Continuing surveillance FCC didnt really rate regulate AT&T during this period; all done through informal negotiations AT&T made voluntary reductions in interstate long-distance rates of $30 million per year –Result of generally falling prices and technological progressnot because of FCC action FCC able to take credit for continually lower prices on long distance charges with no full-scale rate investigation until the 1960s

A regulatory problem State toll rates were going up, while Interstate toll rates were going down (by 1949, state rates about 35% higher than interstate) –Local Bells asking for rate increases –State commissions increasing toll, not local rates –Fear that the FCC would look more effective than the state commissions

The answer? Separations –The allocation of local telephone company costs between state and interstate jurisdictions –Keep in mind The more costs allocated to a jurisdiction, the better the justification to raise rates in that jurisdiction There are many joint costs involved in the provision of telephone service The challenge: how to get everyone to agree on how to do separations

Splitting up the baby Smith v. Illinois Bell Tel. Co. (1930) –The proper regulation of rates can be had only by maintaining the limits of state and federal jurisdiction... While the difficulty in making an exact apportionment of the property is apparent, and extreme nicety is not required, only reasonable measures being essential... It is quite another matter to ignore altogether the actual uses to which the property is put.... Unless an apportionment is made, the intrastate service to which the exchange property is allocated will bear an undue burden...

Effect of Smith v. Illinois From board-to-board To station-to-station

The positions of the various interests The state commissions –Split between station-to-station or board-to-board Why?? The FCC –Wanted long distance rates to decrease, but getting increasing pressure from the states AT&T –Started from a board-to-board position, shifted to station-to-station Why??

The development of separations Separations Manual of 1947 –How-to manual, not officially adopted by the FCC, but no objection to its use –$19 million transfer of costs from state to interstate Didnt result in lower local rates Stopped a planned interstate rate decrease

Long process of shifting costs to interstate The history of Subscriber Line Use (SLU) –Growth in SLU from 2.5% to 8.1% by 1980 –Allocation from actual (2.5%) to 26% by 1980

Jurisdictional Separations This is the method for allocating the cost of a telephone companys assets and expenses between the interstate and the state jurisdiction This is a complex, multi-step process that starts with how the books of the telephone company are kept. The following examples explains how the cost of a local loop (the connection between the customer and the switching office) is jurisdictionally separated

Part 32 of the FCC Rules: The Chart of Accounts –VERY specific rules about what the specific accounts are and what gets booked into each account –Ex: Account Cable and Wire Facilities –Account Cable and Wire Facilities Expense

Part 36 of the FCC Rules Jurisdictional Separations Procedures –Categorization of Assets Based on engineering records –Ex: Categories of Cable and Wire Facilities Category 1: Exchange Line (loop plant) Category 2: Exchange Trunk (between switching offices)

More of Part 36 Apportionment Procedures For Category 1: Exchange Line (loop plant) –Determine number of working loops by subcategories dedicated lines versus subscriber lines –Calculate an average cost per loop Take total exchange line cost and divide by number of working loops

And more of Part 36 Allocation to state or interstate jurisdiction –Determine total subscriber line loop costs Multiply average cost per working loop times number of subscriber line loops –Multiply the total subscriber line loop costs by an interstate usage factor

An example Account $1,500,000 Category 1: Exchange Line = $1,000,000 Total working loops = 10,000 Average loop cost is $100 –$1,000,000/10,000 Subscriber line working loops = 9,000 Total subscriber line loop costs =$900,000 –9,000 x $100

More of the example Assume usage is 12% interstate –12% of total traffic is interstate Allocation of subscriber loop costs to the interstate jurisdiction is $108,000 –12% times $900,000

Why is this important? This means that $108,000 will not have to be recovered from local rates or from state toll ratesespecially from local rates!!