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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 ) In the Matters of ) ) ) Deployment of Wireline Services Offering) CC Docket No. 98-147 Advanced Telecommunications Capability) ) ) SECOND REPORT AND ORDER Adopted: November 2, 1999 Released: November 9, 1999 By the Commission: I. Introduction 1. One of the fundamental goals of the Telecommunications Act of 1996 (1996 Act) is to promote innovation and investment by all participants in the telecommunications marketplace, in order to stimulate competition for all services, including advanced services. In this order, we take another important step towards implementing Congress' goals with respect to advanced services. 2. Although both incumbent local exchange carriers (LECs) and new entrants are developing and deploying innovative new technologies to meet the ever-increasing demand for high-speed, high-capacity advanced services, including enhanced Internet access, the consumer market is still in the early stages of development. Congress has directed the Commission to ensure that advanced services are being deployed on a reasonable and timely basis to all Americans, including residential consumers. In order to encourage carriers to develop and deploy new advanced services to all markets, we are committed to ensuring that incumbent LECs and competitive carriers alike are able to make their decisions to invest in, and deploy, advanced telecommunications services based on market demand and their own strategic business plans, rather than on regulatory requirements. 3. In this Second Report and Order, we address the issue raised in the Advanced Services NPRM of whether the discounted resale obligation of section 251(c)(4) applies to incumbent LEC provision of advanced services without regard to their classification as telephone exchange or exchange access. As discussed below, we determine that our analysis of section 251(c)(4) requires a fact specific evaluation of the features and characteristics of a particular transaction. Based on the record before us, we conclude that advanced services sold at retail by incumbent LECs to residential and business end-users are subject to the section 251(c)(4) discounted resale obligation, without regard to their classification as telephone exchange service or exchange access service. This finding reinforces the resale requirement of the Act by ensuring that resellers are able to acquire advanced services at wholesale rates. We reach a different result as to advanced services sold to Internet Service Providers for inclusion in a high-speed Internet service offering. We conclude that these advanced services are inherently different from advanced services made available directly to business and residential end-users, and as such, are not subject to the discounted resale obligations of section 251(c)(4). The Commission's determination herein should encourage incumbents to offer advanced services to Internet Service Providers at the lowest possible price. In turn, the Internet Service Providers, as unregulated information service providers, will be able to package the DSL service with their Internet service to offer affordable, high-speed access to the Internet to residential and business consumers. As a result, consumers will ultimately benefit through lower prices and greater and more expeditious access to innovative, diverse broadband applications by multiple providers of advanced services. II. Background 4. Section 251(c)(4) imposes on incumbent LECs the duty to offer for resale "any telecommunications service that the carrier provides at retail to subscribers who are not telecommunications carriers." In the Local Competition First Report and Order, the Commission emphasized that the resale obligation under 251(c)(4) extends to all such telecommunications services. The Commission concluded that "an incumbent LEC must establish a wholesale rate for each retail service that: (1) meets the statutory definition of a 'telecommunications service'; and (2) is provided at retail to subscribers who are not 'telecommunications carriers.'" The Commission concluded, however, that because exchange access services "are predominantly offered to, and taken by," telecommunications carriers, exchange access services are not subject to the provisions of section 251(c)(4). 5. In our Advanced Services Memorandum Opinion and Order we determined that by the plain terms of the Act, advanced services offered by incumbent LECs are telecommunications services. Accordingly, we concluded that, pursuant to section 251(c)(4), incumbent LECs have the obligation to offer for resale at wholesale rates all advanced services that they generally provide to subscribers who are not telecommunications carriers. We further concluded that incumbent LECs must offer advanced services for resale pursuant to section 251(c)(4), whether such services are deemed telephone exchange service or exchange access services. In the accompanying Notice of Proposed Rulemaking, we tentatively concluded that, to the extent advanced services are exchange access services, these services are fundamentally different from the exchange access services that the Commission excluded from the obligations of section 251(c)(4) in the Local Competition First Report and Order because advanced services will be offered predominantly to residential or business end-users or to Internet service providers and not to telecommunications carriers. Accordingly, in the Advanced Services NPRM, we sought comment on the applicability of section 251(c)(4) to advanced services to the extent that such services are exchange access services. III. Discussion 6. Incumbent LECs are marketing and providing DSL services in two distinct ways: (1) directly to residential and business end-users; and (2) to Internet Service Providers who package it as part of a high-speed Internet service. Some incumbent LECs have filed tariffs with the Commission offering single lines of DSL service to end-user customers. Incumbent LEC advertising for these services makes clear that these single line DSL offerings are designed for and offered to the ultimate end-user because the incumbent LEC will be performing functions such as marketing, billing, and customer care for the end-user. 7. Incumbent LECs are also entering into arrangements directly with Internet Service Providers, such as America Online (AOL) and Prodigy, pursuant to which the Internet Service Providers purchase large volumes of DSL lines at various discounts based on the number of lines purchased and the duration of the plan. For example, Bell Atlantic recently filed a transmittal with the Commission revising its ADSL tariffs to include volume and term discount plans. Pursuant to the Bell Atlantic tariff, some Internet Service Providers, such as AOL, are purchasing the DSL service, combining the service with their Internet service, and offering the combined high-speed Internet service directly to end-user subscribers. The tariff requires the entities obtaining the bulk DSL services, whether Internet Service Providers or carriers, to perform certain functions with respect to the DSL service supplied to them, including provisioning all customer premises equipment (CPE) and wiring, providing customer service, and marketing, billing, ordering, and repair. 8. As discussed below, based on our examination of the statutory language, the Act's purpose, and the specific facts before us, we conclude that advanced services sold to residential and business end-users are subject to the section 251(c)(4) discounted resale obligation, without regard to their classification as telephone exchange service or exchange access service. Moreover, we conclude that advanced services sold to Internet Service Providers under the volume and term discount plans described above are inherently and substantially different from advanced services made available directly to business and residential end-users, and as such, are not retail services and are not subject to the discounted resale obligations of section 251(c)(4). 9. Section 251(c)(4) imposes on incumbent LECs the duty to offer for resale at wholesale rates "any telecommunications service that the carrier provides at retail to subscribers who are not telecommunications carriers." The category of services subject to the provisions of section 251(c)(4) is determined, therefore, by whether those services are telecommunication services that an incumbent LEC provides (1) at retail and (2) to subscribers who are not telecommunications carriers. 10. The record reflects, and the parties agree, that advanced services are telecommunications services that predominantly are offered to residential and business end-users and to Internet Service Providers all subscribers that are not telecommunications carriers. Moreover, the parties do not dispute that advanced services made available directly to business and residential end-users are provided "at retail." The only real dispute in this proceeding is whether advanced services sold to Internet Service Providers pursuant to volume and term discount plans are subject to the discounted resale obligation under section 251(c)(4). Answering this question requires that we examine the language of this section, and in particular, determine the proper interpretation and application of the term "at retail." A. Absence of Plain Meaning 11. Although Congress used the term "at retail" to identify the types of transactions that are subject to a wholesale discount, it is not clear how the Commission should interpret the term. The Act does not define the term "at retail," and the legislative history on section 251(c)(4) provides only minimal clarification of Congress' intentions with regard to the appropriate definition and application of the term. Although the legislative history suggests that the Commission should interpret section 251(c)(4) in such a way so as to create affordable resale opportunities in order to stimulate the development of local competition, while still allowing incumbents to recover their costs for providing these services, there is no indication in the legislative history that Congress considered how "at retail" should be construed in the context of the sale of data services to Internet Service Providers as an input component to their information service offerings to the ultimate end-user. 12. We agree with AOL that given the recent emergence of DSL technology to provide high-speed Internet service, Congress likely did not anticipate the prospect of bulk DSL services designed primarily for Internet Service Providers and others to be used in conjunction with information services offered to ultimate end-user customers. Because the meaning of the term "at retail" is not clear and unambiguous from the language of the act, using the traditional tools of statutory construction, we look to the ordinary and common meaning of the term "at retail" and to the overall purpose of the Act, and sections 251 and 706 in particular, to determine a reasonable interpretation in this context. B. Ordinary Meaning of "At Retail" 1. Sale to End Users 13. Although the parties generally agree that the Commission should adopt the common and ordinary definition of the term "at retail," they disagree upon what constitutes that ordinary meaning. Webster's Unabridged Dictionary defines the term "retail" as "the sale of commodities, goods, articles, etc. individually or in small quantities or parcels directly to the consumer." Similarly, Black's Law Dictionary defines retail as "[a] sale for final consumption in contrast to a sale for further sale or processing (i.e., wholesale) . . . to the ultimate consumer." Based on these definitions, we agree with commenters that retail transactions necessarily involve direct sales of a product or service to the ultimate consumer for her own personal use or consumption. 14. Therefore, whether the buyer uses the purchased DSL service to create a combined product, such as an information service, to be sold to an ultimate end-user or instead consumes the product itself is directly relevant to our analysis of the transaction. For that reason, we carefully analyze the nature of the sale to determine whether or not the service is provided to a particular group of customers "at retail." We disagree with TRA and NAS that the fact that some incumbents are making DSL services directly available to businesses and residential end-users ends our inquiry and requires a finding that all DSL services, whether sold to business and residential end-users directly or sold to Internet Service Providers, are retail services. We do not find persuasive TRA's argument that Internet Service Providers are the ultimate consumers who are using or consuming the DSL services. An Internet Service Provider is purchasing the DSL service for the sole purpose of combining the telecommunications service with its own information service and offering a new retail service, i.e., high-speed Internet service, to the ultimate end-user. In this process, the Internet Service Provider adds value to the bulk DSL telecommunications service by dividing that service for individual consumer use and adding the Internet service, thus enabling the Internet Service Provider to offer and sell the newly created information service to the ultimate consumer: the residential or business subscriber. For these reasons, the Internet Service Provider is not the ultimate end-user. 2. Nature of Bulk Services 15. Further, the DSL services that incumbents are offering to Internet Service Providers specifically contemplate that the Internet Service Provider will be the entity providing to the ultimate end-user many services typically associated with retail sales, thus reinforcing our conclusion that the bulk DSL services are not retail services offered to the ultimate end-users. Bell Atlantic's volume and term discount plan tariff illustrates this point. Pursuant to Bell Atlantic's tariff, the purchasing Internet Service Provider must provision all CPE and wiring to its end-users, provide customer service directly to the end-users, and assume sole responsibility for marketing, ordering, installation, maintenance, repair, billing and collections vis-a-vis the end-user subscriber. Any Internet Service Provider that purchases a bulk DSL service must itself, rather than the incumbent, provide these typical retail services to the ultimate consumer. These facts underscore that bulk DSL services sold to Internet Service Providers are markedly different from the retail DSL services designed for individual end-user consumption. 16. In contrast, some incumbent LECs are selling single lines of DSL service directly to residential and business end-users. Parties do not dispute that these customers are the ultimate end-users of the DSL service. These customers buy the DSL service to meet their own internal telecommunications needs. C . Statutory Purposes and Context 17. Our interpretation of the term "at retail" to mean a sale to an ultimate consumer is consistent with our previous determination that section 251(c)(4) should apply only to services targeted to end-user subscribers, consistent with Congress's intent. As stated previously, in the Local Competition Order, the Commission recognized that although exchange access services may be purchased at times by end-users, such services are designed for, and sold to, interexchange carriers as an input component to the interexchange carriers' own retail services. The Commission reasoned that Congress intended section 251(c)(4) to apply to services targeted to end-user subscribers, because only those services would involve an appreciable level of avoided costs that could be used to generate a wholesale rate. The Commission concluded that such services are not subject to section 251(c)(4) given that LECs would not avoid any "retail" costs when offering these services at "wholesale" rates to those same interexchange carriers. Similarly, here the DSL services are designed for and sold to Internet Service Providers as an input component to the Internet Service Providers' retail high-speed Internet service. DSL services sold to Internet Service Providers are not targeted to end-user subscribers, but instead are targeted to Internet Service Providers that will combine a regulated telecommunications service with an enhancement, Internet service, and offer the resulting service, an unregulated information service, to the ultimate end-user. As stated above, in offering this information service, the Internet Service Provider will take on the consumer-oriented tasks of marketing, billing, and collections to the ultimate consumer and accepting repair requests directly from the end-user. Incumbents would not avoid any appreciable level of retail costs associated with providing these typical retail functions for the ultimate end-user when offering these bulk services to the Internet Service Providers. It is reasonable to conclude, therefore, that such services do not fit within the type of transaction Congress intended to include under the discounted resale obligation in section 251(c)(4). 18. By interpreting "at retail" in the manner described above, we give it a meaning consistent with the primary objective of section 251: opening the local exchange market to competition in all services to ensure that consumers reap the benefits of broad-based and long- lasting competition. In particular, section 251 requires all incumbent LECs to provide nondiscriminatory access to their network facilities, thereby allowing competing carriers to enter the local exchange and exchange access markets by purchasing parts of the incumbent's network or by reselling the incumbent's services at wholesale rates. Section 706 sets forth the complementary goal of facilitating investment and deployment of innovative technologies, specifically, those that provide advanced telecommunications capabilities, to all consumers. Thus, in giving meaning to the term "at retail" in the context of the sale of advanced services to residential and business end-users and to Internet Service Providers, we focus on the effect our determination will have on the deployment of advanced services in a competitive, broad-based, and expeditious manner. We conclude, therefore, that the interpretation and application of the term "at retail" set out above best promotes the pro-competitive and innovation-enhancing purposes of the Act. IV. Conclusion 19. Based on the record before us and the fact specific evaluation set out above, we conclude that while an incumbent LEC DSL offering to residential and business end-users is clearly a retail offering designed for and sold to the ultimate end-user, an incumbent LEC offering of DSL services to Internet Service Providers as an input component to the Internet Service Provider's high-speed Internet service offering is not a retail offering. Accordingly, we find that DSL services designed for and sold to residential and business end-users are subject to the discounted resale obligations of section 251(c)(4). We conclude, however, that section 251(c)(4) does not apply where the incumbent LEC offers DSL services as an input component to Internet Service Providers who combine the DSL service with their own Internet service. 20. We are confident that our findings reinforce the resale requirement of the Act by ensuring that resellers are able to acquire advanced services sold by incumbent LECs to residential and business end-users at wholesale rates, thus ensuring that competitive carriers are able to enter the advanced services market by providing to consumers the same quality service offerings provided by incumbent LECs. Moreover, we expect that our conclusions will stimulate the development and deployment of broadband services to residential markets in furtherance of the Commission's mandate to encourage the deployment of advanced telecommunications capability to all Americans. We believe that our conclusions will encourage incumbents to offer advanced services to Internet Service Providers at the lowest possible price. In turn, the Internet Service Providers, as unregulated information service providers, will be able to package the DSL service with their Internet service to offer affordable, high-speed access to the Internet to residential and business consumers. As a result, consumers will ultimately benefit through lower prices and greater and more expeditious access to innovative, diverse broadband applications by multiple providers of advanced services. We note that our conclusions herein do not change the regulatory status of the Internet Service Provider, which we have previously concluded to be an information service provider rather than a telecommunications carrier. We believe that maintaining the non- carrier status of Internet Service Providers, in this instance, benefits the public interest. 21. Moreover, we agree with NTIA that although bulk DSL services sold to Internet Service Providers are not retail services subject to section 251(c)(4), these services are telecommunications services, and as such, incumbent LECs must continue to comply with their basic common carrier obligations with respect to these services. These obligations include: providing such DSL services upon reasonable request; on just, reasonable, and nondiscriminatory terms; and in accordance with all applicable tariffing requirements. 22. Based on the foregoing, we clarify the Commission's decision regarding the scope of section 251(c)(4) set forth in the Local Competition First Report and Order. We affirm that the type of exchange access services predominantly offered to interexchange carriers are not subject to the discounted resale obligations of section 251(c)(4). In addition, we amend our rules to clarify that advanced services sold to Internet Service Providers as an input component to the Internet Service Providers' own retail Internet service offering are not subject to the discounted resale obligations of section 251(c)(4). We also amend our rules to clarify that, notwithstanding the fact that advanced services sold to Internet Service Providers are excluded from the discounted resale obligations of section 251(c)(4), advanced telecommunication services sold directly to residential and business end-users are not exempt from these obligations, even though such services may be classified as exchange access services. V. Final Regulatory Flexibility Act Analysis 23. As required by the Regulatory Flexibility Act, see 5 U.S.C.  604, the Commission has prepared a Final Regulatory Flexibility Analysis (FRFA) of the impact on small entities of the conclusions in this order. The FRFA is set forth in Appendix C. VI. Ordering Clauses 24. Accordingly, IT IS ORDERED that, pursuant to sections 1-4, 10, 201, 202, 251- 254, 256, 271, and 303(r) of the Communications Act of 1934, as amended, 47 U.S.C.  151- 154, 160, 201, 202, 251-254, 256, 271, and 303(r), the SECOND REPORT AND ORDER is hereby ADOPTED. The requirements adopted in this Order shall be effective 30 days after publication of a summary thereof in the Federal Register. 25. IT IS FURTHER ORDERED that the Commission's Office of Public Affairs, Reference Operations Division, SHALL SEND a copy of this SECOND REPORT AND ORDER, including the Final Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business Administration. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary APPENDIX A Advanced Telecommunications Services CC Docket No. 98-147 Comments September 25, 1998 1. ADC Telecommunications, Inc. 2. Ad Hoc Telecommunications Users Committee 3. Alliance for Public Technology 4. Allegiance Telecom, Inc. 5. America Online, Inc. 6. America's Carriers Telecommunications Association (ACTA) 7. Ameritech 8. Association for Local Telecommunications Services (ALTS) 9. AT&T Corp. 10. Bell Atlantic 11. BellSouth Corporation 12. Cable & Wireless, Inc. 13. Cablevision Lightpath, Inc. 14. Central Texas Telephone Cooperative, Inc. 15. Cincinnati Bell Telephone Company 16. Coalition of Utah Independent Internet Service Providers 17. Commercial Internet Exchange Association 18. Communications Workers of America 19. Competition Policy Institute 20. Competitive Telecommunications Association (CompTel) 21. Computer & Communications Industry Association 22. Consumer Federation of America 23. Copper Mountain Networks, Inc. 24. Cottonwood Communications 25. Covad Communications Company 26. CTSI, Inc. 27. e.spire Communications, Inc. 28. Federal Trade Commission 29. First Regional TeleCOM, LLC and FirstWorld Communications, Inc. 30. Florida Digital Network, Inc. 31. Florida Public Service Commission 32. General Services Administration 33. GST Telecom Inc. 34. GTE Service Corporation 35. GVNW Inc. 36. Hyperion Telecommunications, Inc. 37. ICG Telecom Group, Inc. 38. Illinois Commerce Commission 39. Indiana Utility Regulatory Commission and Staff of Public Service Commission of Wisconsin 40. Information Technology Association of America 41. Intermedia Communications Inc. 42. Internet Access Coalition 43. Internet Service Providers' Consortium 44. Keep America Connected, United Homeowners Association, Alpha One, American Council on Education, National Braille Press, National Association of Commissions for Women, the National Trust for the Development of African American Men, National Association for College and University Business Officers, Latin American Women and Supporters, Harlem Consumer Education Council, National Latino Telecommunications Task Force, Northern Virginia Resource Center for the Deaf and Hard of Hearing, MaineCITE Coordinating Committee, Florida Association for the Deaf, American Telemedicine Association, World Institute on Disability, The Massachusetts Assistive Technology Partnership, and National Association of Development Organizations 45. Kiesling Consulting LLC 46. KMC Telecom, Inc. 47. Level 3 Communications, Inc. 48. MachOne Communications, Inc. 49. McLeodUSA Telecommunications Services, Inc. 50. MCI WorldCom, Inc. 51. MGC Communications, Inc. 52. Mindspring Enterprises, Inc. 53. Minnesota Department of Public Service 54. Moultrie Independent Telephone Company 55. National Rural Telecom Association and the Organization for the Promotion and Advancement of Small Telephone Companies (NRTA/OPASTCO) 56. National Telephone Cooperative Association 57. Network Access Solutions, Inc. 58. Network Plus, Inc. 59. New Networks Institute (Bruce Kushnick) 60. New World Paradigm, Ltd. 61. New York Department of Public Service 62. NEXTLINK Communications, Inc. 63. Northern Telecom, Inc. 64. Northpoint Communications Inc. 65. OpTel, Inc. 66. Paradyne Corporation 67. Paging and Messaging Alliance of the Personal Communications Industry Association 68. Paging Network, Inc. (PageNet) 69. People of the State of California and PUC of California 70. PSINet, Inc. 71. Public Utility Commission of Texas 72. Qwest Communications Corporation 73. RCN Telecom Services, Inc. 74. Rhythms NetConnections, Inc. 75. Rural Telecommunications Group 76. SBC Communications Inc. 77. Sprint Corporation 78. Supra Telecommunications and Information Systems, Inc. 79. Tandy Corporation 80. Technology Entrepreneurs Coalition 81. TCA, Inc. 82. Telecommunications Resellers Association 83. Telehub Network Services Corporation 84. Time Warner Telecom 85. Transwire Communications, Inc. 86. United States Small Business Association 87. United States Telephone Association 88. UTC 89. U S WEST Communications, Inc. 90. US Xchange, LLC 91. Virtual Hipster (Shad Nygren) 92. Warner, Jim 93. Washington Association of Internet Service Providers 94. Westel, Inc. 95. Williams Communications, Inc. 96. xDSL Networks, Inc. Reply Comments -- October 16, 1998 1. Allegiance Telecom, Inc. 2. ALLTEL Communications Services Corporation 3. Ameritech 4. Association for Local Telecommunications Services (ALTS) 5. AT&T Corp. 6. Aware, Inc. 7. Bell Atlantic 8. BellSouth Corporation 9. Coalition of Utah Independent Internet Service Providers 10. Commercial Internet Exchange Association 11. Consumer Federation of America 12. Covad Communications Company 13. CTSI, Inc. 14. DSL Access Telecommunications Alliance 15. e.spire Communications, Inc. 16. Excel Telecommunications, Inc. 17. Florida Digital Network, Inc. 18. General Services Administration 19. GST Telecom Inc. 20. GTE Service Corporation 21. Hyperion Telecommunications, Inc. 22. Intermedia Communications Inc. 23. Keep America Connected, United Homeowners Association, Harlem Consumer Education Council, National Latino Telecommunications Task Force, American Telemedicine Association, National Association of Development Organizations, Alpha One, and The World Institute on Disability 24. KMC Telecom, Inc. 25. Level 3 Communications, Inc. 26. MachOne Communications, Inc. 27. MCI WorldCom, Inc. 28. MGC Communications, Inc. 29. Mindspring Enterprises, Inc. 30. Moultrie Independent Telephone Company 31. National Cable Television Association 32. National Rural Telecom Association and the Organization for the Promotion and Advancement of Small Telecommunications Companies 33. National Telephone Cooperative Association 34. Network Access Solutions, Inc. 35. Network Plus, Inc. 36. New World Paradigm, Ltd. 37. Next Level Communications 38. NEXTLINK Communications, Inc. 39. Northpoint Communications Inc. 40. Qwest Communications Corporation 41. RCN Telecom Services, Inc. 42. Rural Telecommunications Group 43. SBC Communications Inc. 44. Sprint Corporation 45. Telecommunications Resellers Association 46. Telehub Network Services Corporation 47. Teligent, Inc. and Net2000 Group, Inc. 48. Time Warner Telecom 49. Transwire Communications, Inc. 50. United States Small Business Association 51. United States Telephone Association 52. Universal Service Alliance 53. U S WEST Communications, Inc. 54. Verio Inc. 55. Virgin Islands Telephone Corporation APPENDIX B - Final Rules AMENDMENTS TO THE CODE OF FEDERAL REGULATIONS PART 51 - INTERCONNECTION * * * * Subpart G - Resale  51.605 Additional obligations of incumbent local exchange carriers 2. Section 51.605 of Title 47 of the Code of Federal Regulations (C.F.R.) is amended by deleting paragraph (b) and by adding the following new paragraphs after paragraph (a): (b), (c), (d), and (e) to read as follows: * * * * (b) For purposes of this subpart, exchange access services, as defined in section 3 of the Act, shall not be considered to be telecommunications services that incumbent LECs must make available for resale at wholesale rates to requesting telecommunications carriers. (c) For purposes of this subpart, advanced telecommunications services sold to Internet Service Providers as an input component to the Internet Service Providers' retail Internet service offering shall not be considered to be telecommunications services offered on a retail basis that incumbent LECs must make available for resale at wholesale rates to requesting telecommunications carriers. (d) Notwithstanding paragraph (b) of this section, advanced telecommunications services that are classified as exchange access services are subject to the obligations of  51.605(a) of this part if such services are sold on a retail basis to residential and business end-users that are not telecommunications carriers. (e) Except as provided in  51.613, an incumbent LEC shall not impose restrictions on the resale by a requesting carrier of telecommunications services offered by the incumbent LEC.  51.607 Wholesale pricing standard. 3. Section 51.607 of Title 47 of the Code of Federal Regulations (C.F.R.) is amended by deleting paragraph (b) and striking "(a)" before the beginning of the remaining text. APPENDIX C -- FINAL REGULATORY FLEXIBITY ANALYSIS 1. As required by the Regulatory Flexibility Act (RFA), an Initial Regulatory Flexibility Analysis (IRFA) was incorporated in the Advanced Services Order and NPRM. The Commission sought written public comment on the proposals in the Advanced Services Order and NPRM, including comment on the IRFA. [The comments received are discussed below.] This present Final Regulatory Flexibility Analysis (FRFA) conforms to the RFA. I. Need for and Objectives of this First Report and Order and the Rules Adopted Herein. 2. In order to encourage competition among carriers to develop and deploy new advanced services, it is critical that the marketplace for these services be conducive to investment, innovation, and meeting the needs of consumers. In this Second Report and Order, we seek to ensure that all carriers have economic incentives to innovate and invest in new technologies. 3. We amend our rules to clarify that advanced services sold to Internet Service Providers as an input component to the Internet Service Providers' own retail Internet service offering are not subject to the discounted resale obligations of section 251(c)(4). We also amend our rules to clarify that, notwithstanding the fact that advanced services sold to Internet Service Providers are excluded from the residential resale obligations of section 251(c)(4), advanced telecommunication services sold directly to residential and business end-users are not exempt from these obligations, even though such services may be classified as exchange access services. II. Summary of Significant Issues Raised by Public Comments in Response to the IRFA. 4. In the IRFA, we stated that any rule changes would impose minimum burdens on small entities. We indicated that the IRFA solicited comment on alternatives to our proposed rules that would minimize the impact they may have on small entities. The comments we received did not respond directly to the issue addressed in this Order. III. Description and Estimates of the Number of Small Entities Affected by the First Report and Order. 5. The RFA generally defines "small entity" as having the same meaning as the term "small business," "small organization," and "small governmental jurisdiction." In addition, the term "small business" has the same meaning as the term "small business concern" under the Small Business Act, unless the Commission has developed one or more definitions that are appropriate to its activities. Under the Small Business Act, a "small business concern" is one that: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) meets any additional criteria established by the Small Business Administration (SBA). The SBA has defined a small business for Standard Industrial Classification (SIC) categories 4812 (Radiotelephone Communications) and 4813 (Telephone Communications, Except Radiotelephone) to be small entities when they have no more than 1,500 employees. We first discuss the number of small telephone companies falling within these SIC categories, then attempt to refine further those estimates to correspond with the categories of telephone companies that are commonly used under our rules. 6. The most reliable source of information regarding the total numbers of common carrier and related providers nationwide, as well as the numbers of commercial wireless entities, appears to be data the Commission publishes annually in its Carrier Locator report, derived from filings made in connection with the Telecommunications Relay Service (TRS). According to data in the most recent report, there are 3,604 interstate carriers. These carriers include, inter alia, local exchange carriers, wireline carriers and service providers, interexchange carriers, competitive access providers, operator service providers, pay telephone operators, providers of telephone toll service, providers of telephone exchange service, and resellers. 7. We have included small incumbent LECs in this present RFA analysis. As noted above, a "small business" under the RFA is one that, inter alia, meets the pertinent small business size standard (e.g., a telephone communications business having 1,500 or fewer employees), and "is not dominant in its field of operation." The SBA's Office of Advocacy contends that, for RFA purposes, small incumbent LECs are not dominant in their field of operation because any such dominance is not "national" in scope. We have therefore included small incumbent LECs in this RFA analysis, although we emphasize that this RFA action has no effect on FCC analyses and determinations in other, non-RFA contexts. 8. Total Number of Telephone Companies Affected. The United States Bureau of the Census ("the Census Bureau") reports that, at the end of 1992, there were 3,497 firms engaged in providing telephone services, as defined therein, for at least one year. This number contains a variety of different categories of carriers, including local exchange carriers, interexchange carriers, competitive access providers, cellular carriers, mobile service carriers, operator service providers, pay telephone operators, PCS providers, covered SMR providers, and resellers. It seems certain that some of those 3,497 telephone service firms may not qualify as small entities or small incumbent LECs because they are not "independently owned and operated." For example, a PCS provider that is affiliated with an interexchange carrier having more than 1,500 employees would not meet the definition of a small business. It seems reasonable to conclude, therefore, that fewer than 3,497 telephone service firms are small entity telephone service firms or small incumbent LECs that may be affected by the decisions and rules proposed in the Notice. 9. Wireline Carriers and Service Providers. SBA has developed a definition of small entities for telephone communications companies other than radiotelephone companies. The Census Bureau reports that, there were 2,321 such telephone companies in operation for at least one year at the end of 1992. According to SBA's definition, a small business telephone company other than a radiotelephone company is one employing no more than 1,500 persons. All but 26 of the 2,321 non-radiotelephone companies listed by the Census Bureau were reported to have fewer than 1,000 employees. Thus, even if all 26 of those companies had more than 1,500 employees, there would still be 2,295 non-radiotelephone companies that might qualify as small entities or small incumbent LECs. Although it seems certain that some of these carriers are not independently owned and operated, we are unable at this time to estimate with greater precision the number of wireline carriers and service providers that would qualify as small business concerns under SBA's definition. Consequently, we estimate that there are fewer than 2,295 small entity telephone communications companies other than radiotelephone companies that may be affected by the decisions and rules proposed in the Notice. 10. Local Exchange Carriers, Resellers and Internet Service Providers. Neither the Commission nor SBA has developed a definition of small local exchange carriers (LECs), competitive local exchange carriers (CLECs), resellers, or Internet Service Providers (ISPs). The closest applicable definition for these carrier-types under SBA rules is for telephone communications companies other than radiotelephone (wireless) companies. The most reliable source of information regarding the number of these carriers nationwide of which we are aware appears to be the data that we collect annually in connection with the Telecommunications Relay Service (TRS). According to our most recent data, there are 1,410 LECs, 129 CLECs, and 351 resellers. 11. Although it seems certain that some of these carriers are not independently owned and operated, or have more than 1,500 employees, we are unable at this time to estimate with greater precision the number of these carriers that would qualify as small business concerns under SBA's definition. Consequently, we estimate that there are fewer than 1,410 small entity LECs or small incumbent LECs, 129 CLECs, and 351 resellers that may be affected by the decisions and rules proposed in the Notice. 12. Internet Service Providers. SBA has developed a small business size standard for "Information Retrieval Services," SIC code 7375. This category includes establishments primarily engaged in providing online database information retrieval services, on a contract or fee basis. According to SBA regulations, a small business under this category is one having annual receipts of $18 million or less. Based on firm size data provided by the Bureau of the Census, 3,123 firms are small under SBA's $18 million size standard for SIC code 7375. Although some of these Internet Service Providers (ISPs) might not be independently owned and operated, we are unable at this time to estimate with greater precision the number of ISPs that would qualify as small business concerns under SBA's definition. Consequently, we estimate that there are 3,123 or fewer small entity ISPs that may be affected by the decisions and rules of the present action. IV. Summary of Projected Reporting, Recordkeeping, and Other Compliance Requirements. 13. We require incumbent LECs to make available at a wholesale discount advanced services sold at retail to residential and business end-users, without regard to their classification as telephone exchange service or exchange access service. We determine that complying with these rules may require use of operational, accounting, billing, and legal skills. We believe, however, that incumbent LECs will already have these skills. 14. The burden of compliance with this requirement is minimal because, pursuant to section 251(c), incumbent LECs already must comply with state mandated wholesale discount requirements for all telecommunications services they provide at retail to subscribers who are not telecommunications carriers. V. Steps Taken to Minimize Significant Economic Impact on Small Entities and Small Incumbent LECs, and Alternatives Considered. 15. Section 251(c)(4) imposes on all incumbent LECs, including small incumbent LECs, the duty to offer for resale at wholesale rates "any telecommunications service that the carrier provides at retail to subscribers who are not telecommunications carriers." The Commission's conclusions in this order clarifies this statutory obligation. The order imposes no additional obligations on incumbent LECs. VI. Report to Congress 16. The Commission will send a copy of the SECOND REPORT AND ORDER, including this FRFA, in a report to be sent to Congress pursuant to the Small Business Regulatory Enforcement Fairness Act of 1996, see 5 U.S.C.  801(a)(1)(A). In addition, the Commission will send a copy of the SECOND REPORT AND ORDER, including FRFA, to the Chief Counsel for Advocacy of the Small Business Administration. A copy of the SECOND REPORT AND ORDER and FRFA (or summaries thereof) will also be published in the Federal Register. See 5 U.S.C.  604(b).