Prescription of Interstate Depreciation Rates

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 32 and 43

[CC Docket No. 98-137; FCC 98-170]

Prescription of Interstate Depreciation Rates

AGENCY: Federal Communications Commission.

ACTION: Proposed rule, request for comments.

-----------------------------------------------------------------------

SUMMARY: In this document, the Commission proposes to reduce or

streamline further its depreciation prescription process by permitting

summary filings and eliminating the prescription of depreciation rates

for incumbent LECs, provided that the carrier uses depreciation factors

that are within the ranges adopted by the Commission, expanding the

prescribed range for the digital switching plant account, and

eliminating salvage from the depreciation process. It also seeks

comment on whether the Commission should permit carriers to set their

own depreciation rates if they are willing to waive the automatic low-

end adjustment. These proposed modifications are designed to minimize

the reporting burden on carriers and to provide incumbent LECs with a

greater flexibility to adjust their depreciation rates while allowing

the Commission to maintain adequate oversight. This NPRM seeks comment

on whether the current procedures for protecting confidential

information, are adequate or whether additional safeguards need to be

adopted to protect information that carriers regard as confidential.

The Commission invites commenters to submit information on the costs

and benefits of the rules at issue in this proceeding and of its

proposed modifications.

DATES: Comments are due on or before November 23, 1998 and reply

comments are due on or before December 8, 1998. Written comments by the

public on the modified information collections are due on or before

November 23, 1998. Written comments must be submitted by the Office of

Management and Budget (OMB) on the modified information collections on

or before December 22, 1998.

ADDRESSES: One original and six copies of all comments and reply

comments should be sent to the Commission's Secretary, Magalie Roman

Salas, Office of the Secretary, Federal Communications Commission, 1919

M Street, N.W., Room 222, Washington, D.C. 20554. All filings should

refer to 1998 Biennial Regulatory Review--Review of Depreciation

Requirements for Incumbent Local Exchange Carriers, CC Docket No. 98-

137, and FCC 98-170. Parties also may file comments electronically via

the Internet at: http://www.fcc.gov/e-file/ecfs.html>. Only one copy

of an electronic submission must be submitted. In completing the

transmittal screen, commenters should include their full name, Postal

Service mailing address, and the docket number for this proceeding,

which is CC Docket No. 98-137. Parties not submitting their comments

via the Internet are also asked to submit their comments on diskette.

Parties submitting diskettes should submit them to Ernestine Creech,

Accounting Safeguards Division, 2000 L Street, N.W., Room 257,

Washington, D.C. 20554. Such a submission should be on a 3.5 inch

diskette formatted in an IBM compatible format using WordPerfect 5.1

for Windows or compatible software. The diskette should be accompanied

by a cover letter and should be submitted in ``read only'' mode. The

diskette should be clearly labelled with the party's name, proceeding

(including the docket number in this case, CC Docket No. 98-137), type

of pleading (comment or reply comment), date of submission, and the

name of the electronic file on the diskette. Each diskette should

contain only one party's pleadings, preferably in a single electronic

file. In addition, parties must send copies to the Commission's copy

contractor, International Transcription Service, Inc., 1231 20th

Street, N.W., Washington, D.C. 20037. In addition to filing comments

with the Secretary, a copy of any comments on the information

collections contained herein should be submitted to Judy Boley, Federal

Communications Commission, Room 234, 1919 M Street, N.W., Washington,

DC 20554, or via the Internet to [email protected], and to Timothy Fain,

OMB Desk Officer, 10236 NEOB, 725--17th Street, N.W., Washington, DC

20503 or via the Internet to [email protected].

FOR FURTHER INFORMATION CONTACT: Thomas G. David, Attorney, Common

Carrier Bureau, Accounting Safeguards Division, (202) 418-7116, or via

the Internet at [email protected], or Wade Herriman, Common Carrier

Bureau, Accounting Safeguards Division, (202) 418-0862. For additional

information concerning the information collections contained in this

NPRM contact Judy Boley at (202) 418-0214, or via the Internet at

[email protected].

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

document released on October 14, 1998. The full text of this document

is available for public inspection during regular business hours in the

FCC Reference Center, Room 239, 1919 M Street, N.W., Washington, D.C.

20554. An electronic copy of the document also may be found on the

Commission's Web Page at www.fcc.gov/ccb/XXXXXXX.pdf>.

Paperwork Reduction Act

This NPRM contains a modified information collection. The

Commission, as part of its continuing effort to reduce paperwork

burdens, invites the general public and the Office of Management and

Budget (OMB) to comment on the information collections contained in

this NPRM, as required by the Paperwork Reduction Act of 1995, Public

Law 104-13. Public and agency comments are due at the same time as

other comments on this NPRM; OMB notification of action is due December

22, 1998. Comments should address: (a) whether the proposed collection

of information is necessary for the proper performance of the functions

of the Commission, including whether the information shall have

practical utility; (b) the accuracy of the Commission's burden

estimates; (c) ways to enhance the quality, utility, and clarity of the

information collected; and (d) ways to minimize the burden of the

collection of information on the respondents, including the use of

automated collection techniques or other forms of information

technology.

OMB Approval Number: 3060-0168.

Title: Reports of Proposed changes in Depreciation Rates--Section

43.43.

Type of Review: Proposed Revision of Existing Collection.

[[Page 56901]]

Respondents: Business or other for profit.

Number of Respondents: 11.

Estimated Time per Response: 6000.

Total Annual Burden: 66,000 Burden Hours.

Estimated Cost Per Respondent: $0.

Needs and Uses: In this NPRM the Commission proposes to reduce or

streamline further its depreciation prescription process by permitting

summary filings and eliminating the prescription of depreciation rates

for incumbent LECs, provided that the carrier uses depreciation factors

that are within the ranges adopted by the Commission, expanding the

prescribed range for the digital switching plant account, and

eliminating salvage from the depreciation process. It also seeks

comment on whether carriers should be allowed to set their own

depreciation rates.

Background

1. Section 11 of the Communications Act requires the Commission, in

every even-numbered year beginning in 1998, to review its regulations

applicable to providers of telecommunications service to determine

whether the regulations are no longer necessary in the public interest

as a result of meaningful economic competition between providers of

such service and whether such regulations should be repealed or

modified.

2. Although price caps regulation largely eliminated the direct

link between costs and prices, a carrier's depreciation remains

significant, even under current price cap rules, in the following

situations: (1) a calculation of a low-end adjustment; (2) a

recalculation of the productivity factor; (3) an exogenous cost

determination; (4) a calculation of the Base Factor Portion that is

used to determine how much a carrier can recover through End User

Common Line charges; or (5) the cost support a carrier would have to

provide if it proposed an Actual Price Index (``API'') higher than its

Price Cap Index (``PCI''). In addition to these price cap effects,

changes in depreciation expense may also affect prices or federal

support payments through new mechanisms created to implement the

Telecommunications Act of 1996. For example, the Commission required

incumbent LECs to use depreciation factors within the FCC authorized

ranges when calculating forward-looking economic costs for universal

service high cost loop support purposes. Also, state commissions have

required incumbent LECs to use interstate depreciation rates or life

and salvage factors developed during the Commission's depreciation

prescription process when calculating rates for interconnection or

unbundled network elements. Finally, depreciation may play a role in a

takings claim under the Fifth Amendment.

Issue for Comment

3. In this NPRM, the Commission seeks comment on conditions under

which carriers could set their own depreciation rates without

compromising the Commission's oversight, even in the absence of full

competition. In addition, the document proposal several options for

streamlining these depreciation rules by eliminating all unnecessary

regulatory requirements. The Commission invites commenters to submit

information on the costs and benefits of the rules at issue in this

proceeding and of the proposed modifications to those rules.

4. The Commission seeks comment on BellSouth's proposal that

carriers be allowed to set their own depreciation rates on the

condition that they not seek an automatic low-end adjustment. The

Commission also seeks comment on what additional conditions could be

imposed to eliminate the need for depreciation prescription in the

other contexts upon which the Commission relies on it. If the

Commission can identify conditions that would eliminate the need for it

to prescribe depreciation in the remaining situations identified in

this document, the Commission proposes to allow carriers to set their

own depreciation rates.

5. In the event that the Commission continues to set some

depreciation rates for some carriers, it tentatively concludes that the

depreciation prescription requirements for incumbent LECs subject to

the depreciation prescription process should be further streamlined by

doing the following: (1) reducing the supporting documentation required

for carriers selecting depreciation factors from within the prescribed

ranges; (2) eliminating depreciation prescription for carriers that

select depreciation factors within the ranges; (3) expanding the range

of lives for digital electronic switching equipment; and (4)

eliminating net salvage from the depreciation prescription process.

Filing and Prescription Procedures

6. In this NPRM, the Commission proposes to reduce filings to four

summary exhibits and the electronic data files used to generate them,

provided carriers select depreciation factors from within the ranges

and certify that their selections are consistent with their operations.

The four summary exhibits are a comparison of existing and proposed

depreciation rates; a comparison of existing and proposed annual

depreciation expenses; a book and theoretical reserve summary; and the

depreciation factors. The Commission further proposes that, if a

carrier selects depreciation factors from within the ranges for all of

its accounts, the Commission would permit the rates to go into effect

without a prescription order. The Commission believes that its proposal

to eliminate its prescription of depreciation rates under these

conditions will save time and resources for both the Commission and

incumbent LECs. It seeks comment on this proposal and on SBC's proposal

that the Commission remove itself completely from the prescription of

depreciation rates for price cap carriers.

Equipment Life Ranges

7. The Commission expects that the retirement rates for the digital

switching will continue to increase and therefore we propose to expand

the range for digital switching equipment from a range of 16 to 18

years to a wider range of 13 to 18 years. The Commission's proposal

will permit a carrier that can support life estimates between 13 and 16

years to select a new life estimate without an out-of-range filing. It

requests comment on this proposal. The Commission has concluded that,

except for the digital switching equipment account, it has no evidence

indicating that the current ranges are either too long or too short.

The Commission asks whether the ranges for any of the accounts other

than digital switching require revision. Commenters proposing range

changes should propose specific new ranges and should provide

justifications for their proposals. The Commission also requests

comment about whether the Commission's existing confidentiality

procedures, contained in 47 CFR 0.457 and 0.459 of the Commission's

rules, are adequate or whether additional safeguards need to be adopted

to protect information that carriers regard as confidential.

Proposed Treatment for Salvage and Cost of Removal

8. In order to calculate net salvage, carriers must estimate both

gross salvage and cost of removal. Given the speculative nature of

these estimates and the burdens associated with their calculation, the

Commission tentatively concludes that the prescription of net salvage

no longer serves a regulatory purpose and that eliminating that factor

from the depreciation prescription formula would significantly reduce

the regulatory burden of the depreciation

[[Page 56902]]

prescription process. Accordingly, the Commission proposes to eliminate

the future net salvage factor from the depreciation formula and to

record salvage and cost of removal as a current expense in the period

incurred. Alternatively, the Commission could make the elimination of

salvage from the depreciation formula optional, allowing each incumbent

LEC the option to treat net salvage as either a current expense or a

component of depreciation. The Commission seeks comment on these

proposals.

9. In commenting on the proposed removal of net salvage from the

depreciation process, commenters should address the effect this change

could have on the current depreciation rates, whether new rates should

be prescribed, whether the elimination of salvage would require

adjustment of depreciation reserves, and what accounting changes would

be necessary to effectuate the change.

10. The Commission tentatively concludes that, if it removes net

salvage from the depreciation process, it should create a new account,

Account 6566, Net cost of removal, to record both salvage receipts and

removal costs incurred. The Commission also tentatively concludes that

it should revise Secs. 32.3100, Accumulated depreciation, and 32.2000,

Instructions for telecommunications plant accounts, to eliminate the

provisions that salvage and cost of removal be recorded in the

depreciation reserve account. The Commission requests comment on the

tentative conclusions. The Commission also requests comment on whether

it should require carriers to keep subsidiary record categories in

Account 6566 for salvage and cost of removal.

Reporting Requirements for Mid-Sized LECs

11. In separate proceedings on ARMIS and Accounting Biennial

Review, the Commission proposes to create a category of mid-sized

incumbent LECs that would be subject to a lighter regulatory burden

than would be imposed on large incumbent LECs. Similarly, the

Commission proposes in this proceeding, in addition to the streamlined

processes proposed for all carriers, that mid-sized incumbent LECs not

be required to file annual theoretical reserve studies. Because the

Commission would continue to receive theoretical reserve studies from

the largest incumbent LECs, which represent over 90 percent of the

industry, this proposal would relieve these mid-sized companies of this

regulatory burden without seriously encumbering the Commission's

ability to monitor its depreciation prescription process. See 47 CFR

43.43. To avoid unnecessary complexity, the Commission tentatively

concludes that it should apply the definition of mid-sized LEC that is

adopted in the ARMIS proceeding 1 to the Commission's

depreciation prescription requirements. The Commission requests

comments on this proposal.

---------------------------------------------------------------------------

\1\ ARMIS NPRM at 7. In that proceeding, we propose to

streamline the depreciation prescription process for certain mid-

sized incumbent LECs based on the aggregate revenues of the

incumbent LEC and any LEC that it controls, is controlled by, or is

under common control with another LEC. If the aggregate revenues of

these affiliated incumbent LECs are less than $7 billion, then each

LEC within that group would be eligible to not file annual

theoretical reserve studies. Incumbent LECs with individual annual

operating revenues below the indexed revenue threshold would

continue to be exempt from the Commission's depreciation

prescription process.

---------------------------------------------------------------------------

Low-End Adjustment

12. The Commission seeks comment on whether it should permit

carriers to set their own depreciation rates, as proposed by several

incumbent LECs, or alternatively, whether such carriers should be

permitted to do so only on the condition that they become ineligible

for a low-end adjustment.

Conclusion

13. The Commission tentatively concludes that the elimination of

depreciation regulation at this time would have an adverse impact in

several critical areas, including the calculation of universal service

high cost loop support, takings claims, and the low-end adjustment. The

Commission tentatively concludes that, if adopted, our proposal would

eliminate all unnecessary depreciation prescription requirements and

retain only those essential to the sound administration of the

universal service high cost loop support and the achievement of the

Commission's other regulatory goals. The Commission seeks comment on

this tentative conclusion and solicits comment on SBC's alternative

proposal that depreciation rates for price cap carriers should be based

on ``economic analysis consistent with the procedures called for by

Generally Accepted Accounting Principles (``GAAP'').'' The Commission

also seeks comment on how it should determine when sufficient

competition exists to allow it to eliminate the depreciation

prescription process.

Procedural Issues

Ex Parte Presentations

14. This is a permit but disclose rulemaking proceeding. Ex parte

presentations are permitted, except during the Sunshine Agenda period,

provided that they are disclosed as provided in the Commission's rules.

See generally 47 CFR 1.1202, 1.1203, and 1.1206.

Regulatory Flexibility Analysis

15. The Regulatory Flexibility Act (``RFA'') requires that an

initial regulatory flexibility analysis be prepared for notice-and-

comment rulemaking proceedings, unless the agency certifies that ``the

rule will not, if promulgated, have a significant economic impact on a

substantial number of small entities.'' See 5 U.S.C. Sec. 601 et seq.,

amended by the Contract With America Advancement Act of 1996, Public

Law 104-121, 110 Stat. 847 (1996) (``CWAAA''). The RFA generally

defines ``small entity'' as having the same meaning as the terms

``small business,'' ``small organization,'' and ``small governmental

jurisdiction.'' 2 In addition, the term ``small business''

has the same meaning as the term ``small business concern'' under the

Small Business Act. A small business concern is one which: (1) is

independently owned and operated; (2) is not dominant in its field of

operation; and (3) satisfies any additional criteria established by the

Small Business Administration (``SBA''). See 15 U.S.C. 632.

---------------------------------------------------------------------------

\2\ Id. Sec. 601(6).

---------------------------------------------------------------------------

16. This NPRM proposes to eliminate the prescription of

depreciation rates for incumbent LECs in most cases, expand the

prescribed range for the digital switching plant account, and eliminate

salvage from the depreciation process. This NPRM also asks whether we

should permit carriers to set their own depreciation rates if they are

willing to waive their right to a low-end adjustment. The NPRM proposes

to further reduce the reporting requirements for certain mid-sized

incumbent LECs by eliminating their obligation to file an annual

theoretical reserve study. Neither the Commission nor SBA has developed

a definition of ``small entity'' specifically applicable to LECs. The

closest definition under SBA rules is that for establishments providing

``Telephone Communications, Except Radiotelephone,'' which is Standard

Industrial Classification (``SIC'') code 4813. Under this definition, a

small entity is one that, including affiliates of the entity, employs

no more than 1,500 persons. See 13 CFR 121.201, SIC code 4813.

17. The Commission certifies that the proposals in this NPRM, if

adopted, will not have a significant economic impact

[[Page 56903]]

on a substantial number of small entities. Pursuant to long-standing

rules, incumbent LECs with annual operating revenues exceeding the

indexed revenue threshold must comply with the Commission's

depreciation prescription process. This NPRM proposes to reduce certain

of these depreciation requirements. These changes should be easy and

inexpensive for incumbent LECs to implement and will not require costly

or burdensome procedures. The Commission therefore expects that the

potential impact of the proposal rules, if such are adopted, will be

beneficial and will not amount to a possible significant economic

impact on affected entities. If commenters believe that the proposals

discussed in the NPRM require additional RFA analysis, they should

include a discussion of these issues in their comments.

18. The Commission's Office of Public Affairs, Reference Operations

Division, will send a copy of this NPRM, including this initial

certification, to the Chief Counsel for Advocacy of the Small Business

Administration.

Ordering Clauses

19. Accordingly, it is ordered that, pursuant to Sections 1, 4, 11,

201-205, 215, 218, 220 and 403 of the Communications Act of 1934, as

amended, 47 U.S.C. 151, 154, 161, 201-205, 215, 218, 220 and 403 that

notice is hereby given of proposed amendments to Parts 32 and 43 of the

Commission's rules, 47 CFR Parts 32 and 43, as described in this Notice

of Proposed Rulemaking.

20. It is further ordered that the Commission's Office of Public

Affairs, Reference Operations Division, shall send a copy of this

Notice of Proposed Rulemaking, including the Initial Regulatory

Flexibility Certification, to the Chief Counsel for Advocacy of the

Small Business Administration.

Federal Communications Commission.

Magalie Roman Salas,

Secretary.

[FR Doc. 98-28479 Filed 10-22-98; 8:45 am]

BILLING CODE 6712-01-P