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In the Matter of AMERICAN TELEPHONE & TELEGRAPH CO. Charges for Domestic Telephone Service

 A.T. & T. Transmittal Nos. 10989, 11027


Docket No. 19129




27 F.C.C.2d 151




January 21, 1971 Released


 Adopted January 21, 1971





 [*151]  1.  The Commission has before it for consideration the following items: (a) proposed tariff changes filed by the American Telephone and Telegraph Company on November 20, 1970, to be effective January 19, 1971, calling for increased rates and changes in the rate structure in the provision of long distance message toll telephone service under Tariff FCC No. 263; (b) numerous petitions and letters opposing such rate changes and seeking to participate in any hearings held thereon; n1 (c) replies of AT&T to certain of these public filings; (d) our letter of January 12, 1971 to AT&T; (e) its reply thereto of January 13, 1971; and (f) further tariff changes filed by AT&T on January 14, 1971, to be effective January 21, 1971. 

n1 Formal pleadings were filed by the following parties: Equal Employment Opportunities Commission; Secretary of Defense on behalf of all Executive Agencies; Silver Beehive Telephone Company; City of Chicago; Anthony Martin-Trigona; Utility Users League; Microwave Communications, Inc.; National Association for the Advancement of Colored People; National Organization for Woman; Telephone Users Association of the District of Columbia.  In addition, numerous letters and telegrams have been received expressing interest in the proposed rate increases and any hearings to be held with respect thereto, or commenting on the merits of the proposed increases.  AT&T filed replies to the petitions of EEOC, Secretary of Defense, Utility Users League, and City of Chicago.  Following a Public Notice issued January 12, 1971, a further telegram was received from the EEOC on January 14, 1971 seeking certain information relating to the Commission's deliberations and consideration of the proposed rate increases and the EEOC petition.  Further Petitions for Suspension, Intervention and Declaration of Unlawfulness were filed on January 18, 1971, by California Rural Legal Assistance, Inc., Mexican American Legal Defense Fund, NAACP, American Civil Liberties Union, and the NOW Legal Defense and Education Fund.  On January 19, 1971, a Petition for Suspension was filed by Mr. Ralph Nader.  Further pleadings and responsive pleadings have been recently filed.

2.  The major increases included in the tariffs as filed on November 20, 1970, are in the rates for Person to Person calls, Operator Handled calls and customer dialed calls made during the "Day" period (8 a.m. to 5 p.m.) on the week days, i.e., during the business period of the work week.  The revised tariffs provide for increased charges for operator assisted calls (both Person and Station calls) by 30! for the initial three minute period and five cents per minute for the additional time over three minutes in most mileage steps.  Increases  [*152] for day time customer dialed calls would average about nine cents for the initial period and three cents per minute thereafter.  Increases would be proportionately greater for the shorter distances allegedly to reflect costs more accurately and to lessen the interstate/intrastate rate disparity.  In its filing, AT&T is also proposing some relatively minor decreases in evening, night and weekend rates for customer dialed calls (generally reductions of five cents or less).  These decreases are designed, in conjunction with the increases described above, to create a pattern whereby evening rates are at least 20 percent below daytime rates and night and weekend rates are at least 40 percent below daytime rates.  The tariffs also provide for rates for paid Station calls originated at coin-box telephones which are lower than other Operator Handled calls in the first seven mileage steps (0 to 70 miles).  The increases range from 67% from some short haul Operator Handled Station calls (three minute rate increased from 15 cents to 25 cents in step one -- 1 to 10 miles -- and from 45 cents to 75 cents in step seven -- 56 to 70 miles) down to 7% for cross country Customer Dialed Day calls ($1.35 rate increased to $1.45).

3.  A straight repricing of interstate calls at the revised rates (i.e., assuming no change in volume or composition of messages projected for 1971) would result in increased revenues of about $760 million annually.  The Company estimates that only $385 million additional annual revenues will be realized because of the following: (1) Shrinkage -- the reduction in the volume of interstate calls because of the higher rates; (2) Shifts -- the lower revenue derived because of customers shifting their calls to a time period where lower rates prevail, e.g., calling at night rather than daytime; and (3) Reclassifications -- the lower revenues derived due to customers using a class of service where lower rates prevail, e.g., making Customer Dialed calls rather than Person or Operator Handled calls.  The rate schedules were specifically designed to encourage shifts and reclassification of calls in a continuation of the changes in the message toll rate structure designed to encourage the use of the network in off-peak periods and to place calls without operator assistance when feasible.  In addition to reducing the additional amount of revenues expected to be derived from the rate revisions, these factors also reduce costs.  The Company estimates the cost reduction to be about $160 million for the year 1971.  Therefore, the improvement in operating results before income taxes is estimated to be about $545 million ($385 million increased revenues plus the $160 million reduction in costs).

4.  In its transmittal letter, AT&T states that the rate increase:

"... is required in order (1) to offset the effect of the new separations methods shifting $130 million of annual revenue requirements from intrastate to interstate operations by order of the Commission effective January 1, 1971; (2) to recoup the reduction in revenues of over $150 million annually made earlier this year on the basis of estimates of economic and financial conditions which have been proved inaccurate by experience; and, (3) to improve earnings to a level which will sustain the financial integrity of the Bell System and permit the attraction of additional capital needed to satisfy consumer requirements for telecommunications service."


 [*153]  The Company has also filed 17 statements by Company officials and outside consultants and 22 volumes of related data and workpapers in support of various aspects of the rate increase.

5.  In support of the need for a 9 1/2% rate of return, AT&T places primary stress on the change in economic conditions and substantial increases in costs of debt and equity capital since the 1966 test period on which the Commission's July 5, 1967 decision was based in phase 1A of the AT&T rate case in which the Commission found that a rate of return in the range of 7% to 7 1/2% was appropriate for Bell's interstate operations.  See 9 FCC 2d 30. With respect to the cost of debt capital to the Bell System the Company notes the increase in the current cost of debt capital of about three percentage points, from a range of 5 1/2% to 6% in 1966 to the range of 8.6% to 9.4% in 1970 and the increase in embedded debt cost from 4.0% in 1966 to 6.0% which Bell estimates it will reach shortly.  AT&T contends that because of the vast amounts of capital it will require in the near future (about $4 billion annually) and its current debt ratio of about 45% it will be necessary to acquire a substantial amount of equity capital; that a return on equity of 12% to 12 1/2% will be required to attract the necessary new equity capital, that the increase in return on equity to a level of 12% to 12 1/2% over that allowed in the Commission's July 1967 decision is well justified by the changed economic and financial conditions and the increase in bond interest rates since 1966.

6.  The revised tariff changes, as filed on January 14, 1971, provide for an increase in revenue of $175 million and associated costs savings of $75 million, for a total increase in net earnings before income taxes of $250 million annually.  The following summarizes the major reductions from the November 20, 1970 filing for increased rates provided for in the revised tariffs filed on January 14, 1971:

1.  The increases in the initial period rate for customer dialed daytime calls were reduced generally from ten cents to five cents.  The increases in the additional minute rate for such calls were also generally reduced.

2.  The increases in the initial period rates for Daytime Operator Station-to-Station calls were reduced from 30 cents to 15 cents.

3.  The increases in the initial period rates for Person-to-Person calls were, with some exceptions, reduced from 30 cents to 25 cents.


The Company estimates that earnings for the year 1971 would be 7.9% absent any rate change and without the implementation of the recent separations change (Ozark Plan) adopted by the Commission.  With the Ozark Plan, which became effective January 1, 1971, in effect the estimate for 1971 is 7.4% n2 again absent any rate change.  The Company indicates that each deviation from their forecasts  [*154] of message volumes and expenses of one percent and their forecast of average revenues per message by one cent, would alter the results by 1/2 of 1 percent above or below the projected figure. 

n2 In a letter of January 4, 1971, AT&T indicated that further data on operating results for December, 1970 suggest that the estimate for 1971 should be adjusted downward to 7.2%.

7.  Upon consideration of the proposed tariff changes and the material submitted therewith, the Commission adopted its letter of January 12, 1971 wherein it requested that AT&T voluntarily postpone the effective date of the tariffs as filed pending the outcome of an expedited hearing, and simultaneously granted special permission to the company to refile revised tariffs providing for increases in MTT rates that will produce additional annual net earnings, before income taxes, of not more than $250 million.  It stated that such new rates would be suspended and would also be subject to accounting and refund by the carriers, pending a final determination by the Commission on the justness and reasonableness of the rates sought by AT&T.  In so acting, the Commission indicated that it had taken into account its decision in 1967 in Docket No. 16258 that an allowable rate of return for AT&T's interstate operations was within a range of 7.0% to 7.5%, whereas the present rate of return objective was substantially higher.  The Commission's letter also referred to the pendency of proceedings in Docket No. 18128 in which the determination of appropriate relationships among the earnings level of each of AT&T's several classes of interstate service is to be made.  At the same time, the Commission recognized that interstate annual revenue requirements, as of January 1, 1971, would be increased by about $130 million as a consequence of recent revisions in jurisdictional separations procedures prescribed by the Commission; it also noted that changes occurring in the capital structure and the costs thereof of AT&T subsequent to the 1967 decision, particularly the net increase in embedded cost of debt, were of particular importance.

8.  The Commission stated in its letter to AT&T that if the carrier would agree to postpone the effective date of the pending tariff changes and would file new tariff schedules designed to generate the lower net earnings level specified in the letter, the Commission would, nevertheless, proceed immediately to institute an expedited hearing under Section 204 of the Act to inquire into the justness and reasonableness of the rates, both as originally filed and as modified by the carrier.  The Commission felt that under these circumstances it should expedite the proceeding with a view to completing it within a time frame of six to nine months (barring extraordinary developments).  It also stated that the concurrent proceedings in Docket No. 18128 would also be expedited with the objective that determinations in this docket should be available in a timely fashion to implement the conclusions reached in the rate proceeding to be initiated with respect to the revised tariff schedules.  The Commission made it clear that the procedures set out in its letter should not be construed as in any way indicating approval or acceptance of the rates filed pursuant to the special permission being granted.  Instead, it specifically stated that its findings and conclusions in this matter would be reached only after it had before it the entire record resulting from the hearing and investigation it would institute.  It noted that the new rates were subject to protest and to any action that the Commission  [*155]  might deem warranted prior to the effective date.  The Commission further noted that the carrier would be free to make a showing that the rates originally filed and the resulting rate of return change, which the carrier felt to be justified, were warranted and would be in the public interest.  Conversely, any party participating in the projected hearing would, of course, be given equal opportunity to show that other rates or another rate of return should be found to be just and reasonable.  Implicit in the Commission's request to the company to refile the lower rates was the strong feeling that an increase of the magnitude first proposed, even with a 90 day suspension, was not warranted until it had been explored on the basis of a complete record in the projected hearing.  On the other hand, the Commission recognized that by its own action in Docket No. 18688, the company's interstate revenue requirements had been increased by some $130 million annually, effective January 1, 1971, and that changes had taken place in the various elements which make up the cost of capital since the Commission's 1967 decision in Docket No. 16258.  Accordingly, any long term suspension of the revised proposed rate increases would inevitably prevent the company from recovering any of these sums during the period of such suspension.  On the other hand an accounting order with provision for refund would protect the using public if any or all of the increases collected by the company during this period were not justified by the company.  Under such circumstances, the public which had paid the sums found to be excessive would secure prompt refunds with interest for the time the company held the sums found to be excessive.  As already noted, AT&T has, in fact, refiled at the lower rates pursuant to the special permission granted.  In view of all of the foregoing considerations including the company's refiling of rates substantially below those originally filed, the Commission adopted an order herein on January 20, 1971 suspending the refiled rate increases until 12:01 a.m., January 26, 1971, and requiring appropriate accounting with provision for possible refund.  This order was premised on the Commission's inability to find the rates either as initially filed or refiled to be just, reasonable and non-discriminatory and, therefore, requiring investigation and hearing pursuant to Section 204 of the Act.  In its present posture, therefore, there is before the Commission a filing by AT&T which that company must justify on a record with leave, of course, to justify the higher rates and the associated rate of return originally filed by the company.

9.  In addition to the determination to be made herein regarding the just and reasonable rate of return to be allowed AT&T on its interstate operations, a number of other important issues are presented for determination, as indicated in our letter of January 12, 1971.  The subject tariff filings rest on an implicit conclusion that the additional revenue requirements claimed by AT&T and the Bell System companies should be met by imposing higher charges on MTT users, to the exclusion of increases or adjustments in the rates of other classes of service provided by them.  The basis for this assumption is not shown and we expect AT&T to carry the burden of proof on this  [*156]  issue in Docket No. 18128, in which we also expect AT&T to demonstrate that the instant rate increases do not involve any cross-subsidization of other services provided by the carriers involved.

10.  An additional matter warranting specific inquiry is that of the expense level used by the company in making its revenue requirement calculations.  In our continuing review of Bell's operating results, we have noted an unusually sharp upswing in interstate operating expenses excluding Federal income taxes.  For the first nine months of 1970 such expenses were 15.7% greater than the same period in 1969 and for the year 1969 the growth was 15.8%, whereas since 1960 the annual growth rates ranged from 7.4% in 1962 to 13.9% in 1965 and averaged 10.6% for the 1961-1968 period.  The growth rates for maintenance expenses assigned to interstate were 20.3% for the first nine months of 1970 and 20.0% for 1969 compared to 10.7% in 1968 and 9.6% in 1967.  There may be valid reasons for these unusual growth rates.  However, the question arises whether these growth rates are to continue in the foreseeable future or whether adjustments should be made in the Company's operating results to reflect the nonrecurring nature of these expenses if they are not expected to continue at such high level.  A specific issue is included herein to deal with this matter.

11.  Included by the company in its material filed in support of the original tariff changes is considerable testimony and data related to the regulatory problems posed by the integration of Western Electric into the AT&T's corporate structure.  That matter is already in issue in Phase II of Docket No. 16258, and we believe it would be appropriate to inquire specifically into the question whether the costs and expenses for Western Electric equipment and plant should result in earnings in excess of those necessary to give AT&T a fair rate of return; we expect AT&T to demonstrate what justification there is for a return to Western Electric which is different from that allowed AT&T generally, and why charges higher than those sufficient to maintain the same rate of return as that allowed to AT&T overall for its interstate operations should not be disallowed for rate making purposes.

12.  We also wish to explore in this proceeding issues going to the appropriateness of the rate structure for MTT service as proposed by AT&T herein and a specific issue on this matter will be included.  Both the November 20, 1970 and the January 14, 1971 filings effect substantial changes in the MTT rate structure.  We wish to investigate the MTT rate structure to determine whether each sub-class of MTT users bears an appropriate share of the burden and whether there is any discrimination in favor of or against any MTT users or class thereof.

13.  While we are concerned with a prompt resolution of the issues herein, we stress that we do not intend to preclude the parties from making the presentations necessary to permit a full and fair exploration of the issues specified.  However, in view of the fact that we have recently held a full hearing on the rate of return issues for AT&T and since AT&T has already filed its case in chief, we believe  [*157]  that at least the rate of return issue can be resolved within a six to nine month period.  We propose, therefore, to consider the question of the fair and allowable rate of return first.  To the extent that actual experience, as the hearing proceeds, makes it possible and feasible to explore the other issues in the first phase, we believe it would be desirable to do so.

13a.  Turning now to other procedural questions we are of the opinion that in light of all of the circumstances involved in this matter and discussed herein, it would be desirable to provide for the submission of an Initial Decision by a hearing examiner and we have done so below.  Moreover, we believe it would be desirable for the trial staff of the Common Carrier Bureau to be separated both from the Commission and from the Examiner.  We will therefore follow the procedures recommended by the Administrative Conference.  See Selected Reports of the Administrative Conference of the U.S., 88th Cong., 1st Sess. S. Doc. 24 at pp. 109-110.  After the record has been completed on the rate of return issue the parties may file proposed findings of fact and conclusions of law, but in establishing procedural dates for the conduct of the hearings the examiner should bear in mind the need for expedition as outlined above and consistent with a full and fair hearing should strive to issue an Initial Decision within approximately six months of the publication hereof in the Federal Register.  Such a schedule would permit the parties sufficient time to brief and argue the issues on appeal from the examiner's decision, and to permit us sufficient time to prepare a Final Decision within the time frame specified above.  n4 After the parties have concluded their participation in the rate of return phase, they may address themselves to the remaining issues and every effort should be made to expedite that phase of this proceeding, although we do not, at this time, impose any time limitations on the conduct of that aspect of the matter. 

n4 We will at this time order all intervenors filing a direct case to do so within 30 days of the prehearing conference.

14.  As indicated above, we are prepared to handle the issues in phases since this will "best conduce to the ends of justice and the proper dispatch of business" 47 USC 154(j).  This may result in rate adjustments at the end of the first phase, but before the resolution of other important issues.  This, in turn, again calls for full protection of the public while these further issues are being explored.  Thus, any such rate changes as may be authorized in the Final Decision or any appropriate further orders may be of an interim nature and may be accompanied by appropriate accounting and refund orders pending the outcome of the further hearing on questions related to expenses, rate level and structure, and other associated matters.

15.  In view of our inability to find that the rate increases or rate structure changes proposed by AT&T comply with all statutory requirements and are in the public interest, it is necessary, in order to adequately protect the rate payers, to require AT&T to undertake such accounting procedures as will permit it to make appropriate refunds to subscribers if the rates refiled on January 14, 1971 subsequently  [*158]  prove to be too high or otherwise contrary to the public interest.  In response to an inquiry from the Chief of the Common Carrier Bureau, AT&T indicated, in a letter of December 1, 1970, that it could institute a procedure for maintenance of collection records, at minimal cost and complexity, which would assure equitable treatment to all but coin-box patrons or hotel guests paying for toll calls.  We have been assured that other carriers will also be able to establish such procedures.  n5 According to AT&T the cost of maintaining individual records for sent paid coin-box calls and for hotel guest calls would be approximately five times the additional revenue from such users sought by AT&T in its November 20, 1970 filing.  Accordingly, with respect to those classes of service we provided that accounting procedures be established sufficient to provide revenue data for the classes as a whole rather than on an individual user basis.  Should the rates ultimately be reduced or modified as a consequence of this proceeding in such a way as to require further consideration of the total revenue collected from these user classes, the carrier shall dispose of such funds as directed by the Commission. 

n5 United Utilities, Inc. has suggested an accounting procedure less costly than AT&T's but also less precise.  In view of the magnitude of the sums in issue here we believe AT&T's approach is the more appropriate.

16.  As indicated in footnote 1, numerous petitions and informal filings have been submitted in response to the proposed rates increase.  One group of petitions in particular warrants particular mention at this time.  The Equal Employment Opportunities Commission (hereafter EEOC) filed a Petition for Intervention, asking the Commission to suspend the proposed rate increases, conduct a hearing, and declare the proposed increases illegal until the operating companies of the Bell System "have ceased their unlawful discrimination against women, blacks, Spanish-surnamed Americans, and other minorities." The EEOC also seeks numerous other forms of relief, arguing that for many years, and continuing to the present time, the operating companies of the Bell System have engaged in massive, deliberate, illegal discrimination against blacks, women, Spanish-surnamed Americans and other minorities in hiring, promotion, job classification, and wage scales.

17.  The EEOC contends that because AT&T has operated in widespread and flagrant disregard of the equal employment laws, the proposed rate increase is unjust and unreasonable as contrary to the public interest, and therefore unlawful.  It notes that the Bell System, as a regulated utility, is a public trustee and as a company of enormous economic power and influence, is particularly bound to serve the national goal of eradicating employment discrimination; it contends that, in considering the "public interest," the Commission is bound to consider issues other than the narrow and traditional ones which are related to the economic factors generally considered in public utility regulation.  Finally, the EEOC contends that to approve the rate increases in issue here would be to authorize the discrimination to continue and would contravene the Fifth and Fourteenth Amendments to the Constitution.

 [*159]  18.  AT&T responded with an Opposition to the Petition on December 21, 1970, denying, with varying degrees of specificity, the charges lodged by the EEOC, and urging the Commission not to consider the issues raised by the EEOC petition in its disposition of the pending request for rate increases.  AT&T argues that it would be "incongruous to hear and investigate charges of discrimination simply because an employer files new rates while ignoring the employment practices of those who enjoy adequate earnings" (Oppos., p. 3).  Moreover, AT&T argues that to delay the rate increases in issue would seriously injure the public interest inasmuch as the additional funds are required to permit attraction of capital for construction programs which must be maintained to provide telecommunications service.  Subsequently, numerous petitions for "Rate Suspension, Hearing Intervention, and Declaration of Unlawfulness" were filed by California Rural Legal Assistance, Inc., Mexican American Legal Defense Fund, the NOW Legal Defense and Education Fund and the American Civil Liberties Union.  Each of these pleadings adopts and incorporates the petition filed by EEOC.

19.  We agree with the EEOC that the matters raised by it are indeed crucial considerations in effectuating our statutory responsibilities.  As the Commission recently said in adopting its non-discrimination rules applicable to common carrier operations: "It is clear to us that discriminatory employment practices by a common carrier licensee or permittee are not compatible with the public interest." Employment Practices by Common Carriers, 24 FCC 2d 725 at 729 (1970). We also observed that "The Commission has an independent responsibility to effectuate the strong national policy against discrimination in employment...." Id. at 727. See also Potomac Electric Power Co., (D.C.) 83 PUR 3d 113 at 147-149 (1970); 84 PUR 3d 236. Moreover, on the basis of the pleadings now before us on this issue, we believe there are outstanding substantial and material questions of law and fact which can be resolved only after full evidentiary hearing and briefing of the issues by the parties.

20.  It is therefore our intention to vigorously pursue the questions raised by the EEOC and related filings and to reach appropriate determinations on a full record.  No showing has been made, however, or even attempted, as to any logical or functional relationship between rate levels and the company's policies and practices in the matter of equal employment opportunity.

21.  In these circumstances, we believe the most appropriate way to proceed is as follows: We will treat the EEOC and related petitions as formal complaints filed under our anti-discrimination rules, and will establish a separate docketed proceeding in which the questions raised by EEOC may be fully considered.  We will include an issue in that proceeding inquiring into the effect, if any, of the employment practices or policies of AT&T and the Associated Bell System companies on the company's revenue requirements, so as to permit the complainants an opportunity to demonstrate some logical or causal relationship between the matters raised by them and the determination of just and reasonable rates under Section 201 of the Act.  Pending a final resolution of this separate proceeding, we will retain jurisdiction  [*160]  of the instant case until such time as the employment discrimination issue and its relationship, if any, to revenue requirements has been resolved.  n6 Any of the civil rights groups is of course free to intervene, upon appropriate notice, in this proceeding, in its capacity as a telephone subscriber or representative of telephone subscribers, and for the purpose of assisting in the determinations of the issues set forth herein; the petitions to intervene filed by the City of Chicago, Telephone Users Association, MCI Inc., Martin-Trigona, and Silver Beehive Telephone Company will be granted. 

n6 The petitions filed by the civil rights groups specifically state that they are not complaints filed under Section 1.721 of our rules.  However, the alternative to so construing them is to dismiss them outright, a result we believe would not be in the public interest.

22.  In its telegram of January 14, 1971 (See n. 1, supra), EEOC asks that the Commission provide, in addition to certain documents which are readily available, and certain relief which is mooted by this order, a transcript of the Commission proceeding at which the Commission's letter of January 12, 1971 was authorized, a copy of each correspondence item received or sent by the Commission in relation thereto, and a report of all telephone calls, meetings and other communications between commissioners and officers of the carrier in relation to the letter of January 12, 1971.  EEOC also seeks a transcript of the Commission proceeding which dealt with the petition.  The Commission responded to that telegram by letter dated January 19, 1971.  We adopt that letter (Att. A hereto) as our response.

23.  The Petitions filed by the Civil Rights groups on January 18, 1971, uniformly make two additional arguments: (1) that the lower rate increase proposed by AT&T is a Commission-prescribed rate and as such is violative of numerous statutory provisions; and (2) that no "good cause" has been shown to permit the rate increase to become effective prior to the 60 day period specified in 47 U.S.C.  Section 203(b).  They also request that if the Commission denies the relief requested in the petition, it stay its actions pending judicial review.  We find no merit in any of these points.  We believe the language of this order makes clear beyond quibble that we have not established any rates pursuant to Section 205 of the Communications Act; instead we have suspended these rates with an accounting order and placed the burden of justifying them upon AT&T.  The determination that good cause does exist for waiving the usual statutory waiting period of 60 days is one which is committed to our discretion and we believe, on the basis of all the circumstances presented, that our decision in this respect, for the reasons set forth above, is well within the bounds of a reasonable exercise of such discretion.  As to the imposition of a stay, we note that the parties have neither alleged nor proven that a denial of such extraordinary relief would result in irreparable injury either to themselves or to the public, particularly in view of our accounting order, nor have they demonstrated that they have a substantial likelihood of prevailing on the merits.  In such circumstances we see no reason to grant a stay.  See Virginia Petroleum Jobbers Ass. v. FPC, 259 F. 2d 921 (D.C. Cir., 1958).  As indicated above, we have also received a letter from Mr. Ralph Nader protesting the Commission's actions and policies and requesting suspension of the  [*161]  proposed rate increases.  Many of the points raised in that letter are dealt with either in our response to the EEOC of January 19, 1971, cited above, or in this Memorandum Opinion and Order.  We reemphasize, however, that the accounting and refund provisions included in this proceeding will adequately protect the public; that by our action here we have not approved any rate increases or higher rate of return and that we are holding a full evidentiary hearing on the public interest issues raised by the proposed rates increases.  Mr. Nader or any other interested party is free to seek intervention in this proceeding, pursuant to Section 1.223(b) of our Rules, and to make any relevant showing with respect to the issues set forth herein.

24.  We wish to make clear that as to all the issues specified below, AT&T, as the proponent of higher rates, shall bear not only the burden of proof, but also the burden of going forward with the evidence.  We will provide by order that the proceedings in Docket No. 18128 be expedited and it is our expectation that a resolution of that proceeding insofar as it relates to the rate adjustments proposed by AT&T in its filing of November 20, 1970, as well as in the tariff schedule suspended herein, will occur in less than one year.  We shall retain jurisdiction herein to implement our conclusions in Docket No. 18128 insofar as they relate to the assignment of any revenue requirements of AT&T to MTT.

In view of all the foregoing matters, IT IS ORDERED, That, pursuant to the provisions of Sections 201(b), 202(a), 204, 205 and 403 of the Communications Act of 1934, as amended, an investigation is hereby instituted into the lawfulness of the charges of the American Telephone and Telegraph Company and the Associated Bell System Companies for interstate and foreign communication service; n7

n7 See 2 FCC 2d 876 (1966) for a full listing of the corporate parties included.

IT IS FURTHER ORDERED, That, without in any way limiting the scope of the proceeding, it shall include consideration of the following:

1.  What are the revenue requirements of the Bell System Companies applicable to their interstate and foreign communication services and the basis upon which such revenue requirements are to be determined, including:

A.  The amounts properly includible as the net investment of the above-mentioned companies in property and plant use and useful for providing interstate and foreign communication service;

B.  The fair rate of return required by the Bell System on the amounts of net investment determined pursuant to the foregoing;

C.  The amounts properly includible as expenses and taxes incurred by the above-mentioned companies in the provision of interstate and foreign communication service.

2.  The amount of operating revenues that are or may reasonably be expected to accrue in the foreseeable future from interstate and foreign communication services rendered by use of the plant and facilities, the costs of which are included in the net investment to be determined herein as a consequence of the particular MTT rate levels proposed  [*162]  by respondent in its filing of November 20, 1970, as well as those suspended herein, with particular reference to the projected gross revenues to be derived therefrom, the changes in traffic level and usage patterns anticipated as a result of the rate change, and the associated changes in expense level;

3.  The cost justification, demand factors and other pertinent considerations in respect to the structure and differing rate levels proposed for various classes of MTT service proposed by AT&T in its filing of November 20, 1970, as well as that included in the tariff schedules suspended herein;

4.  In light of our determinations as to the foregoing, whether the instant rate increases sought by the Bell System Companies are just and reasonable within the meaning of Section 201(b) of the Communications Act of 1934, as amended;

5.  Whether the specific charges for the above-mentioned service proposed by AT&T in its filing of November 20, 1970, as well as those suspended herein, will subject any person or class of persons to unjust or unreasonable discrimination, or give any undue preference or advantage to any person, class of persons, or locality, or subject any person, class of persons or locality to any undue or unreasonable prejudice or disadvantage within the meaning of Section 202(a) of the Communications Act of 1934, as amended;

6.  Whether the Commission should prescribe just and reasonable charges or maximum or minimum or maximum and minimum charges to be hereafter followed with respect to message toll telephone service, and, if so, what charges should be prescribed;

IT IS FURTHER ORDERED, That the hearings in this investigation shall be held at the offices of the Commission in Washington, D.C., at a time to be later specified and that the Examiner appointed to preside at the hearings shall conduct a hearing with the objective of issuing, if practicable and fully consistent with the requirements for a full and fair hearing, an Initial Decision no later than six months following the publication hereof in the FEDERAL REGISTER on the rate of return issue, and on such other issues as the foregoing schedule will permit.

IT IS FURTHER ORDERED, That upon issuance of its Final Decision herein, consideration will be given to what action, if any, should be taken by the Commission to effect such interim rate adjustments as may be warranted on the basis of the record as it is then constituted, and such further order or orders will issue as may be appropriate to this end;

IT IS FURTHER ORDERED, That the Petition for Intervention filed by the EEOC and the relief sought in its telegraph of January 14, 1971, is DENIED to the extent indicated herein;

IT IS FURTHER ORDERED, That the American Telephone and Telegraph Company and the Associated Bell System Companies are hereby made parties respondent in this proceeding, and subject to the procedures set forth in paragraph 13 above the Common Carrier Bureau is named a party hereto;

 [*163]  IT IS FURTHER ORDERED, That the petitions for Hearings and Suspension of the increased rates are GRANTED to the extent indicated herein and are in all other respects DENIED, and that the petitions for denial, declarations of unlawfulness or for similar forms of relief are DENIED;

IT IS FURTHER ORDERED, That the Commission will retain jurisdiction of this proceeding until such time as a final determination in the proceedings in Docket No. 19143.  In the Matter of Petitions Filed by the Equal Employment Opportunity Commission (EEOC) and Others is reached as to the effect, if any, of the alleged discriminatory hiring and employment practices of AT&T and the Associated Bell System Companies on the revenue requirements of the parties respondent herein.  Jurisdiction will also be retained until we are able to implement our conclusions in Docket No. 18128 insofar as they relate to the assignment of any revenue requirements of AT&T to MTT.








I am concurring in the Commission's order setting for hearing the proposed Bell rate increases of $545 million.  In light of the fact that rate increases of any magnitude are relatively unprecedented, and because of the unusual method the Commission has used to arrive at today's order, an explanation of my position may be useful.

The arithmetic of the Bell increases bears some explaining.  Earlier this year the Commission agreed to allow some costs to be "shifted" from "intrastate" to "interstate." Although the telephone network is a national integrated system, its regulation is divided between Federal and state jurisdiction.  As a result, plant and costs of the system are divided by mathematical formulae among the various jurisdictions.  These shifts amounted to $130 million in increased revenue requirements for Bell interstate, and it was fully expected that Bell would file rate increases to offset those increased costs.

Bell chose to use the opportunity, when filing for these offsetting increases, to try to make a case for a dramatic increase in its interstate rate of return, last formally fixed by the Commission in 1967 at 7.0 to 7.5%.

Bell has asked for a 9.5% overall rate of return.  (It should be noted that all the following figures are Bell's and there may be substantial question about their validity.) When Bell filed, it said that its present rate of return, projected for 1971, was 7.4%.  Based on projected traffic for 1971, a 9.5% rate of return would have yielded Bell $750 million in new revenue.  However, Bell estimates that a total of $270 million will not materialize because fewer calls are made when prices rise.  And Bell also estimates that $95 million will not materialize as consumers shift to lower cost (off-peak and direct dial) calling patterns.  Thus, Bell estimates the true increase in revenues from repricing as $385 million.  But Bell also expects to save $160 million in projected costs because of the lower number of calls and the less costly calling patterns.  Adding $160 million to $385 million results in a net increase in Bell's revenue of $545 million.

Based on Bell's then-estimated 1971 rate of return of 7.4%, and figuring that each $25 million in revenue is roughly equivalent to 0.1% rate of return, a grant of Bell's full increase would bring their earnings to roughly 9.5%, which is the level Bell feels they are justified in obtaining.  While the rate increase was pending, Bell submitted revised estimates which in their view showed that the rate of return for 1971 would be 7.2%, based on revised estimates of traffic growth.  Thus, a full grant of their rate increases -- under these new projections -- would bring Bell to a 9.3% overall rate of return.

At this point it would be useful to refer to the Commission's 1967 rate decision.  In its 1967 decision setting 7.0 to 7.5% as the reasonable range, the Commission considered the components of that rate of return -- return to debt and return to equity.  Assuming a 40% debt ratio * at an imbedded (average) debt cost of 4%, the 7.0 to 7.5% range would yield 9.3 to 9.8% return on equity, as follows:


* Bell has raised capital by selling stock (equity) and borrowing, by selling bonds (debt).  "Debt ratio" (in fact a misnomer) refers to the percentage of total capital that is debt.




40 percent debt at 4 percent



60 percent equity at 9.3 percent



60 percent equity at 9.8 percent







Now, with Bell's increasing debt ratio, obtained at relatively high debt costs, Bell finds itself with a 45% debt ratio at 6% inbedded debt cost.  In order to maintain the same return on equity, Bell must earn an overall rate of return in the range of 7.8%-8.u%.




45 percent dept at 6.0 percent cost



55 percent equity at 9.3 percent



55 percent equity at 9.8 percent







Thus, if Bell's actual present going rate of return is 7.4%, Bell would need $100 to $175 million just to maintain the level of equity earnings allowed in 1967.  If Bell's rate of return now is 7.2%, then Bell would need $150 million to $225 million to maintain the equity earnings, depending on what level the Commission wished to establish the range.  Bell applied for $545 million in rate increases.  How then did the Commission reach the present posture of permitting a $250 million increase and holding hearings on a new rate schedule while Bell deferred the effective date of the $545 million increase?

The Commission's traditional concept of its power to deal with rate increases is to suspend them for 90 days (at the maximum), with an "accounting order" providing for possible refunds to consumers if the higher rates are determined to be unreasonable.  However, the facts of this case suggest that the Commission had other remedies available to it.  In view of recent cases which have taken an expansive view toward the powers of regulatory agencies to fashion procedures to deal with industry-wide problems, particularly in the federal power regulation field, and given that the courts have tended to sustain FCC actions which have also been premised on broad Commission powers, arguably the Commission could have rejected the Bell filing with instructions that some lower level be filed while determinations on the reasonableness of the $545 million was litigated.  This view is premised on the following hypotheses:

The Commission has broad statutory powers;

The Courts have given liberal interpretations to such powers in acts similar to the Communications Act;

In this matter there are unprecedented increases in dollar amounts as well as on the returns being requested;

The impact of the requested rate increase is placed solely on users accounting for only 80 percent of the total revenues;

The FCC now has in process a proceeding designed to determine the proper relationship between the levels of charges for the various services provided by ATT including message toll service.

There is no purpose to developing fully the legal arguments on this question since the Commission decided not to follow such a course.

At the other end of possible Commission actions would have been a one-day suspension of the $545 million increase.  It would then have gone into effect immediately, pending the outcome of the Commission hearing, and subject to potential refunds to customers under an accounting order.  Or, the Commission could have ordered a 90-day suspension of the full amount.

The Commission unanimously chose to ask that Bell postpone the $545 million increase.  It permitted the company to file for $250 million, to go into effect promptly, but with consumer protection in an accounting order and the possibility of refund.  It should be noted that under Bell's most recent figures, $250 million will allow a rate of return of about 8.2% -- close to the level that would permit the same return on equity as in 1967 -- again using Bell's figures.  Thus, the course ultimately chosen by a unanimous Commission seemed far preferable to me to the likely alternatives of a Commission majority with a split vote.

Now that the Commission has decided to designate this case for hearing, I want to indicate the issues I believe must be explored before the Commission can made a determination on this massive rate increases for the Bell System.  It is clear what the Bell System wants the Commission to do.  It would prefer a quick rate of return hearing where rate of return is the only issue.  It wants questions of costs, rate base questions, and questions of pricing allocation to be deferred to the hopefully distant future.  I believe we simply must not fall into this trap again.  In 1965 the Commission promised to explore costs, pricing policies, and rate base-Western Electric relationships in a full rate investigation.  On those particular issues the passage of six years has shown no real results.  When questions of quick rate decreases are at stake for the consumer, an argument can be made that ignoring time-consuming issues may delay deserved rate decreases, and the Commission should move ahead quickly.  But now that there are price increases to be paid by consumers, at a time when the highest national priority should be directed to reducing inflationary price increases, the Commission can no longer ignore important rate issues.  I yield to no one in my encouragement of expedition in Commission proceedings, but I will not worship expedition at the expense of thoroughness when hundreds of millions of dollars of the public's money are at stake.

The Commission has expressed a hoped-for time schedule.  I would expect that our staff would immediately tell us if its resources are inadequate to do a thorough job, and that it would then be up to the Commission to secure those resources if our staff lacks them.  The Commission has indicated in its January 12 letter to Bell the issues it particularly wishes to explore in the upcoming hearing -- issues on allocations of revenue requirements among Bell's services, and a speedy resolution of the issues in Dkt. No. 18128 where those questions are already being litigated.  Other issues the Commission pointed to in its letter include Bell's estimate of the elasticity of the MTT service (message toll telephone, the "long distance" per-call pricing system), and its predictions on the increases in costs, particularly in maintenance expenses.  Naturally these are all issues the Commission must explore in the forthcoming hearing.

But there are other Bell costs which the Commission should evaluate before deciding that Bell can tax its subscribers an additional half billion dollars every year.  These should include Bell's advertising expenses, particularly expenses for institutional advertising and for service stimulation at times when Bell was already having problems meeting service demands.  Another category which should be examined is that of managerial expenses, and the possibility that the cost-plus contract of regulation has induced padding in this area.  And fundamental to any determinations about cost of capital, rate of return, and financing policies are evaluations of growth policies -- particularly in areas which might be considered peripheral to the provision of a basic telephone service.  The specter of other utilities, such as railroads like the Penn-Central, concentrating on expansion in exotic areas to the detriment of basic consumer services, should be explored in any expansion program as massive as that of the Bell System.

In my judgment, public utility regulation generally tends to be perceived by public, companies and commissions alike in a way that over-emphasizes profit ("rate of return") and under-emphasizes costs (and capital investment, or "rate base").  Bell earns a rate of return on its "rate base" (depreciated capital investment).  Subscribers' monthly bills are computed at levels sufficient to guarantee the company the recovery of all of its costs of operation plus a profit ("rate of return").  Of the total amount paid by the subscribers, something on the order of 80% represents costs rather than profits.

Assume the following ballpark figures for purposes of ease of illustration:

Rate base: $40 billion.

Rate of return: 7%.

Annual costs of operation: $10 billion.

Subscribers would then have to pay telephone bills sufficient to raise $10 billion costs plus $2.8 billion profit (7% of a $40 million rate base as a rate of return) or $12.8 billion.

Now assume the rate of return is increased 10%, from $2.8 billion to about $3 billion, and costs remain constant.  The total subscriber burden increases from $12.8 billion to $13 billion.

If, on the other hand, costs increase by 10%, from $10 billion to $11 billion (while the rate of return remains constant), the subscribers' burden goes from $12.8 billion to $13.8 billion.

Moreover, even the amount of profit is affected as much by the amount of the rate base as by the "rate" of return.  A 7% rate of return on $40 billion is $2.8 billion of annual profit.  A 6% rate of return on $40 billion is $2.4 billion.  But a 7% rate of return on $30 billion is only $2.1 billion.

The only point of this discussion is that it is dangerously shortsighted for this Commission to be willing to accept the company's suggestion that it pass upon a half-billion-dollar annual increase by examining only the issue of rate of return while ignoring (or continuing to postpone for subsequent consideration -- which is the same thing) the 80% of the subscribers' burden represented by the company's unexamined multi-billion-dollar levels of costs, and the tens-of-billions-of-dollars of rate base to which the simple rate-of-return percentage would be applied.

The Equal Employment Opportunity Commission petition charging that Bell discriminates in its hiring practices is an issue the Commission cannot duck, no matter how strongly Bell cries "foul." EEOC's position is that no rate increases may be found by the Commission to be in the public interest while Bell discriminates in employment.  There is some concern by the Commission on the relevance of this issue to what is construed as the narrow issue of rate levels.  I do not now reach that question because I do not need to.  I would establish a separate proceeding, to be resolved concurrently with this one, to examine EEOC's charges.  EEOC should be permitted to file a brief subsequently, after the evidentiary proceeding, showing how its complaint is relevant to the Commission determination on the proposed rate increase.

It should also be noted that half of Bell's direct case in this proceeding, Bell statements 10 through 16, are directed toward justifying the present vertically integrated relationship with Western Electric.  This is another terribly important issue that the Commission promised it would explore in its 1965 rate investigation, but which it has never considered.  I do not believe the Commission can any longer shirk its duty in this area.  Vertical integration has increased in the domestic common carrier industry since 1965.  I believe the Commission must now open a new proceeding and undertake a full market study of vertical integration, particularly in this era of changing rates of technological innovation.  The Department of Justice has commented in another proceeding before the FCC:

The Bell System has traditionally relied on a captive equipment supplier, Western Electric, and has continued to rely extremely heavily on that supplier, thereby insuring that virtual nationwide monopoly in public message telephone service to be repeated in the field of telephonic equipment, whether or not there was any economic justification for such concentration at the manufacturing level.

DOJ Reply Comments in Dkt. No. 18920, p. 3 (emphasis supplied).  Under these circumstances, the question of vertical integration in the domestic common carrier industry is one the Commission simply must examine fully, particularly when the issues are related to the Bell half-billion-dollar rate increase.  Even Bell acknowledges the crucial importance of this relationship by devoting so much of its direct case to it.  A full market study of vertical integration should again proceed concurrently with the other proceedings related to the rate increases -- Dkt. No. 18128 on pricing; the EEOC proceeding; and the rate of return/cost justification proceeding.

For this Commission to do otherwise seems to me to leave it open to the charge that it acquiesces in Bell's setting the rules for Commission action, rather than the Commission setting the rules to protect the public.  In short, I believe the least the Commission can do on a rate increase of this magnitude is to conduct a proceeding no less thorough than some of those conducted by the state commissions -- for example, the California investigation in 1964 of Pacific Telephone.  Pacific Telephone & Telegraph Co., 55 P.U.R. 3d 513 (1964), aff'd in major respects 62 Cal. 2d 634, 58 P.U.R. 3d 229 (1965). I do not see how the Commission can maintain that it has done an adequate job of protecting the public without such an effort.  This is particularly so when it is apparently this Commission's destiny to preside over perhaps the largest proposed public utility rate increase in history.

Perhaps the Commission does not have the resources to undertake the job it should.  If true, then an estimate of the resources required should be made and a candid request for those resources made.  (And, of course, any "public interest" intervenors ought to be specially welcomed, rather than discouraged as has so often been the case in the past.) But I cannot believe that with a half-billion dollars at stake, the representatives of the public -- who must pay these prices -- will not give serious consideration to the Commission's needs.  And if statutory authority is thought to be lacking to protect the public and its own regulatory processes, I would expect the Commission to seek that authority with vigor.

It might be argued that pursuing these issues would risk "delays." I have heard these arguments, and I am not persuaded.  If an adequate hearing takes a little longer, the Commission has ample power to protect the interests of all parties, including Bell.  I would welcome a reasoned presentation as to why the Commission should not move in the manner I have suggested.  And I would especially like to hear any reason why an intervening six years have decreased the urgency of the issues the Commission should explore.

I fully support the efforts to provide more vigorous representation of consumer interests in these proceedings by our staff.  Formerly the Common Carrier Bureau has had the unenviable role of presenting a case to an examiner as an advocate, and then coming around to counsel the Commissioners privately as their advisor.  This may have been illegal or even unconstitutional.  At the very least, it was unwise and unfair -- to everyone: the consumer, the company, the Bureau and the Commissioners.  Now a Bureau task force is to be "separated" from the Bureau and the Commissioners for the purpose of this hearing.  The task force will be free to present as strong a case for the consumer as possible.  All issues can be fully explored.  The company can know that the same Commission employees who are functioning as advocates will not subsequently be privately advising the Commissioners.  I expect to see tangible effects of these procedural changes in the intensity and quality of advocacy by the Commission's staff in this case, and believe the Chairman is entitled to some credit for bringing about unanimous Commission support for this long-overdue procedural reform.




JANUARY 19, 1971.


Hon. WILLIAM H. BROWN III, Chairman, Equal Employment Opportunity Commission, Washington, D.C.


DEAR MR. BROWN: This is in response to your telegram of January 14, 1971, with regard to the tariffs filed by American Telephone and Telegraph Company for increases in rates for interstate long distance message telecommunication services (MTT).  I am enclosing a copy of the Commission's letter of January 12, 1971, which sets out the actions taken by the Commission.

In response to your first and third numbered paragraphs, the Commission will act in the near future on your petition of December 10, 1970, which requests, inter alia, that the Commission suspend AT&T's proposed rate increase, conduct a hearing, allow EEOC to intervene, and declare the rate increases illegal until AT&T's operating companies have ceased their alleged unlawful discriminatory employment practices.  You will, of course, receive a copy of the Commission's order on your petition as soon as it is released.

As to your request for documents and other records in paragraph number 2, there was no transcript of Commission proceedings.  We are enclosing a copy of AT&T's response to our letter of January 12, 1971.  Any other correspondence which may be received or sent relating to our letter of January 12 will be available for inspection at the Commission.  Item 2 also requests a report of all ex parte telephone calls, meetings and other communications that took place between members of the Commission and the officers of the applicant.  Informal discussions with a carrier filing a tariff revision are normal and routine, and are customarily held to inform the Commission fully on all aspects of the proposal before it.  Such informal discussions are in accord with our regulations which were adopted on July 7, 1965 (FCC 65-598, 30 F.R. 9266) pursuant to the recommendation of the Administrative Conference of the United States.  Thus, the Commission's rules governing ex parte presentations (Sections 1.1201-1.1251, 47 CFR 1.1201-1.1251) permit informal discussions between the Commission and a common carrier filing for a rate increase until such time as the matter is designated for hearing under Section 204 of the Communications Act, 47 U.S.C. Section 204.  See Section 1.1207 of the rules, which provides that the prohibitions against ex parte presentations are applicable to rule making proceedings which are required by statute to be decided on the record after hearing only from the time such proceedings are designated for hearing.  A hearing on a rate increase under Section 204 comes within that regulation since it constitutes rule making under the Administrative Procedure Act.  Therefore, so long as a filing for a rate increase has not been designated for hearing, there is no impropriety in discussions between the Commission and the carrier, nor any right in any persons to be a party to such discussions or to be apprised of their content.  A petition to deny invokes the prohibitions against ex parte presentations only where there is involved an application filed under Section 308 of the Communications Act.  See Section 1.1202(b) (1) of the rules.  Finally, I would also note that our regulations on ex parte matters are appreciably more comprehensive and restrictive than the statutory provision governing such matters, which has no application to tariff proceedings (47 U.S.C. 409(c) (1)).

As to your paragraph number 4, as provided in the Commission's letter of January 12, AT&T has been granted permission to file revised tariffs, to be effective on not less than seven days' notice, providing for increases in MTT rates that will produce additional annual net earnings before income taxes not to exceed $250 million, rather than the $545 million provided by its tariff filing.  (The revised tariffs were filed January 14, 1971.) As set out in the enclosed copy of our letter, the Commission intends to conduct an expedited hearing with respect to the lawfulness of such rates, and to require that all collections under such rates be subject to accounting and refund by the carriers.  As to the effective date of the revised tariffs, the Commission provided that in determining the length of the period of suspension to be ordered under Section 204, due regard will be given, among other factors, to the January 1, 1971, effective date of the revised separation procedures prescribed in Docket No. 18866, and immediate adverse effects thereof on the company's level of interstate earnings.

As to paragraph number 5, AT&T filed its revised tariffs on January 14, 1971, specifying an effective date of January 21, 1971, and your General Counsel's office was notified of this filing on the same day.  On January 15, the Commission released a public notice of this filing.

As to paragraph number 6, all proceedings of the Commission on the tariffs will be public.  However, as is the case with all meetings at which our Commissioners make their decisions, such meetings are not open to the public, nor is the public entitled to information regarding such deliberations which are quasi-judicial in nature.


DEAN BURCH, Chairman.

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