Office of Advocacy

May 27, 1999

William E. Kennard
Chairman
Federal Communications Commission
445 12th St., S.W.
Room 8-B201
Washington, DC 20554

• RE: Initial and Final Regulatory Flexibility Analyses for In re Deployment of Wireline Services Offering Advanced Telecommunications Capability (CC Dkt. No. 98-147); In re Inter Carrier Compensation for ISP-Bound Traffic (CC Dkt. 99-68); In re Defining Primary Lines (CC Dkt. 97-181).(PDF File)

Dear Chairman Kennard:

As part of its statutory duty to monitor and report on the FCC’s compliance with the Regulatory Flexibility Act of 1980 ("RFA"), as amended by the Small Business Regulatory enforcement Fairness Act of 1996 ("SBREFA")(1) the Office of Advocacy, U.S. Small Business Administration ("Advocacy") has reviewed the following actions by the Federal Communications Commission ("FCC" or "Commission"):

• In re Deployment of Wireline Services Offering Advanced Telecommunications Capability, First Report and Order and Further Notice of Proposed Rulemaking, CC Dkt. No. 98-147, FCC 99-48, (rel. March 31, 1999)("Broadband Order");
• In re Defining Primary Lines, Report and Order and Further Notice of Proposed Rulemaking, CC Dkt. 97-181, FCC 99-28 (rel. March 10, 1999)("Primary Lines Order"); and
• In re Inter-Carrier Compensation for ISP-Bound Traffic, Notice of Proposed Rulemaking, CC Dkt. 99-68, FCC 99-38 (rel. Feb. 26, 1999)("Reciprocal Compensation Order").

In each of these actions, the FCC has stated that it will exclude small incumbent local exchange carriers ("ILECs") from the definition of "small entity" and "small business concern" under the RFA, and has justified its conclusion that an ILEC cannot be a small entity because it is dominant in its field of operation.(2) Advocacy does not agree that small ILECs are dominant in their fields of operation, and asserts that the Commission’s refusal to recognize small ILECs as small businesses is incorrect and contrary to the spirit and the letter of the RFA.

For the purposes of the RFA, 5 U.S.C. § 601(3) adopted the following definition for small businesses:

• the term "small business" has the same meaning as the term "small business concern’’ under Section 3 of the Small Business Act, unless an agency, after consultation with the Office of Advocacy of the Small Business Administration and after opportunity for public comment, establishes one or more definitions of such term which are appropriate to the activities of the agency and publishes such definition(s) in the Federal Register.(3)

Section 3 of the Small Business Act states that a small business is one that is independently owned and operated and not dominate in its field of operation.(4) In addition, Section 3 allows the Administrator of the Small Business Administration ("SBA") to specify detailed definitions to determine small business concerns.(5)

Pursuant to that authority, the SBA implementing regulations for the Small Business Act clearly state that dominance in a "field of operation" is determined on a national basis.(6) Furthermore, the SBA’s Office of Hearings and Appeals has upheld that dominance is determined on a national basis.(7) Unless the Commission has complied with the requirements of Section 601(3) of the RFA and consulted with Advocacy and allowed public comment on a changed definition, it must follow the definition as laid out by the SBA and consider dominance on a national basis.

Failure to use the proper size standard in the RFA analysis is reversible error. In Northwest Mining Ass’n v. Babbit, the D.C District Court remanded a rule which utilized a small business size standard that was not in compliance with the SBA’s size standards.(8) Specifically, the court stated that the agency’s reasons for using another size standard were:

• unconvincing in light of the clearly mandated procedure of the RFA. The definitions section of the RFA uses phrases such as "‘small entity’ shall have the same meaning. . ." . . . Words such as these do not leave room for alternate interpretations by the agency.(9)

Small ILECs are not dominant in the national telecommunications industry and qualify as small entities. Treating small ILECs as small entities is in keeping with the spirit of the RFA and the Telecommunications Act of 1996. Compliance burdens such as additional recordkeeping requirements that are inconsequential to the large ILECs can cripple a smaller ILEC. Moreover, small ILECs are not likely to have the market share or market power of the Regional Bell Operating Companies and GTE. Regulations that are necessary to prevent a large ILEC from exerting undue influence on the market are not necessary for a small ILEC. Regulatory flexibility was implemented by Congress to combat this sort of uneven regulatory burden and to encourage agencies to implement regulations that address only those entities that are the source of the problem.

Advocacy requests that the Commission amend its regulatory flexibility analyses in the above-listed actions to comply with the small business definition as defined by the Small Business Administration. Furthermore, Advocacy asserts that the Commission must include small ILECs within the small business definition in future analyses to comply with the requirements of the RFA.

Sincerely,

Jere W. Glover
Chief Counsel
Office of Advocacy

Eric E. Menge
Assistant Chief Counsel
for Telecommunications

ENDNOTES

1. Pub. L. No. 96-354, 94 Stat. 1164 (1980) (codified at 5 U.S.C. § 601 et seq.) amended by Subtitle II of the Contract with America Advancement Act, Pub. L. No. 104-121, 110 Stat. 857 (1996). 5 U.S.C. § 612(a).

2. Broadband Order, Appendix C, para. 4; Primary Lines Order , paras. 39, 52; Reciprocal Compensation Order, para. 41.

3. 5 U.S.C. § 601(3).

4. 15 U.S.C. § 632 (a).

5. 15 U.S.C. § 632 (b).

6. 13 C.F.R. § 121.102(b).

7. Size Appeal of Joan of Arc Electric Supply Co., No. 4237 (1997); Size Appeal of George E. Hill, No. 4222 (1996); Size Appeal of Control Laser – Orlando, Inc. No. 511 (1971).

8. 5 F. Supp 2d 9 (D.D.C. 1998).

9. Id.