In the Matter of AMERICAN TELEPHONE
& TELEGRAPH CO. AND THE ASSOCIATED BELL SYSTEM COMPANIES Charges for
Interstate and Foreign Communication Service; In the Matter of AMERICAN
TELEPHONE & TELEGRAPH CO. Charges, Practices, Classifications, and Regulations
for and in Connection With Teletypewriter Exchange Service; In the Matter of
AMERICAN TELEPHONE & TELEGRAPH CO., LONG LINES DEPARTMENT Revisions of
Tariff F.C.C. No. 260, Private Line Services Series 5,000 (Telpak)
Docket No. 16258; Docket No. 15011;
Docket No. 18128
FEDERAL COMMUNICATIONS COMMISSION
18 F.C.C.2d 761 (1969)
RELEASE-NUMBER: FCC 69-842
July 29, 1969 Adopted
ACTION:
MEMORANDUM
OPINION AND ORDER
BY THE
COMMISSION: COMMISSIONER JOHNSON DISSENTING AND
ISSUING A STATEMENT; COMMISSIONER H. REX LEE ABSTAINING FROM VOTING.
[*761] 1.
The Commission has before it for consideration a statement of ratemaking
principles and factors in docket No. 16258, phase 1-B. This statement embodies a stipulation of the
parties to the proceeding and of the Common Carrier Bureau (staff), reached on
May 28, 1969 (tr. 179, pp. 22329-22341), as well as certain procedures
recommended to the Commission. It is
further specified in the statement that if the Commission should direct
procedures other than those proposed (except with respect to the reopening of
the record in the Telpak Sharing case, docket No. 17457), then the respondents
and other parties would not be bound by the stipulations set forth
therein. The statement of ratemaking
principles which is attached hereto as appendix A, was entered into following a
series of off-the-record conferences, open to the parties, as provided by the
order of the telephone committee released February 18, 1969 (F.C.C.
69M-197). The telephone committee has
reviewed this matter and has forwarded the statement to the Commission with a
recommendation that the procedures set forth therein, with the exception noted
below (see par. 13), be approved.
2. The issues in this proceeding were specified
in our original order of investigation of October 27, 1965 (2 F.C.C. 2d 871),
and a twophase procedure was provided by the order released December 23,
1965 [*762] (2 F.C.C. 2d 142). We have previously dealt with certain of the
phase 1 issues, such as rate of return, certain rate base items, and
jurisdictional separations procedures.
( Memorandum Opinions and Orders, July 5, 1967, 9 F.C.C. 2d 30; Sept.
13, 1967, 9 F.C.C. 2d 960.) The issue of the appropriate ratemaking principles
and factors which should govern the relationship among the rate levels for each
of respondents' principal services was, however, deferred for later
consideration. ( Memorandum Opinion and
Order, Dec. 9, 1966, 5 F.C.C. 2d 844.) This remainder of phase 1 has been
described as phase 1-B.
3. Hearings in phase 1-B began October 9, 1967,
and required approximately 100 days of hearing and 12,000 pages of testimony by
February 14, 1969, when the present series of hearings ended. All direct testimony has been offered. Cross-examination has been conducted on all
testimony except certain fully distributed cost studies (FCC staff exhibits 1
through 8, 37, and 48, and certain explanatory statements relating thereto, FCC
staff exhibits 53 through 55). The Bell
System respondents have not yet had opportunity to present rebuttal testimony.
4. Pursuant to the off-the-record conferences
previously noted, the present statement was reached. It deals with both substance and procedure. In effect, the statement sets forth a set of
principles and accompanying procedures which would be applied and tested in
conjunction with the consideration of specific ratemaking issues, such as those
now involved in the pending docket 18128, which embraces all private line
services, including Telpak service.
5. We have reviewed the statement solely for
the purpose of determining whether the implementation of the suggested
procedures might facilitate the determination of appropriate ratemaking
principles for the interstate services of the Bell System respondents, and,
hence, permit a more definitive and timely disposition of the issues involved
in phase 1-B of this docket.
Accordingly, we express no opinion on the merits of the various
positions advocated on the record. A
review of the salient issues and the general nature of the evidence thus far
adduced, however, is necessary background to our considerations.
6. A primary predicate of our initial order of
investigation herein was the results of the fully distributed cost study made
by
7. We have accumulated, in phase 1-B, a massive
record in which the economics of pricing has been explored in detail. In this regard, the record has been
benefited by testimony from a number of eminent economists, including Drs.
James C. Bonbright, William J. Baumol, J. Rhoads Foster, Paul Davidson, William
Vickrey, R. B. Johnson, John W. Coughlan, Harold Wein, and William H. Melody.
8. The specific statement of principles now
proposed, in our judgment, properly recognizes the relevance of both fully
distributed and incremental costs in considering appropriate rate levels of
specific classes of service. n1 We make this observation without
reaching any conclusion, at this time, as to the weight, if any, that should be
accorded to either or both of these factors in fixing rates for a specific
service. We note, in this connection,
that the statement contemplates the submission of both fully distributed and
incremental cost studies, based on methodologies to be developed. It is the thrust of the statement that
effective testing of the complex economic theories of costing and pricing which
have been advanced in this record, and the reconciliation of opposing, or at
least partially conflicting, views of expert witnesses, can best be
accomplished by relating the principles advocated to specific rate proposals.
n1 We note, of course, that each
party to the agreement has reserved the right to assert the relevance of
f.d.c., l.r.i.c., or any other method of cost determination.
9. The record developed in docket 16258
provides an examination of pricing principles which we believe is of
unprecedented scope in regulatory
[*764] proceedings. It affords a sound basis upon which to
determine theoretical ratemaking principles which can then be tested and
applied in the context of ratemaking proceedings dealing with respondents' rate
structure and the prices to be charged for their specific services. It is readily apparent that the techniques or
methodology for developing the data needed to test and apply long-run
incremental cost principles require formulation. Implementation of the stipulation and development of such needed
data will substantially benefit from the extensive testimony and cross-examination
which occurred in docket 16258, and will permit us to proceed to the testing of
specific ratemaking principles in the light of the issues in the Telpak-Private
Line case (docket 18128), the new program transmission rates, and such
additional issues that may arise. Thus,
if we follow the procedures recommended, the full benefits of the record so far
developed will not be lost or minimized.
Moreover,
we believe that the procedures will enable us to reach these rate issues with greater
dispatch and effectiveness than if further extended hearings were held in
docket 16258. Accordingly, it is our
judgment that the proposed procedures will provide a better and more timely
method of reaching a final conclusion on these important matters and will best
conduce to the proper exercise of our statutory authority and promote the ends
of justice. We, therefore, note the
Stipulation (without necessarily approving it) and approve the procedures,
except as stated in paragraph 13 below.
10. In taking this action, we will incorporate
the record of phase 1-B (vols. 77-179 of the transcript and related exhibits,
including staff exhibits 1 through 8 and 37) into docket 18128, in order that
we may then have the full benefit of the extensive and informative record
already developed and to prevent any duplication or repetition thereof in the
consideration of the specific rate issue involved in that docket. In the course of the hearing in docket
18128, it is expected that appropriate disposition will be made of any related
matters still pending in docket 16258, such as the receipt into evidence of
certain exhibits (FCC staff exhibits 48 and 53 through 55), and corrections to
Networks exhibits 6 and 6A (tr. 21176).
There would also be incorporated with docket 18128, the record of docket
14251, the Telpak case which was previously incorporated herein.
11. Other matters presently pending in phase
1-B, such as the TWX proceeding, docket 15011, which was consolidated herein
(order of July 22, 1966, F.C.C. 66-675); issues relating to the restructuring
of interexchange channel rates in connection with the elimination of Telpak A
and B; and increases in charges for private line teletypewriter station
equipment which went into effect August 1, 1968, are awaiting the outcome of
phase 1-B (order Aug. 1, 1967, F.C.C. 67-895), but in view of our action
herein, will be separately treated.
Accordingly, in view of the events which have transpired since the
consolidation, we shall treat the TWX issue by separating docket 15011, and
disposing of it on the record in that docket.
The teletypewriter station equipment rates and related issues are
already included in docket 18128 (order of July 16, 1968, F.C.C. 68-711), and,
since any remaining questions as to those rates may be resolved in the
latter [*765] proceeding, there is no need for any further action in docket
16258 with respect to such rates.
12. When we brought the private line services
within the scope of docket 18128 by our July 16, 1968, order, we excluded the
program and video transmission services (series 6,000 and 7,000 services). New rates for such services are to be filed
on September 1, 1969, to be effective October 1, 1969, partly as a result of
the proceeding in the Sports Network case, docket 16043. The same ratemaking principles that will be
further considered in docket 18128 will be involved in connection with the new
program transmission rates. When those
new rates are filed in tariffs, we will make appropriate provision for their
consideration in the light of the same ratemaking principles.
13. Paragraph 5(D) of the related procedures
proposed in the statement is a recommendation, joined in by all the parties
(but not by the staff of the Common Carrier Bureau), that the record in the Telpak
Sharing case, docket 17457, be reopened and consolidated with docket
18128. For the reasons set forth in our
recent denial of petitions seeking this same result (Memorandum Opinion and
Order, adopted June 11, 1969, F.C.C. 69-646), we do not adopt this
recommendation.
In view
of the foregoing, it is ordered that:
1. Further proceedings in docket 16258 will be
subject to further order.
2. The record of phase 1-B of docket 16258,
consisting of volumes 77 through 179 of the transcript, and related exhibits,
including staff exhibits 1 through 8, and 37, together with the entire record
of docket 14251, is incorporated by reference into docket 18128. Any required rulings with respect to such
exhibits, as noted in paragraph 10 above, shall be made in docket 18128.
3. Docket 15011, the Teletypewriter Exchange
Service case, previously consolidated herewith by our order of July 22, 1966,
is hereby separated from docket 16258 for final disposition on the record of
that docket.
FEDERAL
COMMUNICATIONS COMMISSION, BEN F. WAPLE, Secretary.
[*769] DISSENTING
OPINION OF COMMISSIONER NICHOLAS JOHNSON
Four
years ago the Federal Communications Commission began a complete investigation
into the interstate and foreign communications services provided by the Bell
System. Today the Commission terminates
without decision an important phase of that proceeding. The issues and questions remain -- and are
to be taken up in further proceedings.
In order to terminate the present proceeding the Commission notes an agreement
worked out by the contending parties -- an agreement concluded by Bell, Western
Union, several user groups, and the Commission's Common Carrier Bureau staff in
off-the-record, closed-door conferences.
After noting the agreement the Commission terminates this phase of its
investigation without a decision or comment on the merits. The matters under review are to be
consolidated into new proceedings which will examine specific rate levels. The general public must now wait
indefinitely longer for the proper resolution of the issues now directly before
the Commission.
I
dissent to the Commission's action for three basic reasons.
First,
determination of the appropriate ratemaking principles for the Nation's telephone
system is a matter of crucial importance calling for all the expertise and
devotion of this Commission. The public
interest is not served by now refusing to confront and resolve the difficult
issues raised in this 4-year-old proceeding.
Secondly,
expedition, the professed rationale of this decision, is an oft-professed but
seldom achieved illusory goal of this agency.
Unless the Commission intends to retire from the field of contention
altogether, allowing
Third,
the difficulties with the agreement illustrate that in fact there is no
agreement. Rather there is: A summary
of the contending positions,
Acknowledgment
that any, all, or none of the viewpoints may or may not be relevant to any
particular ratemaking process, Pious statements about firm deadlines and
promised studies, Lack of any agreed upon common ground and, Clear promises of
renewed battle wherever the Commission again raises the issue of ratemaking
principles.
[*770] History and Importance of the Investigation
In order
to gain an understanding of what is at stake here it is necessary to review in
part the events leading to the present Commission consideration. The majority notes:
A
primary predicate of our initial order of investigation herein was the results
of the fully distributed cost study made by
The
principal reason for undertaking a formal investigation of the entire
These levels of earnings, as well as the wide variations in
such levels for the different classes of service, indicate the desirability of
a thorough examination by the Commission of the interstate rate structure of
the Bell System to determine the lawfulness of the rate levels and rate
relationships within that structure.
The importance of such a determination is underscored by the fact that
certain of the services involved are furnished by the Bell System in direct
competition with services offered by other carriers. American Telephone & Telegraph Co., 2 F.C.C. 2d 871-72
(1965). (Italics supplied.)
The
Commission's specification order in this investigation noted:
In phase 1, we shall consider the substantial questions
raised by the seven-way cost study, which we found to warrant "a thorough
examination by the Commission of the interstate rate structure of the Bell
System to determine the lawfulness of the rate levels and rate relationships
within that structure." (Footnote omitted.) These questions are of fundamental
importance, clearly call for the sharp focus referred to in the above
paragraph, and should be resolved as promptly as possible. American Telephone
& Telegraph Co., 2 F.C.C. 2d 42-43 (1965). (Italics supplied.)
Thus,
initially, the question of unlawful price discrimination and possible cross
subsidization of services by A.T. & T. was to have been resolved first in
the proceeding. The importance of the
rate structure question was emphasized again in the denial of reconsideration
when
It may
be useful to describe precisely the environment of pricing under
consideration. In 1968 the
By the
same token in other situations
Bell
could find it in its best interest for many reasons to subsidize the rates for
these services -- to meet competition, to enter new markets, or to satisfy
powerful customers. To do so would keep
these rates low, with
If it were
to follow such a course,
At least
these are some of the concerns which gave rise to this proceeding. And these concerns have been embodied in
more than the commonsense description put forward here, and in the Commission's
earlier statements. In one of the most
famous articles on utility regulation, Harvey Averch and Leland Johnson laid
out a rigorous exposition of the economic incentives of a firm under
regulation. One incentive they describe
is for the firm "to expand into other regulated markets, even if it
operates at a (long run) loss in these markets; therefore, it may drive out
other firms, or discourage their entry into these other markets, even though
the competing firms may be lower cost producers." See H. Wein, "Fair
Rate of Return and Incentives -- Some General Considerations," in Trebing
(ed.) Performance Under Regulation 39, 42 (1968); and H. Averch and L. Johnson,
"Behavior of the Firm Under Regulatory Constraint," 52 Am. Econ. Rev.
1052 (1962). Averch and Johnson used the communications industry as their
example, focusing on the Private Line cases.
(A.T. & T. and * Western Union Private Line Cases, 34 F.C.C. 217
(1963).) Among the conditions necessary for this type of behavior on the part
of the regulated firm are the desire to pursue a level of profits and an actual
rate of return greater than the firm's cost of capital. Recognizing the difficulty of satisfying
theoretical conditions in the real world the following data is nevertheless of interest. Between 1959 and 1966
The
importance the Commission once attached to the need for defining ratemaking
principles in this area is clear. When
undue discrimination takes place it is the user with no alternative who pays
the [*772] subsidy -- in the case of telephone service it would be the
m.t.t. (regular long-distance) user.
What is also clear is that the Commission has repeatedly found
In the
Private Line cases the Commission found that the rate structure was
unlawful. A.T. & T. and
In the
Telpak case the Commission found unlawful discrimination and ordered
termination of certain offerings.
Telpak, 37 F.C.C. 1111 (1964), aff'g 38 F.C.C. 370 (1964). The rates for
others were increased later. Again the
burden was borne by the small m.t.t. user.
In the
Wide Area Data Service (w.a.d.s.) case the Commission found the low rates not
justified by cost savings. 35 F.C.C.
149 (1963). The service was terminated by
In its
telegraph report the Commission found that the data disclosed that, for each
period in which a cost study was requested by the Commission, the Bell System's
earnings levels appeared to be deficient in areas where direct competition
existed between Western Union and A.T. & T. Report of the telephone and
telegraph committees of the Federal Communications Commission in the Domestic
Telegraph Investigation, docket No 14650 (1966) p. 207.
In the
Sports Network, Inc., case, Bell has been found to have unlawfully
discriminated in its provision of broadcast program transmission services in an
examiner's initial decision released January 30, 1968, F.C.C. 68D-4
(1968). The Commission has taken no
action to remedy this particular situation, but has deferred consideration
despite the fact that there have been concerns over the possible discriminatory
nature of this service and its affect on broadcast policy since its inception
in 1948. The Barrow Report on networks
issued in 1958 noted: "There is sufficient question with respect to the
level of rates and the rate structure to warrant an early Commission
determination of the docketed proceeding." Network Broadcasting, H.R.
1297, 85th Cong., 2d sess. (1958) p. 546.
Also see the initial decision in docket No. 16043, paragraphs 8-16
(F.C.C. 68D-4 (1968)).
And in a
paper presented to the Symposium on Regulatory Pricing Policies, Institute of
Public Utilities, Michigan State University, East Lansing, Mich. (Mar. 25,
1969), Commissioner Cox noted: "I might observe that to this day the
Commission has still been unable to reach a decision as to whether or not these
Telpak service classifications are compensatory and whether or not they are a
burden on users of other services.
Hopefully we will finally be able to reach a decision on this issue in
the investigation of A.T. & T. that is now underway. But it must be emphasized that the Telpak
discrimination has been in existence for over 8 years and remains
unjustified." (Mimeo ed., pp. 17-18, italics supplied.) In the light of
this record, extending over 15 years, it seems clear to me that Commission
action is long everdue if the interests of the general consumer are ever to be
protected.
The
Commission's dereliction in the past on matters of price discrimination,
service cross-subsidization, and predatory pricing has had very serious
implications for the public interest.
But continued failure would be even more serious.
The
President's Communications Policy Task Force Final Report (1968), said the
domestic telecommunication's common carrier was in a state of creative ferment
facing a host of new challenges and new opportunities. Chapter 6, p. 2. It recommended that, "Public policy [*773]
should promote an environment assuring free and competitive opportunity
* * *"
The Hope
for Expedition
The
majority now hopes to expedite a case that is 4 years old. The majority states: "[We] believe that
the procedures (here adopted) will enable us to reach these rate issues with greater
dispatch and effectiveness than if further extended hearings were held in
docket 16258." Majority opinion, par. 9.
Presumably expedition is always a desirable goal so long as the
consideration of important substantive issues is not impaired. But for two basic reasons the majority will
not achieve expedition by adopting this agreement.
First,
any specific rate case will necessarily require a determination of the
appropriate mixture of ratemaking principles to be used in assessing the
degree, if any, of past burden on other services, and the likelihood in the
future of discriminatory burden.
The
important questions that should have been resolved in this proceeding are:
(1) What
indices will the Commission use to detect past and prospective cross-subsidization
of one service by another?
(2) What
analysis and data must
(3) What
principles should be followed in pricing the basic m.t.t. service?
The
specific rates in question must then be measured against these ratemaking
standards. The majority's incorporation
of the entire record of ratemaking in this proceeding into the next one, docket
No. 18128, is more than a procedural or ministerial act. More than docket numbers are changed. In fact, it is a recognition that all the
issues raised in this proceeding must be resolved before satisfactory
determinations can be made on specific rate questions for specific
services. The present proceeding has
had specific rate questions associated with it for the entire time that
ratemaking principles were considered -- these were the residuals of TWX rate
proceeding (docket No. 15011), and the Telepak proceeding (now docket No.
18128). Tossing in specific rate
matters does not help in determining appropriate ratemaking principles -- the
Commission has had these questions before it all along. In addition, the present proceedings have
included testimony directed at cost analysis of specific rates and services.
[*774]
Thus, for 15 years the Commission has been trying to evaluate charges of
unlawful price discrimination, service cross-subsidization, and predatory
pricing; during that time it essentially has been flying blind in terms of any
overall analysis of the questions of price discrimination and the appropriate
ratemaking principles; the telegraph inquiry at least suggested that an entire
company's (Western Union) economic viability might be threatened by the effects
of price discrimination; and a proceeding (this one) was begun to deal with the
overall question. The Commission admits
it cannot decide now.
The
second reason that the expedition argument is illusory is that expedition is
clearly compatible with rejection or modification of thisp agreement. There has been talk that without this
agreement a decision on ratemaking principles is more than a year away. This is nonsense. The Commission does not need to accede to every procedural
delaying tactic thrust upon it. The
record is already extensive in this case.
The arguments have been made.
Little will be added by further proceedings. And procedural fairness can be discharged by specifying precise
amounts of time for each remaining stage (testimony and cross-examination) of
the proceeding. It is now the end of
July. An equitable time schedule,
perhaps with some extended sessions, could result in a closed record by the
middle of September. One month could be
given for submitting briefs and reply briefs.
The case could be argued in October and a decision issued by the middle
of December. Thus the parties could
have the decision on hand to begin the specific rate proceeding (docket No.
18128) with the studies and rate adjustments now due to be filed by late fall.
Even if
there were a month slippage, little would be lost. The important consideration is that the Commission and the
parties would have some overall guidelines for inspection of specific rates --
guidelines that are a sine qua non of effective regulation.
The
Commission is deluding itself if it believes by turning to specific rate
matters it can avoid difficult decisions or questions of proper theoretical
principles and overall policy guidelines.
And if further formal and informal proceedings lead to continued
disagreement, the Commission may spend twice as long getting to any resolution
of the issues. It is folly to believe
that implementing studies called for by the statement, and any related rate
adjustments based thereon, can be filed by October 1, 1969.
The
Agreement Is Meaningless
In a
somewhat extended use of understatement, paragraph 3 of the procedures outlined
after paragraph 18 of the agreement notes: "[The] agreed ratemaking
principles and factors herein contained
[*775] are, of necessity, rather
general and nonexclusive," (Italics supplied). One wonders what has been agreed to, except to agree to
disagree. The positions of the parties
are summarized, and none are barred from asserting their present positions on
others. (Agreement pars. 6-15 and
footnote 8, as well as par. 1 of the procedures section.) Statements of
evaluation of the positions advanced are often tautological -- e.g. "It is
not intended that any one of the principles be given undue weight. It is recognized that the regulatory process
involves a proper balancing. * *
*" (Agreement, par. 3); and again "The rate level for any single
class of service and the ultimate rates must meet the statutory requirements
that they be reasonable and not unduly discriminatory or preferential"
(Agreement, par. 17). In other
instances the principle and technique is simply enunciated with the note that
it may be useful, without any indication as to when it is useful. See Agreement, paragraphs 8, 10, 14, and
15. In sum there is no agreement; it is
just that some way had to be found to terminate this proceeding. n1
n1 If the Commission were really
serious about questions of price discrimination it might consider whether there
are instances where price discrimination would be socially beneficial to the
Nation. It has given limited
consideration to this question in its consideration of preferential
interconnection rates for educational broadcasting. The question is also before the Commission in the press wire case
(docket No. 15094). Internal indirect
subsidies are never viewed with much enthusiasm. But it is conceivable that public interest considerations might
find them justified. (And any pricing
scheme by a communications common carrier is filled with instances where rates
are not strictly cost related, for obvious reasons.) A few examples might
include lower than ordinarily justifiable rates for the poor, for very remote
areas (note the REA telephone program), and for some educational purposes.
There
has recently been much consideration given to the fact that
One
extreme proposal would be to make long-distance calls (and television) free to
these States, in part as a remedial measure.
But the proposal is not so extreme when one considers that under the
following circumstances a long-distance call is free anywhere in the country,
at lease in a direct charge sense.
A long
distance information call.
A long distance
station-to-station call when there is no answer.
A long
distance call (including inward WATS) where the number is busy.
A long
distance person-to-person call when the person called is not there, or there is
no answer.
A long
distance reverse charges call which is not accepted.
All
these uses of communication facilities are subsidized, albeit by all
long-distance callers as a class. In
view of these subsidies, consideration might be given to making charges to and
from
There
are numerous ways in which the agreement could be improved. These would include the following:
The
Commission should recognize some of the basic concerns in communications price
discrimination: That ratemaking principles for m.t.t. by itself must be
properly and rationally applied; and that
The
m.t.t. service should not be viewed as the catchall residual where consumers
are required to pay off all past mistakes of
In
evaluating present or proposed new services other than m.t.t.,
The
Commission should begin examination now of the m.t.t. tariff to determine
whether all beneficial price adjustments have been exhausted (e.g., off-peak
promotional rates v. peak penalty rates), and to determine the proper rate
levels and structure for m.t.t. standing alone.
Four
years after the beginning of the Commission's heralded investigation of
Rate of
Return
In July
1967 the Commission ruled that
Separations
In July
1967 the Commission ordered the adoption of certain separations
procedures. It reconsidered this
determination, ordered separate rulemaking and finally in January 1969 adopted
procedures less wise than otherwise might have been. See Jurisdictional Separations of Telephone Companies, 16 F.C.C.
2d 311, 335 (1969).
Commissioner
Cox in his pricing policy paper of March 1969, described the need for action in
this proceeding: "We expect the thorough and far-reaching investigation
into the ratemaking principles and factors that will be used by the Commission
for evaluating carrier pricing proposals will evolve a set of workable,
implementable ratemaking standards.
These standards will establish a framework of analysis that should
facilitate problems of information gathering, carrier justifications, and
commission examinations in such a manner that the regulatory process will be
expedited and the quality of commission decisions will be improved." Now
on ratemaking principles and price discrimination -- questions central to this
investigation -- the Commission decides after 4 years no decision can be made
now. These actions call into sharp
question the capability of this agency to engage in public utility regulation
at all. I dissent.
APPENDIX
A
STATEMENT
OF RATEMAKING PRINCIPLES AND FACTORS IN DOCKET NO. 16258, PHASE 1-B (Transcript vol. 179, May 28, 1969, pp.
22329-22341)
1. The Commission recognized with respect to the
instant matter:
The
proceeding is one involving several complex and very important questions. It is desirable for the Commission and the
parties to focus sharply upon these questions.
It is important, from the standpoint of the Commission's processes and
the interests of the parties, to resolve the questions as quickly a
practicable. (F.C.C. 65-1143)
Respondents
have presented their views with respect to the appropriate ratemaking
principles and factors which should govern the proper relationship among the
rate levels for each of their principal services. The several parties, and witnesses presented by the Common
Carrier Bureau (staff), also presented testimony with regard to these matters. Differences of view as to the reasonable
application of theoretical principles were voiced. However, there is general recognition of significant benefits
which could be derived from a proper application of those ratemaking theories
presented for Commission consideration in this record which are hereinafter set
forth.
2. Further work needs to be done in
implementing the theoretical principles in a practical manner in the
communications industry. While rebuttal
testimony has not yet been presented, all participants have had an opportunity
to present their views on the formal record.
The development of more advanced techniques can best be devised through
informal procedures rather than a formal record. In recognition of the Commission's desire to "resolve the
questions as quickly as practicable", we believe that informal discussions
should commence immediately, outside of docket No. 16258, between the staff and
the Bell System, with appropriate consultation with other interested persons
from time to time, with the goal of arriving at appropriate methods of implementing
the theoretical concepts. It is
recognized that the Commission will execute its statutory obligations pending
resolution of these problems and adoption of the necessary techniques.
3. It is not intended that any one of the
principles be given undue weight. It is
recognized that the regulatory process involves a proper balancing of both the
supply and demand factors, in the light of public interest considerations, with
respect to the costing and pricing of all communications services, whether in
monopoly or competitive markets.
4. Accordingly, the staff and the participating
parties have agreed upon a set of ratemaking principles, which by their very
nature must be in general terms. These
principles are as follows:
5. The implementation of ratemaking principles
and factors should not impair the Bell System's opportunity to achieve its
overall allowed rate of return on its interstate investment, nor should it
permit an overall rate of return which is excessive.
6. In a situation where the Commission is
considering adjustments in the rate levels for the m.t.t. category of service
of such a magnitude that the Bell System's overall rate of return from
interstate operations would be either inadequate or excessive, it should give
concurrent consideration to adjustments in the rate levels for other categories
of service. Any such rate-level
adjustments which are authorized or prescribed should take into account the
ratemaking principles set forth herein and should, in total, be such as to afford
the Bell System the opportunity to earn its allowed overall return on
interstate operations. The extent of
adjustment, if any, in the rate level for any particular category of service
will depend upon the statutory standards and applicable ratemaking principles.
7. Fully distributed cost (f.d.c.) studies
contemplate that the total of the company's interstate recorded costs for a
test period will be allocated among the various service categories in such a
way that the costs so allocated to each service will add up to the total test
period recorded costs of service. In a
multiservice company many elements of cost will be common to two or more
categories of service. There are
numerous ways in which such common costs might be allocated. The need for judgment in making allocations
is recognized, but the basis therefor should appear.
8. Historical book costs for interstate
services should be analyzed for the purpose of obtaining information which may
be useful in determining whether, during the test period, any service category
has burdened n1 any
other service category. Such analyses
should, to the extent practicable, allocate the total test period historical
costs in such a way as to estimate the costs that have been incurred for the
provision of each service category.
Consistent with the foregoing, the assignment or allocation of these
costs to a service category should reflect consideration, as appropriate, of
cost responsibility, relative use and any other factors which are pertinent to
the purpose for which the analysis is being made.
n1 The determination of the
existence of a "burden" will depend upon the context of the
particular case.
9. A long-run incremental cost (l.r.i.c.) n2 study
contemplates that an estimate will be made of the full amount of incremental
investment and expenses which would be incurred by reason of furnishing
additional quantities of service, whether in a new or an existing service
category. Such a study also
contemplates that, for the particular category of service, l.r.i.c. will be
equal to the sum of the longrun marginal costs of the added units of
service. In a multiservice company many
elements of cost will be common to two or more categories of service. A purpose of an l.r.i.c. study is to
determine prospectively the effect on total costs, including the effect on
common costs, as a result of adding units of service. The need for judgment in determining the appropriate method of
estimating l.r.i.c. is recognized, but the basis therefor should appear.
n2 Use of the term "long
run" does not preclude the treatment of costs in terms of a period
relevant to the particular rate changes under consideration.
10. L.r.i.c. should be analyzed for the purpose
of obtaining cost information which may be useful in determining rate levels
and rates for the future for each category of service.
11. In order to determine l.r.i.c. and f.d.c.
for the major categories of interstate services, the Bell System, in
consultation with the FCC staff, will undertake to develop appropriate methods
to be used in the production of l.r.i.c. and f.d.c. studies at regular
predetermined intervals and will go forward as promptly as possible to produce
up-to-date cost data. By such formal or
informal procedures as the Commission deems appropriate, interested persons
will be afforded a timely opportunity to express their views with respect to
the formulation of the appropriate methods.
12. The rates for any category of service should
produce a rate level which is not below l.r.i.c. or, where appropriate, not
below avoidable costs. If any category
of service is to be priced to produce a lower level, however, such lower rate
level should be supported by a determination by the Commission that it is
required in the public interest. Where
avoidable costs are considered as the rate level floor, and they are lower than
l.r.i.c., consideration should be given by the Commission as to whether the public
interest requires that the service should be allowed to grow, or to continue,
or whether it should be phased out as quickly as the facilities used to supply
the service can be used to provide other services.
13. In analyzing alternative future rate levels
for either an existing or a new service category, estimates of l.r.i.c. should
be compared with estimates of incremental revenues for that category for a
reasonable future period. Such
estimates should, to the extent feasible, take into account the
cross-elasticities (positive and negative) which may result from the change in
rate level or from the introduction of the new service category.
14. Rate levels for the future should be
determined with reference to relevant costs, n3 market conditions and public
interest considerations. Where
appropriate cost and noncost data are available for consideration, neither a
cost standard nor a noncost standard taken by itself, will be used as the
measure of the rate level for any service category. To improve the noncost data presently available, further study
should be undertaken regarding such subjects as the specific techniques for
making analyses of the noncost ratemaking factors, the type of data required
for such analyses, the procedures for obtaining the necessary data, and the
information that such analyses can be expected to produce on a continuing
basis.
n3 It is recognized that no party
is precluded by any provision herein from asserting in any rate proceeding the
relevance of f.d.c., l.r.i.c., or any other method of cost determination.
15. In assessing market conditions,
consideration should be given, as appropriate, to reasonable estimates of the
following, among others: Elasticities of demand, including price elasticities
for various types of communications and for particular service categories,
income elasticities, and cross-elasticities among substitute services whether
supplied by Bell or others; existing and potential competition and competitive
necessity; customer requirements; the effects of existing tariff provisions;
and the effects of Commission policy upon the availability of consumer
alternatives.
16. Within a given class of service, it is
recognized that, for any particular rate level, more than one rate structure
could be appropriate. The design of a
rate structure should reflect consideration of cost and demand characteristics
within the class of service, including peak versus off-peak factors.
17. The rate level for any single class of
service and the ultimate rates must meet the statutory requirements that they
be reasonable and not unduly discriminatory or preferential.
18. It is recognized that, in the f.d.c. and
l.r.i.c. studies to be undertaken to implement these ratemaking principles,
depreciation expense is a relevant cost element and depreciation reserve is a
relevant component of the net investment determined for the various service
categories. In allocating depreciation
expense and reserve in any f.d.c. analysis, the total of the test period
expense and reserve will be allocated among the various service
categories. While existing depreciation
policy and practice should be studied, the determination of depreciation policy
and the prescription of depreciation rates are not at issue in phase 1-B. The treatment afforded these cost elements
in f.d.c. and l.r.i.c. studies of particular service categories depends upon
the principles applicable to the studies undertaken.
* * *
For the
purposes of implementing the foregoing principles, the following procedures
should be utilized:
(1) The
staff and the participating parties agree to the statement of ratemaking
principles and factors as a basis and guide for further detailed studies of
rate levels and rates of
(2) The
Commission, by its order of December 23, 1965, 2 F.C.C. 2d 142, directed respondents
to submit, in connection with its study of ratemaking principles and factors,
the specific rate adjustments if any, "which they consider should be made
on an interim basis in the light of such study results and the ratemaking
principles and factors advocated by them." While respondents have
previously submitted in this record detailed studies and have proposed or
effectuated rate adjustments, they propose to make new studies in conformity
with the principles agreed to herein, and thereafter to file such further
specific rate adjustments as may be consistent therewith. Accordingly, respondents will proceed
expeditiously to make such new studies.
(3) As
recognized above, the agreed ratemaking principles and factors herein contained
are, of necessity, rather general and nonexclusive. An adjudication of other relevant and more specific principles
and factors will be required in connection with a Commission determination as
to the appropriate rate level for any category of service. No carrier initiated rate level increases
will be filed until the new cost studies described in paragraph (2) have been
completed and made available to the parties hereto. The effective date of any such rate level increase will be
subject to such authority as the Commission may possess. The parties do not agree as to the scope of
the Commission's authority under various circumstances to reject, suspend or
postpone the effectiveness of carrier initiated rates, and no party, by this
agreement, waives its position on this question. If, pursuant to the foregoing, a rate level increase is to become
effective, it should be subject to an accounting order upon an appropriately
supported request of an affected person.
(4) If
the Commission should decide that formal proceedings are appropriate with
respect to the rate level adjustment filed by
(5) In
the absence of any direction to the contrary by the Commission, the following
procedures will be employed:
(a)
Inasmuch as the record in phase 1-B of docket No. 16258 has not been closed,
and proposed findings and briefs have not been filed, no recommended decision
can be issued by the Chief of the Common Carrier Bureau, as contemplated by the
order of September 12, 1968 (F.C.C. 68-930).
(b)
Following the filing of the new studies and proposed rate adjustments by respondents
and the institution of, or continuation of, any separate proceedings (see par.
4), the Chief of the Common Carrier Bureau will recommend that phase 1-B of
docket No. 16258 be terminated without opinion on the merits by the Commission.
(c) If the
Commission should direct procedures other than those hereinbefore proposed, or
if the Bureau Chief's recommendation that phase 1-B be terminated without
opinion on the merits should not be adopted by the Commission, then the
respondents and the other parties will not be bound in any way by the foregoing
agreement.
(d) It
is recommended that the record in the Telpak Sharing case (docket 17457) be
reopened, and that such docket be consolidated with docket 18128 for further
hearing and determination. (The Common
Carrier Bureau takes no position on this recommendation. The parties hereto support this provision,
but agree that it is not a condition precedent to this agreement. In the event this recommendation is not
adopted by the Commission, no party is precluded from asserting its position in
support of this recommendation, including the position of certain parties to
the effect that any decision in docket 17457 prior to final determination of
the issues now in phase 1-B of docket 16258, whether in docket 16258 or in some
other proceeding, would be premature and improper.)
Telephone
Ratemaking Principles
(In the
matter of American Telephone & Telegraph * * * docket No. 16258 Phase 1B)