                 IN THE COURT OF APPEALS OF TENNESSEE
                             AT NASHVILLE
                                  November 8, 2000 Session

  BELLSOUTH BSE, INC. v. TENNESSEE REGULATORY AUTHORITY

                                Tennessee Regulatory Authority
                                         No. 98-00879



                  No. M2000-00868-COA-R12-CV - Filed February 18, 2003


BellSouth BSE, Inc. appeals from an order of the Tennessee Regulatory Authority denying BSE’s
application for certification as a competing local exchange company in those areas where BSE’s
affiliate, BellSouth Telecommunications, is the incumbent provider of local services. Because the
TRA denied the petition on the basis that such certification may be inconsistent with the goal of
fostering competition and could be potentially adverse to competition, as opposed to establishing
conditions or requirements designed to ensure that anticompetitive practices did not occur, we vacate
the order as beyond the agency’s statutory authority.

 Tenn. R. App. P. 12 Appeal as of Right; Judgment of the Tennessee Regulatory Authority
                                 Vacated and Remanded

PATRICIA J. COTTRELL, J., delivered the opinion of the court, in which BEN H. CANTRELL , P.J., M.S.,
and WILLIAM C. KOCH , JR., joined.

Guilford F. Thornton, Jr., Nashville, Tennessee, for the appellant, Bellsouth BSE, Inc.

Henry Walker, Nashville, Tennessee, for the appellees, MCI WorldCom, Southeastern Competitive
Carriers Association, Time Warner Communications of the South, L.P. and US LEC of Tennessee,
Inc.

J. Richard Collier, Jonathan N. Wike, Nashville, Tennessee, for the appellee, Tennessee Regulatory
Authority.

                                            OPINION

       Before the state legislature made significant changes in the law governing
telecommunications services in 1995, local telephone service was provided to consumers in a locality
by one company under a regulated monopoly system. The adoption of the Tennessee
Telecommunication Act, 1995 Tenn. Pub. Acts 408 (effective June 6, 1995), abolished monopolistic
control of local telephone service and opened that market to competition. It also changed the way
in which providers of such services, and the rates they charge, were regulated.

        As part of the implementation of local service competition, a company which was providing
basic local exchange telephone service, as defined by statute, prior to June 6, 1995, was designated
as the “incumbent local exchange telephone company,” or ILEC. Tenn. Code Ann. § 65-4-101(d).
New entrants into the market after June 6, 1995, were known as “competing telecommunications
service providers” or CLECs. Tenn. Code Ann. § 65-4-101(e). To become a CLEC, a provider is
required to be certificated pursuant to Tenn. Code Ann. § 65-4-201, which provides in pertinent part:

        After notice to the incumbent local exchange telephone company and other interested
        parties and following a hearing, the authority shall grant a certificate of convenience
        and necessity to a competing telecommunications service provider if after examining
        the evidence presented, the authority finds:

        (1) The applicant has demonstrated that it will adhere to all applicable authority
        policies, rules and orders; and

        (2) The applicant possesses sufficient managerial, financial and technical abilities to
        provide the applied for services.

Tenn. Code Ann. § 65-4-201(c).

        BellSouth BSE, Inc. applied for a certificate as a CLEC (First Application) to provide local
telephone services on a statewide basis. BellSouth BSE, Inc. is a wholly owned subsidiary of
BellSouth BSE Corporation which, in turn, is a wholly owned subsidiary of BellSouth Corporation.
BellSouth Telecommunications (“BST”), another wholly-owned subsidiary of BellSouth
Corporation, is the incumbent local exchange provider for portions of Tennessee. The Tennessee
Regulatory Authority (“TRA”) granted BellSouth BSE, Inc. (“BSE”) authority to provide local
services only in those territories where its affiliate, BST, was not the ILEC. The TRA concluded that
the potential for anticompetitive harm outweighed the benefits to consumers if BSE were permitted
to operate as a CLEC in those areas where its affiliate was providing local service as the ILEC.

        BSE, however, was invited to re-open the issue if at any time in the future it believed it could
“carry the public interest burden herein raised and alleviate the Agency’s concerns with regard to
Tenn. Code Ann. § 65-5-208(c). . . .” BellSouth BSE, Inc. did just that and sought expanded
authority to operate as a CLEC (Second Application). Competitors were allowed to intervene,1 and
a hearing was held. The TRA denied the petition. It is that denial which is the subject of this appeal.




        1
          The intervenors who are also ap pellees in this app eal are MCI W orldCom, Inc., Southeastern Competitive
Carriers Association, Time W arner Telecom of the Mid-South, L.P., and US LEC of Tennessee, Inc.

                                                       -2-
       BSE did not propose to offer any services that could not be offered by BST. BSE intended
to provide “any and all services that are or may be provided by a local exchange carrier.”

                                     I. The TRA’s Concerns

         In denying BSE’s application for a certificate of convenience and necessity to provide
expanded intrastate telecommunications services, the TRA recounted that the Second Application
proceedings were held to provide BSE the opportunity to alleviate the concerns which led to the
TRA’s order on the First Application. Those concerns are related to the potential for anticompetitive
behavior and the potential for BST to avoid controls imposed upon it because of its status as an
ILEC, as well as its status under federal law as a “Bell operating company,” through the use of an
affiliate. The TRA expressed several specific areas of concern, which can only be examined in the
context of the regulatory framework, both state and federal, for telecommunication services
providers.

        By enactment of the Telecommunications Act of 1996, Congress made fundamental changes
in local telephone markets by, among other things, prohibiting states from enforcing laws that
impede competition. In order to facilitate the transition from regulated monopolies to true
competition, the Act imposes upon the incumbent provider or ILEC, who formerly enjoyed the
monopoly, a number of duties intended to facilitate entry into the market by other, formerly
excluded, providers. AT & T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 371-72, 119 S. Ct. 721, 726-27
(1999). As more specifically explained:

       Until the passage of the 1996 Act, state utility commissions continued to regulate
       local telephone service as a natural monopoly. Commissions typically granted a
       single company, called a local exchange carrier (LEC), an exclusive franchise to
       provide telephone service in a designated area. Under this protection the LEC built
       a local network – made up of elements such as loops (wires), switches, and
       transmission facilities – that connects telephones in the local calling area to each
       other and to long distance carriers.

       The 1996 Act brought sweeping changes. It ended the monopolies that incumbent
       LECs held over local telephone service by preempting state laws that had protected
       the LECs from competition. See 47 U.S.C. § 253. Congress recognized, however,
       that removing the legal barriers to entry would not be enough, given current
       technology, to make local telephone markets competitive. In other words, it is
       economically impractical to duplicate the incumbent LEC’s local network
       infrastructure. To get around this problem, the Act allows potential competitors,
       called competing local exchange carriers (CLECs), to enter the local telephone
       market by using the incumbent LEC’s network or services in three ways. First, a
       CLEC may build its own network and “interconnect” with the network of an
       incumbent. See id. § 251(c)(2). Second, a CLEC may lease elements (loops,
       switches, etc.) of an incumbent LEC’s network “on an unbundled basis.” See id. §


                                                -3-
       251(c)(3). Third, a CLEC may buy an incumbent LEC’s retail services “at wholesale
       rates” and then resell those services to customers under its (the CLEC’s) brand. See
       id. § 251(c)(4).

GTE South, Inc. v. Morrison, 199 F.3d 733, 737 (4th Cir. 1999).

       This access is accomplished through an interconnection agreement between the ILEC and
a CLEC. In addition, an ILEC is required to provide access to its network elements and various
services and to provide dialing parity to competing providers on a nondiscriminatory basis. 47
U.S.C. §§ 251(c)(3) & 251(b)(3). The FCC has promulgated rules and policies implementing those
provisions “to require incumbent LECs to provide competition with access to the incumbent LECs’
networks sufficient to create a competitively neutral playing field for new entrants. . . .” In Re
Implementation of the Telecommunications Act of 1996, Third Report and Order in CC Docket No.
96-115, Second Order on Reconsideration of the Second Report and Order in CC Docket No. 96-98,
and Notice of Proposed Rulemaking in CC Docket No. 99-273, at ¶ 6 (rel. Sept. 9, 1999).

        Under state law, all providers are required to provide non-discriminatory interconnection to
their public networks under reasonable terms and conditions, and all are to be provided “desired
features, functions and services promptly, and on an unbundled and non-discriminatory basis from
all other telecommunications providers.” Tenn. Code Ann. § 65-4-124(a).

         At the state level, incumbent providers are also governed by specific provisions, again
designed to facilitate entry into the local telephone service market by competitors. For example,
rates to be charged by incumbent providers opting to be under a price regulation plan are subject to
a requirement that such rates be just and reasonable, defined as “affordable”, as determined by the
TRA. Tenn Code Ann. § 65-5-209(a). These rates are subject to limitations, including safeguards
to ensure universal service and nondiscrimination among customers. Tenn. Code Ann. § 65-5-
209(b).

        After the initial qualification of a price regulation plan, an ILEC’s ability to increase rates
is subject to limitations. Essentially, a price regulated ILEC can adjust rates for specific services
subject to an overall maximum annual adjustment to aggregate revenues for such services. Tenn.
Code Ann. § 65-5-209(e). However, rates for basic services cannot be increased for four (4) years
after implementation of the plan, and annual increases for basic services are thereafter limited to
annual rates of inflation. Tenn. Code Ann. § 65-5-209(f).

       ILECs not under a price regulation plan are subject to traditional rate regulation. ILECs have
unique, carrier-of-last-resort obligations and universal service obligations. Tenn. Code Ann. § 65-5-
207(c)(2) & (8). ILECs, upon request, are required to provide interconnection services to CLECs.
Tenn. Code Ann. § 65-5-209(d). None of these burdens apply to CLECs.

      Another requirement for ILECs which was the subject of argument herein and part of the
TRA’s reasoning is that found in Tenn. Code Ann. § 65-5-208(c), which provides:


                                                 -4-
         Effective January 1, 1996, an incumbent local exchange telephone company shall
         adhere to a price floor for its competitive services subject to such determination as
         the authority shall make pursuant to § 65-5-207.2 The price floor shall equal the
         incumbent local exchange telephone company’s tariffed rates for essential elements
         utilized by competing telecommunications service providers plus the total long-run
         incremental cost of the competitive elements of the service. When shown to be in
         the public interest, the authority shall exempt a service or group of services provided
         by an incumbent local exchange telephone company from the requirement of the
         price floor. The authority shall, as appropriate, also adopt other rules or issue
         orders to prohibit cross-subsidization, preferences to competitive services or
         affiliated entities, predatory pricing, price squeezing, price discrimination, tying
         arrangements or other anti-competitive practices.

(emphasis added).

        It is the highlighted language which provides the primary basis for the TRA’s denial of BSE’s
application for CLEC status in those areas where its affiliate is the incumbent provider. The TRA
expressed concerns that the relationship between BSE and BST fostered the potential for the
enumerated, or other, anticompetitive activities, as well as the opportunity for BST to avoid the
limitations placed on it as an ILEC. The six concerns, or issues for resolution, expressed by the TRA
were:

         1.        Whether there exists the potential for discriminatory treatment of other
                   CLECs or for preferential treatment of BSE by BellSouth when there are no
                   safeguards being offered to monitor affiliate transactions or performance;

         2.        Whether BellSouth seeks to avoid its ILEC obligations through BSE’s ability
                   to select BellSouth’s best customers and offer special deals that BellSouth
                   cannot offer due to statutory prohibitions;

         3.        Whether there exists the potential for the prohibited acts of price squeezing
                   and cross-subsidization;

         4.        Whether in the solicitation of BellSouth business customers by BSE, those
                   customers will continue to be offered the same services under the same
                   utility’s name, with the same personnel over the same local network as
                   employed by BellSouth;




         2
          Tenn. Code Ann. § 65-5 -207 authorizes the TR A to establish p olicies, rules, and orders req uiring all
telecommunications service providers to contribute to the support of universal service, which consists of residential basic
local exchan ge telephon e service at affordab le rates and carrier-of-last-resort obligations.

                                                           -5-
         5.       Whether BSE presented substantial and material evidence that it would
                  provide services to consumers that could not be offered by BellSouth; and

         6.       Whether it is in the public interest for a Regional Bell Operating Company
                  (“RBOC”) such as BellSouth, to have an affiliated CLEC operating within its
                  territory.

        The last issue involves BellSouth’s status as a RBOC, and that issue again requires some
background explanation. In 1974, the U.S. Department of Justice brought an antitrust action against
AT&T for monopolization of telecommunications services and equipment. United States v.
American Tel. and Tel. Co., 552 F. Supp. 131 (D.D.C. 1982), aff’d sub nom. Maryland v. United
States, 406 U.S. 1001, 103 S. Ct. 1240 (1983). That long and complex litigation resulted in a
settlement reflected in a consent decree. This consent decree required AT&T to divest itself of the
twenty or so Bell operating companies (“BOCs”) that provided local telephone service as
monopolies. Under the court-approved plan, these BOCs were spun off from AT&T and grouped
into seven regional holding companies, or RBOCs, who continued to provide local service as
regulated monopolies until the 1996 Telecommunications Act and/or similar legislation in various
states. See AT&T Corp. v. Federal Communications Comm’n, 220 F.3d 607, 611 (D.C. Cir. 2000).
Bell South is a RBOC. Id.; see also 47 U.S.C. § 153(4) (defining “Bell operating company” by
listing twenty companies by name, including South Central Bell Telephone Company, the
predecessor of BST). Although the Bell operating companies were allowed to retain their state-
regulated monopolies on local service, they were prohibited by the consent decree from entering
other parts of the telecommunications business, including long distance, equipment sales, and
specified other services. United States v. American Tel. and Tel. Co., 552 F. Supp. at 224.

         The Telecommunications Act of 1996 rescinded the consent decree. While a number of key
provisions apply to all incumbent local exchange carriers, such as the requirement that they offer
nondiscriminatory access and interconnection to local competitors, 47 U.S.C. § 251, the Act also
includes “Special Provisions Concerning Bell Operating Companies,” 47 U.S.C. §§ 271 to -276,
which apply only to the BOCs and their affiliates. Some of these provisions allow BOCs to enter
into formerly prohibited areas of the telecommunications market, but only under specifically
enumerated conditions. Of primary importance, § 271 establishes requirements that a BOC or its
affiliate must meet before it can provide long distance, or InterLATA, services. Those requirements
relate primarily to interconnection and include a competitive checklist insuring, among other things,
nondiscriminatory access to network elements and other facilities and services. 47 U.S.C. § 271(c).3

       BOCs and their affiliates are barred from manufacturing and selling equipment until they
have received authorization to provide interLATA services, which, of course, requires demonstrated

         3
           The Act further provides that the FCC cannot approve a BOC or BOC affiliate application to provide
interLATA services unless it finds that the applicant has met the requirements with respect to access and interconnection,
has fully implemented the competitive checklist, “the requested authorization will be carried out in accordance with the
requirements of section 272,” and the approval is consistent with the pu blic interest, convenience and necessity. 47
U.S.C. § 2 71(d)(3 ).

                                                           -6-
compliance with the nondiscriminatory access requirements and the competitive checklist. 47
U.S.C. § 273. That section includes additional strictures on such manufacturing activities. Section
276 includes nondiscrimination safeguards for provision of payphone services by a BOC and a
requirement that a BOC may not subsidize its payphone services directly or indirectly from its
telephone exchange service operations. In addition, BOCs may provide electronic publishing only
through a separate affiliate or through a joint venture operated according to specific requirements,
including structural separation. 47 U.S.C. § 274.4

       Most relevant to our analysis of the issues herein, because of the parties’ references to and
arguments about “Section 272 affiliates” is the requirement of 47 U.S.C. § 272, which the FCC has
described as follows:

         Section 272(a) provides that a BOC (including any affiliate) that is a LEC subject to
         the requirements of section 251(c) may provide certain services only through a
         separate affiliate. Under section 272, BOCs (or BOC affiliates) may engage in the
         following activities only through one or more affiliates that are separate from the
         incumbent LEC entity: (A) manufacturing activities; (B) interLATA
         telecommunications services that originate in-region; and (C) interLATA information
         services.

In the Matter of Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the
Communications Act of 1934, As Amended, CC Docket No. 96-149, First Report and Order, at ¶ 50
(rel. Dec. 24, 1996) (footnotes omitted).

         The statute establishes “structural and transactional requirements” for § 272 separate
affiliates, including independent operation, maintenance of separate books and records, totally
separate officers, directors and employees, and no credit arrangement whereby recourse may be had
against the assets of the BOC. 47 U.S.C. § 272(b)(1) - (4). In addition, the affiliate is required “to
conduct all transactions with the Bell operating company of which it is an affiliate on an arm’s length
basis with any such transactions reduced to writing and available for public inspection.” 47 U.S.C.
§ 272(b)(5). Nondiscrimination safeguards also exist. 47 U.S.C. § 272(c).

       It is this structural and operational separation between the BOC and its affiliate which has
been determined on the federal level to provide protection against anticompetitive practices. It
allows a BOC affiliate to provide some services that the BOC itself would be prohibited from
providing. This separation is a critical element in understanding the TRA’s position herein.




         4
          This required structural separation, o r line-of-business re striction, ha s been upheld in a bill of attainder and
first amendm ent challenge. BellS outh Corp. v. F.C.C., 144 F.3d 58, 6 1 (D .C. Cir. 199 8), cert. denied, Apr. 26, 1999.

                                                            -7-
                                                 II. ILEC Affiliation

       The TRA has previously granted certificates to over thirty competing local exchange carriers
to provide local services on a statewide basis. In addition, the TRA has granted certificates as
CLECs to two affiliates of ILECs, namely Citizens Telecommunications Company of Tennessee and
United Telephones-Southeast, Inc.5 BSE asserts that these prior approvals establish precedent which
the TRA must follow and require that BSE’s statewide application be granted because the TRA is
required by federal and state law to certificate CLECs on a competitively neutral basis.

       The TRA responds that its prior decisions, involving other companies in other situations, do
not bind it in this situation. It also asserts, and found, that BellSouth and its affiliate BST or
BellSouth are different from other CLECs and their affiliates and present unique issues. The TRA
found:

         In Tennessee, Citizens, Sprint, and their affiliated companies are not similarly
         situated to BellSouth and BSE. Neither Citizens nor Sprint are RBOCs, and neither
         possesses the historical market dominance so closely associated with RBOCs such
         as BellSouth. Unlike Citizens and Sprint, BellSouth maintains approximately eighty
         percent (80%) of the access lines in Tennessee. Therefore, since BSE is the affiliate
         of the dominant local exchange carrier in Tennessee, the actions which BSE seeks
         to take must be evaluated by assessing whether such actions will truly foster
         competition in Tennessee. The authority finds that Citizens and Sprint are not
         similarly situated to BSE and BellSouth.

(footnotes omitted).

        If the TRA had determined that BSE was ineligible to be certified statewide as a CLEC on
the basis that an affiliate was disqualified from certification in the same market where its affiliate
was the incumbent provider, the two prior approvals would pose serious problems to affirming the
TRA’s order herein. However, the TRA did not find that such a per se disqualification existed, and
we can find none in the statute. The prior approvals indicate that the TRA interpreted the
Telecommunications Act as authorizing affiliates of ILECs to be certified as CLECs statewide,
including in those markets where the affiliate was the incumbent.




         5
            At BSE’s request, at the hearing involved herein the TRA took judicial notice of its grant of these certificates,
and the records from those proceedings have been included in the record herein. Those records reflect that the TRA
granted to Sprint C omm unicatio ns Co mpa ny, L.P. a certificate to provide intrastate service based upon an application
to provide a full array of telecommunications services normally provided by an incumbent local excha nge tele phone
company throughout the State of Tennessee in all geographic locations permitted under Tenn. Code Ann. § 65-4-201.
Similarly, Citizens Telecommunications Company filed an application for certification as a CLEC seeking authority to
ope rate statewide to provide a full array of telecommunications services as would normally be provided by an incumbent
local exchange telephone company. The T RA granted the application.

                                                            -8-
       The prior approvals also serve to rebut an argument made herein by the intervenors. Those
intervenors argue that it is illegal under Tennessee law for BellSouth to operate as both an ILEC and
a CLEC in the same service territory. They assert that because the Telecommunications Act defines
a CLEC as a carrier providing service before June 6, 1995, and defines an ILEC as a provider of
services certified after June 6, 1995, an ILEC cannot be a CLEC. We do not disagree that the statute
envisions an ILEC and a CLEC as being different entities.

        However, the intervenors argue that because BST cannot be a CLEC, BellSouth should not
be allowed to accomplish the same illegal result through use of an affiliate; i.e., BST cannot do
indirectly what it is prohibited from doing directly. While much of the intervenors’ argument is
addressed to BellSouth’s market dominance and position, their argument is also based upon the
statutory distinctions between ILECs and CLECs. To that extent, the intervenors’ assertions that
BellSouth cannot operate both an ILEC and a CLEC would apply equally to any other affiliate
relationship. Obviously, the TRA has rejected that interpretation of the statute by certifying as
CLECs at least two other entities affiliated with ILECs. We find no basis for rejecting the TRA’s
interpretation. In fact, the legislature apparently foresaw the possibility of an ILEC providing
services to an “affiliated entity.” See Tenn. Code Ann. § 65-5-208(c).

        As the TRA’s order makes clear, its denial of BSE’s request for a certificate for statewide
CLEC status was not based upon BSE’s status as an affiliate of an ILEC per se. Instead, it was
related to the unique position enjoyed by BellSouth as the dominant provider of local exchange
services and as a Bell operating company.

        We agree with the TRA that each application must be considered on its own merits and upon
the facts of each individual situation. In the instant situation, the facts raise issues as to the effect
of certification on competition which may differ from those raised by other incumbent affiliate
applications. However, the TRA cannot apply legal requirements arbitrarily or capriciously and must
have a factual basis for its actions. Tenn. Code Ann. § 4-5-322(h).

                                           III. BOC Status

        As set out earlier, BellSouth, BST and BSE (as an affiliate of a BOC) are subject to specific
provisions of the Telecommunications Act of 1996 not applicable to other CLECs. The question is
whether that status justifies a differing approach or standard for BSE’s qualification as a CLEC than
that applied to affiliates of other ILECs who are not also BOCs.

        BSE argues that the FCC has recognized or authorized affiliates of ILECs and BOCs. The
TRA has acknowledged and referred to the FCC’s rulings on specific arrangements, but has
distinguished the situation covered by those rulings from the situation presented by BSE’s
application herein.

       The FCC has considered the question of the provision of local exchange and exchange access
by Section 272 BOC affiliates and reached the following conclusion:


                                                  -9-
       Based on our analysis of the record and the applicable statutory provisions, we
       conclude that section 272 does not prohibit a section 272 affiliate from providing
       local exchange services in addition to interLATA services, nor can such a
       prohibition be read into this section. Specifically, section 272(a)(1) states that - -

               A Bell operating company (including any affiliate) which is a local
               exchange carrier that is subject to the requirements of section 251(c)
               may not provide any service described in [section 272(a)(2)] unless
               it provides that service through one or more affiliates that . . . are
               separate from any operating company entity that is subject to the
               requirements from section 251(c) . . .

       We find that the statutory language is clear on its face - - a BOC section 272 affiliate
       is not precluded under section 272 from providing local exchange service, provided
       that the affiliate does not qualify as an incumbent LEC subject to the
       requirements of section 251(c).

In the Matter of Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the
Communications Act of 1934, As Amended, CC Docket No. 96-149, First Report and Order, at ¶ 312
(rel. Dec. 24, 1996) (emphasis added).

       It is clear that the FCC’s comments are addressed to those BOC affiliates which are Section
272 affiliates and are operated independently from an ILEC affiliate. They apply where the BOC
incumbent has been authorized to provide long distance services. This means that the BOC
incumbent has demonstrated to the FCC’s satisfaction that it has complied with the various
competition requirements set out in 47 U.S.C. § 271.

        We agree with the TRA that the FCC rulings relied upon by BSE do not directly apply to an
application by an affiliate of a BOC which is not a Section 272 affiliate to provide local service in
an area where the BOC is the incumbent. While BSE is not incorrect in asserting that these FCC
rulings do not prohibit the grant of its application, they also do not require it. The FCC, based on
federal statutory law, has found that BOC affiliates may provide certain kinds of services when
circumstances not present in the case before us exist.

        BSE is not a Section 272 affiliate, and does not claim to be. Section 272 affiliate status only
applies to affiliates of a BOC which have received Section 271 approval. The TRA determined that
BSE “remains a type of affiliate not contemplated under § 272.” In addition, the TRA explained:

       It is appropriate that BSE has not requested in its Application to provide non-
       incidental services, because BSE cannot satisfy the requirements for a Section 272
       affiliate, for those services, until interLATA permission is granted pursuant to
       Section 271. The Authority concludes that BSE cannot, at this time, as a matter of
       law, provide Section 272(a)(2) non-incidental services, does not intend to provide


                                                 -10-
        Section 272(a)(2) incidental services, and is, therefore, not a Section 272 affiliate.
        Having concluded as such it is difficult to embrace the position that the safeguards
        established under Section 272 are applicable to BSE. It is equally difficult to accept
        that an entity such as BSE is of the type contemplated by the FCC’s pronouncement
        that Section 272 does not prohibit a Section 272 affiliate from providing local
        exchange services in addition to interLATA services.

(footnotes omitted).

        The TRA asserts that BSE’s lack of Section 272 status is important is considering the
competitive goals of both federal and state legislation. The Authority contends that Section 271
approval indicates satisfaction of the requirements for entry into the long distance market, including
compliance with the competitive checklist. As of the date of the proceedings herein, BellSouth did
not have Section 271 approval, and the TRA states that BellSouth has been denied that approval
several times by the FCC and in other states.6 Consequently, the TRA found that BSE had not been
required to show that it has adequate operations support systems with performance measurements
in place which would “provide assurance that the public welfare is protected by ensuring that
competing carriers have a means to compete and are treated in a competitively neutral manner by the
ILEC [BST].” The TRA also found that not only does the denial of such approval indicate that the
required proof of compliance with competitive safeguards was not provided in those proceedings,
the TRA found that BSE did not demonstrate such compliance in the hearing herein.

        The TRA did not deny the application for statewide CLEC certification because of BSE’s
status as a BOC or BOC affiliate. It did, however, consider that status as a factor in its consideration
of the competitive effect of allowing BSE to compete with its affiliate where the competition
protections assured by Section 272 affiliate status are not present. We conclude that neither BSE’s
status as an ILEC affiliate nor its status as a BOC affiliate was the basis for the TRA’s denial. That

        6
            For example:

        In the M atter of App lication of Be llSou th Co rporation , et al., Pursuant to Section 271 of the
        Communications Act of 1934, as amended, to Provide In-R egion, InterLATA Services in Sou th
        Ca rolina, 13 FCC Rcd 53 9, 547 P 14 (1997) (failure to (1) provide nondiscriminatory access to
        operations support systems, (2) provide unbundled network elem ents in a m anner that permits
        competing carriers to combine them through collocation, and (3) offer certain retail services at
        disco unted rates), aff’d, BellSouth Corp. v. FCC, 333 U.S. App. D .C. 253, 162 F.3d 678 (D .C. Cir.
        1998); In the Matter of Application by BellSouth Corporation, et al., Pursuant to Section 271 of the
        Communications Act of 1934, as amended, to Provide In-Region, InterLATA Services in Louisiana,
        13 FCC Rcd 624 5, 62 46-4 7 P 1 (19 98) (failure to provide nondiscriminatory access to operations
        support system and to make telecommunications services available for resa le); In the Matter of
        Application of BellSouth Corporation, BellSouth Telecommunications, Inc., and BellSouth Long
        Distance, Inc., for Provision of In-Region, InterLATA Services in Louisiana, 13 FCC Rcd 20599,
        20605 P 10 (1998 ) (failure to provide nondiscriminatory access to operations support system and
        unbundled network elements).

AT&T Corp.v. FCC, 220 F.3d at 613.

                                                       -11-
status did, however, influence the standards applied by the TRA to BSE in its consideration of the
competitive effect of granting BSE’s application.

                       IV. The Issues Presented and The Standard of Review

         As the list of TRA concerns set out earlier in this opinion demonstrates, the TRA focused its
decision on the potential for anticompetitive activities and conduct if an affiliate of the Regional Bell
Operating Company and ILEC were certified as a CLEC, especially in the absence of the protections
provided by federal law to Section 272 affiliates. In the order now under appeal, the TRA noted that
in its previous denial “one critical area of concern was that the affiliate relationship between BST
and BSE could be potentially and irreversibly adverse to competition.” The TRA found without
Section 271 approval of BellSouth, there was still no evidence that BellSouth had the necessary
safeguards in place to ensure fair treatment among all CLECs and further stated:

        Exacerbating our concern is that no other performance measurements have been
        established, which arguably help to serve as support to the existence of competitive
        neutrality in the relationship between BellSouth, BSE and other CLECs. Without
        these safeguards and measurements the Authority would have difficulty determining
        whether BellSouth in fact afforded preferential treatment to its affiliate CLEC in
        Tennessee.

       It was on the basis of these concerns that the TRA determined that approval of BSE’s
application was not in the public interest and “may, in fact” be inconsistent with the goal of
competition. The TRA concluded that BSE offered little convincing evidence or testimony to
diminish its concerns regarding potentially abusive collusive behavior.

       On appeal, our review of the TRA’s order is governed by Tenn. Code Ann. § 4-5-322(h),
which provides:

        The court may affirm the decision of the agency or remand the case for further
        proceedings. The court may reverse or modify the decision if the rights of the
        petitioner have been prejudiced because the administrative findings, inferences,
        conclusions or decisions are:

        (1) In violation of constitutional or statutory provisions;
        (2) In excess of the statutory authority of the agency;
        (3) Made upon unlawful procedure;
        (4) Arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted
        exercise of discretion; or
        (5) Unsupported by evidence which is both substantial and material in the light of the entire
        record.




                                                  -12-
       In determining the substantiality of evidence, the court shall take into account
       whatever in the record fairly detracts from its weight, but the court shall not
       substitute its judgment for that of the agency as to the weight of the evidence on
       questions of fact.

        The TRA may exercise only that authority given it expressly by statute or arising by
necessary implication from an express grant. BellSouth Adver. & Publ’g Corp. v. Tennessee
Regulatory Auth., 79 S.W.3d 506, 512 (Tenn. 2002); Tennessee Pub. Serv. Comm’n v. Southern Ry.
Co., 554 S.W.2d 612, 613 (Tenn. 1977). The General Assembly has given the TRA “practically
plenary authority over the utilities within its jurisdiction.” BellSouth Adver. & Publ’g Corp., 79
S.W.3d at 312 (quoting Tennessee Cable Television Ass’n v. Tennessee Pub. Serv. Comm’n, 844
S.W.2d 151, 159 (Tenn. Ct. App. 1992)). The TRA has “general supervisory and regulatory power,
jurisdiction, and control over all public utilities.” Tenn. Code Ann. § 65-4-104. The General
Assembly has given the TRA, in addition to other jurisdiction conferred, the authority to
“investigate, hear and enter appropriate orders to resolve all contested issues of fact or law arising
as a result of the application of Acts 1995, ch. 408 [the Tennessee Telecommunications Act].” Tenn.
Code Ann. § 65-5-210(a).

         BSE asserts, however, that the TRA’s order was contrary to governing statutory provisions.
In reviewing BSE’s request, the TRA was required to apply Tenn. Code Ann. § 65-4-201(c), quoted
earlier, which establishes the requirements for certification as a competing provider. BSE asserts
that it met the two requirements by demonstrating: (1) that it will adhere to all applicable TRA
policies, rules and orders; and (2) that it possesses managerial, financial and technical abilities to
provide the services. BSE cites the TRA’s approval of it as a CLEC in some territories in Tennessee
as proof the TRA has found that BSE meets these statutory qualifications. Accordingly, BSE argues,
the TRA was required to grant its application for statewide certification because of the mandatory
language of the statute.

        There is no dispute that BSE met the two requirements of Tenn. Code Ann. § 65-4-201(c).
The TRA, however, determined that its other statutorily assigned responsibilities required it to
examine the application in light of its effect on competition, including its responsibility under Tenn.
Code Ann. § 65-4-201(a) to consider the present and future public interest in determining whether
to grant a certificate of convenience and necessity. In the case herein, however, the TRA defined that
public interest in terms of the impact of BSE’s application on competition. It is clear from the order
that the TRA’s reason for denying BSE certification as a CLEC in those areas where its affiliate was
the ILEC was its determination that such certification could adversely impact the development of
competition in the provision of local telephone service.

        The TRA maintains that it was required to consider the effect on competition. The TRA
relied upon its obligations set out in Tenn. Code Ann. § 65-5-208(c), also quoted above, to prohibit
anticompetitive practices in dealings between the incumbent and competitors. The TRA was also
mindful of the General Assembly’s policy of fostering competition, as set out in the Tennessee
Telecommunications Act of 1995:


                                                 -13-
        The general assembly declares that the policy of this state is to foster the
        development of an efficient, technologically advanced, statewide system of
        telecommunications services by permitting competition in all telecommunications
        services markets, and by permitting alternative forms of regulation for
        telecommunications services and telecommunications services providers. To that
        end, the regulation of telecommunications services and telecommunications services
        providers shall protect the interests of consumers without unreasonable prejudice or
        disadvantage to any telecommunications services provider; universal service shall be
        maintained; and rates charged to residential customers for essential
        telecommunications services shall remain affordable.

Tenn. Code Ann. § 65-4-123. In the preamble to the Tennessee Telecommunications Act, the
General Assembly stated a policy that “Competition among providers should be made fair by
requiring that all regulation be applied impartially and without discrimination to each.” 1995 Tenn.
Pub. Acts ch. 408.

       In addition, federal law places a duty on the TRA to promote or insure competition in the
provision of telecommunication services. In particular, the Telecommunications Act of 1996
requires removal of barriers to entry into that business and states:

                (a) In general. No State or local statute or regulation, or other State or local
        legal requirement, may prohibit or have the effect of prohibiting the ability of any
        entity to provide any interstate or intrastate telecommunications service.

                  (b) State regulatory authority. Nothing in this section shall affect the ability
        of a State to impose, on a competitively neutral basis and consistent with Section 254
        of this title, requirements necessary to preserve and advance universal service, protect
        the public safety and welfare, ensure the continued quality of telecommunications
        services, and safeguard the rights of consumers.

47 U.S.C. § 253.

        We agree with the TRA that it has the authority to consider the effect on competition of an
application for statewide certification as a CLEC. In addition to its general almost plenary authority
to regulate public utilities and the authority granted by the statutes quoted herein, it also has specific
authority to adopt rules or issue orders to prohibit anticompetitive practices. Tenn. Code Ann. § 65-
5-208(c). Thus, we conclude the TRA did not act in excess or in contravention of relevant statutory
authority in considering the effect on competition.

       However, the authority to consider the effect on competition does not remove the
requirements that the agency base its decisions on substantial and material evidence and that those
decisions not be arbitrary or capricious. The determinative issues in this appeal are framed by BSE’s
arguments that the TRA’s decision was arbitrary because it differentiated among ILEC affiliates and


                                                  -14-
that the decision was based upon speculation and not upon the evidence and, therefore, is not
supported by substantial and material evidence. In addition, BSE asserts that the TRA’s order is
actually anticompetitive and prevents BSE’s entry into the market as a competing local exchange
service provider by establishing more stringent requirements for it than those applied to other ILEC
affiliates. The intervenors assert that BST is already dominant in the local services market, making
removal of barriers to entry irrelevant. The TRA asserts its order was designed to further the
competition envisioned by both federal and state law.

        The TRA did, in fact, treat BSE’s application differently from applications for statewide
CLEC certification other affiliates of ILECs. They based this differing treatment on BSE’s
relationship to BellSouth, which has undisputed market dominance in the state and which is a BOC.
Regional Bell Operating Companies have been subject to strictures and limitations not applicable
to other companies since the consent order was entered in United States v. American Tel. and Tel.
Co. The 1996 Telecommunications Act has special provisions relating to RBOCs. Because RBOCs
had gained control of the local services markets through a monopoly, such measures were considered
necessary if true competition were to develop as a practical matter.

        The FCC has recognized the authority of state regulatory agencies to treat certain BOC
related entities differently because of the potential impact on competition.

         State regulation. As mentioned above, several BOCs have already submitted
         applications to state regulatory commissions seeking authority to provide both local
         exchange services and interLATA services from the same affiliate. Although we
         conclude that the 1996 Act permits section 272 affiliates to offer local exchange
         service in addition to interLATA service, we recognize that individual states may
         regulate such integrated affiliates differently than other carriers.7

In the Matter of Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the
Communications Act of 1934, As Amended, CC Docket No. 96-149, First Report and Order, at ¶ 317
(rel. Dec. 24, 1996) (footnotes omitted).

       Although state statues do not make reference to RBOCs, we conclude that the TRA had the
authority to consider BellSouth’s market dominance in the state and its status as a BOC in analyzing
the competitive effects of its affiliate’s application. We also conclude that Tenn. Code Ann. § 65-5-
208(c) gave the TRA the authority to issue orders which would prohibit the specific anticompetitive


         7
           BS E’s application does not include a proposal to provide interLATA (long distance) services. As discussed
earlier, the FCC’s pronouncements have involved Section 272 affiliates who propose to provide bo th local and long
distance services. Thus, in our earlier discussion of BOC status, we have agreed with the TRA that the FCC’s recognition
of BOC and ILEC affiliates is not dispositive of the question of whether an affiliate wh ich is not a Section 27 2 affiliate
may q ualify as a C LEC where its affiliate is the ILEC. However, while the finding that state regulatory agencies may
regulate integrated affiliates differently from other entities is not directly applicable to a non-272 affiliate becoming a
CLEC, we think the principles involved are similar enough to warrant reliance on the FC C’s recognition of state
agencies’ authority to regulate B OC affiliates differently.

                                                           -15-
practices listed in the statute, as well as others. Because the relationship between BST, BSE, and
BellSouth provides a situation where such practices can develop, the TRA was authorized to
examine this situation differently from other applications and to adopt rules or to establish by order
standards or requirements to fulfill its responsibility to further competition.

       However, that is not what the TRA did. Instead of “regulating” a BOC affiliate differently,
the TRA denied the certification. BSE describes the TRA’s decision as “Rather than engage with
BSE in a reasonable framework of regulation for its services in the market, the TRA has chosen to
simply deny BSE a place at the table.” The question is whether the TRA could deny certification
under the facts presented.

                                                           V.

       The TRA had previously expressed its concerns about the potential for anticompetitive
conduct between BSE and its affiliates. The second hearing was held to allow BSE to address those
concerns. In the hearing, BSE offered to submit itself to various requirements to alleviate the
concerns of the TRA. In specific, BSE offered:

       (1)         To operate independently from BST;
       (2)         To maintain its books, records, and accounts separate from the books, records, and
                   accounts maintained by BST;
       (3)         To have separate officers, directors, and employees from BST;
       (4)         Not to obtain credit under any arrangement that would permit a creditor, upon
                   default, to have recourse to the assets of BST;
       (5)         To conduct all transactions with BST on an arms’ length basis with any such
                   transactions reduced to writing and available for public inspection;8
       (6)         Not to engage in cross-subsidization, granting preferences to competitive services or
                   affiliated entities, predatory pricing, price squeezing, price discrimination, tying
                   arrangements, or other anticompetitive practices as prohibited by Tenn. Code Ann.
                   § 65-5-208(c);
       (7)         To set its price floor equal to the wholesale price it pays to BST;
       (8)         To file and resell its Contract Service Agreements;
       (9)         To be bound by the non-discrimination requirements of 47 U.S.C. §§ 251 and 252;
       (10)        To file tariffs;
       (11)        To consent to regular audits of its operations by the TRA;
       (12)        To provide cost allocation data of its operations;
       (13)        To accept advertising restrictions assuring that any advertising would properly
                   identify “BellSouth BSE”;
       (14)        To submit to any other applicable ILEC Rules in the event BSE undertakes the
                   activities of its ILEC affiliate BST; and
       (15)        To abide by any and all of the applicable TRA policies, rules and orders.


       8
           Items 1-5 replicate the structural separation requirements set out in 47 U.S.C. § 27 2(b).

                                                          -16-
        The TRA found these promises insufficient, primarily for three reasons. It determined that
BSE’s failure to file a cost allocation manual prevented the Authority from determining whether
appropriate safeguards were in place to prevent cross-subsidies between regulated and non-regulated
services.9 Similarly, BSE did not file a business plan, and the TRA stated it routinely examined such
plans when considering CLEC applications. The TRA found that “The lack of a business plan and
cost allocation manual prevents the Authority from determining the extent to which BSE intends to
operate, and whether such operation and the provisioning of telecommunications services on an
expanded level is compatible with the public interest.”

         Although BSE did not file a business plan, an Intervenor introduced into evidence a report
prepared for BellSouth by a consultant regarding the benefits to BellSouth of sending a CLEC
affiliate into various markets. BSE disavowed the report, stating that it did not serve as BSE’s
business plan. In its brief, the TRA argues the report is “significant, not as a representation of BSE’s
current or future business practices, but for its indication of the most obvious opportunities that a
CLEC affiliate would provide for BellSouth and for the fact that BellSouth was studying these
opportunities in great detail.” The brief continues:

         The report is replete with statements that BellSouth viewed its “CLEC” as an
         extension of BellSouth, which would benefit from maximum identification with
         BellSouth, that the CLEC would be operated as part of a comprehensive business
         strategy that would pertain to all BellSouth companies, and that the CLEC would
         offer many ways of circumventing regulatory restraints on BellSouth’s incumbent
         LEC operations. . . . Elsewhere, the report states that the rationale for establishing
         a CLEC is that “BellSouth needs alternatives to gain pricing and packaging
         freedoms.”

        We do not disagree with the TRA’s description of the report. Although BSE denied the
report was ever its business plan, the TRA argues that “The existence of this report submitted by the
Intervenors and the absence of a business plan from BSE creates a reasonable presumption that BST
intended to let loose its affiliate ‘CLEC’ upon the market not as a truly independent competitor and
in order to circumvent regulatory requirements.”

         The final, and apparently most significant, reason given by the TRA is its interpretation of
BSE’s offer to be bound by a price floor equal to the resale price it pays to BST for the purchase of
its telecommunications services. As discussed above, Tenn. Code Ann. § 65-5-208(c) requires an
ILEC to adhere to a price floor for its competitive services which must equal the ILEC’s rates for
essential services used by CLECs plus the total long-run incremental cost of the competitive
elements of the service.



         9
          There is proof in the record that with reg ard to BSE’s operation in the Tampa, Florida area, cost allocations
betw een BSE and BellSouth’s cellular phone comp any were not very strict, even though the companies shared some
costs. For examp le, the cellular pro vider paid all advertising co sts, and B SE did no t pay a p ortion of that.

                                                         -17-
        One of the major concerns of the intervenors was the price floor issue. On appeal, they argue
that Tennessee has established a “price floor” for certain ILEC services and prohibited the ILEC
from charging customers less than that amount for the purpose of preventing ILECs from engaging
in predatory pricing, i.e., pricing services below cost. The intervenors’ expert testified that the price
floor statute prevents an incumbent provider with market power from pricing services at less than
cost and thereby discouraging potential competitors from building their own networks. Essentially,
the intervenors argue that since an ILEC is restricted by law to a price floor, the same public policy
requires that an affiliate of an ILEC be subject to the same restriction because the ILEC should not
be allowed to avoid the statutory price floor by operating through an affiliate.10

        The TRA was also unconvinced that BSE’s offer regarding the price floor was sufficient to
alleviate its concerns about anticompetitive conduct and found:

        In an effort to lessen the anti-competitive effect of its expanded certification, BSE
        agreed to be bound by a price floor equal to the resale price paid to BellSouth for the
        purchase of its telecommunications services. However, BSE failed to demonstrate
        whether the resale price it will pay to BellSouth will or will not include operator
        service costs, administrative costs, or marketing and advertising costs. Absent an
        evidentiary demonstration of all costs to be included in the resale price paid to BST,
        the “price floor” promised by BSE may not be comparable to that set for incumbents
        under Tenn. Code Ann. § 65-5-208(c). Furthermore, the Authority is of the opinion
        that if a price floor is to act as a deterrent against price squeezing, the floor must be
        set in a manner that will ensure that all of the costs of providing the services are
        included therein. Thus, a meaningful promise to be bound to a price floor will not
        only include the rate paid to BellSouth by BSE, but will also include additional costs
        incurred by BSE in providing such services. Under BSE’s proposal to set the price
        floor at the resale rate paid to BellSouth, BSE would still be free to sell a service
        below the total cost that BSE must incur to provide that service.



        10
             The intervenors’ position is exp lained in their brief as follows:

        Based on the testimo ny at the second hea ring, here is how BS E’s scheme would work: Under federal
        law, BellSouth is required to make all services available for resale at a discounted, wholesale rate. In
        Tennessee, state regulators have determined that BellSouth’s wholesale rate should be 16% less than
        the carrier’s retail rate. Thus, if BellSouth’s retail rate for local service were $12.15, a CLEC may
        purchase tha t service for a discounted p rice of $10 .31.

        During cross-examination, [BS E] was aske d to assume , for the sake of argument, that B ellSouth’s
        $12.15 rate was also the price floor for that service, as ca lculated in accordance with section 208(c).
        Under those circumstances he rep eated ly maintained that BS E co uld legally purchase B ellSouth’s
        service at the wholesale rate an d rese ll it for $10 .31 o r $10.81 , substantially less than BellSouth’s price
        floor. In an effort to persuade the TRA to approve B SE’s prop osal, [B SE] said B SE would agree to
        price its services at no less than $10.31 - the wholesale price it paid to BellSouth - but would not
        agree to abide by BellSouth’s price floor of $12.15.

                                                             -18-
        On appeal, the TRA contends that the danger of a price squeeze is presented by the possibility
that BSE would lower its resale price, “as long as the cost components of that price are undisclosed
or are subject to manipulation,” to a level that competitors of BSE and BST would be unable to
match. The TRA found BSE’s promise to set its price floor at the resale rate it pays BST would still
allow BSE to resell a service below the overall cost to BSE of providing the service. The TRA
contends this situation results in an “obvious opportunity” for a price squeeze. See Town of
Norwood v. New England Power Co., 202 F.3d 408, 418 (1st Cir. 2000) (explaining the “traditional
price squeeze”).

       The TRA points out that BSE has never agreed to apply the price floor as described by the
TRA. BSE argues that its price floor agreement must be considered in conjunction with the other
safeguards it promised to comply with, which will “ensure that all of the costs of providing its
services are included in its pricing.”

        The price floor statute only applies to incumbent providers and does not by its terms apply
to CLECs. In fact, in situations where an affiliate relationship with the incumbent is not present, the
issue would simply not arise. Consequently, the TRA must rely upon its authority to promote
competition and prevent anticompetitive practices as authority for its decision. There is no evidence
in the record that in the other situations where the TRA has approved an affiliate of the incumbent
provider as a CLEC that any such price floor requirement has been imposed.

         It is the relationship between BSE and BellSouth and BellSouth’s market dominance and
status as a RBOC that created the “concerns” that led the TRA to determine that anticompetitive
practices might occur. It is actually the potential for BellSouth to use a subsidiary to circumvent
restrictions placed on its operation by federal and state law and regulation, to the detriment of
competition, which is at the core of the TRA’s action. The fact that it is the affiliate relationship that
is the problem is exemplified in the TRA’s finding that, “Counterbalancing these proposals [BSE’s
agreement to the listed restrictions] in the record before the TRA are BSE’s numerous
demonstrations of its close ties to BST. Further, as BSE’s witness admitted, BSE and BST will
remain affiliates. BSE will be nominally independent of BST, but neither will be truly independent
of BellSouth Corporation.”11 Although the TRA did not decide that no affiliate of BellSouth or BST
could be certified as a CLEC in those areas where BST is the incumbent provider, it did not by rule
or order establish minimum requirements to insure the type of independent operation it felt necessary
to prevent “possibilities” for anticompetitive conduct.



         11
            The Intervenors assert that this case is simply about whether BellSouth can be both an ILEC and a CLEC at
the same time and in the same service territory. “Since BSE does not propose to offer any services to Tennessee
customers that BellSouth itself cannot also offer, the o nly app arent re ason for B SE’s creatio n is to allow BellSouth to
do indirectly, through an affiliate, what it cannot do directly, i.e., to engage in otherwise prohibited pricing and marketing
strategies.” The intervenors assert that the BellSouth companies are attempting to avoid the effect of those statutes which
prohibit BellSouth itself from obtaining a CLEC certificate and which regulate BellSouth as the incumbent provider.
This argum ent pre supp oses, amon g other things, that there is no structural and operational separation between the
affiliates.

                                                            -19-
       The FCC has addressed concerns similar to those raised by the TRA in the context of a
Section 272 affiliate (an affiliate of a BOC which meets the structural separation requirements of 47
U.S.C. § 272) in its report entitled In the Matter of Implementation of the Non-Accounting
Safeguards of Sections 271 and 272 of the Communications Act of 1934, As Amended, CC Docket
No. 96-149, First Report and Order (rel. Dec. 24, 1996), wherein it made the following findings:

         We also conclude as a matter of policy that regulations prohibiting BOC section 272
         affiliates from offering local exchange service do not serve the public interest. The
         goal of the 1996 Act is to encourage competition and innovation in the
         telecommunications market. We agree with the BOCs that the increased flexibility
         resulting from the ability to provide both interLATA and local services from the
         same entity serves the public interest, because such flexibility will encourage section
         272 affiliates to provide innovative new services. To the extent that there are
         concerns that the BOCs will unlawfully subsidize their affiliates or accord them
         preferential treatment, we reiterate that improper cost allocation and discrimination
         are prohibited by existing Commission rules and sections 251, 252, and 272 of the
         1996 Act, and that predatory pricing is prohibited by the antitrust laws. Our affiliate
         transaction rules, as modified by our companion Accounting Safeguards Order,
         address the BOCs’ ability to engage in improper cost allocation. The rules in this
         Order and our rules, in our First Interconnection Order and our Second
         Interconnection Order ensure that BOCs may not favor their affiliates. In sum, we
         find no basis in the record for concluding that competition in the local market would
         be harmed if a section 272 affiliate offers local exchange service to the public that is
         similar to local exchange service offered by the BOC.

Id. at ¶ 315 (footnotes omitted).

        Of course, BSE is not a Section 272 affiliate, and the structural separation requirements
established in that provision are not automatically imposed upon BSE. There is no impediment,
however, to the TRA imposing the same safeguards as a condition to certification, by virtue of its
authority under Tenn. Code Ann. § 65-5-208(c).12 In fact, BSE and BellSouth agreed to be bound


         12
              The Georgia Public Service Commission, in ruling on a similar application by BSE in Georgia, stated that:

         The critical issue that is raised in this proceeding stems fro m the affiliate relationship the Applicant
         has with the predo minan t incumbent local ex change carrier in G eorgia, Be llSouth
         Telecomm unications, Inc. Testimony presented by the intervenors raises questions as to whether the
         service expe cted to be provid ed by the Ap plicant will indeed be in com petition with BST . Or, will
         the entry of the Ap plicant into the local exc hange market simply garner for the parent corporation an
         even larger share of the market in Georgia and thereby thwart the movement toward
         telecommunications competition in the state.

After finding that there was not sufficient cause to deny the application, the Comm ission found that certain conditions
would be imposed. Tho se included use of the same operating system support as other CLECs, a prohibition of favoring
                                                                                                           (continued...)

                                                          -20-
by those structural separation requirements. The TRA could have included other requirements
directly related to preventing anticompetitive practices between BSE and BellSouth. Again, BSE
and BellSouth agreed to additional safeguards, including the filing of various documents, accepting
advertising restrictions which ensure the proper identification of the affiliate, providing cost
allocation data, and setting its price floor equal to the wholesale price it pays to BST.

        The TRA determined these offers were not sufficient. However, it did not, by order or rule,
establish the minimum requirements or safeguards it thought necessary. Instead, it determined that
BSE did not sufficiently allay concerns that anticompetitive practices might occur. The TRA found
that approval of BSE’s application “may” be inconsistent with the goal of fostering competition, that
potentially abusive, collusive behavior “might” occur, and that the relationship “could be potentially”
adverse to competition.

         Additionally, the TRA is not bound by the FCC’s judgment that competition in local markets
would not be harmed, considering the safeguards provided elsewhere, if Section 272 affiliates were
to offer local service. The TRA is authorized to make its own determination about the effect of
competition in this state. However, the TRA did not make a determination that competition would
be adversely affected by certification of BSE statewide. It merely found that certification “may” be
contrary to promotion of competition. Apparently, any harm to competition would come only if the
affiliated entities acted collusively, in an anticompetitive manner, and in violation of existing
prohibitions.

         While Tenn. Code Ann. § 65-5-208(c) authorizes the TRA to implement safeguards to
prohibit anticompetitive conduct between an ILEC and its affiliated CLEC, we can find nothing in
the statute to authorize the TRA to deny certification of a related entity simply because, by its nature,
the affiliate relationship may provide the opportunity for anticompetitive practices. The legislature
has prohibited anticompetitive conduct, not affiliation relationships. The TRA’s responsibility in
that situation is to put in place standards or requirements to prohibit and prevent the anticompetitive
possibilities from becoming realities and/or to make violations easier to discover so that regulation
is effective.

        We conclude that the TRA’s decision herein must be vacated because it is in excess of the
statutory authority of the agency. We remand to the TRA for consideration of BSE’s application in
light of the principles set out in this opinion. Because the order which is the subject of this appeal




         12
           (...continued)
treatment to B SE b y the incumben t, and certain repo rting requiremen ts.

                                                           -21-
does not establish standards, requirements, or conditions, for the certification, we do not rule upon
the validity of any such requirement.13 Costs of this appeal are taxed to the Tennessee Regulatory
Authority.



                                                             ____________________________________
                                                             PATRICIA J. COTTRELL, JUDGE




        13
            For example, we decline to address the issue of whether the TRA may impose a miniumum charge or price
floor on B SE wh ich insures it recoups all its costs.

                                                      -22-
