1. 3/99©GVNW Consulting Inc. Separations 101 Rural Task Force Meeting March 3, 1999 Bob Schoonmaker

2. 3/99GVNW Consulting, Inc. What is Separations? n Process for “separating” investments, expenses, and revenues between the interstate and state jurisdictions n Similar process may be used to separate state toll and local jurisdictions

3. 3/99GVNW Consulting, Inc. Financial Rules Relationships Financial Records Part 32 Part 64 Non- Regul. Acctg. Subject to Separations Part 36 Separated Results Inter- state State Part 69 Access Elements CCL Local Switch Local Transport Special Access

4. 3/99GVNW Consulting, Inc. General Principles n Assignment to jurisdiction based either on: – Direct assignment – “Actual use” giving consideration to: n relative occupancy or n relative time measurements

5. 3/99GVNW Consulting, Inc. Overall Framework n Revenue Requirement – Amount necessary to cover operating expenses and taxes, as well as generate an adequate return on the rate base – Equals Operating expenses and taxes + Return on rate base + Income taxes on return

6. 3/99GVNW Consulting, Inc. Overall Framework n Plant Investments n Plant Specific Expenses n Other Expenses n Revenues

7. 3/99GVNW Consulting, Inc.7 Plant Accounts n The first step in the separations process is the assignment of plant to categories. The basis for making this assignment is : – Identifying the plant – Calculate the cost of the plant – Determine its use n The second step is to allocate the cost of the plant in each category into separate jurisdictions by direct assignment or application of prescribed factors

8. 3/99GVNW Consulting, Inc. Central Office Equipment n COE - Operators - Category 1 n COE - Switching – Tandem Switching - Category 2 – Local Switching - Category 3 n COE Transmission - Category 4 – Exchange - Category 4.1 – Interexchange - Category 4.2 – Host / Remote - Category 4.3

9. 3/99GVNW Consulting, Inc. COE Transmission n Exchange - Category 4.1 – Wideband - Category 4.11 – Exchange Trunk - Category 4.12 – Other - Category 4.13 n Interexchange - Category 4.2 – Furnished to Others - Category 4.21 – Wideband - Category 4.22 – Joint - Category 4.23 – Connecting Company - Category 4.24 n Host / Remote - Category 4.3

10. 3/99GVNW Consulting, Inc. Cable & Wire Facilities (C&WF) n Cable & wire Facilities – Exchange Line - Category 1 – Wideband & Exchange Trunk - CAT. 2 – Interexchange - Category 3 – Host / Remote - Category 4

11. 3/99GVNW Consulting, Inc. C&WF Detail n Exchange Line - Category 1 – Intrastate Private Line - Category 1.1 – Interstate Private Line - Category 1.2 – Joint Message - Category 1.3 n Wideband & Exchange Trunk - Category 2

12. 3/99GVNW Consulting, Inc. C&WF Detail n Interexchange - Category 3 – Furnished to Others - Category 3.21 – Wideband - Category 3.22 – Joint - Category 3.23 n Host / Remote - Category 4

13. 3/99GVNW Consulting, Inc. Allocation - COE Switching n Local Switching - Category 3 – Dial Equipment Minutes of Use (DEM) – Weighting Factor for companies under 50,000 lines n 0 - 10,000 - 3x n 10,001 - 20,000 - 2.5x n 20,001 - 50,000 - 2x – Weighting amount frozen at 1996 level – Maximum of 85% for ER and RA toll

14. 3/99GVNW Consulting, Inc. Allocation - Subscriber Plant n Exchange Plant (or Subscriber Plant) – COE Transmission - Category 4.13 – C&WF Category 1.3 n Basic Allocation Factor (the factor formerly known as SPF) – 25% Interstate – Balance on state specific rules

15. 3/99GVNW Consulting, Inc. Allocation - Interoffice Plant n Interexchange Plant – COE Transmission - Category 4.23 n Conversation Minutes (CM) – C&WF - Category 3.23 n Conversation Minute Kilometers (CMKM or CMM)

16. 3/99GVNW Consulting, Inc. Allocation - Host/Remote n Host / Remote Plant – COE Transmission - Category 4.3 – C&WF - Category 4 n Minute of Use Kilometers (MOUKM or MOUM)

17. 3/99GVNW Consulting, Inc. Alloc.-General Support Facilities n Class A companies – Allocation based on Big Three expenses (Plant Specific expenses, Network Operations Exp (6530) and Customer Operations Expense

18. 3/99GVNW Consulting, Inc. Alloc.-General Support Facilities n Class B companies – ‘The costs of the general support facilities... are apportioned among the operations on the basis of the separation of the costs of Central Office equipment, Information Origination/Termination equipment, and Cable and Wire Facilities, combined” 36.112(b) (sometimes called Big 3 investment)

19. 3/99GVNW Consulting, Inc. Traffic Studies n Traffic Studies measure the “relative”or “actual” use of the telephone network. n Usage data is collected over given periods of time and used to develop apportionment factors. n Apportionment factors are applied to categorized costs in the separations process.

20. 3/99GVNW Consulting, Inc.20 TRAFFIC STUDY OVERVIEW Types of Data Collected Usage & Peg Counts = from the switching Entity Minutes of Use Study Office Measurements LINESTRUNKS ORIGINATING TERMINATING OUTGOING TOLL INCOMING TOLL OUTGOING LOCAL EAS INCOMING LOCAL EAS Conversation Minutes & Messages = from accounting data

21. 3/99GVNW Consulting, Inc. Traffic Observation Study Minutes of Use Study - – Develops Holding Times by jurisdiction. – Toll Minutes of Use per originating message. – Local Minutes of Use per peg count.

22. 3/99GVNW Consulting, Inc. Annual Traffic Study Develops annualized Minutes of Use - – Toll Minutes of Use are developed from billed access minutes. – Local Holding Times multiplied by the annual peg counts. – Resulting minutes are then used to develop Dial Equipment Minutes of Use factors and ultimately various types of traffic factors.

23. 3/99GVNW Consulting, Inc.23 Impact of Internet Usage Test Telephone Company Statistics – Access Line Count = 1,825 – Internet access via a local to local call to 56 Kbps facilities – Annual 2 way Internet minutes of use = 5,917,866 – Annual Internet calls = 117,165 – Internet local network 2 way holding time = 50.50882 – Internet access holding time = 25.25441

24. 3/99GVNW Consulting, Inc.24 INTERNET IMPACT EXAMPLE Test Telephone Company Impact on Unweighted DEM Factors Without With Jurisdiction Internet Internet Difference Interstate 0.18650 0.15351 -0.03299 Intrastate 0.29312 0.24129 -0.05183 Local 0.52038 0.60520 0.08482

25. 3/99GVNW Consulting, Inc.25 INTERNET IMPACT EXAMPLE Test Telephone Company Impact on Weighted DEM Factors Without With Jurisdiction Internet Internet Difference Interstate 0.55950 0.46053 -0.09897 Intrastate 0.29050 0.38947 0.09897 Local 0.15000 0.15000 0.00000

26. 3/99GVNW Consulting, Inc. Plant Specific Expenses n 6110 Network Support n 6120 General Support n 6210 COE - Switching n 6220 COE - Operator Systems n 6230 COE - Transmission n 6310 Information Origination/Termination n 6410 Cable & Wire Facilities Part 36 apportionment based on related investment,

27. 3/99GVNW Consulting, Inc.27 Plant Non-Specific Expenses Account Part 36 Apportionment n 6510 Provisioning Account 2001 TPIS n 6530 Network Operations Combined Separation of COE, IOT, C&WF (Big 3) n 6540 Access Expense Directly Assigned n 6560 Depreciation Follows Primary Plant Account or Category

28. 3/99GVNW Consulting, Inc.28 Customer Operations Expenses n 6610 Marketing - Allocated based on current billing, excluding billing for others n 6620 Operator Services - Based on weighted standard work seconds n 6620 Directory Listings - Classified assigned to exchange, foreign is assigned based on geographic locations, alpha is apportioned on Subscriber Line Usage Factor (SLU)

29. 3/99GVNW Consulting, Inc.29 Customer Operations - Local Business Office Expenses Work Function Analysis Part 36 Apportionment n EU Service Order Proc. Contact Studies n EU Payment & Collect Billed Revenues (customer) n EU Bill Inquiry Contact Studies n IX Service Order Proc. Contact Studies n IX Payment & Collect Billed Revenues (CXR) n IX Billing Inquiry Contact Studies

30. 3/99GVNW Consulting, Inc.30 Customer Operations - Revenue Accounting Expenses n Customer Billing Function Part 36 Apportionment n Message Processing Billed Message Count n CABS Expense 50/50 State and Interstate

31. 3/99GVNW Consulting, Inc.31 Corporate Operations Expenses Corporate Part 36 Apportionment n 6710 ExecutiveBig 3 Expenses n 6720 General and AdministrativeBig 3 Expenses What is included in the “Big 3 Expense” Factor n Plant Specific - Accounts 6210-6410 n Plant Non-Specific - Account 6530 n Customer Operations - Accounts 6610-6620

32. 3/99GVNW Consulting, Inc. Part 69 - Access Elements n Similar Process n Allocation of Jurisdiction to Access Elements – Carrier Common Line – Local Switching – Local Transport – Special Access – Billing and Collecting