1. “Continuing surveillance” During the 1930’s and 1940’s the FCC regulated AT&T 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 progress—not 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 1960’s

2. 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

3. 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

4. The birth of separations 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...”

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

6. $$$ Effects of Smith v. Illinois Board-to-board: the cost of the switchboard and the local loop and the telephone set are all recovered from local service rates and from state long distance. Interstate long distance rates do not cover any of these costs. Station-to-station: a portion of the cost of the switchboard and the local loop and the telephone set are allocated to interstate long distance and so this portion of costs is recovered from interstate long distance rates.

7. 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??

8. 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 Didn’t result in lower local rates Stopped a planned interstate rate decrease

9. 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 Allocation based on SPF (subscriber plant factor)