TR Daily FCC Extends Separations Freeze Six Years, Offers Opt-Out
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Monday, December 17, 2018

FCC Extends Separations Freeze Six Years, Offers Opt-Out

The FCC has extended the existing freeze on the jurisdictional separations cost-allocation factors for “up to six years,” has directed the Federal-State Joint Board on Jurisdictional Separations to “approach the challenge” of addressing “substantive reforms” by dealing with issues “incrementally,” and has granted all rate-of-return carriers the opportunity to opt of the 2001 freeze on cost-category relationships.

The six-year extension of the separations freeze announced today roughly splits the difference between the FCC’s proposal in a notice of proposed rulemaking (NPRM) earlier this year to extend the freeze by 15 years and a resolution by the National Association of Regulatory Utility Commissioners recommending that an extension of the FCC’s jurisdictional separations freeze be no longer than two years (TR Daily, July 18). In separate statements, FCC Commissioners Mike O’Rielly and Brendan Carr indicated that the latter brokered the compromise.

In 2001, pending comprehensive reform of the jurisdictional separations system, the FCC adopted a five-year “interim” freeze of the cost-allocations factors (TR Daily, May 23, 2001), which it has repeatedly extended during the ensuing 17 years. Pending publication of a summary of today’s action in the “Federal Register,” the current freeze is set to expire Dec. 31 of this year, but to avoid a discontinuity in the freeze, the FCC also granted, on its own motion, a waiver of the relevant separations rules to allow carriers to continue using the same category relationships and allocation factors that they have been using during the freeze.

In a series of orders beginning in 2008, the FCC granted forbearance from the jurisdictional separations rules to petitioning price cap carriers, finally reaching all price cap carriers in 2013, but until earlier this fall, the allocation-factor freeze remained in effect for all rate-of-return carriers, and the category relationships freeze remained in effect for rate-of-return carriers that elected that freeze in 2001, freeing them from conducting separations cost studies for the duration of the freeze.

In October, the FCC cleared the way for certain incumbent telcos that receive model-based or other fixed high-cost universal service support to move their “legacy” TDM (time-division multiplexing) business data services (BDS) operating at 45 megabits per second or less in competitive markets from rate-of-return (RoR) regulation to incentive regulation, at the same time forbearing from applying cost assignment and separations rules to electing carriers’ BDS offerings (TR Daily, Oct. 23).

At the time, Commissioner O’Rielly said that the forbearance adopted for BDS services moving to incentive regulation “provides greater justification for the Commission’s proposal in a separate proceeding to provide a one-time opportunity for carriers to change their category elections and extend the separations freeze for a prolonged period — rather than to overhaul our separations rules for an ever-shrinking base.”

In the report and order and waiver adopted Dec. 12 and released today in CC docket 80-286, the FCC asked that, “in the short term, the Joint Board focus on how best to amend the separations rules to recognize that they impact only rate-of-return carriers and on whether any other separations rules or recordkeeping requirements can be modified or eliminated in light of that limited application. Coming to a decision on these issues will reduce the Joint Board’s work over the longer term as it seeks to replace the existing jurisdictional separations process with a simplified system for reasonably allocating costs between the interstate and intrastate jurisdictions. We begin this incremental reform by allowing rate-of-return carriers that elected to freeze their separations category relationships in 2001 to opt out of that freeze.”

“Longer term,” the FCC added, “we continue to seek the Joint Board’s recommendations on how we might replace the existing jurisdictional separations process with a simplified system for reasonably allocating costs between the interstate and intrastate jurisdictions. We agree with NARUC that the existing separations rules, which presume circuit-switched, primarily voice networks, require updating to reflect today’s network configurations and mix of broadband, video, and voice services. We also share NARUC’s and the Irregulators’ [‘an independent consortium of retired and semi-retired telecom experts, analysts, policy wonks, forensic auditors, and lawyers who are former senior staffers from the FCC, state advocate and Attorneys General Office experts and lawyers, as well as former telco staff and consultants’] concern that those rules necessarily misallocate network costs.

“We know that any changes to the separations rules will need to be harmonized with the Commission’s reforms to the universal service, intercarrier compensation, and business data services rules. Indeed, we extend the separations freeze for up to six years to free resources to address these and other long-term separations problems. We look forward to working with the Joint Board in a more directed manner, addressing these important issues step-by-step. By addressing the separations procedures in a concerted fashion — through substantive reforms of the universal service, intercarrier compensation, and business data services rules on one hand, and focused revisions of specific areas in the separations rules on the other — we hope to resolve the complex separations issues that have proven so challenging well before the end of the maximum six-year extension period,” it said.

In the wake of the July NPRM, NARUC had argued that the FCC must refer the issues raised in the NPRM regarding extending the existing freeze and changing category freezes to the joint board, citing a statutory requirement for such referrals (TR Daily, Sept. 19).

In the order released today, the FCC said, “We reject NARUC’s assertion that because we did not refer or receive a recommended decision from the Joint Board on the specific proposal to extend the freeze for 15 years, and because we did not receive a recommended decision from the Joint Board on allowing carriers subject to the category relationships freeze the opportunity to update their category relationships, we are violating section 410(c) of the Communications Act. In so arguing, NARUC ignores the fact that the Commission has twice referred comprehensive separations reform to the Joint Board. The Joint Board clearly understood that these referrals encompassed a separations freeze; otherwise it would have sought an additional referral before recommending the initial freeze. Moreover, in 2009, the Commission referred the specific question of whether to allow carriers subject to the category relationships freeze the opportunity to unfreeze those relationships. The Joint Board has never come to a recommended decision on the latter referral, and the only Recommended Decision the Joint Board has issued addressing any part of either comprehensive reform referral was the decision the Joint Board issued in 2000 recommending a separations freeze.”

The FCC set July 1, 2019, “as the effective date for opting out of the freeze. We find it important to implement the unfreeze option ‘efficiently and swiftly’ while at the same time giving carriers enough time to prepare. Commenters generally agree that July 1, 2019, is a reasonable effective date. We require that carriers currently in the [National Exchange Carrier Association’s] traffic-sensitive pool notify NECA by March 1, 2019, of their decision to opt out of the category relationships freeze. This deadline provides the same advance notice that carriers exiting the NECA pool must give NECA under section 69.3 of our rules. We also require carriers that file their own tariffs to provide the Wireline Competition Bureau with notice of their intent to opt out of the category relationships freeze by May 1, 2019.”

Regarding the effective date of the extension of the freeze, the FCC said, “We cannot ensure publication by December 31, 2018 when the current extension expires, but requiring that carriers use updated category relationships and allocation factors for a short period of time between the expiration of the current separations freeze extension and publication of the new extension would impose significant and unjustifiable burdens on rate-of-return carriers while providing no countervailing benefit. Under these circumstances, deviation from the rules is warranted and will serve the public interest. Pursuant to this waiver, carriers may continue applying the same separations category relationships and allocation factors they have used during the freeze. This waiver would expire on the date of publication in the ‘Federal Register’ of a summary of the Separations Freeze Extension Order we adopt today.”

In his separate statement, Commissioner O’Rielly said, “it makes much more sense to spend the Commission’s time and resources on substantive work than on repeated freeze extensions, and that is why I sought a much longer extension. However, I am willing to agree to Commissioner Carr’s request for a reduced extension and look forward to his active participation on coming projects. It should be widely-recognized that the need for comprehensive reform has become increasingly irrelevant in view of technological and regulatory obsolescence, and that the separations rules may ultimately become defunct by the time the six-year extension lapses. Therefore, the Joint Board will likely consider certain discrete changes, such as eliminating unnecessary recordkeeping requirements, that would be helpful and achievable in the near-term.

“I also appreciate that the State Members of the Joint Board have weighed in by voicing their support for the Commission’s plan for a six-year freeze extension and an opt-out opportunity for carriers whose category relationships have been frozen since 2001. As Joint Board Chair, I am committed to working with State Members, and I am grateful that we are on the same page on this item. However, to be clear, the State Members’ letter was in no way a necessary precondition for adopting this Report and Order. The Commission has full statutory authority to extend the current separations freeze in the absence of a new Joint Board referral, and the item gives no indication that new precedent has been established otherwise,” Commissioner O’Rielly added.

Commissioner Carr said, “I approached this most recent round with the goal of reaching common ground with my hardworking colleagues here on the Commission and our State counterparts, including those we serve with on the Joint Board. I appreciated the chance to hear directly from my fellow Joint Board members and learn from their perspectives. During this process, the State members of the Joint Board shared with me their concerns about the impact that a long-term extension would have on the prospect for substantive separations reform. So I appreciate that my fellow federal Joint Board Member, Commissioner O’Rielly, was willing to work with me to reach a compromise. In fact, the agreement we reached now aligns with the input provided by our State counterparts in this proceeding.

“I want to thank the State members of the Joint Board for their input. I appreciated the opportunity to work with them through this process. And I look forward to continuing to work collaboratively with them on policies that will help bring more broadband to more Americans,” Commissioner Carr added. —Lynn Stanton, [email protected]

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