*Pages 1--82 from C:\Pdf2Text\Ready4Text_in\pdf\57068.pdf* Federal Communications Commission FCC 06- 70 Before the Federal Communications Commission Washington, D. C. 20554 In the Matter of Jurisdictional Separations and Referral to the Federal- State Joint Board ) ) ) ) ) CC Docket No. 80- 286 ORDER AND FURTHER NOTICE OF PROPOSED RULEMAKING Adopted: May 15, 2006 Released: May 16, 2006 Comment Date: 90 days after publication in the Federal Register Reply Comment Date: 180 days after publication in the Federal Register By the Commission: Commissioners Copps and Tate issuing separate statements. TABLE OF CONTENTS Paragraph # I. INTRODUCTION.................................................................................................................................. 1 II. BACKGROUND.................................................................................................................................... 2 A. Jurisdictional Separations and the Separations Process ................................................................... 2 B. 2001 Separations Freeze Order........................................................................................................ 5 C. Subsequent Filings and Commission Actions................................................................................ 11 III. ORDER ................................................................................................................................................ 15 IV. FURTHER NOTICE OF PROPOSED RULEMAKING..................................................................... 25 A. Separations Reform Proposals ....................................................................................................... 26 1. Refreshing the Record on the 1997 Separations Notice.......................................................... 27 2. Glide Path Papers.................................................................................................................... 29 3. Draft Data Request .................................................................................................................. 31 4. Separations of the Costs Associated with Emergence of New Technologies and Local Competition ............................................................................................................................. 33 B. Reallocation of Investment Categories .......................................................................................... 38 V. PROCEDURAL MATTERS................................................................................................................ 39 A. Final Regulatory Flexibility Certification...................................................................................... 39 B. Paperwork Reduction Act Analysis ............................................................................................... 40 C. Initial Regulatory Flexibility Act Analysis.................................................................................... 41 D. Congressional Review Act............................................................................................................. 42 E. Ex Parte Presentations.................................................................................................................... 43 F. Comment Filing Procedures .......................................................................................................... 44 VI. ORDERING CLAUSES....................................................................................................................... 48 Appendix A – Separations Joint Board State Members’ Glide Path Paper Appendix B – Separations Joint Board State Members’ Glide Path II Paper Appendix C – Draft Data Request Appendix D – Final Regulatory Flexibility Certification Appendix E – Initial Regulatory Flexibility Analysis 1 Federal Communications Commission FCC 06- 70 2 I. INTRODUCTION 1. In this Order and Further Notice of Proposed Rulemaking (Order and Further Notice), we address several pending issues related to the jurisdictional separations process by which incumbent local exchange carriers (incumbent LECs) apportion regulated costs between the intrastate and interstate jurisdictions. 1 First, we adopt an Order extending, on an interim basis, the current freeze of Part 36 category relationships and jurisdictional cost allocation factors, which would otherwise expire on June 30, 2006. 2 Extending the freeze will allow the Commission to provide stability for carriers that must comply with the Commission’s separations rules while the Commission considers issues relating to comprehensive, permanent reform of the jurisdictional separations process. Second, we adopt a Further Notice seeking comment on issues relating to reform of the jurisdictional separations process, including several proposals submitted to the Commission since its adoption of the 2001 Separations Freeze Order. II. BACKGROUND A. Jurisdictional Separations and the Separations Process 2. Jurisdictional separations is the process by which incumbent LECs apportion regulated costs between the intrastate and interstate jurisdictions. 3 Historically, one of the primary purposes of the separations process has been to prevent incumbent LECs from recovering the same costs in both the interstate and intrastate jurisdictions. 4 3. Jurisdictional separations is the third step in a four- step regulatory process to establish rates for the incumbent LECs’ interstate and intrastate regulated services. First, carriers record their costs, including investments and expenses, into various accounts in accordance with the Uniform System of Accounts (USOA) prescribed by Part 32 of the Commission’s rules. 5 Second, carriers assign the costs in 1 47 C. F. R. §§ 36. 1- 36. 507. 2 Jurisdictional Separations and Referral to the Federal- State Joint Board, CC Docket No. 80- 286, Report and Order, 16 FCC Rcd 11382 (2001) (2001 Separations Freeze Order). 3 For purposes of section 251 of the Communications Act of 1934, as amended (the Act), a local exchange carrier (LEC) is regarded as an “incumbent local exchange carrier” (incumbent LEC) for a specific area if, on the date of enactment of the Telecommunications Act of 1996, Pub. L. 104- 104, Feb. 8, 1996, 110 Stat. 56, codified at 47 U. S. C. § 151 et seq. (1996 Act), the carrier provided telephone exchange service in that area and was deemed to be a member of the National Exchange Carrier Association, Inc. (NECA), or if the carrier “became a successor or assign” of such a member on or after that date. 47 U. S. C. § 251( h)( 1). Pursuant to section 69. 601( b) of the Commission’s rules, “[ a] ll telephone companies that participate in the distribution of Carrier Common Line revenue requirement, pay long term support to association Common Line tariff participants, or receive payments from the transitional support fund administered by [NECA] shall be deemed to be members.” 47 C. F. R. § 69. 601( b). For purposes of this Order and Further Notice, the term “carriers” refers to incumbent LECs. We note that, unlike the incumbent LECs, competitive local exchange carriers (competitive LECs) are not subject to the requirements of Part 36. See 47 C. F. R. §§ 36. 1 et seq. 4 As the Supreme Court has recognized, procedures for the separation of intrastate and interstate property and expenses have been necessary for the appropriate recognition of authority between the interstate and intrastate jurisdictions. Smith v. Illinois Bell Tel. Co., 282 U. S. 133, 148 (1930) (Smith v. Illinois). The Supreme Court added that “[ w] hile the difficulty in making an exact apportionment of the property is apparent, and extreme nicety is not required, only reasonable measures being essential, it is quite another matter to ignore altogether the actual uses to which the property is put.” Id. at 150- 151. See also MCI Telecommunications Corp. v. FCC, 750 F. 2d 135, 137 (D. C. Cir. 1984) (MCI v. FCC) (stating that "'[ j] urisdictional separations is a procedure that determines what proportion of jointly used plant should be allocated to the interstate and intrastate jurisdictions for ratemaking purposes"). 5 47 C. F. R. Part 32. 2 Federal Communications Commission FCC 06- 70 3 these accounts to regulated and nonregulated activities in accordance with Part 64 of the Commission’s rules to ensure that the costs of non- regulated activities will not be recovered in regulated interstate service rates. 6 Third, carriers perform jurisdictional separations by apportioning the regulated costs in each category between the intrastate and interstate jurisdictions in accordance with the Commission’s Part 36 separations rules. 7 Fourth, carriers apportion the interstate regulated costs among the interexchange services and rate elements that form the cost basis for their interstate access tariffs. 8 Carriers perform this apportionment in accordance with Part 69 of the Commission’s rules. 9 The intrastate costs that result from application of the Part 36 rules form the foundation for determining carriers’ intrastate rate base, expenses, and taxes. 4. The jurisdictional separations process itself has two parts. In the first step, carriers assign regulated costs to various categories of plant and expenses. In certain instances, costs are further disaggregated among service categories. 10 In the second step, the costs in each category are apportioned between the intrastate and interstate jurisdictions. These jurisdictional apportionments of categorized costs are based upon either a relative use factor, a fixed allocator, or, when specifically allowed in the Part 36 rules, by direct assignment. 11 For example, loop costs are allocated by a fixed allocator, which allocates 25% of the loop costs to the interstate jurisdiction and 75% of the costs to the intrastate jurisdiction. 12 6 The Part 64 cost allocation rules are codified at 47 C. F. R. §§ 64. 901- 04. Non- regulated activities generally consist of activities that have never been subject to regulation under Title II; activities formerly subject to Title II regulation that the Commission has preemptively deregulated; and activities formerly subject to Title II regulation that have been deregulated at the interstate level, but not preemptively deregulated at the intrastate level, which the Commission decides should be classified as non- regulated activities for Title II accounting purposes. See 47 C. F. R. § 32. 23( a); Accounting Safeguards under the Telecommunications Act of 1996, CC Docket No. 96- 150, Report and Order, 11 FCC Rcd 17539, 17573 (1996), recon. granted in part and denied in part, Report and Order in CC Docket No. 98- 81, First Order on Reconsideration in CC Docket No. 96- 150, Fourth Memorandum Opinion and Order in AAD File No. 98- 43, 14 FCC Rcd 11396 (1999) (granting petitions for reconsideration in part and adopting changes to section 274( f) reporting requirements), recon. denied, Second Order on Reconsideration in CC Docket No. 96-150, 15 FCC Rcd 1161 (2000) (rejecting petitions for reconsideration on the grounds that the petitions raised no new arguments). Similarly, state jurisdictions have the ability to remove the costs of state non- regulated activities so that those costs will not be recovered in regulated intrastate service rates. 7 47 C. F. R. Part 36. 8 Part 61 of the Commission’s rules prescribes the procedures for filing and updating interstate tariffs. See 47 C. F. R. Part 61. 9 47 C. F. R. Part 69. 10 For example, central office equipment (COE) Category 1 is Operator Systems Equipment, Account 2220. The Operator Systems Equipment account is further disaggregated or classified according to the following arrangements: (i) separate toll boards; (ii) separate local manual boards; (iii) combined local manual boards; (iv) combined toll and DSA boards; (v) separate DSA and DSB boards; (vi) service observing boards; (vii) auxiliary service boards; and (viii) traffic service positions. See 47 C. F. R. § 36. 123. 11 Because some costs are directly assigned to a jurisdictionally pure service category, i. e. a category used exclusively for either intrastate or interstate communications, both steps are often effectively performed simultaneously. For example, the cost of private line service that is wholly intrastate in nature is assigned directly to the intrastate jurisdiction. See 47 C. F. R. § 36. 154( a). 12 See 47 C. F. R. § 36. 154( c). 3 Federal Communications Commission FCC 06- 70 4 B. 2001 Separations Freeze Order 5. In 1997, the Commission initiated a proceeding seeking comment on the extent to which legislative changes, technological changes, and market changes warrant comprehensive reform of the separations process. 13 The Commission noted that the current network infrastructure is vastly different from the network and services used to define the cost categories appearing in the Commission’s current Part 36 rules, and that the separations process codified in the current Part 36 rules was developed during a time when common carrier regulation presumed that interstate and intrastate telecommunications service must be provided through a regulated monopoly. 14 In addition, the Commission sought comment on several proposals previously submitted to the Commission. 15 The Commission also invited the State Members of the Federal- State Joint Board on Jurisdictional Separations (Joint Board) to develop a report that would identify additional issues that should be addressed by the Commission in its comprehensive separations reform effort. 6. On December 21, 1998, the State Members filed a report recommending that the Joint Board address certain additional issues in connection with the consideration of comprehensive separations reform. 16 The State Report proposed an interim jurisdictional separations freeze, among other things, to reduce the impact of changes in telephone usage patterns and resulting cost shifts from year to year. 17 7. On July 21, 2000, the Joint Board issued its 2000 Separations Recommended Decision for an interim freeze of the Part 36 category relationships and jurisdictional allocation factors. 18 The Joint Board recommended interim action to provide simplicity and stability to the separations process while the Commission and the Joint Board continue to review comprehensive reform in light of legislative, technological, and market changes. Accordingly, the Joint Board recommended that, until comprehensive reform can be achieved, the Commission should freeze Part 36 category relationships and jurisdictional 13 Jurisdictional Separations Reform and Referral to the Federal- State Joint Board, CC Docket No. 80- 286, Notice of Proposed Rulemaking, 12 FCC Rcd 22120, 22126- 22131, paras. 9- 19 (1997) (1997 Separations Notice). 14 Id. at 22126, para. 9. 15 For example, NYNEX proposed in its Petition for Forbearance that all costs be separated for each study area based on a single, frozen interstate allocation factor. See New England Telephone and Telegraph Company and New York Telephone Company, Petition for Forbearance from Jurisdictional Separations Rules, AAD 96- 66 (filed May 2, 1996); New England Telephone and Telegraph Company and New York Telephone Company, Public Notice, AAD 96- 66, 11 FCC Rcd 7139 (1996) (soliciting Comments on the NYNEX petition); New England Telephone and Telegraph Company and New York Telephone Company, Order, AAD 96- 66, 12 FCC Rcd 2308 (1997) (denying the NYNEX petition and incorporating the issues raised by NYNEX into this proceeding). 16 See Jurisdictional Separations Reform and Referral to the Federal- State Joint Board, CC Docket No. 80- 286, State Members Report on Comprehensive Review of Separations (filed Dec. 21, 1998) (State Report). 17 See id. at 15- 16. 18 Jurisdictional Separations Reform and Referral to the Federal- State Joint Board, CC Docket No. 80- 286, Recommended Decision, 15 FCC Rcd 13160 (2000) (2000 Separations Recommended Decision). The Commission sought public comment on the 2000 Separations Recommend Decision. See Jurisdictional Separations Reform and Referral to the Federal- State Joint Board, CC Docket No. 80- 286, Public Notice, 15 FCC Rcd 15054 (CCB 2000); Public Notice, 15 FCC Rcd (CCB 2000) (2000 Separations Public Notice). “Category relationships” are the percentage relationships of each Part 36 category to the total amount recorded in its corresponding Part 32 account( s). See 47 C. F. R. Part 32, Part 36. “Jurisdictional allocation factors” are the percentage relationships that allocate costs assigned to Part 32 accounts for jointly used plant between the interstate (federal) and intrastate (state) jurisdictions. See 2000 Separations Recommended Decision, 15 FCC Rcd at 13172, para. 20. 4 Federal Communications Commission FCC 06- 70 5 allocation factors for price cap carriers and allocation factors only for rate- of- return carriers. 19 The Joint Board further recommended that the Commission implement the freeze based on data from the twelve-month period immediately prior to the Commission’s issuance of an order on the 2000 Separations Recommended Decision. 20 Finally, the Joint Board recommended that the Commission continue to consider, in the context of comprehensive reform, other proposals in the record, such as the NYNEX single frozen factor proposal. 21 8. In the 2001 Separations Freeze Order, the Commission adopted the Joint Board’s recommendation to impose an interim freeze of the Part 36 category relationships and jurisdictional cost allocation factors, pending comprehensive reform of the Part 36 separations rules. 22 The Commission concluded that this freeze would provide stability and regulatory certainty for carriers by minimizing any impacts on separations results that might occur as a result of circumstances not contemplated by the Commission’s Part 36 rules, such as growth in local competition and new technologies. 23 Further, the Commission found that a freeze of the separations process would reduce regulatory burdens on carriers during the transition from a regulated monopoly to a deregulated, competitive environment in the local telecommunications marketplace. 24 9. Accordingly, the Commission froze all Part 36 category relationships and allocation factors for price cap carriers and all allocation factors for rate- of- return carriers. 25 Under the freeze, price cap carriers calculate 1) the relationships between categories of investment and expenses within Part 32 accounts; and 2) the jurisdictional allocation factors, as of a specific point in time, and then lock or “freeze” those category relationships and allocation factors in place for a set period of time. The carriers use the “frozen” category relationships and allocation factors for their calculations of separations results and therefore are not required to conduct separations studies for the duration of the freeze. Rate- of- return carriers are only required to freeze their allocation factors, but had the option to freeze their category relationships at the outset of the freeze. 19 2000 Separations Recommended Decision, 15 FCC Rcd at 13172, para. 20. 20 Id. at 13174, para. 25. 21 Id. at 13167, para. 11; see supra note 15. 22 See 2001 Separations Freeze Order, 16 FCC Rcd at 11387- 88, para. 9. 23 Id. at 11389- 90, para. 12. Jurisdictional cost shifts in separations results generally are caused by changes in any of three areas: overall cost levels, categorization of costs (i. e., relative category assignments), or jurisdictional allocation factors. A carrier’s increased overall cost level in a Part 32 account that has a high cost allocation to the interstate jurisdiction will cause shifts to the interstate jurisdiction for other investment and expense accounts whose jurisdictional allocations are dependent on that account. Increasing investment in specific categories (e. g., interexchange cable and wire facilities (C& WF)) may also contribute to jurisdictional shifts in the final results. Likewise, changes in customer calling patterns (e. g., increased interstate calling) will cause shifts in the jurisdictional allocation factors, many of which are based on usage. These factors allocate a significant portion of a carrier’s investment between the interstate and intrastate jurisdictions. 24 Although incumbent carriers were required under Part 36 rules to perform separations studies, competitive carriers had no similar requirements. The Commission found that a freeze would further the Commission’s goal of achieving greater competitive neutrality during the transition to a competitive marketplace by simplifying the separations process for those carriers subject to Part 36. 25 The frozen category relationships and allocation factors are based on data from the carriers’ calendar- year 2000 separations studies. 2001 Separations Freeze Order, 16 FCC Rcd at 11387- 88, para. 9. 5 Federal Communications Commission FCC 06- 70 6 10. The Commission ordered that the freeze would be in effect for a five- year period beginning July 1, 2001, or until the Commission completed comprehensive separations reform, whichever came first. 26 In addition, the Commission stated that prior to expiration of the separations freeze, the Commission would, in consultation with the Joint Board, determine whether the freeze period should be extended. 27 The Commission further stated that any decision to extend the freeze beyond the five year period in the 2001 Separations Freeze Order would be based “upon whether, and to what extent, comprehensive reform of separations has been undertaken by that time.” 28 C. Subsequent Filings and Commission Actions 11. Following the adoption of the 2001 Separations Freeze Order, on December 18, 2001, the State Members of the Joint Board filed the Glide Path Paper, outlining seven options for comprehensive separations reform upon expiration of the freeze. 29 In particular, the Glide Path Paper proposed: (1) extending the separations freeze; (2) using fixed allocators to separate traffic sensitive costs; (3) having the Commission set rates for interstate services, and allowing states to apply “residual” ratemaking methods when setting intrastate rates; (4) establishing a new accounting and separations system that is based on separating switched circuits from packet circuits, and that recognizes the existence of broader categories of unregulated service, packet switching, distributed network architecture, and increasing sales of unregulated services; (5) simplifying separations procedures by directly assigning all telecommunications equipment to either the state or the federal jurisdiction; (6) eliminating separations by assigning regulation to a single jurisdiction, either the FCC or the states; or (7) eliminating separations by ending cost- based rate regulation in all jurisdictions where the incumbent carrier faces effective competition. 30 Subsequently, on December 20, 2001, the Wireline Competition Bureau sought comment on the Glide Path Paper in a Public Notice. 31 In addition, on February 5, 2002, the Joint Board held an en banc hearing to discuss options for comprehensive separations reform that were proposed in the Glide Path Paper. 32 12. On May 27, 2004, the Separations Joint Board State Members filed a letter with the Federal Members of the Joint Board requesting that a data request be issued to carriers to better analyze 26 See id. at 11387- 88, para. 9 27 See id. at 11397, para. 29. 28 Id. at 11397, para. 29. The Commission also agreed with the Joint Board’s request in the Recommended Decision that the Commission commit itself to addressing separations treatment of new technologies (e. g., digital subscriber lines) during the freeze and seek comment on the impact of the freeze prior to its expiration. See id. at 11397- 98, paras. 31- 33. 29 Letter from David J. Lynch, Iowa Utilities Board, to Magalie Roman Salas, FCC, filed Dec. 17, 2001 (attaching “Options for Separations: A Paper Prepared by the State Members of the Separations Joint Board” (Glide Path Paper) (attached as Appendix A hereto)). 30 See Glide Path Paper at 8- 26. 31 See Common Carrier Bureau Seeks Comment on “Glide Path” Policy Paper Filed by State Members of the Federal- State Joint Board on Jurisdictional Separations, CC Docket No. 80- 286, Public Notice, 16 FCC Rcd 22551 (CCB 2001). The Wireline Competition Bureau was formerly known as the Common Carrier Bureau. 32 See Federal- State Joint Board on Jurisdictional Separations to Hold En Banc Hearing on Compreshensive Separations Reform, CC Docket No. 80- 286, Public Notice, 17 FCC Rcd 2179 (2002) (Glide Path Hearing Public Notice). 6 Federal Communications Commission FCC 06- 70 7 the impact of the separations freeze on carriers. 33 In October 2004, the State Members of the Joint Board also filed comments in the IP- Enabled Services proceeding proposing, among other suggestions, that the Commission issue a Notice of Proposed Rulemaking seeking comment on action to be taken upon expiration of the separations freeze, and include with it a data collection that could be used to compile information related to the freeze and the impact on separations of its termination. 34 Following these filings, pursuant to the Paperwork Reduction Act, in March 2005, the Commission published a notice in the Federal Register seeking comment regarding the estimated burdens of responding to a data request related to separations and the separations freeze. 35 13. More recently, on October 25, 2005, the Separations Joint Board State Members prepared an update to the Glide Path Paper. 36 The Glide Path II Paper proposes six options – many of them the same as those presented in the original – for a separations policy following the end of the freeze on June 30, 2006. These options include: (1) allowing the freeze to expire; (2) extending the freeze; (3) separating traffic- sensitive costs with fixed allocators; (4) having the Commission set rates for interstate services, and allowing states to apply “residual” ratemaking methods when setting intrastate rates; (5) coordinating separations changes with universal service and intercarrier compensation changes; or (6) abolishing separations altogether. 14. Finally, on December 12, 2005, the United States Telecom Association (USTelecom) filed a White Paper advocating that the Commission extend the separations freeze on an interim basis from July 1, 2006 until a permanent rule retaining, modifying, or terminating the separations freeze takes effect. 37 USTelecom argues that the looming expiration of the freeze is causing significant uncertainty in the industry and forcing carriers to consider making substantial – but potentially unnecessary – investments in an effort to permit compliance with separations study requirements if the freeze is not extended. 38 33 See Letter from Paul Kjellander, State Chair of Federal- State Joint Board on Separations and President, Idaho Public Utilities Commission, Diane Munns, Chair, Iowa Utilities Board, Judith Ripley, Commissioner, Indiana Utility Regulatory Commission, and John Burke, Board Member, Vermont Public Services Board, to Michael Powell, Chairman, Michael Copps, Commissioner, and Kevin Martin, Commissioner, FCC, dated May 27, 2004 (State Members May 2004 Letter). The State Members of the Joint Board also requested that the Commission issue a referral to the Separations Joint Board concerning how to address expiration of the freeze no later than July 2005, and release an order addressing expiration of the freeze no later than March 2006. Id. 34 See IP- Enabled Services; Vonage Holdings Corporation Petition for Declaratory Ruling Concerning an Order of the Minnesota Public Utilities Commission, WC Docket Nos. 04- 36 and 03- 211, Late- Filed Comments by State Members of Separations Joint Board (filed Oct. 26, 2004) (State Members IP- Enabled Services Comments). 35 See Federal Communications Commission, Notice of Public Information Collection( s) Being Reviewed by the Federal Communications Commission, Comments Requested, 70 Fed. Reg. 11971 (March 10, 2005) (Separations Data Request FR Notice). 36 See Letter from James Bradford Ramsay, General Counsel, National Association of Regulatory Utility Commissioners (NARUC), to Marlene H. Dortch, Secretary, Federal Communications Commission, CC Docket No. 80- 286 (filed May 1, 2006) (NARUC May 1, 2006 Letter), Att., “Post- Freeze Options for Separations: A Paper Prepared by the State Members of the Joint Board,” dated Oct. 25, 2005 (signed by Paul Kjellander, Commissioner, Idaho Public Utilities Commission; John Burke, Board Member, Vermont Public Services Board; and Mark Johnson, Commissioner, Regulatory Commission of Alaska) (Glide Path II Paper). 37 See Letter from James W. Olson, USTelecom, to Marlene H. Dortch, FCC, filed Dec. 15, 2005 (attaching USTelecom White Paper, “Paving the Way for Jurisdictional Separations Reform” (USTelecom White Paper)). 38 See USTelecom White Paper at 1- 4. 7 Federal Communications Commission FCC 06- 70 8 III. ORDER 15. In this Order, we extend, on an interim basis, the freeze on Part 36 category relationships and jurisdictional cost allocation factors that the Commission adopted in the 2001 Separations Freeze Order, because we conclude that extending the freeze will provide stability to carriers that must comply with the Commission’s jurisdictional separations rules pending further Commission action to reform the Part 36 rules. 16. We find that more time is needed to study comprehensive reform, including the recent filings by the Joint Board’s State Members and USTelecom. 39 Accordingly, as discussed further below, 40 we extend the separations freeze on an interim basis to allow the Commission and Joint Board to complete comprehensive reform of the jurisdictional separations process. The duration of such extension shall be no longer than three years from the initial date of this extension or until such comprehensive reform can be completed, whichever is sooner. 17. We continue to agree with the Joint Board’s earlier recommendation that, as part of their efforts to comprehensively reform jurisdictional separations, the Joint Board and the Commission should address the appropriate separations treatment of (1) unbundled network elements, (2) digital subscriber line services, (3) private lines, and (4) Internet traffic. 41 Because these issues remain pending, we seek comment on these issues in the attached Further Notice. 42 An extension will allow additional time to study the interrelationships between these issues with comprehensive reform. 18. In the 2001 Separations Freeze Order, the Commission concluded that it had the authority to adopt an interim separations freeze to preserve the status quo pending reform and provide for a reasonable allocation of costs. 43 The analysis performed there remains applicable here. 44 In this 39 Despite a number of filings by USTelecom and the Joint Board State Members disagreeing on procedural matters with regard to extending the separations freeze, on April 18, 2006, the full membership of the Joint Board filed a “letter recommending that the Commission extend the current separations freeze rules for an additional three- year period in order to allow an opportunity to seek comment on and conclude comprehensive separations [reform].” Letter from Deborah Taylor Tate, Chair, Federal- State Joint Board on Separations and Paul Kjellander, State Chair, Federal- State Joint Board on Separations, to Marlene H. Dortch, Secretary, FCC, at 1 (filed April 18, 2006) (Letter of Joint Board Chairs). In this letter, which resulted from extensive and meaningful consultation and cooperation amongst state and federal Joint Board members and staff, the Joint Board expressed its intent “to schedule several substantive working meetings, some of which will include all state and federal members of the board.” Id. at 2. Further, to assist the Commission as it considers separations reform, NARUC, on behalf of the Joint Board State Members, filed the Glide Path II Paper, which expresses the State Members’ views on possible directions for post-freeze separations reform. See NARUC May 1, 2006 Letter. In the Further Notice, we seek comment on the Glide Path II Paper. See infra paras. 29- 30. 40 See infra paras. 25- 38. 41 See 2001 Separations Freeze Order, 16 FCC Rcd at 11397- 98, para. 31. 42 See infra para. 33. For example, in the IP- Enabled Services proceeding, the State Members of the Joint Board emphasized the need to study the impact of Commission action in that proceeding on separations reform. State Members IP- Enabled Services Comments. In addition, more recently the State Members of the Joint Board proposed, in their Glide Path II Paper, that intercarrier compensation and high- cost universal service for rural carriers have a significant impact on separations. Glide Path II Paper, at 12- 13. See also Developing A Unified Intercarrier Compensation Regime, CC Docket No. 01- 92, Further Notice of Proposed Rulemaking, 20 FCC Rcd 4685 (2005); Federal- State Joint Board on Universal Service, CC Docket No. 96- 45, Order, 19 FCC Rcd 11538 (2004 ) (asking the Federal- State Joint Board on Universal Service to review the Commission's rules relating to the high- cost universal service support mechanisms for rural carriers). 43 2001 Separations Freeze Order, 16 FCC Rcd at 11392- 93, para. 17. 8 Federal Communications Commission FCC 06- 70 9 (Continued from previous page) instance, the facts support maintaining the status quo through an interim extension of the separations freeze. Allowing the separations process to revert to the pre- freeze rules would create undue instability and administrative burdens while the Commission is considering comprehensive separations reform. 45 Moreover, a comprehensive source of data to assess alternatives to a freeze is not currently available. Taking those concerns into account, on balance, we find that extending the jurisdictional separations freeze on an interim basis is a reasonable measure to apportion costs. 19. Under the Administrative Procedure Act, an administrative agency may implement a rule without public notice and comment “when the agency for good cause finds . . . that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.” 46 We find that good cause exists in this instance. The Commission adopted the original separations freeze based on an extensive record, which has been supplemented since that time in several filings by the State Members of the Joint Board and interested parties. 47 Extending the freeze will prevent the wasteful expenditure of significant resources by carriers to develop the ability to perform separations in a manner that likely would only be relevant for a relatively short time while the Commission considers comprehensive separations reform. 20. We also find that an interim extension of the separations freeze without public notice and comment is consistent with Mid- Tex Electric Cooperative, Inc. v. FERC. 48 Here, too, the interim extension of the separations freeze is limited, and the concurrent adoption of the attached Further Notice should allow for a timely resolution of the underlying issues. 49 (continued….) 44 The Supreme Court found in Smith v. Illinois that “extreme nicety is not required [in apportioning costs for jurisdictional separations], only reasonable measures being essential . . .” Smith v. Illinois, 282 U. S. at 150. As the D. C. Circuit explained in MCI v. FCC, “Smith compels ‘only reasonable measures’, because the ‘[ a] llocation of costs is not a matter for the slide- rule, ’ but ‘involves judgment on a myriad of facts. ’” MCI v. FCC, 750 F. 2d at 141 (citing Smith, 282 U. S. at 150; Colorado Interstate Gas Co. v. FPC, 324 U. S. 581, 589 (1945)). The court further explained that: Substantial deference must be accorded to an agency when it acts to maintain the status quo so that the objectives of a pending rulemaking proceeding will not be frustrated. What needs to be shown to uphold the FCC is that “existing, possibly inadequate rules” had to be frozen to avoid “compounding present difficulties.” MCI v. FCC, 750 F. 2d at 141. 45 See infra paras. 22- 23. 46 5 U. S. C. § 553( b)( 3)( B). 47 See Glide Path Paper; State Members IP- Enabled Services Comments; Glide Path II Paper; USTelecom White Paper. 48 Mid- Tex Elec. Co- op., Inc. v. FERC, 822 F. 2d 1123 (D. C. Cir. 1987). There, the court found good cause for the agency to adopt interim rules without public comment, placing great weight on the interim nature of the rules: “[ W] e have consistently recognized that a rule’s temporally limited scope is among the key considerations in evaluating an agency’s ‘good cause’ claim.” Id. at 1132. 49 See id. (assessing FERC’s good faith intent to address permanent rulemaking in a timely manner). The Mid- Tex court further cited additional factors contributing to the finding of good cause that are similar to the factors supporting our finding of good cause here. The court credited FERC’s “context- specific concerns regarding ‘regulatory confusion’ and ‘irremedial financial consequences. ’” Id. at 1133. Similarly, we have noted our concerns regarding the financial consequences and administrative burdens of allowing the separations rules to revert to the pre- freeze rules. Much like FERC in Mid- Tex, we have the benefit of the record from an earlier public notice 9 Federal Communications Commission FCC 06- 70 10 (Continued from previous page) 21. In addition, we find that the interim extension of the separations freeze does not require a referral to the Joint Board because it is temporary in scope and because the issue of extension was within the scope of the Joint Board’s earlier recommended decision. 50 We have continued to receive valuable comments, analysis and expertise from the Joint Board on this matter during the current separations freeze. 51 22. We believe that extending the freeze at this time will provide significant stability to the jurisdictional separations process. We find, as did the Commission in the 2001 Separations Freeze Order, that avoiding a sudden cost shift will provide regulatory certainty that offsets the concern that there may be a temporary misallocation of costs between the jurisdictions. 52 Maintaining the stability and regulatory certainty of the freeze will allow carriers to make investment decisions without fear that a reversion to the earlier rules would create radically different cost recovery requirements than they would currently expect. 23. Further, extending the freeze will avoid the imposition of undue administrative burdens on carriers. The Commission described the significant burdens associated with the jurisdictional separations process in the 2001 Separations Freeze Order. 53 If the Commission did not extend the separations freeze, and instead allowed the earlier separations rules to return to force, carriers would be required to reinstitute their separations processes. As noted in the USTelecom White Paper, Verizon alone devoted “at least 60 employees and 11 major computer systems” to the separations process at the time of the freeze. 54 As the USTelecom White Paper further notes, many carriers no longer have the necessary employees and systems in place to comply with the old jurisdictional separations process. 55 Carriers, therefore, likely would have to hire or reassign and train employees and redevelop systems for collecting and analyzing the data necessary to perform separations. Because the Commission may ultimately adopt comprehensive separations reform, these efforts might have very short useful lives. It would be unduly burdensome for carriers to commit the resources necessary to perform separations consistent with our prior rules when there is a significant likelihood that there would be no lasting benefit to doing so. and comment process, as well as other, subsequent filings. The existing record provides us a sufficient basis for considering whether to extend the freeze. See id. at 1132- 33. 50 As we explain above, our finding of good cause permits us to extend the freeze on an interim basis without notice and comment, so no referral is required. 51 See Glide Path Paper; State Members IP- Enabled Services Comments; Glide Path II Paper. 52 We stress that, under the principles of Smith v. Illinois, extreme precision is not required in the separations process. Smith v. Illinois, 282 U. S. at 150- 51. 53 2001 Separations Freeze Order, 16 FCC Rcd at 11390- 91, para. 14. 54 USTelecom White Paper at 1 and n. 1 (citing Federal- State Joint Board on Jurisdictional Separations to Hold En Banc Hearing on Comprehensive Separations Reform, CC Docket No. 80- 286, Verizon Comments at 2 (filed Sept. 25, 2000)). See also Letter from Joe A. Douglas, Vice President Government Relations & Corporate Communications, NECA, to Marlene H. Dortch, Secretary, Federal Communications Commission, CC Docket No. 80- 286 (filed Mar. 2, 2006), Att. at 2 (stating that the burdens imposed on smaller rate of return carriers are proportionately as significant) (letter filed on behalf of NECA, Eastern Rural Telephone Association, the Independent Telephone & Telecommunications Alliance, National Telecommunications Cooperative Association, Organization for the Protection and Advancement of Small Telecommunications Companies, and Western Telecommunications Alliance). 55 Id. at 2. 10 Federal Communications Commission FCC 06- 70 11 24. As indicated in the attached Further Notice, we remain committed to reforming the separations process. Until that occurs, however, we find it is appropriate to extend the freeze on an interim basis. 56 The extended freeze will be implemented as described in the 2001 Separations Freeze Order. 57 Specifically, price- cap carriers will use the same relationships between categories of investment and expenses within Part 32 accounts and the same jurisdictional allocation factors that have been in place since the inception of the current freeze on July 1, 2001. Rate- of- return carriers will use the same frozen jurisdictional allocation factors, and will use the same frozen category relationships if they had opted previously to freeze those as well. IV. FURTHER NOTICE OF PROPOSED RULEMAKING 25. In this Further Notice, we seek comment on proposals relating to comprehensive separations reform. 58 A. Separations Reform Proposals 26. In the 1997 Separations Notice, the Commission noted that the network infrastructure was vastly different from the network and services used to define the cost categories appearing in the Commission’s Part 36 rules. The Commission further noted that the separations process codified in Part 36 was developed during a time when common carrier regulation presumed that interstate and intrastate telecommunications service must be provided through a regulated monopoly. 59 The technological and market landscape of the telecommunications industry has continued to evolve since the adoption of the 1997 Separations Notice. Thus, below, we seek comment on the effects on our separations rules of increased market adoption of IP- enabled services such as voice over IP (VoIP) services, among other technological and market changes. In addition, because of the time that has passed and changes that have occurred since the 1997 Separations Notice, we ask that commenters refresh the record on the 1997 Separations Notice. We also seek comment on specific proposals for comprehensive separations reform advanced by the State Members of the Joint Board, as well as a draft data request prepared by the State Members that is intended to elicit data that may be helpful in formulating a reformed separations process. 1. Refreshing the Record on the 1997 Separations Notice 27. In the 1997 Separations Notice, the Commission sought comment on the extent to which legislative changes, technological changes, and market changes warrant comprehensive reform of the separations process. 60 Because over eight years have elapsed since the closing of the comment cycle on the 1997 Separations Notice, and the industry has experienced substantial changes during that time, we ask that commenters, in their comments on this Further Notice, refresh the record on the issues set forth in the 1997 Separations Notice. 28. For instance, we seek guidance on whether competitive neutrality, administrative simplicity, and principles of cost causation still should be the primary criteria for evaluating proposals for reform of the separations rules, 61 or whether other criteria should be balanced in addition to or in place of 56 See Letter of Joint Board Chairs at 1. 57 2001 Separations Freeze Order, 16 FCC Rcd at 11393- 408, paras. 18- 55 (describing the components of the freeze in detail). 58 See Letter of Joint Board Chairs at 1- 2. 59 1997 Separations Notice, 12 FCC Rcd at 22126, para. 9. 60 Id. at 22126- 22131, paras. 9- 19. 61 See id. at 22132- 36, paras. 22- 31. 11 Federal Communications Commission FCC 06- 70 12 these criteria. In addition, we solicit updated analysis of whether the Supreme Court’s holding in Smith v. Illinois is still applicable in light of competitive market conditions. 62 Furthermore, we seek comment on whether there is a continued need to prescribe separations rules for either price cap or rate- of- return incumbent LECs. 63 Commenters should address the Commission’s existing separations procedures -- including the definition of “study areas,” Part 36 cost categories, and apportionment of costs among Part 36 cost categories and between jurisdictions. 64 Have the Commission’s Part 36 separations rules become obsolete? 65 Where commenters advocate reform of the separations rules, we request that they submit with specificity proposed separations rules, identifying amendments or deletions to the Commission’s existing separations rules that would be necessary if their proposals were adopted. 66 These proposals should include an analysis of how such proposals would affect prices paid by consumers, the way costs are recovered in the intrastate and interstate jurisdictions, and a jurisdictional shift in revenue requirements. 67 Commenters also should consider how costly and burdensome any proposed changes to the Commission’s separations rules would be for small carriers, and whether such changes would disproportionately affect specific types of carriers or ratepayers. 2. Glide Path Papers 29. On December 19, 2001, following adoption of the 2001 Separations Freeze Order, the State Members of the Joint Board filed the Glide Path Paper, outlining seven options for comprehensive separations reform, including the advantages and disadvantages of each option. 68 The Glide Path II Paper, prepared by the State Members of the Joint Board in late October 2005, proposes six options for comprehensive separations reform. 69 The Glide Path Paper and Glide Path II Paper propose options for a transition path from the current frozen Part 36 regime to a mechanism that reflects a telecommunications environment that has experienced significant technological, economic, and legal changes. In both papers, the State Members of the Joint Board express concern about avoiding unwanted consequences when transitioning to a new separations system. Both papers also outline several goals for 62 See id. at 22136- 38, paras. 32- 37 (interpreting and analyzing Smith v. Illinois). In that decision, the Court stated that “proper regulation of rates can be had only by maintaining the limits of state and federal jurisdiction” to determine whether rates are confiscatory. The Court held that when distinct jurisdictional limits exist as to the determination of reasonable rates, some form of jurisdictional separations must occur. In light of this holding of the Court, the Commission sought comment on whether some form of allocation of costs is necessary when there are distinct jurisdictional limits to ensure that regulated rates are not confiscatory or excessive. See id. at 22136- 37, para. 33 (quoting Smith v. Illinois, 282 U. S. at 149). 63 See 1997 Separations Notice, 12 FCC Rcd at 22138- 41, paras. 38- 42. See also Petition of BellSouth Telecommunications, Inc. For Forbearance Under 47 U. S. C. § 160 From Enforcement of Certain of the Commission’s Cost Assignment Rules, WC Docket No. 05- 342, Petition for Forbearance, at 43 (filed Dec. 6, 2005) (BellSouth Cost Assignment Forbearance Petition) (arguing that the original purpose of separations, to prevent incumbent LECs from recovering the same costs in both the interstate and intrastate jurisdictions, was “only valid under rate- of- return regulation where costs could have a direct impact on rates. For [BellSouth], the need for a separations process evaporated when both federal and state regulators moved to pure price cap regulation”). 64 See 1997 Separations Notice, 12 FCC Rcd at 22145- 59, paras. 51- 83. 65 See id. at 22131, para. 21. 66 See id. 67 See id. at 22159- 60, paras. 84- 87. 68 See supra para. 11. 69 Some of these options overlap with the seven proposed in the original Glide Path Paper. See supra para. 13. 12 Federal Communications Commission FCC 06- 70 13 comprehensive separations reform, including the principles that separations should be simpler, separations should be compatible with new technologies and competitive markets, and cost responsibilities should follow jurisdictional responsibilities. 30. We ask commenters to refresh the record on the Glide Path Paper, 70 and, as requested by the State Members of the Joint Board, 71 we seek comment on all of the proposals in the Glide Path II Paper. 72 Specifically, we seek comment on how these proposals account for technological, market, legislative, and other regulatory changes in the telecommunications industry over the last 15 years. In addition, we solicit comment on the State Members’ enunciated goals for and principles underlying comprehensive separations reform. How do these comport with the proposed criteria for evaluating separations reform proposals, as described by the Commission in the 1997 Separations Notice? 73 Moreover, what are the merits of the proposals advanced in the Glide Path Paper and Glide Path II Paper in light of the criteria described by the Commission in the 1997 Separations Notice, as well as the goals and principles for reform enunciated by the State Members of the Joint Board? We also ask commenters to address the impact of the State Members’ proposals on other proceedings before the Commission. Finally, we ask that commenters specifically comment on how these proposals would affect small carriers, including rural incumbent LECs. 3. Draft Data Request 31. In the State Members May 2004 Letter, the State Members of the Joint Board suggested that the Joint Board “issue a data request to find out what the carriers are doing under the freeze – e. g., to find out how carriers are allocating certain costs and expenses and where they are recording or booking certain costs, expenses, and revenues – and to determine what is, and is not, working.” 74 In soliciting comment on the potential burdens associated with a data request, the Commission stated that it contemplated “a one- time data collection designed to assist the Commission in evaluating whether to modify its rules pertaining to jurisdictional separations, specifically, the Part 36 category relationships and jurisdictional cost allocation factors.” 75 We continue to believe that the information derived from such a data request will be useful in assisting the Commission as it contemplates comprehensive separations reform. Appendix C of this Order and Further Notice contains the draft data request. We 70 As a starting point for comprehensive separations reform, the Common Carrier Bureau solicited comment on the Glide Path Paper shortly after it was filed in late 2001. See Glide Path Paper Public Notice. Soon thereafter, in February 2002, the Joint Board held an en banc hearing on the Glide Path Paper. See Glide Path Hearing Public Notice. 71 See State Members May 2004 Letter at 2 (requesting that the Commission publish an updated version of the Glide Path Paper for public comment). 72 Appendices A and B of this Order and Further Notice contain the Glide Path Paper and Glide Path II Paper, respectively, in their entireties. 73 Cf. 1997 Separations Notice, 12 FCC Rcd at 22132- 36, paras. 22- 31 (suggesting that competitive neutrality, administrative simplicity, and principles of cost causation should be the primary criteria for evaluating separations reform proposals). 74 State Members May 2004 Letter at 2. 75 Separations Data Request FR Notice, 70 Fed. Reg. at 11972. The Commission added: “To assist the Federal-State Joint Board on Separations and the Commission in this regard, carriers will be requested to identify and explain the way in which specific categories of costs and revenues are recorded for accounting and jurisdictional purposes.” Id. Though the Commission, in March 2005, published a Federal Register notice seeking comment on the burdens associated with a proposed data request, the Commission did not attach the actual proposed data request at that time. See id. 13 Federal Communications Commission FCC 06- 70 14 seek comment generally on its utility in assisting separations reform efforts, and on whether, as currently drafted, it will help the Commission to elicit useful information towards that end. We also seek comment on whether there are alternatives to a data request to help the Commission educe the desired information. 32. In addition, we seek comment on whether the questions in the appended data request are appropriate as drafted. For instance, in the Separations Data Request FR Notice, the Commission expressed that, among other things, “the data will allow the Federal- State Joint Board and the Commission to study the impact of the Internet and the growth in local minutes during the interim freeze.” 76 Do the questions as drafted accomplish this purpose? Because LECs already retain most of the requested information pursuant to Parts 32, 36, 64, and 69 of the Commission’s rules, we believe that the request should not be unduly burdensome. Nevertheless, we seek input on whether there is any way to streamline the draft data request without sacrificing its utility. We also particularly seek comment on the burdens of the draft data request on small carriers. 4. Separations of the Costs Associated with Emergence of New Technologies and Local Competition 33. Though the proposals formulated by the State Members of the Joint Board in the Glide Path Paper and Glide Path II Paper cast a fairly wide net -- considering carefully the effects of separations reform on other Commission proceedings, and likewise the effect of other Commission proceedings on separations reform -- there are a few issues and other proceedings on which we will particularly focus in this section, in order to ensure that we derive as complete a record as possible on them. In the 2001 Separations Freeze Order, the Commission agreed with the Joint Board’s recommendation that the Commission commit itself to addressing the separations ramifications of issues associated with the emergence of new technologies and local exchange service competition. These issues include the appropriate separations treatment of: (1) UNEs; 77 (2) DSL services; 78 (3) private lines; 79 and (4) Internet traffic. 80 In accord with the Commission’s commitment, we seek comment on the separations ramifications of these four specified issues. We also seek comment on how the market adoption and 76 Id. 77 See 1997 Separations Notice, 12 FCC Rcd at 22162, para. 91. 78 See 2001 Separations Freeze Order, 16 FCC Rcd at 11398, para. 31. See generally Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, Universal Service Obligations of Broadband Providers, CC Docket No. 02- 33, Report and Order and Notice of Proposed Rulemaking, 20 FCC Rcd 14853 (2005) (classifying wireline broadband Internet access service, including DSL Internet access service, as an information service). 79 See 1997 Separations Notice, 12 FCC Rcd at 22128- 29, para. 13, 22149, para. 60. 80 2001 Separations Freeze Order, 16 FCC Rcd at 11398, paras. 31, 33 (citing 2000 Separations Recommended Decision, 15 FCC Rcd at 13175, para. 27). With the substantial growth in broadband adoption over the last five years, we seek comment on its effect on the ISP- bound traffic issue and the question of whether to adjust the local DEM factor. 2001 Separations Freeze Order, 16 FCC Rcd at 11402- 03, paras. 39- 40, 42. For example, the State Members of the Joint Board have proposed that frozen separations usage factors should be changed by transferring 33 percent of each company’s current local DEM to the interstate jurisdiction and recalculating separations factors accordingly, while assigning 100 percent of a carrier’s investment to interstate where the carrier has converted completely its network to IP Format. See State Members IP- Enabled Services Comments at 21- 22. We seek comment on this proposal. We encourage commenters to support their views on this issue with specific, reliable data that will allow the Commission to quantify with reasonable certainty the portion of local usage that can be attributed to Internet usage, and thus establish a reasonable amount, if any, of local DEM reduction that should be applied on an across- the- board, nationwide basis. 14 Federal Communications Commission FCC 06- 70 15 regulatory treatment of IP- enabled services, 81 and other issues and proceedings before the Commission, may affect, or be affected by, comprehensive separations reform. 82 34. Local Competition. In the 2001 Separations Freeze Order, the Commission expressed that a freeze of the separations process would reduce regulatory burdens on carriers during the transition from a regulated monopoly to a deregulated, competitive environment in the local telecommunications marketplace. The Commission also stated that, because incumbent LECs are required under part 36 to perform separations studies, while competitive LECs have no similar requirements, a freeze would further the Commission’s stated goal in the 1997 Separations Notice of achieving greater competitive neutrality during the transition to a competitive marketplace, by simplifying the separations process for incumbent LECs. 83 We seek comment on what effect competitive changes in the local telecommunications marketplace since passage of the 1996 Act should have on comprehensive reform of the Commission’s separations rules. 84 35. Universal Service. The State Members of the Joint Board maintain that separations procedures were never adjusted to reflect the obligations of the Commission, with respect to interstate services, and the States, with respect to intrastate services, under section 254( k) of the 1996 Act to “establish any necessary cost allocation rules, accounting safeguards, and guidelines to ensure that services included in the definition of universal service bear no more than a reasonable share of the joint and common costs of facilities used to provide those services.” 85 In addition, the State Members suggest that any adjustment to separations factors could require parallel adjustments to the assumptions and parameters used in calculating high- cost universal service support. 86 We seek comment on these issues raised by the State Members, and on the general interaction of our separations rules with our universal service rules. 36. Special Access. In an Order and Notice of Proposed Rulemaking adopted over a year ago, the Commission sought comment generally on whether accounting rates of return are meaningful 81 For instance, in the 2001 Separations Freeze Order, the Commission suggested that the part 36 rules do not appropriately address the allocation methods for newer technologies such as packet switching. 2001 Separations Freeze Order, 16 FCC Rcd at 11390, para. 12 & n. 32. Insofar as IP- enabled services rely on packet switching, see generally IP- Enabled Services, WC Docket No. 04- 36, Notice of Proposed Rulemaking, 19 FCC Rcd 4863, 4869-70, para. 8 (2004), how, if at all, could the Commission’s separations rules be modified to account for the irrelevance of usage- based separations procedures as applied to such services? 82 See, e. g., Letter from Douglas Meredith, Director – Economics & Policy, John Staurulakis, Inc., to Marlene H. Dortch, Secretary, Federal Communications Commission, CC Docket No. 80- 286 (filed Mar. 30, 2006) (urging Commission to account for line count declines in revised separations rules); Letter from Douglas Meredith, Director – Economics & Policy, John Staurulakis, Inc., to Marlene H. Dortch, Secretary, Federal Communications Commission, CC Docket No. 80- 286 (filed Apr. 26, 2006). 83 See 2001 Separations Freeze Order, 16 FCC Rcd at 11390, para. 13. 84 For instance, Verizon has argued: “In a market where all services – interstate, intrastate, wireline, wireless, local, long distance, basic, and enhanced – are competitively disciplined, regulatory cost allocation requirements such as the separations rules are not only unnecessary to protect ratepayers, but destructive of true competition.” BellSouth Cost Assignment Forbearance Petition, WC Docket No. 05- 342, Verizon Comments at 6- 7 (filed Jan. 23, 2006) (Verizon Cost Assignment Forbearance Petition Comments). 85 Glide Path II Paper at 8 (quoting 47 U. S. C. § 254( k)). The State Members of the Joint Board provide as an example that Part 64 of the Commission’s rules, “as applied,” concentrates primarily on expense accounts and not investment accounts. Glide Path II Paper at 8. 86 See State Members IP- Enabled Services Comments at 22. 15 Federal Communications Commission FCC 06- 70 16 statistics for evaluating the reasonableness of price cap special access rates. 87 The Commission suggested that its cost allocation rules and factors such as the separations freeze may undermine the usefulness of examining rates of return derived from ARMIS data, but it asked for input on what factors may affect the relevance of ARMIS data to the Commission’s examination of special access rates. The Commission further noted that some parties claim that accounting rates of return for services such as interstate special access are meaningless, because these returns reflect arbitrary allocations of fixed costs between regulated and nonregulated services, between interstate and intrastate jurisdictions, and among interstate services. 88 We seek comment on the effects that separations reform would have on evaluation of special access rates. 37. BellSouth Cost Assignment Forbearance Petition. In a recent petition for forbearance, BellSouth argues that the increase in competitiveness of the telecommunications marketplace since the Commission adopted the 2001 Separations Freeze Order, combined with a “full- fledged” rollout of IP-enabled services and BellSouth’s subjection to price cap regulation, warrants the Commission’s grant of its request for forbearance from the separations rules. 89 Though we solicit comment in other parts of this Further Notice on the effect on comprehensive separations reform of the factors cited by BellSouth to support its petition, we also specifically seek comment on the effect of a Commission grant or denial of the BellSouth Cost Assignment Forbearance Petition on comprehensive separations reform, and vice-versa. B. Reallocation of Investment Categories 38. While the Commission froze the separations category relationships and the jurisdictional cost allocation factors in the 2001 Separations Freeze Order, the Commission also required that categories or portions of categories that had been directly assigned prior to the separations freeze would continue to be directly assigned to each jurisdiction. 90 The Commission’s rules provide that direct assignments shall be updated annually. 91 There has been some disagreement, however, between state commissions and carriers regarding the application of this direct assignment requirement. For instance, at its February 2006 Winter Meetings, the NARUC Board of Directors adopted a resolution stating that the Commission “should clarify that all carriers must continue to directly assign all private lines and special access circuits based on existing line counts.” 92 Conversely, USTelecom requests that the Commission 87 Special Access Rates for Price Cap Local Exchange Carriers; AT& T Corp. Petition for Rulemaking to Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services, WC Docket No. 05- 25, RM- 10593, Order and Notice of Proposed Rulemaking, 20 FCC Rcd 1994, 2015, para. 61 (2005). 88 See id. at 2006, para. 29 & n. 93, 2015, para. 61. 89 See BellSouth Cost Assignment Forbearance Petition at 43- 45. 90 See 2001 Separations Freeze Order, 16 FCC Rcd at 11395, para. 23. The Commission explained that the frozen factors shall not have an effect on the direct assignment of costs for categories, or portions of categories, that are directly assigned. Since those portions of facilities that are utilized exclusively for services within the state or interstate jurisdiction are readily identifiable, we believe that the continuation of direct assignment of costs will not be a burden on carriers, nor will it adversely impact the stability of separations throughout the freeze.” Id. [internal footnote omitted]. 91 See, e. g., 47 C. F. R. § 36. 3( a) (“ Direct assignment of private line service costs between jurisdictions shall be updated annually. Other direct assignment of investment, expenses, revenues or taxes between jurisdictions shall be updated annually.”). 92 Resolution Relating to Separations Reform, NARUC (Feb. 15, 2006), http:// www. naruc. org/ associations/ 1773/ files/ TCOM- 2SeparationsReform. pdf. In a supporting white paper, (continued….) 16 Federal Communications Commission FCC 06- 70 17 (Continued from previous page) “reaffirm” that, under the 2001 Separations Freeze Order, state regulators may not compel LECs to reallocate categories of investment from the intrastate to the interstate jurisdiction while the freeze remains in effect. 93 USTelecom asserts that the direct assignment provision “is narrow and does not require investment studies,” but that some state regulators are attempting to compel carriers to demonstrate that costs are directly assigned in the proper manner. 94 We seek comment on the clarifications sought by NARUC and by USTelecom. V. PROCEDURAL MATTERS A. Final Regulatory Flexibility Certification. 39. The Regulatory Flexibility Act of 1980, as amended (RFA), 95 requires that an RFA analysis be prepared for rulemaking proceedings, unless the agency certifies that "the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities." 96 The RFA certification is in Appendix D. The Commission will send a copy of the Order, including the final certification, in a report to Congress and the Government Accountability Office pursuant to the Congressional Review Act. 97 In addition, the Commission will send a copy of the Order, including this final certification, to the Chief Counsel for Advocacy of the Small Business Administration. A copy of the Order and final certification (or summaries thereof) also will be published in the Federal Register. 98 B. Paperwork Reduction Act Analysis 40. This Order and Further Notice does not contain new, modified, or proposed information collections subject to the Paperwork Reduction Act of 1995 (PRA), Public Law 104- 13. In addition, therefore, it does not contain any new, modified, or proposed “information collection burden for small NARUC maintains that when the Joint Board recommended a freeze in 2000, the Joint Board relied on the updating of direct assignments to offset the effect of increased sales of interstate private lines and special access services, but that “at least some carriers are not performing these annual adjustments.” Whitepaper on Separations Resolution, NARUC, http:// www. naruc. org/ associations/ 1773/ files/ TCOM- 2aWhitepaperonSeparationsResolution. pdf (last visited Mar. 20, 2006). 93 See USTelecom White Paper at 10- 12 (citing proceedings in Vermont and Maine). Similarly, in comments on the BellSouth Cost Assignment Forbearance Petition, Verizon argues that permitting states to engage in such reallocation “would undermine not only the freeze, but the entire concept of a unified national approach to jurisdictional separations.” Verizon Cost Assignment Forbearance Petition Comments at 6 (citing Crockett Tel Co. v. FCC, 963 F. 2d 1564, 1567, 1573 (D. C. Cir. 1992), and Hawaiian Tel. Co. v. Public Utilities Commission of Hawaii, 827 F. 2d 1264, 1275- 76 (9 th Cir. 1987)). Thus, Verizon urges that the Commission “confirm” that the freeze precludes states from imposing inconsistent separations requirements, and that the Commission not create or tolerate a situation where the same investment is split between two different jurisdictions in two different ways. See Verizon Cost Assignment Forbearance Petition Comments at 1, 4. 94 USTelecom White Paper at 11 (citing 2001 Separations Freeze Order, 16 FCC Rcd at 11390, para. 14, 11395, paras. 22- 23); see also Letter from Linda S. Vandeloop, Director, AT& T Services, Inc., to Marlene H. Dortch, Secretary, Federal Communications Commission, CC Docket No. 80- 286 (filed Apr. 6, 2006) (asserting that "[ n] ot all companies currently directly assign special access and private line costs"). 95 See 5 U. S. C. § 603. The RFA, see 5 U. S. C. §§ 601- 12, has been amended by the Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. No. 104- 121, Title II, 110 Stat. 857 (1996). 96 5 U. S. C. § 605( b). 97 See 5 U. S. C. § 801( a)( 1)( A). 98 See 5 U. S. C. § 604( b). 17 Federal Communications Commission FCC 06- 70 20 VI. ORDERING CLAUSES 48. Accordingly, IT IS ORDERED that, pursuant to sections 1, 2, 4, 201- 205, 215, 218, 220, 229, 254, and 410 of the Communications Act of 1934, as amended, 47 U. S. C. §§ 151, 152, 154, 201- 205, 215, 218, 220, 229, 254 and 410, this Order IS ADOPTED. 49. IT IS FURTHER ORDERED that, pursuant to the authority contained in sections 1, 2, 4, 201- 205, 215, 218, 220, 229, 254, and 410 of the Communications Act of 1934, as amended, 47 U. S. C. §§ 151, 152, 154, 201- 205, 215, 218, 220, 229, 254 and 410, this Further Notice of Proposed Rulemaking IS ADOPTED. 50. IT IS FURTHER ORDERED that the Commission’s Consumer and Governmental Affairs Bureau, Reference Information Center, SHALL SEND a copy of this Order and Further Notice of Proposed Rulemaking, including the Final Regulatory Flexibility Certification and Initial Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business Administration. 51. IT IS FURTHER ORDERED that this Order shall be effective thirty days after publication in the Federal Register. FEDERAL COMMUNICATIONS COMMISSION Marlene H. Dortch Secretary 20 Federal Communications Commission FCC 06- 70 21 APPENDIX A Separations Joint Board State Members’ Glide Path Paper 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 Federal Communications Commission FCC 06- 70 22 APPENDIX B Separations Joint Board State Members’ Glide Path II Paper 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 Federal Communications Commission FCC 06- 70 23 APPENDIX C Draft Data Request A. General Instructions 1. When applicable, please list each account and sub account separately by Uniform System of Accounts (U. S. O. A.) 1 reference number. 2. To the extent your answers vary by state, subsidiary, or study area, please so indicate. You may submit more than one Data Request form if that will assist you to explain differences in responses between state operations, subsidiaries or study areas. If more than one form is filed, use Question B below to indicate those study areas included in the Data Request form. 3. Please respond for all of your cost company study areas. B. Nature of Company Please identify your cost company study areas and check the columns that apply to those study areas. Nature of Study Area Study area Interstate Price Cap? Interstate Rate of Return? Frozen Categories & Factors? Frozen Categories Only? C. General Effect of the Freeze 1. When was the last year of operations for which your company( s) calculated, based on current network data, the usage sensitive factors used for state or interstate separations purposes? 2. Would the interstate factors have materially changed if the separations freeze were not in effect? a) ____ Yes; b) ____ No; 1 47 C. F. R. Part 32. 65 Federal Communications Commission FCC 06- 70 24 c) If Yes, please explain: 3. Has your company( s) benefited from or been harmed by the interstate separations freeze? If so, how? D. Unbundled Network Elements (UNEs) 2 1. Is your company( s) selling UNEs? _______ If No, please skip ahead to Section E. 2. Does your company( s) separately identify or track the embedded costs associated with your investment used to provide UNEs (answer separately for different UNEs, if answers differ)? ____ If so, please explain below: a) UNE embedded costs are separately recorded in an account or subaccount created for that purpose _____; b) UNE embedded costs are included in the following U. S. O. A. account( s) _________________. c) Are UNE embedded costs recorded in accounts (or subaccounts) that also are used for other, non- UNE purposes? ______. d) How are UNE embedded costs recorded by jurisdiction? Purely interstate costs? Purely intrastate costs? Some interstate, some intrastate? 3. How does your company( s) treat revenues from sale of UNEs (answer separately for different UNEs, if answers differ): a) UNE revenues are separately recorded in an account or subaccount created for that purpose _____. b) UNE revenues are included in the following U. S. O. A. account( s) _________________. c) Are UNE revenues recorded in accounts (or subaccounts) that also are used for other, non- UNE purposes? ______. d) How are UNE revenues recorded by jurisdiction? Purely interstate revenues? Purely intrastate revenues? Some interstate, some intrastate? Please explain below. 2 See 47 U. S. C. §§ 251( c)( 3), 252( d)( 1); 47 U. S. C. § 271( c)( 2)( B)( ii); and 47 U. S. C. §§ 271( c)( 2)( B)( iv), (B)( v), and (B)( vi). 66 Federal Communications Commission FCC 06- 70 25 E. Wholesale: Resale at a Discount off Retail 3 1. Does your company( s) provide services to a competitor through a wholesale discount, as provided for under Section 251( c)( 4) of the Act? _____. If No, please skip ahead to Section F. 2. Does your company( s) separately identify and track the embedded costs of provisioning wholesale services provided at a discount? If so, please explain below (answer separately for different wholesale services, if answers differ): a) Embedded costs for wholesale services are separately recorded in an account or subaccount created for that purpose _____. b) Embedded costs for wholesale services are included in the following U. S. O. A. account( s) _________________. c) Are embedded costs for wholesale services recorded in accounts (or subaccounts) that also are used for other, non- wholesale purposes? ______. d) How are embedded costs for wholesale services recorded by jurisdiction? Purely interstate revenues? Purely intrastate revenues? Some interstate, some intrastate? 3. How does your company( s) treat revenues from wholesale services provided at a discount: a) Revenues from wholesale services provided at a discount are separately recorded in an account or subaccount created for that purpose _____. b) Revenues from wholesale services provided at a discount are included in the following U. S. O. A. account( s) _________________. c) Are revenues from wholesale services provided at a discount recorded in accounts (or subaccounts) that also are used for other, non- wholesale purposes? ______. d) How are revenues from wholesale services provided at a discount recorded by jurisdiction? Purely interstate revenues? Purely intrastate revenues? Some interstate, some intrastate? Please explain below. 3 See 47 U. S. C. §§ 251( c)( 4), 252( d)( 3). 67 Federal Communications Commission FCC 06- 70 26 F. Local Interconnection (other than UNE or Wholesale) 4 1. Does your company( s) provide interconnection under Section 251( c)( 2) of the Act (other than UNE or Wholesale)? _____. If No, please skip ahead to Section G. 2. Does your company( s) separately identify or track the embedded costs associated with the investment used to provide interconnection? _____ If so, please explain below: a) Interconnection- related embedded costs are separately recorded in an account or subaccount created for that purpose _____. b) Interconnection- related embedded costs are included in the following U. S. O. A account( s) _________________. c) Are interconnection- related embedded costs recorded in accounts (or subaccounts) that also are used for other, non- interconnection purposes? ______. d) How are interconnection- related embedded costs recorded by jurisdiction? Purely interstate revenues? Purely intrastate revenues? Some interstate, some intrastate? 3. How does your company( s) treat interconnection revenues: a) Interconnection revenues are separately recorded in an account or subaccount created for that purpose _____. b) Interconnection revenues are included in the following U. S. O. A account( s) _________________. c) Are interconnection revenues recorded in accounts (or subaccounts) that also are used for other, non- interconnection purposes? ______. d) How are interconnection revenues recorded by jurisdiction? Purely interstate revenues? Purely intrastate revenues? Some interstate, some intrastate? Please explain below. G. Digital Subscriber Lines (DSL) Definitions: For purposes of this question, “shared DSL” means that a customer buys traditional local exchange service from the telephone company and also buys high frequency DSL service from that same company or its affiliate or subsidiary. 4 See 47 U. S. C. §§ 251( c)( 2), 252( d)( 1); 47 U. S. C. § 271( c)( 2)( B)( i). 68 Federal Communications Commission FCC 06- 70 27 For purposes of this question, “solo” DSL means that a customer buys high frequency DSL service from the telephone company or its affiliate but does not buy traditional local exchange service from the same company. If not otherwise specified, the term “DSL” refers to both solo and shared DSL. 1. Does your company or an affiliate or subsidiary offer DSL? _____ If No, please skip ahead to Section H. 2. How does your company treat revenue from retail DSL customers? a) Retail DSL revenues are separately recorded in an account or subaccount created for that purpose _____. b) Retail DSL revenues are included in the following U. S. O. A. account( s) _________________. c) Are Retail DSL revenues recorded in accounts (or subaccounts) that also are used for other, non- DSL purposes? ______. d) How are retail DSL revenues recorded by jurisdiction? Purely interstate revenues? Purely intrastate revenues? Some interstate, some intrastate? Please explain below: If your answers above differ depending upon whether the service is solo or shared DSL, please explain. 3. Unless explained earlier, how does your company treat revenues collected for DSL functions purchased by another carrier or an affiliate for resale? a) ____ Resale DSL revenues are separately recorded in an account or subaccount created for that purpose. b) ____ Resale DSL revenues are included in the following U. S. O. A. accounts _________________. c) Are Resale DSL revenues recorded in accounts (or subaccounts) that also are used for other, non- DSL purposes? ______. d) How are Resale DSL revenues recorded by jurisdiction? Purely interstate revenues? Purely intrastate revenues? Some interstate, some intrastate, as explained below? If your answers above differ depending upon whether the service is solo or shared DSL, please explain. 4. Does your company( s) separately identify or track the cost associated with loops used to provision solo DSL? ____. If so, please describe the assignment of that cost by jurisdiction. 69 Federal Communications Commission FCC 06- 70 28 a) ____ 100% is directly assigned to interstate; b) ____ 25% is directly assigned to interstate; c) ____ A different method is used, as explained below: 5. Does your company( s) separately identify or track the cost associated with loops used to provision shared DSL? ____. If so, please describe the assignment of that cost by jurisdiction. a) ____ 100% is directly assigned to interstate; b) ____ 25% is directly assigned to interstate; c) ____ A different method is used, as explained below. 6. Does your company separately identify or track costs that are directly attributable to DSL service (e. g., line conditioning, Digital Subscriber Loop Access Module (DSLAM) investment)? _____. If so, please describe the assignment of that cost by jurisdiction. a) ____ 100% is directly assigned to interstate; b) ____ 25% is directly assigned to interstate; c) ____ 100% is directly assigned to intrastate; d) ____ A different method is used, as explained below. 7. Do you believe that complying with the freeze or other separations requirements have resulted in your company inappropriately assigning DSL costs or revenues between the jurisdictions? _____. If Yes, please explain: H. Special Access Lines Definitions: For purposes of this section, “Special access lines” means both “private lines” and “special access lines”, and includes “intrastate private lines,” “interstate private lines” and “WATS lines.” It includes both lines and “trunks,” and it includes both wholesale and retail sales. 1. Has the reporting and cost separations for special access lines been working properly during the freeze? 2. Has complying with the freeze or other separations requirements caused your company( s) to assign special access costs or revenues to an incorrect jurisdiction? _____. If Yes, please explain: 70 Federal Communications Commission FCC 06- 70 29 3. Does your company( s) ever assign a special access line’s costs to a different jurisdiction than that to which the revenues are assigned? _____. If Yes, please explain: Given the FCC’s 90%- 10% rules classifying most mixed use special access traffic as interstate, how (from a jurisdictional standpoint) does your company classify embedded costs and applicable expenses for mixed- use special access circuits that have been classified as 100% interstate? Has the separations freeze affected your practice in this area? If so, please explain. Given the FCC’s 90%- 10% rules classifying most mixed use special access traffic as interstate, how (from a jurisdictional standpoint) does your company classify revenues for mixed- use special access traffic? Has the separations freeze affected your practice in this area? If so, please explain. I. Internet Traffic Definitions: For purposes of this section, “Internet Traffic” means traffic that terminates on your company( s) switched network that was originated on the Internet or that has passed through the Internet. 1. If you have reliable information, please estimate the nature of all the terminating traffic reaching your network (by minutes of use): a) ____% Interstate toll usage subject to switched access charges. b) ____% Intrastate toll usage subject to switched access charges. c) ____% Circuit switched local usage. d) ____% Wireless usage. e) ____% Other (please specify: ______________________). 2. If you have reliable information, please estimate the extent to which Voice Over Internet Protocol (VOIP) calls either originate or terminate over the company’s network? 3. If your company provides voice services using VOIP technology, are you recording the revenues for this service as: a) ____ Non- regulated revenue. b) ____ Interstate revenue. c) ____ Intrastate revenue. d) ____ A mix of interstate and intrastate revenue based on the origination and termination points of the call. 71 Federal Communications Commission FCC 06- 70 30 e) _____ Other (please specify: ______________________). 4. If your company provides voice services using VOIP technology, are you recording the costs for this service as: a) ____ Non- regulated costs. b) ____ Directly assigned interstate costs. c) ____ Directly assigned intrastate costs. d) ____ A mix of interstate and intrastate costs based on the origination and termination points of the call. e) _____ Other (please specify: ______________________). 5. Have your costs increased as a result of Internet usage? Why? How much? In which jurisdiction are those costs being assigned? 6. If there had been no separations freeze, would Internet usage have increased your local exchange costs more than has actually occurred? If Yes, please explain. J. Bundled Packages Definition: For purposes of this question, “Package” means a group of individual services or products offered to customers that includes at least one tariffed service (e. g., local calling or non- local services such as toll services), and sold for a fixed monthly price. 1. Services. a) Do you offer bundled packages to your customers? _____. If Not, you are done with this questionnaire. b) How many bundled packages do you offer that include both intrastate and interstate services? c) What services or products have you packaged with local services? 2. Revenue a) For your most popular bundled package, please list the revenue allocation for that service: (1) ____% Unregulated revenue. (2) ____% Intrastate revenue. 72 Federal Communications Commission FCC 06- 70 31 (3) ____% Interstate revenue. (4) ____% Other (Please specify: ___________). b) How did you determine the percentages given in (a) above? c) When your company sells services as part of a bundle for which the total price is discounted, please explain how your company allocates the discounts as between local exchange, intrastate toll and interstate toll revenues. Do you use a separate account or subaccount to record discounts associated with the bundle? d) When your company sells services as part of a discounted bundle, how do you record the revenues? For example, do you record the amount paid by the customer directly, or do you record the sale at the undiscounted rates, then record the discount separately? 73 Federal Communications Commission FCC 06- 70 32 APPENDIX D Final Regulatory Flexibility Certification 1. The Regulatory Flexibility Act of 1980, as amended (RFA), 1 requires that a regulatory flexibility analysis be prepared for rulemaking proceedings, unless the agency certifies that "the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities." 2 The RFA generally defines "small entity" as having the same meaning as the terms "small business," "small organization," and "small governmental jurisdiction." 3 In addition, the term "small business" has the same meaning as the term "small business concern" under Section 3 of the Small Business Act. 4 Under the Small Business Act, a small business concern is one that: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the Small Business Administration (SBA). 5 2. In the instant Order, we extend the current freeze of the Part 36 category relationships and jurisdictional cost allocation factors for price cap carriers, and of the allocation factors only for rate-of- return carriers. 6 Among the underlying objectives of the freeze are to ease the administrative burden of regulatory compliance and to provide greater regulatory certainty for all local exchange carriers subject to the Commission’s Part 36 rules, including some entities employing 1500 or fewer employees. 7 The extension of the freeze will continue the status quo that has existed since July 1, 2001, when the freeze originally became effective. 8 Moreover, the freeze has eliminated the need for all incumbent LECs, including incumbent LECs with 1500 employees or fewer (small incumbent LECs), to complete certain annual studies formerly required by the Commission’s rules. 9 3. This Order poses no additional regulatory burden on incumbent LECs, including small incumbent LECs. If this extended action can be said to have any effect under the RFA, it is to reduce a regulatory compliance burden for small incumbent LECs, by eliminating the aforementioned separations studies and providing these carriers with greater regulatory certainty. Furthermore, we note that the Commission specifically considered the impact of the freeze on small incumbent LECs (in general, rate-of- return carriers) in the 2001 Separations Freeze Order, and provided them with the option to freeze 1 The RFA, see 5 U. S. C. §§ 601- 12, has been amended by the Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. No. 104- 121, Title II, 110 Stat. 857 (1996). 2 5 U. S. C. § 605( b). 3 5 U. S. C. § 601( 6). 4 5 U. S. C. § 601( 3) (incorporating by reference the definition of "small business concern" in Small Business Act, 15 U. S. C. § 632). Pursuant to 5 U. S. C. § 601( 3), the statutory definition of a small business applies "unless an agency, after consultation with the Office of Advocacy of the Small Business Administration and after opportunity for public comment, establishes one or more definitions of such term which are appropriate to the activities of the agency and publishes such definition( s) in the Federal Register." 5 15 U. S. C. § 632. 6 See Order and Further Notice, supra, para. 15. 7 See Order and Further Notice, supra, paras. 22- 23. 8 See Separations Freeze Order, 16 FCC Rcd at 11387, para. 9. See also 1997 Separations Notice, 12 FCC Rcd at 22170, para. 113. 9 See Order and Further Notice, supra, paras. 22- 23. 74 Federal Communications Commission FCC 06- 70 their category relationships at the onset of the freeze. 10 Our action, therefore, does nothing more than temporarily extend the status quo, which itself was certified not to have a significant economic impact on a substantial number of small entities. 11 4. Therefore, we certify that the requirements of this Order will not have a significant economic impact on a substantial number of entities. The Commission will send a copy of the Order, including a copy of this final certification, in a report to Congress and the Government Accountability Office pursuant to the Congressional Review Act. 12 In addition, the Order and this certification will be sent to the Chief Counsel for Advocacy of the Small Business Administration, and will be published in the Federal Register. 13 33 10 See id., 16 FCC Rcd at 11394, para. 21. 11 See 2001 Separations Freeze Order, 16 FCC Rcd at 11408- 10, paras. 56- 59. 12 See 5 U. S. C. § 801( a)( 1)( A). 13 See 5 U. S. C. § 605( b). 75 Federal Communications Commission FCC 06- 70 APPENDIX E Initial Regulatory Flexibility Analysis 1. As required by the Regulatory Flexibility Act of 1980, as amended (RFA), 1 the Commission has prepared this present Initial Regulatory Flexibility Analysis (IRFA) of the possible significant economic impact on small entities by the policies and rules proposed in this Further Notice of Proposed Rulemaking (Further Notice). Written public comments are requested on this IRFA. Comments must be identified as responses to the IRFA and must be filed by the deadlines for comments on the Further Notice provided above in section V( F). The Commission will send a copy of the Further Notice, including this IRFA, to the Chief Counsel for Advocacy of the Small Business Administration (SBA). See 5 U. S. C. § 603( a). In addition, the Further Notice and the IRFA (or summaries thereof) will be published in the Federal Register. A. Need for, and Objectives of, the Proposed Rules 2. In the 1997 Separations Notice, the Commission noted that the network infrastructure by that time had become vastly different from the network and services used to define the cost categories appearing in the Commission’s Part 36 jurisdictional separations rules, and that the separations process codified in Part 36 was developed during a time when common carrier regulation presumed that interstate and intrastate telecommunications service must be provided through a regulated monopoly. 2 Thus, the Commission initiated a proceeding with the goal of reviewing comprehensively the Commission’s Part 36 procedures to ensure that they meet the objectives of the 1996 Act. 3 The Commission sought comment on the extent to which legislative changes, technological changes, and market changes might warrant comprehensive reform of the separations process. 4 Because over eight years have elapsed since the closing of the comment cycle on the 1997 Separations Notice, and the industry has experienced myriad changes during that time, we ask that commenters, in their comments on the present Further Notice, refresh the record on the issues set forth in the 1997 Separations Notice, and we seek comment on several new issues related to separations reform. 3. We seek comment on four issues relating to comprehensive separations reform. First, the Commission seeks comment on specific proposals for comprehensive separations reform advanced by the State Members of the Joint Board. 5 Second, the Commission seeks comment on a draft data request prepared by the State Members that is intended to elicit data that may be helpful in formulating a reformed separations process. 6 Third, the Commission seeks comment on the separations ramifications of four specific issues associated with the emergence of new technologies and local exchange service competition, including the appropriate separations treatment of: 1) UNEs; 2) DSL services; 3) private lines; and 4) Internet traffic. 7 Fourth, the Commission seeks comment on how the market adoption and 34 1 5 U. S. C. § 603. The RFA, see 5 U. S. C. §§ 601- 12, has been amended by the Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. No. 104- 121, Title II, 110 Stat. 857 (1996). 2 1997 Separations Notice, 12 FCC Rcd at 22126, para. 9. 3 See id., 12 FCC Rcd at 22122, para. 2. 4 See id., 12 FCC Rcd at 22126- 22131, paras. 9- 19. 5 See Order and Further Notice, supra, paras. 27- 30. 6 See Order and Further Notice, supra, paras. 31- 32. 7 See Order and Further Notice, supra, para. 33. See also Separations Freeze Order, 16 FCC Rcd at 11398, paras. 31, 33 (citing Separations Freeze Recommended Decision, 15 FCC Rcd at 13175, para. 27). 76 Federal Communications Commission FCC 06- 70 regulatory treatment of IP- enabled services, and other issues and proceedings before the Commission, may affect, or be affected by, comprehensive separations reform. 8 4. Furthermore, we seek comment on clarifications sought by NARUC and by USTelecom as to direct assignment of investment categories and portions of investment categories during the freeze. 9 5. The purpose of proposed separations reform is to ensure that the Commission’s separations rules meet the objectives of the 1996 Act, and to consider changes that may need to be made to the separations process in light of changes in the law, technology, and market structure of the telecommunications industry. 10 Though the Commission originally proposed that competitive neutrality, administrative simplicity, and principles of cost causation should be the primary criteria for evaluating proposals for separations reform, 11 in the Further Notice we seek guidance on whether these criteria should be retained as the primary criteria, or whether other criteria should be balanced in addition to or in place of these criteria. B. Legal Basis 6. The legal basis for the Further Notice is contained in Sections 1, 2, 4, 201 through 205, 215, 218, 220, 221( c), 254 and 410 of the Communications Act of 1934, as amended, 47 U. S. C. §§ 151, 152, 154, 201- 205, 215, 218, 220, 221( c), 254 and 410; Section 706( a) of the Telecommunications Act of 1996, 47 U. S. C. § 157 nt; and sections 1.421, 36.1 and 36.2 of the Commission’s rules, 47 C. F. R. §§ 1.421, 36. 1, and 36. 2. C. Description and Estimate of the Number of Small Entities to Which Rules May Apply 7. The RFA directs agencies to provide a description of, and, where feasible, an estimate of the number of small entities that may be affected by the proposed rules, if adopted. 12 The RFA generally defines the term “small entity” as having the same meaning as the terms “small business,” “small organization,” and “small governmental jurisdiction.” 13 In addition, the term “small business” has the same meaning as the term “small business concern” under Section 3 of the Small Business Act. 14 Under the Small Business Act, a “small business concern” is one that: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the Small Business Administration (SBA). 15 8. We have included small incumbent LECs in this RFA analysis. As noted above, a “small 35 8 See Order and Further Notice, supra, paras. 34- 37. 9 See Order and Further Notice, supra, para. 38. 10 See 1997 Separations Notice, 12 FCC Rcd at 22122, para. 2. 11 See id. at 22132- 36, paras. 22- 31. 12 See 5 U. S. C. § 603( b)( 3). 13 5 U. S. C. § 601( 6). 14 5 U. S. C. § 601( 3) (incorporating by reference the definition of “small business concern” in the Small Business Act, 15 U. S. C. § 632). Pursuant to 5 U. S. C. § 601( 3), the statutory definition of a small business applies “unless an agency after consultation with the Office of Advocacy of the Small Business Administration and after opportunity for public comment, establishes one or more definitions of such term which are appropriate to the activities of the agency and publishes such definition( s) in the Federal Register.” 15 15 U. S. C. § 632. 77 Federal Communications Commission FCC 06- 70 business” under the RFA is one that, inter alia, meets the pertinent small business size standard established by the SBA, and is not dominant in its field of operation. Section 121. 201 of the SBA regulations defines a small wireline telecommunications business as one with 1,500 or fewer employees. 16 In addition, the SBA’s Office of Advocacy contends that, for RFA purposes, small incumbent LECs are not dominant in their field of operation because any such dominance is not “national” in scope. 17 Because our proposals concerning the Part 36 separations process will affect all incumbent LECs providing interstate services, some entities employing 1500 or fewer employees may be affected by the proposals made in this Further Notice. We therefore have included small incumbent LECs in this RFA analysis, although we emphasize that this RFA action has no effect on the Commission’s analyses and determinations in other, non- RFA contexts. 9. Neither the Commission nor the SBA has developed a small business size standard specifically for providers of incumbent local exchange services. The closest applicable size standard under the SBA rules is for Wired Telecommunications Carriers. 18 Under the SBA definition, a carrier is small if it has 1,500 or fewer employees. 19 According to the FCC’s Telephone Trends Report data, 1,303 incumbent LECs reported that they were engaged in the provision of local exchange services. 20 Of these 1,303 carriers, an estimated 1,020 have 1,500 or fewer employees and 283 have more than 1,500 employees. 21 Consequently, the Commission estimates that most incumbent LECs are small entities that may be affected by the rules and policies adopted herein. D. Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements 10. The Further Notice seeks comment on a draft one- time data collection designed to assist the Commission in evaluating whether to modify its separations rules, specifically, the Part 36 category relationships and jurisdictional cost allocation factors. 22 To assist the Separations Joint Board and the Commission in this regard, carriers would be requested to identify and explain the way in which specific categories of costs and revenues are recorded for accounting and jurisdictional purposes. The Commission seeks comment on alternatives to the data collection, including the draft data request’s impact on small incumbent LECs. 23 Furthermore, we believe that incumbent LECs, including small incumbent LECs, would be able to readily obtain the required data at minimal additional costs. We believe that the information derived from a data request will be useful in assisting the Commission as it contemplates comprehensive separations reform, including evaluation of the possible impact of various reform efforts specifically on small incumbent LECs. 24 We emphasize that any data request that the 36 16 13 C. F. R. § 121. 201, NAICS code 517110. 17 See Letter from Jere W. Glover, Chief Counsel for Advocacy, SBA, to Chairman William E. Kennard, FCC (May 27, 1999). SBA regulations interpret “small business concern” to include the concept of dominance on a national basis. 13 C. F. R. § 121. 102( b). 18 NAICS code 513310. 19 13 C. F. R. § 121. 201, NAICS code 517110. 20 FCC, Wireline Competition Bureau, Industry Analysis and Technology Division, “Trends in Telephone Service” at Table 5.3, page 5- 5 (June 2005). This source uses data that are current as of October 1, 2004. 21 Id. 22 See Order and Further Notice, supra, para. 31. 23 See Order and Further Notice, supra, paras. 31- 32. 24 See Order and Further Notice, supra, paras. 31- 32. 78 Federal Communications Commission FCC 06- 70 Commission adopts looking towards comprehensive separations reform would be a one- time request. E. Steps Taken to Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered 11. The RFA requires an agency to describe any significant alternatives that it has considered in reaching its proposed approach, which may include the following four alternatives (among others): (1) the establishment of differing compliance and reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance or reporting requirements under the rule for small entities; (3) the use of performance, rather than design, standards; and (4) an exemption from coverage of the rule, or part thereof, for small entities. 25 12. As described above, because over eight years have elapsed since the closing of the comment cycle on the 1997 Separations Notice, and the industry has experienced myriad changes during that time, we ask that commenters, in their comments on the Further Notice, refresh the record on the issues set forth in the 1997 Separations Notice. We also seek comment on specific proposals for comprehensive separations reform advanced by the State Members of the Joint Board, as well as a draft data request prepared by the State Members that is intended to elicit data that may be helpful in formulating a reformed separations process. For each of these issues and proposals, we seek comment on the effects our proposals would have on small entities, and whether any rules that we adopt should apply differently to small entities. 13. For instance, we ask that commenters specifically address how proposals for comprehensive separations reform advanced by the State Members, the Glide Path Paper and Glide Path II Paper, would affect small carriers, including rural incumbent LECs. 26 Furthermore, we particularly seek comment on the burdens of the draft data request on small carriers. 27 Moreover, we seek comment on whether there are alternatives to a data request to help the Commission educe the desired information, and on whether there is any way to streamline the draft data request without sacrificing its utility. 28 Finally, as a general matter, we direct commenters to “consider how costly and burdensome any proposed changes to the Commission’s separations rules would be for small carriers, and whether such changes would disproportionately affect specific types of carriers or ratepayers.” 29 14. We also emphasize that several of our proposals in the Further Notice, if adopted, could have the effect of eliminating the separations rules in whole or in part. For example, we seek comment on whether there is a continued need to prescribe separations rules for either price cap or rate- of- return incumbent LECs. 30 In addition, several of the proposals in the Glide Path Paper and Glide Path II Paper call for simplifying separations procedures or eliminating separations altogether. 31 Implementation of these proposals would have the same ultimate effect as freezing the separations rules, namely, easing the administrative burden of regulatory compliance for LECs, including small incumbent LECs. As we 37 25 See 5 U. S. C. § 603( c)( 1)-( 4). 26 See Order and Further Notice, supra, para. 30. 27 See Order and Further Notice, supra, para. 32. 28 See Order and Further Notice, supra, paras. 31- 32. 29 Order and Further Notice, supra, para. 28. 30 See Order and Further Notice, supra, para. 28. 31 See Order and Further Notice, supra, paras. 11, 13, 29. 79 Federal Communications Commission FCC 06- 70 recognize in the final RFA certification in Appendix D, the freeze has eliminated the need for all incumbent LECs, including incumbent LECs with 1500 employees or fewer, to complete certain annual studies formerly required by the Commission’s rules. If this extended action can be said to have any affect under the RFA, it is to reduce a regulatory compliance burden for small incumbent LECs, by eliminating the aforementioned separations studies and providing these carriers with greater regulatory certainty. 32 Thus, the Commission is considering several proposals that ultimately could lead directly to reducing the regulatory compliance burden for small incumbent LECs. F. Federal Rules that may Duplicate, Overlap, or Conflict with the Proposed Rules 15. None. 38 32 See Appendix D, supra, para. 3. 80 Federal Communications Commission FCC 06- 70 STATEMENT OF COMMISSIONER MICHAEL J. COPPS Re: In the Matter of Jurisdictional Separations and Referral to the Federal- State Joint Board, CC Docket No. 80- 286 I agree with today’s decision to extend the interim freeze of the Commission’s Part 36 separation rules in order to provide stability to carriers as the Joint Board considers comprehensive reform of the jurisdictional separations process. I also support the Commission’s decision to seek further comments on the jurisdictional separation process as much has changed with regard to network operations and telecommunications services since the Commission first initiated the separations freeze in 2001. Congress directed the Commission and the Joint Board to work cooperatively to determine the methods under which incumbent telephone carriers apportion their regulated costs between interstate and intrastate jurisdictions. It is disappointing that the Commission was unable to overhaul the system in the last five years, and equally disappointing that we had to short circuit the ordinary process in order to issue this decision before the interim freeze expired on June 30. It is generally the practice of the Commission to refer matters under the Joint Board’s jurisdiction to the Board to enable the Board to seek comment and issue a thorough recommendation to the Commission. Given the important role of the states and the value they bring to this process, I would have preferred to have had the benefit of even more extensive state input prior to reaching today’s decision. It is imperative that the Joint Board be given ample opportunity to participate and make recommendations to the Commission in the course of a comprehensive review of the process so that when the Commission moves ahead we will have the benefit of a full top- to- bottom recommendation from our state partners on the Joint Board. 39 81 Federal Communications Commission FCC 06- 70 STATEMENT OF COMMISSIONER DEBORAH TAYLOR TATE Re: In the Matter of Jurisdictional Separations and Referral to the Federal- State Joint Board, CC Docket No. 80- 286 This is my first opportunity to work with both my former state colleagues and my Commission colleagues in my role as Joint Board Chairman. I thank the members of the Joint Board for seizing this opportunity for joint collaboration on this important issue. As is often the case, compromise made this possible, and I appreciate the willingness of all to meet in the middle in order to move forward. Input from the state members of the Joint Board is important because they provide unique, on- the- ground experiences that can further enhance our decision making. Equally important is providing stability and predictability for carriers. I look forward to working with all members of the Joint Board as we refresh the record in this proceeding. In actuality, as technology has changed so dramatically, we can now make even better decisions with updated information in this digital age. 40 82