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