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In the Matter of AMERICAN TELEPHONE & TELEGRAPH CO. AND THE ASSOCIATED BELL SYSTEM COS. Charges for Interstate Telephone Service, Transmittal Nos. 10989 and 11027

 

Docket No. 19129

 

FEDERAL COMMUNICATIONS COMMISSION

 

36 F.C.C.2d 491

 

RELEASE-NUMBER: FCC 72-662

 

July 24, 1972 Released

 

 Adopted July 21, 1972

 


JUDGES:

BY THE COMMISSION: COMMISSIONERS ROBERT E. LEE AND H. REX LEE CONCURRING AND ISSUING STATEMENTS; COMMISSIONER JOHNSON DISSENTING AND ISSUING A STATEMENT; COMMISSIONER HOOKS ISSUING A SEPARATE STATEMENT.


OPINION:

 [*491]  1.  We have under consideration the hearing record in this case, the Initial Decision of the Hearing Examiner issued herein on August 23, 1971, the exceptions and briefs filed by the parties, and oral argument en banc before the Commission on October 26 and 27, 1971.  We also have under consideration the regulations promulgated by the Price Commission applicable to the authorization of interim rates in Phase I of this proceeding, which regulations became effective on June 1, 1972, and were amended on July 6, 1972.  In addition, the Commission noted the position of the Trial Staff and the Respondents, as well as the Hearing Examiner, that it would be appropriate for the Commission, in reaching decision on the allowable rate of return and the amount of any allowable interim rate adjustments, to take account of relevant financial and operating data applicable to the period subsequent to the close of the record.  Accordingly, we deem it necessary and appropriate to take official notice of (a) the actual cost to the Bell System of long term debt issued since the close of the record in Phase I and (b) the actual interstate operating results experienced by the Bell System since the close of the record.  The data (as of this date) which we propose to officially notice are set forth in the attachment hereto.

2.  We are cognizant of the amount of time that has elapsed in this case since the close of the record on June 3, 1971 and the recent promulgation of the Price Commission regulations regarding interim rates.  In addition, two of the present seven Commissioners were not members of the Commission at the time of oral argument.  Therefore, the Commission is of the view that its resolution of the issues in Phase I of this case will be assisted by a limited re-argument thereof in the context of the changes reflected by the aforementioned financial and operating results which have occurred since the close of the record, and  [*492]  the Price Commission's regulations currently applicable to any interim rates which may be authorized by our decision herein.

3.  Accordingly, IT IS ORDERED, That oral re-argument with respect to the foregoing matters involved in Phase I of this proceeding shall be held before the Commission en banc at Washington, D.C., commencing at 9:30 a.m. on September 19, 1972.

4.  IT IS FURTHER ORDERED, That each party desiring to participate in such argument shall file with the Commission on or before September 5, 1972, a written notice of intention to do so which shall set forth a summary of its oral argument and the amount of time desired.  The order of argument and the specific time allotments will be specified by further order of the Commission.

 

FEDERAL COMMUNICATIONS COMMISSION, BEN F. WAPLE, Secretary.


 

CONCURBY: LEE; LEE; HOOKS

 

CONCUR:

CONCURRING STATEMENT OF COMMISSIONER ROBERT E. LEE

In deference to my colleagues who wish to more meaningfully participate in the ultimate resolution, I concur in the Memorandum Opinion and Order that requires further oral argument to amplify and update the long and involved record in this case.  Obviously the broadest participation by all the Commissioners is desirable if not necessary.

However, had I had my "druthers" I would have preferred an immediate decision establishing a reasonable rate of return consistent with the economic and financial realities in our economy at this particular time in history.

Imbedded cost of debt has risen a drastic 50% from our last examination of AT&T in 1967 from 4% to 6%.  Current cost of debt for triple A bonds issued by Bell is approximately 7 1/2%.  All other costs, in recent years, have spiraled substantially upwards i.e. labor, equipment, etc.

Appropriate adjustment in interstate rates should relieve the very real pressure that now exists on the Bell System for additional revenues.

Early resolution of the problem is appropriate.


CONCURRING STATEMENT OF COMMISSIONER H. REX LEE

I concur in the decision to schedule a limited reargument of the Phase I issues in Docket No. 19129 only because of the announced desire of two of the present Commissioners who were not members of this agency at the time of the initial oral argument in October, 1971.  I would prefer to proceed to a final resolution of the rate of return phase of the proceeding now since the Commission may take officials notice of relevant financial and operating data and Price Commission regulations applicable to the period subsequent to the close of the hearing record and since both the rate-paying public and the Bell System are entitled to an early decision on Phase I. Nevertheless, I accede to the wishes of the most recent appointees to the Commission to have a limited reargument, and it is for that reason alone that I concur in the present action.


SEPARATE STATEMENT OF COMMISSIONER BENJAMIN L. HOOKS

Today I cast my first vote as Commissioner by concurring in scheduling the above matter for oral argument.  Since my personal reasons go beyond those stated in the Commission order, I feel compelled to state my rationale.

This case commenced nearly two years ago.  n1 More than 25 separate parties have appeared in this proceeding and the record in this case is spread over 18 volumes (approximately 9,000 pages) of testimony and exhibits.  The matter is further complicated by a number of pertinent rulings of the Price Commission.  I have been a member of this Commission less than three weeks.  I do want to emphasize (as I have stressed to the Commission itself) that even with the benefit of oral argument and additional time to familiarize myself with the record as well as ratemaking proceedings before this Commission generally, I cannot now say, nor does this vote signal, that I will ultimately vote on the merits of this case.  However, I do welcome the opportunity for oral argument n2 and my first opportunity to interrogate the parties. 

n1 AT&T Transmittal No. 10989, filed November 20, 1970.

n2 The consumers' interest is unaffected by this action inasmuch as all interim rates currently being charged by AT&T are subject to the accounting and refund provisions of 47 U.S.C.   204. Hence, any rate increase since November 20, 1970, determined to be unjust by the Commission, would be refunded, with interest, to the subscribers.

I feel a compelling obligation not to bypass the opportunity to vote on a matter of this magnitude, provided the oral argument and my review of the record compiled by the hearing examiner supplies me with the necessary information to make a reasoned decision.


DISSENTBY: JOHNSON

 

DISSENT:

 [*494]  DISSENTING OPINION OF COMMISSIONER NICHOLAS JOHNSON

The telephone company would like to increase our phone bill a little -- say, about $1 billion a year.  *

* The "$1 billion" figure is, of course, an approximation.  It is, however, a fair approximation which can be substantiated by any one of a number of approaches.

The last FCC rate hearing resulted in an authorization, in 1967, of a 7.0 to 7.5% rate of return.  Bell is now earning a system-wide rate of return of about 7.5%.  If that rate of return is increased to 8.5%, ratepayers will pay an additional $930 million a year.

The $930 is computed as a relatively simple mathematical exercise.  The "rate of return" is a return on "rate base" -- the company's property, its capital investment.  That rate base (depreciated) is about $46-47 billion.  A 1% return would be, therefore, say, $465 million.  That is, it would be $465 million but for the fact the return is after taxes.  Since taxes are about 50%, it means the rate payers must pay twice as much -- or $930 million -- in order for AT&T to earn a 1% increase.

In fact, prices are raised to levels that would create even more than $930 million if usage remained constant: because prices are raised, however, usage declines somewhat, and therefore "only" $930 million additional revenue is created.

The FCC, pleased to do what it can to help, held the fastest hearing on record to accommodate.

It was decided by the Hearing Examiner after a rushed hearing of but 33 days, on August 31, 1971.  It was argued orally before the Commission on October 26 and 27, 1971.  Since then, changing signals from the Price Commission have prevented the FCC from acting.  Now the Price Commission regulations have been available for a month, and the immediate problem confronting the Commission is what to do between now and November with the "expedited" case before it.  What more can we do?

We can hold another oral argument, that's what.  So we decide today by a vote of five to one, a skimpy order with very little explanation, and a press release.

Ironically, there would be good reason to reopen the record in this case, send it back to the Hearing Examiner, and hold another hearing.  The record in the rate-of-return proceeding was closed in June, 1971.  In August, 1971 President Nixon imposed his New Economic Policy.  It was this policy which created the Price Commission, and the Price Commission which created the new standards for public utility regulation now applicable to this case.

Public utility rate regulation is, in short, a whole new ball game.

The Commission has three choices before it.

One would be to admit that the record before it is stale, because of the extraordinary and unanticipated economic events that have occurred since Bell requested its massive rate increase, and the need for that increase was tested in a hearing.  Having made that admission, this case then could be -- I would urge, must be -- remanded for further evidentiary proceedings.

What is the "New Economic Policy?" Can regulated industries -- which constitute roughly 20% of the gross national product -- be exempt from any inflation controls worthy of the name?  If not, what standards should this agency, and the Price Commission apply -- beyond (or instead of) those traditionally used in this field?  Are there special peculiarities of telephone regulation that require special treatment?  Must we now examine the recent increases in AT&T executives' compensation?  Wage hikes?  What has been the effect of the New Economic Policy?  Can AT&T now raise capital at lower interest rates  [*495]  than it projected in 1971 prior to the Policy?  Have its cost increases leveled out?

This is by no means an exhaustive or carefully conceived list of the new issues before us, but it gives a sense of their range and sophistication.  These are simply not the kinds of questions that can be resolved in a few hours of "oral argument" by lawyers before Commissioners.  An oral argument before an appellate body comes after a hearing before a trial tribunal -- in this case an FCC Hearing Examiner.  The oral arguments are based -- in fact, and in law -- upon the evidence of record in that hearing.  In this case that would be a hearing consuming many days, a hearing that would require the testimony of many economists and other experts, a hearing that would require the restructuring of almost the entire case originally put before the Examiner by the FCC Trial Staff and by AT&T.  After that hearing the Examiner would prepare an initial decision (as he has on the hearing already held), and the Commission then would be ready to hear oral argument on that record and decision (as it already did last October).

The problem with this procedure, of course, is that it takes time.  During the years when modest rate decreases were ordered by the FCC, neither AT&T nor the FCC were anxious to expedite matters -- the longer the hearing lasted, the longer consumers went on paying the higher, unwarranted rates.  And the hearings went on for years.  Now that AT&T thinks it may get a rate increase -- perhaps because we already permitted a $250 million increase in January, 1971 without a hearing, and the states have approved $1.5 billion in increases since January, 1969 -- everyone's suddenly taken a great interest in expediting rate cases.  So the prospect of sending this case back to the Examiner to do over is an anathema to the AT&T/FCC.

And yet, if the majority really wants an updated and current record, it is the only way it can be obtained.

A second choice would be to decide the case now, based on the old record.  We can take official notice of any facts likely to be mentioned in a second oral argument, such as updated operating results, decisions by other regulatory agencies and current debt costs to AT&T.  The probable effects of any Commission decision now would be additional payments by consumers of around $1 billion per year -- once those effects were felt fully throughout the economy and the various state commissions.  The majority is understandably reluctant to issue such a decision when the Nixon price control program is under increasing attack as being ineffectual, and biased in favor of business and against the working man and consumer -- however warranted (or not) AT&T's case for the increase may be.  It would simply create terrific pressures on the Nixon Price Commission either to interfere and stop the decision, or to let it go into effect -- with the risk of further criticism.

So the majority opts for a holding action -- an oral argument at which everyone but the Commissioners agree nothing new will be learned that could not be gained by simply rereading the transcript of the October, 1971 argument.  Bell will simply have to be mollified about the additional delay.  But that should be relatively easy.  There will be much less public and press interest in a massive rate increase after November, thereby taking pressure off of the Price Commission  [*496]  to reject whatever the FCC ultimately does.  And the odds are good that whatever Commission decision comes months from now will mean even more money and higher rates for Bill -- as hard to believe as that may now seem -- than if the Commission decided the case this week.

Last December, the FCC, in an uncontrollable fit of candor, announced to the world it was simply calling off the hearings on AT&T's costs of doing business and the value of its investment (on which the rate of return is paid).  See "Why Ma Bell Believes in Santa Claus," Saturday Review, March 11, 1972, pp. 57-60.  (Those hearings -- which I believe simply must be resolved prior to this case as a matter of law, morality and common sense -- have been hanging around for years and are still unresolved.) The news they were to be cancelled entirely was met with stunned outrage by the Congress, public and press.

The FCC quickly retreated, reinstated the hearings -- and then failed to do much about them.  The lesson, however, has not been lost upon the Commissioners.  No more will candor raise its naive head around these halls.

Mr. Dooley wrote:

No matter whether th' constitution follows th' flag or not, th' supreme court follows th' iliction returns.

This agency, clearly, is not the Supreme Court, and the motives of the majority may be pure as snow.  But the net effect of today's decision -- whether or not it follows the last election returns -- may very well help to influence the next ones.

Needless to say, I will be delighted to be proved wrong in my reading of the futility of the majority's action to achieve any save political results.  I'll wait to see.  Meanwhile, I dissent.

The FCC only considers "interstate" rates (long distance phone calls out of state), some 30% of AT&T's revenue.  The "system-wide" impact of its finding comes about because AT&T uses the FCC-authorized rate of return figure in arguing for rate increases before state commissions.

The $1 billion figure can also be supported by the recent history of the state commissions.  Since January, 1969 they have approved $1.5 billion in rate increases for AT&T; an additional $1.1 billion in requested rate hikes are now pending nationally.

We do know roughly how big a price rise is needed to increase earnings.  For example, the $250 million increase in earnings this agency permitted Bell to achieve in January, 1971 required a straight price rise of $384 million -- a 7.8% price increase.  To that has been added a $36 million increase in earnings from private line users.  To reach 8.5% interstate would require an additional $160 million in earnings, achieved by a price rise of $246 million -- in interstate alone -- if the increase is placed entirely on the small user, as was the January, 1971 increase.  This is a price rise of about 4.4%.

The FCC has not decided what the rate of return should be.  The Trial Staff urged 7.8 to 8.3%.  The Hearing Examiner awarded a range of 7.9 to 8.8%, with 8.25% as the fixed rate.  Bell is, of course, anxious to increase his award.  My use of 8.5% is hypothetical and arbitrary and in no sense a "finding" based on the record (although it is neither  [*497]  patently unreasonable nor necessarily unlikely); it is merely a simple mathematical way to illustrate with particulars the general issues before us.


APPENDIX:

Bell Telephone System -- Total interstate operations

[Millions]

 

 

 

 

 

 

Earnings

 

 

Gross

Total

Net

Average

ratio

Year

Message

revenues

deductions

operating

net

(annual

 

 

 

 

income

investment

basis)

(1)

(2)

(3)

(4)

(5)

(6)

(7)

1971

 

 

 

 

 

Percent

First quarter

690.3

$1,419.8

$1,149.8

$270.0

$13,236.8

8.16

Second quarter

724.2

1,463.6

1,177.9

285.7

13,525.9

8.45

Third quarter

744.2

1,473.3

1,216.6

256.7

14,091.4

7.29

Fourth quarter

741.0

1,494.8

1,222.3

272.5

14,367.7

7.58

Year 1971

2,899.7

5,851.5

4,766.6

1,084.9

13,805.5

7.86

1972

 

First quarter

759.9

1,549.3

1,272.7

276.6

14,630.0

7.56

April

253.7

518.3

422.2

96.1

14,880.5

7.75

May

272.6

544.6

444.2

100.4

15,153.6

7.95

Five months 1972

1,286.2

2,612.2

2,139.1

473.1

14,784.9

7.68

Percent increases over same periods of preceding year and average revenue per message

 

 

 

 

Average

Average

 

 

Gross

Total

net

revenue per

Year

Messages

revenues

deductions

investment

message

(1)

(2)

(3)

(4)

(5)

(6)

1971

Percent

Percent

Percent

Percent

 

First quarterh7.6

11.6

9.5

12.1

$1.92

 

Second quarter

6.1

10.2

7.3

11.3

1.91

Third quarter

6.3

10.6

10.1

12.9

1.88

Fourth quarter

7.4

11.2

11.1

12.7

1.92

Year 1971

6.8

10.9

9.5

12.3

1.91

1972

 

First quarter

10.1

9.1

10.7

10.5

1.94

April

6.6

6.8

8.3

11.4

1.92

May

14.6

13.1

14.3

11.2

1.91

Five months 1972

10.3

9.5

10.9

10.9

1.93

NOTE: Reflects the Commission's rate base determinations in its Order of 9/13/67 in Docket No. 16258.

Bell system long-term debt cost

 

Cost

 

(percent)

Date issued:

 

1971 average

7.49

January 5, 1972

7.27

January 25, 1972

7.37

February 15, 1972

7.30

April 10, 1972

7.53

May 2, 1972

7.45

May 22, 1972

7.39

June 13, 1972

7.51


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