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. 18866
RECOMMENDED REPORT AND ORDER OF FCC-NARUC JOINT BOARD ON JURISDICTIONAL SEPARATIONS
26 F.C.C.2d 248
Adopted October 27, 1970
Released October 27, 1970
BY THE JOINT BOARD:
COMMISSIONER SYMONS CONCURRING AND ISSUING A STATEMENT; COMMISSIONERS BARTLEY AND BLOOM ABSENT AND INFORMALLY APPROVING THE ADOPTION OF THE RECOMMENDED REPORT AND ORDER. COMMISSIONER JOHNSON DISSENTING AND ISSUING A STATEMENT.
1. The Commission instituted this proceeding on May 20, 1970, by the adoption of a Notice of Proposed Rule Making and Order Convening Joint Board to consider changes in Part 67 of the Commission's Rules relating to jurisdictional separations. The Order also convened a Joint Board pursuant to the provisions of Section 410 of the Communications Act of 1934, as amended, to recommend to the Commission the change or changes in separations procedures it believes should be made the subject of rule making proceedings. The Order further provides that the Joint Board shall prepare a recommended decision for the Commission's consideration with respect to the issues involved in such further notice of proposed rule making adopted by the Commission in this proceeding. In accordance with the procedures established by the Commission's Order, the Joint Board, upon consideration of the Report and Recommendations of its Technical Staff Committee, on August 13, 1970, submitted certain proposed changes, identified as the Ozark Plan, in Part 67 of the Commission's Rules which it recommended be made the subject of rule making in this proceeding. Acting upon the Joint Board's recommendation, the Commission on August 26, 1970, adopted a Further Notice of Proposed Rule Making requesting comments from interested parties on the proposed revision in the Commission's Rules.
2. Comments of interested parties in response to the Further Notice of Proposed Rule Making were due on or before September 25, 1970. By its Order of September 30, 1970, the Commission provided that reply comments be filed on or before October 14, 1970. Timely comments have been filed by the American Telephone and Telegraph Company (AT&T); the Independent Telephone Group (consisting of United States Independent Telephone Association, GT&E Service Corporation, United Utilities, Inc., Continental Telephone Service Corporation, National Telephone Cooperative Association and OPASTCO); the National Association of Regulatory Utility Commissioners (NARUC); and the California Public Utilities Commission (California).Reply comments have been filed by the AT&T; the Independent Telephone Group; and California.
3. The comments of AT&T, the Independent Telephone Group and the NARUC fully support the proposed Ozark Plan and urge the Commission to amend Part 67 of its Rules so as to adopt the Ozark Plan revisions for use in jurisdictional separations. California, in its comments, alleges that the disposition of this matter is unlawful on procedural grounds and that there are a number of defects in the proposed procedures with respect to both subscriber plant and local dial switching equipment. AT&T and the Independent Telephone Group oppose California's position in their reply comments whereas California, in its reply comments, opposes certain statements in AT&T's comments and introduces extraneous comments regarding proposed legislation which is not pertinent to this proceeding. California's position appears ambiguous and contradictory in that it alleges the procedures used in this proceeding are unlawful on the one hand whereas it endorses adoption of the Ozark Plan with certain modifications on the other hand. We shall discuss California's allegations more fully in the subsequent sections of this report.
4. California alleges that on procedural grounds the proposed disposition is unlawful because: (a) the Joint Board, as conceived, selected and constituted, fails to meet the provisions of Section 410 of the Communications Act of 1934, as amended, principally because it does not have a representative from each of the 49 states affected; (b) Notices of Proposed Rule Making adopted on May 20, 1970, and August 26, 1970, do not contemplate an evidentiary hearing as required by Section 221(c) of the Communications Act of 1934, as amended; and (c) dismissal of the petition of NARUC for proposed rule making dated December 9, 1969, File No. RM-1543 is arbitrary, unreasonable, and without good cause.
5. We find California's allegations as to procedural defects herein to be without merit. The first objection is that contrary to the provisions of Section 410 of the Communications Act the Joint Board is not composed of a member from each state affected by the proceeding. We believe that the Commission's implementation of the provisions and objectives of Section 410 is entirely reasonable and appropriate within the context of the nature of the problem with which the Joint Board is concerned. It is obvious that it would be a practical impossibility to convene a Joint Board composed of a representative of each of the 49 jurisdictions affected and at the same time to expect such a Board to accomplish the objectives of this proceeding in a reasonably expeditious and orderly fashion. We feel that Section 410 contemplates that the Commission should use appropriate discretion to employ the Joint Board procedures in a manner compatible with the nature and substance of the particular issue. Of equal importance, it should be noted that California is in no way prejudiced by the composition of the Board. A California Commissioner is a member of the Board. Members of the California Commission staff participated actively in the deliberations of the Board's Staff Committee. Having heretofore participated actively in the proceedings at both the Board and staff level, California cannot be heard, at a point where it appears that its particular views may not be adopted, to object to the composition of the Board, particularly in the absence of any prejudice to it.
6. In any case, regardless of whether the Joint Board be characterized as having been convened pursuant to Section 410 of the Act or other statutory provisions such as Section 4(j), we see no procedural defect in this proceeding as a whole. In essence, this is an ordinary Commission rule making proceeding authorized under Section 4(i) of the Act. Procedures are governed by Section 553 of the Administrative Procedure and Judicial Review Act and such procedural requirements have been followed.
7. California's second procedural objection is to the lack of an evidentiary hearing. While there may be contexts in which an evidentiary hearing is appropriate in connection with separations matters, in the instant proceeding there is no controverted issue of material fact to warrant an evidentiary hearing. In fact, California, while objecting to the absence of evidentiary hearings, makes no specific request for such proceedings and no offer of proof.
8. California's third procedural objection is to the dismissal of the Petition for Proposed Rule Making filed by the NARUC (RM-1543) dated December 9, 1969, which California characterizes as 'arbitrary, unreasonable, and without good cause.' We believe the reasons for dismissing that petition without prejudice are sufficient as set forth in the Commission's Further Notice of Proposed Rule Making and need not be repeated here. We note that NARUC, the original petitioner, does not object to that action.
9. As noted in the Commission's Notice, questions have been raised regarding the presently prescribed procedures for allocating subscriber plant costs to interstate operations because of (a) the high level of costs assigned to short haul interstate toll calls in relation to the rates for such messages, and (b) the allocation of different amounts of costs to interstate calls of the same length of haul and duration depending on the point of origin of a particular call, even when the average subscriber plant costs per minute of use in both study areas are identical. The fact that there is no rational correlation between short haul costs and rates is a consequence of several factors. A principal factor is inherent in the present separations procedures because of the use of the nationwide interstate subscriber line use (SLU) factor as a part of the present procedures for the allocation of subscriber plant costs. Further, the use of this nationwide factor results in the failure of the present procedures to appropriately reflect the widely varying deterrent effect of the toll rate schedules as the distance changes. As a result, the present procedures operate to inflate the costs of short haul toll. Thus, they cannot appropriately be used for the separation of intrastate operations between exchange and intrastate toll which is predominantly short haul. Nor can they be used to ascertain the legitimate toll costs of the various carriers for settlement purposes.
10. The proposed Ozark Plan is designed to alleviate the problems caused by the presently prescribed procedures for the allocation of subscriber plant costs. The Ozark Plan provides for the assignment of subscriber plant costs to interstate by use of a two-part factor. The first part develops the basic subscriber plant cost of an exchange call and assigns to each interstate holding time minute-of-use the same cost as is assigned by the formula to an exchange minute-of-use. This is accomplished by multiplying the study area interstate SLU factor by the nationwide ratio of (a) the cost per minute of use of the subscriber plant assigned to exchange to (b) the cost per minute of use for both exchange and toll traffic. Studies made by the industry indicate that initially this ratio will be 85% so that the first part of the Ozark Plan subscriber plant factor will be 85% of the study area interstate SLU factor. The second part of the subscriber plant factor is twice the study area interstate SLU factor times the composite station rate (CSR) ratio. The CSR ratio is (a) the average composite interstate initial 3 minute station rate at the study area average length of haul divided by (b) the composite average total toll initial 3 minute station rate at the nationwide average length of haul for all toll traffic for the total telephone industry. This additive is to recognize the deterrent effect of the interstate toll rate schedule specifically related to interstate calls originating in each study area. The first part of the proposed plan differs from the present method in that 85% (initially) of the study area SLU factor will be used in the first part of the formula, rather than 100% of study area SLU factor which is used in the present procedures. The second part of the proposed formula differs from the present method in that it replaces the nationwide average interstate SLU factor by adding a second modified study area interstate SLU factor.
11. It is our view that the changes in procedures for the allocation of subscriber plant costs contained in the Ozark Plan will correct the foregoing infirmities and will provide a more equitable separation of such costs. The use of the nationwide average interstate SLU factor in the present formula assigns the same percentage of subscriber plant costs in all study areas. This does not accomplish the intent of the Commission's prior decisions wherein the Commission has stated that the additive factor is to compensate for the deterrent effect of the interstate toll rate schedule on interstate use of subscriber plant. This factor is not related to the amount of interstate use in a particular study area nor to the lengths of haul of interstate calls originated in the study area. Thus, it is apparent that the nationwide average factor does not appropriately reflect the deterrent to interstate use of subscriber plant in any particular study area. The modified study area SLU factor provided for in the Ozark Plan, as a substitute for the nationwide average SLU factor, is specifically related to the deterrent effect of toll rates on interstate use in each study area in that it is related directly to the characteristics of interstate calls in the study area with respect to both distance and time in use. The application of the CSR ratio has the effect of increasing the assignment of cost to interstate as the length of haul of interstate calls increases. It is apparent that this gives more rational accord to the deterrent effect of the interstate toll rate schedules than does the flat percent added by the application of the nationwide average interstate SLU factor.
12. The application of the 85% local cost factor to the study area interstate SLU factor in the first part of the Ozark Plan formula is an improvement over the present formula in that it assigns the same cost per minute of use to exchange, intrastate toll and interstate toll. Inasmuch as this part of the formula is designed to assign cost based on actual use it is proper that the same costs per minute of undeterred use be assigned each of the services.
13. California contends that the Ozark Plan revisions to subscriber plant separations are defective because: (a) the provisions produce a substantial change in subscriber plant separations procedures with no demonstration of 'changed conditions' which was required by the July 5, 1967 FCC Order; (b) the change in subscriber plant separations fails to achieve its stated objective of reducing short-haul interstate costs and increasing long-haul interstate costs for total interstate traffic for each state; (c) distribution of revenue requirement benefits by states is very erratic, with a number of states negative and disproportionately large benefits to several smaller states; (d) agreement of AT&T and USITA to use this plan for settlements is irrelevant in considering the proper separations method to use for interstate-introstate jurisdictional purposes; (e) it is not proper to apply the so-called 'local cost' penalty factor of 85% to the subscriber line usage (SLU) factor; (f) if, despite its obvious drawbacks, the so-called 'local cost' factor is used, it should be 90% rather than 85%; (g) no evidence is suggested to nullify the reaffirmed findings of the FCC in Docket No. 17975 that the nationwide SLU factor is an essential ingredient of subscriber plant separations; (h) use of the CSR ratio twice in the separations formula compounds the unreasonable and unlawful effect of separations based on revenues or rates; (i) the CSR ratio is further deficient in that it assumes that the deterrent to interstate usage is directly proportional to the interstate rates alone and the CSR ratio squared provides a better correlation to the traffic deterrence index than the first power of the CSR ratio; and, (j) the Ozark Plan provides for only a single additive factor rather than two diverse additives which would make the plan more equitable in its application to the various study areas and the use of a single additive factor is in conflict with the Commission's findings in paragraph 30 of the January 29, 1969 decision in Docket No. 17975 that two additives should be used.
14. Contrary to the assertion of California, there is nothing in the Commission's Interim Decision and Order of July 5, 1967, Docket No. 16258, which would preclude the Commission from instituting proceedings at any time in order to introduce improvements or refinements in separations procedures. The Commission is not obliged to predicate such actions only upon a demonstration of 'changed conditions' as suggested by California. Further, in the Report and Order of January 29, 1969, Docket No. 17975, the Commission said, 'In fact the Commission will look to these joint studies as the prime forum for continued analysis of separation procedures and the source of proposals for their refinement, improvement or modification in light of actual experience and technological changes.' (Emphasis added)
15. California contends that the change in subscriber plant separation methods contemplated by the Ozark Plan would not achieve its stated objective of reducing short-haul interstate costs and increasing long-haul interstate costs for total interstate traffic for each state. The Commission's August 26, 1970 Notice, and the attached Staff Committee report list a number of considerations in support of a change in the present subscriber plant procedures. The Commission's Notice does not define the objectives of the Ozark Plan as being limited to '... reducing short-haul interstate costs and increasing long-haul interstate costs for total interstate traffic for each state.' However, it is obvious that the application of the nationwide average interstate SLU factor in the present procedures has no relationship to cost related to length of haul, whereas the modified study area SLU factor, because of the effect of the CSR ratio, increases the assignment of costs as the length of haul increases. California does not attempt to dispute the graphic presentation shown on Attachment 2 of the Staff Committee's report which illustrates clearly that the Ozark Plan does reduce the costs assigned to short haul calls and increases the costs assigned to long haul calls. This is further demonstrated by an analysis of Attachments A and B to AT&T's reply comments. We agree with the analysis in the reply comments of the Independent Telephone Group and AT&T which amply demonstrate the fallacy of the interpretation California places on the data attached to their comments to support their contentions. Upon the basis of these considerations, we conclude that this contention of California is without merit.
16. The contention by California that the distribution by states of revenue requirement benefits is very erratic, with a number of states negative and disproportionately large benefits to several smaller states is based on the invalid premise that the Ozark Plan subscriber plant procedures were designed to uniformly increase interstate revenue requirements rather than to meet the objectives discussed in the Commission's Notice. As the Commission has noted in previous decisions regarding jurisdictional separations, where corrective action is being taken to remove inequities in the existing procedures it is inevitable that the resultant transfers of interstate revenue requirements will not be consistent in all states. This contention of California therefore has no relevance as to the merits of the Ozark Plan.
17. We agree that the agreement of AT&T and USITA upon use of the Ozark Plan for settlements is not controlling as to the usability of such procedures for interstate-intrastate jurisdictional separations purposes. However, we cannot ignore the concern that the present procedures cannot appropriately be used for other separations purposes such as allocation of costs between exchange and intrastate toll operations and for settlements among the carriers. The fact that AT&T and USITA have agreed to use the Ozark Plan for settlement purposes for both interstate and intrastate toll, tends to remove those questions with respect to the Ozark Plan.
18. California contends that the 85% so-called local cost factor (characterized as a 'penalty factor' by California) should not be applied to the SLU factor, and if it is used it should be 90% instead of 85%. This contention is based apparently on the assumption that the factor was developed to reduce the assignment of revenue requirements to interstate. This assumption is incorrect. We have stated in paragraph 12 the reasons we believe the use of the 85% factor as contemplated by the Ozark Plan is appropriate. We agree with the analyses supporting the 85% factor as set forth in the reply comments of the Independent Telephone Group and AT&T wherein it is demonstrated that the use of the 85% factor is a reasonable method of accomplishing the desired objective of assigning the same level of costs per undeterred minute of use to each of the services.
19. With respect to California's contention that no basis exists for nullifying use of the nationwide SLU factor in subscriber plant separations, such contention is refuted by the Staff Committee of Experts which states in its report that the problems with respect to the present method of allocating subscriber plant costs '... stem from the use of a nationwide interstate factor as part of the present formula for the allocation of subscriber plant costs.' It is evident, as AT&T points out in its comments, that the nationwide industry-wide SLU factor does not make allowance for the time in use of the subscriber plant in any study area nor does it reflect the relative deterrent effect on such use of the toll rates which apply in that area.
20. California contends that the use of the CSR ratio twice in the separations formula has a compounding adverse effect of separating costs on the basis of revenues or rates. This contention rests on an erroneous assumption or a misunderstanding concerning the nature and use of the CSR ratio. The basic concept of the interstate toll additive factor is that the interstate toll use of subscriber plant would be a larger percent of total use if it were not for the deterrent effect of the interstate toll rate schedule. If this concept were unreasonable or unlawful, as California submits, the entire interstate toll additive should be eliminated. We feel that the addition of a second modified study area SLU factor which entails the use of the CSR ratio a second time in the formula is an appropriate substitute for the nationwide average SLU factor. As we concluded in paragraph 11, the modified interstate SLU factor recognizes the characteristics of the deterrent effect of the interstate toll rate schedule as distance increases. Therefore, its use twice as contemplated by the Ozark Plan is justified.
21. California contends that the CSR ratio squared provides a much better correlation to the 'traffic deterrence index' than the first power of the CSR ratio. From the comments submitted in the proceeding, it is apparent that this suggested approach is subject to substantial questions as to its validity. In any event, the Staff Committee has not had an opportunity to explore this proposal in any depth and the Joint Board recommended that this proposal, as well as other pending separations proposals, be referred to the NARUC Commissioners Committee on Communications for further disposition or study. The Commission's Notice further indicated that this procedure was in accord with the Commission's prior orders on separations matters wherein it stated that it would look to joint NARUC-FCC studies as the primary source of proposals for suggested revisions in separations procedures. Therefore, we will defer any consideration of California's proposal until it has been appropriately evaluated by and reported on by the Staff Committee for consideration and action of the Joint Board.
22. California is in error in its contention that the use of a single additive factor is in conflict with the Commission's findings in Paragraph 30 of the January 29, 1969, decision in Docket No. 17975. This paragraph does not make a '... finding that two additives should be used...' as stated by California. Furthermore, California added emphasis in the wrong place in the quoted portion of paragraph -- 'Thus, we believe there is merit to the criticism of the use of a single uniform additive for all study areas.' (California's emphasis) Emphasis was added to the word 'single,' whereas it should have been added to the word 'uniform,' since the Commission's concern was with the failure of the procedures to reflect differences among study areas as to the impact of the deterrent effect of the interstate toll rate structure. Thus, the Commission stated '... we recognize that the application of the same factor in each and every study area can produce some questionable results in particular study areas.' (Emphasis added) It is clear that the Commission was making a point regarding a 'uniform' or 'same' factor rather than a 'single' factor.
LOCAL DIAL SWITCHING EQUIPMENT
23.On the basis of the studies conducted by the Staff Committee and the industry, we are satisfied that there is a demonstrated need for revision of the present procedures applicable to the separation of the costs of local dial switching equipment. To the extent that the present procedures for allocating local dial switching equipment assumes that all such equipment is traffic sensitive, we believe such procedures are deficient. Studies conducted by the industry under the aegis of the Staff Committee clearly identify that portions of such equipment are non-traffic sensitive and support a conclusion that the same principle of allocation as is applied to subscriber plant should be accorded to the non-traffic sensitive portion of the local dial switching equipment. This principle is encompassed in the Ozark Plan.
24. Under the present procedures, all local dial switching equipment is allocated on the basis of relative use with toll minutes of use weighted by a factor of 1.5 to reflect the fact that the cost per toll minute of use is higher on the average than the cost per exchange minute of use. The proposed revisions provide for the separation of this equipment between traffic sensitive and non-traffic sensitive plant. The non-traffic sensitive portion, which averages about 25%, would be allocated between interstate and intrastate by the use of the subscriber plant factor developed as described in preceding paragraphs. The traffic sensitive portion would be allocated between interstate and intrastate on a relative minutes-of-use basis as under the present procedure but the weighting factor to reflect the higher cost per minute of use for a toll call compared to an exchange call would range from 1.3 to 2.3 depending on the type of equipment in the office, the size of the office, and whether or not a majority of the traffic originated in the office also terminates in the office.
25. California contends that the Ozark Plan ignores the inherent function and purpose of local dial switching equipment which demands that the entire central office be allocated on the same basis as subscriber plant. California alleges several factors in support of their position. These allegations are generally the same as those used to support the NARUC petition of December 9, 1969. The Commission's discussion of these allegations as set forth in its Further Notice of Proposed Rule Making are sufficiently dispositive of these allegations and need not be repeated here. Further, as previously recommended by the Joint Board, the proposal contained in the original NARUC petition should be referred to the NARUC Commissioners Committee on Communications for further disposition or study.
26. California contends that the use of 25% as the 'non-traffic sensitive' portion of local dial switching equipment is based on the 'arbitrary definition promoted by the Bell System' and that nearer 50% is non-traffic sensitive. We note that the 25% non-traffic sensitive factor is an average based on detailed analyses of the costs of local dial switching equipment in about 200 local dial offices selected on a sampling basis so as to be representative of the various types and sizes of offices. These analyses were made at the request of the Separations Subcommittee and were based on a definition of non-traffic sensitive local dial switching equipment as comprising the equipment in a local dial office which is determined by the number of subscriber lines in the office and which is not affected by the volume of traffic handled in the office. California presents no proof or support for their contention that nearer 50% of the local dial switching equipment is non-traffic sensitive. Based on the foregoing, we conclude that the use of 25% as the average non-traffic sensitive portion of local dial switching equipment is reasonable at this time.
27. California contends that the sliding scale of central office traffic weighting varying from 1.3 to 2.3 is unreasonably refined and penalizes efficiency in central office design and construction, and that no information has been presented to the Staff Committee, the Joint Board or to the FCC detailing either the basis or the effects of using such individual weighting factors. California suggests that a uniform weighting factor of 2 be used. As was indicated in the Staff Committee report, the Separations Subcommittee requested industry representatives to prepare a study of the appropriate weighting factors to apply to toll minutes of use in apportioning the traffic sensitive portion of such plant. The results of these studies indicated that the 1.5 weighting factor presently used in the allocation procedures for all local dial switching equipment was not appropriate for application to only the traffic sensitive portions of such plant. The studies support the application of weighting factors ranging from 1.3 to 2.3, depending upon the size and characteristics of the offices, to the traffic sensitive portion of such plant. The studies and the results thereof were reviewed by the Staff Committee at meetings in which the California staff was represented. California has presented nothing to substantiate its allegations nor its suggested use of a weighting factor of 2. We therefore conclude that there is no basis in fact for these contentions of California.
28. We have given careful consideration to the report and recommendations of the Joint Board's Technical Staff Committee, the prior recommendations of the Joint Board, the Commission's prior decisions regarding separations matters and the comments and reply comments filed in this proceeding. We have also taken note of AT&T's suggestion for revision of the procedures applicable to inter-exchange circuit plant and other proposed revisions set forth in the Staff Committee report. It is the Joint Board's recommendation that these proposals be referred to the NARUC Commissioners Committee on Communications for further disposition or study.
29. In accordance with all of the foregoing we conclude that the revisions to the separations procedures set forth in the Ozark Plan should be adopted. [FN1] We further conclude that the present procedures for the allocation of subscriber plant and local dial switching equipment, in the separation of investment, operating expenses, taxes and reserves between the interstate and intrastate operations of telephone companies should be revised in accordance with the proposed wording as set forth in Appendix C of the Further Notice of Proposed Rule Making, Docket No. 18866, of August 26, 1970. Accordingly, it is recommended that the following form of order be adopted:
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, effective January 1, 1971, the 1971 Addendum to the Separations Manual as contained in Appendix A hereto is adopted as an amendment to the NARUC-FCC Separations Manual, which is incorporated by reference into Part 67 of the Commission's Rules.
IT IS FURTHER ORDERED, That this proceeding shall continue in an open docket until further order of the Commission.
FCC-NARUC JOINT BOARD ON JURISDICTIONAL SEPARATIONS, DEAN BURCH, Chairman.
CONCURRING OPINION OF COMMISSIONER WILLIAM SYMONS, JR.
In my opinion it would have been preferable to have an alternative to the Ozark Plan considered by the Joint Board as was suggested by Chairman Burch at the August 6, 1970 meeting. I support the Ozark Plan because it does result in substantial benefits to most states. However, the Ozark Plan fails to go far enough in causing a transfer of costs from intrastate to interstate operations. It is may position that the modifications proposed by the California Public Utilities Commission's comments, dated September 23, 1970, should be given consideration by the Federal Communications Commission because these changes would result in the following improvements to the Ozark Plan:
1. Cause shifts in revenue requirement by states in better relationship to the average length of interstate toll haul of the states.
2. Cause a more equitable spread of benefits to avoid having several relatively small states receiving inordinately large benefits as now results from the unmodified Ozark Plan.
3. Cause a greater total magnitude of shifts of intrastate costs to the interstate operation (at 1969 level would add $69 million).
4. Result in a more realistic treatment of local central office equipment to recognize this equipment's subscriber sensitive characteristics by utilizing the usage definitions originally proposed by the United States Independent Telephone Association.
WILLIAM SYMONS, JR., Commissioner, Member, NARUC-FCC Joint Board.
The Federal Communications Commission today guarantees that consumers who use the interstate telephone system will soon be paying as much as $300 million in increased prices for telephone service. There is no demonstration of commensurate public benefit, and I dissent.
Once again a cozy arrangement between the FCC, the state regulatory commissions and the telephone industry works to increase costs for the general public. The issue this time is 'separations' -- the allocation of telephone company costs between 'interstate' and 'intrastate' telephone charges. In order to understand what is happening here today, it is necessary to explain -- simply and briefly -- the meaning of separations and the chronology which has led to today's decision.
The telephone plant for our nation's communication's system is an integrated whole. It is, necessarily, a nationally interconnected system of 120 million telephones. It is not, however, regulated as a national entity. In order for different jurisdictions (state commissions and the FCC) to apply their regulatory authority, the value of the investment in the telephone plant, and the costs of service, must be divided between the states ('intrastate') and the federal government ('interstate'). These allocations are inherently arbitrary. In point of fact, there is no geographical area called 'interstate.' All telephone plant is, necessarily, located within some state. For example, the familiar telephone set found in most homes is used for interstate calls, for intrastate toll calls, and for local exchange calls. The FCC regulates interstate service, state regulatory commissions generally regulate intrastate toll and local exchange service. The home telephone is used for all three types of calls. How are the costs of this equipment to be allocated to each jurisdiction when the equipment is used jointly for each service? That is what 'separations' is all about. The criterion that has been adopted is relative use.
The allocation of the value of the equipment between the states and the FCC depends on how the facility is used. The formula for allocation has been modified in different ways to take account of the fact that much of the time the equipment is idle, and not used by any service. The formula has also been modified to take account of the fact that 'use' is inhibited for long distance toll calling because each toll call means additional costs to the consumer, while local exchange calls are marginally cost free.
Today's action, which shifts roughly $130 million in costs from intrastate to interstate jurisdictions, results from a reformulation of the methods for accomplishing this cost allocation, and by adding additional equipment to the new formula -- the so-called local dial switching equipment. The arbitrariness of the allocations is easily seen. Equally appealing arguments can be made for assigning the total cost of the equipment under study here to interstate entirely, or to intrastate toll, or to local exchange service. The costs might be split equally three ways. Or strict use might be the only allocations formula, which if applied here, would shift cost to intrastate. Marginal cost attribution theories would reach different results, if attempts were made to estimate the specific incremental costs of plant in state jurisdictions which are incurred only because that plant is used for long-distance interstate communications.
Other theories of distinctions between common or joint costs, or possible cost allocations based on principles developed in connection with TVA joint development projects, could again lead to different results.
In sum, any number of alternative allocation schemes would be of equal intellectual rigor. The mathematical formulae are only so much obfuscation and diversion. The only question that makes a hill of beans is what public policy consequences will result from choosing among the alternatives. And yet that question the majority ignores entirely in this proceeding. To understand why the public interest has been ignored in this proceeding, one must examine its chronology and the political forces that have shaped it.
In late 1969, after a round of continuous surveillance proceedings, the Bell System agreed to reduce its interstate rates. The state regulatory commissions, faced with rising costs for state telephone services and incessant petitions for rate increases by Bell's operating companies, were incensed. How could the FCC reduce rates when the states were being forced to raise their rates? The solution was obvious -- rather than reduce interstate rates the FCC should allow a change in the separations formulae and shift some costs from intrastate to interstate, soaking up the excess profits in the interstate segment and providing relief for regulatory commissions caught between consumers and the Bell System. When the Bell System filed lower rates with the FCC, the state regulatory commissions' organization, the National Association of Regulatory Utility Commissioners (NARUC), filed a petition to deny and asked that a separations change be instituted.
But in January 1970 the FCC was not playing the game. Stung by past criticism that the FCC had simply acquiesced in the use of the separations procedures to accomplish political ends, the FCC refused to stop the rate reductions and they went into effect. Since the FCC had embodied the separations procedures into agency rules, their manipulations was more difficult and required more time. But the effort was made, and today's action is witness to its success.
Legislation was introduced in Congress that would have removed separations matters from the jurisdiction of the FCC. In response, the FCC on May 20, 1970, constituted a 'Joint Board' made up of four representatives of NARUC and three FCC Commissioners to consider separations changes. Meetings were held in Lake Ozark, Missouri (giving its name to this separations plan, the 'Ozark Plan') in July, and in Washington in early August. A tight time schedule was established which contemplated final FCC action. A NARUC-FCC staff committee prepared a report which is the basis for this rulemaking. The report was filed with the Joint Board on August 6. On August 13 the Joint Board referred it to the full FCC for proposal as rulemaking. Only California's representative dissented, and proposed an alternative. On August 26 the FCC proposed the Ozark Plan as rulemaking, rejecting the California alternative. California in its reply comments characterizes the Ozark Plan this way:
[The] first time the Staff Committee saw this plan was in AT&T's letter of June 30, 1970, signed by Mr. R. B. Holt, Assistant Vice President. The plan there presented was the full blown Ozark Plan, already agreed to in principle by the independent segment of the industry, and to which the NARUC-FCC Subcommittee made no changes or revisions. It is particularly noteworthy that there was not time for even a minor improvement to be made by the Staff Committee. The Staff Committee had only a period of 26 working days between the June 30th unveiling and the presentation of the staff report to the Joint Board on August 6, 1970. The plan is thus, for all practical purposes, the industry plan presented on a 'take it or leave it' basis.
Now to complete the chronology, today the Joint Board adopts the proposed rules in a recommended decision, and on the same day, in virtually the same meeting, the full FCC adopts the recommended decision.
It is very difficult to evaluate the public interest impact of the majority's decision. It is essentially a political accommodation among the various parties -- the state commissions, the telephone industry, and the FCC. California objects to the formulae adopted here, in part because California could be benefited if alternative changes were adopted. Most significant, the majority provides absolutely no evidence whatsoever for a finding that consumers or the general public will be benefited by this change.
One could advance arguments for what is being done here. But that would require that we be open, candid, straightforward and honest in stating what it is we are doing. Basically, what we are doing is subsidizing the costs of local service with Bell's excess profits from long distance service.
Whatever its motivations may have been, the fact is that Bell has put most of its research and development money, and attained most of its cost-cutting results, in those areas where it has competition: long distance service. As a result, the costs of moving information by modern microwave are roughly 1% of the costs of moving it by open wire. Needless to say, there have not been equivalent reductions in the costs of supplying local service. Bell is subject to (as well as a part of the cause of) inflation, like everybody else. As a result, the costs of supplying local telephone service have been increasing. This puts pressure on state regulatory commissions to raise rates. Understandably, they would rather not incur the political consequences of raising rates -- nor would Bell. As they look around for some slush fund to make up the difference, a subsidy for local service, all eyes naturally turn to the extravagant profits Bell is making from its long distance service. (Even though there have been some modest reductions in long distance rates, the reductions have been nowhere nearly as much as the reductions in costs would warrant.)
Now one can make some rational arguments for this rob-the-rich-to-give-to-the-poor approach to telephone ratemaking.It may very well be that we should have a national policy that encourages the installation of home telephones. Perhaps if local customers had to pay the full costs of providing service many would not have telephones. In fact, of course, we don't know that to be true. But it's possible. And if it were true, and if we did have that national policy, that would be a rational basis for the kinds of shifts in revenue that are brought about by our metaphysical 'separations' mathematics:
Of course, it may be the case that we should at least start with the premise that costs be allocated to the services benefited. (Bell has certainly argued tenaciously, for example, against giving a subsidy to the Corporation for Public Broadcasting in its national television network -- notwithstanding the fact that Congress ordered it to do just that.) And one might argue that if Bell had to price based upon costs, and was forced to raise local rates, it would provide a spur to (1) potential competitors, and (2) more cost-cutting research and development by Bell for local service.
In any event, those are, in short, the social-political-economic dimensions of what we are dealing with. I have repeatedly urged my colleagues on the Commission and the members of the Joint Board to address today's decision in these terms. They have repeatedly given the suggestion a deaf ear.
The detriments of today's decision are easily shown.
First, there will be an interstate rate increase. This is not discussed in the majority document today -- but Bell has made its plans clear. A rate increase of at least $130 million will be filed soon. Rumors persist that the increase will be much higher -- some estimates reach as high as $300 million. In addition to the burdens this will place on telephone subscribers, it will produce a significant impetus to our spiraling inflation.
Secondly, the pattern of political manipulation of the separations game continues. Unfortunately we still cannot look forward to the fundamental study of separations allocations problems by disinterested experts that has been required for so long.
Thirdly, the possibility exists that today's action is simply in whole or in part a transfer from one Bell pocket to another. It is extremely difficult to prove that every penny in revenue requirements assumed by the interstate ratepayer will be offset by lower rates in state jurisdictions. To assume so requires a large act of faith.
Fourth, the absence of consumer representation in the entire proceeding is a disquieting reminder of the problems of regulatory agencies which are so widely recognized today. Concern for the consumer is not a dominant feature of the language of the majority report issued here.
The benefits of this action are more elusive. In some technical sense the reformulation of certain of the separations formula may cure some inequities from the past allocations. Like circumstances may receive more similar results.
But the crucial question is whether state rates will be lower. This is not known, and there is nothing to indicate what the trade-off is between lower rates for state services and interstate services in terms of whatever regulatory goals this Commission and the states are following.
I dissent because it is impossible to tell whether commensurate public benefits exist to offset the significant detriments inherent in this decision.
I dissent because the procedures followed in this case are more familiar to backroom maneuverings at a political convention than openly conducted reviews of the public's business. (Today's decision way very quickly explained by staff and disposed of at an informal, non-public session at which the FCC Commissioners first voted their approval as members of the Joint Board, and then voted once again as the FCC. The opinion was released promptly thereafter.)
I dissent because I do not detect any indication that the questions of separations procedures are to be attacked in a dispassionate and informed way with disinterested analysis of the consequences of alternative courses of action.
I do not oppose the effort to effect better coordination with the state regulatory agencies. The bifurcated jurisdiction in telephone regulation makes no sense at all, and any efforts at coordination and integrated approaches to mutual problems are to be applauded. But I would be more comfortable if these efforts would rise above political accommodation and attempt to achieve intellectually reputable rationale and results. That we have not been able to do in this instance.
1971 ADDENDUM TO THE SEPARATIONS MANUAL
This Addendum modifies and amends the procedures covered in the April 1963 Separations Manual and the 1964, 1965 and 1969 Addenda thereto, to reflect the changes in separations procedures set forth in the Federal Communications Commission Report and Order in Docket No. 18866, dated October 27, 1970. These changes were prescribed by the FCC for jurisdictional purposes and cover revisions in procedures for the separation of subscriber plant and local dial switching equipment.
This Addendum replaces Paragraphs 23.444, 24.03312, 25.24, and 24.82 and 24.821 in the 1963 Edition of the NARUC-FCC Separations Manual and the modifications of those paragraphs as amended and included in the 1965 and 1969 Addenda thereto.
23.444 The cost of subscriber line outside plant in Category 1.3 assigned to message telephone services in the study area, as determined in Par. 23.443, is apportioned between state and interstate operations by the application, to the cost of such plant, of a subscriber plant factor, which is the sum of the
(a) Interstate subscriber line use (SLU), representing the 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, multiplied by the nationwide ratio of (1) subscriber plant costs assignable to the exchange operation per minute of exchange use to (2) total subscriber plant cost per total minute of use of subscriber plant, plus
(b) Twice the interstate subscriber line use ratio for the study area multiplied by the ratio of (1) the nationwide, industrywide average interstate initial 3 minute station charge at the study area average interstate length of haul to (2) the nationwide, industrywide average total toll initial 3 minute station charge at the nationwide average length of haul for all toll traffic for the total telephone industry.
24.03312 The cost of exchange basic circuit equipment assigned to message telephone services for the study area is apportioned between state and interstate operations by the application of a subscriber plant factor developed as described in Par. 23.444. $25.24 Other Station Equipment -- Category 4 -- This category includes all station equipment not assigned to other categories. The cost of station equipment assigned to this category in the study area is apportioned between state and interstate operations by the application of a subscriber plant factor developed as described in Par. 23.444.
LOCAL DIAL SWITCHING EQUIPMENT
24.82 The cost of this equipment in each local dial office is first segregated between non-traffic sensitive equipment and traffic sensitive equipment. The cost of non-traffic sensitive equipment comprises the cost of those items of equipment used jointly for both exchange and toll services, the quantities of which are determined as a function of the number of subscriber lines terminated and which in no way are a function of the busy hour or total volumes of attempts, calls, or messages offered to or switched by the office, together with a share of the cost of common equipment items, such as aisle lighting, ladders and ladder racks and framing, test equipment, power plants, etc., determined in the manner described in Par. 24.131. The cost of traffic sensitive equipment comprises the cost of all other local dial switching equipment, including its share of the cost of common equipment items.
24.821 The segregation of the cost of local dial switching equipment is accomplished in each local dial office by the application of a non-traffic sensitive equipment factor appropriate for the particular type of equipment (step-by-step, panel, crossbar, electronic, etc.) installed in the office and for the size of the office. The non-traffic sensitive factors are developed by means of analyses of the cost of local dial switching equipment in selected local dial offices which are representative of the several types and size ranges and which are chosen for study by sampling methods.
24.83 The cost of non-traffic sensitive equipment in each office in a study area is apportioned between state and interstate operations by the application of a subscriber plant factor for the study area developed as described in Par.
23.444. The cost of traffic sensitive plant in each office is apportioned among the operations on the basis of relative dial equipment minutes of use, i.e., the minutes of holding time of the originating and terminating local dial switching equipment, as holding time is defined in the Glossary. The toll dial equipment minutes of use applicable to each office are weighted to reflect the difference in average cost per toll minute of use as compared to the average cost per exchange minute of use.
24.831 The weighted toll dial equipment minutes of use applicable to each office are developed by application of a weighting factor appropriate for the particular type of equipment (step-by-step, panel, crossbar, electronic, etc.) installed in the office, the size of the office, and whether or not a majority of the traffic originated in the office also terminates in the office. The weighting factors for application to the toll minutes of use are developed by means of analyses of the traffic sensitive local dial switching equipment in local dial offices selected for study by sampling methods. The analyses of the traffic sensitive items of equipment are made in sufficient detail to reflect the use of each item of equipment for exchange and for toll services.
FN1 In accordance with the Commission's past decisions regarding
jurisdictional separations, these procedures are not necessarily designed to
apply to Alaska and Hawaii in view of the substantially different conditions
existing in the case of these states.