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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 ) ) CC Docket No. 80-286 Jurisdictional Separations Reform and ) Referral to the Federal-State Joint Board ) RECOMMENDED DECISION Adopted: July 19, 2000 Released: July 21, 2000 By the Federal-State Joint Board on Jurisdictional Separations: Commissioner Powell issuing a statement. Chairman Welch, Commissioner Smith, Commissioner Munns, and Commissioner Mettner issuing a joint statement. TABLE OF CONTENTSparagraph I. INTRODUCTION . . . . . . 1 II. BACKGROUND . . . . . . . 3 III. DISCUSSION . . . . . . .10 A. Legal Authority to Implement a Freeze . . . . . . . . . . . . . . . 12 B. Components of the Freeze. . . . . . . . . . . . . . . . . . . . . . 14 1. Extent of the Freeze. . . . . . . . . . . . . . . . . . . . . . . .14 2. Dial Equipment Minutes Factors. . . . . . . . . . . . . . . . . . .28 3. Data Collection and Reporting During Freeze . . . . . . . . . . . .31 4. Adjustments During Freeze . . . . . . . . . . . . . . . . . . . . .32 C. Use of Separations Simulation Tools . . . . . . . . . . . . . . . . 36 IV. RECOMMENDING CLAUSE. . . . . . . . . . . . . . . . . . . . . . . . .39 APPENDIX A I. INTRODUCTION 1. In this Recommended Decision, the Federal-State Joint Board established in CC Docket No. 80-286 (Joint Board) recommends that, until such time as comprehensive reform of jurisdictional separations can be implemented, the Federal Communications Commission (Commission) should institute an interim freeze of the Part 36 category relationships and jurisdictional allocation factors. We believe that an interim freeze will provide much needed simplification and stability to the separations process in a time of rapid market and technology changes. 2. Specifically, the Joint Board recommends that the Commission institute a five-year freeze of all Part 36 category relationships and allocation factors for price cap carriers, and a freeze of the allocation factors for rate-of-return carriers. As discussed further below, we recommend that the Commission adopt a freeze calculated based on carriers' data from the twelve months prior to the Commission's issuance of an order on this Recommended Decision. The freeze should be mandatory and apply to all carriers subject to the Part 36 rules. The Joint Board recommends that the freeze remain in effect for five years, or until the Commission takes further action pursuant to a recommendation from the Joint Board, whichever occurs first. The Joint Board also recommends that, if the Commission finds that Internet traffic is jurisdictionally interstate in the proceeding that has been initiated as a result of the remand by the United States Court of Appeals for the D.C. Circuit on the Commission's Reciprocal Compensation Ruling, the Commission freeze the local DEM factor for the duration of the freeze at some substantial portion of the current year level based on data from the twelve months preceding the implementation of the freeze. Based on the record established in connection with this Recommended Decision, the precise percentage of the current year's local DEM should be established according to how much of a reduction in local DEM is warranted in light of any effects that Internet usage has had on jurisdictional allocations or consumers. We also recommend that, during the interim freeze period, the Joint Board and the Commission continue to review issues regarding separations reform, as specified in this Recommended Decision. III. BACKGROUND 4. Jurisdictional separations is the process by which incumbent local exchange carriers (ILECs) apportion regulated costs between the intrastate and interstate jurisdictions. One of the primary purposes of the separations process is to prevent ILECs from recovering the same costs in both the interstate and intrastate jurisdictions. As the Supreme Court recognized in Smith v. Illinois, separations procedures for the separation of intrastate and interstate property, revenues, and expenses, are necessary for the appropriate recognition of authority between the interstate and intrastate jurisdictions. The Supreme Court stated that "the proper regulation of rates can be had only by maintaining the limits of state and federal jurisdiction." 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." 5. Jurisdictional separations is the third step in a four-step regulatory process that begins with an ILEC's accounting system and ends with the establishment of rates for the ILEC's 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. Second, carriers assign the costs in 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. Third, carriers separate the regulated costs between the intrastate and interstate jurisdictions in accordance with the Commission's Part 36 separations rules. Finally, carriers apportion the interstate regulated costs among the interexchange services and rate elements that form the cost basis for their interstate access tariffs. Carriers perform this apportionment in accordance with Part 69 of the Commission's rules. The intrastate costs that result from application of the Part 36 rules form the foundation for determining carriers' intrastate rate base, expenses, and taxes. 6. The first step in the separations process requires carriers to assign regulated costs to various categories of plant and expenses. In certain instances, costs are further disaggregated among service categories. 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. 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. 7. On October 7, 1997, the Commission initiated a proceeding to address separations reform with the release of the NPRM, in which it sought comment, among other things, on the extent to which legislative changes, technological changes, and market changes warrant comprehensive reform of the separations process. 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. In addition, the Commission sought comment on several proposals previously submitted to the Commission by parties in this proceeding. 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. In response to the NYNEX Petition for Forbearance, BellSouth proposed a two-factor freeze, using separate factors for investment and expenses in each state. SBC proposed a simplification of separations through a freeze of the allocation factors for each category, but only after jurisdictional allocations had stabilized, following an initial consolidation of several dozen plant and service categories into four cost categories. 8. The NPRM generated a wide range of comments. Most parties agreed that some form of separations is necessary until the market is fully competitive and there is no longer a need for rate regulation. USTA and the large price cap companies recommended a "freeze" of the separations process to simplify the process and to ease the administrative burden on carriers pending the elimination of separations. Some parties, such as GTE and US West, went further and proposed that the states be given full authority over local exchange facility costs for purposes of separations, resulting in the direct assignment of all local loop and local switching costs to the intrastate jurisdiction. Small and mid-sized carriers, and several state utility commissions, expressed concern that radical reform of the separations rules would result in cost shifts from the interstate to the intrastate jurisdiction, resulting in an increase in local rates. 9. In the NPRM, the Commission invited the State Members of the Joint Board (State Members) to develop a report that would identify additional issues that should be addressed by the Commission in its comprehensive separations reform effort. On December 21, 1998, the State Members filed a report setting forth additional issues that they believe should be addressed by the Joint Board in connection with its consideration of comprehensive separations reform. The State Report addressed several separations issues, and, among other things, proposed an interim reform measure whereby the Commission would adopt a three-year rolling average of actual separations results in order to reduce the impact of changes in telephone usage patterns and resulting cost shifts from year to year. On February 26, 1999, the Commission released a State Report Public Notice seeking comment on the issues raised in the State Report. Many commenters on the State Report proposed an interim freeze as a means to address the impact of technological and market changes, to provide stability for the separations process by halting any jurisdictional cost shifts that may occur as a result of such changes, and to simplify the separations process. 10. In addition, the State Members and USTA each proffered different simulation tools to analyze the impact of various interim separations reforms, which include freeze proposals. In response to a Commission public notice seeking comment on the State simulation tool, several commenters urged the Joint Board to move forward immediately on such an interim freeze while continuing a comprehensive review of long-term separations reform. XI. DISCUSSION 12. While the Joint Board continues to review comprehensive reform in light of legislative, technological, and market changes, the Joint Board believes that interim action is necessary to provide simplicity and stability to the separations process. Accordingly, we recommend that, until comprehensive reform can be achieved, the Commission should freeze Part 36 category relationships and jurisdictional allocation factors for price cap carriers and allocation factors only for rate-of-return carriers, as detailed below and specified in Appendix A of this Recommended Decision. 13. As explained more fully below, we believe that the Commission has legal authority to implement a freeze of the Part 36 allocation factors and category relationships to preserve the status quo pending comprehensive reform. We recommend that the Part 36 category relationships and jurisdictional allocation factors utilized for each category be frozen for price cap carriers, and only the allocation factors be frozen for rate-of-return carriers, for a five-year period, or until the Commission takes further action in this docket. We further recommend that the Commission implement a freeze on the basis of data from the twelve months prior to the Commission's issuance of an order on this Recommended Decision. The Joint Board also recommends that, if the Commission finds that Internet traffic is jurisdictionally interstate in the Reciprocal Compensation Ruling Remand Proceeding, the Commission freeze the local DEM factor for the duration of the freeze at some substantial portion of the current year level based on data from the twelve months preceding the implementation of the freeze. Based on the record established in connection with this Recommended Decision, the precise percentage of the current year's local DEM should be established according to how much of a reduction in local DEM is warranted in light of any effects that Internet usage has had on jurisdictional allocations or consumers. We note that the State Members' and USTA's simulation tools have aided the Joint Board in its analysis of the potential impact of a freeze. While we recommend the adoption of an interim freeze, we will continue to consider, in the context of comprehensive reform, other proposals in the record. A. Legal Authority to Implement a Freeze 14. We believe that the Commission has legal authority to institute an interim freeze to provide stability to the separations process and to preserve the status quo pending comprehensive reform. First, we believe that an interim freeze of the Part 36 allocation factors and category relationships would not contravene the United States Supreme Court's ruling in Smith v. Illinois. Under an interim freeze, the costs and revenues associated with ILEC operations would still be separated between the intrastate and interstate jurisdictions, consistent with Smith v. Illinois, which does not require "extreme nicety" in the separations process. That is, Smith v. Illinois does not require absolute precision for cost allocation between the federal and state jurisdictions. Accordingly, a freeze whereby category relationships and/or factors are not recalculated on an annual basis using current data, but instead are frozen as of a specific year, satisfies the Smith v. Illinois requirement for cost allocation. 15. Second, there is clear precedent for the Commission's "freezing" of certain regulations and, in particular, freezing elements of Part 36 of the Commission's rules. The Commission previously has frozen certain regulations in order to address changes in the telephone network and its usage, and to reduce any potential, sudden cost shift impact of such changes. We believe that a separations freeze in this instance is similar to the Commission's previous decision in 1982 to freeze the subscriber plant factor (SPF). The Commission imposed that freeze to halt the growth in allocation of exchange plant costs to the interstate jurisdiction, while the Commission considered revision of the cost allocation procedures. The D.C. Circuit Court of Appeals upheld the Commission's SPF freeze decision despite the fact that it was based primarily upon policy determinations rather than on cost causation principles, noting that Smith v. Illinois does not "constitutionally compel use of a particular formula." We agree with commenters who argue that the Commission's freeze to halt the growth of the SPF is similar to this recommended interim freeze measure. Both freezes are temporary freezes of cost allocations designed to provide stability and to preserve the status quo during a pending rulemaking proceeding. The Joint Board concludes, therefore, that a freeze of category relationships and allocation factors is consistent with Smith v. Illinois and Commission precedent. B B. Components of the Freeze 1. Extent of the Freeze 2. We believe that instituting a mandatory interim freeze of both the Part 36 category relationships and jurisdictional allocation factors for price cap carriers is consistent with our goals of stabilizing and simplifying the Part 36 separations process, pending comprehensive reform. As described more fully below, however, we agree with commenters that argue that, for rate-of-return carriers, cost category relationships should not be frozen. 3. One primary goal of an interim freeze at this time is to provide stability for all carriers while the Joint Board evaluates comprehensive reform of jurisdictional separations. We believe that a freeze of the jurisdictional allocation factors and categories would achieve this goal by minimizing any cost shift impacts on separations results that might occur as a result of circumstances not contemplated by the Commission's current Part 36 rules, such as growth in local competition and new technologies. Since the NPRM was released in 1997, there have been rapid changes in the telecommunications infrastructure, such as the growth in Internet usage and the increased usage of packet switching. We believe that these types of changes may produce cost shifts in separations results because these and other new technologies, such as digital subscriber line (DSL) services that combine voice and high speed data circuits over shared copper facilities, as well as a competitive local exchange marketplace, are not sufficiently contemplated by the current Part 36 rules. 4. 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. 5. We believe that a freeze of category relationships and jurisdictional allocation factors is appropriate to provide stability to the separations process at this time. "Freezing" category relationships means that the same category distribution percentages for each account in the base year of the freeze would apply to future account balances (e.g. Account 2210). "Freezing" jurisdictional allocation factors means that the same jurisdictional cost allocation percentages used in the base year of the freeze would be used for future jurisdictional cost allocations. By freezing categories and factors, we believe that greater stability and predictability for separations results will be realized than under a factors-only freeze since costs would be assigned based on both fixed jurisdictional allocation factors and fixed category relationships. We also believe that a freeze will supply all telecommunications carriers with more predictable separations results as they deploy new services and technologies in the marketplace. Some commenters oppose a freeze on grounds that a freeze would not account for major changes in the telecommunications marketplace and would only serve to continue what they claim is a current misallocation of costs to the interstate jurisdiction. We believe that such concerns are mitigated by the interim nature of the freeze. 6. Another purpose of this recommended freeze is to simplify the separations process and thereby reduce regulatory burdens on carriers during the transition from a regulated monopoly to a deregulated, competitive environment in the local telecommunications marketplace. At the present time, ILECs are required under the Part 36 rules to perform separations studies, while CLECs have no similar requirements. We believe that the recommended freeze will further the Commission's stated goal in the NPRM of achieving greater competitive neutrality during the transition to a competitive marketplace by simplifying the separations process for those carriers subject to Part 36. 7. The freezing of factors and categories will reduce the Part 36 administrative burden on carriers in several specific ways. First, carriers will no longer have to measure usage in order to develop jurisdictional allocation factors for interstate purposes, as frozen factors will be carried forward from year to year and used by carriers to calculate their separations results. Second, carriers will not have to perform the analyses necessary to categorize annual investment changes for interstate purposes. The major divisions of separations, such as central office equipment (COE) and C&WF investment, will be allocated to the categories and, where appropriate, subcategories for the given year based on the frozen year category relationships. We note that nothing precludes a state commission from requiring that carriers provide certain data and/or cost studies, including Part 36-type studies. 8. We recommend that the categories and factors freeze be mandatory for all price cap carriers subject to the Commission's Part 36 rules, as advocated by many commenters. For rate-of return carriers, however, we recommend that a mandatory factors-only freeze apply. We recommend this bifurcated approach to a Part 36 freeze, similar to that advocated by USTA and NECA, because such an approach would afford rate-of-return carriers with the opportunity to better recover their investment costs through the appropriate accounts. 9. While we believe a factors and categories freeze would provide more stable separations results for all carriers, we are persuaded by the record that a categories freeze may harm rate-of-return carriers. By not freezing the category relationships for rate-of return carriers, we agree with certain parties that the rate-of-return carriers, whose investment patterns may fluctuate more than those of price cap carriers from year to year, will retain maximum flexibility for recovering costs from new plant investments (upgrades). We believe that a categories freeze may harm rate-of-return carriers by limiting their ability to account for changes in investment through the separations process. In effect, a mandatory categories freeze for all rate-of-return carriers may provide disincentives for these carriers to deploy new technologies due to insufficient cost recovery. 10. Furthermore, certain parties have reported that a categories freeze may have a negative impact on some rate-of-return carriers current universal service high cost support levels. We note that COE Category 4.13 and CW&F Category 1.3 are included in the current Universal Service High Cost Loop formula that is used for the rate-of-return carriers under Part 36. The investment levels in these two categories may increase for rate-of-return carriers as new technologies are deployed, such as facilities to provide DSL services. If the category relationships are frozen at the current year level, rate-of-return carriers will not be able to properly recover these costs in the future through increased loop support under the Universal Service High Cost Loop formula. 11. In contrast, we believe that the price cap carriers, due to their sheer size, have little fluctuation in the relative category levels within their investment accounts. In other words, the category relationships for price cap carriers generally remain relatively constant on an annual basis. For example, a review of all companies that file ARMIS data (the majority of which are price cap companies) for the years 1995-1998 shows that telephone plant under construction (TPUC) as a percent of total plant in service (TPIS) never exceeded 4.5%, whereas many rate-of- return companies, during the same time period, had TPUC that ranged from 20% to 40% of TPIS. Thus, a categories freeze would not likely have the same negative impact on the investment accounts of the price cap carriers as it would for the rate-of-return carriers, and a categories freeze for price cap carriers would serve to further simplify the separations process by eliminating the need to analyze investment by separations category. 12. We believe that a freeze of both categories and factors will provide the greatest measure of stability and simplification for the separations process for the price cap carriers, while a factors-only freeze for the rate-of-return carriers will achieve similar goals and, at the same time, allow these carriers to appropriately adjust their separations results to account for new investments on a year-to-year basis. While a freeze of category relationships would further the goal of simplifying the separations process, we believe the potential harm to rate-of-return carriers caused by such a freeze necessitates a factors-only freeze for these carriers and outweighs the added simplification benefits of a categories freeze. We note that this recommendation is consistent with previous Commission decisions to treat rate-of-return carriers differently because of the unique circumstances confronted by these carriers, which generally serve rural, high cost areas. 13. We recommend the following specific parameters for the duration of the freeze. As noted above, the category relationships and allocation factors for price cap carriers and the allocation factors only for rate-of-return carriers shall be frozen by carriers based on data from the twelve months prior to the Commission's issuance of an order on this Recommended Decision. We believe a freeze based on carriers' most recent data would provide the greatest measure of stability to the separations process. For price cap carriers, costs should be assigned to the Part 36 categories based upon the current year percentage relationship of each Part 36 category to the total amount recorded in its associated Part 32 account. For example, Central Office-Switching, Account 2210, for separations purposes, is categorized into Category 2 Tandem Switching and Category 3 Local Switching. If current year Category 2 costs are twenty percent of total Account 2210 and Category 3 are eighty percent of total Account 2210, then during the interim freeze, twenty percent of Account 2210 will continue to be assigned to Category 2 Tandem Switching and eighty percent will be assigned to Category 3 - Local Switching Equipment. The separations allocation factors for both price cap carriers and rate-of- return carriers shall be frozen at the most current levels, provided that, however, as discussed below, the local DEM factor may be reduced. 26. We further recommend that the Commission institute the Part 36 factors and categories freeze for a five-year period or until the Commission takes further action in this docket. We believe that a five-year freeze is appropriate as an interim measure to maintain stable separations results while the Joint Board considers long-term, comprehensive separations reform. We believe that five years is a reasonable amount of time for the Commission to monitor the impact of the freeze on separations results and to consider comprehensive reform. The freeze also represents an important step toward simplifying the separations process, as the freeze will eliminate the need for many separations studies during this five-year period, as described in more detail below. We recommend that the freeze expire at the end of five years, unless extended by the Commission at the recommendation of the Joint Board. At the end of the second year of the freeze, we recommend that the Commission seek comment on the impact of the freeze. 27. During the freeze, we recommend that the Commission continue its comprehensive review of the separations process. Specifically, we believe that several issues must be addressed by the Joint Board and the Commission in the near future as a result of the emergence of new technologies and local exchange service competition. These issues include the appropriate separations treatment of 1) unbundled network elements (UNEs), 2) digital subscriber line (DSL) services, 3) private lines, and 4) Internet traffic. We also believe that the Joint Board and the Commission should work towards providing a clear path for comprehensive reform of separations with the possible, future target of the elimination of separations. Accordingly, we recommend that the Commission commit to addressing these issues and a path to comprehensive reform in the near term. 2. Dial Equipment Minutes Factors 28. The Joint Board recognizes that there have been increased intrastate usage patterns since 1995, as evidenced by the increase in local minutes. While one explanation for this growth may be a growth in the use of the local network to connect to the Internet, other explanations might include the impact of changes in the telecommunications environment that are resulting from the local competition provisions in the 1996 Act, or changes in technology. The Joint Board recommends that the Commission further develop the record on this issue, and in particular, determine what, if any, impact the growth in local minutes has had on jurisdictional allocations and consumers. 29. On March 24, 2000, the United States Court of Appeals for the D.C. Circuit vacated certain provisions of the Commission's Reciprocal Compensation Ruling, and remanded it to the Commission. The Court found, among other things, that the Commission had not adequately explained its conclusion that Internet traffic is interstate in nature. As a result, the jurisdictional nature of Internet traffic currently remains unresolved. The Joint Board recommends that, if the Commission finds that Internet traffic is interstate, the Commission freeze the local DEM factor for the duration of the freeze at some substantial portion of the current year level based on data from the twelve months preceding the implementation of the freeze. The precise percentage of the current year's local DEM should be established according to how much of a reduction in local DEM is warranted in light of any effects that Internet usage has had on jurisdictional allocations or consumers. Given the inadequate record on this issue, we cannot recommend with precision what portion of the current year level is appropriate for the freeze. In order to facilitate discussion and the development of a specific record, however, we would suggest, as a default estimate, freezing the local DEM at 95% of the current year level based on data from the twelve months preceding the implementation of the freeze. 30. We also recommend that, if the record warrants a reduction of the local DEM factor in conjunction with the implementation of the freeze, the current year unweighted, interstate DEM factor should be recalculated and frozen. As required by 47 U.S.C. 54.301(a)(2)(ii), ILECs currently benefiting from DEM weighting, pursuant to 47 U.S.C. 36.125(f), shall continue to monitor the growth in access lines and adjust downward the 1996 DEM weighting factor and, thereby, the local switching support factor, as access lines increase. 3. Data Collection and Reporting During Freeze 4. We recommend that all carriers continue to report separations results under the Commission's current reporting rules. ARMIS-reporting companies would continue to report separations results to the Commission, and NECA companies would continue to report separations results to NECA. During the freeze, however, we recommend that the Commission would no longer require price cap carriers to conduct certain separations studies to assign costs to the Part 36 categories and neither price cap nor rate-of-return carriers to calculate updated jurisdictional allocation factors. We believe that the removal of these steps from the separations process will greatly simplify the entire Part 36 process for all ILECs. 5. Adjustments During Freeze 32. As explained above, the intent of the freeze is to stabilize and simplify the separations process. Accordingly, we recommend further that, as a general matter, adjustments by the carriers should not be allowed to the separations category relationships and allocation factors of price cap carriers or to the allocation factors of rate-of-return carriers during the freeze. We believe that this prohibition of adjustments during the freeze is consistent with the stability we seek to achieve through the freeze, pending more comprehensive reform of the separations process. We note, however, that carriers may request a waiver of the Part 36 freeze pursuant to the Commission's regulations, in order to make adjustments where special circumstances warrant such action. 33. In recommending that adjustments to the separations category relationships and allocation factors should not be permitted during the freeze, we recognize that, during the freeze, carriers may merge affiliated operations, or acquire from or sell exchanges to non-affiliated carriers. We recommend that a carrier selling or otherwise transferring exchanges to another carrier's study area continue to employ its pre-transfer frozen factors and, if applicable, category relationships. We recommend, however, that the acquiring carrier be required to recalculate its frozen factors and category relationships. The acquiring carrier should calculate new, composite frozen factors and category relationships based on a weighted average of both the seller's and purchaser's existing frozen factors and frozen category relationships. This weighted average should be based on the number of access lines currently being served by the acquiring carrier and the number of access lines in the transferred exchanges. We believe that this approach will result in factors and category relationships that more accurately reflect the acquiring carrier's post-transfer study area. 34. We also recognize that, when exchange(s) are transferred, they may not include all of the categories of investment found in the selling carrier's study area. We wish to avoid the anomaly of creating categories of investment in the new study area that are not actually transferred to the purchaser. Accordingly, we recommend requiring the acquiring carrier to remove all categories of investment from the selling carrier's category relationships where no such category investment exists within the sold exchange(s). The seller's remaining category relationships must then be increased proportionately to total 100 percent. Finally, the adjusted seller's category relationships must be composited with those of the acquiring carrier to determine the category relationships for the acquiring carrier's post-transfer study area. 35. We believe that this approach is an administratively simple, workable one that is consistent with our stated goal of stabilization of the separations process through temporarily halting any jurisdictional cost shifts. We recognize that, under this approach, some distortions may result. On balance, however, we believe that the waiver process will provide a mechanism for relief when special circumstances warrant deviation from the freeze. 1 Use of Separations Simulation Tools 2. In reaching this recommendation, we have generated and reviewed the results for various types of freezes utilizing the State Separations Tool for both the ARMIS and NECA companies. We have also examined USTA's results for its freeze proposal, which were generated by the USTA Separations Reform Analysis Program. We examined results for both frozen category relationships and allocation factors, and with only frozen allocation factors, using categorization and factor levels from years 1996, 1997, and 1998. With the State Separations Tool, we also examined the change in 1998 separations results if each carrier's 1998 local DEM factor were reduced by 5%. While we recognize that these simulation tools cannot predict the impact of the freeze recommended here on future separations results, we believe that the results suggest that the freeze will not result in significant cost shifts to either jurisdiction. 3. This finding is consistent with a primary purpose of the freeze, which is to protect against future significant cost shifts and thereby to provide stability for the separations process. We note that, absent a reduction in the local DEM factor at the time the freeze is implemented, there will be no immediate cost shift as a result of a freeze whereby categories and/or factors are frozen based on data from the twelve months prior to issuance of the Commission's order adopting this Recommended Decision. We recognize that some cost shifts may result from a freeze employing a reduction in the local DEM factor, as the cost allocations between the federal and state jurisdictions would clearly change, to some degree, as the result of such a reduction. 4. While these simulation tools have assisted us in arriving at this Recommended Decision, we are not basing the decision entirely on the results generated by these tools, nor are we implying that the results generated by either tool represent the actual impact of a freeze. We agree with GVNW that no separations simulation tool can precisely predict the outcome of a Part 36 freeze. However, these simulation tools do suggest that the two recommended freeze options will cause no immediate or substantial harm to ratepayers or carriers. Furthermore, we believe that these tools will be particularly useful while the Joint Board considers comprehensive reform as they will enable us to analyze proposed changes to the Part 36 separations rules. V. RECOMMENDING CLAUSE 6. For the reasons discussed herein, the Federal-State Joint Board on Separations, pursuant to sections 1, 2, 4, 201-205, 215, 218, 220, 229, 254 and 410 of the Communications Act, as amended, 47 U.S.C.  152, 152, 154, 201-205, 215, 218, 220, 229, 254 and 410, RECOMMENDS that the Federal Communications Commission adopt the interim freeze of Part 36 described above relating to the jurisdictional separation of common carrier property and expenses between interstate and intrastate operations. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary APPENDIX A Recommended Categories/Subcategories to Freeze (by account) Account 2210 - Central Office Switching Category 2 Tandem Switching Equipment Category 3 Local Switching Equipment Account 2220 Operator Systems Category 1 Operator Systems Equipment (by type of board) § Separate toll boards § Separate local manual boards § Combined local manual and toll boards § Combined toll and DSA boards § Separate DSA and DSB boards § Service observing boards § Auxiliary service boards § Traffic service positions Account 2230 Circuit Equipment Category 4 Circuit Equipment Subcategory 4.1 Exchange Circuit Equipment 4.11 Wideband Exchange Line Circuit Equipment 4.12 Exchange Trunk Circuit Equipment 4.13 Exchange Line Circuit Equipment § State private line and state WATS § Interstate private line and interstate WATS § Message telephone service 4.2 Interexchange Circuit Equipment 4.21 Interexchange circuit equipment furnished to another company for IS use 4.22 Interexchange circuit equipment used for WDBD services including satellite and earth station equipment 4.23 All other interexchange circuit equipment § State private line and state WATS § Interstate private line and interstate WATS § Message telephone service 4.3 Host/Remote Message Circuit Equipment Account 2310 Information Origination/Termination (IOT) Equipment Category 1 Other information origination / termination equipment Category 2 Customer premises equipment Account 2410 Cable & Wire Facilities Category 1 Exchange Line C&WF Subcategory 1.1 - State private line and state WATS 1.2 - Interstate private line and interstate WATS 1.3 - Subscriber lines jointly used for local exchange and exchange access Category 2 Wideband and Exchange Trunk C&WF Category 3 Interexchange C&WF Subcategory 3.1 - State private line and state WATS 3.2 - Interstate private line and interstate WATS 3.3 Message telephone service Category 4 Host/Remote Message C&WF Account 6623 Customer Services Category 1 Local Business Office Expense § End user service order processing § End user payment and collection § End user billing inquiry § Interexchange carrier service order processing § Interexchange carrier payment and collection § Interexchange carrier billing inquiry § Coin collection and administration Category 2 Revenue Accounting Expense § Message processing expense Ø Toll ticket processing Ø Local message processing § Other billing and collection expense § Carrier access charge billing and collecting expense Category 3 All Other Customer Services Expense Recommended Factors to Freeze (by Jurisdiction) 1. Subscriber Line Minutes of Use (SLU) 2.Weighted Standard Work Seconds (WSWS) by type of board 3.Tandem switch minutes of use (Tdm MOU) 4.Dial Equipment Minutes (DEM) measured (i.e. unweighted) 5.Exchange Trunk Minutes of Use (Exch Trk MOU) 6.Wideband Minutes of Use (WDBD MOU) 7.Conversation Minutes (CM) 8.Conversation Minute Kilometers (CMKm) 9.Host-Remote Minute of Use Kilometers (MOUKm) 10.Equal Access Minutes of Use (EA MOU) 11.End User service order processing contact factor 12.End User payment & collection revenue factor 13.End User billing inquiry contact factor 14.IXC service order processing contact factor 15.IXC payment & collection revenue factor 16.IXC billing inquiry contact factor 17.Coin collection & administration revenue factor 18.Marketing - billed revenue factor 19.SP + RC messages 20.TSPS Relative Processor Real Time (in seconds) [to allocate RTA investment in end office] SEPARATE STATEMENT OF COMMISSIONER MICHAEL K. POWELL Re:Recommended Decision, Jurisdictional Separations Reform and Referral to the Federal-State Joint Board (CC Dkt. No. 80-286) Despite its relative brevity, this Recommended Decision reflects a long and lively dialogue among the state and federal members of this Joint Board. It is for this dialogue that I am most grateful, for it is only through effective partnership among regulators at all levels of government that we can maximize the efficiency, utility and availability of the public switched telephone network. I especially appreciate the contributions to this partnership made by my state colleagues on the Joint Board. It is primarily to applaud those contributions that I write separately here. Secondarily, I wish to underscore what the Recommended Decision itself makes clear: in order to determine whether and how to institute a freeze of the Part 36 category relationships and jurisdictional allocation factors, we first need an adequate record. In particular, it is only on the basis of such a record that we can determine what impact Internet usage has contributed to the growth in local minutes, and whether that growth has, in turn, affected jurisdictional allocations and consumers. I agree that it is a reasonable hypothesis that recent growth in local minutes has resulted from use of the Internet. I also agree that such growth may have skewed jurisdictional allocations, notwithstanding parallel growth in interstate minutes during the same period. Moreover, I agree that we could ultimately develop a record that would support freezing the local DEM at 95% of its level based on the preceding twelve months of data. I would only point out that, upon testing these reasonable hypotheses in the crucible of a proper record, we might also find that these hypotheses are invalid. In that event, the Commission's court-imposed obligation to engage in only reasoned decisionmaking, as well as the requirements of good public policy, will no doubt require us to freeze the local DEM at some level other than the 95% offered in this Recommended Decision. With these few embellishments, I am pleased to support this Recommended Decision, and I look forward to continued work with the rest of the Joint Board in exploring the challenges imposed by the development of competition and new networks on the legacy system of jurisdictional separations. JOINT SEPARATE STATEMENT OF CHAIRMAN THOMAS L. WELCH, COMMISSIONER JOAN H. SMITH, COMMISSIONER DIANE MUNNS, AND COMMISSIONER JOSEPH P. METTNER Re:Recommended Decision, Jurisdictional Separations Reform and Referral to the Federal-State Joint Board (CC Dkt. No. 80-286) The undersigned state member(s) of the Joint Board wholeheartedly support today's Recommended Decision proposing that the Commission adopt an interim separations freeze. We write only to express our understanding of the effect of Paragraphs 28 and 29 of the Recommended Decision, relating to the increase in local minutes experienced since 1995. The Recommended Decision states that one possible explanation of the increase in local minutes is growth in the use of the local network to connect to the Internet, but the Recommended Decision also states that the Commission should "further develop the record on this issue and, in particular, determine what, if any, impact the growth in local minutes has had on jurisdictional allocations and consumers." The Recommended Decision then provides that if, on remand, the Commission finds that Internet traffic is interstate, the Commission should "freeze the local DEM factor for the duration of the freeze at some substantial portion of the current year level based on data from the twelve months preceding the implementation of the freeze." The Recommended Decision does not specify the amount of the local DEM rollback, but suggests a "tentative estimate" of 95 percent of the current year level. We read Paragraphs 28 and 29 of the Recommended Decision as endorsing a freeze of the local DEM factor at no more than 95 percent of the current year level, unless a different conclusion is warranted by the record developed through this proceeding. Based upon the information available to the Joint Board, we believe the increase in local minutes is primarily attributable to the increased use of the local network to connect to the Internet. While we cannot quantify the precise impact, we believe it is a permissible inference that a reduction of the local DEM factor by at least 5 percent is appropriate to account for Internet-related growth. We support the approach of the Recommended Decision to develop a record to try to assess the reasons for the increase and the impact with more precision. However, if a more precise number cannot be discerned from the record, we believe it is reasonable to make at least a 5 percent adjustment to the DEM, if the Commission finds that Internet traffic is interstate, to correct for shifts that have already occurred.