Winter Is Here: FCC Extends Jurisdictional Separations Freeze For Another Six Years!
December 17, 2018 – The Federal Communications Commission has released a Report and Order and Waiver that extends the existing freeze on jurisdictional separations for up to another six years.[1] The extension will begin on January 1, 2019, and will continue until the earlier of December 31, 2024, or the completion of comprehensive reform of the Part 36 jurisdictional separations rules.
This most recent decision now extends what was originally an interim freeze for a period of five years to its 24th year. The reason? So the FCC and the Federal-State Joint Board on Jurisdictional Separations can devote their resources to substantive reform, rather than to extending artificial deadlines. Specifically, the FCC wants “the Joint Board to adopt an incremental approach to separations reform by focusing first on cleaning up the existing separations rules and then on long-term steps toward comprehensive reform of the remaining rules.” As a first step in this process, the FCC has provided carriers that opted to freeze their separations category relationships in 2001 a one-time opportunity to unfreeze and update those relationships so that they can categorize their costs based on current circumstances. Below is a summary of the long history of the jurisdictional separations freeze, followed by a quick summary of the recent order.
What The Hell Is Jurisdictional Separations Anyway? Jurisdictional Separations Is The Third Step In A Four-Step Regulatory Process, Duh...
The FCC’s separations rules require each rate-of-return local exchange carrier (LEC) to divide its regulated costs of providing service – cost of network facilities and services – between the interstate and intrastate jurisdictions in a manner reflecting each jurisdiction’s relative use of the LEC’s network. This jurisdictional separations process prevents LECs from recovering the same costs in both the intrastate and interstate jurisdictions. The FCC’s jurisdictional separations rules are from a bygone era – the 1970’s – when plain old telephone service provided by “phone companies” was the primary means of communications for all Americans and FCC and state commissions “set virtually all telephone rates based on actual costs.” Fast forward to today, and these same phone companies are providing “voice, data, and video services that are increasingly being provided over Internet Protocol-based networks.”
Jurisdictional separations is the third step in a four-step regulatory process. The separations process is complex, and it is difficult to understand, but here goes:
In the first step, rate-of-return carriers record their costs and revenues in various accounts using the Uniform System of Accounts prescribed by the FCC’s Part 32 rules.
The second step in the separations process is “reg vs. non-reg.” Carriers record their costs, including investments and expenses, and assign them to an account labeled either regulated or nonregulated activities in accordance with Part 64 of the FCC’s rules. (This prevents carriers from recovering costs of nonregulated activities through regulated interstate rates.)
In step three, rate-of-return LECs must jurisdictionally separate their regulated costs between intrastate and interstate jurisdictions in accordance with FCC Part 36 separations rules.
In the fourth and final step of the process, a “carrier apportions the interstate regulated costs among the interexchange services and the rate elements that form the cost basis for its exchange access tariffs.” Rate-of-return regulation perform this apportionment in accordance with the FCC’s Part 69 rules.
Ok, back to step three again – rate-of-return LECs must jurisdictionally separate their regulated costs between intrastate and interstate jurisdictions. Separations are calculated using direct assignment, a relative use factor, or a fixed percentage allocator. In other words, some costs are entirely interstate or intrastate. This is easy to calculate. Amounts in categories that are used exclusively – 100% – for interstate or intrastate communications are directly assigned to the appropriate jurisdiction.
Some costs go into both jurisdictions. Amounts in categories that support both interstate and intrastate services are divided between the jurisdictions using allocation factors that reflect relative use or a fixed percentage. For instance, loop costs are allocated by a fixed allocator—25 percent of the loop costs are interstate and 75 percent are intrastate.[2] To demonstrate to the FCC that they comply with these rules, rate-of-return incumbent LECs perform annual cost studies that include jurisdictional separations. The separations rules do not apply to rate-of-return carriers that are average schedule companies.
Brrrrr, The Long, Cold History Of The FCC’s Jurisdictional Separations Freeze
To understand the history of the FCC’s jurisdictional separations freeze, you have to go all the way back to 1997. That was when FCC began a proceeding to consider changes to the separations process in light of certain legislative, technological, and telecommunications services market changes.[3] The FCC kicked off the proceeding, but the Federal-State Joint Board on Jurisdictional Separations plays the primary role. The Communications Act requires the FCC to “refer any proceeding regarding the jurisdictional separation of common carrier property and expenses between interstate and intrastate operations, which it initiates pursuant to a notice of proposed rulemaking” to a federal-state Joint Board.[4] Seems obvious right? The FCC saw the technological changes that were happening and determined changes were needed.
In response to the 1997 referral, the state members of the Joint Board first filed a report identifying issues they believed should be addressed. Then in 2000, the state members of the Joint Board issued a report that proposed “an interim freeze, among other things, to reduce the impact of changes in telephone usage patterns and resulting cost shifts from year to year.”[5]
Then came what is referred to by FCC regulatory wonks as the “first freeze.” In May of 2001, acting on the Joint Board’s recommended decision, the FCC “[took] a significant step towards reforming outdated regulatory mechanisms that are out of step with [a] rapidly-evolving telecommunications marketplace,” by issuing a separations order that placed an interim freeze, for a period of five years, on part 36 category relationships and jurisdictional allocation factors for ILECs.[6]
In that first freeze order, the FCC froze all Part 36 category relationships and allocation factors for price cap carriers and froze all allocation factors for rate-of-return carriers. Because requiring rate-of-return carriers to freeze their category relationships could potentially harm these carriers, the FCC provided rate-of-return carriers a one-time option to freeze their category relationships. This move enabled each rate-of-return carrier to determine whether such a freeze would be beneficial “based on its own circumstances and investment plans.” The FCC’s December 2018 Report and Order and Waiver notes that “[p]resently, rate-of-return carriers in about 45 study areas operate under the category relationships freeze.”[7] So to recap, the 2001 first freeze order froze rate-of-return carriers’ allocation factors, and gave those carriers the option of also freezing their category relationships. That first freeze was supposed to last for five years or until the FCC completed comprehensive separations reform, whichever came first.
Neither came first. The long cold winter continued. The FCC subsequently extended the separations freeze seven times. In 2006, the freeze was extended for a period of three years, and was then further extended for a period of one year in 2009. The FCC extended the separations freeze for a period of one year in 2010 and then again in 2011. In May 2012, the FCC extended the freeze another two years, and in June 2014, extended it another three years.[8] In May 2017, the freeze was extended through December 31, 2018.[9] Here’s a recap of the freezes:
2001 – 5 years
2006 – 3 years
2009 – 1 year
2010 – 1 year
2011 – 1 year
2012 – 2 years
2014 – 3 years
2017 – 1 year
2018 – 6 years
The Declining Relevance Of Jurisdictional Separations Rules
In the December 2018 Report and Order and Waiver, the FCC notes that its “jurisdictional separations rules have become irrelevant to the carriers that provide most Americans with telecommunications services.” How so? The separations rules were never applicable to wireless carriers; in 2008, the FCC granted price cap carriers forbearance from the separations rules; and recently the FCC extended forbearance to rate-of-return carriers that receive fixed or model-based high-cost universal service support and that elect incentive regulation for their business data services.[10] Because of the many reforms adopted over the past 20 years, the FCC currently uses separations results only for carriers subject to rate-of-return regulation and only for the following limited purposes of calculating: (a) business data services rates; (b) the charge assessed on residential and business lines, known as a subscriber line charge, allowing carriers to recover part of the costs of providing access to the telecommunications network; (c) the rate for Consumer Broadband-Only Loop service; and (d) the interstate common line and Consumer Broadband-Only Loop support for non-fixed support carriers.[11] The FCC estimates that “next year, the separations rules will apply only to rate-of-return carriers serving about 800 study areas.”
The Freeze Extension And A One-Time Unfreeze Opportunity: Rate-Of-Return Carriers Operating Under The Category Relationships Freeze May Opt Out And Update Their Category Relationships
As mentioned earlier, the FCC has extended the existing freeze on jurisdictional separations for up to another six years. The extension will begin on January 1, 2019, and will continue until the earlier of December 31, 2024, or the completion of comprehensive reform of the Part 36 jurisdictional separations rules. This freeze extension comes with a one-time opt-out opportunity.
In the Report and Order and Waiver, the FCC explains that rate-of-return carriers that elected to freeze their category relationships in 2001 did so based, in part, on the FCC’s representation that the freeze would last no more than five years. While that freeze has now gone on for over 17 years, the FCC’s rules prohibit carriers from doing anything about it. The FCC has addressed that problem now.
To kick off the incremental separations reform process, the FCC has provided carriers that opted to freeze their separations category relationships in 2001 a one-time opportunity to unfreeze and update those relationships so that they can categorize their costs based on current circumstances.[12] This, the FCC hopes, should enable those carriers to better recover network upgrade costs from ratepayers that benefit from those upgrades and to take greater advantage of universal service programs that incent broadband deployment.
***** Footnotes *****
[1] Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Report and Order and Waiver, FCC 18-182 (rel. Dec. 17, 2018) (2018 Report and Order).
[2] See 47 C.F.R. § 36.154(c).
[3] See Jurisdictional Separations Reform and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Notice of Proposed Rulemaking, FCC 97-354 (Oct. 7, 1997).
[4] 47 U.S.C. § 410(c).
[5] Jurisdictional Separations Reform and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Recommended Decision, FCC 00J-2 (July 21, 2000) (2000 Separations Recommended Decision).
[6] Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, FCC 01-162, Report and Order, ¶1 (May 22, 2001) (2001 Separations Freeze Order).
[7] 2018 Report and Order at ¶10.
[8] Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Report and Order, FCC 14-91 (June 13, 2014).
[9] Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Report and Order, FCC 17-55 (May 15, 2017).
[10] 2018 Report and Order at ¶16.
[11] 2018 Report and Order at ¶18.
[12] In the Rate-of-Return Business Data Services Order, the FCC allowed carriers subject to the category relationships freeze that receive model-based and other forms of fixed high-cost support and elect incentive regulation for business data services to opt out of that freeze and update their category relationships. See Regulation of Business Data Services for Rate-of-Return Local Exchange Carriers, WC Docket No. 17-144, Report and Order, Further Notice of Proposed Rulemaking, and Second Further Notice of Proposed Rulemaking, FCC 18-146, (rel. Oct. 24, 2018).
