Simplification of the Depreciation Process

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 43

[CC Docket No. 92-296; FCC 94-174]

Simplification of the Depreciation Process

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: The Federal Communications Commission is adopting range for

the underlying factors that are used to compute depreciation rates for

the local exchange carriers (LECs) regulated under the price cap

incentive regulatory plan. This Second Report and Order establishes

ranges for 22 of the 33 depreciation rate categories. LECs may make

streamlined filings for changes in depreciation rates for these

categories, if their underlying factors fall within the prescribed

ranges. The rule change will lessen the depreciation prescription

burden on price caps LECs in light of regulatory and market changes

without sacrificing protection for consumers.

EFFECTIVE DATE: August 12, 1994.

FOR FURTHER INFORMATION CONTACT:

Fatina K. Franklin or John Hays, Common Carrier Bureau, accounting and

Audits Division, (202) 632-7500.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Second

Report and Order in the Simplification of the Depreciation Prescription

Process, CC Docket No. 92-296, FCC 94-174, adopted June 22 1994 and

released June 28, 1994. The full text of this Commission decision in

available for inspection and copying during normal business hours in

the FCC Dockets Branch (room 230), 1919 M St., Washington, DC. The full

text will be published in the FCC Record and may also be purchased from

the Commission's copy contractor, International Transcription Services,

room 246, 1919 M Street, NW., Washington, DC 20554.

Paperwork Reduction Act

The Federal Communications Commission has submitted the following

information collection request to OMB for review and clearance under

the Paperwork Reduction Act of 1980, 44 U.S.C. Section 3507. Persons

wishing to comment on this information collection should contact

Timothy Fain, Office of Management and Budget, Room 322, New Executive

Office Building, Washington, DC 20503, (202) 395-3561. For further

information, contact Judy Boley, Federal Communications Commission,

(202) 632-7513.

Please note: The Commission has requested emergency review of this

collection by July 22, 1994, under the provisions of 5 C.F.R. Section

1320.18.

Title: Section 43.43--Report of Proposed Changes in Depreciation

Rates.

OMB Control No.: 3060-0168.

Action: Revised collection.

Respondents: Businesses or other for-profit entities.

Frequency of Response: On occasion; Triennially; Annually.

Estimated Annual Burden: 12 responses; 7500 hours per response;

90,000 hours total.

Needs and Uses: In the Report and Order in CC Docket No. 92-296

(released 10/20/93), the Commission streamlined its depreciation

prescription process for local exchange carriers (LECs) regulated under

its price cap regulatory scheme by adopting a modified form of the

basic factor range option. The Second Report and Order adopts the

initial set of accounts and ranges for the price caps LECs. The

Commission has modified its information collection requirements whereby

large LECs must submit analyses on proposed changes in depreciation

rates. The changes should reduce by 25% the amount of time needed to

prepare and review these analyses. The information will be used by the

Commission staff to establish proper depreciation rates to be charged

by the carriers pursuant to Section 220(b) of the Communications Act,

as amended. 47 U.S.C. Sec. 220(b).

The foregoing estimates include the time for reviewing

instructions, searching existing data sources, gathering and

maintaining the data needed, and completing and reviewing the burden

estimates or any other aspect of the collection of information

including suggestions for reducing the burden to the Federal

Communications Commission, Records Management Division, Paperwork

Reduction Project, Washington, DC 20554 and to the Office of the

Management and Budget, Paperwork Reduction Project, Washington, DC

20503.

Summary

1. On September 23, 1993, we adopted streamlined depreciation

prescription procedures for the local exchange carriers (``LECs'')

regulated under our price cap incentive regulatory plan.\1\ These

procedures require us to establish ranges for the underlying factors

that are used to compute depreciation rates for plant categories. The

new procedures generally will permit carriers to make streamlined

filings for changes in depreciation rates for these categories, as long

as their underlying factors fall within the prescribed ranges. By

adopting these streamlined procedures, we hoped to simplify the

depreciation process, achieve administrative savings, and allow the

LECs greater flexibility\2\ in the depreciation process, while

remaining consistent with the public interest.

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\1\Simplification of the Depreciation Prescription Process,

Report and Order, 58 FR 58788 (1993) (Depreciation Simplification

Order).

\2\Flexibility allows a LEC to select, within established

ranges, the life and salvage factors it uses in prescribed

depreciation rates without undergoing the expense of submitting

studies to justify its specification of those factors. In addition,

under the new procedures, the LECs can change their basic factors

annually, as opposed to the current triennial represcription cycle.

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2. We further concluded that the streamlined procedures should be

implemented as soon as practicable. To that end, we decided to

implement the new procedures in two phases. In phase one, we directed

the Common Carrier Bureau to identify the accounts most readily

adaptable to the range approach and propose ranges for them. In phase

two, we will establish ranges for the remaining, more complex accounts,

to the extent feasible.

3. On November 8, 1993, we adopted an Order Inviting Comment\3\ on

22 plant categories selected by the Bureau for initial implementation

of the streamlined procedures. These categories represent two-thirds of

the 33 plant categories for which carriers currently submit

depreciation studies. In addition, the OIC sought comments on the

proposed projection life and future net salvage ranges proposed by the

Bureau for these categories.

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\3\Simplification of the Depreciation Prescription Process,

Order Inviting Comments, 58 FR 62083 (1993) (OIC).

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4. In response to the OIC, the LECs and the United States Telephone

Association (USTA) maintained that, to maximize the benefits of the

simplification procedures, ranges should be established for all

accounts as quickly as possible. They argued that the limited number of

accounts for which ranges have been proposed in phase one severely

restricts the benefits of streamlining depreciation. On the other hand,

MCI, the National Association of Regulatory Utility Commissioners

(NARUC) and the state commissions supported the 22 plant categories

proposed in the OIC for implementation in phase one of the

simplification process.

5. We agree with the commenters that the ranges should be

established as soon as possible. However, to begin the simplification

process in 1994, it is necessary to implement the streamlined

depreciation procedures in two phases and to limit the initial phase to

certain categories of plant readily adaptable to the range approach. As

we stated in the Depreciation Simplification Order, this schedule will

make the most efficient use of our limited resources. To change our

plans at this time and to perform the thorough analyses required to

establish appropriate ranges for additional plant accounts would delay

unnecessarily the use of the new procedures for the depreciation

categories identified in the OIC. The commenting parties have presented

no new information or arguments that would warrant a change in our

plans.

6. Prior to the release of the Notice of Proposed Rulemaking in

this proceeding, the staff of the Common Carrier Bureau had been

considering ways to improve and to streamline the depreciation

prescription process. The staff collected a substantial amount of data

and performed analyses to determine the difficulty of establishing

ranges for various accounts. Based on these analyses, it concluded that

the 22 plant categories proposed in the OIC were the categories most

adaptable to the range approach, because their life and salvage factors

did not vary substantially among the carriers, or over time. The

commenting state commissions generally concur with this conclusion.

7. We estimate that instituting these procedures for the 22

categories selected for phase one will reduce the size of a typical

depreciation study by 50%. We recognize that a 50% reduction in the

size of the study will not necessarily result in a reduction of the

workload by 50%. Nevertheless, in our view, the elimination of so much

of the detailed analyses currently required in the studies will produce

a substantial administrative savings for both the LECs and our staff.

Moreover, we plan to propose ranges for additional accounts later this

year, and to adopt ranges for these accounts early in 1995. As a

result, we expect that the simplification procedures will be in place

for all accounts, to the extent feasible, for the 1995 depreciation

prescription review process. The ranges we establish in this Second

Report and Order will be used to establish depreciation rates for 1994.

Considering that ranges for additional accounts will take effect in

1995, we believe that our two-phase plan will allow us to achieve a

major improvement in the depreciation prescription process in a very

short period of time.

8. In the OIC, we proposed to establish ranges at the account level

for sixteen plant accounts and at a rate category level for four

additional accounts. The majority of parties commenting on this matter

supported our proposal. Pacific Bell further suggested that, where a

carrier maintains levels of categorization more detailed than those

proposed by the Commission, it should be allowed to use the streamlined

procedures, if the ``composite'' factors of its individual rate

categories are within the ranges established for the category as a

whole. In addition, NYNEX made a special request that the Commission

establish a separate rate category with appropriate ranges for

interoffice cable plant, because it contends the life characteristics

of this plant are significantly different from those of subscriber

cables.

9. Based on these comments, we have decided to adopt the ranges for

the 22 rate categories as proposed in the OIC (see Appendix below). As

NARUC observed, establishing ranges at these levels should not require

any additional record keeping or substantial effort on the part of the

LECs, since they are presently required to maintain their accounting

records at these levels under Part 32.\4\

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\4\47 C.F.R. 32.12(b). The LECs for which we prescribe

depreciation rates are Class A companies and must keep all the Class

A accounts prescribed in Part 32.

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10. We have decided not to develop special ranges for LECs that

have chosen to study rate categories at levels not listed in the

Appendix. The application of our range approach is based on national

averages of prescribed depreciation factors. Consequently, to develop

special ranges would slow the process significantly as it would be

necessary to require many carriers to submit large amounts of data

which we would then have to analyze in order to establish appropriate

ranges. This would place an undue burden on the majority of the

carriers that do not study the plant investment at the levels of detail

desired by those LECs that seek ranges for additional categories.

11. Nevertheless, we will consider requests from LECs like Pacific,

that study an account listed in the Appendix at a more detailed level

than shown, but wish to qualify within the established range for that

account. During the prescription process, we will consider their

proposals on a case-by-case basis to use the basic factors computed at

the more detailed levels to satisfy the range requirements.

12. In the OIC, we solicited comments on a specific set of proposed

ranges for the future net salvage and projection life factors for 22

plant categories. USTA and the LECs argued that the proposed ranges are

too narrow, because the LECs will be able to use the streamlined

procedures for fewer than 50% of the 22 plant categories. They argued

that the ranges should be expanded in order to streamline the process

significantly. In addition, for a few of the plant categories, they

argued that the proposed life ranges are too high. They suggested that,

because of the rapid changes in technology, certain plant accounts

should be written off more quickly. However, GSA, MCI, NARUC and most

of the state commission commenters support the ranges proposed in the

OIC. California CATV and GSA believe that the objections to the

proposed ranges raised by the LECs are aimed at obtaining higher

depreciation rates, rather than streamlining the depreciation process.

13. In the Depreciation Simplification Order, we set forth the

specific data that should be considered in establishing the projection

life and future net salvage ranges, and we used these data in proposing

ranges in the OIC. We based the ranges on statistical studies of the

most recently prescribed factors. These statistical studies required

detailed carrier-by-carrier analyses of the most recent plant

retirement patterns, the carriers' plans, and the current technological

developments and trends. Because the proposed ranges reflect these

data, we believe that the ranges provide a reasonable degree of

confidence that the basic factors falling within their bounds will

produce depreciation rates accurately reflecting plant retirements,

company plans, and technological trends. Moreover, they allow the LECs

sufficient flexibility in the selection of the final factors.

14. Furthermore, we do not believe that the ranges are too high, or

too low, as some of the commenters contend. Our objective was not to

change the depreciation rates, but to streamline the process used by

the Commission to prescribe those rates. Consequently, we will not at

this time modify any of the proposed ranges. We believe that some

experience with the ranges should be developed before we consider

modifying them. If changing conditions require revisions in the ranges,

we can modify them at that time.

15. The LECs' assertion that they will be able to use the

streamlined procedures for fewer than 50% of the 22 rate categories is

incorrect.\5\ We have studied the potential application of the ranges

to every carrier for which the Commission prescribes depreciation

rates. We have found that today over two-thirds of the carriers would

qualify for the streamlined procedures for the 22 proposed rate

categories. Furthermore, our most recent depreciation rate reviews

indicate that the proportion should increase over the next few years.

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\5\In the Depreciation Simplification Order, the Commission

decided that ``if a LEC's current basic factors for any one account

do not both fall within the established ranges for that account, the

LEC may not use the range approach for that account.''

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16. In the past, we allowed two informal, alternative streamlined

procedures for plant accounts representing less than 3% of a carrier's

total depreciable investment in a jurisdiction. We are replacing these

informal streamlined study procedures with the adoption of our range

option. To have several streamlined procedures in place at the same

time could prove confusing and could negate any streamlining achieved

by the Commission. Moreover, these previous procedures had a minimal

streamlining effect as compared with the new streamlined procedures. To

illustrate, they only reduce the studies by 3 or 4 pages per category,

whereas our new procedures reduce them by 15 pages. Therefore, we have

decided to employ only the streamline range option adopted in our

Depreciation Simplification Order.

17. Under our depreciation prescription process, one-third of the

carriers for which we prescribe depreciation rates have their rates

reviewed each year. In the Depreciation Simplification Order, we stated

that price cap LECs scheduled for review in 1995 and 1996 could file

for changes in their depreciation rates for 1994 as long as they used

basic factors within the ranges we selected. These carriers must file

these depreciation rate changes in a timely manner in accordance with

the requirements set forth in the Depreciation Simplification Order.

18. Accordingly, it is ordered, pursuant to Section 4(i), 201-205

and 220(b), of the Communications Act of 1934, as amended, 47 U.S.C.

Secs. 154(i), 201-205 and 220(b), that the ranges for the future net

salvage and the projection life factors for the accounts listed in the

Appendix are hereby adopted as specified in the Appendix.

19. It is further ordered, that this order is effective thirty days

after publication in the Federal Register.

20. It is further ordered, that carriers may use the ranges

established herein for federal filing purposes prior to the effective

date of this order.

List of Subjects in 47 CFR Part 43

Communications common carriers, Reporting and recordkeeping

requirements, Telephone.

Federal Communications Commission.

LaVera F. Marshall,

Acting Secretary.

Appendix--Accounts and Ranges for Phase One Implementation

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Projection life range Future net salvage range

Depreciation rate (years) (percent)

Account No. Account name category -----------------------------------------------------

Low High Low High

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2112.............. Motor Vehicles.... Motor Vehicles.... 7.5 9.5 10 20

2113.............. Aircraft.......... Aircraft.......... 7 10 30 60

2114.............. Special Purpose Special Purpose 12 18 0 10

Vehicles. Vehicles.

2115.............. Garage Work Garage Work 12 18 0 10

Equipment. Equipment.

2116.............. Other Work Other Work 12 18 0 10

Equipment. Equipment.

2122.............. Furniture......... Furniture......... 15 20 0 10

2123.1............ Office Support Office Support 10 15 0 10

Equip. Equip.

2123.2............ Co. Communications Co. Communications 7 10 -5 10

Equip. Equip.

2124.............. Gen. Purpose Gen. Purpose 6 8 0 5

Computers. Computers.

2231.............. Radio Systems..... Radio Systems..... 9 15 -5 5

2232.............. Circuit Equipment. Digital Data 7 11 -5 10

Service.

2232.............. Circuit Equipment. Analog............ 8 11 -5 0

2311.............. Station Apparatus. Station Apparatus. 5 8 -5 5

2341.............. Large PBX......... Large PBX......... 5 8 -5 5

2351.............. Public Telephone.. Public Telephone.. 7 10 0 10

2362.............. Other Terminal Other Terminal 5 8 -5 5

Equipment. Equipment.

2421.............. Aerial Cable...... Non-Metallic...... 25 30 -25 -10

2422.............. Underground Cable. Non-Metallic...... 25 30 -20 -5

2422.............. Underground Cable. Metallic.......... 25 30 -30 -5

2423.............. Buried Cable...... Non-Metallic...... 25 30 -10 0

2424.............. Submarine Cable... Submarine Cable... 25 30 -5 0

2441.............. Conduit Systems... Conduit Systems... 50 60 -10 0

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[FR Doc. 94-16948 Filed 7-11-94; 10:29 am]

BILLING CODE 6712-01-M