“Continuing surveillance”

1. “Continuing surveillance” • FCC didn’t really rate regulate AT&T during this period; all done through informal negotiations • AT&T made voluntary reductions in interstate long-distance rates of $30 million per year • Result of generally falling prices and technological progress—not because of FCC action • FCC able to take credit for continually lower prices on long distance charges with no full-scale rate investigation until the 1960’s

2. A regulatory problem • State toll rates were going up, while Interstate toll rates were going down (by 1949, state rates about 35% higher than interstate) • Local Bells asking for rate increases • State commissions increasing toll, not local rates • Fear that the FCC would look more effective than the state commissions

3. The answer? • Separations • The allocation of local telephone company costs between state and interstate jurisdictions • Keep in mind— • The more costs allocated to a jurisdiction, the better the justification to raise rates in that jurisdiction • There are many joint costs involved in the provision of telephone service • The challenge: how to get everyone to agree on how to do separations

4. Splitting up the baby • Smith v. Illinois Bell Tel. Co. (1930) • “The proper regulation of rates can be had only by maintaining the limits of state and federal jurisdiction . . .” While the difficulty in making an exact apportionment of the property is apparent, and extreme nicety is not required, only reasonable measures being essential . . . It is quite another matter to ignore altogether the actual uses to which the property is put. . . . Unless an apportionment is made, the intrastate service to which the exchange property is allocated will bear an undue burden . . .”

5. Effect of Smith v. Illinois • From board-to-board • To station-to-station

6. The positions of the various interests • The state commissions • Split between station-to-station or board-to-board • Why?? • The FCC • Wanted long distance rates to decrease, but getting increasing pressure from the states • AT&T • Started from a board-to-board position, shifted to station-to-station • Why??

7. The development of separations • Separations Manual of 1947 • How-to manual, not officially adopted by the FCC, but no objection to its use • $19 million transfer of costs from state to interstate • Didn’t result in lower local rates • Stopped a planned interstate rate decrease

8. Long process of shifting costs to interstate • The history of Subscriber Line Use (SLU) • Growth in SLU from 2.5% to 8.1% by 1980 • Allocation from actual (2.5%) to 26% by 1980

9. Jurisdictional Separations • This is the method for allocating the cost of a telephone company’s assets and expenses between the interstate and the state jurisdiction • This is a complex, multi-step process that starts with how the books of the telephone company are kept. • The following examples explains how the cost of a local loop (the connection between the customer and the switching office) is jurisdictionally separated

10. Part 32 of the FCC Rules: • The Chart of Accounts • VERY specific rules about what the specific accounts are and what gets booked into each account • Ex: Account 32.2410 Cable and Wire Facilities • Account 32.6410 Cable and Wire Facilities Expense

11. Part 36 of the FCC Rules • Jurisdictional Separations Procedures • Categorization of Assets • Based on engineering records • Ex: Categories of Cable and Wire Facilities • Category 1: Exchange Line (loop plant) • Category 2: Exchange Trunk (between switching offices)

12. More of Part 36 • Apportionment Procedures • For Category 1: Exchange Line (loop plant) • Determine number of working loops by subcategories • dedicated lines versus subscriber lines • Calculate an average cost per loop • Take total exchange line cost and divide by number of working loops

13. And more of Part 36 • Allocation to state or interstate jurisdiction • Determine total subscriber line loop costs • Multiply average cost per working loop times number of subscriber line loops • Multiply the total subscriber line loop costs by an interstate usage factor

14. An example • Account 32.2410 $1,500,000 • Category 1: Exchange Line = $1,000,000 • Total working loops = 10,000 • Average loop cost is $100 • $1,000,000/10,000 • Subscriber line working loops = 9,000 • Total subscriber line loop costs =$900,000 • 9,000 x $100

15. More of the example • Assume usage is 12% interstate • 12% of total traffic is interstate • Allocation of subscriber loop costs to the interstate jurisdiction is $108,000 • 12% times $900,000

16. Why is this important? • This means that $108,000 will not have to be recovered from local rates or from state toll rates—especially from local rates!!