State of California

Public Utilities Commission


Los Angeles




Date : April 16, 2010

To : The Commission

From : Gretchen Dumas

Subject: Filing of Comments in Response to the Federal-State Joint Board on Separations' Request for Comment on Proposals for Interim Adjustments to Jurisdictional Separations Allocation Factors and Category Relationships Pending Comprehensive Reform; CC Docket No. 80-286.

RECOMMENDATION: The CPUC should (1) file in support of the interim-only reform proposals put forth by the State Members of the Federal-State Joint Board on Jurisdictional Separations (Joint Board), and (2) urge the Joint Board to issue a recommendation for permanent reform before the end of the year. The State Members of the Joint Board (State Members) propose interim adjustments to the separations allocation factors and category relationships because the current allocation of costs between the state and interstate jurisdictions is governed by separations studies that are nine years old and are not reflective of current conditions. In the absence of comprehensive reform of the separations scheme these proposals for interim adjustments are designed to reduce the most glaring imbalances between state and federal cost assignment developed over the last decade. The adjustments should result in a lower draw on our high cost fund programs. Comments are due April 29, 2010.

BACKGROUND: Jurisdictional Separations is the process by which incumbent local exchange carriers apportion regulated costs between the intrastate and interstate jurisdictions. On May 22, 2001, the FCC imposed an interim freeze of the Part 36 category relationships and jurisdictional cost allocation factors for price cap carriers and of the allocation factors for rate-of-return carriers. The freeze was originally intended to remain in place from July 1, 2001 to
June 30, 2006, but was later extended twice by the FCC for a total of four years. While the FCC expected the freeze to provide an opportunity for comprehensive, permanent reforms of the jurisdictional separations process, reform has not occurred. Currently, the freeze will expire on June 30, 2010, but the FCC has indicated it will again extend the freeze for one year.

The State Members are proposing two interim-only adjustments. One proposal would move more of the costs of special access service from the intrastate jurisdiction to the interstate jurisdiction. The second proposal would move more of the costs of advanced services from the intrastate side to the interstate side.

Special Access Cost Assignment

Under the freeze, large price cap carriers1 have frozen the relationships among their categories and subcategories of investment. Some if not all of these carriers have also ceased applying direct assignment rules to special access facilities. The same may be true of rate-of-return companies that have chosen to voluntarily freeze their category relationships. State Members believe that the freeze and the FCC staff directive to ignore direct assignment rules have led to a mis-assignment of special access costs. This mis-assignment is created by the growth in interstate special access lines and revenues over time without a commensurate growth in interstate assignment of costs. This mis-assignment is accentuated by the fact that much of the revenue benefit due to the growth in the number of special access circuits would have been 100 percent allocated to the interstate jurisdiction given the FCC's assertion of jurisdiction over certain exchange special access lines with even a minimal 10 percent level of interstate traffic. In contrast the associated special access costs under the freeze would in large part have been allocated to the state jurisdiction at the same relative level as before the freeze. State Members propose an interim-only adjustment based on the assumption that allocation based on revenues provides a reasonable surrogate to directly assigning costs. State Members believe this proposal better matches plant costs to usage than the current freeze. Basically the proposal would move more of the costs of special access services to the interstate side, which is where the revenue is assigned.

Advanced Services Cost Assignment

The State Members propose to create new subcategories and allocators for assignment of costs and revenues within Cable and Wire Facility Category 1. Unlike the current rules, this proposal does not assume that a local loop is used primarily for voice telecommunications or that DSL usage is insignificant. The new assignments are intended to align the jurisdiction of loop investment more

closely with the jurisdiction of the principal services provided on the loop and in which the associated revenues are generated. In sum, the State Members propose to categorize loops according to the services provided over them, and then to apply distinct fixed separations factors to each category. In this way, if a loop is actually used to deliver advanced services, its subcategory would change. More costs would be assigned to the interstate jurisdiction or to non-regulated costs, an assignment that is consistent with the FCC's assertion of jurisdiction over those services. The proposal also standardizes the allocation of costs associated with loops used to provide UNEs. The State Members also propose a method for allocating revenues from multi-jurisdictional bundled services.

The Joint-Board is seeking comments on these Interim Reform proposals of the State Members as well as comments on issues related to comprehensive permanent separations reform.

DISCUSSION: Due to the freeze, the current allocation of costs between the state and interstate jurisdictions is governed by separations studies that are nine years old. Based on their age alone, these studies are unlikely to reflect current conditions. Further, as stated by the State Members in their filing with the FCC:

"any age-related inaccuracies are amplified by advances in technology and several key FCC jurisdictional determinations during the last nine years. The increased use of packet-based networks; the increased sale of DSL and other broadband services; the extraordinary increase of bandwidth use caused by the uploading, transmission, and downloading of digital photos and video files; the FCC's decision to alter the jurisdictional nature of various services; and a wide variety of other factors unquestionably requires the adjustment of the current process. The planned expansion in broadband services under newly created stimulus programs will further widen the gap between separations procedures and network realities.

The current separations allocation factors and categorizations no longer have any basis in fact. While some inaccuracy of the separations process is permissible, currently the actual use to which the property is put is almost completely ignored. This is contrary to the Supreme Court's instructions in Smith v. Illinois. Under these circumstances, it is unreasonable to continue the freeze past July 1, 2010 without key adjustments to ensure existing allocation factors better reflect actual use of property. Once these changes are made, the freeze could be reimposed and continued while further reform options are considered."

Staff recommends that the CPUC file comments in support of the State Members' interim reform proposals. Although the reforms are not comprehensive, they are reasonable on an interim basis and a step toward rationalizing the current separation process. As the State Members emphasize, they are not offering "long term separations reforms," only interim steps "to reduce the most glaring imbalances in cost assignment that have arisen during the nine years of the separations freeze." The interim adjustments cover the direct assignment of special access investment and the treatment of advanced services over cable and wire facility loops. Staff believes that in the absence of full-scale reform, these interim adjustments will better align costs with revenues. The adjustments should result in a lower draw on our high cost fund programs.

However, staff urges the CPUC to emphasize that the CPUC is only supporting these reforms on an interim basis and that our support for moving more of the costs of advanced services to the interstate jurisdiction while the freeze is in place does imply that the CPUC believes that it has no jurisdiction over advanced services. Also the CPUC should strongly urge the Joint Board to issue a recommendation for permanent reform of the separations scheme by the end of the year.


1 The term "price cap carriers" refers to the federal price cap scheme - includes AT&T and Verizon.