Appendix — Louisiana Public Service Commission v. Federal Communications Commission

lias

84-871

NO.

NOV 30 1984

|

ry ANDCR L. STEWAS,

In the l mate

—

Supreme Court of the United States

October Term, 1984

LOUISIANA PUBLIC SERVICE COMMISSION,

Appellant

versus

FEDERAL COMMUNICATIONS COMMISSION

and UNITED STATES OF AMERICA,

Appellees

On Appeal from the United States Court of Appeals

for the Fourth Circuit

APPENDIX TO JURISDICTIONAL STATEMENT

VOL. II—APPENDIX A (Continued) — APPENDIX E

Michael R. Fontham

Paul L. Zimmering

Noel J. Darce

Of STONE, PIGMAN, WALTHER,

WITTMANN & HUTCHINSON

546 Carondelet Street

New Orleans, Louisiana 70130

Telephone: (504) 581-3200

Marshall B. Brinkley

General Counsel

Louisiana Public Service Commission

Suite 1630

One American Place

Baton Rouge, Louisiana 70825

Telephone: (504) 342-4429

Attorneys for the

Louisiana Public Service Commission

A B Letter Service, Inc., 327 Chartres St., New Orleans, La. (504) 581-5555

9a

i

TABLE OF CONTENTS

Amend. of Part 31, 89 F.C.C.2d 1094

a A

Order Denying Siheasion

Notice of Appeal.......

State Ratemaking Orders

Ex parte South Central Bell Telephone Co.,

Order No. U-15445 (La. Pub. Serv.

Comm ’n, 1983)....... ee

Ex parte South Central Beil Piteshone Co.,

Order No. U-15445-A (La. Pub. Serv.

Comm'n, 1983)............

General Order, Reaffirmation of the

applicability of state regulatory

principles (La. Pub. Serv. Comm'n, 1981)

Ex parte South Central Bell Telephone Co.,

Order No. U-15955-A (La. Pub. Serv.

Comm'n, 1984)...

Statutes Involved .

47 U.S.C. §151 ..

47 U.S.C. §152..

47 U.S.C. §153(e)

47 U.S.C. §220..

47 U.S.C. §221(b) .

47 U.S.C. §221(c)

47 U.S.C. §410

Page

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BEFORE THE

FEDERAL COMMUNICATIONS COMMISSION

WASHINGTON, D.C. 20554

CC Docket 79-105

In the Matter of

Amendment of Part 31, Uniform System of Ac-

counts for Class A and Class B Telephone Com-

panies, of the Commission’s Rules and Regula-

tions with respect to accounting for station con-

nections, optional payment plan revenues and

related capital costs, customer provided equip-

ment and sale of terminal equipment.

MEMORANDUM OPINION AND ORDER

Adopted: April 1, 1982; Released: April 27, 1982

BY THE COMMISSION: COMMISSIONERS FOGAR-

TY AND JONES DISSENTING AND ISSUING A

JOINT STATEMENT; COMMISSIONER RIVERA

DISSENTING.

1. We have before us a petition for clarification of our

First Report and Order in this proceeding (85 FCC 2d 818

(1981)) filed by the National Association of Regulatory

Utility Commissioners (NARUC) and a petition for recon-

sideration of that Report and Order filed by the People of

the State of California and the Public Utilities Commission

of the State of Cali: unia (California). The First Report and

Order, commonly known as ‘‘Expensing of Station Connec-

tions,’’ adopted a number of changes in Part 31 of this

Commission’s Rules (Uniform System of Accounts for

Class A and Class B Telephone Companies). The principal

A-62

ehanges required that future costs of installing new inside

wiring and similar costs be included as an expense in Account

605 (Repair of Station Equipment). Such costs have previous-

ly been capitalized in Account 232 (Station Connections). The

First Report and Order also required that the present net in-

vestment in inside wiring and investment that will be add-

ed during a transition period be amortized over a period of

10 years. That requirement superseded existing depreciation

prescriptions for such investment.

2. Both petitions raise the question of whether, and to

what extent, the adoption of the First Report and Order limits

the discretion of state commissions to follow different accoun-

ting and depreciation procedures for purposes of computing

revenue requirements for intrastate telecommunications ser-

vices. NARUC seeks a clarification of the First Report and

Order declaring that it does not restrict the discretion of the

state commissions and California seeks reconsideration of our

decision to the extent that it purports to restrict the discre-

tion of state commissions. GTE Service Corporation (GTE)

and American Telephone and Telegraph Company (AT&T)

have filed oppositions to the petitions. Those companies con-

tend that the First Report and Order does and should restrict

the discretion of the state commissions.

3. We have concluded that the First Report and Order

does not preclude state commissions from using other accoun-

ting or depreciation procedures for intrastate ratemaking pro-

ceedings. Thus, we are granting the NARUC petition insofar

as it seeks such a clarification. In view of our conclusion that

state commissions are not precluded from using their own

accounting and depreciation procedures for intrastate

ratemaking purpose, it is unnecessary to consider further the

California petition and it will be dismissed as moot.

— eos Oe eS eee -

—_— ----— - —— ee eee ee ee

A-63

I. Nature of the First Report and Order

4. In our Phase II Final Decision and Order in

Docket 19129, 64 FCC 2d, 1, 54-56 (1977), we concluded

that it would be desirable to place costs associated with

station connections on the causative ratepayer. We accor-

dingly ordered AT&T to submit a plan for changing the ac-

counting treatment of station connection costs that would

be consistent with that objective. Jd. at 110. AV&T

responded by filling a petition for rulemaking (RM-3017)

that proposed amendments to Part 31 of our Rules. After

reviewing that petition, we instituted this proceeding by in-

viting comments upon a somewhat different proposal to

modify accounting for station connections. !

5. After reviewing the comments, we concluded that

any changes in the accounting or other regulatory treat-

ment of station connections should not include drop or

block lines and protectors. We also concluded that changes

in accounting procedures would not be sufficient in and of

themselves to place other station connection costs on the

causative ratepayer. This is the case because costs

associated with the provision of inside wiring necessarily

must be apportioned between the federal and state jurisdic-

tions as long as inside wiring is provided as a tariffed ser-

vice subject to dual regulation. Complete unbundling can-

not be achieved by expensing rather than capitalizing such

costs because both the telephone operations investment

and telephone operations expenses are apportioned for pur-

poses of computing an interstate and an intrastate tele-

communication service revenue requirement. Complete

T Notice of Proposed Rulemaking (CC Docket 79-105), 44 F.R.

48988 (August 14, 1979). We also invited comment upon some other pro-

posed accounting changes that are closely related to station

connections.

eee

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unbundling could be achieved by determining that the pro-

vision of inside wiring should be provided on a detariffed

basis. We have, of course, made such a determination with

respect to customer premises equipment and have adopted

rules to separate that business from the telephone opera-

tions that are subject to tariff regulation.2 We concluded

that it would be premature to adopt such a fundamental

change in the regulatory status of inside wiring without

conducting further inquiry.

6. Nevertheless, we concluded that changes in ac-

counting and depreciation procedures that would facilitate

implementation of any decision to change the regulatory

status of inside wiring would be desirable in the absence of

such a change. We accordingly issued a First Report and

Order adopting changes in accounting and depreciation

rules and a separate Further Notice of Inquiry (86 FCC 2d

885 (1981)) inviting additional comments with respect to

possible changes in the regulatory status of inside wiring.

The First Report and Order does not produce any change

in regulatory status. The interstate portion of the embedd-

ed net investment will be reflected in the return component

of the interstate telecommunication service revenue re-

quirement and the interstate portion of the annual amor-

tization and the new installation expenses will be reflected

in the expense component of that revenue requirement.

Unless and until we determine that inside wiring should

not be provided as part of a tariffed service, the new ac-

counting rules will not have a greater or different effect

than any other accounting rules we have prescribed for the

- See Primary Instrument Concept (PIC), 68 FCC 2d 1157 (1978);

Second Computer Inquiry Final Decision, 77 FCC 2d 384 (1980), recon.,

84 FCC 2d 50 (1980); further recon., (FCC 81-481, released October 30,

1981).

A-65

purpose of computing the interstate telecommunication

service revenue requirement.

7. Insofar as the petitions seek a determination with

respect to this Commission’s purpose and intent, we con-

clude that the First Report and Order was not intended to

have any preemptive effect that does not arise by operation

of law. The discussion of the effects of expensing upon in-

trastate rates and revenue requirements in that Order was

based upon the assumption that all or most state commis-

sions would choose to follow those rules for purposes of

computing intrastate telecommunications service rates.

Our decision to permit carriers to accelerate the transition

to expensing with the approval of state regulatory commis-

sions was also based on the assumption that few, if any, of

the state commissions would choose to prohibit expensing

for intrastate ratemaking purposes. Such assumptions ap-

peared reasonable because most state commissions have

followed most accounting and depreciation procedures

prescribed by this Commission in the past and the con-

siderations that led us to conclude that expensing will

benefit both carriers and consumers in the long run are

equally applicable to intrastate ratemaking. No policy of

this Commission would be furthered by requiring state

commissions to adhere to the rules we have adopted for

purposes of computing the interstate revenue requirement.

If carriers adhere to our rules for purposes of computing

the interstate revenue requirement, our purpose will be

achieved.

8. The participants in this proceeding may not view

the preemption issue as a question of intent, but rather as

a matter of statutory interpretation. The petitioners may

be contending that this Commission could not require state

commissions to follow our accounting or depreciation rules

—————— a

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for intrastate ratemaking purposes and AT&T and GTE

apparently contend that Section 220 of the Communica-

tions Act precludes state commissions from departing

from any accounting or depreciation rule that has been

prescribed by this Commission. To the extent this is the

case, this controversy might more appropriately be

characterized as a request for a declaratory ruling with

respect to the meaning and effect of Section 220 that is not

limited to these particular rules. We do not propose to deny

relief because the petitions or oppositions may not be pro-

perly labeled. We have concluded, for reasons explained in

Part II, that Section 220 does not preclude state commis-

sions from departing from accounting or depreciation rules

prescribed by this Commission for purposes of regulating

intrastate telecommunication service rates.

II. Effect of Section 220

9. AT&T and GTE rely primarily upon Subsection

220(g) to support their contention that Section 220

precludes the states from departing from our accounting

and depreciation rules for purposes of computing in-

trastate telecommunication service revenue requirements.

Subsection (g) provides:

(g) After the Commission has prescribed the

forms and manner of keeping of accounts,

records, and memoranda to be kept by any person

as herein provided, it shall be unlawful for such

person to keep any other accounts, records or

memoranda than those so prescribed or such as

may be approved by the Commission or to keep

the accounts in any other manner than that

prescribed or approved by the Commission.

Notice of alterations by the Commission in the re-

quired manner or form of keeping accounts shail

TT rr

ee

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be given to such persons by the Commission at

least six months before the same are to take ef.-

fect. (Emphasis added)

10. Subseccion (g) does not literally impose any

restriction upon the power of the states to regulate in-

trastate rates or the methods state commissions use to

determine whether a particular rate will be approved or

prescribed. A state commission could theoretically adjust

information derived from a carrier’s system of accounts for

purposes of its own ratemaking without creating any con-

flict with obligations that Subsection (g) imposes upon car-

riers. Nevertheless, it would be extremely difficult as a

practical matter for a state commission to perform such

ratemaking computations without requiring a carrier to

collect and compile some data in some form that might be

described as ‘accounts, records or memoranda.”’ Thus,

AT&T and GTE may be contending that Subsection (g) im-

plicitly precludes the use of other accounting methods or

systems for other regulatory purposes when this Commis-

sion has prescribed methods that must be used for in-

terstate ratemaking purposes.

11. Subsections (a)-(g) of Section 220 were in the main

a reprint of provisions contained in Section 20 of the In-

terstate Commerce Act.* Although the Interstate Com-

merce Act was designed for the regulation of railroads.

many of the provisions were extended to communications

common carriers and the Interstate Commerce Commis-

sion was in the process of developing accounting and

3 At the time of adoption of Section 220(g) of the 1934 Com-

munications Act, Section 20(5) of the Interstate Commerce Act provided

that “*...it shall be unlawful for such carriers to keep any other accounts,

records, or memoranda than those prescribed by the Commission..."* 41

Stat. 493 (1920). See 49 U.S.C. § 20(5).

A-68

depreciation rules for telephone companies at the time the

Communications Act was adopted. In the absence of

statutory changes or indications to the contrary, it is assumed

that whenever the legislature enacts or reenacts a provision

in an existing statute it has in mind the previous statute

relating to the same subject matter.* Unless the context in-

dicates otherwise, words and phrases in a provision that were

used in a prior act pertaining to the same subject matter will

be construed to be used in the same sense.°

12. The parallel section 20 language was added to the

Interstate Commerce Act by the Hepburn Act of 1906, 34

Stat. 584. The legislative history of the Hepburn Act does

not shed any light upon Congressional reasons for pro-

hibiting railroads from maintaining accounts, records or

memoranda other than those prescribed by the ICC. Con-

gress may have wished to inhibit the railroads from

defrauding investors through fraudulent or sloppy accoun-

ting practices or to prevent the railroads from concealing

unlawful rebates. There is no indication in the legislative

history of the Hepburn Act that the 1906 Congress wished

to curb state regulation of railroads. The Act was apparent-

ly motivated solely by a desire to make railroad regulation

more effective.

13. ICC accounting rules that were promulgated pur-

suant to Section 20 of the Interstate Commerce Act were

challenged in int. Com. Commission v. Goodrich Trans.

Co.,

4 Courts have attached great weight to interpretations of In-

terstate Commerce Act provisions in interpreting the Communications

Act. See e.g., American Telephone and Telegraph Company v. F.C.C.,

487 F.2d 864, 873-874 (2d Cir. 1973).

5 See Sutherland, Statu tory Construction, Section 51.02 (C. Sands

ed. 1972) and cases cited therein.

A-69

224 U.S. 194 (1912) (hereinafter cited as Goodrich). The

railroad contended that the ICC had exceeded its authority

by prescribing the form of accounts for activities that were

nt subject to ICC rate regulation. The Supreme Court sus-

tained the ICC accounting rules on the theory that the ICC

needed information about such activities in order to

regulate the activities that were subject to ICC rate regula-

tion. The Court said (id. at 211):

If the Commission is to successfully perform its

duties in respect to reasonable rates, undue

discriminations and favoritism, it must be in-

formed as to the business of the carriers by a

system of accounting which will not permit the

possible concealment of forbidden practices in ac-

counts which it is not permitted to see and concer-

ning which it can require no information. It is a

mistake to suppose that the requiring of informa-

tion concerning the business methods of such cor-

porations, as shown in their accounts, is a regula-

tion of business not within the jurisdiction of the

Commission, as seems to be argued for the com-

plainants. The object of requiring such accounts

to be kept in a uniform way and to be open to the

inspection of the Commission is not to enable it to

regulate the affairs of the corporations not within

its jurisdiction, but to be informed concerning the

business methods of the corporations subject to

the act that it may properly regulate such mat-

ters as are really within its jursidiction.

14. Goodrich is of limited relevance because that case

did not raise any question with respect to the effect of ICC

accounting rules upon the regulation of activities that were

not subject to ICC rate regulation. Nevertheless, a con-

struction of Section 20 that would have limited the states’

discretion to regulate intrastate rail rates would have been

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inconsistent with the Court’s description of the nature and

function of the accounting rules.

15. The adoption of an interpretation of Section 20(5)

of the Interstate Commerce Act or Section 220(g) of the

Commerce Act that restricts state accounting practices for

purposes of intrastate ratemaking would also restrict other

forms of state or federal regulation that might require ac-

counting records or information that differ from data

generated by the rules prescribed for interstate ratemak-

ing. Indeed such an interpretation would appear to

preclude carriers from using accelerated depreciation

methods for purposes of computing their income taxes

since such methods differ from the depreciation methods

that have been prescribed for ratemaking purposes.

16. The question of the effect of ICC accounting re-

quirements upon railroad tax accounting did arise before

the Communications Act was enacted. The Interstate Com-

merce Commission had required a railroad to armmortize the

value of certain abandoned property over a period of 15

years and to charge the amortized amounts as an operating

expense for accounting purposes. The railroad contended in

Kansas City Southern Ry. Co. v. Commissioner of Int.

Hev., 52 F.2d 372 (8th Cir. 1931) that the Commissioner

was required to accept the amortized expenses as a deduc-

tion from income because failure to do so would violate Sec-

tion 20 of the Interstate Commerce Act. The Court sum-

marily rejected that contention.

The Court said (Jd. at 378):

The Commission did not, purport in requiring the

loss for abandonment to be charged to operating

expenses to provide any standards for tax

A-71

authorities to follow. This would be beyond its

province....Systems of accounting for railroads

under the control of the Commission cannot in-

terfere with the government’s system of taxation.

The Commission has not power to direct how the

Revenue Laws of the United States shall be inter-

preted or by its orders provide standards to

govern the taxing authorities.

17. AT&T apparently contends that providing stan-

dards for state-regulators to follow was within the In-

terstate Commerce Commission’s province and that the

ICC had specifically rejected contentions that Section 20 of

the Interstate Commerce Act did not give it that power.

AT&T's reliance on Depreciaton Charges of Telephone

Companies, 118 I.C.C. 295 (1926), is misplaced. In the

Depreciation Charge proceeding, NARUC had argued that

the words ‘“‘as soon as practicable’ contained in section

20(5) gave the ICC latitude to refrain from prescribing

depreciation requirements for the local telephone com-

panies engaged only to an insignificant extent in interstate

commerce. In rejecting NARUC’s position, the ICC merely

held that its obligation wnder Section 20(5) to prescribe

depreciation rates for telephone companies was mandatory,

not discretionary.® In dicta, the Commission additionally

appeared to suggest that its authority under Section 20(5)

extended to all property “open for use in interstate com-

merce.’ Petitioners in CC Docket No. 79-105, however, do

not appear to dispute the authority of the FCC, under sec-

tion 220 of the Communications Act, to extend its accoun-

ting and depreciation prescriptions to cover assets used for

primarily intrastate purposes. The ICC’s 1926 telephone

depreciation charge proceeding is silent on the issue of

whether federal prescription of depreciation rates preempts

118 L.C.C. at 332-33.

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the states from prescribing additional and distinct

depreciation rates and classifications covering the same

property for regulatory purposes.’

18. AT&T further cites Accounting Rules For

Telephone Companies, 203 ICC 13 (1934), in support of its

contention that state commissions lack jurisdiction over

telephone company accounts insofar as intrastate service is

concerned. Here, again, we disagree with AT&T’s reading

of this opinion. In Accounting Rules For Telephone Com-

panies (an advisory opinion for the benefit of the newly

created Federal Communications Commission) the ICC

concluded, over the objections of the states, only that the

federally-prescribed system of accounts should be uniform

in its treatment of telephone companies operating among

the several states.® Indeed, far from preempting the states

from independently prescribing separate additional ac-

counts, the ICC expressly recognized that the states might

have additional accounting needs and sought to assist the

states in this respect by permitting state prescribed sub-

accounts within the federally-required books of account.

The ICC stated;

In the measures adopted with respect to the

uniform system, we are acting in pursuance of the

direction of Congress. Uniformity is the desired

and important object. The nature of the undertak-

ing necessarily precludes the incorporation of

special provisions covering the requirements of

the several State commissions.

q Indeed, the Supreme Court has placed this same construction on

the ICC’s order in the Depreciation Charge proceeding. Smith v. Illinois

Bell Tel. Co., 282 U.S. 133, 159 (1930).

8 See also, Kansas City So. Ry. v. United States, 231 U.S. 423

(1913); and Int. Com. Comm. v. Goodrich Trans Co., supra.

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We have, however, recognized the needs of the

several State commissions in the intrastate regula-

tion which is their duty and have, endeavored to

help them in the securing of all necessary informa-

tion by leaving it open to them to require subdivi-

sion of the accounts prescribed.

Since the ICC may not delegate any of its authority under

the Interstate Commerce Act to the individual states,? ICC

acceptance of these state prescribed sub-accounts may be con-

strued as recognition of the power of the states to require

accounts for this own regulatory purposes independent of the

scope of the Commission's authority to prescribe accounts

for federal purposes. !°

19. That Commission's conclusion that states may sup-

plement a uniform system would not preclude a conclusion

that Section 20 of the Interstate Commerce Act or Section

220 of the Communications Act forecloses states from depar-

ting from a federally prescribed accounting system by adop-

ting accounting methods that are inconsistent with the

federai system. That ICC opinion does contain language that

indicates that the ICC believed such departures from unifor-

mity would be undesirable, but the ICC did not conclude that

such departures are precluded by statute.

Lien See, 49 USCA. Section 17(2); and Davis, Administrative Lau

Treatise, Ch. 2 (1978).

10 Significantly, the FCC also has permittted state-prescribed sub-

accounts in the USOA books, 47 C.F.R. Section 31.10-2(f) provides the

following:

Nothing contained in the part shall prohibit or excuse any car-

rier or receiver or operating trustee of any carrier from sub-

dividing the accounts hereby prescribed in the manner ordered

by any State commission having jurisdiction or to the extent

necessary to secure the information required in the prescrib-

ed reports to such commission. (Emphasis added.)

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20. Supreme Court decisions relating to Section 20 of

the Interstate Commerce Act never squarely addressed the

question of the extent of the states’ power to prescribe ac-

counting and depreciation rules that supplement or deviate

from rules prescribed by the ICC. A telephone company did

challenge certain state-prescribed depreciation requirements

in N. W. Bell Tel. Co. v. Ry. Comm'n, 297 U.S. 471 (1936). The

Court concluded that Section 20 clearly did not preclude a

state commission from adopting and enforcing depreciation

rules prior to the adoption of the ICC depreciation rules. The

Court expressly declined to determine what effect the adop-

tion of ICC depreciation rules would have upon the state com-

mission’s powers.

21. Inasmuch as Section 20 had never been construed

to restrict state commissions from requiring carriers to keep

additional records for purposes of intrastate ratemaking and

court decisions in analogous contexts did not adopt an ex-

pansive interpretation of that provision, the reenactment of

that language should not be interpreted to restrict state com--

missions from keeping such additional records in the absence

of clear evidence that the 1934 Congress intended to produce

that result. AT&T and GTE would infer such an intent from

that Congress failure to enact a proposed subsection 220(j)

that would have provided:

Nothing in this section shall (1) limit the power of

a State commission to prescribe, for the purposes

of the exercise of its jurisdiction with respect to any

carrier, the percentage rate of depreciation to be

charged to any class of property of such carrier, or

the composite depreciation rate, for the purpose of

determining charges, accounts, records or practices;

(2) relieve any carrier from keeping any accounts,

records, or memoranda which may be required to

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be kept by any State commission in pursuance of

authority granted under State Law.!!

22. This version of section 220(j) passed the House

but was eliminated from the Senate bill. The revised Senate

version of Section 220(j) provided instead:

The Commission shall investigate and report to

the Congress whether in its opinion legislation is

desirable (1) authorizing the Commission to ex-

cept the carriers of any particular class or classes

in any State from any of the requirements under

this section in cases where such carriers are sub-

ject to State commission regulation with respect

to matters to which this section relates; and (2)

permitting the State commissions, in pursuance

of authority granted under State Law, to

prescribe their own percentage rates of deprecia-

tion or systems of accounts, records, or memoran-

da to be kept by carriers.'*

23. The Conference Committee drafted a com-

opromise that retained the House version of subsection

220(h) and substituted a new subsection 220(j) for both the

House and Senate versions. The Conference Committee

version of Section 220, which was enacted without further

modification, also included a subsection (i) that did not

parallel Interstate Commerce Act language. Subsections

(h)-(j) provided:

(h) The Commission may classify carrier subject

to this Act and prescribe different requirements

under this section for different classes of carriers,

and may, if it deems such action consistent with

IT’ 9910, 73d Cong., 2d Sess. Section 220(j) (February 20, 1934);

H.R. 8301, 73d Cong., 2d Sess. Section 220(j) (February 27, 1934).

12 s 3285, 73d Cong., 2d Sess. Section 220(j) (March 28, 1934).

A-76

the public interest, except the carriers of any

particular class or classes in any state from any of

the requirements under this section in cases

where such carriers are subject to State commis-

sion regulation with respect to matters to which

this section relates. (Emphasis added)

(i) The Commission, before prescribing any re-

quirements as to accounts, records, or memoran-

da, shall notify each State commission having

jurisdiction with respect to any carrier involved,

and shall give reasonable opportunity to each

such commission to present its views and

recommendations. |

(j) The Commission shall investigate and report to

Congress as to the need for legislation to define

further or harmonize the powers of the Commis-

sion and of State commissions with respect to

matters to which this section relates.

24. AT&T and GE argue that statements by

witnesses at the commiti#e hearings both in favor of and in

opposition of the origiwal version of Section 220(j) support

the position that Congrésé intended in dropping this provi-

sion to preempt the states for all purposes. They contend

that statements by witnesses from both sides were premis-

ed os. the belief that absent a provision similar to original

section 220(j) the states would be bound by federal accoun-

ting and depreciation prescriptions in their local regula-

tion. We disagree.

25. The record of the Congressional hearings in-

dicates little more than that the supporters of original sec-

tion 220(j) believed that the provision was desirable to

‘esolve a previous unsettled point of law under the

predecessor provision of the Interstate Commerce Act.

A-77

This desire on the part of the state commissions to have

Congress explicitly recognize the authority of the states to

prescribe accounts and depreciation rates for local

regulatory purposes is reflected in the following

statements of J. E. Benton, NARUC’s general solicitor

(emphasis added).

Section 220, which is the section giving the Com-

mission jurisdiction to prescribe accounts and

reports, also takes account of local conditions and

safeguards the powers of State commissions in

the matters of depreciation and of accounting

regulations. The State commissions are very

solicitous that the act shall be so phrased that it

cannot be construed as imposing any depreciation

regulation promulgated by the Federal Commis-

sion upon the regulatory agencies of the States.

* * * * 4 * *

Ever since the power to fix depreciation rates was

given to the Interstate Commerce Commission in

1920, the State commissions have been apprehen-

sive that when an order finally came to be fixed by

a Federal Commission it would be pointed to by

the utilities as depriving the State commissions

thereafter of going into the question of deprecia-

tion in rate cases...

* * * ” * * *

[W]e do not ask for any particular form of words,

but there should go into the act a provision which

makes it clear that in the administration of their

laws for the regulation of rates, the State commis-

sions shall have the power in rate cases to deter-

mine what allowances shal! be made for deprecia-

tion in the rates which are fixed.

[T]he State Commissions believe that it is not in

the public interest that the act shall contain a

er lOO CC >

A-78

mandate to the Federal commission to fix rates of

depreciaton unles it shall be made entirely clear in

the act that such determination is for the use of

the Federal commission only and is not to affect

the State commissions in their regulatory work.

* * * * * * *

That section merely proposes to provide, in plain

terms, that the control of intrastate telephone

business as now exercised by the States, shall

continue to be exercised by them without in-

terference by the Federal Commission.!*

26. Several witnesses opposed original section 220(j)

on the grounds that it would create the possibility of

unreasonably burdening the carriers with the cost of multi-

ple sets of books,'* that it would destroy the uniform

system of accounts!® and that it would create conflicts in

the exercise of federal and state jurisdiction.!© Only one

opposing witness, however, specifically expressed the view

that the then-current law piohibited the states from

prescribing accounts and depreciation rates for their own

Is Hearings on H.R. 8301, Before the Committee on Interstate

and Foreign Commerce, U.S. House of Representatives, 73d Cong., 2d

Sess. (April 10, 1934}, pp. 136-44 (Emphasis added.); see also, Hearings

on S. 2910 Before the Committee on Interstate Commerce, United

States Senate, 73 Cong., 2d Sess., (March 9-10, 13-15, 1934) pp. 178-84.

14 See e.g., Hearings on S. 2910, p. 96; and Hearings on H.R. 8301,

p. 191. (Statements of W.S. Gifford, President, AT&T.)

15 See. e.g., Hearings on S. 2910, p. 208; and Hearings on H.R.

8301, p. 96. (Letters of F. McManamy, Commissioner, ICC.)

16 See, e.g., Hearings on H.R. 8301, p. 243 (Statement of F.B.

MacKinnon, President, United States Independent Telephone Associa-

tion). How this version of section 220(j) would undermine the uniformity

of the federal accounting system or result in conflict between federal and

state authorities was not explained.

A-79

purposes, and this statement was tentative.!?

27. Even if all the witnesses who testified concerning

original section 220(j) had consistently and clearly express-

ed the view that the states lacked authority to prescribe ad-

ditional accounts and depreciation rates absent this provi-

sion, we could accord little weight to the statements given

the silence contained in the Congressional reports.!® In

TT MR. GIFFORD. [Section 220(j)] throws the whole uniform ac-

counting of the teiephone industry out of line too, as | see it. It would

make it necessary to keep two sets of accounts, one for the Federal Com-

mission and one for the State commission, because each State may pro-

vide for a different system of accounting. The States will require one

system of accounting, and we will also have to keep accounts for the Federal

system of accounting. I do not think it is workable.

MR. MAPES. Do the States now require you to keep accounts of

any kind?

MR. GIFFORD. No. The present law, the interstate commerce law,

calls for accounts and that controls. as against the State laws.

MR. MAPES. Exclusively.

MR. GIFFORD. Exclusively, and has since 1913, I think, when the

act was passed. I think the matter ought to be given very serious con-

sideration before we go into that.

Hearings on H.R. 8301, pp. 191-92. (Emphasis added).

18 Generally, statements made by interested parties as to the nature

and effect of a bill are accorded to little or no weight if not incorporated

into a committee report. These statements are very weak evidence that

the legislature adopted the assumed interpretation, in view of the possibili-

ty that the committee believed the changes were unnecessary because the

assumed interpretation was erroneous. See, Sutherland Statutory Construc-

tion, Section 48.10, and cases cited therein.

Similarly, contrary to the contention of AT&T, the mere existence

of provisions in (he Natural Gas Act, 15 U.S.C.A. Section 717(g) and the

Federal Power Act, 16 U.S.C.A. Section 825(a) specifically reserving to the

states the right to prescribe additional accounting regulations does little

to assist its cause in this case. See, e.g., Keifer & Keifer v. Reconstruction

Finance Corp., 306 U.S. 381 (1939).

A-80

striking the compromise which became the law, Congress

was completely silent as to its intent in eliminating the

House version of Section 220(j).

28. H. REP. No. 1918 describes the Conference provi-

sions as follows (p. 47):

Section 220(j) of the Senate bill (accounts and

depreciation charges) authorizes the Commission

to investigate and report to Congress upon the

desirability of legislation authorizing the Com-

mission to except the carriers of any particular

class or classes in any State from the re

quirements of the section and permitting State

commissions to prescribe their own percentage

rates of depreciation and systems of accounts for

carriers. The House amendment (sec. 220(h))

specifically authorizes the Commission to except

carriers of any particular class or classes in any

State and provides (in sec. 220(j}) that the section

shall not limit the power of the State commissions

to prescribe percentage rates of depreciation or to

require the keeping of accounts.

29. At most this legislative history indicates that the

1934 Congress was not sure whether reenactment of the In-

terstate Commerce Act language would or would not

preempt state accounting and depreciation rules and did

not choose to resolve the question at that time. One might

infer that Congress believed Subsection (g) did not preempt

inconsistent state commission accounting and depreciation

practices. If Subsection (gj produced that effect, any fur-

ther legislation tm ‘harmonize’ the powers of the

regulatory commissions might be superfluous.

30. The carriers’ contention that Subsection {i)

demonstrates that the 1934 Congress believed it had

A-81

preempted State commission accounting and depreciation

rules is not persuasive. Congress undoubtedly correctly an-

ticipated that most State commissions would not choose to

create a complete system of accounts and would be vitally

interested in any rules developed by this Commission. The

adoption of special notice and consultation requirements

does not demonstrate that Congress assumed all states

would be required to adhere to all federal accounting or

depreciation rules.

31. Subsections (h)-(j) indicate that the 1934 Con-

gress wished to achieve as much uniformity as possible

without coercing any state commission to use ratemaking

methods it found unacceptable. This Commission has pro-

ceeded in a manner that is consistent with that purpose for

nearly four decades. We have? always given special con-

sideration to the needs and views of state commissions in

developing accounting and depreciation rules and most

State commissions have chosen to follow most accounting

and depreciation rules prescribed by this Commission.

Departures have nonetheless occurred from time to time.!9

T9 For example, our Order on reconsideration (FCC 79-678. releas-

ed November 6, 1979) with respect to our Docket 21230 decision adop-

ting revised accounting rules for plant under construction notec that

many states have adopted different accounting procedures for plant

under construction. We expressly, acknowledged in paragraph 9 of that

order that our decision would not inhibit the discretion of the state com-

missions. We said:

As our Final Order in Docket 21230 makes clear, we have in

no way attempted to influence, or interfere with, the rate

making prerogatives of the New York PSC or any other state

commission. The states remain free to establish intrastate

rates on whatever lawful basis they choose. The fact that

separate accounting information will have to be retained to

accomplish this and the fact that the gathering and reten-

tion of this information may involve additional cost does

not, in our view, involve any significant interference with

State control over intrastate rates

A-82

This Commission has never attempted to prevent any

State commission from departing from our accounting and

depreciation rules. Indeed we have expressly recognized

that State commissions have a right to do so.

32. NARUC correctly notes that this Commission

previously has recognized that states are not obligated to

follow F.C.C. prescribed accounts in intrastate ratemaking

proceedings. Thus, Jn the Matter of Amendment of Part 31,

Uniform Systems of Accounts For Class A and Class B

Telephone Companies, 68 F.C.C. 2d 902, 906-07 (1978), we

stated:

It should be pointed out that we are not in any

way attempting to influence the intrastate

ratemaking decisions the several state commis-

sions may make in this area. Of course, they are

free to adopt the same ratemaking treatment for

plant under construction and interest during con-

struction as we adopted in Docket 19129, or they

may prefer to follow a different treatment. We are

familiar with at least one state that by statute

must follow a different treatment. We do not

believe, nor is it intended that the accounting

changes adopted in this proceeding impinge upon

the ratemaking prerogatives of any state commis-

sion. Further, as everyone is aware, different

treatment is already given to a number of items

for intrastate vs. interstate ratemaking as well as

among the several state commissions for in-

trastate ratemaking.

(Footnote 19 continued)

States have also departed from accounting practices we have

prescribed in other situations. Florida requires full normalization of

taxes, this Commission does not. Many states have authorized or re-

quired a deferral of expenses when we do not.

A-83

No. 79-105, at para. 7; and 47 C.F.R. Section 31.01-2(f).

33. Telephone companies have rarely challenged past

state commission departures from accounting or deprecia-

tion rules prescribed by this Commission. Such challenges

have not been successful. Pacific Telephone did challenge a

California Public Utility Commission rate order on the

grounds that it was invalid because it was based upon

depreciation methods that departed from methods

prescribed by this Commission. The California Supreme

Court rejected that contention in Pacific Tel. and Tel. Co.

v. California, 401 P.2d 353, 372-73 (1965).?°

34. Thus, AT&T and GTE are asking us to repudiate

nearly forty years of administrative practice and applicable

state court precedents by adopting an interpretation of

Section 220 that would require an unwilling state commis-

sion to follow all accounting and depreciation methods

prescribed by this Commission. A very compelling showing

would be required to persuade us to follow such a course.

35. GTE appears to argue that the existence of such

state accounting and depreciation departures wou'd make

impossible a federal scheme of accounting and depreciation

prescriptions. Past departures have not produced such an

effect. If carriers maintain the records we require for pur-

poses of interstate ratemaking, federal regulation will not

be frustrated if carriers maintain additional records for

other purposes.

36. Unlike GTE, AT&T appears to concede this

point. AT&T argues, however, that the sanctioning of

20 The Florida Public Service Commission concluded that it is not

required to use depreciais.> methods prescribed by this Commission.

Southern Bell Telephone and Telegraph Co., 66 PUR 3d 1, 57-58 (1966).

A-84

state accounting and depreciation departures from the

prescriptions contained in the First Report and Order would

permit the states to burden the carriers with the costs of

maintaining multiple sets of records. We, of course, are not

free to preempt the states on the theory that they otherwise

may impose administrative costs on the carriers in the course

of engaging in intrastate ratemaking.

37. Our analysis of Section 220 is supported also by

Section 2(b) of the Act, 47 U.S.C. § 152(b), which provides

in pertinent part that ‘nothing in this Act shall be construed

to apply or to give the Commission jurisdiction with respect

to (1) charges...for or in connection with intrastate com-

munication service by wire or radio of any carrier...’’ Sec-

tion 2(b) does not prohibit preemption of state regulatory

actions that raight interfere with or tend to frustrate policies

or rules we have adopted to carry out statutory objectives

with respect to interstate and foreign communications. North

Carolina Utilities Commission v. FCC, 552 F.2d 1036 (4th

Cir. 1977), cert. denied, 434 U.S. 874 (1977) [hereinafter cited

as NCUC II}; North Carolina Utilities Commission v. FCC,

537 F.2d 787 (4th Cir. 1976), cert. denied 429 U.S. 1027 (1976);

Puerto Rico Telephone Co. v. FCC, 553 F.2d 694 (ist Cir.

1977); People of California v. FCC, 185 U.S. App. D.C. 217,

567 F.2d 282 (1966), cert. denied 325 U.S. 837 (1966). But

where state regulation is reconcilable with federal policies

or rules, there is no occasion for us to override state agency

actions in furtherance of legitimate state regulatory objec-

tives. Section 2(b) makes clear that Congress did not intend

this Commission to foreclose state ratemaking actions unless

those actions imperiled ‘‘important interests of national com-

munications policy...."’ NCUC II, 552 F.2d at 1047. We have

found in this instance that federal regulation will not be

frustrated if carriers maintain additional records for in-

trastate ratemaking purposes.

A-85

Ordering Clauses

38. Accordingly, IT IS HEREBY ORDERED THAT

the petition for clarification of the National Association of

Regulatory Utility Commissioners, filed April 30, 1981, IS

GRANTED to the extent reflected herein.

39. IT IS FURTHER ORDERED THAT the petition

for reconsideration of the People of the State of California

and the Public Utilities Commission of the State of Califor-

nia, filed April 30, 1981, IS DISMISSED as moot.

40. IT IS FURTHER ORDERED THAT the Secretary

of the Federal Communications Commission shall cause this

Memorandum Opinion and Order to be published in the

Federal Register and in the Federal Communications Reports.

41. IT IS FURTHER ORDERED THAT the Secretary

shall cause to be served on each party of record in CC Docket

No. 79-105 and each state commission having jurisdiction

over intrastate communication service a copy of this

Memorandum Opinion and Order.

FEDERAL COMMUNICATIONS COMMISSION

William J. Tricarico Secretary

April 1, 1982

JOINT DISSENTING STATEMENT

OF

COMMISSIONERS JOSEPH R. FOGARTY AND

ANNE P. JONES

A-86

IN RE: EXPENSING OF STATION CONNECTIONS

(CC DOCKET NO. 79-105)—PETITIONS FOR

CLARIFICATION AND RECONSIDERATION.

We dissent from today’s majority decision that the

First Report and Order in this proceeding does not preempt

State regulators from imposing accounting and deprecia-

tion rules for inside wiring which are inconsistent with

those prescribed by this Commission.

In its First Report and Order the Commission re-

quired that account 232 of the Uniform System of Ac-

counts be separated into two subclasses, “Station

Connections-inside wiring’ and ‘Station Connections-

Other.” We further required that the existing investment

in Station Connections—inside wiring be amortized over a

period of ten years, which represents an accelerated

depreciation in contrast to past practices, and that all new

investment for inside wiring be expensed rather than

capitalized.

Because we wished to ameliorate the effect such an

expensing plan could have upon local rates, the Commis-

sion required that expensing take place over a four-year

period. In discussing this phase-in approach, the Commis-

sion stated that ‘‘...we want to allow all carriers and state

regulatory agencies as much flexibility as possible in shif-

ting from capitalization to expensing.. Hence, for those car-

riers who feel that a flash-cut approach will not be too

disruptive to their operations and who gain state

regulatory approval, we will allow them to use a flash-cut

approach.” It is clear from this discussion that the Com-

mission intended its decision to be binding upon the States.

| First Report and Order, 85 FCC 2d 818, 829 (Emphasis added).

A-87

Since only approximately one-quarter of inside wiring costs

are apportioned to the interstate jurisdiction, a phase-in

which embraced only these costs would result in about 6%.

12'%, 18% and 25 percent of all new inside wiring costs be-

ing expenses instead of capitalized in each of the four years

respectively. Surely this is not what the Commission in-

tended. It would be nonsensical to order such a time- and

resource-consuming process to achieve only such a limited

effect.

We also intended the decision in our First Report and

Order to be binding upon the States for the sound policy

reason that telephone operating companies need to obtain

a more rapid recovery of capital in order to modernize their

plant to meet consumer needs and increased competition in

the future.

Further, the FCC may ultimately order the complete

detariffing and deregulation of inside wiring. The Commis-

sion anticipated this possibility in the First Report and

Order when we said:

*...we believe that the final a:swer rests not with

accounting changes but r-.ner with the ultimate

deregulation of this activity. This is nothing more

than a logical extension of the recommendations

made by parties, our decision in Docket 20828

and our overall regulatory scheme to introduce

competition whenever’ technological and

economic circumstances are conducive to such a

change.’’?

As the Commissicn has seen in the deregulation of

customer premises equipment, asset valuation is a very

2 Thid, 827.

A-88

difficult problem. If inside wiring is similarly deregulated,

asset valuation will be made more difficult if this account

is not capped. Furthermore, if there are two sets of accoun-

ting books required (one Federal and one State), any even-

tual detariffing of the inside wiring account will be made all

the more difficult, since inside wiring must be deregulated

in toto or not deregulated at all (unless the Commission con-

templates deregulating only the first one-fourth of the length

of the wire between the protector block and the wall outlet).

Disregarding these important considerations of Federal

policy, the majority has decided that the Commission did not

intend to preempt inconsistent State accounting and

ratemaking practices and procedures with respect to the Sta-

tion Connections-inside wiring account. At the same time,

the majority allows that the Federal Communications Act—

and, in particular, Section 2(b) thereof—‘does not prohibit

preemption of state regulatory actions that might interfere

with or tend to frustrate policies or rules we have adopted

to carry out statutory objectives with respect to interstate

and foreign communications.”* The continued capitalization

of inside wiring by State regulatory authorities will in fact

imperil and frustrate “important interests of national com-

munications policy...’*—enhanced capital recovery and the

effective implementation of any ultimate FCC decision on

ordering the detariffing and deregulation of inside wiring.®

3 MO&O, para. 37 (Citations omitted).

4 North Carolina Utilities Commission v. FCC. 552 F.2d 1036, 1047

(4th Cir. 1977), cert. denied 434 U.S. 874 (1977).

> Several State commissions have already acted to deny the applica-

tion of FCC policy on inside wiring and related depreciation at the state

level, and others appear to be in the process of following suit. Alabama

(Sept. 4, 1981), Nebraska (Sept. 1, 1981), South Dakota (Feb. 2, 1982), and

Missouri (Nov. 27, 1981) have disapproved carrier filings seeking the ex-

pensing of inside wiring.

A-89

We would not—and the majority should not—‘‘defer

to the States’”’ on critical capital recovery ‘ssues affecting

the continued viability and competitiveness of our Nation's

telephone industry in providing increasingly essential in-

terstate, as well as inw-astate, facilities and services. This

Commission has thrust the telephone industry into the

brave new world of telecommunications competition and in

doing so has overridden the strenuous and in many cases

intransigent objections of many State commissions. It is

therefore oddly inappropriate for this same Commission

now to be so reticent about preempting the State jurisdic-

tions from denying the industry the capital recovery

necessary for its full and fair participation in this new com-

petitive world. Here, the Commission curiously appears to

have lost the courage of its pro-competitive convictions.

Because the majority's decision is inconsistent with

the clear preemptive thrust and intent of the Commission’s

First Report and Order in this proceeding and, further, fails

to recognize and support the integrity of our pro-

competitive policies, we dissent.

A-90

APPENDIX “B”

ORDER DENYING REHEARING

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 83-1136

Virginia State Corporation Commission,

Petitioner,

versus

Federal Communications Commission

and United States of America,

Respondent.

ORDER

The petitions for rehearing and suggestions for

rehearing en banc have been submitted to the Court. Upon

the request for a poll of the Court on the suggestions for

rehearing en banc, Judge Russell, Judge Phillips, Judge

Murnaghan, and Judge Sprouse voted to deny the petitions

for rehearing en banc; Judge Widener voted in favor of

rehearing en banc; Chief Judge Winter, Judge Hall, Judge

Ervin and Judge Chapman are disqualified. Judge Wilkin-

son abstains from voting.

IT IS ADJUDGED and ORDERED that the peti-

tions for rehearing and suggestions for rehearing en banc

are DENIED.

A-91

Entered at the direction of Judge Murnaghan, with

the concurrence of Judge Sprouse. Judge Widener dissents.

For the Court,

JOHN M. GREACEN

CLERK

NSE ——— = ee

A-92

APPENDIX “C”’

NOTICE OF APPEAL

IN THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 83-1136

VIRGINIA STATE CORPORATION COMMISSION,

Petitioner

versus

FEDERAL COMMUNICATIONS COMMISSION

and UNITED STATES OF AMERICA

Respondents

On Petition for Review of an Order

of the Federal Communications Commission

NOTICE OF APPEAL TO THE SUPREME

COURT OF THE UNITED STATES

Notice is hereby given that the Louisiana Public Ser-

vice Commission, intervenor, appeals to the Supreme Court

of the United States from the decision of the United States

Court of Appeals for the Fourth Circuit dated June 18,

1984, rehearing denied by order dated October 3, 1984, af-

firming the decision of the Federal Communications Com-

mission released January 6, 1983.

A-93

This appeal is taken pursuant to 28 U.S.C. §1254(2).

/S/ Michael R. Fontham

Michael R. Fontham

Paul L. Zimmering

Noel J. Darce

Of STONE, PIGMAN, WALTHER,

WITTMANN & HUTCHINSON

546 Carondelet Street

New Orleans, Louisiana 70130

Telephone: (504) 581-3200

/S/ Marshall B. Brinkley

Marshall B. Brinkley

General Counsel

Louisiana Public Service Commission

Suite 1630

One American Place

Baton Rouge, Louisiana 70825

Telephone: (504) 342-4429

Attorneys for the

Louisiana Public Service Commission

A-94

APPENDIX “D”

STATE RATEMAKING ORDERS

LOUISIANA PUBLIC SERVICE COMMISSION

ORDER NO. U-15445

DOCKET NO. U-15445

SOUTH CENTRAL BELL TELEPHONE COMPANY

(NEW ORLEANS, LOUISIANA),

ex parte

In re: Proposed revision of its intrastate rates and

charges for telephone service within the

State of Louisiana.

This case involves the application of South Central

Bell Telephone Company (‘South Central Bell” or “the

Company”’) requesting an increase in its intrastate rates

and charges for the service it renders in the amount of

$238,600,000.00. The Company also requested an increase

in certain of its tariffs applicable to the provision of private

line services. Interventions were filed by Common Cause of

Louisiana, the Louisiana Telephone Answering Service

Committee, the Louisiana Alarm Association, the Division

of Administration of the State of Louisiana and the United

States Department of Defense. The Company, intervenors

and the Commission pre-filed testimony and exchanged

data requests and responses. Hearings were conducted on

December 13, 14, and 15, 1982, and January 17, 18, and 19,

1983.

A-95

South Central Bell is a Delaware corporation doing

business as a public utility in the State of Louisiana. The

last rate increase received by the Company in Louisiana

was on January 21, 1981 when an increase in intrastate

rates of $51,408,000.00 was approved by this Commission.

Ex Parte South Central Bell Telephone Co., Order No.

U-14673 (La. Pub. Serv. Comm. 1981).

During the period since the last rate case when rates

were adjusted to produce an additional $51,408,000.00 an-

nually for this Bell operating company, the state of the

economy has resulted in unprecedented unemployment ex-

ceeding 12% im this State alone and many industrial cor-

porations and businesses have experienced and are ex-

periencing operating losses in the millions of dollars. While

at the same time, the rate of inflation has substantially

abated and interest rates have declined appreciably.

In the light of the foregoing especially since the Com-

pany has earned a rate of return comparable to that found

to be reasonable by the Commission in the last rate pro-

ceeding, we find no justification for an increase in rates at

this time.

Accordingly,

IT IS HEREBY ORDERED that South Central

Bell's request for an increase in its intrastate rates in the

amountof $238,600,000.00 is denied.

BY ORDER OF THE COMMISSION:

BATON ROUGE, LOUISIANA

MAY 19, 1983

A-96

__/S/ THOMAS E. POWELL

CHAIRMAN

bl /S/ ED KENNON

COMMISSIONER

/S/ LOUIS J. LAMBERT, JR.

COMMISSIONER

*Commissioner John Schwegmann

concurs in part and dissents in

part.

[Si JOHN F. SCHWEGMANN

COMMISSIONER

/Si/ GEORGE J. ACKEL

VICE CHAIRMAN

/S/ LOUIS S. QUINN

SECRETARY

* (Separate Opinion Attached)

[Opinion of Commissioner Schwegtnann omitted]

A-97

LOUISIANA PUBLIC SERVICE COMMISSION

ORDER NO. U-15445-A

DOCKET NO. U-15445

SOUTH CENTRAL BELL TELEPHONE COMPANY

(NEW ORLEANS, LOUISIANA),

ex parte

In re: Proposed revision of its intrastate rates and

charges for telephone service within the

State of Louisiana.

This case is before the Commission pursuant to an

order of the United States District Court for the Middle

District of Louisiana, Honorable John V. Parker, which

was issued on June 27, 1983.

In May, 1982, South Central Bell Telephone Com-

pany (‘‘South Central Bell’’ or ‘‘the Company’’) requested

an increase in its intrastate rates and charges in the

amount of $238.6 million. Included within that rate request

was a request for more than $40 million in revenues that

the Company alleged it would need if the Coimmission

adopted certain methodologies for computing the expenses

of the Company prescribed by the Federal Communications

Commission (‘‘FCC’’).

Specifically, South Central Bell asked the Commis-

sion to employ, for the purpose of intrastate ratemaking,

Equal Life Groups and Remaining Life depreciation

A-98

methods rather than the Straight Line Vintage Life Group

method which had previously been employed by the Com-

mission and consistently approved by the courts of this

State. In addition, South Central Bell sought to have the

Commission ‘‘expense’”’ 75 per cent of the costs associated

with station connections, rather than capitalizing these

costs as the Commission had done in the past. At the hear-

ings of the rate case, South Central Bell alleged that the

FCC had mandated the use of the new methods in an Order

issued January 6, 1983 Memorandum Opinion and Order,

CC Docket No. 79-105 (FCC, Jan. 6, 1983). The net effect

of the adoption of these proposals would have been to in-

crease the Company’s intrastate expense level by

$40,506,000.

After extensive hearings on the rate request, this

Commission issued Order No. U-15445 (Commissioner

Schwegmann concurring in part and dissenting in part). In

light of unprecedented unemployment levels, the state of

the economy, the fact that irlation has substantially

abated, the decline in interest rates and the fact that the

Company had earned a rate of return comparable to that

found reasonable in the last rate proceeding, among other

factors, this Commission denied the Company’s rate re-

quest. However, the Commission did not make a finding at

that time of the fair rate of return on equity for South Cen-

tral Bell, since no increase in revenues was required.

On May 19, 1983, South Central Bell filed suit in the

Federal court seeking the issuance of a preliminary injunc-

tion ordering the Commission to recognize the FCC-

mandated depreciation rates. On June 27, 1983, the

Honorable John V. Parker ordered that within 10 days the

Louisiana Public Service Commission ‘‘issue an order

which provides for the collection of rates by (South Central

A-99

Bell) sufficient to recover the intrastate revenue require-

ment resulting from the FCC-prescribed depreciation rates

and methodologies’. It is this ruling by a federal judge

ordering the Louisiana Commission to increase intrastate

rates which forces the Commission to issue this Order.

This Commission is the body constitutionally vested

with the duty and authority to regulate all common car-

riers and public utilities providing intrastate service in

Louisiana. We believe that this most recent attempt by the

FCC to preempt this State’s authority to regulate in-

trastate rates and services is inconsistent with the Com-

munications Act and may run afoul of the limitations con-

tained in the UnitedpStates Constitution protecting state

sovereignty. However, we are faced with an order of a

federal judge which has not yet been overturned. Although

we believe that the order is invalid, we are compelled to

obey it at this time. For that reason we will reconsider the

case in light of the increased expense level of $40,506,000

resulting from the FCC Order. (Aithough the Company

asked the federal court to increase revenues in the amount

of $41,463,000, that request was based on 1983 data, none

which was ever presented to the Commission. The ap-

propriate figure based on test year data reviewed by the

Commission is $40,506,000).

As noted, the Commission denied the rate request of

South Central Bell in May, but did not make a determina-

tion of the fair rate of return on equity. The currently

authorized overall rate of return of South Central Bell was

set in 1981, when market interest rates were significantly

higher than they are today. The prime rate has remained at

about 10% per cent for some time. In addition, the rate of

return earned by the Company includes a return on

unamortized investment tax credits, which constitute

A-100

approximately 7.5 per cent of South Central bell’s total

capital. In fact, however, these tax credits are cost-free in-

vestment of the Company, so in reality the rate of return

on its investor-supplied equity is higher than that authoriz-

ed for regulatory purposes. When these factors are viewed

in light of the continued low level of inflation, and con-

tinued high unemployment, we find that a rate of return on

equity of 12 per cent is sufficient to assure confidence in

the Company’s financial soundness, will be adequate to

maintain and support its credit and will permit it to raise

the capital necessary to perform its public functions. The

gross revenue increase necessary to produce a rate of

return on equity of 12 per cent after taking account of the

ratemaking adjustments proposed by a consultant of the

Commission, Bruce M. Louiselle, and recognizing the full

amount of the FCC-mandated accounting changes as quan-

tified by South Central Bell, is $12,700,000.

The increase in rates approved in this Order shall be

distributed as follows:

ITEM AMOUNT

Basic Local Flat Rate Exchange and

Related Services; $ 1,000,000

Including Residence and Business

basic local service, Centrex

Access Measured PBX, etc.

Service Charges 1,000,000

Miscellaneous Services: 2,000,000

Including Toll Terminals, Grouping

Service, Zone Charges, etc.

Network Services 2,000,000

Customer Premises Products 6,000,000

Unrecovered Telephone Equipment

Charge 700,000

A-101

Total Billing Charge $12,700,000

Less Independent Company (257,000)

Settlements $12,443,000

Accordingly,

IT IS HEREBY ORDERED THAT:

(1) South Central Bell Telephone Company be per-

mitted to increase its tariffs in the amounts

directed by the Commission sufficient to increase

its gross annual revenues by $12,700,000;

(2) This increase shall be implemented subject to

refund with interest at 12 per cent per annum and

the Commission reserves the right to require fur-

ther security from the Company;

(3) No increases shall become effective until such

time as the Company files and the Commission

accepts tariffs drawn in accordance with this

order and which provide for a refund plan which

includes provisions for refunds to ratepayers who

discontinue or change service during the time

that these increased rates are in effect.

BY ORDER OF THE COMMISSION:

BATON ROUGE, LOUISIANA

JULY 7, 1983

is) THOMAS E. POWELL

CHAIRMAN

COMMISSIONER

/s/ LOUIS J. LAMBERT, JR.

COMMISSIONER

A-102

*Commissioner John Schwegmann

concurs in part and dissents in part.

COMMISSIONER

/s|/ GEORGE J. ACKEL

VICE CHAIRMAN

/s/ LOUIS S. QUINN

SECRETARY

* (Separate Opinion Attached)

A-103

Commissioner Schwegmann, concurring in part and dissen-

ting in part,

At the time of the decision of the South Central Bell

rate case, I stated the position that a maximum rate in-

crease of $21,989,000 should be granted the Company in

view of the burdensome effect of any increase on con-

sumers. This increase would have produced a 14 per cent

rate of return on equity.

I agree that the federal court order should be com-

plied with in full, recognizing that full $40.5 million in ac-

counting changes sought by the Company. After giving ef-

fect to this increase in expenses, I would still raise the

revenues of the Company by the gross amount (after in-

dependent company settlements) of $21,989,000. This in-

crease would produce a rate of return on equity of 12.6 per

cent. I recognize that this rate of return is below the

amount I deemed reasonable in May, but I believe we still

must balance the investor interests against the interests of

consumers, and in light of all relevant factors, this rate of

return is still reasonable.

isi) JOHN F. SCHWEGMANN

JOHN F. SCHWEGMANN, Commissioner

A-104

LOUISIANA PUBLIC SERVICE COMMISSION

GENERAL ORDER

In re: Reaffirmation of the applicability of state

regulatory principles to telephone terminal

equipment and telephone accounting

practices.

This General Order is issued to set forth the scope of

regulatory authority over telephone tariffs that is exercis-

ed, and will continue to be exercised absent a contrary and

authoritative judicial order, by the Louisiana Public Ser-

vice Commission. In the view of the Commission, this

statement of regulatory policy is necessary because of

orders issued by the Federal Communications Commission

(“FCC”) which attempt to preempt the authority of this

Commission and other state regulatory agencies to

regulate certain intrastate activities of communications

common Carriers.

In a proceeding generally known as the ‘Second

Computer Inquiry,” the FCC last year stated its intention

to preempt the authority of state regulatory agencies to

establish tariffs for the marketing of ‘terminal equipment’’

by communications common carriers. ‘‘Final Decision,’’ In

the Matter of Amendment of Section 64.702 of the Com-

mission’s Rules and Regulations (Second Computer In-

quiry) (hereinafter referred to as ‘‘Second Computer In-

quiry’’), Docket No. 20828, 77 F.C.C. 2d 384 (Released May

2, 1980); “‘Memorandum Opinion &@nd Order’”’ in Second

Computer Inquiry, 84 F.C.C. 2d 50 (Released Dec. 30,

1980). ‘“Terminal equipment”’ is that equipment located on

A-105

a customer’s premises which the customer uses to transmit

and recieve communications through the telecommunica-

tions network. Thus, it includes equipment ranging from

the ordinary telephone to the sophisticated equipment used

on the premises of businesses. The action of the FCC is

designed to further an asserted federal policy of ‘‘deregula-

tion’ and would permit the Bell System, along with other

common carriers, to set the prices for terminal equipment

free of rate regulation by any state regulatory agency or

the FCC. In the words of the FCC, the Second Computer

decision has the effect of ‘’eviscerating state jurisdiction to

establish charges for this terminal equipment in a manner

that conflicts with federal interests....." Memorandum Opi-

nion and Order in Second Computer Inquiry, 84 F.C.C. 2d

50, 103 (Released Dec. 30, 1980).

The Louisiana Commission did not learn of the scope

and potential-impact of the decision in the Second Com-

puter Inquiry until recently. Although the ruling attempts

a vast reordering of federal and state regulatory

prerogatives, no public notice issued by the FCC prior to its

Final Decision even mentioned the possibility that any

preemption of state authority might be attempted. The Se-

cond Computer Inquiry was orignially undertaken to

redefine the distinctions between communications and data

processing services previously adopted by the FCC. Notice

of Inquiry and Proposed Rulemaking in Second Computer

Inquiry, 61 F.C.C. 2d 103 (Released Aug. 9, 1976); Sup-

plemental Notice of Inquiry and Enlargement of Proposed

Rulemaking in Second Computer Inquiry, 64 F.C.C. 2d 771

(Released March 8, 1977); Tentative Decision and Further

Notice of Inquiry and Rulemaking, 72 F.C.C. 2d 358,

440-43 (Released July 2, i979).

The potential consequences of the regulatory policies

A-106

of the FCC began to become apparent, however, when South

Central Bell Telephone Co. requested drastic increases in in-

trastate rates to satisfy prospective changes in depreciation

rates and other accounting practices prescribed by the FCC.

See Ex parte South Central Bell Telephone Co., Order No.

U-14673 (La. Pub. Serv. Comm’n., Jan. 21, 1981) at 30 et seg.

These accounting changes are associated with the process

of deregulation and are designed in part to allow the telephone

company an accelerated return of capital to permit the

transfer of assets to an unregulated Bell System subsidiary

at low prices. Final Decision in Second Computer Inquiry,

77 FCC. 2d 384, 449 (Released May 2, 1980). Faced with the

claim for substantial intrastate rate increases to promote

federal objectives, this Commission initiated an inquiry in-

to the scope and impact of the Second Computer decision

and related actions of the FCC. Ex parte South Central Bell

Telephone Co., Order No. U-14673 (La. Pub. Serv. Comm’n.,

Jan. 21, 1981) at 30 et seq.

The Second Computer decision, if it is implemented,

will have a number of consequences for state regulatory agen-

cies and intrastate ratepayers. First, the state agencies will

be precluded from regulating the Bell System and other com-

mon carriers in the marketing of terminal equipment. Con-

sumers will be forced to pay whatever prices can be exacted

by these carriers in light of local market conditions. Second,

state regulatory agencies will be unable to foster the goal of

universal service by permitting the rates for terminal equip-

ment, which ordinarily reflect at least the full intrastate and

interstate cost of this equipment, to defray part of the ex-

penses associated with basic service. Thus, intrastate rates

will increase. Third, the other actions of the FCC taken to

implement the deregulation decision, such as the prescrip-

tion of accelerated depreciation rates, will cause intrastate

rates to increase even further.

A-107

The attempted preemption of state ratemaking

authority by the FCC is ironic because the FCC has never

established the tariffs for most enhanced services, nor do

federal tariffs exist for most of the terminal equipment pro-

vided to consumers by common carriers. The establishment

of these rates has historically been the prerogative of state

regulatory agencies.

Much of the plant devoted to communications ser-

vice in this country is devoted to both intrastate and in-

terstate use. Thus, a piece cf terminal equipment may be

used primarily for intrastate calls in the local exchange and

intrastate toll calls, but it may also be used for interstate

toll calls. A similar joint use is made of the inside wiring on

the customer’s premise, the wiring that connects

customers to switching facilities, some of the central office

equipment, and other plant. Under the decision of the

United States Supreme Court in Smith v. Illinois Bell

Telephone Co., 282 U.S. 133, 51 S.Ct. 65 (1930), a fair ap-

portionment is required of the costs attributable to each

jurisdiction in order to fairly account for these costs. Over

time, a separations process has developed to accomplish

this objective. Of the joint costs, which are apportioned in

part according to the use of the facilities, the majority are

assigned to the intrastate jurisdictions.

While the costs associated with terminal equipment

are divided between the state and federal jurisdictions, the

responsibility for tariffing jointly used terminal equipment

has always rested with the state regulatory agencies. Thus,

the FCC recognized that the only federai tariffs for ter-

minal equipment involve equipment used exclusively in

“interstate or foreign communications’’ and that ail ter-

minal equipment subject to the separations process is

“tariffed at the state level.”” Memorandum Opinion and

A-108

Order in Second Computer Inquiry, 84 F.C.C. 2d 50, 67, 66

(Released Dec. 30, 1981).

The objectives of regulation on the intrastate level

vary from state to state. However, one general objective of

utility regulation is to ensure that an entity enjoying

‘natural monopoly” status does not charge excessive

prices to consumers. A second objective is to ensure the

ready availability to the general public of common carrier

services: the concept of universality of service. Regulatory

agencies may act to ensure that communications service is

provided to all who request it at reasonable prices. These

regulatory policies have long been accepted in Louisiana.

The method by which regulatory agencies protect the

consumer, while ensuring the financial health of the utility,

is through the ratemaking process. As Professor Priest in-

dicates in his treatise, ‘’(e)very state has...established a

regulatory agency”’ and ‘“‘the early predicates for regula-

tion were developed under the guidance of state tribunals.”

A.J.G. Priest, Principles of Public Utility Regulation

(Michie Co., 1969) at 26. The ratemaking process is design-

ed to set: utility prices at a level that will allow only a fair

rate of return to the utility. Jd. at 191 et seq. The overriding

principle is the “‘protection of the public interest.’ Jd. at

193.

Generally, only communications common carriers

have been regulated in the marketing of terminal equip-

ment. The prices charged by independent suppliers of ter-

minal equipment, that do not engage in common carrier ac-

taivities, have not been regulated. The only companies

‘“‘deregulated’’ by the FCC are the Bell System and other

common carriers. The Beli System, however, enjoys encr-

mous economic power in the United States. South Central

A-109

Bell Telephone Co. has natural monopoly status in this state.

In only a few areas of the state do market conditions reflect

any significant “competition” in the marketing of terminal

equipment. In most areas, an unregulated telephone company

would be free to charge excessive prices.

A full implementation of the deregulation decision of

the FCC, including the changes in accounting pract.ces pro-

posed to further the goal of deregulation, could cause in-

creases in Louisiana intrastate rates of more than $100 million

annually. The economic power of the Bell System would be

enhanced. Consumers would be unprotected in obtaining ter-

minal equipment from a natural monopoly. The policy of

universal service would be retarded.

The Louisiana Constitution and other laws of this State

vest this Commission with regulatory authority over the

telephone company. This law provides the Commission with

broad authority over regulated utilities. Concomitantly, the

Commission has a duty to exercise its authority in reasonable

fashion to protect consumers while ensuring fairness to

utilities. The law of the State and our longstanding regulatory

policies do not permit the Commission to meekly accede to

an ill advised policy of regulatory abdication advocated by

a federal agency.

In the view of this Commission, the Communications

Act of 1934 specifically reserves to the states the authority

to prescribe rates for equipment used primarily for intrastate

communications. 47 U.S.C. §§152(b), 221(b). Even if it did not,

the attempt of a federal agency to displace our authority to

protect Louisiana citizens, while providing no assurance that

federal regulations will protect them, runs afoul of constitu-

tional limitations protecting state sovereignty. National

League of Cities v. Usery, 426 U.S. 833, 96 S.Ct. 2465 (1976).

———— YC SC One aa 1 8 ee eS So |

A-110

In order to place the FCC and South Central Bell

Telephone Co. on notice of the regulatory policy of this

State as it relates to the policies announced by the FCC,

this Commission hereby orders:

(1) The marketing of terminal equipment by com-

munications common carriers will continue to be

the subject of rate regulation by this Commis-

sion, even after March 1, 1982. This order will

apply to any attempt of the Bell System to

market this equipment through a _ separate

subsidiary.

(2) Depreciation rates for imbedded terminal

equipment, and all other equipment historically

regulated in the intrastate jurisdiction, will be set

according to policies approved in this State. They

will not be established to further a policy of

‘“‘deregulation”’ of the FCC.

(3) Changes in accounting procedures proposed by

common carriers will be examined for their con-

sistency with the approved regulatory practice of

this State and will be approved or disapproved on

this basis, and this basis only.

The staff, special counsel and consultants of the

Commission are instructed to take the necessary actions to

ensure the implementation of this Order. The Order does

not reflect any change in the regulatory policy of this Com-

mission. However, it is necessary in light of the policies an-

nounced by the FCC.

BY ORDER OF THE COMMISSION

BATON ROUGE, LOUISIANA

JUNE 30, 1981

A-111

/s| ED KENNON

CHAIRMAN

/s/ THOMAS E. POWELL

VICE CHAIRMAN

/s/ LOUIS J. LAMBERT, JR.

COMMISSIONER

/s|/ GEORGE J. ACKEL

COMMISSIONER

/s|/ JOHN F. SCHWEGMANN

COMMISSIONER

/s/ LOUIS S. QUINN

SECRETARY

A-112

BEFORE THE

LOUISIANA PUBLIC SERVICE COMMISSION

DOCKET NO. U-15955

EX PARTE APPLICATION OF

SOUTH CENTRAL BELL TELEPHONE COMPANY

FOR A REVISION OF ITS INTRASTATE

RATES AND CHARGES

ORDER NO. U-15955-A

I. INTRODUCTION

This case involves the application of South Central

Bell Telephone Company (‘‘South Central Bell’’) for an in-

crease of its intrastate rates and charges of $407,337,000.

The case involves unprecendented issues in telecommunica-

tions because it requires the Commission to set rates for

the period following the divestiture of South Central Bell

and other Bell operating companies by the American

Telephone and Telegraph Co. (‘‘AT&T’’) pursuant to the

settlement of the antitrust suit brought against AT&T by

the Justice Department. The settlement was modified and

approved by a United States District Court in United

States v. American Telephone & Telegraph Co., 552

F.Supp. 131 (D.D.C. 1982), aff'd sub. nom., Maryland v.

United States, _. U.S. __ (1983). In addition, this case

follows the decision of the Federal Communications Com-

mission preempting state jurisdiction over certain services

and offerings of telecommunications common carriers and

deregulating these areas. Computer & Communications In-

dustry Ass'n v. Federal Communications Commission, 693

F.2d 198 (D.C. Cir. 1982), cert. denied sub. nom. Louisiana

A-113

Public Service Commission v. Federal Communications

Commission, __ U.S. __ (1983).

The company filed its rate application November 4,

1983. It requested general rate relief, but also asked for an

interim, emergency rate order to make up revenues

assertedly to be lost January 1, 1984 as the result of

divestiture and deregulation. On December 30, 1983, the

Commission issued Order No. U-15955, granting the com-

pany authority to file access tariffs sufficient to produce

annual revenues of $141.5 million, with the charges to be

assessed entirely to interexchange carriers. This amount

was later reduced to about $138 million by agreement of

South Central Bell and the principal interexchange carrier,

AT&T Communications of the South Central States, Inc.

(“‘ATTCOSCSI’’), a subsidiary of AT&T.

South Certral Bell formerly was a wholly owned sub-

sidiary of AT&T. It now is a wholly owned subsidiary of

Bell South Corporation (‘‘BellSouth’’), a corporation that

was ‘‘spun off’’ by AT&T at the time of divestiture.

Southern Bell Telephone & Telegraph Company is also a

wholly owned subsidiary of BellSouth. To accomplish the

divestiture, South Central Bell transferred most of its

customer premises equipment (‘‘CPE’’) to a subsidiary of

AT&T and transferred other equipment, assets and person-

nel to other entities.

Interventions were filed in this proceeding by a

number of parties, including ATTCOSCSI, the Alarm

Association of Louisiana, Southern Pacific Communica-

tions, Southern Message Service, Inc., Radiofone, Inc., the

American Petroleum Institute’s Central Committee on

Telecommunications, Louisiana Telephone Association,

Lafourche Telephone Company, and the Regulatory Law

A-114

Office, U.S. Army Legal Services Agency. A hearing was

conducted on the interim application December 8, 1983,

and hearings for the cross-examination of witnesses

presented by South Central Bell, the Commission Staff,

and intervenors were held April 10, 11 and 12, and May 15,

16 and 31, 1984.

Il. THE RATE APPLICATION

In a normal rate case, determining the revenue re-

quirements of the utility requires five steps: 1) choosing the

test period for the measurement of the earnings of the com-

pany; 2) calculating the rate base in the test period; 3) fin-

ding the adjusted operating income for the period; 4) deter-

mining the fair rate of return; and 5) adjusting rates to

allow the utility the opportunity to earn this rate of return.

Traditionally, the Commission has used a past test period

and adjusted the data for known changes to occur when

rates are in effect and, if necessary, for attrition.

In this case, the traditional rate-making mechanism

is complicated enormously by divestiture and deregulation.

Because of these events, historic data is not necessarily in-

dicative of future conditions. The splitting of the assets,

personnel, offerings and services of the company do not

necessarily have a proportionate impact on expenses and

revenues, so it is impossible to predict the rate levels for

the divested company that are necessary to produce the

fair rate of return. Moreover, because of divestiture and

deregulation, the rate filing is based to an unprecedented

degree on assumptions and estimates, many of which were

made by employees of AT&T or employees of South Cen-

tral Bell who are now employed by AT&T. The presump-

tive validity attaching to the books and records of a utility

in a normal case, when this material is kept in accordance

A-115

with standard and accepted accounting practices, does not

apply to the unique decisions made in connection with the

reorganization of the industry, especially since an entity

that is now a potential competitor of South Central Bell

controlled many divestiture decisions.

In addition, because divestiture was a mammoth

task, involving decisions by hundreds of employees of

AT&T and South Central Bell, it is impossible to test these

decisions for their prudence and regulatory propriety. This

Commiss’ 9n simply does not have resources to match those

devoted by the telephone company to this effort. Thus,

regulatory scrutiny in the normal sense is not possible.

These observations do not mean that rates should

not be established for the post-divestiture period, but that

any prognostication of the impact of these events is

unreliable and the capacity of the Commission to protect

the interests of ratepayers is reduced. The rate setting pro-

cess requires an unusual dose of judgment. The handicaps

under which the Commission must set rates mandate cau-

tion in analyzing the company’s forecast of a need for addi-

tional revenue.

A. The Test Year.

South Central Bell proposed the use of a fully

forecasted 1984 test year. The Commission traditionally

has relied on actual data for a recent past test year, but

recognizes that divestiture and deregulation make past

data unreliable for predicting the future. Nevertheless, the

use of actual data, adjusted to the extent possible, for

divestiture, is likely to be more representative, and permit

better regulatory scrutiny, than data based entirely on

estimates. Therefore, the Commission adopts the test year

A-116

1983. South Central Bell was given the opportunity to sug-

gest all necessary adjustments to this data.

B. The Rate Base.

The Commission adopts the rate base proposed by

its regulatory consultant, Mr. Kenneth Gallagher. The ad-

justments proposed by Mr. Gallagher are consistent with

the traditional practices of the Commission and reflect

reasonable adjustments to the estimates proposed by the

telephone company. The Commission notes that the

estimates of 1984 separations factors made by South Cen-

tral Bell increase the rate base by $125 million as compared

to the 1983 factors. These estimates were not supported in

any detail by the company and could not be checked by the

Commission’s consultants.

In addition, it should be noted that given the impact

of divestiture, it is no longer necessary to separate

customer deposits into intrastate/interstate components.

The amount to be properly deducted from the intrastate

rate base is the entire unseparated amount.

South Central Bell recently spun off its directory

assistance operation to a subsidiary of BellSouth. The con-

sultants of the Commission indicated that even though

South Central Bell will receive a percentage of directory

assistance revenues, these revenues will decrease. Pur-

suant to their recommendation, South Central Bell is

directed to maintain its records in a manner that will per-

mit the Commission to determine in the future the

revenues lost because of the spin off. For the test year, only

an adjustment to working capital is required to achieve the

proper ratemaking treatment of the directory assistance

matter.

SS

A-117

The adjusted rate base is set forth below:

RATE BASE FOR TEST YEAR 1983

($1,000)

Telephone Plant in Service 2,347,680

Depreciation Reserve _ (315,530)

Net Telephone Plant 2,032,150

Long-Term Telephone Plant

Under Construction 22,971

Short-Term Telephone Plant

Under Construction 24,545

Property Held for Future Use 335

Working Capital (15,372)

Less: Non-Investor Supplied Capital

Customer Deposits Including

Interest (13,064)

Accumulated Deferred

Income Taxes (249,249)

Pre-1971 Investment Tax

Credits (1,293)

Reserve for Uncollectibles _ (1,355)

Total Non-Investor Supplied Capital (264,961)

CPE Phase-Out (18,457)

Capitalized CPE Transfer 290

Rate Base 1,781,501

C. Adjusted Operating Income.

The net operating income for 1983 was adjusted for

divestiture. Mr. Gallagher recommended that a number of

further adjustments proposed by South Central Bell be

A-118

accepted and that others be rejected. In addition, he pro-

posed several adjustments to this data. The recommenda-

tions of Mr. Gallagher all appear reasonable and are

adopted by the Commission. Only the following ad-

justments require discussion.

1. Changed divestiture ratios.

Mr. Gallagher recommended that the ratios for the

computation of certain payroll adjustments be changed

from those proposed by the company. South Central Bell

developed the ratios using a post-divestiture forecast of the

number of employees in 1984 and a pre-divestiture forecast

for 1984, though the 1983 number of employees was used

to price out the adjustments. With respect to the test year

labor costs, Mr. Gallagher’s adjustment to reflect the ef-

fect of the actual number of employees retained upon

divestiture is accepted. The revised proforma wage ad-

justments proposed by Mr. Gallagher are also accepted.

Mr. Gallagher’s method of comparing the post-divestiture

actual number of employees to the 1983 figures used to

develop the pre-divestiture adjustment is the correct pro-

cedure to develop the appropriate ratios.

2. Reimbursements.

The company received reimbursements from AT&T

for expenses previously financed by ratepayers. These

funds should be amortized back to ratepayers over é

reasonable period, as recommended by Mr. Gallagher.

3. General Services and Licenses—

Central Service Organization.

Mr. Gallagher estimated the amount of General

A-119

Services and Licenses expense and the Centra! Service

Organization expense by starting with and adjusting the

1983 License Contract expense. The Commission approves

this method, which is a reasonable method of projecting

this expense. The Commission adopts Mr. Gallagher's

recommendations concerning the divestiture ratios to be

applied to various expense categories and the removal of

certain categories for ratemaking purposes.

4. Adjustment to Previously Deferred Research Costs.

South Central Bell retained 100 per cent of previous-

ly deferred research costs rather than transferring some of

these costs, along with assets, to AT&T. Mr. Gallagher

recommended that only a percentage of these costs be

recognized for ratemaking treatment, since research im-

proved all of the company’s technology, including that

transferred to AT&T. A portion of the research costs will

be amortized to ratepayers as recommended by Mr.

Gallagher.

5. Depreciation and Expensing of Station Connections.

In 1983, the Commission rejected the implementa-

tion of certain accounting changes approved by the Federal

Communication Commission and assertedly made man-

datory for state regulatory agencies in a Preemption Order

issued by the FCC. South Central Bell obtained a

preliminary injunction from a federal court requiring that

the additional book expenses be recognized and that a rate

increase be granted, subject to refund, to permit the collec-

tion of these expenses. The increase was approximately $41

million. The decision is now on appeal to the United States

Court of Appeals for the Fifth Circuit.

SS ee ee ee ee

A-120

The expense in the test year for these items for the

post-divestiture South Central Bell causes the need for ad-

ditional revenues of approximately $41 million. The 1984

represcriptions recently approved by the FCC require addi-

tional revenues of $21.72 million. In sum, then, the total

revenue effect of the mandated changes in depreciation

methods and rates is approximately $62.7 million.

Except for the federal court order, the Commission

would not approve the new depreciation methods or the ex-

pensing of station connections. However, because of the

preliminary injunction, the additional expenses will be

recognized for ratemaking purposes, pending’ the decision

of the courts on the appeal of the preliminary injunction.

The rates attributable to these expenses will be im-

posed subject to refund. South Central Bell is directed to

keep records sufficient to make the necessary refunds.

6. Amortization of Excess Deferred Income Taxes.

Due to the change in the federal income tax rate, the

Company has accumulated ‘‘excess’’ deferred taxes. The

deferred taxes were accumulated at a 48 per cent rate, but

the tax liability now only reflects a rate of 46 per cent,

meaning that funds have been accumulated for which there

is no tax liability. The company proposes to return this ex-

cess to its ratepayers over the life of the plant which gave

rise to the deductions. It asserts that this treatment is in

accord with generally accepted accounting principles and

also that if the company returned these deferred taxes

more rapidly to ratepayers it would jeopardize its ability to

defer federal income taxes pursuant to the Internal

Revenue Code.

SO ar ee ee ee

A-121

Mr. Gallagher recommended that these excess defer-

red taxes be amortized to ratepayers over a two year

period. These excess deferred taxes have arisen as a result

of accounting convention and do not in fact constitute a

potential liability of the Company. The money was advanc-

ed by ratepayers. The Company has offered no reason to

support its retention of these funds for any longer than two

years.

Finally, there is no indication that South Central Bell

runs a significant risk of losing its ability to defer federal

income taxes if these excess deferred taxes are amortized

over a two year period. The Commission will still permit

the normalization of the tax effects of accelerated deprecia-

tion. Ineaddition, various other state regulatory commis-

sions have required that such excess reserves be amortized

over a shorter period of time than the life of the associated

plant and there have been no adverse effects on the ability

of the regulated companies to defer federal taxes.

7. Interest during construction.

Interest during construction should be reflected at

the overall cost of capital approved by the Commission,

both for long-term and short-term plant under construc-

tion. The appropriate adjustment at the rate of return of

11.82% is $651,000.

8. Tax effect of proforma interest.

Mr. Gallagher indicated that the test year tax ex-

pense be adjusted to reflect the proforma amount and cost

rate of debt adopted for ratemaking purposes. This recom-

mendation is consistent with the standard practice of the

Cémmission and is adopted.

A-122

The adjustments to operating income are set forth

below:

ADJUSTED OPERATING INCOME

($1,000)

Test Year Net Operating Income

ADJUSTMENTS

Annualize 4/83 Management

Salary Increase

ES, CPE, FSS Reimbursements

AMPS Reimbursement

8/83 Tariff Increase

Annualize 8/83 Non-Mgmt. Salary

Increase

Annualize 10/83 Management

Salary Increase

Annualize 1983 Pensions Accrual

Increase

Annualize Independent Company

Settlements

Remove Divestiture ‘‘Get Ready’”’

Costs

Annualize RL/ELG—1983

Remove ASD Formation Costs

Remove Regional Service Company

Costs

Proforma Non-Management

Savings Plan

Proforma 1984 FICA

Proforma 4/84 Management

Salary Increase

Proforma 8/84 Non.-Mgmt. Salary

Increase

Proforma 10/84 Management

Salary Increase

(400)

1,401

760

8,205

(2,924)

(1,564)

(396)

238

227

(4,460)

316

2,659

(76)

(386)

(529)

(4,172)

(683)

90,717

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Proforma 1984 Property Tax

Increase (1,693)

Proforma 1984 Revenue—ATTIX/

EBO 376

Proforma 4/85 Management Salary

Increase (989)

ESC—100% (9,676)

Adjust Test Year Payroll for

Divestiture Ratio 8,910

Amortization of Reimbursements 178

CPE Phase-Out 3,463

CPE Transfer to Employees 234

Official Toll (2,284)

Contract Charging (4,016)

Adjust IDC to 11.82 651

Interest on Customer Deposits (648)

Amortization of Excess DFIT 1,536

Proforma Interest 9,772

12/83 Tariff Change (1,084)

RL & ELG—1984 (10,877)

Total Adjustments

Adjusted Net Operating Income

D. Fair Rate of Return

The determination of the fair rate of return is also in-

fluenced by divestiture and deregulation. In the past, the

Commission has regulated South Central Bell on the basis

of a reasonable capital structure for the Bell System. The

company has now been divested and is wholly owned by

BellSouth. In addition, the Commission now must deter-

mine a reasonable return on equity for the divested com-

pany rather than for a company that is part of the Bell

System.

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Dr. Richard L. Lurito, a consultant of the Commis-

sion, testified that a reasonable capital structure for

BellSouth would include 45 per cent long term debt, 6 per

cent short term debt and 49 per cent common equity. In the

1980 South Central Bell case, Docket No. U-14673, this

Commission used a capital structure containing only 45 per

cent equity for regulatory purposes; this capital structure

was also used in the last case. Thus, the recommendation

of Dr. Lurito would permit a significant increase in the

equity ratio.

Under the divestiture order of the federal court, the

divested Bell subsidiaries were required to have equity

ratios of at least 55 per cent. However, the divestiture

order does not purport to determine a reasonable capital

structure of these subsidiaries for regulatory purposes. The

55 per cent requirement is partly a function of the historic

refusal of the Bell System to move toward a reasonable

capital structure and the court’s desire to avoid exploita-

tion of the subsidiaries by AT&T. It is not binding on this

Commission.

Dr. Lurito performed studies to determine whether

his recommended capital structure provides adequate safe-

ty to South Central Bell and found that it ensures more

than a reasonable margin of safety. This finding is especial-

ly supportable because other utilities in this State with

fewer assets and greater risk than South Central Bell are

able to obtain reasonable financing with equity ratios

below 40 per cent. The Commission is reluctant to approve

any increase in the equity ratio, but will adopt the recom-

mendation of Dr. Lurito for this case with the provision

that to conform to the regulatory goal in this State, the

utility plan its future financing to achieve the most

economical capital structure and equity ratio.

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Dr. Lurito also provided the proform cost of debt of

South Central Bell and BellSouth and indicated that it may

be preferable to use the cost rates of South Central Bell un-

til experience shows the effect on the BellSouth cost rates

of its creation of certain new subsidiaries. The Commission

will accept this recommendation, at least for this case.

The following recommendations were submitted for

the fair rate of return on equity:

Mr. J. D. Matheson, Jr., the

witness of South Cental Bell

Dr. Lurito

Mr. Mark Langsum, the witness

of the U.S. Army

In evaluating these recommendations, the Commis-

sion is mindful of the following tenets. First, the company

is entitled to earn a rate of return that is ‘‘commensurate

with returns on investment in other enterprises having cor-

responding risks”’ and ‘‘sufficient to assure confidence in

the financial integrity of the enterprise, so as to maintain

credit and to attract capital.’’ FPC v. Hope Natural Gas

Co., 320 U.S. 591, 603, 64 S.Ct. 281, 288 (1944). This,

however, is but the first part of the Commission's inquiry.

The Commission is also bound to ‘provide appropriate pro-

tection to the relevant public interests, both existing and

foreseeable.’ In re Permian Basin Area Rate Cases, 390

U.S. 747, 792, 88 S.Ct. 1344, 1373 (1968). Furthermore, the

Commission is bound to assess these requirements of the

broad public interest ‘‘at each step of its regulatory pro-

cess."’ 390 U.S. at 791, 88 S.Ct. at 1372. A balance must

thus be struck between investor and consumer interests.

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Second, unamortized investment tax credits con-

stitute approximately 8.1 per cent of South Central Bell’s

total investor-supplied capital. If such unamortized invest-

ment tax credits are not deducted from the Company’s rate

base, South Central Bell will in fact be permitted the oppor-

tunity to earn a higher rate on its actual equity investment.

Although these unamortized investment tax credits are

treated as if they were investor-supplied, they actually

have zero cost to the Company. If the unamortized invest-

ment tax credits are deducted from rate base, there might

be a disadvantageous tax consequence. However, the Com-

mission is not precluded from considering this factor in

determining the rate of return on equity that will ensure

the financial integrity of the utility.

Third, inflation continues to be relatively low. In-

vestors are receiving a higher real return on their invest-

ment than they have for some time. The use of historic

studies concerning the investor’s required rate of return

may overstate the real return requirement.

Fourth, the preliminary injunction requires the Com-

mission to permit faster capital cost recovery methods

than historically have been allowed. The increase in cash

flow of $62.7 million annually reduces the investment risk

of South Central Bell and gives it a better ‘‘quality”’ of

earnings.

In the final analysis, the fair rate of return on equity

is a matter of regulatory judgment. This rate of return will

be fixed at 14.75 per cent. The overall fair rate of return is

11.82 per cent.

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E. Revenue Requirement.

To produce the fair rate of return, a rate increase of

$126,393,000 is required after reflecting the fact that ac-

cess rates charged to interexchange carriers will produce

$128,790,000 of revenues, as discussed below. South Cen-

tral Bell has assured the Commission that it will pursue a

construction program costing $300 million or more in the

next 12 months, allowing it to improve and upgrade the

quality of service in this State. The Company will be re-

quired to perform this undertaking, especially in light of

the rate relief provided in this order. |

Ill. ADDITIONAL MATTERS.

The following additional matters must be dealt with

in this Order.

First, divestiture and deregulation have created a

new telephone company and shifted much of the burden of

paying for telecommunications services among classes of

customers. New issues in rate design are presented. The

goal of universal service is threatened by the spectre of so-

called ‘‘competition,’’ which in the world of the telephone

company mandates increases rather than decreases in

price. A full analysis of these issues is necessary. Therefore,

the Staff is directed to receive evidence and make recom-

mendations concerning these matters. However, the Com-

mission hereby orders that the increase applied to residen-

tial exchange service not exceed $2.00 per month and the

increase to business exchange service not exceed $4.00 per

month, and authorizes the implementation of these two

tariffs.

Second, pursuant to the recommendation of Bruce

A-128

M. Louiselle, a Commission consultant, and the current

cost study showing the need for $128,790,000 in revenue

resulting from the l0ss of the toll services of South Central

Bell, the access charge assessed to interexchange carriers

will be fixed at $128,790,000. The so-called threat of

“bypass” has not been shown to be serious enough to

justify reducing these tariffs any further.

Third, the Commission is concerned that accounting

guidelines be developed to ensure that interexchange car-

riers bear the full cost of ensuring ‘‘equal access’’ pursuant

to the divestiture order. In the continuing proceedings, the

Staff is directed to analyze this issue and make

recommendations.

Fourth, the Commission Staff is directed to conduct

an examination of the contracts between AT&T and South

Central Bell for the use of multifunction plant to determine

their reasonableness and the extent to which the

divestiture order affects the freedom of the Commission to

adjust these expenses for regulatory purposes.

Fifth, South Central Bell will from time to time be re-

quired to construct projects to serve the needs of inter-

exchange customers. Procedures must be developed to per-

mit regulatory scrutiny of these projects and the compen-

sation received from AT&T and other carriers. The staff

should analyze these issues in the continuing proceeding.

IV. CONCLUSION

For the foregoing reasons,

IT IS ORDERED that South Central Bell Telephone

Company will be permitted to raise its intrastate rates in

Tiina:

A-129

the gross amount of $126,393,000. After the implementa-

tion of the increase, $62.7 million of the revenues of South

Central Bell will be subject to refund. In addition, these

proceedings shall remain open to formulate recommenda-

tions regarding the other issues described in this Order.

The Company is also ordered to expend at least $300

million on construction, to improve and upgrade service, in

the 12 months beginning September 1, 1984.

BY ORDER OF THE COMMISSION:

BATON ROUGE, LOUISIANA

OCTOBER 1, 1984

/s/ Signed

CHAIRMAN

is/ Signed

John Schwegmann concurs in part

and dissents in part.*

VICE CHAIRMAN

COMMISSIONER

Pa isi Signed

COMMISSIONER

___——s/8/ Signed

COMMISSIONER

/s/ Signed

SECRETARY

* Commissioner Schwegmann concurs in all parts of this Order ex-

cept the decision to approve an additional $21.72 million in depreciation

expense for 1984 represcriptions approved by the FCC. Commissioner

Schwegmann would approve this additional expense only if it were man-

dated by the courts. Commissioner Schwegmann woudd approve a rate

increase of $104,673,000.

A-130

* Commissioner Lambert concurs in all parts of this Order except

the decision to approve an additional $21.72 million in depreciation ex-

pense for 1984 represcriptions mandated by the FCC. Commissioner

Lambert would deny the depreciation expense. However, Commissioner

Lambert agrees that a rate increase of $126,393,000 is necessary to en-

sure the financial viability of the telephone company and permit it to

make necessary capital expenditures. Therefore, Commissioner Lambert

joins Commissioners Ackel and Powell in approving a rate increase of

$126,393,000.

eee eee A Att —

A-131

APPENDIX “E”

STATUTES INVOLVED

47 U.SC. 8151:

For the purpose of regulating interstate and foreign

commerce in communication by wire and radio so as to make

available, so far as possible, to all the people of the United

States a rapid, efficient, Nation-wide, and world-wide wire and

radio communication service with adequate facilities at

reasonable charges, for the purpose of the national defense,

for the purpose of promoting safety of life and property

through the use of wire and radio communication, and for

the purpose of securing e more effective execution of this

policy by centralizing authority heretofore granted by law to

several agencies and by granting additional authority with

respect to interstate and foreign commerce in wire and radio

communication, there is created a commission to be known

as the “Federal Communications Commission’, which shail

be constituted as hereinafter provided, and which shall ex-

ecute and enforce the provisions of this chapter.

47 U.S.C. §152:

(a) The provisions of this chapter shall apply to all in-

terstate and foreign communication by wire or radio and all

interstate and foreign transmission of energy by radio, which

originates and/or is received within the United States, and

to all persons engaged within the United States in such com-

munication or such transmission of energy by radio, and to

the licensing and regulating of all radio stations as hereinafter

provided; but it shall not apply to persons engaged in wire

or radio communication or transmission in the Canal Zone,

or to wire or radio communication or transmission wholly

within the Canal Zone.

i

A-132

(b) Except as provided in section 224 of this title and

subject to the provisions of section 301 of this title,

nothing in this chapter shall be construed to apply or to

give the Comission jurisdiction with respect to (1) charges,

classifications, practices, services, facilities, or regulations

for or in connection with intrastate communication service

by wire or radio of any carrier, or (2) any carrier engaged in

interstate or foreign communication solely through

physical connection with the facilities of another carrier

not directly or indirectly controlling or controiled by, or

under direct or indirect common control with such carrier,

or (3) any carrier engaged in interstate or foreign com-

munication solely through connection by radio, or by wire

and radio, with facilities, located in an adjoining State or in

Canada or Mexico (where they adjoin the State in which the

carrier is doing business), of another carrier not directly or

indirectly controlling or controlled by, or under direct or in-

direct common control with such carrier, or (4) any carraier

to which clause (2) or clause (3) of this subsection would be

applicable except for furnishing interstate mobile radio

communication service or radio communication service to

mobile stations on land vehicles in Canada or Mexico; ex-

cept that sections 201 to 205 of this title shall, except as

otherwise provided therein, apply te carriers described in

clauses (2), (3), and (4) of this subsection.

47 U.S.C. §153(e)

(e) ‘‘Interstate communication” or “interstate

transmission’’ means communication or transmission (1)

from any State, Territory, or possession of the United

States (other than the Canal Zone), or the District of Col-

umbia, to any other State, Territory, or possession of tahe

United States (other than the Canal Zone), or the District

of Columbia, (2) from or to the United States to or from the

a —

A-133

Canal Zone, insofar as such communication or transmission

takes place within the United States, or (3) between points

within the United States but through a foreign country;

but shall not, with respect to the provisions of subchapter

II of this chapter (other than section 223 of this title), in-

clude wire or radio communication between points in the

same State, Territory, or possession of the United States,

or the District of Columbia, through any place outside

thereof, if such communication is regulated by a State

commission.

47 U.S.C. §220:

(a) The Commission may, in its discretion, prescribe

the forms of any and all accounts, records, and memoranda

to be kept by carriers subject to this chapter, including the

accounts, records, and memoranda of the movement of traf-

fic, as well as of the receipts and expenditures of moneys.

(b) The Commission shall, as soon as practicable,

prescribe for such carriers the classes of property for which

depreciation charges may be properly included under

operating expenses, and the percentages of depreciation

which shall be charged with respect to each of such classes

of property, classifying the carriers as it may deem proper

for this purpose. The Commission may, when it deems

necessary, modify the classes and percentages as prescrib-

ed. Such carriers shall not, after the Commission has

prescribed the clasess! of property for which depreciatior

charges may be included, charge to operating expenses an)

A-134

depreciation charges on classes of property other than those

prescribed by the Commission, or, after the Commission has

prescribed percentages of depreciation, charge with respect

to any class of property a percentage of “epreciation other

than that prescribed therefor by the Commission. No such

carrier shall in any case include in any form under its

operating or other expenses any depreciation or other charge

or expenditure included elsewhere as a depreciation charge

or otherwise under its operating or other expenses.

(c) The Commission shall at all times have access to

and the right of inspection and examination of all accounts,

records, and memoranda, including all documents, papers,

and correspondence now or hereafter existing, and kept or

required to be kept by such carriers, and the provisions of

this section respecting the preservation and destruction of

books, papers, and documents shall apply thereto. The burden

of proof to justify every accounting entry questioned by the

Commission shall be on the person making, authorizing, or

requiring such entry and the Commission may suspend a

charge or credit pending submission of proof by such per-

son. Any provision of law prohibiting the disclosure of the

contents of messages or communications shall not be deem-

ed to prohibit the disclosure of any matter in accordance with

the provisions of this section.

(d) In case of failure or refusal on the part of any such

carrier to keep such accounts, records, and memoranda on

the books and in the manner prescribed by the Commission,

or to submit such accounts, records, memoranda, documents,

papers, and correspondence as are kept to the inspection of

the Commission or any of its authorized agents, such car-

rier shall forfeit to the United States the sum of $500 for each

day of the continuance of each such offense.

A-135

(e) Any person who shall willfully make any false en-

try in the accounts of any book of accounts or in any record

or memoranda kept by any such carrier, or who shall

willfully destroy, mutilate, alter, or by any other means or

device falsify any such account, record, or memoranda, or

who shall willfuliy neglect or fail to make full, true, and cor-

rect entries in such accounts, records, or memoranda of all

facts and transactions appertaining to the business of the

carrier, shall be deemed guilty of a misdemeanor, and shall

be subject, upon conviction, to a fine of not less than $1,000

nor more than $5,000 or imprisonment for a term of not less

than one year nor more than three years, or both such fine

and imprisonment: Provided, That the Commission may in

its discretion issue orders specifying such operating, ac-

counting, or financial papers, records, books, blanks, or

documents which may, after a reasonable time, be

destroyed, and prescribing the length of time such books,

papers, or documents shall be preserved.

(f) No member, officer, or employee of the Commis-

sion shall divulge any fact or information which may come

to his knowledge during the course of examination of books

or other accounts, as hereinbefore provided, except insofar

as he may be directed by the Commission or by a court.

(g) After the Commission has prescribed the forms

and manner of keeping of accounts, records, and memoran-

da to be kept by any person as herein provided, it shall be

unlawful for such person to keep any other accounts,

records, or memoranda than those so prescribed or such as

may be approved by the Commission or to keep the ac-

counts in any other manner than that prescribed or approv-

ed by the Commission. Notice of alterations by the Com-

mission in the required manner or form of keeping accounts

A-136

shall be given to such persons by the Commission at least

six months before the same are to take effect.

(h) The Commission may ciassify carriers subject to

this chapter and prescribe different requirements under

this section for different classes of carriers, and may, if it

deems such action consistent with the public interest, ex-

cept the carriers of any particular class or classes in any

State from any of the requirements under this section in

cases where such carriers are subject to State commission

regulation with respect to matters to which this section

relates.

(i) The Commission, before prescribing any re-

quirements as to accounts, records, or memoranda, shall

notify each State commission having jurisdiction with

respect to any carrier involved, and shall give reasonable

opportunity to each such commission to present its views,

and shall receive and consider such views and

recommendations.

(j) The Commission shall investigate and report to

Congress as to the need for legislation to define further or

harmonize the powers of the Commission and of State com-

missions with respect to matters to which this section

relates.

47 U.S.C. §221(b); (c):

(b) Subject to the provisions of section 301 of this ti-

tle, nothing in this chapter shall be construed to apply, or

to give the Commission jurisdiction, with respect to

charges, classifications, practices, services, facilities, or

regulations for or in connection with wire, mobile, or point-

to-point radio telephone exchange service, or any combi-

A-137

nation thereof, even though a portion of such exchange ser-

vice constitutes interstate or foreign communication, in

any case where such matters are subject to regulation by

a State commission or by local governmental authority.

(c) For the purpose of administering this chapter as

to carriers engaged in wire telephone communication, the

Commission may classify the property of any such carrier

used for wire telephone communication, and determine

what property of said carrier shall be considered as used in

interstate or foreign telephone toll service. Such classifica-

tion shali be made after hearing, upon notice to the carrier,

the State commission (or the Governor, if the Stzte has no

State commission) of any State in which the property of

said carrier is located, and such other persons as the Com-

mission may prescribe.

47 U.S.C. §410:

(a) Except as provided in section 409 of this title, the

Commission may refer any matter arising in the ad-

ministration of this chapter to a joint board to be composed

of a member, or of an equal number of members, as deter-

mined by the Commission, from each of the States in which

the wire or radio communication affected by or involved in

the proceeding takes place or is proposed. For purposes of

acting upon such matter any such board shall have all the

jurisdiction and powers conferred by law upon an examiner

provided for in section 3105 of Title 5, designated by the

Commission, and shall be subject to the same duties and

obligations. The action of a joint board shall have such

force and effect and its proceedings shall be conducted in

such manner as the Commission shall by regulations

prescribe. The joint board member or members for each

State shall be nominated by the State commission of the

A-138

State or by the Governor is there is no State commission,

and appointed by the Federal Communications Commis-

sion. The Commission shall have discretion to reject any

nominee. Joint board members shall receive such

allowances for expenses as the Commission shall provide.

(b) The Commission may confer with any State com-

mission having regulatory jurisdiction with respect to car-

riers, regarding the relationship between rate structures,

accounts, charges, practices, classifications, and regula-

tions of carraiers subject to the jurisdiction of such State

commission and of the Commission; and the Commission is

authorized under such rules and regulations as it shall

prescribe to hold joint hearings with any State commission

in connection with any matter with respect to which the

Commission is authorized to act. The Commission is

authorized in the administration of, this chapter to avail

itself of such cooperation, services, records, and facilities as

may be afforded by any State commission.

(c) The Commission shall refer any proceeding regar-

ding the jurisdictional separation of common carrier pro-

perty and expenses between interstate and intrastate

operations, which it institutes pursuant to a notice of pro-

posed rulemaking and, except as provided in section 409 of

this title, may refer any other matter, relating to common

carrier communications of joint Federal-State concern, to a

Federal-State Joint Board. The Joint Board shall possess

the same jurisdiction, powers, duties, and obligations as a

joint board established under subsection (a) of this section,

and shall prepare a recommended decision for prompt

review and action by the Commission. In addition, the

State members of the Joint Board shall sit with the Com-

mission en banc at any oral argument that may be schedul-

ed in the proceeding. The Commission shall also afford the

A-139

State members of the Joint Board an opportunity to par-

ticipate in its deliberations, but not vote, when it has under

consideration the recommended decision of the Joint Board

or any further decisional action that may be required in the

proceeding. The Joint Board shall be composed of three

Commissioners of the Commission and of four State com-

missioners nominated by the national organization of the

State commissions as referred to in sections 302(b) and

305(f) of Title 49, and approved by the Commission. The

Chairman of the Commission, or another Commissioner

designated by the Commission, shall serve as Chairman of

the Joint Board.