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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) New England Telephone and ) Telegraph Company and ) New York Telephone Company ) AAD 96-66 Petition for Forbearance ) From Jurisdictional ) Separations Rules ) ORDER Adopted: Febraury 19, 1997 Released: Febraury 20, 1997 By the Commission I. INTRODUCTION 1. On May 2, 1996, the New England Telephone and Telegraph Company and the New York Telephone Company ("NYNEX") filed a petition requesting that the Commission forbear from applying its current Part 36 jurisdictional separations rules to incumbent local exchange carriers ("ILECs") subject to our price cap rules, pursuant to Section 10 of the Communications Act of 1934 ("the Act"), as amended. NYNEX requested that, for ILECs subject to our price cap rules, the Commission adopt instead, for each of the ILEC's study areas, a single, fixed factor to apportion joint and common costs between their interstate and intrastate operations. 2. In a Public Notice dated June 17, 1996, the Commission invited interested parties to comment on NYNEX's Petition. In this order we deny NYNEX's petition for forbearance and state our intent to incorporate the issues raised by NYNEX in a comprehensive rulemaking proceeding to review the Commission's Part 36 jurisdictional separations rules. II. BACKGROUND 3. The Part 36 jurisdictional separations process assigns telecommunications property costs, revenues, expenses, taxes and reserves to specific categories that are then allocated between the interstate and intrastate jurisdictions. The Commission developed its Part 36 separations rules pursuant to its authority under Section 221(c) of the Act. The Act also established procedures for the creation of a Federal-State Joint Board to which the Commission must refer "any proceeding regarding the jurisdictional separation of common carrier property and expenses between interstate and intrastate operations, which it institutes pursuant to a notice of proposed rulemaking." 4. Section 10 of the Act requires the Commission to forbear from applying any regulation or provision of the Communications Act to a telecommunications carrier if it determines that: (1) enforcement is not necessary to ensure that charges, practices, classifications and services are just and reasonable, and not unjustly or unreasonably discriminatory; (2) enforcement is not necessary for the protection of consumers; and (3) forbearance is consistent with the public interest. Section 10 grants the Commission one year, plus a permissible 90-day extension, to act on a petition for forbearance. III. PETITION FOR FORBEARANCE A. NYNEX'S Petition 5. NYNEX's Petition requests that the Commission forbear from applying the current "detailed and cumbersome separations rules" to ILECs regulated under the Commission's price cap plan, and instead apply a simple, fixed factor by state, based on an ILEC's historical percentage of interstate investment in that state. NYNEX suggests that the fixed factor reflect the weighted average interstate investment, calculated using data for the period 1993-95. NYNEX asserts that its petition for forbearance satisfies the criteria established in Section 10 of the Communications Actbecause its proposed simplification will create significant cost savings, avoid regulatory complexity, produce the same separations results, and prevent future revenue requirement shifts. Furthermore, NYNEX cites case law supporting the Commission's ability to promulgate new requirements through adjudicative order rather than notice and comment rulemaking. 6. In support of its proposal to use a fixed factor rather than jurisdictional separations rules to define an ILEC's interstate costs, NYNEX maintains that jurisdictional separations is no longer directly or closely linked to ratemaking, especially for ILECs regulated under the Commission's price cap plan. NYNEX asserts that the price cap rules have broken the link between costs and rates and that in any event, the current Part 36 procedures have produced reasonably consistent interstate percentages of both investment and expenses for price cap ILECs over the past three years. Therefore, NYNEX argues, application of a fixed factor would not significantly change separations results but would eliminate any cost shifts that may result from a loss in demand, thereby improving stability and predictability in the separations process. NYNEX maintains that under the current separations process, a loss in demand would change usage factors that control the interstate/intrastate cost categorization and allocations processes. This, in turn, would cause a shift of costs from one jurisdiction to the other. Finally, NYNEX asserts that adoption of its fixed factor proposal would save costs, predominantly by eliminating the need for separations studies, reducing the need for future separations proceedings, streamlining regulation, and promoting competition. B. Positions of the Parties 7. Without exception, every party that filed comments agrees with NYNEX's assertion that the separations rules must be comprehensively revised. Nonetheless, most parties assert that using Section 10 to amend the existing Part 36 rules would be inappropriate because the relief requested is not a request for forbearance but a request to modify the existing separations process. AT&T and NYDPS, like many parties, assert that NYNEX's request to permit ILECs to substitute a single, fixed factor for the current Part 36 separations rules, is not really a request for forbearance, but rather a request for rulemaking that must be referred to a Federal-State Joint Board. GSA and GVNW express concern that any forbearance the Commission grants with respect to interstate regulation would then become binding on state commissions. 8. MCI argues that NYNEX's petition should be denied because it does not meet the criteria established in Section 10 of the Act. Specifically, MCI argues that NYNEX's proposal is not in the public interest because it would harm the development of competition in local telecommunications markets by relying on a historic average factor when costs are declining. MCI adds that ILECs under price cap regulation could choose a lower productivity factor without increasing their sharing obligations because the inflated interstate costs produced by use of the fixed factor would reduce the reported interstate profits on which sharing is based. Furthermore, MCI argues that, if ILECs have agreed to freeze their local rates, a fixed separations factor will produce incentives to shift costs to the interstate jurisdiction. 9. Supporting NYNEX's petition, Ameritech argues that NYNEX is not asking the Commission to change the separations rules but is merely requesting forbearance in circumstances for which the Commission's separations rules are unnecessary. Ameritech maintains that treating Section 10 proceedings as rulemakings would defeat the purpose of "expeditious regulatory streamlining" and would allow the Commission undue discretion in reviewing requests. Ameritech argues alternatively that NYNEX's petition could be viewed as a petition for waiver. 10. The majority of parties that commented on NYNEX's substantive proposal oppose adopting a single, fixed factor in place of the current Part 36 separations rules. Several commenters argue that NYNEX's proposal is premature and that any separations reform must reflect the market changes developing in response to the implementation of the Telecommunications Act of 1996 ("1996 Act"). US WEST, AT&T, SNET and other parties argue that application of NYNEX's fixed factor would shift more than an "insignificant" amount of costs to the interstate jurisdiction. US WEST argues that if current data rather than historic data proposed by NYNEX are used to separate costs, a larger share of expenses would be assigned to the interstate jurisdiction than would be assigned using Part 36 rules. AT&T, MCI, and Time Warner maintain that adoption of NYNEX's fixed allocation factor would distort the ILECs' access rates by overstating those carriers' interstate costs. 11. The parties that support NYNEX's petition on substantive grounds generally reiterate the arguments appearing in NYNEX's petition. Bell Atlantic argues that the FCC should move toward eliminating all cost allocation requirements for ILECs regulated under price caps that have selected the no-sharing options because such requirements serve no purpose, either as a base for prices or as a safeguard against subsidization. Bell Atlantic argues that under a no sharing "pure" price cap, rates are divorced from regulated accounting costs, and returns based on these often arbitrary allocations have no useful purpose. Bell Atlantic also argues that under price caps, cost shifting is no longer a possibility since prices cannot be affected by any manipulation of cost accounts. USTA supports NYNEX's proposal, but not for any carrier currently regulated under rate-of-return regulation. Sprint support NYNEX's fixed factor only as an interim measure, and only if carriers that elect the fixed factor agree to absorb any resulting increase in the allocation of costs to the interstate jurisdiction. C. Discussion 12. We deny NYNEX's petition for forbearance because the relief requested by NYNEX goes beyond mere forbearance from regulation and instead requests that we substantially amend our Part 36 separations rules. Even if NYNEX had requested only elimination of our separation rules, NYNEX has failed to show that its petition meets each of the criteria for forbearance under Section 10. 13. NYNEX did not ask us merely to refrain from applying the current separations rules. Instead, it proposed use of the Commission's forbearance authority as a means of replacing those rules with new ones without the notice and comment required by the Administrative Procedure Act, and without use of the Joint Board procedures set forth in section 410(c) of the Communications Act. The proposals contained in NYNEX's petition would, in fact, result in significant changes to our Part 36 rules, both structurally and in terms of anticipated results. Any significant revisions to Part 36 separations rules are appropriately addressed in a rulemaking proceeding through which interested parties have the opportunity to offer constructive comment on how the Commission and the Federal- State Joint Board established in CC Docket No. 80-286, can best address the needs of all affected parties. 14. In evaluating only that portion of NYNEX's petition that asks us to forbear from applying the existing rules, we find that NYNEX has failed to show that such forbearance would meet the criteria established in Section 10. Section 10 of the Act requires the Commission to forbear from applying any regulation to a telecommunications carrier when: (1) enforcement is not necessary to ensure that charges, practices, classifications and services are just and reasonable, and not unjustly or unreasonably discriminatory; (2) enforcement is not necessary for the protection of consumers: and (3) forbearance is consistent with the public interest. In making the public interest determination, the 1996 Act requires the Commission to consider whether forbearance will promote competitive market conditions, including the extent to which forbearance will enhance competition among providers of telecommunications services. 15. We agree with NYNEX that comprehensive review of our current jurisdictional separations rules is necessary in light of both the pro-competitive deregulatory telecommunications policy framework established in the 1996 Act and technological advancements and market changes that have occurred in the past decade. Nonetheless, we find that NYNEX has not adequately addressed how forbearance from the current separations rules -- standing alone from its proposal that the Commission adopt new rules -- would ensure just and reasonable rates, avoid unjust and unreasonable discrimination, or protect consumers and the public interest. Merely arguing that jurisdictional separations is not directly or closely linked to ratemaking does not sufficiently support the first two criteria for forbearance under Section 10. Jurisdictional separations continues to play a role for price cap ILECs because the form of price cap regulation adopted by the Commission is not entirely divorced from rate-or-return considerations. Among other things, jurisdictional separations may result in an adjustment to price cap indices to reflect exogenous cost changes. In addition, price cap ILECs must have separations results in order to report their interstate earnings to the Commission on an annual basis for monitoring purposes. For the same reasons, even if we viewed NYNEX's petition as a waiver petition, as suggested by Ameritech, we find that it would not be in the public interest to grant it. 16. The Commission will initiate shortly a rulemaking to begin separations reform in Docket No. 80-286. The issues raised in NYNEX's petition will then be referred to a Federal-State Joint Board pursuant to Section 410(c) of the Communications Act. As NYNEX correctly notes, SEC v. Chenery makes clear that "the choice between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the administrative agency." While we recognize that separations reform may require us to address the different needs of different classes of incumbent local exchange carriers, the issues posed by such reform are not "so specialized and varying in nature as to be impossible of capture within the boundaries of a general rule." Nor does adherence to the current separations procedures impose such a significant burden on ILECs to persuade us to forgo a notice and comment rulemaking. We note that representatives of the smaller carriers, with considerably fewer resources to spend on compliance, filed comments opposing NYNEX's request for immediate relief. 17. We do not, in this Order, address the substantive proposal that we permit an ILEC to apply a fixed factor to separate its costs between the interstate and intrastate jurisdiction. Our rulemaking on jurisdictional separations reform will present the opportunity for full consideration of that proposal. IV. ORDERING CLAUSE 18. Accordingly, IT IS ORDERED, pursuant to sections 4(i), 10, 218 and 220 of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 160, 218 and 220, that the Petition for Forbearance filed May 2, 1996 by the New England Telephone and Telegraph Company and the New York Telephone Company IS DENIED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary