In
the Matter of PRESCRIPTION OF PROCEDURES FOR SEPARATING AND ALLOCATING PLANT
INVESTMENT, OPERATING EXPENSES, TAXES, AND RESERVES BETWEEN THE INTRASTATE AND
INTERSTATE OPERATIONS OF TELEPHONE COMPANIES
Docket No. 17975
FEDERAL COMMUNICATIONS COMMISSION
16 F.C.C.2d 317 (1969)
RELEASE-NUMBER: FCC 69-65
January 29, 1969 Adopted
BY THE
COMMISSION: COMMISSIONER JOHNSON DISSENTING AND
ISSUING A STATEMENT.
1. This proceeding is an outgrowth of the
general investigation (docket No. 16258) into the lawfulness of the charges of
the Bell System companies for interstate and foreign communications services
and other related matters. That proceeding
was instituted by our order of October 27, 1965. As part of that proceeding we considered the propriety of the
principles and procedures set forth in the NARUC-FCC separations manual for
separating the Bell System's plant, expenses, taxes, and reserves between its
interstate and intrastate operations.
We also considered proposals for revisions of the principles and
procedures advanced by the Bell System and other parties. On July 5, 1967, the Commission issued its
interim decision and order in docket No. 16258 in which it accepted and prescribed
the separations manual's methods as appropriate with the exception of the
methods applicable to the allocation of subscriber plant. At the same time, the Commission rejected
the various proposals for revisions to the manual and adopted new principles
and procedures for the separation of subscriber plant. A detailed discussion of the background of
the jurisdictional separations problem, as well as the rationale for various
methods of separations, are contained in paragraphs 240 through 322 of our July
5, 1967, interim decision and order and are incorporated herein by reference.
2. In response to various petitions for
reconsideration, the Commission, on September 14, 1967, released its memorandum
opinion and order on reconsideration by which it stayed the effect of its
prescribed plan and reconstituted the so-called technical experts group n1 to consider improvements or
refinements which might be made in the prescribed [*318] plan. This technical experts group considered the
Commission's prescribed plan, a new plan proposed by the Bell System, and
various suggested modifications of the latter.
The participants could not agree on the acceptability of any one
plan. A report dated November 15, 1967,
was filed which set out the different positions of the parties.
n1 The technical experts group was
formed by direction of the telephone committee at a prehearing conference on
July 11, 1966, in docket No. 16258 for the purpose of endeavoring to narrow the
issues and devising other means of expediting consideration of separations,
pursuant to the Commission's memorandum opinion and order issued Apr. 11,
1966. It consisted of representatives
of all parties who submitted separations proposals pursuant to the telephone
committee's order issued Apr. 22, 1966, and members of the Commission's staff.
3. On January 24, 1968, the Commission adopted
a further memorandum opinion and order in docket No. 16258 in which the
separations methods prescribed by its July 5, 1967, interim decision were
reaffirmed and made final for the purpose of determining the Bell System's
interstate revenue requirements in docket No. 16258. At the same time, the Commission noted certain questions raised
in the technical experts group's report with respect to the Commission's
plan. We also took cognizance of the
policy of this Commission to cooperate with the telephone industry and the
National Association of Regulatory Utility Commissioners (NARUC) in the
development of separations methods and, in particular, the special interests of
the State commissions in the matter of jurisdictional separations. In order to give full consideration to the
views held by those affected by the prescription of procedures for
jurisdictional separations and to evaluate any alternate plans together with
the Commission's plan, the Commission adopted on the same date the notice of
proposed rulemaking instituting this separate proceeding for the purpose of
prescribing separations procedures for the future.
4. Comments of interested parties in response
to the notice of proposed rulemaking were due on February 26, 1968, and reply
comments were due on or before March 12, 1968.
These dates were extended to March 12 and March 27, 1968, respectively,
in our order of February 13, 1968, in response to a request of the NARUC.
5. Timely comments have been filed by the Bell
System; the Independent Telephone Group (consisting of United States
Independent Telephone Association, G.T. & E. Service Corp., United
Utilities, Inc., and the National Telephone Cooperative Association); the
Western Union Telegraph Co.; the National Association of Regulatory Utility
Commissioners; the networks (consisting of American Broadcasting Cos., Inc.,
Columbia Broadcasting System, Inc., and National Broadcasting Co., Inc.);
General Services Administration for the Executive Agencies of the United
States; California Public Utilities Commission; District of Columbia Public
Service Commission; Iowa State Commerce Commission; Kansas State Corporation
Commission; Montana Railroad Commission; New Jersey Board of Public Utilities
Commissioners; North Carolina Utilities Commission; West Virginia Public
Service Commission; Wisconsin Public Service Commission and cities of Los
Angeles, San Francisco, and San Diego.
Reply Comments have been filed by the Bell System; the Independent
Telephone Group; the Western Union Telegraph Co.; the networks; California
Public Utilities Commission; and District of Columbia Public Service
Commission.
INTEREXCHANGE
PLANT
6. Historically, two methods have been used for
the separations of interexchange circuit plant to determine the allocation of
the cost of this plant between State and interstate jurisdictions. The first plan was contained in the 1947
edition of the separations manual and remained in effect until 1956 as a method
for the allocation of the interexchange circuit plant. Under the 1947 plan, the book cost of the
circuits used wholly for a single service was assigned directly to that
service. The book cost of circuits used
jointly for both services was allocated between services on the basis of
relative use measured by the conversation-minute-miles of traffic for each
service using the facilities jointly.
7. In July 1956, the Modified Phoenix plan was
introduced as the method for the separations of
8. The
9. The
10. Those parties seeking herein the elimination
of the Modified Phoenix plan advance the following reasons in support thereof:
(1) The
methodology required by the Modified Phoenix plan is not consistent, in
principle, with the methodology now used for separating exchange plant. The latter procedures are premised on the
principle that traffic sensitive plant should be apportioned on the basis of
actual or relative use. Interexchange
circuit plant is clearly traffic sensitive.
(2) The
Modified
(3)
Compared to the situation existing at the time of the adoption of Modified
Phoenix, short haul toll operations of the associated companies are now
benefiting cost-wise much more from technological advances and to this extent
there is now less justification to equate the economic benefits of said advances
through the averaging of the costs of short haul plant of the associated
companies with the costs of longer haul plant of Long Lines, which is used
exclusively for interstate operations.
(4)
Contrary to the original rationale for Modified Phoenix, Bell System toll lines
plant is not engineered and operated as an entity to serve customers in a
State, but, rather is engineered and operated to serve customers in other
States as well.
(5) The
plan results in an artificial overstatement in interstate book costs of about
$500 million currently and the amount is increasing. Moreover, the plan produces and erratic and inequitable
distribution in benefits among the States (i.e., 70 percent of the benefits
inure to 12 States which would otherwise account for only 40 percent of the
book costs). This disproportion is also
increasing with time.
11. In addition to
12. The separations procedures proposed in this
proceeding by the Bell System and the NARUC are substantially changed from the
procedures advocated by the Bell System in F.C.C. docket No. 16258. Under the previous proposal costs would be
determined separately for line haul and terminal equipment. The present proposal, as already noted,
contemplates continuation of the broad averaging of the line haul and terminal
costs of interexchange plant in each study area. In the previous proposal, a circuit was assigned wholly to one
service where other traffic on the circuit did not exceed 5 percent of the
total usage of the circuit. This is
eliminated in the present proposal. Circuits
used wholly in one service are directly assigned to that service. Circuits carrying more than one service will
be allocated between services on the basis of proportionate use. The previous proposal was opposed by the
NARUC whereas the present proposal is supported by the NARUC and, hence, the
majority of the State commissions. The
previous proposal shifted $175 million in revenue requirements from interstate
to intrastate. By the present proposal,
this amount is reduced to $118 million.
13. We have carefully considered the arguments
advanced by the parties advocating retention of the existing procedures for
separating interexchange plant. In
doing so, we have also reexamined, in light of current conditions, the
rationale on which the adoption of these procedures was premised. We have also considered the importance of
designing cost allocation procedures so as to assign book costs to those
services which are responsible for incurring them and that the principle of
actual use is the best means of assigning such costs except where it can be
demonstrated that adherence to actual use will not result in a fair and
equitable apportionment. Upon the basis
of these considerations we have concluded that reversion to the actual use
principles and procedures similar to those contained in the 1947 separations
manual applicable to interexchange circuit plant is necessary and appropriate
at this time.
14. A principal argument to sustain the Modified
Phoenix plan has been that telephone plant is engineered and operated as an
entity and that, therefore, the averaging of the costs of Long Lines
terminating plant used exclusively in interstate service with the costs of
Associated Co. plant is warranted.
There is no dispute that the telephone system functions as an integrated
entity and that each operating component must have technical compatibility with
all others. While this may be true as a
generality, it tends to oversimplify the picture and to obscure the fact that
substantial amounts of facilities are devoted exclusively to one or the other
of the services, State or interstate.
We think it is essential, in the light of present day technological
considerations, that the book costs of these facilities be assigned to the
service which is responsible for them.
15. Nor is there any dispute that the cost averaging
of Modified Phoenix was designed to lessen the disparity between costs and
revenue requirements applicable to intrastate and interstate services,
respectively. However, current
operating data make it apparent that the Modified Phoenix plan is no longer
producing its desired effects except in a most generalized, but unbalanced,
fashion. It is further apparent [*322]
that under current conditions the plan is now operating to introduce
gross distortions in the relative costs of interexchange plant being assigned
to State and interstate services and that such cost distortions can have
undesirable economic consequences.
16. Thus, it appears that since 1956, when
Modified Phoenix was adopted, Associated Co. interexchange message circuit
plant book costs have actually increased about 100 percent. However, the portion of such total book
costs now being assigned to the interstate jurisdiction by virtue of the
application of Modified Phoenix has increased 175 percent. This, in part, is the result of the more
rapid growth of lower cost Long Lines plant relative to the growth of higher
cost Associated Co. Plant. What is
significant, however, is the progressive nature of the growing disproportionate
assignment of Associated Co. interexchange costs to interstate operations -- a
trend which has no relationship whatsoever to the actual use being made of
Associated Co. plant for State and interstate services.
17. This distortion is compounded by the
disproportionate effect of the Modified Phoenix plan among the several
States. For example, 70 percent of the
additional book costs which are assigned to the interstate service because of
the procedures of the Modified Phoenix plan are distributed among only 12
States. On the basis of actual use, or
in other words, without the cost averaging introduced by the Modified Phoenix
plan, the 12 States would account for only 40 percent of the book costs
allocated to interstate. This
disproportionate distribution, which is largely attributable to the
happenstance of the location and physical routing of Long Lines plant, casts
serious doubt on the current validity of the Modified Phoenix procedures. It also casts doubt on their efficacy in
realizing the objective of the plan to lessen disparity between State and interstate
revenue requirements.
18. Another argument advanced to support
retention of Modified Phoenix has been that the cost averaging provided for
therein is justified by the degree to which Long Lines route mileage represents
plant jointly owned by Long Lines and the Associated Companies. To the extent that this may be a valid
justification for treating all such plant as if it were used jointly for State
and interstate services, it is significant that between 1954 and 1967 the
proportion of Long Lines route miles which were derived from plant jointly
owned with the Associated Companies decreased from 73 percent to 55 percent of
total Long Lines route miles. In 1967,
52 percent of Long Lines terminating circuit miles were, in fact, on wholly
owned Long Lines routes. In any case,
with respect to jointly used facilities, it appears that, in a sense, each of
the services contributes to the whole and that an appropriate measure of such
contribution is the relative use of such facilities in each service applied to
the actual costs associated with such facilities.
19. Under all the foregoing circumstances, we
conclude that the Modified Phoenix plan is not producing fair and equitable
results but rather gross distortions in cost allocation and that it is timely
and necessary to revert to the actual use principles and procedures similar to
those contained in the 1947 separations manual as the basis for assigning the
costs of interexchange circuit plan. We
also conclude that elimination of the Modified Phoenix plan and reversion to
actual or [*323] relative use as the basis for allocating
circuit plant will establish consistency with the treatment we have prescribed
for the allocation of exchange plant, namely, that such plant that is traffic
sensitive should be allocated on the basis of actual or relative use. Since interexchange plant capacity is geared
to traffic volume, it is traffic sensitive.
Finally, we conclude that with the rapid development and advancement of
new and competing technologies, it is important that the separation procedures
used for determining the interstate and intrastate revenue requirements not
obscure the true economic facts and advantages of each technology. The artificial assignment of costs to one
service or another, as occurs under the Modified Phoenix plan, tends to obscure
the basis for objective comparison.
This is of more than theoretical concern today as we expect to be
confronted in the near future with the problems of making sound determinations
as to where and how, if at all, the satellite facilities to provide domestic
communications services would be feasible and economical, having in mind, among
other things, the total costs of alternative means of supplying similar
services over like distances. However,
it should be noted that this discussion is related to procedures for
jurisdictional separations only and should not be construed as indicating the
methods we believe to be proper for the purpose of making allocations of total
interstate services nor for the determination of costs for competitive
services. n2
n2 Insofar as any transfers of
property between Long Lines and Associated Companies may affect the intrastate
and interstate revenue requirements, the Commission has ample statutory
authority to oversee this matter and to prevent possible abuses.
EXCHANGE
PLANT
20. As noted above, the Commission in its July
5, 1967 interim decision accepted and prescribed the principles and procedures
of the separations manual (including the revisions of the Denver plan), except
those applicable to subscriber plant.
With respect to this class of plant, we reashed the following
conclusions:
(a)
Actual use, although a relevant factor, is not the sole factor to be considered
for the allocation of subscriber plant costs.
This is because subscriber plant is not traffic sensitive. The plant is installed largely for the
purpose of providing subscribers with a constantly available access to and from
the exchange and long distance telephone networks. Thus, the cost and capacity of the plant involved is not
determined by the amount of its use.
(b) The
charge per toll message, which is a characteristic feature of all toll rate
schedules has in itself a deterrent effect on the actual use of subscriber
plant. This is in contrast with the
lack of deterrent in the exchange rate schedules which generally are based on
flat or unmeasured rates.
(c)
There is a further deterrent to use of subscriber plant in the toll rate
structure which results from the fact that the charge per toll call increases
with distance and conversation time.
This deterrent effect of distance is enhanced in the case of interstate
use of subscriber plant because on the average the interstate length of haul is
greater than the average length of haul of intrastate toll calls.
(d)
While distance gives an element of value to long distance calls and the greater
cost has a restrictive effect on toll usage, procedures for the separations of
costs of subscriber plant based solely on the concept of distance are not acceptable.
21. On the basis of the foregoing conclusions
and exercising our considered judgment in light of all of the considerations
then before [*324] us, we adopted a new two-part formula for
the jurisdictional separations of the costs of the Bell System's subscriber
plant. The formula was designed to take
account of actual use of such plant for interstate services, as well as the
deterrent effect on such use produced by the measured rate feature of the
interstate toll schedule. The actual
use is reflected in the first part of the formula which provides that a portion
of the costs of the Bell System's subscriber plant allocated to the interstate
message toll service shall be determined by applying to the study area book
costs of subscriber plant the interstate SLU factors as measured by the ratio
of interstate holding time minutes to total holding time minutes-of-use
applicable to traffic originating and terminating in the study area. The deterrent effect is reflected in the
second part of the formula which provides that an additive factor of 200
percent of the nationwide annual average interstate SLU factor for the total
telephone industry be applied uniformly to the Bell System's subscriber plant
costs in each study area. The amounts
thus determined are added together to produce the total apportionment of
subscriber plant costs to interstate.
22. In the instant proceeding, the Commission's
July 5 plan for subscriber plant received the support of the Independent
Telephone Group, Western Union, GSA, the States of California,
n3 Most of these parties advocated
modification of the plan with respect to the
23. The essence of the objections to the
Commission's July 5 plan may be described as follows:
(a) The
use of the same additive factor in each study area to compensate for the deterrent
effect of the toll rate schedules ignores the fact that the degree of the
deterrent is affected in each study area by such characteristics as its
geographical location and community of interest with other parts of the Nation.
(b) The
use of a single uniform factor does not adequately reflect the increasing
deterrent effect of the toll rate schedule as the calling distances increase.
(c)
Because the plan uses a flat percentage figure, it offers no incentive for the
development of additional interstate business in a given study area.
(d) It
produces inequitable results among the States.
24. In an effort allegedly designed to meet
these objections, the Bell System, supported by the NARUC, has proposed herein
the adoption of a revised plan for the allocation of the cost of subscribed
plant. This plan consists of a
three-part formula, part A is the same as the first part of the Commission's
plan, i.e., study area interstate SLU factor times study area book costs. Part B is the same as one-half of the
additive portion of the Commission's plan, i.e., 100 percent of the average
nationwide interstate SLU factor times study area book costs. Part C of the
[*325]
(a) Total industry subscriber plant book costs assigned interstate by
part B; times
(b)
Study area interstate holding time minutes divided by total industry interstate
holding time minutes; times
(c)
Average interstate initial period station rate at study area average length of
haul divided by total industry average interstate initial period station rate
at nationwide average length of haul; times
(d)
Additive factor of 160 percent.
25. The
26. The third part of
27. Secondly, it is to be noted that Bell
supports items (b) and (c) of its formula on the ground that they provide an
incentive to each study area to make a greater contribution to interstate
business and rewards success by increasing the interstate share of the study
area costs.
28. Aside from the foregoing, it must be borne in
mind that the basic premise for an allowance in excess of actual SLU is the
fact that usage of subscriber plant for interstate traffic is deterred by the
combination of the unit charge and increasing initial rate as distance
increases. The incentive approach which
relates allocation to increased use rather than to barriers to use is
diametrically opposed to the concept that there should be compensation for the
existing deterrents to use and is therefore not an appropriate means for fixing
additional allocation of subscriber plant.
29. The third weakness in the
30. Although we are unable, for the reasons
outlined above, to adopt the Bell System proposal as an acceptable method for
the jurisdictional apportionment of subscriber plant, we are of the opinion
that our July 5 plan can be improved by certain modifications or refinements
that will make its application more equitable for all study areas. Thus, we believe that there is merit to the
criticism of the use of a single uniform additive for all study areas. While the additive factor was intended,
properly, to compensate for the deterrent to actual use of subscriber plant
inherent in the toll rate structure, we recognize that the application of the
same factor in each and every study area can
[*327] produce some questionable results in particular study areas. For, as pointed out by
31. Moreover, our further analysis of the July 5
plan indicates that it warrants adjustment in another respect. As interstate rates are reduced the
deterrent to use of exchange plant for interstate calling is likewise reduced. Therefore, the additive factor, which is
intended to compensate for the deterrent, should also have a decreasing
effect. However, as formulated by our
July 5 plan, the additive factor will have the opposite effect as interstate
rates are reduced and will, in itself, require an increasing allocation of
subscriber plant costs to the interstate jurisdiction. In other words, with a nationwide reduction
in interstate rates, there will tend to be a decrease in the deterrent effect
of toll charges and an increase in the nationwide interstate SLU factor. However, under our July 5 plan, with its 200
percent additive factor, interstate revenue requirements would be increased by
a greater allocation of plant and expenses.
Thus, a factor which should have decreasing importance as deterrents are
removed would have a disproportionately increasing effect. Over an extended period of time, this would
defeat the spirit and intent of the additive and could unduly burden the
interstate jurisdiction with excessive allocations of subscriber plant costs.
32. We believe that our concerns in the above
respects, which are shared by a number of respondents in this proceeding, can
be met by a modification of our July 5 formula. All respondents are in apparent agreement with our July 5 plan
insofar as it provides for measuring, in each study area, actual interstate use
of subscriber plant on the basis of interstate subscriber line usage
(SLU). Thus, we will continue to use
the study area SLU factor for the first part of our formula. As recommended by the
30,
above, we are providing, as the third part of our formula, for a second
additive consisting of a midified study area SLU factor to be applied to study
area book costs of subscriber plant.
This modified SLU factor will consist of the study area SLU factor
multiplied by the ratio of the average interstate initial period station rate
at the study area average interstate length of haul to the nationwide composite
total toll initial period station rate at the nationwide average length of haul
for all toll traffic for the total telephone industry. The use of a modified SLU factor in this
fashion will provide a reasonable measure of the deterrent effects on
interstate toll use of subscriber plant in a particular study area resulting
from the conditions affecting such toll usage which are peculiar to such study
area as discussed above. It will also
relate compensation for the deterrent effect reasonably to the effect
itself. Thus, as the relative deterrent
decreases the relative compensation would tend to decrease, and when the
relative deterrent effect increases so will the compensation.
33. In our best judgment and with full
consideration of all the facts and arguments before us in this proceeding, we
are convinced that the procedures for the jurisdictional separation of
telephone plant that we are prescribing herein are fully warranted and produce
fair and equitable results for all parties affected thereby. n4 We wish to stress again that there is no means of
precise mathematical measurement of the amounts necessary to give effect to all
of the factors under consideration in this proceeding. In the area of jurisdictional separations, it
is necessary to make acceptable compromises between complex procedures which
are costly to effectuate and less precise methods which are generally equitable
and have the advantage of simplicity and ease of application. This is particularly appropriate since
informed judgment of necessity has such a substantial impact on the overall
results.
n4 These procedures, and our
prescription thereof, are not designed to apply to
SUBSIDIARY
ALLOCATION PROCEDURES
34. To effectuate our conclusions we are
adopting and prescribing the principles and procedures contained in the April
1963 separations manual including the 1964 and 1965 addenda thereto as modified
by the revisions in those procedures adopted herein for the allocation of the
costs of interexchange circuit plant and subscriber plant. A more precise description of the prescribed
revisions is contained in the attached appendix A for interexchange circuit
plant and for subscriber plant. These
revisions describe the procedures for the allocation of only the book costs of
plant in these categories. The
allocation of reserves and expenses that are directly related to such book
costs shall be accomplished [*329] in a manner consistent with the procedures
set forth for the allocation of book costs.
35. There are certain other traffic and
commercial expenses (specified in app. A) which are now apportioned on the same
basis as the book cost of subscriber plant.
No revisions in the procedures for separating these expenses have been
proposed and the revenue requirement effect of the various plans considered in
this record have been calculated on the basis of continuing the apportionment
of these expenses under the existing procedures. Since the Denver plan procedures will no longer be applied for
the separations of subscriber plant, and in view of the relatively minor effect
of these expenses on the overall amounts assigned to interstate, we do not deem
it necessary to continue the calculations required to apportion these expenses
by the method now being used even if they were otherwise found to be
justified. Furthermore, the deterrent
effect concept discussed herein as supporting the subscriber plant separations
method which we are prescribing does not appear to be applicable to these
expense items. In view of the nature of
these expenses and after consideration of the historical treatment accorded
them for separations purposes, we are of the opinion that subscriber line usage
is an appropriate basis for apportioning such expenses and we are therefore
prescribing such procedures as set forth in appendix A.
PROCEDURAL
QUESTIONS
36. Both
n5
37. The Independent Telephone Group is primarily
concerned with the application of the Modified Phoenix plan to the
independents. It alleges that the
independents should be in the same position as the
38. Aside from the foregoing, it is to be noted
that this entire question of separations has been considered both at great
length and in great depth for a period of well over 2 years. All interested parties, including the
independents, participated fully in the proceedings in docket No. 16258, in the
meetings and deliberations of the Technical Experts Group, and in the filings
in the instant proceeding. Thus, all
parties has ample opportunity to make their views known, to propose their own
separations plans, and to comment on the proposals of other parties. We stress, as has been set forth
hereinabove, that the plan adopted herein is designed, insofar as an exchange
plant is concerned, to improve the plan we originally adopted and to satisfy
legitimate criticisms which have been made with respect to that plan. Insofar as interexchange plant is concerned,
we have determined, on further review and because of the fast pace and vast
scope of technical change, to eliminate the Modified Phoenix plan so that we
may have available appropriate and accurate data with respect to the costs of
long-distance transmission facilities on the basis of which we can make
informed decisions regarding the relative merits of alternative facilities
which are becoming available. Under all
of these circumstances we cannot find that considerations of equity require, or
that any useful purpose would be served, by now setting this matter for further
formal evidentiary hearing. We
therefore deny the above described requests that this matter be set for further
evidentiary hearing.
CONCLUSIONS
39. We are aware that a major change in
jurisdictional separations of the type we are prescribing herein can have
substantial effects on the various jurisdictions, particularly since intrastate
telephone rates have for several years been based on revenue requirement
calculations, computed in accordance with the separations procedures contained
in the Modified Phoenix and
40. Appendix A attached hereto is designed to
serve as an addendum to the April 1963 edition of the separations manual which,
with the 1964 and 1965 addenda thereto, are hereby incorporated by reference
into part 67 of our rules and regulations.
Although appendix A does not set forth specific language as substitute
for various paragraphs of the manual and the 1965 addendum, we believe appendix
A with the discussion in this report and order adequately describes the
separations procedures we are prescribing.
We expect our staff to meet informally with the NARUC separations
subcommittee, representatives of the industry and any other parties having an
interest in this matter, for the purpose of drafting revisions to the manual to
incorporate therein the changes we are adopting in this report and order. Furthermore, we are well aware that because
of the increasingly rapid changes in telephone technology and innovations in
service offerings and rate structure, the jurisdictional separations procedure
we are prescribing and incorporating in our rules will require continuing
review and possible revisions on occasions in the light of changed conditions
in the industry. In this connection we
intend to continue our cooperation with the NARUC, as in the past, in the
conduct of joint studies and reviews of jurisdictional separations
matters. In fact the Commission will
look to these joint studies as the prime forum for continued analysis of
separations procedures and the source of proposals for their refinement,
improvement or modification in light of actual experience and technological
changes. Any proposed revision in the
prescribed procedures which may result from such studies or which may be
advocated by any other interested party will be considered on a public record
in accordance with the rulemaking provisions of the Administrative Procedure
Act.
Accordingly,
It is ordered, That, pursuant to the provisions of sections 4(i), 221(c) and
221(d) of the Communications Act of 1934, as amended, the NARUC-FCC separations
manual, together with its various addenda and as modified by the procedures
described in appendix A hereto, is hereby adopted and prescribed as the
procedures which shall hereafter be used in the separation of investment,
operating expenses, taxes and reserves between the interstate and intrastate
operations of telephone companies; and it is further ordered, effective January
1, 1969, That title 47 of the "Code of Federal Regulations" is
amended by the issuance of a new part 67 as contained in appendix B hereto,
which incorporates by [*332] reference into the Commission's rules as
part 67 thereof, the aforesaid separations manual and its addenda, including
the 1969 addendum as contained in appendix A hereto; and it is further ordered,
That this proceeding Is terminated.
FEDERAL
COMMUNICATIONS COMMISSION, BEN F. WAPLE, Secretary.
DISSENTING OPINION OF COMMISSIONER NICHOLAS JOHNSON
One of
the prime responsibilities of the Federal Communications Commission is to
insure that its actions serve to encourage and promote the creation of the
telephone system best suited to serve all the needs of the Nation. In fulfilling that responsibility the
Commission must articulate the goals and purposes it seeks to serve, consider
the alternatives for the achievement of those goals, and choose the most
feasible alternative. I have previously
indicated my concern about the lack of knowledge of the social and economic
consequences of the Commission's decisions regarding telephone regulation --
and even its disinclination to consider those decisions in the light of these
consequences.
With
regard to separations I noted in July 1967: "[The]
socialeconomic-political implications of charging costs to one telephone user
rather than another are questions the Commission has been able to give less
consideration than I think desirable in evaluating the alternative separations
procedures available to us." A.T. & T., 9 F.C.C. 2d 30, 127 (1967).
And when this rulemaking was opened I urged: "[We] should direct the FCC
staff to come forward with a well-thoughtout, economically rational separations
analysis, not taking into account the political pressures and reactions of
those whom changes would affect.
Presumably
there are several policy alternatives available to us -- depending on the
assumptions and objectives to be achieved by such a plan. Then, after the Commission had arrived at
its best judgment from adequate examination of the policy matters involved,
rulemaking could be proposed." A.T. & T., 11 F.C.C. 2d 493, 503
(1968). Insofar as I can discern the past year and one half since the July 1967
decision has brought no progress in the directions I then thought to be
necessary.
Jurisdictional
separations is an important matter for the Commission, the Bell System,
potential competitors to
Jurisdictional
separations is an inherently arbitrary undertaking: the dividing among
regulatory authorities constituted along State lines of an industry that is
designed as a national system, its parts interdependent and constructed to
serve a whole Nation. One need only
look to the history of separations for illustration of the wide variation in
procedures that at one time or another have constituted the conventional wisdom
on this subject. The point to be drawn
from this review is that justification for a particular methodology must be
sought elsewhere than the pseudointellectual metaphysics of the Charleston
Plan, Denver Plan, Modified Phoenix, and 100 percent to 200 percent of SLU.
Historically,
the separations problem has not been addressed within the framework of public
policy objectives of communications regulation, nor has it involved a thorough
consideration of the consequences of alternative separations methods. Separations procedures involve arbitrary
cost allocations which traditionally have been made on the basis of informal
negotiations, out of the public eye, in accord with the criteria of political
expediency. For
The Commission's
role prior to the formal July 1967 decision and proceeding was to participate
in negotiations between the parties involved --
n1 Gabel, "Development of
Separations in the Telephone Industry," p. 69-70 (1967).
I have
detailed my general objections to the specific separations proposals discussed
by the majority -- and the concomitant adoption of the entire separations
manual. But there are specific problems
with the subscriber and interexchange plant proposals here prescribed. I do not care to elaborate on the subscriber
plant formulas except to note the complete lack of rationale for the value of the
ratios chosen. A substantial additional
amount of cost is shifted from intrastate to interstate jurisdictions, enough
to roughly balance what is to be done with interexchange plant, and to cause no
embarrassment to
For interexchange
plant, the Commission action here appears to provide
The
proposed change in the interexchange allocation methodology is justified by the
necessity to eliminate the erratic or irrational distribution of benefits among
the States. Inasmuch as the proposed
plan allocates benefits among States in accordance with an arbitrary
methodology dependent upon the age, density, and location, of plant as well as
the particular assignment for usage, it does not change the basic problem of
distribution of benefits. It simply
distributes them in a different arbitrary manner.
The
second principal argument for changing the interexchange allocation procedures
is to obtain the costs necessary for an economic comparison among the different
technologies. Such an argument must be
entirely fallacious. Any comparison of
technologies that is undertaken after cost elements are arbitrarily allocated
among jurisdictions can certainly not be very useful. And there is no indication that if and when domestic satellites
become an operational part of the domestic communications system, that
jurisdictional separations problems of severe complexity will not be
involved. The Commission's concern for
[*338]
Finally, we are dealing with an integrated plant that can be used
alternatively for a wide variety of uses.
Additions to it are based upon an aggregation of interrelated
factors. The particular accounting cost
of a particular item of plant in a particular location need not provide any
indication of the true cost of providing the service that happens to be
provided over that plant at any point in time.
In
summary, it is clear that the separations problem is a complex one subject to
strong political forces and vested interests.
Inasmuch as a State line is an artificial boundary for separating
jurisdictions, the cost allocations must remain inherently arbitrary. This leaves open significant discretion in
cost allocation that can be used for good or ill -- that can be used to pursue
the political desires of private parties and particular regulatory agencies, or
that can be used to extend and broaden public interest considerations in accord
with the social benefits and costs of allocating book cost to particular
jurisdictions. Rather than take the
broad view and use the discretion to further public interest objectives, the
Commission continues to prefer the more familiar, if less intelligible,
path. It is content to leave primary
control in the hands of the Bell System for implementation in terms of its
objectives.
The net
result is that the Commission's action ends up granting to
n2 Bushnell, "Regulatory
Responsibilities in Telephone Cost Allocation," Public Utilities
Fortnightly, Nov. 7 and Nov. 21, 1963.
n3 Gabel, "Development of
Separations Procedures in the Telephone Industry," p. 5, 126 (1967).
Other
criteria might involve significant redistribution of telephone costs. The telephone industry is not renowned for
its risk taking. Telephone regulators
are prone to follow the industry pattern.
Both the industry and its regulators have been reluctant to develop
comprehensive cost allocation principles and aggressive pricing practices in
terms of public policy objectives.
Alternative separations treatment could reduce costs of local exchange
service and, eventually, exchange rates, making possible a universal
development of exchange services.
Increased toll revenue requirements should be met not with higher rates,
but by reduced unit charges.
* * *
We have
concluded our chronology of telephone cost allocation methods. It should be clear that separations
principles have been influenced strongly by the regulated utility, the American
Telephone & Telegraph Co. It should
be equally clear that the criticisms expressed herein are not primarily
directed to the myths that have been generated to rationalize the
"philosophy" of telephone separations. Nor is the primary question one of cost accounting method or of
identifying separations principles with appropriate telephone engineering
practice. Neither should separations be
viewed merely as a subject of academic interest. The [*339] matter is one of sound public policy; what
objectives are to be achieved and what separations methods are appropriate to
achieve these objectives. Our criticism
is that our public policy makers, fragmented and competitive, have been unable
to arrive at a clear public direction.
It may
well be that our critics are wrong -- that virtue and wisdom are served by the
FCC's action. But does that not impose
some obligation upon us to explain why we think so? And for the Common Carrier Bureau to fail to even mention these
major studies, much less to deal with their arguments, does strike me as
unnecessarily arrogant and professionally irresponsible. I dissent.
APPENDIX
A
1969
ADDENDUM TO THE SEPARATIONS MANUAL
GENERAL
This addendum
modifies and amends the procedures covered in the April 1963 separations manual
and the 1964 and 1965 addenda thereto, to reflect the changes in separations
set forth in the Federal Communications Commission Report and Order in docket
No. 17975, dated January 29, 1969.
These changes were prescribed by the FCC for jurisdictional purposes and
cover revisions in procedures for the separation of interexchange circuit
plant, subscriber plant and certain traffic and commercial expenses. The modifications to the separations manual
and addenda are described below.
For the
purposes of jurisdictional separations the costs of interexchange circuit plant
(interexchange outside plant, interexchange circuit equipment and associated
land and buildings) in the area under study shall be assigned to categories and
apportioned between interstate and intrastate operations as set forth below: n1
n1 The procedures set forth herein
for the separation of interexchange circuit plant shall become fully effective
Jan. 1, 1970. One-half of the effect of
the Modified Phoenix plan procedures shall be eliminated as of Jan. 1, 1969 and
one-twelfth of the remaining effect shall be eliminated each month of the year
1969.
A. Plant furnished to another company for
interstate use.
This
category comprises that plant provided for use by another company as an
integral part of its facilities. This
category includes such plant as sections of whole cables, complements in a
cable, and circuit equipment associated with the other company's outside plant
conductors and microwave systems. The
total cost of the plant in this category is assigned directly to the interstate
toll operation.
B. Broadband facilities used for private line
services.
This
category includes the plant used for private line services employing broadband
transmission (e.g., video). The cost of
the plant for each broadband facility is determined separately and assigned
directly to the appropriate operation (State or interstate).
C. All other interexchange facilities.
This
category includes the costs of all interexchange plant facilities not assigned
to categories A and B above. The
facilities included in this category are used for the following classes of
circuits:
(1) Interstate
message circuits, i.e., message circuits carrying only interstate message
traffic.
(2)
State message circuits, i.e., message circuits carrying only State message
traffic.
(3) Jointly
used message circuits, i.e., message switching plan circuits other than those
included in (1) and (2) above.
(4)
Circuits used exclusively for TWX service.
(5)
Circuits used for interstate private line services (excluding broadband
circuits).
(6)
Circuits used for State private line services (excluding broadband circuits).
The
circuit equipment in this category is first segregated between (a) basic
circuit equipment, i.e., that which performs functions necessary to provide and
operate channels suitable for voice transmission (telephone grade channels),
and (b) special service circuit equipment, i.e., that which is peculiar to
special service circuits.
The
costs of outside plant, basic circuit equipment and associated land and
buildings in the area under study are combined, and an average cost per
interexchange telephone circuit mile is developed and applied to the
interexchange telephone circuit mileage counts of each of the above six classes
of circuits.
The cost
assigned to interstate message circuits and interstate private line circuits is
assigned directly to the interstate operation.
The cost
assigned to State message circuits and State private line circuits is assigned
directly to the State operation.
The cost
assigned to jointly used message circuits is apportioned between State
operations and interstate operations on the basis of the relative number of
conversation-minute-miles applicable to such facilities.
The cost
assigned to TWX interexchange intertoll circuits which, by use, are assignable
to a given operation, is assigned directly to the appropriate operation. The cost of TWX intertoll trunks used
jointly for State and interstate operations is apportioned between the
operations on the basis of the relative number of TWX connection-minute-miles
applicable to such facilities. The cost
of TWX remote access line interexchange circuits is apportioned between State
and interstate operations on the basis of the relative number of TWX connection-minute-miles
applicable to those facilities.
The cost
of special service circuit equipment is segregated among TWX service, telegraph
grade private line services and other private line services. The cost assigned to TWX service is
apportioned between State and interstate operations on the same basis as that
used for TWX intertoll trunks. The
special service circuit equipment costs assigned to telegraph grade and other
private line services are allocated between State and interstate operations on
the basis of analyses of the use of this equipment for State and interstate
private line services.
Insofar
as the above modifications affect the apportionment of related items,
consistent modifications are made in the treatment of such items.
The
portions of the separations manual and addenda which are significantly affected
as a result of the above are:
Section Part Paragraph
1 1 11.23,
11.231, table 1.
2 3 23.221,
23.51 through 23.5233.
2 4 24.02,
24.04 through 24.0441, 24.05 through 24.054.
Part
II. Subscriber Plant
For the purposes
of jurisdictional separations the costs of subscriber plant (subscriber line
outside plant, subscriber line circuit equipment, station equipment and
associated land and buildings) assigned to message telephone services shall be
allocated to the interstate operations in each State or study area by the
application of a factor to the study area message telephone subscriber plant
book costs. This factor is comprised of
the following:
A. Interstate subscriber line usage (SLU)
representing the actual interstate use of subscriber plant as measured by the
ratio of interstate holding time minutes-of-use to total holding time
minutes-of-use applicable to traffic originating and terminating in the study
area. (This factor will be derived in
each study area in accordance with present procedures.)
Plus
B. Nationwide annual average interstate SLU for
the total industry.
Plus
C. Modified study area interstate SLU, to be
determined by an annual average study area interstate SLU multiplied by the
ratio of (1) the average interstate initial period station rate at the study
area average interstate length of haul to (2) the total industry average total
toll initial period station rate at the nationwide average length of haul for
all toll traffic for the total telephone industry.
Insofar
as the above modifications affect the apportionment of related items,
consistent modifications are made in the treatment of such items.
The
portions of the separations menual and addenda which are significantly affected
as a result of the above are:
Section Part Paragraph
1 1 11.22,
table 1.
2 3 23.444.
2 4 24.03312.
2 5 25.24.
Part
III. Traffic and Commercial Expenses
Certain
traffic and commercial expenses which are indirectly related to subscriber
plant, and which are more fully described below, shall for the purpose of
jurisdictional separations be allocated among the operations in each State or
study area on the basis of the relative number of subscriber line
minutes-of-use applicable to each operation in the area under study. The traffic expenses referred to above are
those in (a) customer instruction and miscellaneous, see par. 44.352 of
separations manual, (b) "all other expense" or private branch
exchange in operators' wages, see par. 44.4222 of separations manual, and (c)
the "remaining expense" of public telephone expenses, see par. 44.82
of separations manual. The commercial
expenses referred to above are the expense of alphabetical and street address
directories and traffic information records included in directory expenses, see
par. 45.713 of separations manual.
The
portions of the separations manual and addenda which are significantly affected
as a result of the above are:
Section Part Paragraph
1 1 Table
2.
4 4 44.352,
44.4222, 44.82.
4 5 45.713.
APPENDIX
B
In
chapter I of the 47 of the Code of Federal Regulations, a new part 67 is added
to read as follows:
PART 67
-- JURISDICTIONAL SEPARATIONS
§ 67.1 Separations manual; incorporation by
reference.
(a)
Jurisdictional separations of telephone companies' property costs, revenues,
expenses, taxes and reserves are determined under principles and procedures set
forth in the separations manual ("Standard Procedures for Separating
Telephone Proerty Costs, Revenues, Expenses, Taxes and Reserves"), as
amended by the Federal Communications Commission, which is hereby incorporated
by reference into this part 67, pursuant to 5 U.S.C. 552(a) (1) and 1 CFR part
20. The contents of the manual, as
incorporated by reference, include the April 1963 edition of the manual, 1964,
1965 and 1969 addenda, subsequent amendments of the manual adopted by the
Federal Communications Commission, and subsequent editions of the manual
authorized by the Federal Communications Commission. The principles and procedures set forth in the manual are
designed primarily for use in the allocation of property costs, revenues,
expenses, taxes and reserves between intrastate and interstate jurisdictions.
(b) The
separations manual is published by the National Association of Regulatory
Utility Commissioners (formerly the National Association of Railroad and
Utilities Commissioners). Copies of the
current edition of the manual, with current addenda and amendments, may be
obtained at a cost of two dollars ($2) per copy, by writing to the Association,
Post Office Box 684, Washington, D.C. 20044.
(c)
Copies of the current edition of the separations manual, with current addenda
and amendments, are available for inspection at the following locations:
Office
of the Common Carrier Bureau Federal Communications Commission 1919 M Street
NW. Washington, D.C.
Field
Offices of the Common Carrier Bureau, Federal Communications Commission (as
listed in § 0.93 of this chapter)
Offices
of the National Association of Regulatory Utility Commissioners ICC Building
12th Street and Constitution Avenue NW. Washington, D.C.
(d) An
official historic file, containing a record of all changes in the separations
manual from 1963 forward, is maintained in the offices of the Common Carrier
Bureau, Federal Communications Commission, 1919 M Street NW., Washington, D.C.,
and is available for inspection at that location. Separations