Critics to Challenge FCC Separations Freeze; Joint Board Eyes Discrete Issues

Litigation looms over a lengthy FCC jurisdictional separations freeze despite buy-in from key state regulators. Critics plan a court challenge to a Dec. 17 order extending the freeze on rules allocating most regulated costs to intrastate rather than interstate services, which they say eases illegal cross-subsidies. “We’re going to definitely appeal," said Bruce Kushnick, New Networks Institute executive director. Commissioner Mike O'Rielly, chairman of a federal-state joint board on separations, and others said the rules are becoming less relevant, applying to fewer carriers.

The agency extended by up to six years the Part 36 rule freeze on category relationships and federal-state cost-allocation factors imposed in 2001 and repeatedly extended (see 1812170049). O'Rielly had pushed a 15-year extension, but state joint board members opposed it. He agreed to a compromise with Commissioner Brendan Carr (another board member), gaining the state members' recommendation and FCC colleagues' votes.

The commission asked the joint board to focus on addressing targeted issues, not a broad overhaul that O'Rielly believes isn't needed on rules that may "become defunct." An FCC spokesperson didn't comment.

O’Rielly "looks forward to convening the Separations Joint Board soon -- hopefully, in February when many members will be in town -- and assessing incremental steps to reflect recent changes to rate-of-return regulation," including a new model-based Connect America Fund offer, "and past forbearance actions,” said a statement his office sent. NARUC meets Feb. 10-13 in Washington.

Joint board state member Sally Talberg appreciates the FCC seeking input. She chairs the Michigan Public Service Commission. Joint Board State Chair Sarah Hofmann, a Vermont Public Service Commissioner, thanked FCC members “for making time in their tightly packed schedules to deliberate, as required, on the extension and optional freeze issues which, in turn, led to the filing of the recommended decision” to extend the freeze up to six years.

'Irregulators' Plans

The accord doesn't erase objections to the freeze and other telco deregulation, said Kushnick, who also spearheads the Irregulators, a group of veteran telecom specialists.

"We’ll also be going after all the cost-accounting deregulation and forbearance that was granted over the last 18 years," said the longtime telco critic. "This may be the last chance," said consultant David Bergmann, another Irregulator. "Without cost studies, reflecting properly-allocated costs, how can it be determined that the services that most people rely on -- like basic telecom and broadband -- are reasonably priced? You can't."

"We're going to fight the freeze," said Mark Cooper, Consumer Federation of America senior fellow and Irregulators collaborator. "We have been looking to bring a case, and this is it." Chairman Ajit Pai "is attempting to repeal the Communications Act administratively. We've got to put a stop to it," Cooper said. "The Irregulators are well-stocked. We've got the data. We've got the economic analysis. And hopefully, we can bring the legal muscle."

Telco interests wanted an even longer freeze extension.

"We had advocated for them to make it indefinite," said Lynn Follansbee, USTelecom vice president-law and policy. "These rules don't get used that much any more. ... This is much ado about increasingly less." The FCC gave larger, price-cap telcos forbearance from separations rules in 2008, and it recently extended the relief to RoR carriers receiving fixed or model-based high-cost USF and opting into business data service incentive regulation. By mid-2019, the rules will apply to RoR carriers serving only about 800 study areas, and some only for certain purposes, the recent order said.

NTCA backed the 15-year extension but welcomes the six-year freeze as helping to stabilize regulation, said Senior Vice President Mike Romano. "This really is only a small-carrier issue." He said the issue "will narrow" further as more RoR carriers move to model-based USF support and BDS price caps. After six years, separations could be a smaller problem, "if it exists at all," he said.

Moot Anyway?

“Separations is going to work its way into obsolescence and, for most carriers and most states, it already has,” emailed Montana Public Service Commissioner Travis Kavulla. He's leaving the PSC and joint board for R Street Institute in the new year.

“It’s still relevant for a limited set of RoR carriers” and states with legacy regulations on intrastate rates and state USF programs based on the federal separations allocation, said the outgoing regulator. “Yet to the degree states are finding it difficult to rely on a professedly antiquated regime of separations to make their own policies work, surely it is common sense that they should rely on some other basis of providing local subsidies and, if they choose to continue engaging in it, ratemaking.”

The FCC tasked the joint board nearer term with focusing on amending the separations rules to recognize they target only RoR carriers and to see if other rules or record-keeping duties can be pared back. "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," said the order. This "appears to be a genuinely constructive effort to move forward in some fashion, by urging the Joint Board to focus on a discrete handful of questions rather than trying to 'boil the ocean' with a grand plan," emailed telecom-industry consultant Carol Mattey.

The tasks shouldn't be that hard, but "that doesn't really advance things very much," said Michael Skrivan, Consolidated Communications vice president-regulatory. The bigger deal would be if regulators tried to revise the frozen allocation factors, including a 75/25 intrastate/interstate split of loop costs, he said, but that appears to be too heavy a lift, given the economic and political fallout of creating winners and losers. The joint board has been dealing with separations for 17 years, and even when the rules applied to more carriers, "you didn't see parties putting in the resources," he said. "With fewer companies affected, it's even less likely that the FCC, NARUC and the industry will revise separations."

Cooper said large telcos took advantage of the freeze and deregulation. "Infrastructure costs are incorrectly allocated to the intrastate jurisdiction," he said. "Telcos jack up local phone rates to recover their costs," and "pocket the money" to "squeeze" competitors for broadband and other interstate services with growing revenue. "What about the poor guy who doesn't buy that other [bundled] stuff?" he asked. "They're violating Title II of the Act, including a prohibition on cross-subsidies" in Section 254(k), he said.

Recognizing the Irregulators' potential to create disruption, Cooper said: "We have an administration that’s willing to upset every apple cart on the planet to the detriment of consumers. Why shouldn’t we upset one to the benefit of consumers?”