State Regulators Object to FCC Plan for 15-Year Separations Freeze But Face Uphill Battle

The FCC seems unlikely to back off its 15-year freeze plan despite the state objections, parties told us Friday. The 4-0 Further NPRM (see 1807180059) "is a strong signal they really don't want to deal with" Part 36 rules separating certain RLEC costs and revenue between the federal and state jurisdictions, said telecom consultant Carol Mattey. "They're effectively saying we're never going to change these rules. To them, it's a relic." She expects the FCC to extend the freeze for "a long time."

Industry officials agreed and none raised concerns. The FNPRM "sends a signal they're not going to do anything further," said Lynn Follansbee, USTelecom vice president-law and policy. "I think our people are happy with it," she said, calling a 15-year extension likely. "No one there has the stomach to deal with it. The knowledge base is diluted" at the FCC, said Mike Jacobs, ITTA vice president-regulatory affairs. "If they do pick a middle ground, then they'll just come back and extend it again," said Michael Skrivan, Consolidated Communications vice president-regulatory, who said the separations process is becoming less relevant.

"My pessimistic prediction is the FCC will extend the separations freeze for another 15 years, erroneously," said Dave Bergmann, consulting counsel to the National Association of State Utility Consumer Advocates. "In telecom time, 15 years might as well be forever. Having separations factors based on basically 20th century networks and services is an infinite time ago. The networks have changed so substantially, and it’s pretty clear in the next 15 years they’re going to change even more substantially."

The freeze was instituted in 2001 for five years and since extended seven times, with the current one expiring Dec. 31. "I think they've gotten tired of seeking comment" on short extensions, said Mattey, who oversaw the 2001 freeze at the agency. In February, FCC Commissioner Mike O'Rielly, joint board chairman, suggested extending the freeze 15 years, saying he doubted the board members would agree on changes (see 1802230019). His office didn't comment Friday.

Coincidental Timing

The FNPRM proposing a 15-year extension also sought comment on a shorter extension. Also Wednesday, NARUC passed a resolution urging an extension be limited to two years and occur only after meaningful consultation with the joint board.

The actions were likely coincidental since the draft FNPRM predated the draft resolution by weeks, said NARUC General Counsel Brad Ramsay. The draft FNPRM circulated June 14. An FCC official said that "you shouldn't read too much" into the same-day timing.

NARUC drafted the resolution knowing the FCC would probably release the FNPRM soon, said Moser. She's looking forward to working with the FCC to consider states’ recommendations. State members sought a two-year freeze extension so the FCC could consider those recommendations and so there could be “meaningful dialogue between the FCC and the states on the myriad of separations issues,” she said.

The FCC historically coordinated informally with states on short freeze extensions, said Ramsay. “A relatively short extension of that recommended freeze with the informal concurrence of the State members to allow work to continue on a required referral on how to change the Part 36 rules to continue is one thing,” he emailed. “A proposal to freeze the rules for 15 years without any recommendation from the Joint Board is something altogether different.”

It’s hard to measure the precise gap between state and federal board members until a replacement is found for ex-Commissioner Mignon Clyburn, said Ramsay. Congress deliberately assigned more state than federal members to boards, Ramsay said. O’Rielly may say finding consensus won’t be possible near term, but “for a Joint Board recommended decision all that has ever been needed is a majority,” Ramsay said. It then goes to the full Commission.

States “very much want to work with the FCC to resolve the separations issue,” said Sherry Lichtenberg, National Regulatory Research Institute telecom principal. They want the FCC to collect facts to address separations within two years rather than kicking the can 15 years, she said. “A separations regime that takes into account the changes in telecommunications products and usage over the years is necessary to ensure that the states are not burdened with an incorrect share of telecommunications costs and can thus focus their resources on broadband deployment.”

Tallying Costs

Under Part 36 rules, rate-of-return telco regulated costs and revenue are separated between FCC interstate jurisdiction and state regulators' intrastate jurisdiction. (The FCC granted large, price-cap ILECs forbearance relief in 2008-13.) Amounts in categories used for interstate and intrastate communications are allocated to the appropriate jurisdiction, while those that support both are allocated between the jurisdictions under relative-use factors or fixed allocators, including a 25/75 percent interstate/intrastate split for message loop costs. Such splits are "political" decisions because poles, lines and switches have "common" costs, with "no right way" to allocate, said Consolidated's Skrivan. State regulators want more costs considered interstate.

Separations rules remain important but affect fewer telco accounts, said Mike Romano, NTCA senior vice president, who cited regulatory changes to switched access and stand-alone broadband, and development of the Connect America Fund cost model. He also said that with consumers shifting from jurisdictionally mixed traditional wireline voice services to interstate broadband/VoIP services, fewer areas need allocation splits. "We’re moving organically toward an end state that achieves the effect of substantial separations reform," he said. The FNPRM says RLECs use separations for: establishing business data service rates, calculating interstate common line support for those carriers not receiving model-based CAF support, and calculating subscriber line charges of the minority of carriers not at the maximum level. The results are also relevant to some other USF and state ratemaking activities.

If the FCC were to "rejigger" separations rules, it would destabilize other regimes, likely requiring further changes, Romano said. Skrivan said it doesn't make sense to make such a "massive" effort for a shrinking area of regulation.

Romano said NTCA generally supports "the stabilizing effect" of a longer freeze, while giving certain carriers a one-time option to redo category relationships frozen in 2001, when the assumption was the freeze would last five years. Other ILEC officials voiced similar support. The FNPRM has such a proposal.