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In the Matter of AMERICAN TELEPHONE & TELEGRAPH CO. AND THE ASSOCIATED BELL SYSTEM COMPANIES Charges for Interstate and Foreign Communication Service; In the Matter of AMERICAN TELEPHONE & TELEGRAPH CO. Charges, Practices, Classifications, and Regulations for and in Connection With Teletypewriter Exchange Service; In the Matter of AMERICAN TELEPHONE & TELEGRAPH CO., LONG LINES DEPARTMENT Revisions of Tariff F.C.C. No. 260, Private Line Services Series 5,000 (Telpak)


Docket No. 16258; Docket No. 15011; Docket No. 18128




18 F.C.C.2d 761 (1969)




July 29, 1969 Adopted









[*761]  1.  The Commission has before it for consideration a statement of ratemaking principles and factors in docket No. 16258, phase 1-B.  This statement embodies a stipulation of the parties to the proceeding and of the Common Carrier Bureau (staff), reached on May 28, 1969 (tr. 179, pp. 22329-22341), as well as certain procedures recommended to the Commission.  It is further specified in the statement that if the Commission should direct procedures other than those proposed (except with respect to the reopening of the record in the Telpak Sharing case, docket No. 17457), then the respondents and other parties would not be bound by the stipulations set forth therein.  The statement of ratemaking principles which is attached hereto as appendix A, was entered into following a series of off-the-record conferences, open to the parties, as provided by the order of the telephone committee released February 18, 1969 (F.C.C. 69M-197).  The telephone committee has reviewed this matter and has forwarded the statement to the Commission with a recommendation that the procedures set forth therein, with the exception noted below (see par. 13), be approved.


2.  The issues in this proceeding were specified in our original order of investigation of October 27, 1965 (2 F.C.C. 2d 871), and a twophase procedure was provided by the order released December 23, 1965  [*762]  (2 F.C.C. 2d 142). We have previously dealt with certain of the phase 1 issues, such as rate of return, certain rate base items, and jurisdictional separations procedures.  ( Memorandum Opinions and Orders, July 5, 1967, 9 F.C.C. 2d 30; Sept. 13, 1967, 9 F.C.C. 2d 960.) The issue of the appropriate ratemaking principles and factors which should govern the relationship among the rate levels for each of respondents' principal services was, however, deferred for later consideration.  ( Memorandum Opinion and Order, Dec. 9, 1966, 5 F.C.C. 2d 844.) This remainder of phase 1 has been described as phase 1-B.


3.  Hearings in phase 1-B began October 9, 1967, and required approximately 100 days of hearing and 12,000 pages of testimony by February 14, 1969, when the present series of hearings ended.  All direct testimony has been offered.  Cross-examination has been conducted on all testimony except certain fully distributed cost studies (FCC staff exhibits 1 through 8, 37, and 48, and certain explanatory statements relating thereto, FCC staff exhibits 53 through 55).  The Bell System respondents have not yet had opportunity to present rebuttal testimony.


4.  Pursuant to the off-the-record conferences previously noted, the present statement was reached.  It deals with both substance and procedure.  In effect, the statement sets forth a set of principles and accompanying procedures which would be applied and tested in conjunction with the consideration of specific ratemaking issues, such as those now involved in the pending docket 18128, which embraces all private line services, including Telpak service.


5.  We have reviewed the statement solely for the purpose of determining whether the implementation of the suggested procedures might facilitate the determination of appropriate ratemaking principles for the interstate services of the Bell System respondents, and, hence, permit a more definitive and timely disposition of the issues involved in phase 1-B of this docket.  Accordingly, we express no opinion on the merits of the various positions advocated on the record.  A review of the salient issues and the general nature of the evidence thus far adduced, however, is necessary background to our considerations.


6.  A primary predicate of our initial order of investigation herein was the results of the fully distributed cost study made by Bell in the Domestic Telegraph Investigation, docket 14650, which revealed a wide disparity in the levels of earnings among the various classes of interstate service.  It was then, and still remains, our concern that the basic message toll telephone service (m.t.t.), for which there is no directly competitive service, and which accounts for about 80 percent of the interstate services, should not be burdened by, or required to subsidize, the so-called competitive services.  It was, and remains, our concern that, whatever methods are employed to price m.t.t. and other services, they should also accord with sound ratemaking practice and statutory requirements.  Traditionally, interstate revenue requirements for the Bell System have been determined on the basis of its net historical investment for the totality of interstate services.  In addition, we also regarded an allocation of net historical investment as a principal, if not controlling, basis upon which to determine revenue  [*763]  requirements and rate levels for a particular class of service, with relative use being the significant measure of such allocation.


7.  We have accumulated, in phase 1-B, a massive record in which the economics of pricing has been explored in detail.  In this regard, the record has been benefited by testimony from a number of eminent economists, including Drs. James C. Bonbright, William J. Baumol, J. Rhoads Foster, Paul Davidson, William Vickrey, R. B. Johnson, John W. Coughlan, Harold Wein, and William H. Melody.  Bell's basic presentation consisted of an attack on fully distributed costs (f.d.c.) for ratemaking purposes, and an advocacy of full additional costs, which were, according to Bell, developed in accordance with the long-run incremenatal cost (l.r.i.c.) principles of theoretical economics.  A variety of views have been expressed as to whether or not a burden on m.t.t. service has occurred, or would occur, on the basis of the principles advocated by Bell.  The practical difficulties of accurately measuring incremental costs in a system as complex as the telephone industry have been recognized even by advocates of incremental costs as a floor for pricing.  Criticisms, likewise, have been directed to the use of fully distributed costs for pricing purposes.  Moreover, some witnesses have advocated that public interest considerations could justify rate levels lower than might be supported by cost considerations alone, and one of the principles set forth in the stipulation (par. 12), provides for such a contingency.


8.  The specific statement of principles now proposed, in our judgment, properly recognizes the relevance of both fully distributed and incremental costs in considering appropriate rate levels of specific classes of service.  n1 We make this observation without reaching any conclusion, at this time, as to the weight, if any, that should be accorded to either or both of these factors in fixing rates for a specific service.  We note, in this connection, that the statement contemplates the submission of both fully distributed and incremental cost studies, based on methodologies to be developed.  It is the thrust of the statement that effective testing of the complex economic theories of costing and pricing which have been advanced in this record, and the reconciliation of opposing, or at least partially conflicting, views of expert witnesses, can best be accomplished by relating the principles advocated to specific rate proposals.  Bell has agreed that implementing studies called for by the statement, and any related rate adjustments based thereon, can be filed by October 1, 1969 (tr. 22342).  Moreover, respondents indicate that, if the plan is adopted, they will waive their right to present rebuttal testimony in phase 1-B.  Cross-examination on the fully distributed cost studies would likewise be unnecessary in this proceeding.  We note that paragraph 11 of the statement provides for l.r.i.c. and f.d.c. studies at regular predetermined intervals.  We expect that such studies will be at least on an annual basis and that initially they will cover the totality of interstate services. 


n1 We note, of course, that each party to the agreement has reserved the right to assert the relevance of f.d.c., l.r.i.c., or any other method of cost determination.


9.  The record developed in docket 16258 provides an examination of pricing principles which we believe is of unprecedented scope in regulatory  [*764]  proceedings.  It affords a sound basis upon which to determine theoretical ratemaking principles which can then be tested and applied in the context of ratemaking proceedings dealing with respondents' rate structure and the prices to be charged for their specific services.  It is readily apparent that the techniques or methodology for developing the data needed to test and apply long-run incremental cost principles require formulation.  Implementation of the stipulation and development of such needed data will substantially benefit from the extensive testimony and cross-examination which occurred in docket 16258, and will permit us to proceed to the testing of specific ratemaking principles in the light of the issues in the Telpak-Private Line case (docket 18128), the new program transmission rates, and such additional issues that may arise.  Thus, if we follow the procedures recommended, the full benefits of the record so far developed will not be lost or minimized. 


Moreover, we believe that the procedures will enable us to reach these rate issues with greater dispatch and effectiveness than if further extended hearings were held in docket 16258.  Accordingly, it is our judgment that the proposed procedures will provide a better and more timely method of reaching a final conclusion on these important matters and will best conduce to the proper exercise of our statutory authority and promote the ends of justice.  We, therefore, note the Stipulation (without necessarily approving it) and approve the procedures, except as stated in paragraph 13 below.


10.  In taking this action, we will incorporate the record of phase 1-B (vols. 77-179 of the transcript and related exhibits, including staff exhibits 1 through 8 and 37) into docket 18128, in order that we may then have the full benefit of the extensive and informative record already developed and to prevent any duplication or repetition thereof in the consideration of the specific rate issue involved in that docket.  In the course of the hearing in docket 18128, it is expected that appropriate disposition will be made of any related matters still pending in docket 16258, such as the receipt into evidence of certain exhibits (FCC staff exhibits 48 and 53 through 55), and corrections to Networks exhibits 6 and 6A (tr. 21176).  There would also be incorporated with docket 18128, the record of docket 14251, the Telpak case which was previously incorporated herein.


11.  Other matters presently pending in phase 1-B, such as the TWX proceeding, docket 15011, which was consolidated herein (order of July 22, 1966, F.C.C. 66-675); issues relating to the restructuring of interexchange channel rates in connection with the elimination of Telpak A and B; and increases in charges for private line teletypewriter station equipment which went into effect August 1, 1968, are awaiting the outcome of phase 1-B (order Aug. 1, 1967, F.C.C. 67-895), but in view of our action herein, will be separately treated.  Accordingly, in view of the events which have transpired since the consolidation, we shall treat the TWX issue by separating docket 15011, and disposing of it on the record in that docket.  The teletypewriter station equipment rates and related issues are already included in docket 18128 (order of July 16, 1968, F.C.C. 68-711), and, since any remaining questions as to those rates may be resolved in the latter  [*765]  proceeding, there is no need for any further action in docket 16258 with respect to such rates.


12.  When we brought the private line services within the scope of docket 18128 by our July 16, 1968, order, we excluded the program and video transmission services (series 6,000 and 7,000 services).  New rates for such services are to be filed on September 1, 1969, to be effective October 1, 1969, partly as a result of the proceeding in the Sports Network case, docket 16043.  The same ratemaking principles that will be further considered in docket 18128 will be involved in connection with the new program transmission rates.  When those new rates are filed in tariffs, we will make appropriate provision for their consideration in the light of the same ratemaking principles.


13.  Paragraph 5(D) of the related procedures proposed in the statement is a recommendation, joined in by all the parties (but not by the staff of the Common Carrier Bureau), that the record in the Telpak Sharing case, docket 17457, be reopened and consolidated with docket 18128.  For the reasons set forth in our recent denial of petitions seeking this same result (Memorandum Opinion and Order, adopted June 11, 1969, F.C.C. 69-646), we do not adopt this recommendation.


In view of the foregoing, it is ordered that:


1.  Further proceedings in docket 16258 will be subject to further order.


2.  The record of phase 1-B of docket 16258, consisting of volumes 77 through 179 of the transcript, and related exhibits, including staff exhibits 1 through 8, and 37, together with the entire record of docket 14251, is incorporated by reference into docket 18128.  Any required rulings with respect to such exhibits, as noted in paragraph 10 above, shall be made in docket 18128.


3.  Docket 15011, the Teletypewriter Exchange Service case, previously consolidated herewith by our order of July 22, 1966, is hereby separated from docket 16258 for final disposition on the record of that docket.







Four years ago the Federal Communications Commission began a complete investigation into the interstate and foreign communications services provided by the Bell System.  Today the Commission terminates without decision an important phase of that proceeding.  The issues and questions remain -- and are to be taken up in further proceedings.  In order to terminate the present proceeding the Commission notes an agreement worked out by the contending parties -- an agreement concluded by Bell, Western Union, several user groups, and the Commission's Common Carrier Bureau staff in off-the-record, closed-door conferences.  After noting the agreement the Commission terminates this phase of its investigation without a decision or comment on the merits.  The matters under review are to be consolidated into new proceedings which will examine specific rate levels.  The general public must now wait indefinitely longer for the proper resolution of the issues now directly before the Commission.


I dissent to the Commission's action for three basic reasons.


First, determination of the appropriate ratemaking principles for the Nation's telephone system is a matter of crucial importance calling for all the expertise and devotion of this Commission.  The public interest is not served by now refusing to confront and resolve the difficult issues raised in this 4-year-old proceeding.


Secondly, expedition, the professed rationale of this decision, is an oft-professed but seldom achieved illusory goal of this agency.  Unless the Commission intends to retire from the field of contention altogether, allowing Bell to price in any manner the company finds in its interest, these issues and their attendant differences will have to be resolved.  The agreement limits none of these differences, nor does it limit any of the positions the parties may assert in future proceedings.


Third, the difficulties with the agreement illustrate that in fact there is no agreement.  Rather there is: A summary of the contending positions,

Acknowledgment that any, all, or none of the viewpoints may or may not be relevant to any particular ratemaking process, Pious statements about firm deadlines and promised studies, Lack of any agreed upon common ground and, Clear promises of renewed battle wherever the Commission again raises the issue of ratemaking principles.


[*770]  History and Importance of the Investigation


In order to gain an understanding of what is at stake here it is necessary to review in part the events leading to the present Commission consideration.  The majority notes:


A primary predicate of our initial order of investigation herein was the results of the fully distributed cost study made by Bell in the Domestic Telegraph Investigation, docket 14650, which revealed a wide disparity in the levels of earnings among the various classes of interstate service.  Majority opinion, par. 6.


The principal reason for undertaking a formal investigation of the entire Bell system interstate and foreign services was the question of reasonable rate structure.  As the Commission noted in the opening paragraph of its investigation order in 1965:


These levels of earnings, as well as the wide variations in such levels for the different classes of service, indicate the desirability of a thorough examination by the Commission of the interstate rate structure of the Bell System to determine the lawfulness of the rate levels and rate relationships within that structure.  The importance of such a determination is underscored by the fact that certain of the services involved are furnished by the Bell System in direct competition with services offered by other carriers.  American Telephone & Telegraph Co., 2 F.C.C. 2d 871-72 (1965). (Italics supplied.)


The Commission's specification order in this investigation noted:


In phase 1, we shall consider the substantial questions raised by the seven-way cost study, which we found to warrant "a thorough examination by the Commission of the interstate rate structure of the Bell System to determine the lawfulness of the rate levels and rate relationships within that structure." (Footnote omitted.) These questions are of fundamental importance, clearly call for the sharp focus referred to in the above paragraph, and should be resolved as promptly as possible. American Telephone & Telegraph Co., 2 F.C.C. 2d 42-43 (1965). (Italics supplied.)


Thus, initially, the question of unlawful price discrimination and possible cross subsidization of services by A.T. & T. was to have been resolved first in the proceeding.  The importance of the rate structure question was emphasized again in the denial of reconsideration when Bell opposed the whole idea of a formal investigation.  American Telephone & Telegraph Co., 2 F.C.C. 2d 173, 174-75 (1965). Now, after 4 years, the resolution is to be deferred again.


It may be useful to describe precisely the environment of pricing under consideration.  In 1968 the Bell interstate operations generated $4.3 billion in revenues and $785 million in net operating income.  Between 80 and 85 percent of these interstate revenues were generated by the message toll telephone service (m.t.t.).  M.t.t. is regular long-distance telephone service available and used by most consumers.  Bell has a monopoly of this service -- consumers have no other choice.  But between 15 and 20 percent of Bell's interstate operation is in so-called private line type or teletypewriter exchange services -- the provision of communications services to specialized users.  These services go under a variety of names -- private line, Telpak, program transmission, and TWX.  The characteristic of each is that the user usually has a choice of more than one supplier and Bell faces at least potential if not actual competition.  Thus, for example, a large business user, subject to license, could build his own communications system -- or have  [*771]  one custom-made by a non-Bell carrier rather than buy from Bell.  A potential user of Bell's TWX service could go to Western Union's Telex service instead.  And a television network or a group of stations might contract with a non-Bell carrier under license for the provision of network program transmission service rather than pay Bell rates.


By the same token in other situations Bell might also find itself under heavy pressure to provide private line service to an important customer for reasons other than potential competition -- perhaps to the Defense Department or NASA -- at reduced rates.  Or Bell might find a potential market which could be entered only with service at very low rates which were below costs.


Bell could find it in its best interest for many reasons to subsidize the rates for these services -- to meet competition, to enter new markets, or to satisfy powerful customers.  To do so would keep these rates low, with Bell making up the losses at the expense of that customer who must buy telephone service from Bell -- the m.t.t. user.


If it were to follow such a course, Bell could keep out potential competitors, satisfy large users who would not have to pay the full cost of their use of communications service, and enter new markets with the attendant increase in rate base and absolute level of regulation-constrained profits.


At least these are some of the concerns which gave rise to this proceeding.  And these concerns have been embodied in more than the commonsense description put forward here, and in the Commission's earlier statements.  In one of the most famous articles on utility regulation, Harvey Averch and Leland Johnson laid out a rigorous exposition of the economic incentives of a firm under regulation.  One incentive they describe is for the firm "to expand into other regulated markets, even if it operates at a (long run) loss in these markets; therefore, it may drive out other firms, or discourage their entry into these other markets, even though the competing firms may be lower cost producers." See H. Wein, "Fair Rate of Return and Incentives -- Some General Considerations," in Trebing (ed.) Performance Under Regulation 39, 42 (1968); and H. Averch and L. Johnson, "Behavior of the Firm Under Regulatory Constraint," 52 Am. Econ. Rev. 1052 (1962). Averch and Johnson used the communications industry as their example, focusing on the Private Line cases.  (A.T. & T. and * Western Union Private Line Cases, 34 F.C.C. 217 (1963).) Among the conditions necessary for this type of behavior on the part of the regulated firm are the desire to pursue a level of profits and an actual rate of return greater than the firm's cost of capital.  Recognizing the difficulty of satisfying theoretical conditions in the real world the following data is nevertheless of interest.  Between 1959 and 1966 Bell never earned less than 7.5 percent and at times as much as 8.25 percent.  In 1967 the Commission determined that Bell's cost of capital was between 7.0 percent and 7.5 percent.  In 1968 Bell earned 7.6 percent.  It is earning well in excess of 8.3 percent now.  Thus, the Averch-Johnson conditions stand in strong probability of being fulfilled.


The importance the Commission once attached to the need for defining ratemaking principles in this area is clear.  When undue discrimination takes place it is the user with no alternative who pays the  [*772]  subsidy -- in the case of telephone service it would be the m.t.t. (regular long-distance) user.  What is also clear is that the Commission has repeatedly found Bell to have engaged in unlawful discriminatory practices in providing specialized services.  The story begins as early as the so-called Private Line cases and the Above 890 mc./s. decision (which allowed private microwave competition).  Allocation of Microwave Frequencies Above 890 Mc., 27 F.C.C. 359 (1959).


In the Private Line cases the Commission found that the rate structure was unlawful.  A.T. & T. and Western Union Private Line Cases, 34 F.C.C. 217 (1963). The regular long distance (m.t.t.) user bore the cost of the discrimination.


In the Telpak case the Commission found unlawful discrimination and ordered termination of certain offerings.  Telpak, 37 F.C.C. 1111 (1964), aff'g 38 F.C.C. 370 (1964). The rates for others were increased later.  Again the burden was borne by the small m.t.t. user.


In the Wide Area Data Service (w.a.d.s.) case the Commission found the low rates not justified by cost savings.  35 F.C.C. 149 (1963). The service was terminated by Bell.


In its telegraph report the Commission found that the data disclosed that, for each period in which a cost study was requested by the Commission, the Bell System's earnings levels appeared to be deficient in areas where direct competition existed between Western Union and A.T. & T. Report of the telephone and telegraph committees of the Federal Communications Commission in the Domestic Telegraph Investigation, docket No 14650 (1966) p. 207.


In the Sports Network, Inc., case, Bell has been found to have unlawfully discriminated in its provision of broadcast program transmission services in an examiner's initial decision released January 30, 1968, F.C.C. 68D-4 (1968).  The Commission has taken no action to remedy this particular situation, but has deferred consideration despite the fact that there have been concerns over the possible discriminatory nature of this service and its affect on broadcast policy since its inception in 1948.  The Barrow Report on networks issued in 1958 noted: "There is sufficient question with respect to the level of rates and the rate structure to warrant an early Commission determination of the docketed proceeding." Network Broadcasting, H.R. 1297, 85th Cong., 2d sess. (1958) p. 546.  Also see the initial decision in docket No. 16043, paragraphs 8-16 (F.C.C. 68D-4 (1968)).


And in a paper presented to the Symposium on Regulatory Pricing Policies, Institute of Public Utilities, Michigan State University, East Lansing, Mich. (Mar. 25, 1969), Commissioner Cox noted: "I might observe that to this day the Commission has still been unable to reach a decision as to whether or not these Telpak service classifications are compensatory and whether or not they are a burden on users of other services.  Hopefully we will finally be able to reach a decision on this issue in the investigation of A.T. & T. that is now underway.  But it must be emphasized that the Telpak discrimination has been in existence for over 8 years and remains unjustified." (Mimeo ed., pp. 17-18, italics supplied.) In the light of this record, extending over 15 years, it seems clear to me that Commission action is long everdue if the interests of the general consumer are ever to be protected.


The Commission's dereliction in the past on matters of price discrimination, service cross-subsidization, and predatory pricing has had very serious implications for the public interest.  But continued failure would be even more serious.


The President's Communications Policy Task Force Final Report (1968), said the domestic telecommunication's common carrier was in a state of creative ferment facing a host of new challenges and new opportunities.  Chapter 6, p. 2.  It recommended that, "Public policy  [*773]  should promote an environment assuring free and competitive opportunity * * *" Id. at 6.  The predatory effect of Bell's Telpak pricing on the development of non-Bell microwave systems has been established by past Commission decisions.  But the potential private competition from CATV-broadband services, domestic satellities, date communication systems serving the computer industry, and non-Bell common carriers is great and growing.  The potential benefits of such competition -- innovation, new technology, improved service responsiveness -- can only be evaluated if new entrants are given fair opportunity to prove their worth.  This cannot occur if Bell is allowed to use its present monopoly position to frustrate entry, or if the Commission refuses to provide the proper environment.  In the words of the Presidential Task Force, "If noncompensatory pricing is to be guarded against, the FCC must establish effective regulatory standards over minimum rates." Id. at 19.


The Hope for Expedition


The majority now hopes to expedite a case that is 4 years old.  The majority states: "[We] believe that the procedures (here adopted) will enable us to reach these rate issues with greater dispatch and effectiveness than if further extended hearings were held in docket 16258." Majority opinion, par. 9.  Presumably expedition is always a desirable goal so long as the consideration of important substantive issues is not impaired.  But for two basic reasons the majority will not achieve expedition by adopting this agreement.


First, any specific rate case will necessarily require a determination of the appropriate mixture of ratemaking principles to be used in assessing the degree, if any, of past burden on other services, and the likelihood in the future of discriminatory burden. 


The important questions that should have been resolved in this proceeding are:


(1) What indices will the Commission use to detect past and prospective cross-subsidization of one service by another?


(2) What analysis and data must Bell provide to demonstrate that cross-subsidization and predatory pricing will not take place?


(3) What principles should be followed in pricing the basic m.t.t. service?


The specific rates in question must then be measured against these ratemaking standards.  The majority's incorporation of the entire record of ratemaking in this proceeding into the next one, docket No. 18128, is more than a procedural or ministerial act.  More than docket numbers are changed.  In fact, it is a recognition that all the issues raised in this proceeding must be resolved before satisfactory determinations can be made on specific rate questions for specific services.  The present proceeding has had specific rate questions associated with it for the entire time that ratemaking principles were considered -- these were the residuals of TWX rate proceeding (docket No. 15011), and the Telepak proceeding (now docket No. 18128).  Tossing in specific rate matters does not help in determining appropriate ratemaking principles -- the Commission has had these questions before it all along.  In addition, the present proceedings have included testimony directed at cost analysis of specific rates and services.


 [*774]  Thus, for 15 years the Commission has been trying to evaluate charges of unlawful price discrimination, service cross-subsidization, and predatory pricing; during that time it essentially has been flying blind in terms of any overall analysis of the questions of price discrimination and the appropriate ratemaking principles; the telegraph inquiry at least suggested that an entire company's (Western Union) economic viability might be threatened by the effects of price discrimination; and a proceeding (this one) was begun to deal with the overall question.  The Commission admits it cannot decide now.


The second reason that the expedition argument is illusory is that expedition is clearly compatible with rejection or modification of thisp agreement.  There has been talk that without this agreement a decision on ratemaking principles is more than a year away.  This is nonsense.  The Commission does not need to accede to every procedural delaying tactic thrust upon it.  The record is already extensive in this case.  The arguments have been made.  Little will be added by further proceedings.  And procedural fairness can be discharged by specifying precise amounts of time for each remaining stage (testimony and cross-examination) of the proceeding.  It is now the end of July.  An equitable time schedule, perhaps with some extended sessions, could result in a closed record by the middle of September.  One month could be given for submitting briefs and reply briefs.  The case could be argued in October and a decision issued by the middle of December.  Thus the parties could have the decision on hand to begin the specific rate proceeding (docket No. 18128) with the studies and rate adjustments now due to be filed by late fall.


Even if there were a month slippage, little would be lost.  The important consideration is that the Commission and the parties would have some overall guidelines for inspection of specific rates -- guidelines that are a sine qua non of effective regulation.  Bell could be fairly on notice as to what precise information would be required for justifying its pricing proposals.


The Commission is deluding itself if it believes by turning to specific rate matters it can avoid difficult decisions or questions of proper theoretical principles and overall policy guidelines.  And if further formal and informal proceedings lead to continued disagreement, the Commission may spend twice as long getting to any resolution of the issues.  It is folly to believe that implementing studies called for by the statement, and any related rate adjustments based thereon, can be filed by October 1, 1969.  Bell has had since January 1968, to study and revise its program transmission tariff and it will not surprise anyone if the Commission finds itself in tariff hearings on all adjustments anticipated by the agreement.  Studies by Bell cannot always be relied on to provide the definitive answers to questions of unlawful discrimination and proper rate structure.


The Agreement Is Meaningless


In a somewhat extended use of understatement, paragraph 3 of the procedures outlined after paragraph 18 of the agreement notes: "[The] agreed ratemaking principles and factors herein contained  [*775]  are, of necessity, rather general and nonexclusive," (Italics supplied).  One wonders what has been agreed to, except to agree to disagree.  The positions of the parties are summarized, and none are barred from asserting their present positions on others.  (Agreement pars. 6-15 and footnote 8, as well as par. 1 of the procedures section.) Statements of evaluation of the positions advanced are often tautological -- e.g. "It is not intended that any one of the principles be given undue weight.  It is recognized that the regulatory process involves a proper balancing.  * * *" (Agreement, par. 3); and again "The rate level for any single class of service and the ultimate rates must meet the statutory requirements that they be reasonable and not unduly discriminatory or preferential" (Agreement, par. 17).  In other instances the principle and technique is simply enunciated with the note that it may be useful, without any indication as to when it is useful.  See Agreement, paragraphs 8, 10, 14, and 15.  In sum there is no agreement; it is just that some way had to be found to terminate this proceeding.  n1


n1 If the Commission were really serious about questions of price discrimination it might consider whether there are instances where price discrimination would be socially beneficial to the Nation.  It has given limited consideration to this question in its consideration of preferential interconnection rates for educational broadcasting.  The question is also before the Commission in the press wire case (docket No. 15094).  Internal indirect subsidies are never viewed with much enthusiasm.  But it is conceivable that public interest considerations might find them justified.  (And any pricing scheme by a communications common carrier is filled with instances where rates are not strictly cost related, for obvious reasons.) A few examples might include lower than ordinarily justifiable rates for the poor, for very remote areas (note the REA telephone program), and for some educational purposes.


There has recently been much consideration given to the fact that Hawaii and Alaska cannot get regular live television service; and that it costs more to call the States of Hawaii or Alaska from the Nation's capital than it does to place a call to the United Kingdom.  Obviously one social goal is to have the people in all our States tied together by the Nation's communications system.  For Alaska and Hawaii costs are a substantial barrier to this goal.


One extreme proposal would be to make long-distance calls (and television) free to these States, in part as a remedial measure.  But the proposal is not so extreme when one considers that under the following circumstances a long-distance call is free anywhere in the country, at lease in a direct charge sense.


A long distance information call.

A long distance station-to-station call when there is no answer.

A long distance call (including inward WATS) where the number is busy.

A long distance person-to-person call when the person called is not there, or there is no answer.

A long distance reverse charges call which is not accepted.


All these uses of communication facilities are subsidized, albeit by all long-distance callers as a class.  In view of these subsidies, consideration might be given to making charges to and from Alaska or Hawaii no greater than the greatest charge for a contiguous U.S. call.  Thus the charge to and from Washington, D.C., might be no higher than the highest charge from Washington to any place in the contiguous United States.  This would be discrimination and subsidy at least with an identifiable social goal -- rather than discrimination begun to protect or extend a monopolist's market position.


There are numerous ways in which the agreement could be improved.  These would include the following:


The Commission should recognize some of the basic concerns in communications price discrimination: That ratemaking principles for m.t.t. by itself must be properly and rationally applied; and that Bell's other pricing policies must not be predatory in relationship to actual or potential competition.


The m.t.t. service should not be viewed as the catchall residual where consumers are required to pay off all past mistakes of Bell in its supply ventures for it and other services; m.t.t. should be priced by itself without reference to the need to augment revenues in other services.


In evaluating present or proposed new services other than m.t.t., Bell must bear the burden of demonstrating prior to the time tariffs go into effect that these services will not burden m.t.t. and that future losses will be borne by someone other than m.t.t. consumers, presumably Bell stockholders.  In meeting this requirement  [*776]  of insuring that m.t.t. consumers are not burdened, Bell should provide adequate data and analysis of the type specified in paragraphs 7-15 of the agreement.  In addition the Commission should clearly be in a position to make its own evaluation of the data and analysis provided.


The Commission should begin examination now of the m.t.t. tariff to determine whether all beneficial price adjustments have been exhausted (e.g., off-peak promotional rates v. peak penalty rates), and to determine the proper rate levels and structure for m.t.t. standing alone.


Four years after the beginning of the Commission's heralded investigation of Bell's interstate and foreign communications service, it is useful to look back and see what has been accomplished.


Rate of Return


In July 1967 the Commission ruled that Bell's overall earnings should be between 7-7.5 percent and a rate reduction was ordered nominally designed to achieve that result.  In fact, in 1968 Bell earned 7.6 percent, an overcharge of at least $10 million and in 1969 is earning at a rate better than 8.3 percent.  The Commission will not even begin reexamination of the present rates under rate of return until September 1969.




In July 1967 the Commission ordered the adoption of certain separations procedures.  It reconsidered this determination, ordered separate rulemaking and finally in January 1969 adopted procedures less wise than otherwise might have been.  See Jurisdictional Separations of Telephone Companies, 16 F.C.C. 2d 311, 335 (1969).


Commissioner Cox in his pricing policy paper of March 1969, described the need for action in this proceeding: "We expect the thorough and far-reaching investigation into the ratemaking principles and factors that will be used by the Commission for evaluating carrier pricing proposals will evolve a set of workable, implementable ratemaking standards.  These standards will establish a framework of analysis that should facilitate problems of information gathering, carrier justifications, and commission examinations in such a manner that the regulatory process will be expedited and the quality of commission decisions will be improved." Now on ratemaking principles and price discrimination -- questions central to this investigation -- the Commission decides after 4 years no decision can be made now.  These actions call into sharp question the capability of this agency to engage in public utility regulation at all.  I dissent.





STATEMENT OF RATEMAKING PRINCIPLES AND FACTORS IN DOCKET NO. 16258, PHASE 1-B  (Transcript vol. 179, May 28, 1969, pp. 22329-22341)


1.  The Commission recognized with respect to the instant matter:


The proceeding is one involving several complex and very important questions.  It is desirable for the Commission and the parties to focus sharply upon these questions.  It is important, from the standpoint of the Commission's processes and the interests of the parties, to resolve the questions as quickly a practicable.  (F.C.C. 65-1143)


Respondents have presented their views with respect to the appropriate ratemaking principles and factors which should govern the proper relationship among the rate levels for each of their principal services.  The several parties, and witnesses presented by the Common Carrier Bureau (staff), also presented testimony with regard to these matters.  Differences of view as to the reasonable application of theoretical principles were voiced.  However, there is general recognition of significant benefits which could be derived from a proper application of those ratemaking theories presented for Commission consideration in this record which are hereinafter set forth.


2.  Further work needs to be done in implementing the theoretical principles in a practical manner in the communications industry.  While rebuttal testimony has not yet been presented, all participants have had an opportunity to present their views on the formal record.  The development of more advanced techniques can best be devised through informal procedures rather than a formal record.  In recognition of the Commission's desire to "resolve the questions as quickly as practicable", we believe that informal discussions should commence immediately, outside of docket No. 16258, between the staff and the Bell System, with appropriate consultation with other interested persons from time to time, with the goal of arriving at appropriate methods of implementing the theoretical concepts.  It is recognized that the Commission will execute its statutory obligations pending resolution of these problems and adoption of the necessary techniques.


3.  It is not intended that any one of the principles be given undue weight.  It is recognized that the regulatory process involves a proper balancing of both the supply and demand factors, in the light of public interest considerations, with respect to the costing and pricing of all communications services, whether in monopoly or competitive markets.


4.  Accordingly, the staff and the participating parties have agreed upon a set of ratemaking principles, which by their very nature must be in general terms.  These principles are as follows:


5.  The implementation of ratemaking principles and factors should not impair the Bell System's opportunity to achieve its overall allowed rate of return on its interstate investment, nor should it permit an overall rate of return which is excessive.


6.  In a situation where the Commission is considering adjustments in the rate levels for the m.t.t. category of service of such a magnitude that the Bell System's overall rate of return from interstate operations would be either inadequate or excessive, it should give concurrent consideration to adjustments in the rate levels for other categories of service.  Any such rate-level adjustments which are authorized or prescribed should take into account the ratemaking principles set forth herein and should, in total, be such as to afford the Bell System the opportunity to earn its allowed overall return on interstate operations.  The extent of adjustment, if any, in the rate level for any particular category of service will depend upon the statutory standards and applicable ratemaking principles.


7.  Fully distributed cost (f.d.c.) studies contemplate that the total of the company's interstate recorded costs for a test period will be allocated among the various service categories in such a way that the costs so allocated to each service will add up to the total test period recorded costs of service.  In a multiservice company many elements of cost will be common to two or more categories of service.  There are numerous ways in which such common costs might be allocated.  The need for judgment in making allocations is recognized, but the basis therefor should appear.


8.  Historical book costs for interstate services should be analyzed for the purpose of obtaining information which may be useful in determining whether, during the test period, any service category has burdened n1 any other service category.  Such analyses should, to the extent practicable, allocate the total test period historical costs in such a way as to estimate the costs that have been incurred for the provision of each service category.  Consistent with the foregoing, the assignment or allocation of these costs to a service category should reflect consideration, as appropriate, of cost responsibility, relative use and any other factors which are pertinent to the purpose for which the analysis is being made. 


n1 The determination of the existence of a "burden" will depend upon the context of the particular case.


9.  A long-run incremental cost (l.r.i.c.) n2 study contemplates that an estimate will be made of the full amount of incremental investment and expenses which would be incurred by reason of furnishing additional quantities of service, whether in a new or an existing service category.  Such a study also contemplates that, for the particular category of service, l.r.i.c. will be equal to the sum of the longrun marginal costs of the added units of service.  In a multiservice company many elements of cost will be common to two or more categories of service.  A purpose of an l.r.i.c. study is to determine prospectively the effect on total costs, including the effect on common costs, as a result of adding units of service.  The need for judgment in determining the appropriate method of estimating l.r.i.c. is recognized, but the basis therefor should appear. 


n2 Use of the term "long run" does not preclude the treatment of costs in terms of a period relevant to the particular rate changes under consideration.


10.  L.r.i.c. should be analyzed for the purpose of obtaining cost information which may be useful in determining rate levels and rates for the future for each category of service.


11.  In order to determine l.r.i.c. and f.d.c. for the major categories of interstate services, the Bell System, in consultation with the FCC staff, will undertake to develop appropriate methods to be used in the production of l.r.i.c. and f.d.c. studies at regular predetermined intervals and will go forward as promptly as possible to produce up-to-date cost data.  By such formal or informal procedures as the Commission deems appropriate, interested persons will be afforded a timely opportunity to express their views with respect to the formulation of the appropriate methods.


12.  The rates for any category of service should produce a rate level which is not below l.r.i.c. or, where appropriate, not below avoidable costs.  If any category of service is to be priced to produce a lower level, however, such lower rate level should be supported by a determination by the Commission that it is required in the public interest.  Where avoidable costs are considered as the rate level floor, and they are lower than l.r.i.c., consideration should be given by the Commission as to whether the public interest requires that the service should be allowed to grow, or to continue, or whether it should be phased out as quickly as the facilities used to supply the service can be used to provide other services.


13.  In analyzing alternative future rate levels for either an existing or a new service category, estimates of l.r.i.c. should be compared with estimates of incremental revenues for that category for a reasonable future period.  Such estimates should, to the extent feasible, take into account the cross-elasticities (positive and negative) which may result from the change in rate level or from the introduction of the new service category.


14.  Rate levels for the future should be determined with reference to relevant costs, n3 market conditions and public interest considerations.  Where appropriate cost and noncost data are available for consideration, neither a cost standard nor a noncost standard taken by itself, will be used as the measure of the rate level for any service category.  To improve the noncost data presently available, further study should be undertaken regarding such subjects as the specific techniques for making analyses of the noncost ratemaking factors, the type of data required for such analyses, the procedures for obtaining the necessary data, and the information that such analyses can be expected to produce on a continuing basis. 


n3 It is recognized that no party is precluded by any provision herein from asserting in any rate proceeding the relevance of f.d.c., l.r.i.c., or any other method of cost determination.


15.  In assessing market conditions, consideration should be given, as appropriate, to reasonable estimates of the following, among others: Elasticities of demand, including price elasticities for various types of communications and for particular service categories, income elasticities, and cross-elasticities among substitute services whether supplied by Bell or others; existing and potential competition and competitive necessity; customer requirements; the effects of existing tariff provisions; and the effects of Commission policy upon the availability of consumer alternatives.


16.  Within a given class of service, it is recognized that, for any particular rate level, more than one rate structure could be appropriate.  The design of a rate structure should reflect consideration of cost and demand characteristics within the class of service, including peak versus off-peak factors.


17.  The rate level for any single class of service and the ultimate rates must meet the statutory requirements that they be reasonable and not unduly discriminatory or preferential.


18.  It is recognized that, in the f.d.c. and l.r.i.c. studies to be undertaken to implement these ratemaking principles, depreciation expense is a relevant cost element and depreciation reserve is a relevant component of the net investment determined for the various service categories.  In allocating depreciation expense and reserve in any f.d.c. analysis, the total of the test period expense and reserve will be allocated among the various service categories.  While existing depreciation policy and practice should be studied, the determination of depreciation policy and the prescription of depreciation rates are not at issue in phase 1-B.  The treatment afforded these cost elements in f.d.c. and l.r.i.c. studies of particular service categories depends upon the principles applicable to the studies undertaken.

* * *

For the purposes of implementing the foregoing principles, the following procedures should be utilized:


(1) The staff and the participating parties agree to the statement of ratemaking principles and factors as a basis and guide for further detailed studies of rate levels and rates of Bell's major service categories, without prejudice to the substantive or procedural rights of any party with respect to any adjustments that may result from such studies.  For example, agreement to this procedure shall not limit the rights of the parties to raise.  In future proceedings, questions such as those respecting rate levels for individual service categories which, but for this agreement, would have been subject to Commission decision in this proceeding.


(2) The Commission, by its order of December 23, 1965, 2 F.C.C. 2d 142, directed respondents to submit, in connection with its study of ratemaking principles and factors, the specific rate adjustments if any, "which they consider should be made on an interim basis in the light of such study results and the ratemaking principles and factors advocated by them." While respondents have previously submitted in this record detailed studies and have proposed or effectuated rate adjustments, they propose to make new studies in conformity with the principles agreed to herein, and thereafter to file such further specific rate adjustments as may be consistent therewith.  Accordingly, respondents will proceed expeditiously to make such new studies.


(3) As recognized above, the agreed ratemaking principles and factors herein contained are, of necessity, rather general and nonexclusive.  An adjudication of other relevant and more specific principles and factors will be required in connection with a Commission determination as to the appropriate rate level for any category of service.  No carrier initiated rate level increases will be filed until the new cost studies described in paragraph (2) have been completed and made available to the parties hereto.  The effective date of any such rate level increase will be subject to such authority as the Commission may possess.  The parties do not agree as to the scope of the Commission's authority under various circumstances to reject, suspend or postpone the effectiveness of carrier initiated rates, and no party, by this agreement, waives its position on this question.  If, pursuant to the foregoing, a rate level increase is to become effective, it should be subject to an accounting order upon an appropriately supported request of an affected person.


(4) If the Commission should decide that formal proceedings are appropriate with respect to the rate level adjustment filed by Bell for any service category, such proceedings will be conducted in dockets separate from docket 16258.  (For example, further proceedings, if any, as to the rate level and rates for the PL Services could be held in docket 18128.) Any unresolved issues of docket 14251, which have been incorporated into docket 16258 for determination, and the pertinent portions of the records of both dockets, will be incorporated into docket 18128 for further hearing and determination.


(5) In the absence of any direction to the contrary by the Commission, the following procedures will be employed:


(a) Inasmuch as the record in phase 1-B of docket No. 16258 has not been closed, and proposed findings and briefs have not been filed, no recommended decision can be issued by the Chief of the Common Carrier Bureau, as contemplated by the order of September 12, 1968 (F.C.C. 68-930).


(b) Following the filing of the new studies and proposed rate adjustments by respondents and the institution of, or continuation of, any separate proceedings (see par. 4), the Chief of the Common Carrier Bureau will recommend that phase 1-B of docket No. 16258 be terminated without opinion on the merits by the Commission.


(c) If the Commission should direct procedures other than those hereinbefore proposed, or if the Bureau Chief's recommendation that phase 1-B be terminated without opinion on the merits should not be adopted by the Commission, then the respondents and the other parties will not be bound in any way by the foregoing agreement.


(d) It is recommended that the record in the Telpak Sharing case (docket 17457) be reopened, and that such docket be consolidated with docket 18128 for further hearing and determination.  (The Common Carrier Bureau takes no position on this recommendation.  The parties hereto support this provision, but agree that it is not a condition precedent to this agreement.  In the event this recommendation is not adopted by the Commission, no party is precluded from asserting its position in support of this recommendation, including the position of certain parties to the effect that any decision in docket 17457 prior to final determination of the issues now in phase 1-B of docket 16258, whether in docket 16258 or in some other proceeding, would be premature and improper.)


Telephone Ratemaking Principles


(In the matter of American Telephone & Telegraph * * * docket No. 16258 Phase 1B)


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