Section 271 of the Communications Act (Act) establishes the procedures by which a Bell operating company (BOC) may seek to provide interLATA services originating in one of its in-region States. A BOC must first file with the Federal Communications Commission (Commission or FCC) an application identifying the State(s) for which authorization is sought. The Commission must render a decision on the application within 90 days of receipt, after having first consulted with the regulatory commission(s) of the State(s) implicated and the Department of Justice (DOJ).
Viewed narrowly, section 271 reflects Congress' judgment that, under appropriate circumstances, the BOCs ought to be allowed to offer interLATA services. The provision cannot be understood fully or applied properly, however, unless it is viewed in the larger context of the Telecommunications Act of 1996 (1996 Act) and its underlying purposes. Although the overriding goal of the Act is to promote competition in all telecommunications markets, Congress was particularly concerned about introducing and expanding competitive entry into the local exchange markets served by the BOCs and other local exchange carriers (LECs). Thus, the Act both removed legal barriers to entry and imposed on the LECs a series of obligations designed to open their monopoly local networks to competition. More importantly, perhaps, Congress sought to create incentives for firms to comply expeditiously with those obligations.
Section 271 is the most prominent example of that effort. Congress held out interLATA entry as a reward for the BOCs' acceptance of and adherence to interconnection, unbundling, and resale obligations designed to facilitate entry by alternative providers of local telecommunications services. As one Congressman succinctly summarized the bargain: "Once the [BOCs] open the local exchange networks to competition, [they] are free to compete in the long distance and manufacturing markets." Section 271 thus makes the BOCs the masters of their own fate, because it links the success of their interLATA efforts directly to their commitment to opening their markets to meaningful competition.
Because many parts of section 271 are neither unambiguous nor self-executing, they have sparked much debate and disagreement among interested parties. This paper offers an interpretation of section 271 that is reasonable, is consistent with the language and intent of the 1996 Act, and that furthers the overriding goal of that statute -- to promote competition in all telecommunications markets, particularly the market for local exchange services.
CONSTITUTIONALITY OF SECTION 271
• Section 271 is not an unconstitutional bill of attainder. It does not single out a fixed class for disparate treatment. It was intended not to punish the BOCs, but rather to create a framework that would enable the BOCs to enter the long distance market in a way that promotes both long distance and local competition. (pp. 6-18)
PRECONDITIONS TO BOC ENTRY
Under Section 271, the Commission may not grant a BOC's application to provide in-region, interLATA services unless the Commission determines that: (1) the BOC provides access and interconnection to one or more facilities-based competitors or, if the BOC has not received a request for access and interconnection, the BOC makes such access and interconnection generally available to potential entrants; (2) the access and interconnection provided or made generally available satisfies the requirements of the "competitive checklist"; and (3) grant of the BOC's application would serve the public interest, convenience, and necessity.
I. Facilities-Based Competitor Requirement -- Section 271(c)(1)
A. Track A or Track B?
• Section 271(c)(1) creates two "tracks" by which BOCs may seek authorization to offer in-region, interLATA services. In order to qualify for interLATA entry under subparagraph (A) ("Track A"), a BOC must provide access and interconnection to one or more facilities-based competitor(s) that offer local telephone service to residential and business subscribers. If, by a certain date, no competing provider has requested access or interconnection, a BOC can pursue interLATA entry via subparagraph (B) ("Track B") by providing a State-ratified statement of generally available terms and conditions that satisfies the checklist requirements. (pp. 19-20)
• The text and legislative history of section 271(c)(1) support the Commission's determination that a BOC must pursue interLATA entry via Track A if, at least three months prior to the filing date of its interLATA application, the BOC receives a request for access and interconnection that, if implemented, will produce a competing facilities-based provider of local exchange service to residential and business subscribers. The firm requesting interconnection does not have to be providing service at the time that the request is made. (pp. 20-35)
B. Characteristics of a Facilities-Based Competitor
• The more reasonable reading of Track A is that a BOC should not be allowed to claim PCS providers as facilities-based competitors until such time as the Commission decides that PCS constitutes local exchange service under section 3(47)(A). (pp. 36-44)
• The competitor must be providing service either exclusively or predominantly over its own facilities. The better reading of the statute substantiates the Commission's conclusion that unbundled network elements (UNEs) procured by the competitor from a BOC should be deemed the competitor's "own" facilities for purposes of Track A. (pp. 44-49)
• Congress' use of the word "predominantly" in Track A indicates that a facilities-based competitor's "own" facilities must comprise at least the majority of its overall local exchange network facilities, if it also resells services obtained only from a BOC, or a plurality of competitor's total network facilities, if it resells services from a BOC and one or more other carriers. Congress' emphasis on cable as the most probable facilities-based competitor evinces its intent that, at a minimum, such a competitor's own facilities to the home should constitute the predominant share of its total local loop plant. (pp. 49-51)
• Facilities-based competitors must provide service to residential and business subscribers. Congress flatly rejected any requirement that such competitors must be available to or must serve a minimum number of subscribers, although it indicated that number of subscribers served could not be "insignificant" or "incidental." (pp. 51-55) Congress' use of the word "subscriber" implies that end users that receive a competitor's service on a trial basis should not be considered in determining whether the competitor satisfies the requirements of Track A. (pp. 56-58)
• When a BOC relies on more than one competitor to satisfy Track A, each such carrier need not provide service to both residential and business subscribers as long as the competing carriers collectively serve both classes of customers. (pp. 59-60)
• When a BOC relies on multiple competitors to satisfy Track A, the Commission should deem Track A to be satisfied if at least one of those competitors serves a sufficient number of residential subscribers either exclusively or predominantly over its own facilities and at least one competitor offers facilities-based service to a satisfactory number of business customers. (pp. 60-64)
II. Compliance with the Competitive Checklist -- Section 271(c)(2)
• Competitors requesting access and interconnection from a BOC are entitled to have all of the 14 items enumerated in the competitive checklist in the competitors' interconnection agreements, if they so choose. (pp. 65-67)
• Because all competitors may not need or desire all checklist elements, the BOCs ought to be allowed to satisfy the checklist by making the unrequested items generally available on just, reasonable, and "commercially useful" terms. (pp. 67-69)
• The United States Court of Appeals for the Eighth Circuit has held that State commissions, and not the FCC, have jurisdiction to establish principles and rules for pricing interconnection, UNEs, and resold services. The Commission should afford State commissions flexibility to establish their own forward-looking pricing rules for those offerings, as long as each State commission specifies what pricing principles it employed, explains how those principles comport with the language of section 252 and the procompetitive aims of the 1996 Act, and details the process by which it transformed the chosen pricing principles into the prices established. If, moreover, a State should adopt forward-looking pricing standards that diverge significantly from those implemented in other jurisdictions, the Commission could reasonably conclude that the offending State was not discharging its obligation to promote competition and deny any BOC application to offer interLATA service within that jurisdiction. (pp. 69-77)
III. Public Interest Requirement -- Section 271(d)(3)(C)
A. Promoting Local Competition
• Because Congress emphasized the need to foster local competition and held out interLATA entry as an inducement to BOC compliance with the Act's market opening requirements, in deciding whether to grant a BOC's interLATA application, the Commission should focus on the probable impact on local competition. (pp. 80-83)
• A BOC's compliance with the competitive checklist does not indicate that local competition is sufficient to warrant grant of the BOC's interLATA application. (pp. 84-87)
• The Commission must instead make a qualitative judgment that the legal and regulatory environment is sufficiently open that new entrants will be able to pursue and to exploit market opportunities whenever and wherever entrants find them. Several minimum conditions should apply:
• There should generally be no State and local legal barriers to competitive entry. Perhaps more importantly, the Commission must be persuaded that State regulators and the BOCs themselves are fully committed to opening the local market to meaningful competition. (pp. 87-90, 98-99)
• All checklist items must be provided or be available in a "commercially useful" manner. Thus, (1) items must be available for immediate ordering in sufficient quantities to enable the purchaser to satisfy reasonably foreseeable demand; (2) all testing of the checklist items has been completed and, where necessary, independently verified; (3) regulatory authorities must be substantially certain that the checklist items will function as expected in a commercial setting; (4) the BOC's provision of the item must be at least equal in quality to the service that it provides itself; and (5) checklist items must be made available at rates that satisfy the pricing standards of section 252(d). The BOCs' interconnection agreements should provide for automatic penalties (including service credits and liquidated damages) in the event that violations of agreement terms occur. (pp. 90-95)
• The BOCs' interconnection agreements should contain specific performance standards that can be used to track the quality of the service that the BOCs provide their competitor/customers over time. (pp. 95-98)
B. Maintaining Service Quality and Protecting Local Telephone Subscribers
• The public interest standard gives the Commission ample authority to consider potential harms to local service quality and local ratepayers resulting from the BOC's provision of interLATA services. (pp. 99-102)
• To the extent that State commissions are concerned about the potential effects of BOC interLATA entry on local service, section 253(b) of the 1996 Act authorizes them to condition their certification of a BOC's compliance with the competitive checklist on the BOC's acceptance of reasonable and competitively neutral service standards. (p. 102)
PROCEDURAL ISSUES
I. Consultation with State Regulatory Commissions -- Section 271(d)(2)(B)
• The Commission must consult with the State commission implicated by a BOC's interLATA application to "verify" the BOC's compliance with the competitive checklist. (pp. 103-104)
• Although section 271(d) does not oblige the Commission to defer to a State commission's findings, the Commission will be hard pressed to discharge its responsibilities if it does not take advantage of the resources and expertise of State commissions concerning the many factual issues raised by the typical BOC application. As a general rule, the Commission should defer to the factual determinations of a State commission if the Commission concludes that (1) the State commission has the authority to act, (2) the procedures employed by the State commission have given interested parties an adequate opportunity to litigate their claims, (3) State courts would be bound to accept the facts as found by the State commission, and (4) the State commission's findings and conclusions are based on a thorough and independent analysis of the record before it. (pp. 104-108)
II. Consultation with DOJ -- Section 271(d)(2)(A)
• DOJ may evaluate a BOC application using any standard that the DOJ deems appropriate. It is not restricted to assessing only the impact of BOC entry on interLATA competition, nor is it limited to considering only "antitrust" issues. The Commission must give "substantial weight" to DOJ's evaluation, even those aspects of the evaluation that are not based on DOJ's "antitrust" expertise. (pp. 108-112)
• The "substantial weight" standard should mean that, if DOJ concludes that a BOC's interLATA entry would harm competition in local or interLATA markets, a Commission decision to that effect should withstand appeal. If the Commission chooses not to follow a DOJ recommendation either for or against entry, it would need to justify that decision by citing clear and significant evidence to the contrary in the record. (pp. 112-116)
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