Draft state-level Bill for requiring the structural or functional separation of large ILECs along LoopCo/ServicCo boundaries.  Drafted by Fred Goldstein, Ionary Consulting, Feb. 2009.


WHEREAS advanced and affordable telecommunications and information services are increasingly important to society and for economic development, and

WHEREAS society benefits from access to a wide diversity of service providers, and

WHEREAS the vertical integration of information services, telecommunications services and physical telecommunications plant facilities limits the access of the public to information and telecommunications services that could potentially make use of the telecommunications plant, and

WHEREAS modern optical fiber facilities have far more capacity than required to carry all of the services that any consumer or business is likely to require; this physical plant is costly to install; and thus there would be little benefit to the consumer of having multiple physical fiber facilities if such facilities were open to all service providers, and

WHEREAS the cost of modernizing the State’s telecommunications infrastructure would be most easily borne by the largest number of participants sharing the same physical plant, and

WHEREAS the recent national experiment with encouraging competition at the level of physical facilities has proven unsuccessful, leading to reduced competition for information services and a public distrust of the ability of new services to be provided across the existing plant, and

WHEREAS the physical telecommunications plant demonstrates the economic characteristics of a natural monopoly, in which the incumbent provider’s cost is lower than that of a new entrant, thus limiting the likelihood of new entry, and

WHEREAS alternative forms of regulation have not produced the hoped-for modernization of the telecommunications plant, and have encouraged disinvestment from rural areas unless explicit subsidies have been provided, while consumer prices have risen,

NOW THEREFORE … [boilerplate legislative header]… to effect the restructuring of the state’s telecommunications industry to provide for the separation of the physical telecommunications infrastructure from the provision of service thereof.

PART I.  Definitions.

Commission refers to the [name of relevant state PUC].

Incumbent Local Exchange Carrier (ILEC).  As defined in the Telecommunications Act of 1996 (47 USC 251(h)(1)).

Subject ILEC. An ILEC shall be subject to the separation provisions of this Bill if it

a) provides telephone service to at least 50,000 subscribers within the state, or at least 10,000 telephone lines within the state and a total of 50,000 telephone lines within the state and contiguous or nearly-contiguous operating territories in adjacent states, and

b) is not currently subject to rate-of-return regulation at the state and federal levels.

Facilities entity.  The entity to which ownership of Subject telecommunications plant shall be transferred.

Services entity.  The residuary of the Subject ILEC after the transfer of Subject telecommunications plant to the Facilities entity.

Subject telecommunications plant.  The plant subject to transfer to the Facilities Entity shall include the following:

a) The Subject ILEC local loop plant between the subscriber demarcation and the ILEC wire center main distribution frame, including copper and optical fiber transmission facilities, poles, conduits, huts, manholes, vaults, and related facilities;

b) Subject ILEC circuit and packet multiplexing equipment located between the wire center and the subscriber point of demarcation;

c) Customer-premise inside wire owned by the Subject ILEC;

d) Subject ILEC intraLATA interoffice optical fiber transmission plant used to provide Local Exchange Service, Exchange Access Service, or Special Access Service, including associated multiplexors, repeaters, and buildings needed to house them, but not including facilities exclusively or primarily used in the provision of interLATA service;

(1) For the purpose of this definition, “Special Access Service” shall be as defined on January 1, 2001, including services subsequently detariffed

e) Subject ILEC wire center buildings, including the common facilities, main distribution frames, power facilities, time-division multiplexors, and other facilities used or typically used by non-ILEC collocators, but not including ILEC voice switching equipment, computing equipment, or packet switching equipment including Digital Subscriber Line Access Mutiplexors located within the wire center.

Comparable plant facilities.  Plant not owned by a Subject ILEC but with fundamentally similar characteristics, including fiber optic, coaxial cable, and other outside plant facilities, poles, huts, manholes, and associated electronics.

Subject wholesale customers.  The customer accounts transferred to the Facilities Entity upon separation shall include:

a) Unbundled network elements including local loops, interoffice facilities, dark fiber, and subloops;

b) Collocation in the Subject ILEC wire center buildings;

c) Special Access intraLATA transmission services and commercial unswitched transmission services subject to Special Access tariffs prior to 2001, including but not limited to voice grade, DS1 and DS3 services, SONET, and Transparent LAN Service.

d) Accounts retained by the Services Entity, whether considered wholesale or retail, are packet-switched or cell-switched services including but not limited to Asynchronous Transfer Mode, Frame Relay, Internet Protocol, and switched Ethernet-framed services.


PART II.  Separation.

Every Subject ILEC operating within the State shall be separated into two entities, the Facilities Entity and the Services Entity.  Ownership of the Subject telecommunications plant shall be assigned to the Facilities Entity.

Separation shall be effected on the first business day of the calendar quarter following one and one half years after the passage of this bill. [18-21 months to prepare]

A Facilities Entity shall be created for the purpose of owning and operating subject telecommunications plant on a wholesale basis.  If more than one Subject ILEC operates within the State, then a common Facilities Entity may take ownership of the subject telecommunications plant formerly owned by more than one of the Subject ILECs; however, this shall be at the option of the Subject ILECs in consultation with the Commission and the Attorney General.

Structural Separation Option:  The Facilities Entity may be created as a public corporation entirely separate from the Subject ILEC.  In such a case, the Facilities Entity may be assigned a share of the Subject ILEC’s debt representing no more than two-thirds of the book value of the Subject telecommunications plant; except that if the fair market value of the Facilities Entity exceeds four-thirds of its book value, then the assigned debt may be up to half of the fair market value.  The fair market value of the Facilities Entity shall be appraised by an entity selected by the Attorney General in consultation with the Subject ILEC, the [state-level corporation regulator, typically called:] Secretary of State, and the Commission. 

Functional Separation Option:  The Facilities Entity may be created as a corporation maintained as a fully separate subsidiary of the Subject ILEC or of the parent corporation of the Subject ILEC.  In such a case, the Facilities Entity shall operate independently.  It shall maintain its own books of account, have separate officers, utilize separate operating, marketing, sales, installation, and maintenance personnel, and utilize separate computer facilities.  Any sales and management incentives shall not favor sales to any affiliated entity.  The share of the Subject ILEC’s debt to be assigned, for rate-making purposes, to the Facilities Entity shall be computed the same was as if it were a separate public corporation, as described [refer to previous paragraph] above.

The Services Entity shall retain, upon separation, its retail customer base, as well as its wholesale and retail telephone exchange service and exchange access service customer base, its DSL customer base, and its Internet Service and other enhanced or information service customer base.

The Services Entity shall retain ownership of telephone switching equipment, including both local exchange and tandem switches.

Prior to separation, the designated management of the Services Entity and Facilities Entity shall work together to divide the Operational Support Systems along appropriate lines, or replicate systems as necessary, in order to ensure continuity of service to all customers.

Prior to separation, the employees of the Subject ILEC will be individually designated as employees of one or the other entity.  In order to maintain continuity of employment, labor contracts, seniority, salaries, pensions and benefits will be preserved at separation; the newly-created Facilities Entity and Services Entity will both be successors-in-interest of the Subject ILEC with regard to personnel matters.  The Facilities Entity may independently organize its management structure to better reflect its mission.


PART III.  Responsibilities of the Entities.

A.  Obligations of the Facilities Entity.

The Facilities Entity shall be subject to rate-of-return regulation.  The Commission shall determine a fair rate of return based upon Public Utility law.  Expenditures of the Facilities Entity shall be subject to supervision of the Public Regulatory Commission, to ensure a proper balance between plant modernization and high-quality operation and a fair cost to the ratepayer. 

The Facilities Entity is responsible for the ongoing maintenance, extension and replacement of Subject telecommunications plant.  It is also chartered with the expectation of providing the state with new telecommunications plant, taking advantage of new technologies as appropriate, so that the state shall receive high quality telecommunications and information services.  Depreciation and amortization schedules of plant constructed by the Facilities Entity shall reflect best estimates of actual economic lifetimes.

If the Facilities Entity is maintained as a fully separate subsidiary of the Service Entity or its parent corporation, all transactions between the Facilities Entity and the Services Entity or its affiliates which involve the transfer, either direct or by accounting or other record entries, of money, personnel, resources, other assets or anything of value, shall be reduced to writing. A copy of any contract, agreement, or other arrangement entered into between such entities shall be filed with the Commission within 30 days after the contract, agreement, or other arrangement is made. This provision shall not apply to any transaction governed by the provision of an effective state or federal tariff.

The Facilities Entity is permanently enjoined against providing telecommunications services or information services to retail customers.  It may self-provision these services for its own administrative use, or for incidental purposes, but shall not engage in direct competition with its customers.

The Facilities Entity shall offer its facilities pursuant to a wholesale tariff approved by the Commission.  These shall not be deemed to be telecommunications services subject to jurisdictional separation, but as network elements provided to service providers.

Wholesale customers of the Facilities Entity may include local exchange carriers, interexchange carriers, commercial mobile radio service carriers, and non-carrier customers including information service providers, cable television service providers, utilities, governmental entities, and other businesses who make use of said Facilities in providing services to the public.  The Facilities Entity shall impose no restrictions on the sharing or resale of its facilities.

The Facilities Entity shall not engage in any pricing of its facilities based upon the nature of the payload transmitted across its facilities.  It may not discriminate based upon the content, protocol, or type of service provided by its wholesale customers, nor may it monitor the transmissions more than required for maintenance and service observation purposes.

The Facilities Entity may negotiate in confidence with multiple wholesale customers in order to plan its facilities deployment.  In deploying new plant, it shall take into account the potential for multiple service providers to make use of its facilities, and shall favor technologies that provide maximum flexibility for additional service provider market entry and service flexibility.

The Facilities Entity shall be the successor-in-interest to the unbundling obligations imposed upon the ILEC by Sections 251 and 271 of the Telecommunications Act with regard to Subject telecommunications plant transferred to it.  The Services Entity shall retain its other obligations under Sections 251 and 271, including those related to telephone switching and services.

In setting rates for the Facilities Entity, the Commission shall base its rates upon costs, with a fair rate of return, and not upon value-of-service, residual pricing, or other non-cost-based methodologies.  The appropriate cost-based methodology or methodologies to be utilized shall be determined by the Commission.  To the extent that the selected methodology conflicts with that specified for ILECs by the FCC, the Commission may request, by Petition or otherwise, that the FCC waive or forbear from enforcing the same methodology on a separated entity that it applies to other ILECs.  If the FCC does not approve, then the FCC-approved methodology shall be retained.

B.  Obligations of the Services Entity.

The pre-separation rates and tariffs of the Subject ILEC shall initially be retained by the Services Entity, initially subject to pre-existing rate caps.  The Commission shall review the competitive state of the market for telecommunications services two years after separation, and at two year intervals hence, and may, upon determination that the Services Entity no longer has Significant Market Power, release the Services Entity from those aspects of rate regulation that do not apply to Competitive Local Exchange Carriers, including retail rate caps.

For a period of three years following separation, the Services Entity shall procure no less than 90% of its local loop and intraLATA interoffice transmission facilities from the Facilities Entity.  This quantity may be reduced by 10% of total procurements per year thereafter, at the option of the Services Entity.


PART IV.  Universal Service.

[IF THERE IS A STATE USF:] To the extent that a Subject ILEC is the recipient of Universal Service funding from the State, this funding shall be transferred to the Facilities Entity, to enable it to provide funded facilities on a competitively-neutral basis to all of its customers.

To the extent that a Subject ILEC is the recipient of Universal Service High Cost Fund (HCF) funding from the federal universal service fund (FUSF), the Commission shall request, by Petition or otherwise, that the Universal Service Access Corporation (USAC) transfer its HCF funding to the Facilities Entity, to enable it to provided funded facilities on a competitively-neutral basis to all of its customers.  The Commission and the Attorney General shall work with the USAC and the FCC to adapt its funding methodologies to be applied to the provision of Subject telecommunications plant by the Facilities Entity, rather than directly to end-user services provided by current Eligible Telecommunications Carriers. 

In setting rates for facilities provided in different geographic locations with different cost characteristics, the Commission may balance the need for affordable rates across the state with the economic efficiency of cost-based rates.  Rates for facilities shall not differ based on whether the end user is classified as residential or business; however, rates may differ based upon factors that impact cost, such as the number and type of facilities provided at or near a given location.  Cross-subsidies between urban and rural areas shall be explicitly identified in the rate-making process.  [IF NO STATE USF EXISTS:] In lieu of cross-subsidies, the Commission may implement an explicit fund for this purpose, its collection based upon a uniform percentage rate applied to the facilities tariff, to enable the Facilities Entity to support the provision of a level of universal service across the state.

In geographic areas where the cost of new telecommunications wireline plant, whether optical fiber, copper, or another medium, is uneconomical, the Facilities Entity may provide, on a wholesale basis, radio transmission facilities;  however, it shall also provision, at a cost-based rate, wireline or radio backhaul facilities to retail service providers who choose to provide their own radio transmission facilities for the provision of retail service.


PART V.  Voluntary Participation

The Facilities Entity shall upon its creation be the owner of Subject telecommunications plant.  It may also own and/or operate Comparable plant facilities on behalf of, or acquire facilities from, entities other than the Subject ILECs.  Such entities may include but are not limited to cable television system operators, competitive access providers, competitive local exchange carriers, utility companies, owners of private telecommunications plant, and governmental entities.

If an owner of Comparable plant facilities so chooses, it may negotiate with the Facilities Entity to sell such properties to the Facilities Entity.  The Facilities Entity may contract to maintain such facilities while providing the seller with Indefeasible Rights of Use on some or all of the transferred facilities for a contractually-specified time period, provided that such a transaction covers at least its costs, and thus does not negatively impact the rates charged to others.  Other than plant acquired subject to Indefeasible Rights of Use, the Comparable plant facilities acquired by the Facilities Entity shall be made available to its customers under the same tariff conditions as other facilities, including Subject telecommunications plant and newly-constructed plant.

The Facilities Entity may contract with the owner of Comparable plant facilities to undertake a program of plant replacement, whereby the Facilities Entity does not take ownership of Comparable plant facilities, but instead provisions existing facilities and/or constructs new plant facilities on behalf of the owner of Comparable plant facilities.  When such plant is constructed, the Facilities Entity shall seek to maximize the wholesale utility of such plant, so that it can be utilized by additional wholesale customers to provide their own services; it shall not construct plant such that it facilitates the monopolization of services by one or a small number of wholesale customers.