Agenda for oversight : domestic common carrier regulation


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Agenda for oversight : domestic common carrier regulation
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United States -- Congress. -- House. -- Committee on Interstate and Foreign Commerce. -- Subcommittee on Communications
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94th Congress SUBCOM MITTEE PRINT 2d Session J









APRIL 26, 1976


HARLEY 0. STAGGERS, West Virginia, Chairman
TORBERT H. MACDONALD, Massachusetts SAMUEL L. DEVINE, Ohio JOHN E. MOSS, California JAMES T. BROYHILL, North Carolina
FRED B. ROONEY, Pennsylvania JAMES M. COLLINS, Texas
W. S. (BILL) STUCKEY, JR., Georgia H. JOHN HEINZ III, Pennsylvania BOB ECKHARDT, Texas EDWARD R. MADIGAN, Illinois

Profe8sional Staff
RONALD DICK COLEMAN, Associate Minority Counsel

GOODLOE E. BYRON, Maryland SAMUEL L. DEVINE, Ohio (ex officio)
TIMOTHY E. WIRTII, Colorado HENRY A. WAXMAN, California HARLEY 0. STAGGERS, West Virginia
(ex officio)

ALAN PEARCE, Staff Economist ANDREW MARGESON, Staff Economist LEENA JOHNSON, Staff Assistant KAREN B. POSSNER, Staff Assistant


1110n. Tom.vit-r If. 'MACDONALDI
ljow c oi P./.
D I I Z Ai I ik a I I I I I Is I I I I (A i I I g I I c Ie Nv I I I I.: I f t d
Illent 1) prepared by t he St a tr clit itled 'A acl Ida m. v(. J.'s] i I )w I 1(, t j (11 C0111111oll Ctart.iet- Re'rulat lon." 'I'llis docIlIllent jweptun-d at, the dit, ctloll of tile ,-;IIbvolIIl1Iittee followilur the ovci :-Udlt 11cal-111"S wbich took I)la(,-.e, Nov(.,,mhvi-.
It is our intention to cii-culate this do( .Illllcllt, fin. public comments for a period of 30 dtays. 0iice fliese com] I lei lt,. havc lwon 1.v,(,T1vvd, tile staff will pi-eparo all Vnalysls for the Illembel-S of. Ow SubcoTillnittm
for 4,111,11wr llealino.s (At wilich this doc till Iclit will forniall considered.
ITARRY L S I I f 10 f I A _N
Chief Commel, Subcommittu, on Coamiu.,n1cat;ons,
Comm;ttce ow Intentate aml Commerce.

Digitized by the Internet Archive in 2013

I. Tit rn 1(. ioln -- - - - - - - -- - - - - -
11. A Re view of past d-bioi ------------------------------------- 2
Abv 9~~AlbPiijug private microwave --------:11rifI~ii~ An t~whe burdeii(,f prot -------------5

1'ha-c IA- -The rate of: return is-sue ------------- 4;
D i vidted j ii-idictitliiis anm ~l tp ir~toi --------------r G
Phae 1I-Rateiiiakinig priiiciptes --------------I 1%eil 12S--'liie privat- line rate caset ----- --- - -P)uc i 1 _,19-A g n rlrate cnst - - - -- - - - it)
k. 7 -A ~ein1rat e cas 11
.Xth iztjl5 of comipet ition -12 ------------ '
4 el-I 1fi(ctI io of exist oier-owvned terminal Iquipmienit B ----- 1 1 )a apctd 410-T'he Colnil)Uiter/COnlliii atinsiundcii-i.;lii~ary B --- 1
i it l dataL SerIvice - - - - - - - - - -- 14
- - - - - - - - - - - - - - 1 5
rflte teClOfiniC impact inquiry - - - - - - - -- 1 (;
Execunt-TFhe scope of the specialized carrier's authorization_ 17 111. A look to the fuituro -----------------------------------------------1s
11 Lteniakingjj principles -------------------------------------1
Anatentieapproach ------------------------------------ 21
Interim ratemaking principles----------------------------------24
Requiring eficienrt operation -------------------------------- 24
Pre-ventingexes profits -----------------------------------5
1. 04 7 TYhe umio carrier tariff bill ------------------------2
IV. Summnary aiid coniclusionis:--------------------------------------P~ersonnel needs( ------------------------------------------------ 27
Policy pang-------------------------------------------Append ices
Appewndix I : Excerpt from major matters before the Commisszion --------19 Appendlix 11I Respo1(nse to Cou)trt of Appeals directive by FCC ----------32
Appewndix III :Respo~nse to Subcilommiittee Chairman's, request by
OTP ------------------------------------------------------------34

A GEd "IDA 1 '(Az ON-EiRSIG11,11: D 0 'If 1 TI "' Tl C CO A I I _N IL I 1Z !I E It It E G U I k T 10 N

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sllh- tantl,,Il fixt'd ('()L,-;tL, (HIA 1, ( oAs which must be t)orne il*D'Specl ive of t Ile level of lise o f- the
AS a result, o''011011lic I'C' 4;'jj'iIti0Ij is f1d0ptcd 'IS a s-11.1)410111_0 '()T' C(Ilil1),,Litim, in regiflatina the belivvior of the firm. r(,trij1,0o-w-; tare
sm-en authority to dowhat competition Nvoi I Id noi-i I I ally bei(d1(,J upou to do:
pl ( b i*7);, woiopo7y po*ccs y1*1,7(j;jj,(7 pl'of fs.- Vle cmllmunWaflonc- Act of 1934 directs tll(l F(V to, Tll;ll\(' 111-0 t1ltt carr or tar tvs are _010))). 11'111_ is
I I I just and ivasonable" (47 U.,'-;,C. -)
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Ili the a: rl_(rrelffato. i-easonable pric('s are defilw l a.-- w111('111 :111")w
tlio carrier to recover its costs. ITICIM1111CY (ft "J'.IAl-" return oi-i c:twid. Al ,O, t1w Collllm.-.:Z inn mu ;t. oversee, the rate. structure Of CATTlet-S to in-,iire tliat, cert:iiTi consumer are not, beiiirr unretm nnablv J'-1,v()rod at, tile, expenze of ot1wrs and tli:if competitors. where fllev exi.-t. ni", III)t
Vl('!-11 11 4 of iodrive tlwlllwitof
Pt tT1'/Wt;0fi.-EdNr(,n if the Iv
,ot, dircctiv expl()It its nionopoly power to make i till tile daiicrcr tl at it will iiieur co.zJs I fk
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reiliv required tO nT'(,\-Id(, t1w spi-vire. Tn corripotit i N T!(
'711*1,11 dm,-, TlOt eflic'ei-itly, i!z force(] out nf T I W (I V
-r') to of rel-urn regulation (](,,ztrovcz tl)(, V V T' 0 M" ITlll ; has- ri rroroilslv plnvod v, Imt it c:,11 I]- f!l*tivell- a"; well. sillve, the 11t;l1tv i Ly!I Irnlllo 'd l 1.0011-1 (m :mv 111N 1_f711011t. -Z "n, (]' rlved from ("mildet(d.v 11<('1-1-fore, tl,(, FCC li:,-, authority to veto :Ilrv ill !11(-J 111:11"
11 D, Crill a t (,J lit i I i!


(8) Control entr?/.-The FCC is also given authority to control the entry of other firms into various aspects of the common carrier in(histry and the activities of the remil"ated companies in related industries. Considerable controversy has been occasioned by FCC decisions to allow private microwave systems (27 FCC 3,59), terminal equipment suppliers (13 FCC 2d 420), and specialized common carriers using their own terrestrial microwave or satellite systems (24 FCC 2d 3181 35 FCC 2d 844). These decisions brought to the forefront questions relating to the rate structures of carriers like the Bell System which operate as regulated monopolies in some markets (for example, local exchange service) and compete with other firms in others (for example, terminal equipment). The fear is that the established carriers will use excess revenues from their monopoly markets to "crosssubsidize" their nonmonopolv services and so drive the other firms out of business. The approval of petitions by competing firms to offer service in competition with the established carriers has brought renewed pressure to resol ye extremely diffcult practical and theoretical policy problems relating to rate structures that are important regardless of the presence or absence of competition.
The purpose of the hearings which the Subcommittee held last November and of this Agenda for Oversiglit is to look carefully at the performance of the FCC in meeting these regulatory goals. The hearings showed quite clearly that the Commission's record is far from exemplary, though it is improving'. This agenda will identify decisions which must be made, examine the reasons for inadequate agency performance to date, establish a tentative timetable for Commission action and assess the resource requirements for a satisfactory resolution of the key issues.
It is important to emphasize too what this agenda does not contain. First, it does not evaluate the basic decisions allowing alternative suppliers. That is a subject that will receive considerable attention by the Subcommittee separately. But, indeed, a rational evaluation of these decisions must be based on an understanding of how they will be implemented. Further, most of the policy issues spotlighted by the decisions allowing competition will require resolution in any case. That is why most of them were set for resolution in Docket 16258-the general telephone investigation-(to be discussed below) which predates those decisions.

It is important to set the stare for this discussion by summarizing the origin and status of the major issues in this field. An attempt to do this graphically is made on the following page.

The "Above 890" decision of 1959 is one of the basic authorizations of competition which will not be analyzed in this document other than to state its conclusion and identify the issues to which it gave rise.

11 *t rat* *t


ff, 66 0 t

Docket 16250 Co":rAl Tolopho"O hass I Docket lalls _)a
Ottsation pri-t. If.* A.t#6]

2 :ta of 4- "111861, A osi I out *0 s ful
I a LTAK C ao4 0 UR) title C till ;,AT*
44 11


:::::::I ..........


In that docket, the Conmunission decided that bencuse adequate frequencies were available, and( in th "al;sence of a showing of a reasonaile likelihoo! thoat adverse e onomic e ffets would result." (27 FCC at 412) it would allow the eneral development of private microwave systems in competition with common carrier supplied services.

In ,(1,arv of 1961, the ell Svstemi filed a tariff in response to the "Above 890 decision which otdered very substantial quantity discounts to bulk users of private lines, i.e., those most likely to consider thle construction of private microwave facilities. The Telipak rates Were:

Monthly charge
Maximum equiva- per airline mile per
lent voice equivalent vo:ca
channels channel
TELPAK A....................................................... ------------------------------------------------------------- 12 $1.25
TELPAK B ..........................................-------------------------------------------------------------. 24 .83
TELPAK C ......... ....--------------------------------------------------------. 60 .42
TELPAK D ................................------------------------------------------------------------- 19

In other words, a private line user of 240 channels paid 15 percent of the rate per channel charged the user whose requirements were for 12 lines.
The Commission issued a decision on the lawfulness of these bulk <1ountst on i)ecember :. 1964- (T F( T 1111). 3 years after the (late on which thie Telpak tariff became effective. The Commission found that Telpak and other private line services are "like" communications services and that therefore any justification of rate distinctions would have to include showings that:
(1) They are a competitive necessity;
(2) They do not impose a burden on other users, that is, that "such retained or obtained business does contribute to the overall economy of thle operation * *" (37 FCC at 1115).
The Conmnission threw out Telpak A and B because it found that there was no competitive necessity for then, the number of channels being too small to justify a private microwave system. WVith regard to Te]pak C and D, the Commission concluded that there was a competitive necessity for them but that A.T & T. had not shown them to be compensatory (point 2 above). It decided to allow A.T. & T. to continue to offer Telpak C and D, however, pending Bell's submission of the seven-way cost study results in the domestic telegraph investi2 ion? Ti s litter docket, it slioil1 hbe toted, was instituted partly in response to charges by Western Union that A.T. & T. used excessive revenues from its monopoly services to subsidize competitive services.
I The Communieations Act of 1934 provides that tariffs may he suspended no more than 3 months. (47 U.S.C. 204). The F(TC could have rejected the tariTffs, however, on the gro i)ld tlht the carrier's burden of proof to show that the TELPAK rates were "just and re: 1'" had not been met (See. 47 U.S.C. 204). SThe seven "ways" refer to seven categories of service provided by Bell.


Tbe Communications, A(J of 19:"-1 clearly ]dams t1le blilden of pl-oof
011 t 110 C I 1-1-101' t ( ) I M W I I N It I I -, t : I I I i I'S I T V MiS :10111CI- KCTITWt 11 COX 1:4 11('(j ',I di-;,4ellt, to this dccl -Ioll Ndlich
mrainst al 1mvIll:'1r :I I n r'I 11' to relim III In ('11'ect even tllwl _(rh I he r:tl-l itr ),ad fill!c'd to mcct I t.- 1) 11 1- le I I () f 1) rm) f
T think that if wi to require lcrmirmt-ion Irtf III(, di-(-rImM;iti(,n io,\%, cm)sider, e I rlwpl '-fmcl 11-i I'll 4,f the
-ilifly inilre iiwcnlivt woWd he 1()r Ili
sludics, so that, any adju.-tilwilf, \011i'll II1j'_-ht III(All he lildir.ill.d (.1,11M 1w plit, illto effect.
11w 111.1j''rily is still 11TI'llde to filid that AT. 'K T, ()I- the i III f-I'V4,111 11*1-4 jl;lve SlImNII till. 111.11PAK (-, nild D ]IT Thi- 11111 flit, 1':m11 ,1* 111hiii flic ()f tliv f:dhire ()I' 1111cl-k-led to ih(- himlen
'1111ple (q)], w 1lillily t'' Ihiir I lind 01
this no reasiin I'm com lim ing, prk'l N\111ch \t, ( ;1111111t- 111111 1') ht, ju'- lified
Nvllil( \ (, '- Ivc lile .1 to ('()rI*e( I lil ift ih J)j'(1f)f'.
I d i "ce 1.11 1 ery I I I r I I I 1 0; 1 t t t I- I I i I I I I I I I I I V.- I I I I I I I I I I I ) I I I k r: I I I I r I ff I t I I I I I. -f i i t v I I- k I & T l Cl'i r s I i w r v i k I I I' very attract Iv(1 li) lnr _-e (if 'Ir(. 111(.(L by
tI)I-"4 NN-11() (-1:jIIII th:11 l1w 1:1,-1lY-" in d ist-rililill:11(j], v Illd w ill n ult ill
to t tw ir 1114, 1;[ r! I'll t (I w v -I) i I It ta t r: I 'irl(l c- 1.,it,
to I-(,I v m i I' %, I I I ( i w h ( Il, Im III f 11 4 ] t k r, w e I! r I I t 1w I ;1 1-1 1 1 w
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III :I very niffi-ijit 11o)-l0wi, tt) the FCC at 1 1*2 )).
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I el p'l k I I 11) 1! 1 (' l I)i Hne ljwN, I I'l ve h(vt I DIVI.<(A t*III(,:but t1w J-110 l"111,11(1111S ill', this 11- mi-fair and
lo tlie c1lier u.-I-n-1 who li, bm,
i tiv have 1. for 1.5
yean ""I"d to \v*'h a -1,t -o in the do.veloplifelit of pl.ivate. lmcm'111(t. suh- k,(iiwndv, iiew carrier,,.

(;1.'Nj-T1'. T TELEP110NE INN'E ;TIGAT.10.r

The -,,vcn v c()-4 -tud-v re:-:ult ;. which 1wt-nw, ,vai1a141(-, in If 67
Showed I-,I t (- () ;' 1vt 111.11 for cc1N*Pl1 A .'TA". &- 1'. (, rvic, .- Is fol 1mv:- "I I
h"ItUd ON di(l C"I' "I'llfly di.;trfl11vt,1d COStS-)
Alonopdv service : Percent
Wi,, I e area t, ,,crvice (WATS) -------------------- 10.1
di-l;mc le'i ;dolile ----------------------------------- 10. 0
Coillpet 11 ive
Privw(, Iiiie telicphoine :(,rvir( - - - - - - - - - - - - - - - - - - - 4. 7
Teb printer service (TWX) - - - - - - - - - - - - - - -- 2. 9
Private line telegraph service( A - - - - - - - - - - - - - - - - - - 1. 4
TE' 1, 1) A K - - - - - - - - - - - - - - - - - - - - - - - - - - - 0. 3
Otl!, l - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1. 2
The rc ziilt- do iridec(l show I) i _(,h1v nit(- ()f n'turn. 1)() they
S1101V th"It 'Felpnl ratc-, a1v I hilrd('111 Ml 0111el. Tll,,, CmII it I
has wrestled with that clu t loll for w kq, lell Pai*s wiLliwit htliig able

740-014- 76-2


to decide. While this study does not show, on its face, that a burden exists, it clal ughit to have raised suspicions, whichi it did. The Com mission quickly announced a general telephone investigation'the now famous Docket 16258. That investigation was also stmniulated by evidence that A.T. & T. was earning excessive profits. According to Dr'. F~rederick Schecrer:
The inquiry was stimulated in part by the observation that A.T. & T. common stock, traditionally a paragon of blue-chip stability, had come to be regarded ,-as a growth stock, with share values appreciating by more than 65 per cent between 1939 and 1965. The Commission was led to reconsider whether its controls on telephone rates had been too lax, permitting A.T. & T. to realize an after-tax return of 7.6 per cent on overall invested capital and 9.3 per cent on stockholders' equity between 1960 and 19635."' (Industrial Market Structure and Economic Performance (Chicago: Rand McNally College Publishing Company, 1970) p. 524.)
This investigation is still far f rom complete but it does represent the first comprehensive attempt by the FCC to f ulfill its statutory obligation. The t-ask was-and is-monumental. It is to the Commission's credit that it even undertook the eff ort. And, it is important to note that, whatever effect competition may have had in stimulating the general telephone investigation, the need for comprehensive investigation of this type is in no way affected by the presence or absence of competition.
Docket 162.58 had as its goal the eliciting of information and the prescription of standards which are absolutely essential to the regulatory ability to assure that rates are just and reasonable. It came to be divided into several phases.

This part of the docket dealt with the issue of the appropriate overall rate~ of return, an issue which had never been formally addressed by the FCC. Prior to this proceeding, rate setting resulting from informal negotiations between the carrier and the reogulator. Also, as will be discussed below, the Commission took its first formal look at the separations procedures in Phase TA, various versions of which have been in effect throughout the Commission's history (Separations procedlures specify the division of cost, responsibility for jointly used facilities between state and interstate jurisdictions).
The Commission found in this phase of the investigation that Bell's
-realized rate of return for 1966 was 8.5 percent, more than a percent higher than what the FCC felt was justified. Accordingly, Bell was ,ordered to file tariffs reducin~r interstate rates.

The required reductions amounted to $120 million. This amount fell short by $85 million from the Commission's calculation of excess revenues. H-owever, the Commission decided to transfer an additional $815 million of joint costs from the state to the federal jurisdiction thIirougih revisions in separations procedures.
This decision was only the latest in a series of such shifts in the postwar period whose current effect is estimated to be an increase in the interstate rate base in excess of $1 billion, with an offsetting

decrease by that amount of the intra-state rate base. The explanation for these shifts is primarily political. Innovation has ocemirred ounequally inII the history of tel)pholny. Nvueo(is a(dvalces have resulted in dramatic decreases in the costs of providing long (listance services which have been much lmore thaln ploport ionate to( iilcrease(I ellicieclies in providing local services. ('onsequeIlt ly, long (listance rates have gone down substantially while loc('al rates have been risi ng, altholluil recently long distance rates have been increasing as well. TIhe state commissioners, through the National Association of Railroad( andm! Utility Comnissioners (NARIT( '). exert ed('( trelilleildlou pressIlre oil the FCC to acquiesce in shifts of joint costs to thel iltersIate jI ris(diction so that pressure on local rates would( he re(iduce(l. The dillicult v with this is that it remoive I tlie pressuree on t:ate comnissioners to:
(1) Insure that local plant be used efficiently-so that unjustified costs are not incurred;
(2) Promote work on technological innovation that would reduce exchange costs; and
(3) Rationalize local rate structures so that excessive use of the telephone system is not encouraged.
A good example of this is the frequent refusal of state commissioners to institute usage sensitive pricing (that is, a direct charge per call) for local calls so that investment in local exchange plant could be kept at reasonable levels. This directly interacts with total costs byv increasing the peak capacity required and unfairly places the burden of intensive use of the exchange plant on less intensive users.
The FCC recognized these difficulties at the time of the Phase TA decision, but apparently felt that political considerations necessitated conformity with state regulatory behavior. Therefore. instead of apportioning subscriber equipment costs according to relative usage. it multiplied the interstate "SLU" factor (subscriber line use for interstate relative to all use) by three as the basis for allocating costs. It thus allowed the state commissions to shift to the interstate user an increased portion of local costs, some of which were unreasonably incurred.
In fairness to the Commission, it should be pointed out that the political pressures were intense and that guidance from the Congress and the courts as to what constituted reasonable separations criteria was singularly murky. Further, the FCC staff was so small relative to the task that substantial acquiescence in separations agreements arrived at by others was practically inevitable. In 1973, however, the Commission announced to NARUC that it would resist any further shifts to the interstate jurisdiction until certain fundamental issues were addressed because:
It appears that a principal cause for the continued increases in intrastate as well as interstate revenue requirements may well be the failure of exehan-e rate structures, unlike toll rates structures, to provide any meaningful economic incentives for efficient use of exchange facilities and services.
It should perhaps be emphasized here that there is no intended implication that interstate users should not share in the costs of facilit ies used jointly. The assertion is simply that unreasonable costs incurred on the state level and unwillingness by state regulators to rationalize


rate, structures should not be acquiesced in by the FCC for separations purposes. As the Commission noted in the 16258 decision:
In this regard, sections 221(c) and (d) of the Communications Act reflect an explicit expression of Congressional intent that the Commission should have the power to determine the costs of service furnished by telephone companies subject to its rate regulatory jurisdiction. We cite this not for the purpose of establishing 1hat ouir action herein will operate to preempt the authority of the State jurisdictions in matters of separation procedures to be employed by them, but only to do(nTintrate what is cutemplated by the schene of regulation tasilioned by Congiress for the guidance of this Commission with respect to interstate telephone rates. (9 FCC 2d at 91).
It seems clear that the appropriate rate base should include only those costs reasonably incurred-and that this standard should extend to joint costs.
This agenda will return to the question of the appropriate rate of return for a regulated common carrier in a followingi section. It is appropriate here to note a further observation by Dr. Scherer:
The 1f5-196 7 A.T. & T. rate of return inquiry wa s as sophisticated an example of enlightened regulatory surveillance as one cani find. Nevertheless, one concept al blind spolN w.s present. Pervading many of he rg iulus waS an implicit assumption that there is some single ideal rate of return, and that what the FCC had to do was to find the magic number (op. cit. at 523).
Dr. Scherer goes on to explain that, within reasonable limits, the primary effect of the allowed rate of return is to affect the amount of capital gain or loss experienced by current stockholders. If the rate of return is too high in the market's judgment, capital gains will occur until the actual return expected by new stockholders comes into line with other market opportunities. Conversely, if the allowed rate of return is too low relative to other investment opportunities, capital losses to existing stockholders will occur until the actual return to new stockholders is sufficient to attract their capital. Consequently, decisions about the rate of return necessary to attract new capital are largely irrelevant. It primarily controls only the level of capital gains or losses to be conferred on existing stockholders. Therefore, Dr. Alfred KIhn, a noted public utility economist and currently Chairman of the New York State Public Service Conmmission, suggests that it is appropriate to judge agency performance on the basis of )blie utility shae prices in relation to their book value. It is also suggested that the regulatory agency could facilitate reliance on the marketplace by a nouncing its intention to maintain a fixed relationship between market price and book value of equity. This is desirable because of the uncertainty occasioned when investors must guess about future regul a tory beha vi or.'
The ('aomissioni also considered the debt /equity ratio of A.T. & T. in Phase _T of )oel:et 1(6258. Without review, thle ar umeIP ts here, it
is appropriate to point out that the Commiission found that Bell's maintenance of a low debt /equity ratio resulted in higher than necessary costs and that c(ordingly it would take this into account in fixing the appropriate rate of return. This effect occurs in part because interest payiiments may be deducted for corporate income tax purposes while dividend payments may not. The trade off is that as debt increases the risk of holding the company's stock also increases.
I AIlfro1 E. Knhn, The Frconomics of Pecgulation, Principles and Tnstitutions (New York: John Weber and Sons, 1970) vol. I, chapter II, especially footnote 70.

6 ,0 11)(111t I R !ttc 1,11, 1' 1111!! t I I k I I A t

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1. 011t I D I V 11 J I I V C( I I 1 0 It I t I-; 1111 111 111
I.a I v (, I t Lt I it I I N. -is t
prlce' are I I _1 I I I I I 1 0.
In simi, t It eii. I I A_ of I he tekI)II'mt, i I I v('1- 1 PrPScribed .1, r:11e of 1'eturn for A.T. & '11111.
fill, litriff 111111-f-,
liclent to I)II, :)mt hw'I/vd J."Ite IvIIII.;1. It i-:
ever. to rcc() I I I lit, 11 (4 1 'T A I
W "Ll v 0 1,." T).I rf, ])(I I I 1- I t'I I 114 't I ( 11 1 1 ) j, I .-( 0 T) W V rf )rl, l it I ."4('e P. I a bove "I'll ",re w, I S Tio f ion I it 1 )11:1 1 A ml Ile
N\ '01 11 (1 Lrj I j ( J(, '()p Tj I m l I p l) ruct I 1 1,
tlwm I"() !I I t Ill I OV-) It 1w I I w it I )".()I I"I"! lwo
11-:0d to 7)I-ovld(, t1w v.,iI.1oI1Q illfer-tlte
tllc-- ( I NI W(11*0 the of 'I'wilt (d, t1lie
wither of 111will Ijilve v(,!- 1w('11 re,zj)lved. We wi, I c v t 11 -It I I Ie I I I v I 11 1 1 11 1 1 t v T) I"
tested "I tilp] v I )v 111 i I 1 1 1 m e v e I o I I-,, ---I I 'I I t I I I I t v I
V(,.111 I ]W it 1 0 f t I I (I t I I I 1 )1.( 1 v(I 1
vi 1,011 Im"I it en,:Zurincr t I ia t t.w rate is not iA .-!t,)(1 j< t:i I v
impo rf a I i

Tn July. of 190. Plm e TB. t1w p:irf of the _rvnoral t(,Iophono inv(,sri-if'. c i )1(,-; 1
Terwilllfe(l :111d Dnwket 101 2,- wa.- Lo 1 1:;
1, TFcC .-)(I The 111100, colts 1", r l tioll wnq wlimher
to a -- firklllent of -)-- (,
re(Y)T-d 1-110 :M('i fk(, (11101 C. t''e Co"11111on

AIIIIOZ t ally puliciple"; 0 to

the crwillii--- ion was not "Ible to k lie ic.) I
pi iiiciples advanccId by u ol-,le 0 f I 11 e p:1 rt i( s (prilAx I pa v
IO)I-r Ftill McIVIIwll1zI1 cc-4 -;uLr"vsl lolls) : ajid
Th,IT co, :-flidle., to ,)'I 11-'J OC IV,
CnI11111c! ( (, oll I Otll I 1W 1)1'1 P-1 pl',1 T':j 1111P:il' 1" 11: j
cos t and loll"" 11111 11WIVI)l"'I"t l v

-11c)IIIJ he iljl' 1!,1;( )1' 1 t

N H A' 'T 1 1 2 8 -TJ I I I I I VA TE 1A N E' RATE CA-;:
I 1 1 .2-1 A (11 J I w"11 i I
p" q)o-el P, IVII _P Ill
m r"11, (111t!, ;I<

that Cle Comm ls-Aoli liad Included the iz, -tic of Nvii( t1wr Tc'lpak C and

'See dlscu! ,Jua, pp. 19- ;1.


D rates were legal in Phase 11, an issue which predates the general telephone investigation. This issue is still pending but a Recommended Decision by the Chief of the Common Carrier Bureau in Docket 18128 has recently been issued (January 19, 1976, FCC 59797). As will. be discussed below, however, the Recommended Decision does not represent a final resolution of the issues. In f act, it represents little progress beyond the statement of rate-making principles agreed upon by the parties in 1969.
The major remaining issue in the general telephone investigation was that of the reasonableness of the, Bell System's rate base-its investment and expenses for the provision of interstate services. However, before the Commission could catch its breath, the Bell System proposed a general rate increase that it estimated would improve its operatingy results by $545 million and increase its rate of return to 9.5 percent. The principal justifications for the rate increase were:
(1) To realize an additional $130 million in revenues required by separations changes effective in January 1971;
(2) To make up for insufficient past revenues due to faulty economic projections; and
(3) "To sustain the financial integrity of the Bell System and permit the attraction of additional capital needed to satisfy consumer requirements for telecommunications service" (27 FCC 2d at 152).
As has been said, the latter argument reduces to an argument that capital losses will be sustained by existing stockholders if new equity capital is sold with the present rate of return (see pp. 15-17 above). The argument about the need to attract new capital is at least theoretically superfluous.
'The Commission and A.T. & T. agreed on the filing of smaller increases which would improve net earnings by $250 million annually and which would be in effect pending, the outcome of an expedited hearing. It also promised to expedite Docket 18128 (which, as of Apr. 15, 1976,, has not yet been decided).
The Commission also said that:
The subject tariff filings rest on an implicit conclusion that the additional revenue requirements claimed by A.T. & T. and the Bell System companies should be met by imposing higher charges on MITT (message toll telephone) users, to the exclusion of increases or adjustments in the rates of other classes of service provided by them. The basis for this assumption is not shown and we expect A.T. & T. to carry the burden of proof on this issue in Docket No. 18128, in which we also expect A.T. & T. to demonstrate that the instant rate increases do not involve any cross-subsidization of other services provided by the carriers involved. (27 FCC 2d at 155-6).
The Comimission again divided the case into two phases, the first to determinee the appropriate rate of return and the second to look into rate base questions sulbstantially similar to those at issue in D ocket 162,58, Phase IT. Curiously, though, the Commission chose to continue both proceedings.
However, the Commission later announced that Phase II would beK ter-minated because:
We (10 not have sufficient resources to permit adequate staffing of the hearings tha't would be involved or to complete the preparatory staff work required for


(jt %-(.1()j)jng a meaningful evidentiary record on thuse L-,.suvs. Th's is the result
()f tfie in the v(dinne and complexity (if regulatory proljlk jlls
Nvithiii the cminnon carrier fielol. (32 VCC 2d (191, 0*92).
AS has beell "aid, (See 1tvill 2, 1). ihoN-c) the issues of Pliase I I arth an es cnti a r I-t (j t () f u so j,(,,rar(11k_ )S Of
the 1wesence ()I- absence of conipetit loll. "File Colilillissitni's decis, is i-viiiarkable, In-1111arily for its candor. "I'lle Conmil.ss1011
publicly adinitted what no ivsj)()iis1b1e obsei-ver could fait to J*j.q'()(jriiize-that t1w regulatory task- was siniply too bicr fol. the, 14J." to (Ical with an(I that, (Tiven tfie level of i-esourCeS available to it, tlie CoMIMSS1011 "'Mild jj-Lvc to (-OIjteIjt 'ts(ijf witli (jc terjjjjIjijj(r f-,I*ir rate-, Of j-ttjjj-jj, 1( ax-jjjir t1j(,, of tile I-ate hase to the discl-etioll ()f t I Ie ca 1. 1, 1 e 1%
As a restilt, of th's f1dinission, Confyi-ess (lid grant new shid" positioti.-; to tho ("onnnission and the Phase 11 investigation was resuilled. 'I'liat investigation is still pending, altliotirrh recently a comprehensix,(, (10cloileat on this isstie was submitted to the AdministratiN-e Law Jii(lge by the seI)arated trial staff of the Common Carrier 11iii-eati (Stateiiient, and Rcwommendations of the Common C(arrier BiireatCs Trl,,i I Staff, Feb. 2. 19*76).
Vith re(rar(l to the Phase I issue of the appropriate rate of return. the Coininission decided on November 22, 1972, that the appropriate rati of renivii was S., to 9 percent., which wotild require an impi uiwiit in earnincrs after taxes of $145 million in addition to the *- .50
interim relief alivady granted (38 FCC 2d 213). Ftirther i!wreases in the rate of return up to the 9 percent ceiling -svere to be, aclileved through efficleiwy improvements. Petitions to requin, proT)ol'tion:ite rate inCI-eftSPS fOT' all services, rather than puttiiicr all of The btiroJen on monopoly services, were denied in view of fli(I Pendency of Docket 18128. However, the increases were, made subject to an acconntintr order in case rate structure revisions were later fomi(l to be.liistifie(l and the Commission saidthat:
AVO ONT-010t Boll to submit an interim rat(, propo,;al that will be eon,,kfont with sound ratt-mqkin_-1 principles and Bell will be expected to support it pro(3s FCC 2d qt246).
The Coiiiiiils 4ion did not state. in even a creneral way what somi(l r.-ifeni,-,kincr principles were and, in view of the complete, lack of conTI 11;9 snbject. this appears to be a fairly meanincrIess ,xpe 't:ltioll. Tn fzwt. tbe subsequent rate increases were confin(,d ol(,ly to nionopoly services.

rwfore hirr.-infy to cases inore intiniately involved Nvit 1i the Co:I,,,] I i_Fj(Ai*.,:z policies on competition. it is aT)I ropriatp. t.0 11wiltion
tlie final Crei)eral rate Pq.qe in tlii.s series. Cowiid-;-:1(-m'- (to(iz:iol) w'Is'lJopted in Febriiary 19 76. JTC 76-100). Uii(ler i li- rulitif--r. P(,Il i, fllowod aii overidl i-:ite of of wl-li' ]) '."!) :11C1'P!)z'P to 10 Per('ent, thT'011-(rll MFCINW-V iw1)r()v1,T To ttY-(-r1i:ite
J,,(-1 zinn the Comrni. ::,z;1on alk)-ved AT&T tt) iiiwi t.
-e- -o iiet nvo!iw1)v inillion in addition to t1w Interiin Or T11' !-II,
i,:,Tzlv allo'we(t A L l in the il--z- Iw () r I 1( ,I 1' l to 1-', 1 111, e foi- r(-ilizintr the !illowtJ rate of n tui-ii Wl- IMt colli0-014-76-3


mission issued an accounting order for the later increase and promised to hold hearings on the subject when other dockets bearing on the issue were resolved, specifically Dockets 18128, 19129 Phase II, 19989 and 20288. (The latter two deal respectively with wide area telephone service and digital data service ').
In view of criticisms above of the Commission's reasoning on rate of return matters it is appropriate to point out that the Docket 20376 decision displays considerable improvement. For example:
We believe that a 12.0 percent return will enable Bell to attract additional equity capital at terms that are fair to existing shareholders and, at the same time, this return will provide for rate levels that are just and reasonable and in the public interest. (Decision at para. 45)
The cases described up to this point have been only peripherally involved with the issue of competition. There have been, in addition, a series of major policy initiatives adopted by the Commission which permit competition. These have been followed by efforts on the Commission's part to implement them and by responses from the Bell System. What follows is a general description of these issues.
Carterfone (13 FCC 2d 420)-Decided in 1968, this decision allows interconnection of customer-owned terminal equipment. Interconnection was subject to technical protection for the network through the mechanism of carrier supplied protective couplers which were required by the revised tariffs filed as a result of the dicesion. Later the Commission instituted Docket 19528 to provide a certification program as an alternative to carrier-supplied protective couplers. It has recently been decided and will be discussed below.
MCI (18 FCC 2d 953) and Specialized Common Carriers (24 FCC 2d 318) -With these decisions, the Commission began allowing companies other than Bell to supply inter-city private line services via terrestrial microwave. A substantial number of alternate suppliers now exist.
Domestic Satellite Decision (35 FCC 2d 844)-This 1972 decision adopted an "open skies" policy for domestic satellites, that is, that the Commission would open up the area to competition. Western Union has an operational satellite system, RCA's has just become operational, A.T. & T. and GTE are putting up a system, and a partnership of Comsat, Aetna, and IBM are planning a system.

As has been said the Carterfone decision ruled out tariff restrictions prohibiting the attachment of customer-owned equipment to the teleWide Area Telephone Service essentially provides discounts for Intensive users of the swifcheil network in various geographical areas and Is available on either a measured or full time basis. The WATS investigation was instituted in response to a WATS tariff revision fild Jan. 15. 1974. which involved internal restructuring of the WATS rates. It also includes an investigation of the unreso,)lved WATS Issues in Docket 19129 stemming from an earlier increase. (urrently. of course, the revisions are in effect. Further, the decision in this case will presumably have to Iv made subject to an accounting order pending the outconme of Docket 18128. as that decision will Impact on the overall revenue requirement appropriate for WATS service. Docket 20288 deals with A.T. & T. Dataphone Digital Service (I)DS) and is discussed below.

phone network wNithouit regar oteeiiuet oeta o am
Su*tb-equent. tariff's filed by A.T & T. allowed lintconnctonl providedI that carrier supplied( netwNork control signllingl~ un1itsb-NCS's (for exauliple, the dial on LL phone) and protective c (niiecting arrangements, C.As. w ere used.
In 1972) the Coinnilssion b)egani coiisidleration of a liberalizat ion of thlis policy thlt, would allo0W customers to provide NCSU.S ando (2As (or equivalent protection). A IFedera1-St ate Joint Boar~d wvas instituted pursuant to~ Section 410(c) of the Commnunications A ct to make a, recomnniendat ion to thle ('onission. Th'e State -on i III iSsionel-S, through NARUC, and thr-ough their majrt ontIJitBad
hiave ad-amiantly opposed t hese interconnect ion policies because Of alleged ecoiioiiic, ilnlpacts on the local ratepayer, even though the F'(' has repeatedly stressed that economic issues are not a part, of the proceed in g.011 Novemllber- 7. 1975. the Commnission adopted the ,Joint BoardI'(s recon icudat ions for a registration p rogra it for terminal equipment, other thant private branch exchanges (PB Xs), key telephone systems
(KT~s) ain station telephones, and coin telephones. At the Samne timle, however, the C onuision releaseol a further Notice of Proposed Ruleniaking which proposed to include, PBXs, KTSs and main station telephones. (.56 FCC 2M (06). This proposal was referred initially to the Joint Board], which on -March 3, 1976, recommended against, its adoption. The Commission, however, rejected the Joint Board's recomme11Vndatiomi and, eight years after the Carterfone, decision, ad opted it pirograin of certificat ion of customner-owned equipm-rent of Ynany kinds. (FCC 61760, Mar. 3. 197 6).
An important reason for the delay in this (locket was the Maamant oppo!,itiou of A.T. &_ T. Recently, Telephony magazine had this to say :
Although legali-stic and- political rhetoric continues to fly over the isS1e, of intercmnnection and the specific effect of thle registration program and its longrzinge imliications, it would appear that significant fighting in thtis, iwrticiilhlr tactical battlefield is over. The comportment of Bell personnel involved in technical aind policy discussis is in 4tark contrast to just a few years ago wheni all mainner of issues could be injected into a meeting oninrcneco-rltd topics to lie re.-olve(L Although. there are no concessions expressed. lurticlikrly in such officially unresolved areas aq economic impact, there no0w is anl iiuiiiab~zh'o ntmowslioer of "let's put this on aj sound technical basis and get it over wit-h." (Teh'ph(,y, 'march 1, 1976 pp. 2S-29).

DATA SPEED 40-T1711F (Y'ofrr1--,/coMf" MUNATIO?{5 BROITNJ rzY
In vet, another decision luffectin,( the1 gmron(l rules, of coinpetitioli. the Chief of the Commnon Carrier Bur-eau hias recently dlecided that A.T. & T. mnay not offer a new vers--ion of it,, "IDataspeed -40."~ a coriipuiter termiinal which the Biiremn Ch-ief hias found to perforiii data: processing as well as commnunications functilon-s. The( policy iii this area was, set in 197 1 in the. Corn puter biquiry (2R' FCC 2d 2f67). Theo Commission does not presently allow coinun111icat ionsz common curirs to offer data processing( services, or eqipment uless4 a Separa.'te suIbsidiary is established for this piurl)os (wihei A T. & T. has riot (lone).


In the latest decision, the Bureau Chief stated the assumptions of this policy as follows:
(1) Data processing is a non-monopoly, competitive market (28 FCC 2d at 298) ;
( '2) There is a possibility of commingling of costs common to data processing and communication services used in conjunction therewith (28 FCC 2d at 299) and
(3) Were common carriers to compete without restrictions in this competitive market, due to the possible commingling of costs between the regulated communications services which the carriers provide in conjunction with data processing, and the data processing services which they might provide, it would be difficult for the Commission to determine whether, and if so by how much, the competitive data processing services would be subsidized by revenues derived from communications services (28 FCC 2d at 302-3) (FCC 61760, Mar. 3, 1976, para. 8).
The conclusion, lie said, was that:
Rather than institute investigations and hearings each time a carrier offered a data processing service, to determine whether, and if so, how much of a subsidy was flowing to the competitive data processing services from regulated services, the Commission promulgated a rule of general applicability, Section 64.702, which was intended to establish a means of detecting such subsidies. Any subsidies which might flow from regulated communications services to the competitive data processing services would be detectible, as they would necessarily show up on the books of account of the separate business entity. (Ibid. at para. 9)
However, he also said that:
While the offering of this equipment through a separate subsidiary would ameliorate many of our concerns, we recognize that Section 64.702(c) precludes A.T. & T. from offering equipment such as the Dataspeed 40/4 through such a subsidiary. However, we believe the appropriate manner to deal with this problem is through a petition seeking a revision of the Commission's Rules, as well as a possible reopening of the 1956 Consent Judgment. (Ibid. at para. 21).
This decision is important in its own right because data processing and communications services are becoming increasingly hard to distinguish, as is the equipment used to offer them. But it is also significant for reasons which will be discussed more fully below. The problem of competition in this area is in many ways similar to those arising in the areas of private microwave, terminal equipment, and specialized carriers. The issue of unfair cross-subsidization being struggled with in Docket 18128 also exists here, but the response has been quite different. Rather than trying to establish and enforce rate-making princiiples in this area of competition, the Commission apparently attempted to set the stage for a market structure that would make the potential for this kind of abuse more manageable. Catch 22, however, is the problem described in paragraph 21 of the decision quoted above.


Following the introduction of competition for intercity private line services, A.T. & T. announced that it bad developed a means of using previously unused portions of the microwave baseband, Data Under Voice, which would make possible the provision of a very economical "Digital Data Service" between 96 cities. Computer data are in digital form and their transmission over normal voice (analog) telephone lines require conversion of the data at both ends. Digital transmission

allows substantially improved error rates and the elimination of this conversion process.
On July 2, 1973, the Commission allowed construction of an initial five city segment of the DDS system (41 FCC 2d 586). In December 1974, the Commission allowed an extension to an additional 19 cities. However, a tariff proposing to charge rates much lower than those for existing private line services, whici were being used in part to provide similar data services, was rejected. The Conmmission allowed the proposed rates to go into effect on an experimental basis for the initial five cities, but required rates comparable to standard private line rates for the other cities. (50 FCC 2d 501). This was done because the Coinmmission found that A.T. & T. had not shown the rates to be just and reasonable. In particular, a suspicion that the rates were so low as to involve cross-subsidization and predatory pricing affecting competitors was mentioned. Again, of course, the Commission acted in the absence of established rate-making principles. It held however, that pending resolution of the rate principles issue, the old fully distributed cost methodology would be relied upon.' The Commission also ordered an expedited investigation and hearing on the rate issue. 11That hearing is still pending before the Administrative Law Judge. In the meantime Bell has proposed the addition of 40 cities to the DDS network. Additionally, the Chief of the Common Carrier Bureau has recently said that it is "very concerned that no accounts or records were kept which would permit A.T. & T. to submit the historical costs associated with operation of DDS * *" This was. of course. a major reason for allowing the tariff to go into effect on an experimental basis.
The Hi-Lo tariff filed by the A.T. & T. company on November 15, 1973, was a major response to the new threat of competition from specialized inter-city carriers. The Bell system alleges that the specialized carriers are competitive because they supply services primarily on high density routes where average costs are lower. Bell says that its rates have been historically based on an average of costs for" allegedly lower-cost, high density service and higher-cost, low density Service which therefore allows the "cream-skimming' to take place. TIhe IIi-Lo tariff deaverages these charges.
The new rate structure concept has been in effect since June 13, 1974. without a Commission determination as to its lawfulness. On September 9, 1975, the Commission adopted an Interim Decision and Memorandum Opinion and Order (FCC 75-1043) which concluded that the record was insufficient to justify the new tariff structure. Bell had submitted cost studies using the two principle ratemaking phi.losophies contending in Docket 18128, but substantive omissions and/or errors were identified in each application. However, the Commission allowed the Hi-Lo rates to stand pending a new hearing. In addition, a specific delineation of the required information was included in the decision (paragraph 75).
I See below pp. 19-21.


The Commision's decision does not appear unreasonable, especially in view of the fact that ratemaking principles still have not been adopted. Controversy did however surround the decision to allow the rates to continue in effect despite the fact that Bell had not justified them to the Commission's satisfaction. This interim policy would appear to have allowed A.T. & T. to charge rates which may have resulted in a severe and unfair economic impact on competing specialized carriers. On the other hand, they may be completely reasonable. Like TELPAK rates, which have been in effect for many years. these interim rates come at a critical time in the growth of specialized carriers and the long delays in reaching final decisions are extremely unfortunate.
However, on January 19, 1976. the Commission reconsidered and reversed itself on the issue of allowing the Hi-Lo rates to remain in effect pending their justification (FCC 76-30). Noting that the Co-mmunications Act places the burden of proof on the carrier to justify its tariffs, the Commission ordered that, 90 days from the date of the decision, the Hi-Lo tariff would be null and void. In that time Bell is to prepare and submit a new version of the tariff. Again, however, this process is severely constrained by the absence of a clear and well established regulatory definition of the appropriate ratemaking principles.
Although virtually all parties agree that the economic imnpat of competition has to date been insignificant, concern about the long range future implications of competition has led to the establishment of an inquiry in Docket 2000.0 (46 F(CC 2d 211). To put thlis inquiry into perspective, the principle argument made by the established telephone companies and many state commissioners is that competition will destroy current rate structures byv shifting revenue requirements onto basic residential telephone service from vertical and business services (the definition is somewhat unclear, but vertical services may be thought of as equipment or service beyond the basic black dial telephone, extension telephones being one example). This would allegedly occur, for instance, because the historical trend of shifting joint costs to the interstate user would be halted or reversed. Consequently, the carriers argue. local rates would be higher and interstate rates lower as a direct result of A.T. & T. being compelled to lower its interstate rates in order to be competitive with the specialized carriers. The argument is that this shift is socially undesirable.
Similarly, competition in the vertical service market would. the telephone companies say, destroy the historical practice of pricing these services above their costs in order to make a contribution to basic residential servicee.
Many of the telephone companies. NARTITC, and others. have recently made studies which purport to show that the effect will be very
I See also First Supplemental Notice, 50 FCC'2d 574.


lay-(Y(,. Dw-ket Prmid(" a 1()cll for tll(- nnnh--i- ()f t Ile-e I I li''rt d
(kifects all(l all Idelitificatlim ()f 1)(dicy alterfultlvv NN-111ch

Inqui ry fm- III format 1011 (M 1111:11 ed Of
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tiN-e e(.tnl() In ic efft-cts A I I I I w t I j. 4 jvera I I o I I I I I I I I I I i(.11 Ill )I I S C( 0.1-4s :I I I (1 (11 1 1'4 r different iif ht),th IIIII)L4. and ()f "11(11 Nthe ititercm illk-i-tital and IIS4, of (.1I.S1,4 ow l 1-16m vidod tilt. tl--(' ''f I'llized cmiumm c.irrier service-'; ill li( u (if (.1,IiIIII(ni 111h,
tile use 4)f fla t -i"lle it fill (it 11c r (-( i.- t i nsf I i sit i vt 1 or i i -I I i )I-: t i t -4 P r It it -: i I o I i 1 1 1 serv I ces, :I I i t I t I i t, j i i r i ,;( I i ( I i t I i : I I .#-I o., I rn t i t ) I i f I-( \-f I i I a n I ex I x n Sf -.,; f 1 r 1 1, 111 t a n (I fit ei I it i es co ninif) n I N. used f(or lot )th i I it rastat t v i I to] I i 14, r,,t zi t 1, 1 1 1 it, I I I, I 111 L foreig-ri ) servives. Finally. %ve ,I re intuTtsted ill cmnpura t.j ve iliforuiati( n (-(mv r n i i i ,, it 11 %' 1-4 1( 1( M I i V ( I I I P I I I ) I I I (,I )sI -, I I I. I 't-1 1('1i I '- t ( o j )(-(-I ti( ( I I ( :" ( ) 1' 14 I ) Ir I I --
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priciiiz and i-w-mIntm-y :md joractices.
11 OlItSi(le I'e- Wal'Cll fil-111 i-; C111THItIV S11111111,1)riZintr tlj( *
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and pro -ent ill or tile al'(1-111 a I-, V
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Commas, ;Ion JdentifY specific al'ens NN-11cf-e furtliel, 1 (' -e't ].(.]I all(l or
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The final 1<-- Iie to IXI 11](1111tiODC(I in t1liS 1'0Vi(1\N- iS (111 11-1111V lw jpr (I]-,j)uted in tli(, 1,'Ixecunet. case. Theiv baF he(-n almo -t since tli( ls( (rillnin of the specialized carrien;z- a controver- y nvei Ni-liat kiji& c I' T*N'ice-, the TieNv companies may offer. The oriaiiial (](,(-i -ion said ()ill\- that fliev were aiitliorized to otl'(,i- I)rivate ]in(** SerV1k.'(1S. Without what a private line service Nv.-urz. Sillee that tillie the speci(alizeorl eam-iel- 4 b,,ive 1)u zljed for a broad definition, of jwivate line em-ices NA-hile flie p4ablil-lied carrioi-.-; have armed for a very narrow definitiOn. Tll
kfl-im-di an),-ze Nvlien. MCL (,I specialize carrier. filed ta tarilr offering Execimet Service. Using Execunet. an "NTCT customer may ca I I ,my telej)lione in the cities ser'\!-ed from a phone in oil(, of the otlier cities i*eceiving the service. 'I'lie local phone company*s y-4f-m i, lllzecl to reach a wither at "NTCT' local transyni- Zion point wili('111 then connects the user to the local telephone disti-lbution iietwork in Ille (--alle(l cltv till-ollcrli t'lle w;e of ATCI',; private line miei owavt- -N--:tcm. Tlie Incentive to lise Execul-'et stems from the very f,,ivonible rat(,-:, at wbich it 14, ofteue(l relative to tl)(, e.4ablished carried "Z
OTI July -2-1. 1()7.-). flie Comnm :Ion (loo-ided fliat .\f('l Nvolliki not be allowed tO OffOr EXeClITIet ; (I'ViCe b(1CaIj contacts lind ocem-n,(I diii-in,m Comnils 11071 Coll, I(Iel"Itloll f tile
Execimet tai-Iff. At H)e Comim sioWs remu-zt. tile (..-a;- V ha-- h(CTI I'0manded to the, FCC where it is currently pell(lin(r.


In a recent case the Court of Appeals for the D.C. Circuit also reviewed the FCC's record in common carrier regulation and concluded that:
[Tihough unwilling to impute ill motives to the Commission, we are constrained to agree with MCI on the following point: nine years should be enough time for any agency to decide almost any issue. There comes a point when relegating issues to proceedings that go on without conclusion in any kind of reasonable time frame is tantamount to refusing to address the issues at all-and the result is a denial of justice. (Nader v. FCC -F. 2d -).
The Court required the FCC to establish a timetable to resolve the major pending issues, which is attached to this agenda as Appendix 11. A glance at it ought to convince even the most optimistic that it is hardly a panacea. Comparison of the three dockets included with the chart on p. 3 shows that numerous unresolved issues are omitted. Additionally, simply establishing a timetable for decisionmaking does nothing to insure that the results will be appropriate. The Subcommittee believes that it is its responsibility to insure that FCC decisions are informed and well-reasoned, as well as timely. It believes that the recommendations contained in this section are a first step.
Before proceeding to our detailed analysis of what needs to be done, the Subcommittee should respond to the Court's cliaracterizat ion of the FCC's record. It is true that the delays have r'esultedl in a denial of justice. Certainly all of the parties are entitled to a prompt resolution of issues that affect them so directly. But it is also important to recognize the enormity of the task before the Commission. Whatever criticism *s the Subcommittee may have of the current state of FCC common carrier regulation, it is clear that the general telephone invest igation, ushered in a vastly improved era of regulation. There is a relatively easy way to avoid delay. It is to simply and literally ignore the issues altogrether, which is what the Commission did up until the time of this investigation.
The FCC has not had in the past, nor does it now possess, the level and kind of resources which would allow it to engage in really informed and expeditious decisionmaking, as the table on the following page shows. Consequently it is usually reduced to the role of deciding among alternatives posed by the parties, a posture fraught with difficulties. Where it has undertaken initiatives, it has frequently been met with intransigence from carriers, which make the implementation of these initiatives exceedingly difficult. Procedural requirements which were adopted to afford due process can be, and are, used to delay resolution of issues when such is in the interest of one or more parties. A good example of this is the (lelay in 'establishing a certification program for terminal equipment. What the Commission did, and what it h ad to do, was create incentives for those with adequate resources, for example, A.T. & T., to provide the technical basis for good policy.



Common carrier bureau Value added by common
obligations carriers I
carrier As percent
revenues of common GNP *
(billions of Millions of carrer (billions of In billions As a percent
Year dollars) dollars revenues dollars) of dollars of GNP

1949 ................... 1.32 0.931 0.07 ........... ............................
1950 ..... ........... 1.43 .868 .06 284.8 4.20 1. 47
1951 ................... 1. 65 .819 .05 328.4 4. 8 1.43
1952 .................. 1.74 .774 .04 345.5 5. 17 1.50
1953 ................... 1.87 .705 .04 364.6 5.77 1.58
1954................... 2.07 .713 .03 364. 8 5.87 1. 61
1955 ................. 2. 30 .785 .03 398.0 6.37 1. o
1956................... 2.59 .818 .03 419.2 6.92 1.65
1957................... 2.79 .886 .03 441. 1 7.52 1.7u
1958 ................... 2.93 1. 015 .03 447.3 7.99 1.79
1959................... 3.27 1.089 .03 483.7 8.77 1.81
1960................... 3.50 1. 207 .03 503.7 9.35 1.86
1961................... 3.75 1.342 .04 520. 1 9.97 1.92
1962................... 4.02 1.371 .03 560.3 10.77 1.92
1963................... 4.33 1.508 .04 590.5 11.63 1.97
1964 ................... 4.86 2.016 .04 632.4 12.55 1.98
1965-------------------................... 5.30 2.122 .04 684.9 13.50 1.97
1966................... ------------------- 6.04 2.156 .04 749.9 14.61 1.95
1967................... 6.57 2.323 .04 793.9 16.02 2.02
1968 ................... 7.29 2.194 .03 864.2 17.08 1.98
1969................... 8.37 2. 436 .03 930.3 19.04 2. 05
1970-------------------................... 9.04 2.641 .03 977.1 20.69 2.12
1971-------------------................... 9.94 3.089 .03 1,054.9 22.78 2.16
1972................... 11.25 3.453 .03 1, 158.0 25.61 2.11
1973 .................------------------- 13.00 4.765 .04 1,294.9 27.79 2.15
1974................... 14.30 5.180 .04 NA ............................----------------------I Figures are for fiscal years.
I Source Department of Commerce, Bureau of Economic Analysis. I Federal Communications Commission Statistics of communications common carriers. Year ended Dec. 31, 1974, p. 16 and p. 158.
Source: Economic Report of the President, February 1975, p. 249.
Source: Library of Congress, Congressional Research Service, Mar. 11, 1976.


Section II of this agenda shows that the absence of established rateminaking principles has been a primary cause of delay in the last 15
years. It is an issue which originated and is important in the absence of
competition but which is much more visible in the presence of competition. The question to be answered is, competition or no competition, what users of AT&T services will pay what prices for what
service? With competition, however, it is not only the fortunes of
different classes of consumers that are at stake, but also the fate of
competitors that are threatened by discriminatory rates.
Preventing' predatory pricing requires the definition of the cost of
each service and regulatory administration of that definition. That is,
for each service the Commission must project revenues and costs, including the cost of capital, to see if the proposed rates will be compensatory. The Docket 18128 proceeding is aimed at defining the cost of a
service. 'While that may seem to be an easy task, the Commission has
been struggling with the choice between two fundamentally different
versions of cost-fully distributed cost and long run incremental cost.
A simple example will illustrate the difference between the two.

Suppose a telephone company operates a microwave system between two cities which costs $10 million a year to operate, including depreciation. Now suppose that in response to an offering of a new service by a competitor, the carrier learns that, by adding an antenna to the already existing tower and a piece of electronic equipment to that already housed in the associated building, it can provide a very economical version of the new service. The additional equipment required will COst only $10.000 per year, again including depreciation. The carrier proposes to charge rates that will cover the $10,000 in additional costs and the Commission must decide if this is just and reasonable. Under the lono run incremental cost methodology, the additional (incremental) cost would be covered and the users of the other service, let us say it is a monopoly service, would not be "burdened"-the pro vision of the new service would result in charges that would be no higher than they would face were the new service not offered. The fully distributed cost methodology, however, says that the new service must bear a share of the common cost of land, equipment, buildings, and persolnel, in addition to the incremental costs incurred in these categories.' This allocation is normally made based on relative usage and as a result of it the new service bears a portion of the $10 million that represents common costs (for example, the tower). Notice, however, that even if the carrier charges a price below fully distributed cost the users of the monopoly service are better off-part of the common costs are covered by the new service-as long as the price is above long run incremental cost.
In practice the dispute is far more complicated than this, but the example does serve to illustrate the nature of the two methodologies. Ter are many difficult theoretical problems involved with the long run increnmental cost approach., but it does reflect the prevailing thinking of neoclassical economists. A principle justification for competition is that it results in the provision of goods and services at the lowest possible cost. If reliance on fully distributed costs prevents that result, as many argue it does, an important advantage of competition is lost.
Returning to Docket 18128, the Chief of the Common Carrier Bureau recently issued a Recommended Decision in which fully distributed cost Mtethod 1 is favored as the ratemaking standard to be employed by the Commission. Based on these costs, the carrier would be coinpelled to equalize rates of return for all services. If this recommendation is a(lopted, A.T. & T. believes that it should be forced to raise its rates for many competitive services, in some cases quite substantially. The table on the following page was prepared by the Bell System to show what it feels the necessary increases would be.
In vigorously opposing the Recommended Decision, A.T. & T. argues the following:
No business, regulated or unregulated, uses a rigid FIDC approach in setting pries for its goods and services. They do not use FDC because it cannot tell them what it costs to provide a product or service, whether it will sell or not at the price indicated, what the piit to the firm would be, what price will yield the optimal volume of business, or any of the other information relevant to sound business and ecoonomic pricing.
A going business with more than one product or service to sell, in deciding whether to offer a new service, will ask a threshold question "Will my business
I The subcommittee does not Intend to discuss problems associated with particular FDC niethods, although the logic of some of them escapes it.


be better off by offering the service, or not?" An FDC1 approach cannot provide an answer to that question since it is no more than an arbitrary allocation of historical costs. Techniques such as the long run incremental analyses established as being economically sound by the record in this proceeding, are tihe only techniques which can answer such a quest ion.---( Ltter of Mar. 19, 1.97, to Rit-hard E. Wiley from James R. lillingsley, p. 2.)

(12-MO PERIOD ENDING SEPT. 30, 1975)1
[Dollar amounts in millions

Revenues to
Revenue achieve a
level under 9 percent Required Percentage
existing FDC method 1 revenue increase
Category or subcategory rates return increase required

Television program:
Transmission services ------------------...................-- $63.4 $103.0 $39.6 62.4
Full-time TV ...............-........... 39.0 41.0 2.0 5.1
Part-time (occasional) TV...............---------------- 17.2 36.9 19.7 114.5
Public broadcasting service .............---------------. 5.3 21.6 16. 3 307.5
Other educational TV.................... -------------------- 1.8 3.4 1.6 85.1
Audio/radio program:
Transmission services -------------------................... 21.4 31.8 10.4 48. 5
National Public Radio --------------------..................... 5 3.9 3.4 686.5
Private line telephone:
Grade services...................... -------------------------- 413.5 522.2 108.8 26.3
2000 3000 channels .....................---------------------- 302.2 345.1 42.9 14.2
CCSA switching........................ ------------------------- 33.0 45.5 12. 5 37.8
SCAN-AUTOVON (U.S. Government)...... 19.0 34.0 15.0 78.9
Private line teletypewriter services ........... 65.8 103.3 37.6 57.1
Telpak ......... .....................--------------------------------- 383.6 409.2 25.6 6.7
Teletypewriter channels.................. ------------------ 16.0 20.4 4.4 28.0
Other: (e.g., leases to other carriers).......... 40.0 62.1 22.1 55.2

1 Based on FDC study for this period the results of which were submitted to the Commission in connection with A.T. & T. transmittal No. 12497, dated Jan. 29, 1976 (see cost data vols. I and 5). These results do not reflect certain private line rate changes made under transmittal No. 12497, that became effective Feb. 29, 1976, nor the tariff revisions under transmittal Nos. 12493 and 12496, that were filed to be effective on Mar. 22, 1976, and Mar. 28, 1976, respectively.
3 Assumes continuation of the TELPAK offering, but at a higher rate level. The conclusion in the recommended decision that "'bulk TELPAK" should be eliminated would require considerably greater increases for TELPAK customers. Source: 'Brief of Bell System Respondents in Support of Exceptions to the Recommended Decision" in Docket No. 18128, Mar. 19, 1976, p. 11.

The Subcommittee believes that the Recommended Decision's result was largely dictated lv the eonstraints of an inadequate regulatory
program, although it recognizes the theoretical problems associated
with a long run incremental cost approach.
The Suncoinm ittee views this as a potentially dangerous situation.
A.T. & T. hlas pointed out that one possible oatcoule of the current
shift toward (ompetition is that the virtues of either competition or
regulated monopoly will be lost to the disa(lvantages of a hybrid- administered comlpet it ion or market division. Put another way, it argues, that. whatever the merits of competition in principle, inadequate implemenltation ot t hese ) "'
p i nttionpolicies will result in a for of onlpetition
which benefits no one. Precisely this danger exists inll the area of ratemaking principles.
.Review of the Recommended Decision suggests that the long run1
11cirellental cost approach was rejerite I t)il'lHl l I118caise of prntical problems with its applicnt ion. A.T. & T. wias responsible for propoSing the 0long increellntal cost a proaeh )lt the ('on1nission
identified problems with the w ,ay A.T. & T. proposed to ilip)lemient it.
IThe lon rul llt(remetl l d cost of a cominitlili jtions service is exceed(1ingly difficult to establish in principle, and im )ssible for the F(C


to identify with its current data and analytical resources. Rturning to the two service example, the long run incremental cost standard would rely on an estimate of what the new service would cost, in addition to Ihe costs incurred for the provision of the other service. While it is true that this is the sort of calculation which should form the basis for rational business decisionmaking, it would be extremely easy for the regulated carrier interested in forcing its competitors out of the market to miask the true incremental cost of the monopoly service, if indeed le knows what it is. This could be done by attributing costs that are rea.llv Ssociated with the incremental provision of the competitive service either to common costs or to the monopoly service, so that the additional cost of providing the competitive service would appear to be very small. In view of the fact that the FCC's efforts to oversee
1"cost acolantiig are extremely limited, it is doubtful that the Commission could identify such practices. In fact., the present accountin system administered by the FCC is so defective that it would be impossible to detect this kind of behavior even retrospectively. The accounts do not segregate costs by service, so that even the estimates of fully distributed costs, such as the seven way cost study mentioned above, have had to be derived from special studies conducted by the Bell system.
Additionally, adoption of a long run incremental cost approach requires that the regulatory agency be able to project revenues by service so that this information, together with projected costs by service, can be used in a test for "burden." The FCC currently lacks this capability. Without it, the Commission is forced to rely on the projections of the carrier.
Having explained why the Recommended Decision in this case was probably inevitable, the Subcommittee wants to stress that it does not see it as an acceptable long range policy. Unfortunately, the period since the filing of the original TELPAK tariff has seen little in the way of progress toward a situation in which the Commission would be able to adopt sound ratemaking principles. While the dangers associated with this may have been manageable in the past, and are probably manageable for the short term future, they are not so in the long run. To stress again, the need for this capability is critical to the Commission's regulatory program regardless of the existence of competition.
The Subcommittee 9d;71 treat as its ftrst priority in ooersiqht the rapid establis.hment of sound ratemaking principles and a program iwSlldPng that they are adhered to by the carriers.
To realize this goal the following commitments will be required:
(1) There is need for further work on the broad principles under which rate structures will be reviewed by the FCC. The Subcommittee has been informed by the Office of Telecommunications Policy that the National Science Foundation is currently considering a very extensive study of cost allocation principles for multiproduct telephone companies (see Appendix III). Assuming that this effort goes forward, there is no need for duplicate work by the FCC, although the Subcoiimnittee expects that the Commission's participation in the study will be extensive;
02) Tlere is a need for a thorough revision of the FCC's Uniform S-s, iii of A(ccounts. As has been said, the current accounting system


does not allow the Commission to identify costs by service, no matter what the definition of cost. This suinuner the Commission will receive recommendations from a consultant on how the rif()ll Systeli of Accounts should be revised so that cost information by service will be readily available. The FCC Iproposes to begin coni(lering these recommendations during the coning year, but an11alysis idicats that it will be some time before the FCC has a satisfactory accoullnting system in operation. The Subcommittee intends to insure that this effort proceeds as rapidly as possible ;
(3) In order to make sound and timely d(lecisions on rates, thle Conmmission must be able to project demand and cost by service, including the cost of capital, on a continuing basis. In an effort to do this the Commission told the subcommittee of plans for a program of continuing and prospective surveillance. This new program is planned because the Conmmnission recognizes the inadequacy of trying to make these determinations within rate cases. If the program is successful it will be a major step toward reducing regulatory lag and will at the same time contribute substantially to the ('onlniSSions ability t o elgage in sound decisionmaking. Unfortunately, however, tlhe subcoriniittee's investigation shows that the program is at present little more than a worthwhile concept. The program has no organizational existence other than being a part of the responsibility -assined to various branches of the Common Carrier Bureau. The 1976 budget estinateproposed a "paper" reallocation of only 22 positions to the effort. In view of the small number of persons involved, however, and the lack of any organizational focus for the program, the subcomnmittee is not satisfied that it will, as currently proposed, be sufficient. Thie sulbcommittee intends to the Commission for more detailed information on its plans for this program because its early implementation is extremely important.
An alternative to the direct administration of ratemaking standards as a means of preventing predatory pricing is to structure the involvement of the established carriers in competitive fields in such a way that the dangers will be minimized.
Such an approach is suggested in the Dataspeed 40 decision described above. A similar proposal was made at the subcommittee hearings for the terminal equipment field by Mr. Bernard Strassburg. a former Chief of the Common Carrier Bureau. The suggestion, which would involve supply of terminal equipment on an unregulatcdl basis by a separate subsidiary of the carrier, was supported in principle by the United Telephone Company witnesses. Additionally, Chairman Wiley alluded to a "carrier's carrier" approach in the intercity market as worth exploring, although he did not elaborate.
The Subcommittee believes that tile Commission should undertake further efforts to develop its thinking in this area. A l)roblC m. of cours-, is that this might require adjustments outside of the commissions control, modification of the A.T. & T. consent decree for example. The Subcommittee would like the Commission to report to it as soon as possible on any such changes that it believes would be desirable. The Subcommittee suggests that this could appropriately be preceded by a formal inquiry in this area.


Even if this effort to identify and implement needed structural reforms were to be successful, there is still the need for the Commission to have a sound ratemniaking program. At the very least the Cormmission will have to retain authority over monopoly service rates. This program must go beyond the simple prescription of a rate of return to the approval of rates for individual services and so the need for the steps outlined above would not be avoided.

The Subcomminttee believes that it will be some time before the FCC will be able to complete the steps outlined above. For example, OTP does not foresee the submission of the cost allocation study until fiscal year 1978. An important question exists as to what approach should be pursued by the FCC in the interim. The Subeommittee feels that it may be unwise to rigidly rely on the approach suggested by the Common Carrier Bureau in the Reconmmended decisionn for the interim period. While it may be acceptable to establish fully distributed cost as a point of reference, the Subcommnittee believes that the carriers should be allowed to make a case for lower rates on the grounds that they will result in a greater contribution to common costs and therefore benefit all users. Such a showing could be made according to the criteria traditionally employed for justifying discrimination among "like" communications services (see p. 4 above). In the Subcommittee's view these criteria implicitly reflect an incremental approach. The experience gained with incremental ratemaking as a result of this interim policy would be very useful to the Commission in its attempts to implement sound ratemaking principles in the future. Again, the Commission should clearly place the burden of proof on the carrier to show that the increased contribution will occur.

Proposed Findings in the Phase II inquiry into the appropriateness of the A.T. & T. rate base and operating expenses have recently been submitted to the Administrative Law Judge. The Commission has committed itself to issuing a final decision within 6 months of the initial decision. The Subcommittee will reserve judgement on the value of this effort until the final decision has been issued. However, it does seem appropriate to observe that formal inquiries exceeding 10 years in length do not appear to be a satisfactory way of dealing with this issue on a continuing basis. The Subcoinnittee takes it that the Conmmission ag trees since this function has recently been reassigned to the continuing and prospective surveillance program. But the Commission's plans for that program have been exceedingly vague. Insuring that the rate base, and expenses of the carrier are not inflated due to inefficient operation is extremely important to the effort to keep telephone rates as low as possible. At the hearings to be held subsequent to the release of this agenda, the Subconmmittee will ask the Commission for its detailed plans in this very important area.
Two issues merit specific mention here because of the direct impact which they have on the cost of interstate services: depreciation practices and separations procedures.

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Alit hIo)i I v to prI", I I e ( t( to 1v~ ),1t ]A wj l at ho"I'Miz t ionS aIPpears i' elat Ivrlv ul:'oi rmover>- il 1. TIar iitVlii Iw- of en ivol ve manyTI


specific rate changes, some of which are uncontroversial. It would appear desirable to the Subcommittee to allow the clearly justified portions of the tariff to go into effect immediately.
Increases in the time periods for notice and suspension are more questionable. In view of the Subcommittee's review of the Commission's past performance, the difference between 3 months and 9 months seems relatively meaningless. As a former Chief of the Common Carrier Bureau pointed out at our hearings, however, it does not appear realistic to expect the Commission to complete all hearings within the currently allowed 3-month period. As a result, tariffs have gone into effect which are later found to be unjustified, sometimes with adverse impact on customers and competitors. The accounting order provision of the current law, which allows the Commission to order carriers to maintain accounts that would allow refunds if the Commission later found tariff increases to be unreasonable, cannot protect against harm from decreases or unjustified internal rate adjustments. Furthermore, the Commission has demonstrated extreme reluctance to order refunds.
The carriers who appeared at the hearings argued that the proviIsion would lead to regulatory lag. In view of the fact that the Docket 20376 rate case, which was expedited by the Commission, took 101> months to complete, it is difficult to the Subcommittee to see how increasing the suspension period from 3 to 9 months would cause regulatory lag. In fact, a case could be made that, by granting the Commission a more realistic time period to complete its work, it might have more of an incentive to do so in a timely fashion.
Vealistically, the bill does little to shorten the time required to dispose of a rate case. The Subcommittee believes that the Comnuission should complete all rate cases in 9 months and less than 9 months in most cases. Therefore the Subcommittee will make very clear to the Commission in approving this suggestion and in subsequent oversig-ht that it expects the FCC to dispose of all rate cases within 9 months. In order to do this the Commission will have to, as it apparently recognizes, resolve in advance many of the issues which are historically argued within major rate cases. This is one of the stated purposes of the prospective and continuing surveillance program and the Subcommittee expects the Commission to show that they are accomplishing its purpose. Furthermore, the Commission must retaill more specifically than it has in the past the showing required of a carrier, rather than negotiating on an ad hoc )asis in each case, as is currently being done for example in the DDS case. Finally, the Cornmission must consistently require, as it sometimes has not done in the c rI. e r l on the,
past, that the Ni urden of proof be placed on the carrier proposi tariff, as the statute provides. The Subcommittee expects the Commission to unequivocally reject a tariff which has not been justified within the 9 month period.

Common carrier regulation in this country is at a critical stage. After decades of neglect by federal regulators the FCC began in the nid-1960's to establish the parameters of a nianinaful regulatory program. That effort has been halting, controversial, and glacially


slow. Decisions made by the FCC to allow competition within the established carriers in some areas of their business have focused( attention on thl inadeluacies of FCC regulations without in ally way affecting the need for impIrovement. Competitors have brought into sharp relief .the absence of sound ratemnaking principles, to mention one example.
ImIrovenlent requlir(,s )oth1 the will alit thie leani)s to 11111i lrov'. 'T11e Subconittee is hopeful that the expressed commitment of several FCC Coniuissioners, in addition to sustained and effective oversight on our part, will result in a willingness by the FCC to deal thoroughly and expeditiously with the many important issues before it. The Subcommittee will dniemonstate in this agenda a conminitment to provide the FCC with adequate resources. Given this, the Subconmmnittee will hldl the FC( ilmore accoulntable for its l)Q1'fomanllc thia it 1as in the past.
The improvements in common carrier regulation which the Subcommittee has suggested place a heavy burden on the FCC, and its Conmnon Carrier Bureau in particular. There is widespread recognition that the resources of the Common Carrier Bureau are inadequate. OMB has been unsympathetic to requests for personnel increases, however, and currently the President has imposed a personnel freeze which applies to the Comminssion. It may be politically expedient to reject what can be viewed as bureaucratic aggrand(lizenieit, ibut this attitude is particularly unfortunate given the present state of the Conmmission's regulatory program. The FCC has adopted policies in the couImonI carrier field which are substantially in line with the positions of the White House. But, as the Subcommittee has pointed out, however appropriate policies may be, poor implementation can, and frequently does, have disastrous consequences. It would be unfortunate if the FCC's current policies allowing competition were to degenerate into a cartelization of the market because the Commission lacked the resources to do otherwise.
The Subconmmittee does not wish to simply throw money and personnel at the FCC. However, it does not appear that OMB will provide the Subcommittee with an assessment of the personnel needs of the Common Carrier Bureau, so it will seek funds for an independent assessment of the Bureau's personnel needs by an outside consultant. It is the Subcommittee's belief that this will provide the Congress with a reliable assessment of the personnel needs of the Connon Carrier Bureau which can be used as a basis for future applropriations. Certainly it is at least conceivable that the consultant will find the existing resources to be adequate if theY were eftli(,(iently vie(1.
For the interim, the Subcommittee will recommend modest increases in policy making personnel for the Common Carrier Bureau. The Sublcommittee is aware that the Bureau believes it needs additional applications processors as well, but it has not ben satisfied as vet that additional resources for this purpose would be used efficiently. In particular, there appears to be a tendency to rely on professionals to complete what are essentially clerical tasks. The Commission will be given an opportunity to correct either this situation or the Subcommittee's impression of it during oversight hearings. If it is successful,


the Subcommittee will also recommend additional personnel in this area.
It is obvious that the effort to improve common carrier regulation requires a great deal of policy planning and supporting research. The Commission, under substantial prodding by the Congress, has been gradually improving its ability to engage in policy planning. The Office of Plans and Policy has an engineer and an economist whose primary area of expertise is common carrier regulation. They are currently overseeing the following studies on common carrier issues:
(a) The Uniform System of Accounts study mentioned above cost: $126,000;
(b) The study to sumniarize and analyze docket 2000,3 submissions mentioned above: $91.000; and
(c) An industry structure study dealing principally with the relationshiip of Western ieetic and A.T. & T'. and economy of scale issues: $100,000.
The research budget of the Commission is small. Only $350,000 has been requested for contractual research studies in fiscal year 1977. This will be administered by a staff of 10 (10 person years for $258,609). The Subcommittee views this amount, which is for work in all areas of the Commission's activities, not just common carrier regulation, to be extreinely inadequate in view of the following pressing needs:
(a) Research support is needed to investigate the structural issues in the coii lo C 'aric1r iek WilcI have been outlined above. The research results would be an integral part of efforts to adopt ground rules for full and fair competition and recommendations which the Subcommittee has asked the FCC to make to it on this subject. Related to this is the question of convergence between communications and data processing technologies. The Dataspeed 40 decision indicates the need for revisitation by the Commission of its fundamental policies in this area;
(b) The economic impact inquiry, Docket 20003, is expected to generate the need for substantial additional research on selected issues relating to the introduction of competition. In particular, a thorough investigation of separations policy would appear highly desirable in view of the fact that much of the claimed impact of competition will result from a shift of cost assignment among jurisdictions. There has been a need for a thorough investigation of separations for some time, but the advent of competition makes it desirable for this effort to proceed more expeditiously.
(c) Finally, there is a need for substantial improvement in the Commission's ability to project demand and cost by service. The CommInon Carrier Bureau has begun an effort in this direction, but the Subcommittee believes that substantial outside research support would be extremely helpful.
The Subcommittee will recommend to the Appropriations Committee that an additional $500,000 be made available for outside contractual studies in the coin iia year. .Thle Slicmolllnittee expects this money to be used in tilhe areas it as out iined above.


r I or vroNl 11A.Tol" -vi If Co'.1

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rates for private line telephone, private line telegraph, TELPAK and program transmission (TV) services, are lawful and the rate levels are appropriate.
(Resolution of these issues will also affect implementation of the decision in the A.T. & T Rate Case, Docket 19129, CC-70-3.) The hearings have been con(luded and the record has been closed. The filing of findings and replies was completed in May 1973.
Necessary action before completion.-A recommended decision by the Chief, Common Carrier Bureau, will be issued January 1976. A final decision by the Commission is anticipated in August 1976.

Issue.-Investigation and inquiry into the regulatory aspects of sharing, resale and brokerage of Common Carrier services.
Disciission.-It is anticipated the near future will witness significant innovative efforts to utilize voice, data, facsimile and video communications services in ways financially beneficial to the users. The Commission is thus conducting rule making proceedings to set forth a policy defining the extent to which such efforts require regulations to protect the interests of both the using public and competitive suppliers of communications services. Comments and reply comments have been filed.
Necessary action before completion.-A final Commission decision is anticipated in May 1976.

CC-75-1-A.T. & T. It-LO TARIFF-DOCKET NO. 19919
Issue.-A.T. & T.'s departure from nationwide averaging of costs in establishing rates.
Discussion.-The Hi/Lo proceeding is an investigation of A.T. & T.'s new rates for certain voice-grade private line services. The major issues of the case include the nature of A.T. & T.'s departure from nationwide averaging of costs for the purpose of meeting the competition from specialized common carriers, the iml)act of the departure among customers, and the impact of the new rate scheme
-upon the specialized common carriers. The new rate schedule provides for lower rates over heavy volume routes that between points with lighter traffic density. The Commission adopted an Interim Decision on September 18, 1975 which found the record insufficient to justify a decision. It therefore remanded the case for further hearings. Reconsideration petitions are pending.
Necessary action before completion.-Action on reconsideration petitions expected in January 1976.

Issue.-A.T. & T. changes for interstate telephone service and rate of return.
Discussim.-In January 1975, A.T. & T. requested an annual increase of $717 million. The FCC found that while an increase of $365 million was justified by the increase cost of debt, further proceedings were required to determine whether all or part of the remaining request could be justified on the basis of increased cost of equity (Docket 20376). The hearing record was closed and proposed findings were filed by the trial staff in August 1975. An initial decision was issued by the Administrative Law Judge in October 1975.
Necessary action before completion.-A final Commission decision is expected in February 1976.

Issue.-Terms and conditions for the interconnection of terminal equipment with the interstate telephone network.
)iscusion.-In 1968 the Commission issued its "Carterfone" decision (Docket 16942). The Commission held that A.T. & T. tariff prohibiting the use of customer-owned interconnect devices was unlawful. Subsequently, the National Academy of Sciences was awarded a contract to conduct a study on the technical problems involved. In 1971/1972 the Commission established two advisory committees to recommend standards and an enforcement program for accommodating custom-


er-provided PBX facilities and dialing and answering devices. The Coiniurittie submit ted a series of reports and recmiinendations on which public C"eman.uts were requested as a part of the proceedings of D)ocket 19528. With the subission of the final technical reports, the work of the Advisory Committees W\ill be terminated in early 1976.
ia June 1972, the Coinmission instituted an inquiry and rule making proceding to determined whether and under what terms, conditions or limitations, interstate message telephone services (MTS) and wide area telephone service (WATS) tariff should be revised to permit customers the option of furni.shing network control signalling units and connecting arrangcnrnts. Thre edera[Stat Joint Board established for this proceeding sent its reconniendat ions for a registration program to the Conission in April 197- and on May 24, 1975 the ('mmission invited public conmients on the Joint Board reconmendations. In October 197 the Co1mission adopted a notice of proposed rule making asking for comments on the planned inclusion in the registration program of PBXs, key thiphonie systems and main station telephones.
eccessury tat before CowIplction .-The Commissioi is expected to nct in petitions for reconsideration in February 197G and Coninini.-sion:rtion On the pussible inclusion of PBX's, key telephone systems and main station telephones in the registration program is expected in March 1976.

Issue.-Economic Inplicat ions and Interrelationships Arising from Policies and Practices Relating to Customer Interconnection, Jurisdictional Sepa rations and Rate Structures.
Discussion.-On April 10, 1974, the Commission adopted a notice concerning an inquiry into the economic implications of customer interconnection, jurisdictional separations, rate structures and the entry of specialized common carriers, interested parties were invited to suggest issues to be explored in this proceeding and on December 17, 1974 a first supplemental notice was issued, identifying additional issues to be addressed and data required. These issues include (a) interconnection and use of customer-provided facilities; (b) use of specialized common carrier services in lieu of common carrier private line services; (c) the use of tlat-rate and other cost-insensitive pricing practices for local exchange services, and (d) jurisdictional separation of revenues and expenses for plant and facilities commonly used for both intrastate and interstate (including foreign services, 32,000 pages of comments have been abstracted. A research cent mact has been granted to Technology and Economics, Inc. of Cambridge, Massachu Necessary action before conpletion.-An interim report on selected issues will be completed during 1970. The Commission will then decide on appropriate follow-on action.

IRsue.-Investigation into A.T. & T. charges for Digital Service (1DS1)
Di.scu*ision.-In June 1975 the Commission granted authority to A.T. & T. to construct Data Under Voice (DUV) facilities as an adjunct to existing m11icrowave facilities between five major cities, to furnish existing data Necessary action before completion.-Proposedltin dinis b tire nmon Cnrrier Bureau Trial Staff are due by March 1976 and a final Commission decision is expected during the Sunner of 197.




PBfore the


Washington, D.C. 205534

(FCC 75-1207 37771)
In the Matter of: Directive from the U.S. Court of Appeals for the District of Columbia Circuit requiring submission of a schedule for the resolution of certain Commission proceedings
(Adopted October 24, 1975; released October ,1975)
By the Commission:
1. The U.S. Court of Appeals for the District of Columbia Circuit, in a decision released on September 29, 1975, afftirmined the Conmmnission in all respects on petitions for review of its Phase I decision in the Docket No. 19120 A.T. & T. rate proceeding. I alph Kader et al. v. F(C' and U.S., Nos. 73-1045,. 73-2051. The Court held (1) that the Commission's rate of return calculation was adequately supported by the record; (2) that the Commission (did not abuse its discretion in splitting the proceeding into separate phases, deferring considering of such questions as a possible Western Electric rate of return adjustment until the second phase; and (3) that the Commission lawfully prescribed a rate of return for A.T. & T. in its Phase I proceeding.
2. The Court was concerned, however, with the pace of the proceeding. Accordingly, on its own motion, the Court directed the Commissien to submit a schedule for the "orderly, expeditious resolution" of certain proceedings. The schedule was to include a timetable for Phase II of Docket No. 19129, Docket No. 18128. and other dockets necessary to resolve the issues discussed in the Court's opinion. Nader v. FCC, slip opinion pp. 1939-41.
3. Although considerable progress has been made since the Nader case was briefed, we are establishing a timetable in this order for the expeditious resolution of Phase II and Docket No. 18128. In addition, we are taking steps administratively to ensure that the administrative law judge presiding over Phase II has the resources and docket relief necessary to meet the timetable. Finally, we are instructing the General Counsel's Office to inform the Court fully of the complexity of the proceeding, the manner in which Docket No. 19129 has moved forward since Phase II was reinstituted in 1972, and the reasonableness and orderliness of the timetable we are establishing.
4. Phase II of Docket No. 19129: The administrative law judge presiding over Docket No. 19129 called a hearing conference of the parties on October 15, 1975, to discuss the Court's mandate in the Nader case with a view to expediting the proceeding as much as possible consistent with an orderly resolution of the issues. Counsel for Mr. Nader and for MCI Communications. Inc., petitioners in the Nader cases, were present and participated in the meeting. On October 17, 1975, the ALJ released an "Order After Hlearing Conference" setting forth the following accelerated timetable for filings:
December 15, 1975: AT&T to file its proposed findings:
February 2. 1976: Conmmission Triail Staff and all other parties (except
AT&T) to file proposed findings or briefs, along with replies to AT&T filing;
April 1, 1976: AT&T, and others similarly situated, to file any replies to the
February 2 filings.
The AL.J proposed to do his best to prepare and issue an Initial Decision by September 1976.
5. In view of the size and comIplexity of the Phase II record and the importance of the issues involved, we believe the AL.Ts timetable to be a reasonable one and see no reason to try to improve uI)pon it." For our own part, we should be able to issue a final decision in Phase 11 within six months after the filing of

xiA terioan Telephone Tcr7earaph rCompan.y, 3' FCC 2d1 213, 38 FCC 2d 492 (1972), 3S "CC 2d 9,1, 42 FCC 2,1 29" (1973).


('Xcept ion -, t l) t I I I, I I I i I ia I I 1) 11. A ss I I I I I i 1.L III 1 11 j I I I E )70, :',0 41,i for 1i I in-, excelit i(m ,, a iiii it i) i i I iii, w t, I I I fir 014, fill.11 C lintmis,- iou(lccision -Iiiuld he hy April 11jT7.
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'tIld, r-ph'-s by .NoV(,IIlbA1r 12,' W11cli I hi, nal I Pr %% As llw-wi, i lcd it. a v. i,
Set. :1 (ica(hille for final 41vci i,,n at n0w immilis Awr indtww W the &A-wif Am
(, v, I o I-. 1- 6 ', , t i :) V ,, 2 1 6 1 ), (;i_". I I I I ) I 0 1 I t I I
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tll re tih es To ill \\ ll t-ii I'l ti"cid lilt' illa t''. A (.".'';
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Tire wqWsitlir %viih resivi"WIN ("diAlmiliml of 1hr Initial DMA'al a'Al 1W
f tilt,
In view of ille 011111's diri"I We ill the A tdcr ;i nd in !it, light of our
asqt-,::ww id what is r(quirtA for the orderlyy and exp(Alious w-uhaion; of thnsu 1hriv.,liroceeding-, it isordtnki:
a. That Iho Ink"'Ill Pocisil ri in Phase 11 of DotkkA No. 10129 lie i --ind
oil 15 EiT.6;
ii. That tht' RWCOIJIIIWIHIC l Decision ill Docket No. 1 -12S be is -iicd i n or
b" 1*( i 1, k, j i 11111 I r 3- 1 -). 19 7 110 -,
Tha t t lit, ( ' ( 'om) 4tl dt ta il wie of his a t t moys t o the a (I It! in
trmit, law ju(Ile jjrcsidiiig over Phase FT of Docl et No. 1912!1, ()it a fiilliiink, t)a!- i-,. from t1w (late Of the first filing, of 1 ropo,- ud lindiii-.< ui,*jl i>-iio!I(v of !Ile Initial I )Ocisioll :
(I. That ille Chief Ad In ini";1 native Law Jut1go tako uch I( ps mil i
sll(,Il ot, ca :.-:(,s 1:-; a rt' Tl('Cts -;:iry t(i iii ju(L_,o in Pha -4e TI (if Do"ket NO. 1 421, i will be full itt(-ntion t(i r(- i)liitioii of That imitter*
o Tl at tho Genomil Comisel convey W s order, alon; with suoli Nwkground inatorial as lie deems myessary to inform thc- (7ourt of Th# i-iportanre and conplexity (if tI,(,-o matters, to Go ('our!, in reqpcinse to il";
9. It i! our firm intention To moof tlip f-Olowing schedule of Final in
lho -:k, and. whero possifile, to improve on it:
-1. Ph:l-e 11 of Dochet 1912!)-six months after issuance of the Initial
Avi-Ision -,
11, T -k (, It 'Nn. I 1 2' A i f 2. 19 70 )
c, N,:. 2W,7(;-F(,hr),,nry VS, 1 )7(3.
V I \ 4- 1: N T J. N 13,


Washington, D.C., December 3, 1975.
Chairman, Subcommittee on Communications, Committee on Interstate and Foreign Commerce, House of Representatives, Washington, D.C.
DEAR MR. MACDONALD: I am pleased to respond to your request for our suggestions as to a timetable for implementation of the regulatory proposals we submitted on November 10 to the Subcommittee's oversight hearings on domestic communications common carriage.
At the outset I think it is useful to draw a distinction between changes in legislation and adoption of new or revised regulations. Each of the specitiw proposals we advanced to the Subcommittee can be accomplished within the framework of the Communications Act as presently written, since each wold implement policy decisions that-as you pointed out in the hearings-have already gained judicial approval. There may still be occasion for confirming legislation, to gain the explicit policy backing of the Congress, to ease the burdens of repetitive judicial challenge, and to forestall any possible backsliding by future FCC's. This is in fact now being considered by the Administration, and may result in statutory proposals to the Congress next year. But whether or not such legislation is submitted or adopted, there will remain a need for updating of outmoded regulatory tools-and this task by its nature must be performed by the FCC, with our assistance and your oversight.
With that background, the following are our suggestions for a regulatory timetable over the balance of this fiscal year and each of the three succeeding fiscal years. In each case, the parenthetical number refers to one of the eight numbered proposals I advanced in my November 10 testimony.
Fiscal Year 1976
(1) FCC decision in Docket 200O (economic impact of competition), and explicit allocation of the burden of proof regarding asserted harms.
(2) FCC decision in Docket 20097 (communications brokerage), and accompanying definition of the scope of "common carrier" services requiring regulation under the Communications Act.
(2), (6) FCC Notice of Inquiry and Proposed Rule Making on de-tariffing of terminal equipment, to include practical questions such as when and under what conditions telephone companies should be permitted or required to service equipment supplied by their affiliates or by other companies: and what steps are necessary or appropriate to prevent cost-divestiture cross-subsidization, while minimizing regulatory intervention.
(4) FCC recommended decision (January 15, 1976) on private-line ratemaking principles, Docket 18128.
(4) Joint FCC-OTP-NSF issuance of a Request for Proposals on a major, multidispliciplinary study of cost allocation principles across the board, including application to terminal equipment and to other services not presently open to competition.
(5) FCC Notice of Inquiry and Proposed Rule Making on revisions to the Uniform System of Accounts.
(7) FCC decision on extension of Docket 19528 (technical interconnection) to voice-related terininal equipment.
Fiscal Year 1977
(3) OTP submission to FCC of proposals for revised separations procedures, and FCC convening of Joint Board.
(4) FCC decision in Docket 18126 (August 2, 1977).
(4) Award of major cost-allocation study contract.

2 The parties at the hearing conference discussed the possibility of eliminating the Initial Decision and having the AL certify the record to the commission n for decision. We agree with those among the parties who found this unlikely to produce real time savings. As was pointed out. the Initial Decision should lay to rest many issues that need not be revisited in detail by the Commission. In addition, we are particularly reluctant to deprive ourselves of the expertise the ATJ will have attained in the hearing process and will pass on in his Initial Decision. We reject that possibility as neither orderly nor expeditious.


1 i cf? I I a r 19 "R
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Y( ar 1979
F(V n(hiptimi (of revim"I s(Tara olis I w(ttdures.
14 1 PCC adi q 0 A at (if m>1 a! 5, it t i i 1 1; r Wd INS.
Wi, (4) F(V dtwisiwi m the (h. lArV;1w: 4 i, PAW v(j1J;,lj1( fit. Nvith ctist
-illm-afiwl prilwiplt- .1ppliml it) (Ow-Our- wid mosx >iibsid; qmwwuwrds; W islwhve revision to1956ATANtimi-tait dt4mm.
I 111.1t to Some the !wvi '(l 'T time :1110ted t(o 'Alititm of' thit-w 110uAttory ImMent4 may easily niqvior t-- l(,11g; to tillwl-S, the tillielaWe lli;l ;111114,;11, unreasonably o;hort. I am disupp-hittAl, for exainl&% ti"If tjqjldlpjj j"Imijoilipilt dic-taritbil- must await a.,-,i*cement (,it wst. allwittion principle>, and th"t ,) little jir(,gi-es-,4 hao, previously 1wen malde ()it this front- :ts to in" juim :t it"Qa- st tidy. Oll ill(, Whel. lialld, yoll Nvill mriabily wint to) insult NOW thii, FCC as to Mit,11wr ilie wher action dt,.idlint-, we li:tvc sllgrgt'ste(l an, attainable. I Impe ill ally that mir wil! assist lo(sth tit(, FCC ana your ,Kiih,-miiiiijtee ill -Iructuring an agend.t for the e0litintling -Ind Nvelcome over:- i,. U ywi have 'dtim(-d.

ticking Dirc( pr.

UNIVERSITY OF FLORIDA 3 1262 09113 7231