REGULATORS, PANELISTS DEBATE VALUE OF SEPARATIONS PROCESS

Federal-State Joint Board on Jurisdictional Separations held hearing at FCC hq to gain views on so-called “glide path” paper issued in Dec. by state members of board. Paper proposed 7 options for moving from current separations freeze to new mechanism. FCC instituted 5-year freeze on separations factors starting July 1, 2001, which left current jurisdictional allocations in place while regulators tried to decide what to do next. State members of joint board assured small telcos Wed. that their release of glide path paper didn’t mean they advocated taking action before freeze expired. Saying they understood rural telcos’ need for certainty, state regulators said they initiated talks now because they knew debate probably would continue for years.

Glide path paper asks whether separations can be abolished or, if retained, what changes should be made. Paper also asks how to make process simpler and compatible with new technologies and competitive markets. Options proposed included: (1) Extend freeze on annual basis. (2) Simplify current process by treating traffic-sensitive costs in same way as non-traffic-sensitive costs, meaning they would be separated using fixed allocator. (3) Institute process in which all ILECs would develop their interstate revenue requirements based on formulas or models similar to “average schedule” concept used by some smaller carriers. (4) Redesign process to account for packet switching and competition. (5) Simplify process by directly assigning certain telecom equipment to either state or federal jurisdiction, based on location of that equipment in network. (6) End separations completely and assign all pricing policy to either state or federal jurisdiction. (7) Eliminate cost- based rate regulation from both state and federal jurisdictions once FCC determines there is effective competition.

Separations is “useless relic” of past, said Me. PUC Chmn. Thomas Welch at hearing Wed.: “I've yet to meet a customer who cares if charges [on bill] are state or federal.” Process once had validity but “the historical and political basis of separations has disappeared.” That doesn’t mean he expects to see change before end of 5-year freeze, Welch said. “But we should begin now to consider what to do [when freeze ends in 2006], considering how long it takes to do any thing in separations.” Ore. PUC Comr. Joan Smith said it took 4 years to get freeze, so it undoubtedly would take that long to decide on what to do after freeze was over: “It’s time to do something about separations. This isn’t about trading the wheels on the jalopy, it’s about trading it in.” Goal is to “first do no harm” to rate-of-return rural carriers that are most affected by change in separations process, Wis. PSC Comr. Joseph Mettner said. FCC Comr. Martin said, “It looks like the only thing clear is that it’s going to be a long process.”

“I encourage you to proceed cautiously,” said Robert Adkisson, pres. of GVNW Consulting which serves rural telcos. He said he disagreed “that the historical justification for separations has disappeared” as well as with idea that separations shifts wouldn’t be felt by consumers. For small companies, no plan has been devised that offers financial stability of rate-of-return regulation and separations is key component of that, he said. USTA Gen. Counsel Larry Sarjeant said it was too soon for Joint Board or FCC to consider transition from current freeze because “the uncertainties that justified the freeze in May 2001 continue to exist.” FCC Common Carrier Bureau should leave record open for comments on policy paper until mid-2003, thus giving parties 2 years’ experience under freeze before reacting to glide path options, he said. Consultant Paul Hartman said option 6 -- ending separations and assigning all costs to one jurisdiction -- made most sense but wasn’t politically realistic: “I can’t figure out how to do it.”

“Let it collapse under its own weight,” recommended Bill Johnston, Qwest exec. dir. for federal policy. “We at Qwest have not come to this conclusion lightly,” he said, but “the future of separations has already been determined by changes in the industry. I urge you not to direct your valuable resources into finding the perfect allocation path because there isn’t one.” Johnston said Qwest once supported simplifying separations policy along lines of glide path option 5 -- that of assigning equipment to state or federal jurisdictions depending upon location of equipment. However, company has decided that regulators should “concentrate on competition and deregulation issues and separations will take care of itself.”

Welch of Me. PUC said thrust of Adkisson’s comments seemed to be that “whatever you do to separations, don’t let it interfere with cost subsidies for rural telephone companies.” He asked Adkisson if there was way “to develop a system of high cost support independent of separations.” Adkisson said there didn’t necessarily have to be tie-in, there could be another method of helping rural telcos support their costs. Reiter warned that if regulators weren’t careful, rural telephony could “fall behind” rest of industry, harking back to situation before subsidy programs were available. It can be “rather insidious,” he warned. “Suddenly, years from now you realize there is a problem. Now is the time to avoid that problem.” There’s no way customers in some rural areas can bear all costs of service now, much less in future broadband era, he said.