TR Daily States’ Ability to Change Separations Factors Dominates Oral Argument
Friday, January 17, 2020

States’ Ability to Change Separations Factors Dominates Oral Argument

A federal appellate judge today focused during oral argument over the FCC’s 2018 separations freeze extension order on the questions of whether states were free to adjust separations factors for intrastate purposes and whether the FCC has been sufficiently clear that they may do so.

During oral argument this morning in “The Irregulators et al. v. FCC and United States of America” (case 19-1085) at the U.S. Court of Appeals for the District of Columbia Circuit, W. Scott McCullough, the attorney for parties challenging the order, told Senior Circuit Judge Stephen H. Williams that the petitioners would be happy to take a loss on the merits if they could walk away with a clear statement from the FCC that states were not precluded from adjusting separations factors for purposes such as intrastate universal service support.

FCC attorney Matthew Dunne suggested that the petitioners should file a petition for declaratory ruling with the Commission if they feel it has not been clear on the matter.

Speaking to TR Daily after the oral argument, Mr. McCullough said that the petitioners raised this issue in the separations freeze extension proceeding at the FCC, and the Commission failed to address it. The petitioners should not have to file a petition for declaratory ruling in lieu of challenging the order, he said.

In the 2018 order, the FCC extended the existing freeze on the jurisdictional separations cost-allocation factors for “up to six years,” directed the Federal-State Joint Board on Jurisdictional Separations to “approach the challenge” of addressing “substantive reforms” by dealing with issues “incrementally,” and granted all rate-of-return carriers the opportunity to opt out of the 2001 freeze on cost-category relationships (TR Daily, Dec. 17, 2018).

The order was the latest in a series of orders extending a five-year “interim” freeze of the cost-allocation factors adopted in 2001 (TR Daily, May 23, 2001), pending comprehensive reform of the jurisdictional separations system. Since 2001, interstate carriers and services have increasingly moved from rate-of-return regulation, for which cost-allocation is needed, to incentive or price-cap regulation, which does not require cost-allocation.

The Irregulators — “an independent consortium of retired and semi-retired telecom experts, analysts, forensic auditors, former senior staffers from the FCC, state advocates and state Attorney General experts and lawyers and former and current telecom consultants” — filed their appeal of the 2018 order last year, joined by the New Networks Institute, Bruce Kushnick, Mark Cooper, Tom Allibone, Kenneth Levy, Fred Goldstein, and Charles Woodward Jr. (TR Daily, April 18, 2019).

At the D.C. Circuit today, Judge Williams, who dominated the questioning, quickly interrupted Mr. McCullough as he began his argument, pointing out that the petitioners are customers of price-cap carriers that don’t use cost allocations to determine their charges, and that the FCC said that the states would have to use their own authority to obtain the information on costs that the FCC no longer needs.

Mr. McCullough responded that the FCC said that the states can use their authority to obtain the data, but they “can’t set their own factors.”

Judge Williams also questioned how the petitioners, as customers of price-cap carriers, are affected by the FCC’s order.

Mr. McCullough said that states use the allocations under the separations process for policy-setting on issues such as state universal service support, which price-cap carriers contribute to and generally recover those contributions from subscribers. He also said that changes in separations factors are included among the “exogenous factors” that every state price-cap regime allows for.

Judge Williams suggested that “if the feds have withdrawn from the field [of jurisdictional separations,” it’s up to the states.” He also said that the inclusion of separations factor changes in the category of price-cap exogenous factors is “the state’s choice,” and not something the federal government has directed them to do.

Section 221 of the Communications Act authorizes the FCC to decide on the allocation of costs to the interstate or foreign jurisdiction, leaving the remainder of costs to be covered by intrastate rates.

Mr. McCullough said that “the FCC has never said that states are free from section 221,” nor has it said that “it has completely withdrawn” from the field of jurisdictional separations.

Circuit Judge Gregory G. Katsas interjected, “Isn’t the whole point of separations” to allow regulators in different jurisdictions to divide responsibility for cost recovery among them?

Judge Williams said, “It’s not clear to me that [the authority of the states] needs to be spelled out” by the FCC.

Mr. McCullough said that “the FCC’s practice is still to follow” the separations practice “informally” with regard to issues such as “the direct assignment of privacy lines” with regard to business data service (BDS) loops.

Without a clear statement by the FCC, states “will tell us, as Maine did, that they are bound” by the FCC’s separations freeze.

Judge Williams asked what the petitioners’ reaction would be if the FCC counsel, who was to speak a few minutes later, stated that states do have authority to adjust the allocation factors.

“We will accept it,” Mr. McCullough said. “We will lose on the merits, [but] we will take it to the states, so long as it is precedential.”

Judge Williams said, “We are not bound by Maine.”

Mr. McCullough said, “If you tell us they [the FCC] were wrong, we will happily go back to Maine and tell them they are wrong.”

Mr. Dunne faced far fewer questions from the bench.

He said that “the issue of whether the states are bound [by the FCC’s separations freeze] does not go [the issue of] whether the petitioners have standing.”

He also said that the FCC “think[s] it’s clear that states are not bound,” and suggested the petitioners seek a declaratory ruling if they believe it is not clear.

In response to Judge Williams’s question about whether removing the barrier to state action would be sufficient remediation, Mr. Dunne said that “removing the freeze would not make it any more likely” that the changes in allocations the petitioners seek would occur.

Judge Williams suggested that both the FCC and the petitioners want reform, but that they differ on the speed with which they want it, and that the FCC wants to approach the issue “holistically” with other issues.

“I think that’s fair,” Mr. Dunne said.

On rebuttal, Judge Williams acknowledged to Mr. McCullough that he was “unable to extract exactly what you wanted” from the FCC in terms of a precedential statement that the states are not bound by the separations freeze.

Mr. McCullough said, “You got closer than we did, and for that, I thank you.”

Judge Williams raised his earlier point about the policy goals of the FCC and the petitioners’ being the same. “Aren’t you asking us to tell them to move faster?” he asked, pointing out that courts are reluctant to make such orders, given that it requires a reallocation of agency resources.

Mr. McCullough pointed to a case involving Comptel in which a court found that a 13-year delay was too long, and the separations freeze has been in place about 18 years already.

Circuit Judge Judith W. Rogers, who presided over the oral argument, did not ask any questions. —Lynn Stanton, [email protected]

MainStory: FederalNews Courts FCC

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