that of the carrier's underlying transmission services, it was deemed appropriate to inquire into whether any distinction should be made between BMC and non-BMC equipment. Moreover, we noted that, because the Tentative Decision sought to isolate the facilities and costs of the carrier's underlying transmission services, identification of costs attributable to such services would be facilitated if all CPE were unbundled from the regulated communications service and provided on a separate basis. Id. at para. 160. Thus we sought comment on whether all carrier-provided CPE should be deregulated and the structure under which carriers should be allowed to provide it.

137. The BMC classification scheme received, at best, a mixed reaction from the commenting parties. The distinction was roundly criticized by a number of parties who characterized it as artificial and unworkable. They asserted that due to the basic fungibility of equipment no distinction between types of equipment was feasible. In particular data processing equipment vendors and their representatives argued that the artificiality of the distinction could lead to an unnecessary expansion in the scope of regulation and would increase the risk of improper cross-subsidization. The support which the BMC

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As already discussed in the previous section, we have rejected any classification scheme that would attempt to distinguish the communications or data processing nature of enhanced services. Accordingly, CPE would no longer be tariffable as part of an enhanced services. The ability to optionally tariff CPE through the resale subsidiary would have removed the possibility that AT&T might be foreclosed from offering CPE under the terms of the 1956 consent decree solely because it was not regulated through the tariff process.

dichotomy did receive was, for the most part, qualified. Although some carriers such as AT&T supported the distinction in principle, definitional modifications were suggested which if implemented, would have substantially changed the concept. For example, AT&T suggested that the demarcation point between basic and sophisticated terminal equipment be moved so that carriers could continue to provide certain types of arguably sophisticated terminal equipment with basic services. Additionally, GTE was concerned that the distinction would potentially limit flexibility in the design of new customer-premises equipment.

138. The question of whether customer-premises equipment should be tariffed drew an equally mixed reaction. Divergent entities, such as AT&T and NATA, took the position that the Communications Act required that the provision of customer-premises equipment by underlying carriers be subject to tariff regulation. Without such regulation NATA saw no hope for the development of a genuinely competitive equipment market. Other parties contended that no CPE of any type should be subjected to tariff regulation, asserting that the CPE market was competitive and that regulation would be unduly burdensome. They recommended instead that the Commission deregulate all customer-premises equipment and prohibit the offering of such equipment pursuant to tariff as part of a basic service or otherwise.

139. Based on the record compiled in this proceeding we are not able to find that the public interest would be served by classifying CPE based on whether or not more than a basic media conversion function is performed. No strong endorsements of this classification scheme have been offered, and those comments that did not claim such a distinction would be unclear, arbitrary, artificial, unjustified, or inappropriate, suggested modifications which would have significantly altered the proposal. We conclude that in light of the increasing sophistication of all types of customer-premises equipment and the varied uses to which such equipment can be put while under the user's control, it is likely that any given classification scheme would serve to impose an artificial, uneconomic constraint on either the design of CPE or the use to which it is put. Moreover, to adopt a classification scheme now, having the benefit of comments that address issues generic to all carrier-provided CPE, would be to only partially address the regulatory concerns raised by a carrier's provision of CPE in conjunction with its transmission services. We conclude that the regulatory process, carriers, unregulated equipment vendors, and the public would be better served if all CPE were accorded uniform regulatory treatment.

Regulatory Scheme
140. Having concluded that we should not classify CPE, our attention is focused on the role of the communication common carrier in offering CPE. Specifically we address whether the objectives of the Communications Act would be better served if carriers were required

to sell or lease CPE separate and apart from their regulated transmission services, and whether Title II regulation of carrier provided equipment is warranted. Upon review of the record in this proceeding, we believe that our statutory mandate can best be fulfilled if all CPE is detariffed and separated from a carrier's basic transmission services.

141. In weighing the merits of this conclusion, we have considered the nature of the terminal equipment market and the effects of advances in technology on equipment design and use ( Tentative Decision at paras. 94-98), the benefits of competition, and our statutory responsibility to insure the reasonbleness of rates charged for interstate services. Beginning with our Carterfone decision this Commission has embarked on a conscious policy of promoting competition in the terminal equipment market. As a result of this policy the terminal equipment market is subject to an increasing amount of competition as new and innovative types of CPE are constantly introduced into the marketplace by equipment vendors. We have repeatedly found that competition in the equipment market has stimulated innovation on the part of both independent suppliers and telephone companies, thereby affording the public a wider range of terminal choices at lower costs. See, for example, First Report in Docket No. 20003, 61 FCC 2d at 867; Phase II Final Decision and Order in Docket No. 19129, 64 FCC 2d 1, 602. Moreover, this policy has afforded consumers more options in obtaining equipment that best suits their communication or information processing needs. Benefits of this competitive policy have been found in such areas as improved maintenance and reliability, improved installation features including ease of making changes, competitive sources of supply, the option of leasing or owning equipment, and competitive pricing and payment options.

142. For the most part, these prior Commission decisions have been directed at removing tariff provisions that restricted non-carrier

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See e.g., Carterfone, 13 FCC 2d 420, recon den. 14 FCC 2d 571 (1968); Telerent Leasing Corp. et. al., 45 FCC 2d 204 (1974) aff'd sub nom. North Carolina Utilities Commission v. FCC, 537 F. 2d 787 (4th Cir.), cert. den., 429 U.S. 1027 (1976) ( NCUC I ); Mebane Home Telephone Co., 53 FCC 2d 473 (1975), aff'd Mebane Home Telephone Co. v. FCC, 535 F.2d 1324 (D.C. Cir. 1976); First Report and Order in Docket No. 19528, 56 FCC 2d 593 (1975); on reconsideration, 57 FCC 2d 1216 (1976), 59 FCC 2d 716 (1976) and 59 FCC 2d 83 (1976). Second Report and Order in Docket No. 19528, 58 FCC 2d 736 (1976); on reconsideration, aff'd sub. nom. North Carolina Utilities Commission v. FCC, 552 F.2d 1036 (4th Cir.), cert. den. 434 U.S. 874 (1977) ( NCUC II ); Phase II Final Decision and Order in Docket No. 19129, 64 FCC 2d 1 (1977); Implications of the Telephone Industry's Primary Instrument Concept ( PIC ), 68 FCC 2d 1157 (1978); Second Report in Docket No. 20003, FCC 80-5, released January 29, 1980; First Report and Order in CC Docket No. 79-143, FCC 80-88, released March 19, 1980.

See, PIC, 68 FCC 2d at 1175; Second Report and Order in Docket No. 19528, 58 FCC 2d at 740; see also First Report in Docket No. 20003, 61 FCC 2d at 867.

provided CPE from being attached to the network on a non-discriminatory basis. Our efforts culminated in a registration program which allows consumers to connect their own equipment to the network if that equipment conforms to certain technical standards and is properly registered with the Commission under Part 68 of the Rules. The Registration Program was an outgrowth of our Hush-a-Phone and Carterfone decisions which confirmed the existence of broad consumer rights under Section 201(b) and 202(a) of the Act. Along with such rights, corresponding carrier responsibilities were established by making unlawful any unjust or unreasonable interference with these consumer rights by the carrier. Consumers have the right to use the telecommunications network "... in ways which are privately beneficial without being publicly detrimental." Hush-a-Phone Corp. v. U.S., 238 F.2d 266 (D.C. Cir. 1956). See also Carterfone, 13 FCC 2d at 423. In essence, our efforts up until now have focused on increasing consumer choice and have resulted in non-discriminatory access to the tele-communications network for connection of non-carrier provided equipment. This has allowed consumers to exercise their rights in the selection and use of terminal equipment that best suits their needs. Moreover, it has opened up various segments of the equipment market to new entrants.

143. The competitive potential of terminal equipment markets is reflected in the fact that there are hundreds of manufacturers and suppliers of modems, terminals, storage devices, front end processors, large and small central processing units, multiplexers, concentrators, and virtually innumerable related devices. While some segments of the CPE market may be more competitive than others, we have been given no evidence that, given certain modifications in the markets, any segment is inherently less competitive than another. In fact, the lack of any significant competition in some segments has been attributable not to any inherent monopoly characteristics, but to those artificial constraints imposed by carrier tariff restrictions which we have struck down as unlawful. There are multiple vendors for almost any type of equipment desired, and consumers are free to select equipment that best suits their needs.

144. Many different types of CPE are offered in the marketplace and it is virtually impossible for a single supplier to satisfy all the various equipment needs of a user. The number of suppliers in the marketplace and the variety of products they offer is evidence of the severability of CPE from a carrier's transmission service. Moreover, to a large extent, the technological revolution in terminal equipment has occurred independent of common carrier transmission services. Non-regulated equipment vendors have been instrumental in applying computer technology to CPE, and have been the primary leaders in innovation in this area. The degree to which innovation occurs independent of the telecommunications network also reflects the fact that CPE is clearly severable from the underlying utility service to

which it is attached. There is nothing inherent in any carrier-provided CPE, including the basic telephone, that necessitates its provision as an integrated part of a carrier's regulated transmission service.

145. NATA has argued, however, that continued regulation is necessary if competition is to have a chance, its concern being the extension of market power by monopoly-based telephone companies. While there may be some validity to NATA's concerns, there are other non-regulatory methods of addressing carrier extension of monopoly power. (See discussion, infra. ) Continued regulation of CPE will not foster a competitive equipment environment. In the present environment in which CPE is marketed, we are hard pressed to proffer any statutory or public interest justification for rate regulation of carrier-provided CPE. Regulation is a substitute for deficiencies in the marketplace. As currently applied to carrier provided CPE, however, regulation may serve to maintain whatever market aberrations exist. From the perspective of this Commission and our overall statutory mandate, the regulation of carrier provided CPE has a negative effect on competition and the exercise of our responsibilities over rates consumers pay for interstate communication services. This is particularly applicable to CPE offered by monopoly-based telephone companies. Contrary to the arguments of NATA, the continued regulation of CPE by these carriers in conjunction with the regulated transmission service may serve to restrict competition in the relevant equipment markets and distort the basic/enhanced dichotomy since distributed processing allows for the placement of computer processing applications in CPE.

146. Moreover, it has a direct effect on the rates charged for interstate services. This becomes readily apparent when one considers the manner in which the communication ratepayer bears the costs associated with telephone company-provided equipment that is rate regulated.

147. Charges for carrier-provided equipment used exclusively for interstate or foreign telecommunications have been regulated by this Commission. Charges for carrier-provided equipment used exclusively for intrastate telecommunications have been regulated by the state commissions. Regulation of charges for equipment that is used in common for intrastate and interstate services--as almost all CPE is--has normally been divided. This Commission has regulated the

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See PIC, 68 FCC 2d at 1163 where we rejected the notion that a telephone service must be linked with a carrier-supplied telephone handset, as opposed to a handset supplied by an independent vendor. While in some sense a service may be incomplete without some kind of terminal equipment, "[o]ther basic utility services, such as electricity and gas, are similarly incomplete until connected to some device such as a light bulb or gas furnace which is necessary to make the service useful." Id. Our statement, in the Tentative Decision at para. 107, to the effect that certain kinds of CPE may properly be provided as part of a communications offering was merely reflective of the fact that the scope of this proceeding did not at that time encompass the carrier provision of simple devices, such as the telephone handset.

interstate use portion and the state commissions have regulated the intrastate use portion.

148. Such divided regulation has occurred because terminal equipment charges have been bundled into the carrier's transmission service charges. Investments and expenses associated with terminal equipment have been allocated between the intrastate rate base and expenses and the interstate rate base and expenses in order to compute bundled intrastate and interstate rates for services and equipment. Divided regulation has also been feasible where charges have been bundled at one level and unbundled at the other level. Although the telephone companies traditionally included one basic telephone as part of the service provided to subscribers to local exchange service, telephone companies have imposed separate charges for optional equipment for many years. Inasmuch as those separate charges theoretically represent intrastate use charges, such charges have generally been tariffed with and regulated by the state commissions. Separate charges for optional equipment that is used exclusively in connection with interstate services have been tariffed with and regulated by this Commission. The Dataspeed 40/4 tariff is an example of such an interstate optional equipment tariff. The interstate use portion of optional equipment and basic telephones that are used for both intrastate and interstate services have bundled into the interstate service rates that are tariffed with and regulated by this Commission.

149. In view of the many changes that have occurred in the telecommunications industry in recent years the validity of permitting carriers to bundle terminal equipment and transmission service charges at any level is highly questionable. In general, bundling of goods and services may restrict the freedom of choice of consumers and restrains their ability to engage in product substitution. Unless the goods and services in the bundle exactly match the preferences of consumers, consumer satisfaction may be reduced by bundling. Thus, consumer satisfaction could be increased by changes in the marketing structure that allow the users, rather than the vendors, to determine the bundle of goods and services that get purchased. When the available choices of types and sources of CPE were limited to those

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The economic analysis of "bundling" is a subset of the modern industrial organization literature on tying arrangements. An introduction to this literature is provided by F.M. Scherer, Industrial Market Structure and Economic Performance 582-584 (2d ed. 1980). Various viewpoints on the economics of tying contracts are provided in W. Bowman, "Tying Arrangments and the Leverage Problem," 67 Yale Law Journal 19 (1957), M.L. Burstein, "A Theory of Full-Line Forcing," 55 Northwestern University L. Rev. 62 (1960) and Posner, Antitrust Law: An Economic Perspective (1976). These references do not examine, however, the economics of tying contracts in markets where a rate-base regulated common carrier supplies a bundled common carrier communications service and a related product such as CPE. A formal economic analysis of bundling useful in the present context is provided by Adams and Yellen, "Commodity Bundling and the Burden of Monopoly," 90 Quarterly Journal of Economics 475 (1976) This reference does not consider, however, the specific case of a rate-base regulated monopoly firm.

offered by the service vendor, presumably the service providers had an incentive to offer consumers a choice of service/equipment bundles that included every combination. Today, however, with the range of diverse CPE options that are available from other sources, the continued provision of bundled offerings by the service vendors presents distinct potential for limiting the freedom of customers to be able to put together the service and equipment package most desired by them.

150. Bundling of equipment and service charges obviously can inhibit competition because a subscriber to the carrier's service would not be likely to obtain equipment from a non-carrier vendor if the subscriber were required to pay for carrier equipment even if he elected not to use it. Such a pricing practice would at least arguably violate the Sherman Act prohibition of tie-ins that unreasonably restrain trade. See Cantor v. Detroit Edison Co., 428 U.S. 579 (1976).

151. Shortly after the Cantor decision the telephone companies revised their local exchange service tariffs filed with the state commissions to include a credit for subscribers who do not elect to use the carrier-provided telephone that has customarily been included with local exchange service. Such credits effectively create an unbundled intrastate use charge for the first carrier-provided telephone. The

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If the markets for the components of the commodity bundle are workably competitive, bundling may present no major societal problems so long as the consumer is not deceived concerning the content and quality of the bundle. The bundle either survives a market test or it does not, and competing vendors find it in their self-interest to make information available to consumers making this choice. More specifically, some consumers may believe that bundling reduces the "transactions cost" of determining the individual consumer's optimal commodity bundle, i.e., the seller rather than consumer performs the "search" for the optimal commodity combination. Alternatively, other consumers may not find the commodity bundle assembled by a vendor consistent with their individual preferences and may prefer to incur the "search costs" of assembling an optimal commodity bundle themselves. The latter alternative emphasizes the benefits of unbundling as a way of improving the consumer's freedom of choice. In technical terms, it can be shown more rigorously that bundling is inefficient in terms of a static welfare criterion. See Adams and Yellen, supra. Nevertheless, in many real-world, non-regulated, workably competitive markets, there exist sustainable markets for both bundled and unbundled commodities. In such cases consumers decide individually whether the benefits of packaging exceed the potential benefits of buying the components of a bundle individually. In regulated markets characterized by dominant firms, there may be an incentive, however, to use bundling as an anti-competitive marketing strategy, e.g., to cross-subsidize competitive by monopoly services, that restricts both consumer freedom of choice as well as the evolution of a competitive marketplace. Restricting bundling practices in such markets reduces these impediments to improve consumer welfare.

Although the Court did not decide the tie-in question in that case the opinions indicate that a majority of the Justices believed that Detroit Edison probably did violate the Sherman Act by offering electricity service and light bulbs to its customers at bundled rates. That practice is obviously closely analogous to the offering of telephone service and terminal devices at bundled rates.

Such credits may not be offered by all telephone companies in all states. However, we understand that the credit practice is now the norm. In some states the local service and equipment charges are separately stated. We have not determined whether credits or separate charges are included in state tariffs of all independents. We assume that this practice is the norm. Charges for extension telephones are bundled with the wiring charge in some states.

carriers already had unbundled intrastate use charges for extension telephones and other optional equipment.

152. The unbundling of intrastate use charges would not solve the competition problems in the retail terminal equipment market if carriers established intrastate use charges that reflect the portion of the terminal equipment investments and expenses that are allocated to intrastate use under the Separations Manual. Inasmuch as 20% or more of those investments and expenses are allocated to interstate use, such a charge would necessarily be substantially less than a charge which reflected the carrier's total terminal equipment investments and expenses and would presumably place competing non-carrier vendors at a severe disadvantage. In various proceedings some carriers have claimed that divided regulation does not in fact produce that result because their intrastate use charges are set at a level which reflects total terminal equipment investments and costs and the excess profits are used to set local exchange rates at levels which do not cover the allocable costs for that service. We examined such claims in the First Report in Docket No. 20003, 61 FCC 2d 766 (1976), and found that they may be unfounded. A New York Public Service Commission study had found that terminal equipment rates charged by the New York Telephone Company were not covering that company's terminal equipment costs. Id. at 772.

153. We have not attempted to determine whether the intrastate use charges of any telephone company are presently set at levels which could have a predatory effect upon competing non-carrier vendors. However, the bundling of a portion of carrier terminal equipment costs into interstate service rates clearly creates an opportunity to engage in predatory pricing. Unfortunately, the problems of predatory pricing and interservice cross-subsidy have created major regulatory difficulties for us. The problems of predatory pricing and cross-subsidy are real, although both the definitions and policy prescriptions for treating these problems vary in the academic literature.

154. The bundling of equipment and service charges also produces distortions in interstate rates which would be difficult to remedy without requiring unbundling. At the present time a subscriber who

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On definitions and analyses of predatory pricing, see P. Areeda and D. Turner, "Predatory Pricing and Related Practices under Section 2 of the Sherman Act," 88 Harvard Law Review 697 (1975): F.M. Scherer "Predatory Pricing and the Sherman Act: A Comment," 89 Harvard Law Review 869 (1976); and O.E. Williamson, "Predatory Pricing: A Strategic Welfare Analysis, " 87 Yale Law Journal 284 (1977). On definitions and analyses of cross-subsidies, see Melody, "Interservice Subsidy: Regulatory Standards and Applied Economics", in Essays on Public Utility Pricing and Regulation 167-210 (H. Trebing ed. 1971) and E. Zajac, Fairness or Efficiency: An Introduction to Public Utility Pricing, Chapter 8 (1978).

does not use a carrier-provided telephone, a subscriber who uses a basic carrier-provided telephone, and a subscriber who uses a speakerphone that is provided by a carrier pay the same rate for an MTS call of comparable time and duration. Inasmuch as that MTS rate includes a substantial portion of the costs of all customer-premises equipment provided by the telephone companies, some subscribers are subsidizing other subscribers. That discrimination problem conceivably could be solved by devising a rate schedule which varies with the equipment used by the subscriber, but it would be extremely difficult for carriers or regulators to implement such a solution and at the same time foster a competitive equipment environment. Unbundling appears to be the only feasible solution to this discrimination problem.

155. Moreover, in a regulated market, bundling introduces complexities that make it more difficult for regulators to achieve a rate structure for regulated services that is sufficiently aligned with cost differences among services to avoid discrimination among users of different services. This Commission has repeatedly held that rates for major service categories must reflect the costs of providing those services. See AT&T (Docket 18128), 61 FCC 2d 587 (1976), recon., 64 FCC 971 (1971), further recon., 67 FCC 2d 1441 (1978); ITT World Communications Inc., 29 FCC 2d 493, 495 (1971); American Satellite Corp., Order F.C.C. 75-768, released July 2, 1975; AT&T and Western Union Private Line Cases, 34 FCC 234, 237 (1963). Keeping service charges closely related to costs is made very difficult if not impossible when those costs include both costs that do not vary with usage but that change frequently due to technological change and costs that are usage sensitive. Such bundling inturn enhances the danger that a misallocation of costs will produce service rates that will result in a misallocation of resources. Terminal equipment costs represent a large portion of the non-usage sensitive costs that are presently reflected in interstate service rates and are the non-usage sensitive portion that is subject to rapid technological change.

156. Unbundling in and of itself may not disassociate all costs of providing basic services from the provision of CPE. To the extent that such equipment is tariffed in a fashion that allows the carriers to earn a regulated return on their investment there is the potential for joint and common costs to distort either the price for the CPE or the basic service. While various unbundling mechanisms can be employed in this process, it is important that the costs attributable to the regulated utility service be separated from the competitive provision of equipment used in conjunction with the service by the removal of such equipment from a carrier's rate base. This is accomplished through detariffing.

157. Moreover, CPE should be detariffed lest the tariffed offering

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This would appear to be a factor of the number of long distance calls a subscriber makes.

of both basic services and CPE result in the regulation of enhanced services where the comptuer processing applications would be performed in the terminal equipment. We have concluded that CPE should not be classified as to its communications or data processing characteristics and that no classification scheme should be adopted. Implicit in this is the fact that no demarcation can be drawn for differentiating CPE for tariff purposes. The detariffing of CPE provides a consistent scheme of regulation for computer processing applications that can be performed in conjunction with the offering of common carrier communications services.

158. Moreover, once unbundled, CPE should be detariffed because the provision of terminal equipment should be allowed to evolve on a competitive basis. The Communications Act does not subject non-carrier vendors to rate regulation. Yet, if carriers remain subject to tariff regulation when they provide CPE, it will be difficult for them to respond in a timely manner to competitive initiatives of non-carrier vendors because the carriers would be required to comply with various notice and information filing requirements, in addition to lacking flexibility to respond to competitive price initiatives. Thus, detariffing of CPE will allow all equipment vendors to compete on an equal basis in responding to market conditions.

159. In considering these matters we came to the following conclusions: First, we find that the offering of CPE in conjunction with regulated communications services has a direct effect on rates charged for interstate services when such equipment is subject to the separations process. To the extent rates for interstate service reflect costs attributable to carrier provided CPE, regulation serves to thwart the competitive provision of that CPE which is tariffed. Second, we find that a carrier should have the same regulatory status in marketing CPE as any other equipment vendor and this should be reflected in our regulatory scheme. While historically certain carriers may have offered equipment as part of an "end-to-end" common carrier service, we have rejected carrier arguments that they are necessarily entitled to provide equipment in this manner. See Carterfone, 13 FCC 2d at 424; Second Report in Docket No. 19528, 58 FCC 2d at 739-740. We have even rejected the equivalent argument that a device as basic as the telephone handset is an indispensable part of the carrier's complete telephone service. PIC, 68 FCC 2d at 1165. Third, we find that the continuation of tariff-type regulation of carrier provided CPE neither recognizes the role of carriers as competitive providers of CPE nor is it conducive to the competitive evolution of various terminal equipment markets. We find that CPE is a severable commodity from the provision of transmission services. The current regulatory scheme which allows for the provision of CPE in conjunction with regulated communication services does not reflect its severability from transmission services, or the competitive realies of the marketplace.

160. This separation of the provision of carrier-provided CPE from the carrier provision of regulated communications services complements the regulatory scheme we are adopting for basic and enhanced services. Trends in technology enable CPE to function as an enhancement to basic common carrier services and many enhanced service applications involve interaction with sophisticated terminal equipment. The uses to which these devices may be put are under the user's, not the carrier's control. The structure we are adopting for network services separates the costs of service enhancements from the underlying transmission service. Deregulation of carrier-provided CPE would separate the costs associated with the provision, marketing, servicing and maintenance of CPE from the rates charged for interstate common carrier services. Thus, the deregulation of CPE fosters a regulatory scheme which separates the provision of regulated common carrier services from competitive activities that are independent of, but related to, the underlying utility service. In addition, the separation of CPE from common carrier offerings and its resulting deregulation will provide carriers the flexibility to compete in the marketplace on the same basis as any other equipment vendor.

161. Accordingly, we conclude that regulation of carrier-provided CPE under Title II of the Communications Act is no longer warranted.

Transition Period

162. The implementation of our decision to require that CPE be provided on an untariffed unbundled basis will require substantial changes in existing tariffs, accounting practices, and settlements arrangements. In some instances it will also require substantial changes in the organization of entities that provide services and equipment. We have concluded that a substantial period of time should be allowed to enable carriers to make the necessary changes.

163. Although we can implement our decision without repealing Separations Manual provisions which will become obsolete when it will no longer be necessary to allocate terminal equipment between interstate and intrastate services, adjustments in other exchange plant

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Excluded from CPE is over voltage protection equipment, inside wiring, coin operated or pay telephones, and multiplexing equipment to deliver multiple channels to the customer. In addition, we are excluding CPE attached to residential party line service because such equipment cannot currently be registered under Part 68 of the Rules. Since the overall percentage of such carrier-provided equipment is very low this is of minimal significance, and will be less so over time as there is a trend among various carriers to phase out party line service. Moreover, the status of mobile telephone equipment is currently being examined in our Cellular Mobile Radio proceeding CC Docket No. 79-318, FCC 79-774, released January 8, 1980. Our action here in deregulating CPE under Title II is not intended to alter in any way the requirements imposed for the licensing of radio equipment under Title III of the Act, even though it may be separated from the carrier's provision of basic services. This decision applies to CPE provided in the 48 contiguous states, Alaska, Hawaii, Puerto Rico, and the Virgin Islands.

allocations may be warranted to offset the indirect effects of unbundling upon residential subscribers who do not make many interstate calls. If such users are required to pay unbundled charges that reflect the terminal equipment investments and expenses that are presently included in the telephone company's combined intrastate and interstate accounts, such users would experience increased terminal equipment costs which would not be offset by the reduced interstate MTS rates. There are a number of means by which this consequence could be alleviated, for example by allocating a larger portion of other exchange plant accounts to interstate services in order to enable state commissions to reduce residential local exchange rates. We have concluded that a Joint Board should be asked to explore such possibilities in order to determine what revisions would be desirable and lawful. An appropriate notice will be issued in the near future.

164. We believe that the carriers and the Joint Board should be able to make the necessary adjustments and decisions in sufficient time to enable us to implement our decision on March 1, 1982. We will accordingly require that unbundled interstate service rates be filed on not less than 90 days notice to become effective upon that date and that all carrier terminal equipment be detariffed on that date.

165. At the same time we believe that residential subscribers should be insulated from any significant dislocations as a result of the transition to a non-regulated terminal equipment environment. As we explain below, we are prepared to undertake appropriate action, if necessary, to help smooth the transition. In our view, it is important that immediately after the detariffing of terminal equipment residental subscribers not be required to pay more for the combination of terminal equipment and local exchange service than they had immediately prior to it. The question of interstate contributions for the use of local exchange facilities, of course, is being dealt with in Docket 78-72, FCC 80-198, released April 16, 1980 and the Joint Board proceeding called for therein. Any socially undesirable distributional effects &emdash; assuming there are any &emdash; from terminal equipment deregulation will be considered in connection with other proceedings. See paras. 166-167, infra. We believe that the interests of the residential subscriber should be safeguarded in the following manner. By March 1, 1981 all telephone companies providing exchange service must unbundle their rates for residential service and file new local tariffs with the various state commissions showing a separate charge for the telephone instrument. The rate level for residential service should be no higher following this subdivision than previously. After March 1, 1982, one option which each telephone company which chooses to remain in the CPE business (either individually or through an affiliate) must offer to

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While we could require that tariffs for unbundled equipment be filed with this Commission such a requirement has obvious practical drawbacks. Beyond that, we see no need to depart from the current practice of having telephone equipment tariffs filed with the various state commissions.

existing residential subscribers in its franchise area is the opportunity to continue leasing the instrument(s) (including maintenance) in place at the terminal equipment tariff rate prevailing immediately prior to deregulation for the life of the instrument(s). We believe that this requirement will not only diminish any severe impact upon residential subscribers as a result of the adoption of a new economic mechanism for the supply of terminal equipment, but also will afford the telephone companies an incentive to unbundle the price of residential terminal equipment from local exchange service as fairly as possible. Carriers, of course, may in addition to this option offer any other lease or sales proposals to residential subscribers which they wish and are free to offer equipment on a deregulated basis prior to the dates we have established for deregulation.

166. The deregulating and detariffing of CPE raise a number of interrelated issues that we shall address in the near future. These include depreciation rates for terminal equipment, adequacy of investment recovery, and prices at which terminal equipment is removed from carriers' rate bases. We shall also consider the relationship of the residential subscriber option indicated in the preceding paragraph to these issues. Thus, prior to the date deregulation is to take effect, it may be necessary for this Commission to participate in a represcription of the depreciation rates for terminal equipment in order to anticipate the changed conditions and assumptions that would result from deregulation of such equipment. It may be necessary to allow for more rapid depreciation of terminal equipment because of the greater market uncertainties that may accompany such a step. Questions concerning a carrier's recovery of its investment in such equipment will also have to be addressed to the extent there is any shortfall or surplus of investment recovery. Because this is related to the price charged consumers choosing to purchase their telephone instrument, we must also address the reasonableness of the transfer price of any unsold equipment from telephone companies to their separate subsidiaries or to their affiliated CPE marketing groups or to unaffiliated companies, as may be appropriate. Accordingly, we intend to initiate a proceeding that would examine into possible changes to depreciation schedules and also address the basis upon which unsold equipment should be removed from a carrier's regulated rate base and books of account.

167. The effect of this decision will be to restructure the manner in which carriers provide CPE. We have essentially set forth a mechanism whereby consumers are better able to ascertain the desirability of acquiring terminal equipment from a full range of equipment suppliers and regulators are better able to ascertain and regulate the charges for common carrier communications services. The overall economic impact on carriers should, on balance, be negligible since we are merely requiring separation of the costs of providing CPE, from the common carrier transmission offering. This is not to say that certain economic

consequences may not ensue to the extent that some or all carrier-provided CPE may be currently overpriced or underpriced, but our convening of a Joint Board to look at the separations and settlement impact and the institution of a proceeding to examine into concerns relative to appropriate depreciation and capital recovery will address any significant problems that may arise.

Legal Considerations
168. The argument is made in the comments that CPE is part of common carriage and must be regulated as communications under the Act. It is argued that the Commission may not forbear the regulation of carrier-provided CPE because the Act mandates the regulation of "all instrumentalities" which are incidental to a carrier's regulated transmission service.

169. In the Tentative Decision we set forth our view of the statutory scheme of the Communications Act relative to our jurisdiction and statutory responsibilities over carrier-provided equipment. We specifically addressed the legislative history of the "all instrumentalities" provision of Section 3 of the Act. Tentative Decision at paras. 115-118.

170. Based on our examination we concluded that the legislative history demonstrates that this Commission has a mandate which compels, at a minimum, that any carrier charge, practice, classification or regulation in connection with the offering of a communications service be just and reasonable. In conferring jurisdiction upon this agency over "all instrumentalities ... incidental to ... transmission," the intent was "... to give the FCC ability to regulate any charge or practice associated with a common carrier service in order to insure that the carrier operated for the public benefit." Id. at 118. Moreover, we concluded that "... the legislative history of the Communications Act manifests no Congressional intent that all carrier-provided equipment be offered on a regulated basis subject to the tariff requirements of Section 203 of the Act, or that such equipment must be offered as 'part and parcel' of a communications service." Id. at 120.

171. The Commission is given "expansive powers" to appropriately tailor regulation to suit the needs of the highly complex and rapidly changing communications industry. On numerous occasions we have exercised our jurisdiction over carrier-provided CPE when used in conjunction with an interstate communication service, and it well

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NBC v. United States, 319 U.S. 190, 219 (1943) See also, United States v. Southwestern Cable Co., 392 U.S. 157, 172-73 (1968); FCC v. Pottsville Broadcasting Co., 309 U.S. 134, 138 (1940); Philadelphia Television Broadcasting Co. v. FCC, 123 U.S. App. D.C. 298, 300, 359 F.2d 282, 284 (1966); NARUC v. FCC, 525 F.2d 630, 638 (1976).

See, Use of Recording Devices, 11 FCC 1033 (1947); Katz v. AT&T, 43 FCC 1328 (1953); Jordaphone Corp. v. AT&T, 18 FCC 644 (1954); Hush-a-Phone Corp. v. United States, 238 F.2d 266 (D.C. Cir. 1956), decision on remand, 22 FCC 112 (1957); AT&T "Foreign Attachment" Tariff Revisions, 15 FCC 2d 605 (1968), recon. den., 18 FCC 2d 871 (1969); Department of Defense v. General Telephone Co., 38 FCC 2d 803 (1973), review denied, FCC 73-854, aff'd per curiam sub nom. St. Joseph Telephone & Telegraph Co. v. FCC, 505 F.2d 476 (D.C. Cir. 1974).

recognized that CPE used for both intrastate and interstate communications is not beyond federal jurisdiction should the need arise. NCUC II, 552 F.2d at 1050. This is not to say, however, that we are compelled to require the carrier provision of CPE as part of a communications service. For example, NCUC II itself upheld our specification of the terms of interconnection of CPE to the interstate network but did not require us to regulate the rates of such equipment. In fact, we have on occasion specifically required that terminal equipment not be provided as part of certain common carrier communications services. Thus, the Communications Act does not require that the provision of terminal equipment be a common carrier service, "[n]or does the Act contain any requirement that the carrier furnish a terminal of any kind as part of any communications service." PIC, 68 FCC 2d at 1163. The fact that some carriers have traditionally furnished various types of equipment with their communications services does not establish that they are required to do so or warrant any universal inferences about the public interest. See MCI Telecommunications Corp. v. FCC, 561 F.2d 365, cert. den. 434 U.S. 1040 (1977).

172. Indeed, the Commission has never regarded the provision of terminal equipment in isolation as an activity subject to Title II regulation. Equipment manufacturers, distributors, and even regulated carriers routinely offer terminal equipment for sale or lease on an untariffed basis. Nevertheless, such activities are not necessarily beyond the jurisdiction of the Commission to the extent they are encompassed within the definition of wire or radio communications in Section 3(a) of the Act.

173. The definitions of wire and radio communications in Section 3(a) and (b) are far-reaching and include "all instrumentalities, facilities, apparatus, and services incidental to such transmission." Indeed we explicitly find that all terminal equipment used with interstate communications services are within the Act's definition of wire and radio communications. However, the fact that the provision of incidental "instrumentalities," etc. is within the subject matter jurisdiction of the Act does not mandate regulation of the "instrumentalities."

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E.g., in the provision of MARISAT service we require that terminal equipment be offered on an unregulated, non-tariff basis and that MARISAT carriers providing such terminals completely separate the charges therefor from charges for the common carrier communications services. We found that "... the terminal and communication service offerings should be kept entirely separate, so that the costs of the terminal ... are in no way recovered through the charges for the communications service and there is no other compulsory tie between the sale of the communication service and the provision of terminal equipment." COMSAT General Corp, 52 FCC 2d 983, 992-93 (1975).

Section 2(a) provides that "all interstate and foreign communication by wire or radio" is subject to Federal jurisdiction.

The equipment, by itself, is not a "communication" service and thus is not required to be separately tariffed under Section 203. Any regulation by tariff or otherwise of terminal equipment must be demonstrated to be reasonably ancillary to the effective performance of the Commission's responsibilities under Title II or "imperative for the achievement of an agency's ultimate purposes." The record here fails to demonstrate the need for tariff-type regulation.

174. We have concluded that the provision of terminal equipment for interstate service is a highly competitive activity. It should no longer be regulated, as it has been in the past, as an offering bundled with interstate transmission services. However, we also believe that it is necessary to prescribe under our reasonably ancillary jurisdiction certain terms and conditions under which such equipment is offered to the public by certain dominant telephone companies such as AT&T or GTE.

175. The provision of equipment has traditionally been subject to regulation both under Title II when offered as part of an end to end offering and under the Commission's ancillary jurisdiction when offered separately or in isolation. We do not believe that any parties to this proceeding have disputed that these pre-existing alternative regulatory approaches to terminal offerings are available to the Commission. The basic question before us, therefore, is whether the Commission can reasonably require certain carriers to terminate their present practice of offering terminal equipment as part of an end to end service and to make equipment available to their customers on a different basis.

176. The basic power to require this change in current practices by carriers offering interstate communications services inheres, we believe, in Section 205 of the Act. We have previously exercised our power under this provision broadly to promote competition in the provision not only of customer-provided equipment but also of interstate transmission services for purposes of resale. We view the

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Permian Basin Area Rate Cases, 390 U.S. 747, 780 (1968); United States v. Southwestern Cable Co., supra, 392 U.S. at 178, HBO v. FCC, supra.

For example, for reasons set forth below, we will require that terminal equipment be offered by these carriers through a separate subsidiary. This requirement is intended to, and should, minimize the possibility that monopoly ratepayers will subsidize competitive terminal equipment offerings. Since these terminal equipment offerings will continue to be subject to our jurisdiction under the Act, we believe we retain ample discretion to take any action in the future with respect to practices which may be necessary to assure that our responsibilities under the Act can be adequately fulfilled. The mere potential exercise of our remedial powers may also act as an effective deterrent to anticompetitive conduct by dominant suppliers of terminal equipment.

See First Report & Order in Docket No. 19258, 56 FCC 2d 593 (1975); on reconsideration, 57 FCC 2d 1216 (1976), 58 FCC 2d 716 (1976) and 59 FCC 2d 83 (1976); Second Report and Order in Docket No. 19528, 58 FCC 2d 736 (1976), on reconsideration, aff'd sub nom. North Carolina Utilities Commission v. FCC, 552 F.2d 1036 (4th Cir.), cert. denied, 434 U.S. 874 (1977) (NCUC II); Resale and Shared Use of Common Carrier Services, supra; aff'd sub nom. AT&T v. FCC, 572 F.2d 17 (2d Cir. 1978), cert. denied, 439 U.S. 875 (1978).

question before us as essentially a choice between two different approaches to regulation of charges for terminal equipment used in the provision of interstate services.

177. Under current procedures we engage in tariff-oriented review of these charges only to the extent that they are bundled into charges for interstate transmission services. We now believe that these charges for use of interstate services should be explicitly identified to a customer on a separate basis. We further believe that these charges in connection with interstate service should be cost-related and not stated on a usage sensitive basis. We also intend that these services should be provided by certain carriers through an entity separate from the provider of underlying transmission services. By so doing, we believe that we can more effectively than at present assure against cross subsidization of essentially competitive services by essentially distinct and separate transmission services.

178. While such an approach would not involve tariffing or service-by-service review of individual equipment offerings, we believe that we should be able more effectively to meet our responsibilities under the Act than under current arrangements. We now exercise little or no effective oversight over the offering of terminal equipment utilized jointly for interstate and intrastate communications. Faced with this choice between alternative regulatory approaches, we believe that there are extraordinarily compelling reasons for adopting a new regulatory approach to the interstate provision of terminal equipment.

179. We believe that the provision of terminal equipment on an unbundled and detariffed basis should enhance significantly our flexibility to assure cost-based provision of transmission services in an increasingly competitive marketplace, This step will also promote our objective of assuring a viable competitive market for terminal equipment. As a result of our actions in requiring interconnection in Carterfone and in subsequently establishing technical standards in this area, we are convinced that there has now developed a strong viable market for equipment which assures users a wide range of competitive alternatives.

180. Our action today is only another in a series of steps to isolate terminal from transmission offerings, increase consumer choice, and to open equipment markets to full and fair competition. By striking down carrier-imposed restrictions on requiring equipment interconnection over a decade ago, we foreclosed carriers from offering only the single option of end-to-end communications service. In implementing a registration program applicable both to carrier provided and customer provided equipment, we sought to isolate the technical standards for transmission and terminal offerings and assure competitive parity

among all suppliers of customer provided equipment. In the same manner, in today requiring equipment to be made available to interstate users on a cost-based non-usage sensitive basis--with equipment investment fully isolated from transmission investment and from the separations process--we hope to strengthen further the prospects for comparing competitive equipment offerings in the market.

181. We are thus convinced our goals under the Act can be more effectively promoted by relying on a different set of regulatory tools. This choice of the most appropriate regulatory mechanism is, we believe, one entrusted to our discretion, especially with respect to terminal equipment where such offerings have historically been viewed as only within the Commission's ancillary jurisdiction, not its Title II jurisdiction, when offered separately from transmission services. Congress has recognized that communications services are highly dynamic and changing and that the Commission must have flexibility to respond to these changing conditions.

182. The degree of discretion available to the Commission is not, moreover, fundamentally determined by the characterization of the offering of terminal equipment as merely the provision of an "instrumentality" or "facility"--not of a "common carrier service." Even if the provision of terminal equipment in conjunction with transmission service is regarded as part of the common carrier service, the Commission clearly has the authority to require "unbundling" of equipment from transmission service. We do not believe that the Act requires an unbundled equipment offering to be made only under tariff. Section 203 of the Communications Act, 47 U.S.C. § 203, does not expressly refer to terminal equipment. To the contrary, Section 203(a) requires that carriers file a schedule showing charges for "communication between points on its own system" and "between points on its own system and points on the system of [connecting or other] carrier[s]." (Emphasis added.) That language describes transmission services rather than terminal equipment charges. While "communication" is defined in Section 3(a) and (b) to include such equipment, Section 203 does not require the inclusion of equipment in an offering.

183. We believe that the extensive record of this proceeding amply supports our conclusion that terminal equipment markets can be workably competitive so long as constaints on competition are not tolerated. Moreover, on the record and on the basis of our informed judgment about likely competitive trends in the terminal equipment

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National Broadcasting Co. v. United States, supra, 319 U.S. at 219; United States v. Southwestern Cable Co., supra, 392 U.S. at 173.

See the discussion of the Commission's powers under Section 205, supra, at para. 169.

Section 203 also requires that tariffs show carrier "classification, practices and regulations affecting such charges" and "such other information" as this Commission may require.

market we believe that we can reasonably conclude that according broad discretion to carriers to raise or lower terminal equipment rates or to enter into individual contractual arrangements with individual customers is not likely to result in users being charged unreasonable or unreasonably discriminatory rates. We reject the contention that in adopting these regulatory policies we are abdicating any responsibility imposed on us under the Communications Act. We also believe that the broad structural safeguards we are instituting with respect to offerings by dominant carriers will implement a scheme of indirect regulatory controls which should reduce the likelihood of undetected cross-subsidization of competition by monopoly services.

184. We recognize, of course, that as a practical matter, the states may no longer be able to regulate, as they have in the past, the charges for terminal equipment used jointly in the provision of intrastate and interstate services. Divided regulation of equipment charges is not feasible if the equipment charges are unbundled from both interstate and intrastate services. Nevertheless, we do not believe that Section 2(b) of the Act forecloses us from taking actions which have this practical effect on the states.

185. It is clear that the Commission has jurisdiction under Section 2(a) over all interstate communications services; and its powers include the authority to require unbundling of terminal equipment from interstate transmission services. As we have noted, the requirement that terminal equipment be unbundled allows the Commission to assure that rates are cost-based and, therefore, not anticompetitive or discriminatory. Precluding bundled or averaged usage-sensitive rates for terminal equipment used for interstate communications in whole or in part obviously will have an adverse impact on the states' ability to base rates for the intrastate usage of such terminal equipment on similar concepts. To this extent, the detariffing of terminal equipment required by this decision will affect the charges for intrastate communications services. This is because, as a practical matter, unless there were two separate phone systems with one being used wholly intrastate, unbundled cost-based pricing for a piece of equipment at the federal level necessarily precludes any other result by the states. But nothing on the face of Section 2(b) precludes this Commission from exercising its conceded regulatory authority over interstate communications

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Indeed, we believe that given the degree of competition in this market some individualized negotiations among terminal equipment providers and customers will result in more vigorous and effective competition than currently when services are available only on a single schedule of charges. There may be even less of a danger of unreasonable or unreasonably discriminatory rates when customers are in a position to "comparison shop" among different suppliers.

Section 2(b) provides that "nothing in this Act shall be construed to apply or give the Commission jurisdiction with respect to (1) charges, classifications, practices, services, facilities, or regulations for or in connection with intrastate communication service by wire or radio of any carrier ..."

service in ways that might have the practical effect of displacing state authority to regulate intrastate rates.

186. In North Carolina Utilities Commission v. FCC, 552 F.2d 1036 (4th Cir. 1977), it was argued by the telephone companies and state utility commissions that Section 2(b)(1) mandates state control over jointly used terminal equipment and that, therefore, the Commission lacked authority to establish its terminal equipment registration program. The court rejected the argument that Section 2(b)(1) deprived this Commission of jurisdiction, even though it was conceded that the equipment was used predominantly in purely intrastate communications. The court explained that if Section 2(b) were construed to give the state primary authority over jointly used terminal equipment whenever state regulations conflicted with Federal rates applicable to interstate calls, the Commission would necessarily be prevented from discharging its statutory duty under Sections 1 and 2(a) to regulate interstate communication.

187. Rejecting the contention that the word "nothing" in Section 2(b)(1) overrides any potentially contrary language elsewhere in the Communications Act, the court explained that the argument misses the point. According to the court, "Section 2(b)(1) does not deny the FCC jurisdiction with respect to interstate facilities; it excludes only intrastate facilities from FCC jurisdiction". Therefore, the court explained that:

"The terminal equipment dealt with in the order appealed from is used for both interstate and intrastate communications. The withdrawal of jurisdiction over one cannot be read to mean the withdrawal as to the other. Based on the statutory policy of centralizing control over interstate communications in the FCC, the otherwise plenary jurisdiction conferred by Sections 201-205, and the recognition by 410(c) of federal supremacy in rate base allocation, we concluded in North Carolina I that the 'intrastate' facilities of Section 2(b)(1) were those facilities 'separable from and ... not substantially affect[ing] the conduct of or development of interstate communications.' 537 F.2d at 793. Congress' use of the word 'nothing' in no way detracts from this analysis, nor does it suggest--as do petitioners--that the 'intrastate' facilities of Section 2(b)(1) are those items of terminal equipment used 'predominantly' for local communication."

188. The State utility commissions also contended that Federal control of interconnection would deprive the States of "meaningful" ratemaking power reserved to them under Section 2(b)(1) because increased substitution of independently provided terminal equipment such as PBXs and key telephones will reduce revenues available to subsidized residence and one-phone consumer service. The court emphatically rejected this contention because:

"Recognition of federal primacy in the regulation of jointly used terminal equipment no more curtails state ratemaking power as a matter of statutory jurisdiction than"

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552 F.2d at 1046.

552 F.2d at 1046.

"would the denial of state authority to set rates for interstate calls in order to subsidize local exchange and intrastate services. In the end, the problem of subsidy reduces to the factual problem of obtaining sufficient revenues to cover the difference between providing subsidized service and the regulated price of subsidized service ... Political expediency may encourage state commissions to defend their current option to bury subsidy costs in as many holes as possible, but this concern cannot be allowed to determine the allocation of jurisdictional competency between State and federal agencies.'"

In short, the court concluded that even if FCC actions had the effect of rendering Section 2(b)(1) "meaningless" as a practical matter, the primacy of federal jurisdiction over interstate communications under Sections 1 and 2(a) must prevail.

189. Likewise, the Commission's decision in this case to require that all terminal equipment be detariffed does not contravene the State's authority under Section 2(b)(1). Although the practical impact of our decision may be to render "meaningless" the jurisdiction of the States to establish charges for intrastate use of facilities, our decision is intended to implement our authority under Sections 1 and 2(a) over interstate service--not as a measure to deprive the States of authority. To the extent that our decision has such effect, it is only because terminal equipment is used jointly for interstate and intrastate communications. Certainly, as a legal matter, our action in this case stands on no different footing than our action which was sustained in NCUC in establishing a registration program. In both cases, even if the States are deprived of "meaningful" ratemaking power, there is "no statutory basis for the argument that FCC regulations serving other important interests of national communications policy are subject to approval by state utility commissions." 552 F.2d at 1046-1047.

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552 F.2d at 1048.

The court pointed out that its construction of the statute rendered Section 2(b)(1) "meaningless" not because exclusively intrastate facilities cannot be built or imagined ... but because state commissions prefer to avoid the economic and political costs of forcing the consumer to buy two sets of terminal equipment." 552 F.2d at 1049.