international services market are high." Further, we do not envision that NYNEX LD's, BACI's, and ACI's cost structure, size, and resources will allow them to control prices or exclude competition insofar as they are new entrants into the international services market and will face a number of large, well-financed competitors, including MCI, Sprint, and AT&T.

16. Nevertheless, the instant applications raise the question of whether NYNEX LD, BACI, and ACI may be able to leverage the market power of their LEC affiliates in their in-region states in the provision of local exchange and exchange access services to gain market power in the provision of international service originating from out-of-region states. The Commission raised substantially the same issue in the BOC Domestic Out-of-Region Order in considering the appropriate treatment of the BOCs' provision of out-of-region, domestic interstate, interexchange services, i.e., "whether a firm with market power in one relevant market (the local exchange and exchange access market) can leverage that power to gain market power or an unfair advantage in another, related market (the interexchange market)."57 In order to provide some protection against "cost-shifting and anticompetitive conduct," the Commission adopted interim safeguards." The Commission adopted these minimum safeguards as an interim measure pending a further comprehensive analysis of the interexchange services of both BOCs and independent LECS in the Interexchange proceeding."

59

17. We believe that application of the interim safeguards adopted in the BOC Domestic Out-of-Region Order as a condition of our granting the instant applications provides necessary and sufficient interim protection against potential abuses by NYNEX LD, ACI, and BACI in their provision of solely out-of-region international switched resale services. We find no practical distinctions between a BOC's ability and incentive to improperly allocate costs, discriminate against, or otherwise disadvantage unaffiliated domestic interexchange as opposed to international service competitors. We also believe that the application of the interim safeguards will not impose an unreasonable burden on the applicants in their provision of out-of-region international services. The conditional safeguards will remain in place at least until completion of the Interexchange proceeding. We therefore reserve the right to modify the conditions of the applicants' authorizations, as necessary, upon adoption of final rules for the BOCs' provision of out-of-region domestic interstate, interexchange services. In the meantime, it is our view that granting the instant Section 214 applications subject to the safeguards as set forth below will facilitate the efficient and rapid provision of out-of-region

56 Id. at ¶¶ 48-65; id. at ¶ 50 ("although barriers to entry exist, they are not so great as to bar effective competition"); id. at ¶ 35 (finding that U.S. facilities-based suppliers may enter markets much more easily today than a decade ago, whether through direct operating agreements, indirect transit arrangements, or "switched hubbing" via U.S. international private lines).

while still protecting ratepayers and competition in the U.S. international services market.

18. Specifically, we grant NYNEX LD's, ACI's and BACI's Section 214 applications to resell international switched services of unaffiliated U.S. carriers on a nondominant basis subject to the condition that they (1) maintain separate books of account from the LEC; (2) not jointly own transmission or switching facilities with the LEC; and (3) take any tariffed services from the affiliated LEC pursuant to the terms and conditions of the LEC's generally applicable tariff.60 Except for the ban on joint ownership of transmission and switching facilities, we will permit NYNEX LD, ACI, and BACI and their respective affiliated LECs to share personnel and other resources or assets. 61 Further, although we require NYNEX LD, ACI, and BACI to maintain their corporate structures as separate legal entities from their LEC affiliates, we do not require that these international service affiliates' separate books of account comply with our Part 32 rules.

62

19. In addition, we will require NYNEX LD, ACI, and BACI to be treated as nonregulated affiliates for purposes of BOC accounting under the Commission's joint cost and affiliate transactions rules.63 The Commission's existing accounting safeguards for affiliate transactions were developed in the Joint Cost Order and are codified in Parts 32 and 64 of our Rules. The Part 64 cost allocation rules prescribe how carriers separate the costs of regulated activities from the costs of nonregulated activities, where the nonregulated activities are performed directly by the carrier rather than through an affiliate." The Part 32 affiliate transactions rules prescribe the way costs are recorded, for Title II accounting purposes, when

60 This provision applies only to services for which the BOC is required to file a tariff, not to detariffed services such as billing and collection. The provision also only applies when the affiliate obtains tariffed services from its affiliated BOC. See BOC Domestic Out-of-Region Order at ¶ 23.

61

62

See id. at ¶ 22.

See id. at ¶ 23. Books of account refer to the financial accounting system a company uses to record, in monetary terms, the basic transactions of a company. These books of account reflect the company's assets, liabilities, and equity, and the revenues and expenses from operations. Each company has its own separate books of account. The Commission's Part 32 rules, the Uniform System of Accounts (USOA), prescribe the books of account for the telephone companies. The Part 32 USOA, however, is not required to be kept by affiliates of a telephone company. These affiliates maintain their own separate books of account. Id. at ¶ 23, n.62.

63 47 C.F.R. §§ 32.27. 64.901-904; see also BOC Domestic Out-of-Region Order at ¶¶ 22, and 35-40.

64

Separation of Costs of Regulated Telephone Service from Costs of Nonregulated Activities, Report and Order. CC Docket No. 86-111, 2 FCC Rcd 1298 (1987) (Joint Cost Order), recon., 2 FCC Rcd 6283 (1987) (Joint Cost Reconsideration Order), further recon., 3 FCC Rcd 6701 (1988), aff'd sub nom. Southwestern Bell Corp. v. FCC, 896 F.2d 1378 (D.C.Cir. 1990); 47 C.F.R. Parts 32 and 64.

a regulated carrier does business with its nonregulated affiliates." These rules are designed to prevent local exchange carriers from imposing the costs and risks of their competitive ventures on local telephone ratepayers. These rules do not require carriers or their affiliates to charge any particular prices for assets transferred or services provided; rather, they require carriers to use certain specified valuation methods in determining the amounts to record in their Part 32 accounts, regardless of the prices charged.67

20. Because the cost allocation and affiliate transactions rules are an important component of our accounting safeguards, we find, as did the Commission in the BOC Domestic Out-of-Region Order, that these rules should apply to NYNEX LD's, ACI's, and BACI's provision of out-of-region international switched resale services. Even though NYNEX LD's, ACI's, and BACI's provision of out-of-region international switched resale services are services regulated under Title II, we will require these carriers to be treated for BOC accounting purposes as nonregulated affiliates and therefore subject to our cost allocation and affiliate transaction rules. The fact that international switched resale services are regulated services in and of itself does not eliminate the potential for improper allocation of costs between the carriers' competitive (international) and noncompetitive (local exchange and exchange access) services. Thus, we believe that application of our cost allocation and affiliate transaction rules is necessary to minimize the possibility that NYNEX LD, ACI, or BACI could improperly shift the costs of their international switched resale operations to their regulated local exchange and exchange access ratepayers.68

21. We find that requiring the applicants to treat affiliates providing out-of-region services as nonregulated will not be unduly burdensome. All the BOCs currently have systems in place to account for transactions between their nonregulated affiliates (e.g., for transactions between a BOC and any of its information services which are not regulated under Title II). Such a requirement will not entail extensive modification of existing company procedures because, prior to the passage of the 1996 Act, BOCs were prohibited from providing international services.

B. Proposed Merger Between Bell Atlantic and NYNEX

22. Noting that a number of BOCs had recently announced plans to merge (including Bell Atlantic and NYNEX), the Commission expressed concern in the BOC Domestic Out-of-Region Order that, in the period prior to a merger's consummation, a partner

68

See BOC Domestic Out-of-Region Order at ¶ 39 (adopting the requirement that BOCs treat affiliates providing out-of-region services as nonregulated for exchange carrier accounting purposes and noting that this requirement is consistent with the current practice of independent LECS that treat their affiliates providing interexchange services as nonregulated for exchange carrier accounting purposes).

that originate in the first partner's service territory.69 Stating its belief that the record before it provided an inadequate basis on which to address the specific concerns raised by the pending mergers, the Commission excluded from the services covered by the interim rules adopted in the BOC Domestic Out-of-Region Order those out-of-region services that originate in the in-region states of a merger partner during the period prior to the consummation of a merger.70 Potential merging parties that seek to provide out-of-region services originating in their respective partners' service territories are required to request the Commission, on an individual case basis, for a determination of whether such services can be provided on a nondominant basis." The Commission also determined that if an announced merger is not consummated, then the interim rules established in the BOC Domestic Out-of-Region Order would apply to all out-of-region services provided by the parties to the proposed merger."2

23. We believe that the Commission's concerns regarding a BOC's provision of out-of-region, domestic interstate, interexchange services in a merger partner's territory are equally relevant in the international context. We also believe that these concerns are relevant not only with respect to merger agreements, but also with respect to acquisition agreements among and between the BOCs. For example, with the signing of the merger agreement, Bell Atlantic may favor NYNEX's international services operations originating in Bell Atlantic's territory because Bell Atlantic may eventually share in NYNEX's profits. We have no record basis or guidance from the Commission to address the specific concerns raised by the pending Bell Atlantic and NYNEX merger. We therefore defer a decision on what conditions should apply to any out-of-region international services provided by BACI or NYNEX LD that originate in each other's respective service territories. We will consider under what conditions they may initiate such services upon the filing by BACI or NYNEX LD of a letter

72 Id. On July 2, 1996, NYNEX and Bell Atlantic amended their original merger agreement. See NYNEX Corporation, Transferor, and Bell Atlantic Corporation, Transferee, Application for Transfer of Control at 2 (filed July 5, 1996) (Transfer of Control Application) (requesting authority pursuant to Sections 214 and 310(d) of the Act to transfer control of NYNEX's Section 214 authorizations and its interest in various radio station authorizations to Bell Atlantic); see also id., Attachment 1 at 1 (Application for Transfer of Control of Section 214 Authorizations) (requesting that NYNEX LD's pending international Section 214 application "be encompassed within the Commission's ruling on this [transfer of control] application"). Under the terms of the original merger agreement, NYNEX and Bell Atlantic would have combined their respective businesses under a new holding company. Under the terms of the amended merger agreement, "Bell Atlantic will form a new subsidiary, which subsidiary will then merge into NYNEX." Transfer of Control Application at 1. After the proposed merger, NYNEX would become a wholly-owned subsidiary of Bell Atlantic. Id.. Exhibit A at 2 (Amended and Restated Agreement and Plan of Merger). We will refer to the transaction proposed under the July 2, 1996 amended agreement as a merger, as does NYNEX and Bell Atlantic in their Transfer of Control Application.

stating their desire to provide these services. We will endeavor to act upon such a request expeditiously. Given that the safeguards adopted in this order are subject to modification upon final action in the Interexchange proceeding and the fact that we are not aware of plans by BACI and NYNEX LD to provide such services, we believe that this approach likely will not impose any burdens on BACI and NYNEX LD.

24. We therefore grant BACI's and NYNEX LD's applications to provide out-ofregion international switched services subject to the condition that they do not initiate service originating from each other's territory until we issue an order determining the regulatory treatment of such services. We similarly reserve the right to impose additional conditions on the provision of service by ACI should it enter into a merger or acquisition agreement with another BOC. If Bell Atlantic and NYNEX decide not to consummate the announced merger and seek to provide out-of-region international switched services originating from each other's territory, they may do so upon the filing of a letter with the Commission stating their decision not to consummate the announced merger and provided BACI and NYNEX LD comply with the safeguards established in this authorization.

C. Foreign Carrier Affiliations

25. In 1992, the Commission modified its 1985 policy that treated U.S. foreignowned common carriers as dominant in their provision of all international services to all foreign markets. Specifically, the Commission adopted a framework for regulating U.S. international carriers as dominant on routes where an affiliated foreign carrier has the ability to discriminate in favor of its U.S. affiliate through control of bottleneck services or facilities in the destination market."3 Under this framework, a U.S. international carrier that serves a destination market solely through the resale of the switched services of a U.S. facilities-based carrier with which the reseller is not affiliated is presumptively non-dominant for that route -"regardless of any foreign affiliations."74 The Commission has found that the resale of an unaffiliated U.S. facilities-based carrier's switched services "presents no substantial possibility of anticompetitive effects in the U.S. international service market, because the reseller's foreign affiliate is negotiating the terms and conditions of access to the destination market

73

Regulation of International Common Carrier Services, 7 FCC Rcd 7331, 7334 (1992) (International Services); see also Market Entry and Regulation of Foreign-affiliated Entities, Report and Order, IB Docket No. 95-22, 11 FCC Rcd 3873, ¶¶ 245-55 (1995) (Foreign Carrier Entry Order) (reaffirming the basic framework for classifying and regulating a carrier as dominant based upon its foreign carrier affiliations as set forth in International Services). The Commission considers to be "foreign-affiliated" those U.S. carriers with a greater than 25 percent interest or controlling interest at any level held by a foreign carrier, as well as those U.S. carriers with interests of more than 25 percent in, or control of, a foreign carrier. Foreign Carrier Entry Order at ¶¶ 7892, and 245-51.

74

International Services at 7335; 47 C.F.R. § 63.10(a)(4); see Streamlining Order at ¶¶ 77, 80-81; International Competitive Carrier at ¶¶ 76-77.