Are mode C altitude returns valid for aircraft separation? According to FAA JO 7110.65 5-12-8 'Validation of MODE C READOUT', Mode C is valid if there is less than 300 feet deviation from the pilot reported altitude.
If ATC instruct 'A' aircraft to maintain 5,000ft, and its Mode C indicate 4,900ft on radar, and ATC instruct 'B' aircraft to maintain 6,000ft and its Mode C indicate 6,000ft, are A and B vertically separated?
By looking radar, it is 900 feet separation, but pilot reported altitude is 1,000 feet separated.
Yes, they are separated. Both according to mode C (in your example, there is 1,100 ft between them - not 900) and in general. It is normal for there to be small deviations in mode C in the range of 100 to 200 ft. If I have two aircraft crossing each other, supposedly with 1,000 ft in between, but the indicated (mode C) separation is slightly less, I will certainly ask the pilots if they are indeed at their assigned altitudes. If they confirm, then all is well. A pilot report generally overrules mode C (to the extend where there is even a procedure for asking the pilot to turn off mode C reporting if there is a discrepancy between pilot report and mode C).