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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) 1998 Biennial Regulatory Review -- ) Review of Depreciation Requirements ) CC Docket No. 98-137 for Incumbent Local Exchange Carriers ) ) ) Ameritech Corporation Telephone Operating ) CC Docket No. 99-117 Companies' Continuing Property Records ) Audit, et. al. ) ) ) AAD File No. 98-26 GTE Telephone Operating Companies ) Release of Information Obtained During ) Joint Audit ) FURTHER NOTICE OF PROPOSED RULEMAKING Adopted: March 31, 2000 Released: April 3, 2000 Comment Date: April 17, 2000 Reply Comment Date: April 28, 2000 By the Commission: Commissioner Furchtgott-Roth concurring and issuing a statement. I. INTRODUCTION 1. On December 30, 1999, the Commission adopted streamlined procedures for depreciation and identified conditions under which price cap incumbent local exchange carriers (ILECs) may seek a waiver of the depreciation requirements. The Depreciation Order set forth specific conditions under which the Commission may find it appropriate to grant a waiver of the depreciation prescription process, emphasizing that these conditions are necessary to ameliorate any harmful impact that unrestricted changes in depreciation expenses could have on consumers and competition. 2. The Coalition for Affordable Local and Long Distance Service (CALLS) has submitted to the Commission a modified proposal that generally sets forth a five-year framework for universal service and interstate access charge reform. In conjunction with the CALLS proposal, participant ILECs have indicated that "the ILEC members of the CALLS coalition propose to take contemporaneous steps over the life of the CALLS proposal to eliminate the disparity that exists between the regulatory and the financial accounting for depreciation expense and associated reserve balances." The ILEC participants stated their intent to file a joint request for waiver of the Commission's depreciation requirements pursuant to the Depreciation Order. 3. The waiver process set forth in the Depreciation Order contemplates Commission review of carriers' requests for depreciation regulatory relief on a case-by-case basis. However, since the ILEC participants represent almost the entire class of carriers subject to our depreciation rules, we are initiating this rulemaking to evaluate the conditions under which our existing depreciation rules may be eliminated or changed for all price-cap carriers. In this further rulemaking, we take notice of the principles and objectives defined in the Depreciation Order. For example, we remain concerned, and seek to assure, that any changes in depreciation practices do not adversely impact consumers and competition. II. BACKGROUND 4. In the Depreciation Order, we denied a petition for forbearance of the depreciation prescription process, but found that a waiver of these requirements may be appropriate in certain instances. Specifically, we found that a waiver may be appropriate when an ILEC voluntarily, in conjunction with its request for waiver: (1) adjusts the net book costs on its regulatory books to the level currently reflected in its financial books by a below-the-line write-off; (2) uses the same depreciation factors and rates for both regulatory and financial accounting purposes; (3) foregoes the opportunity to seek recovery of the write-off through a low-end adjustment, an exogenous adjustment, or an above-cap filing; and (4) agrees to submit information concerning its depreciable plant accounts, including forecast additions and retirements for major network accounts and replacement plans for digital central offices. We also stated that waiver requests must comply with the waiver requirements under the Commission's rules. 5. The first condition required ILECs to adjust the net book costs on their regulatory books to the levels currently reflected in their financial books by below-the-line write-offs. We found that this condition would likely eliminate any disparity that exists between financial and regulatory book levels by increasing the depreciation reserves on the regulatory books. We determined that this accounting treatment would likely ensure that any increase in depreciation expense would not raise the prices of services charged to ratepayers. We indicated that if the difference were accounted for above-the-line, there could be an increase in a carrier's annual depreciation expenses, thereby reducing the carrier's earnings, and possibly providing an opportunity for carriers to seek a low-end adjustment or to seek recovery through exogenous cost treatment or above-cap filings. 6. The second condition required that ILECs use the same depreciation factors and rates for both regulatory and financial accounting purposes. We found that using the same factors and rates would ensure that established accounting procedures are being followed and would prevent carriers from using any unjustified depreciation factors or rates for regulatory purposes. 7. The third condition was established to protect ratepayers from any increases in rates due to a change in regulatory oversight of the depreciation prescription process. We required that ILECs forego the opportunity to seek recovery of the write-off from interstate ratepayers through a low-end adjustment, an exogenous adjustment, or an above-cap filing. This condition, in conjunction with the first and second conditions, was intended to ensure that customers would suffer no adverse rate impacts should a carrier employ new depreciation methods. 8. The fourth condition was established to enable the Commission to continue to establish ranges for use in cost models. We were concerned about the impact that new depreciation methods could have on cost models for determining universal service high cost loop support and on forward looking cost studies for determining interconnection and unbundled network element (UNE) rates. We noted that the current depreciation prescription process is important in the calculation of high cost support amounts because it provides the input for the depreciation expense component of the carriers' average costs per loop. An increase in these expenses by large ILECs could lead to reductions in the high cost support for other, primarily rural, carriers, many of which rely on high cost support to keep their local rates affordable. We also noted that state regulatory commissions have approved rates for interconnection and UNEs, and in many instances, have based the rates on Commission-prescribed depreciation factors. We were concerned that ILECs, acting as wholesale providers of critical facilities to their competitors, could independently establish depreciation rates that could result in unreasonably high interconnection and UNE rates, which competitors would be compelled to pay in order to provide competing local exchange service. We determined that in order to prevent any inappropriate fluctuations in high cost support or the rates for interconnection and UNEs due to any changes in depreciation factors or rates caused by carriers receiving a waiver, we would continue to maintain realistic ranges of depreciable life and salvage factors for each of the major plant accounts. We stated that these ranges can continue to be relied upon by federal and state regulatory commissions for determining the appropriate depreciation factors to use in establishing high cost support and interconnection and UNE prices. Thus, we determined that the ILECs must submit information necessary for us to maintain realistic equipment life and salvage ranges, including forecast additions and retirements for major network accounts, replacement plans for digital central office, and information concerning relative investments in fiber and copper cable. 9. Finally, we stated that alternative proposals by carriers seeking a waiver of the depreciation requirements would be considered on a case-by-case basis. We emphasized, however, that any such proposal must provide the same protections to guard against any adverse impacts on consumers and competition as provided by the conditions adopted in the Depreciation Order. III.DISCUSSION 10. In their March 3, 2000 letter, ILECs participating in the CALLS modified plan identified a potential alternative joint waiver approach to achieving the objectives set forth in the Depreciation Order. Specifically, the letter outlines steps that the ILECs propose to take to achieve freedom from depreciation requirements, including: (1) use of the same depreciation factors and rates for both federal regulatory and financial accounting purposes; (2) submission of information concerning their depreciation accounts when significant changes to depreciation factors are made; and (3) use of a straight-line amortization over a five- year period to account for the difference between the reserve balances on their regulatory books and the corresponding balances on their financial books. The ILECs indicated that, under their proposal, the amortization expense for each year would be included in the calculation of regulated earnings (treated as an above-the-line expense) when reporting to the Commission. The ILECs would agree, however, that the amortization would have no effect on interstate price caps or their interstate rates and would commit not to seek recovery of the amortization expense through a low-end adjustment, an exogenous adjustment, or an above-cap filing. Also, under this proposal, the ILECs would commit not to seek recovery of the interstate amortization expense through any action at the state level, including any action on UNE rates. 11. The primary goal of this proceeding is to determine whether there are circumstances under which our depreciation requirements could be eliminated for price-cap carriers in a manner that serves the public interest. In reaching this goal, it is important to ensure that consumers are protected against harmful rate impacts that could result from unregulated depreciation practices. Further, while we seek to eliminate burdensome regulatory requirements, we remain committed to assuring that such elimination does not have any adverse impact on the development of local competition. Also, because many of the state regulatory commissions use our cost models and often rely on our depreciation prescriptions for state ratemaking purposes, we seek to ensure that elimination of our depreciation requirements will not have any adverse impact at the state level. 12. The conditions we established in the Depreciation Order, pursuant to which a carrier could seek a waiver from the depreciation requirements, were found to largely mitigate any adverse impacts that could occur when carriers are given freedom from depreciation regulation. Prominent among these conditions was a requirement to write-off, below-the-line, the difference between the carriers' regulatory and financial book costs. The Depreciation Order identified this one-time write-off as one means to eliminate the disparity that exists between financial and regulatory books and to ensure that these expenses would not be unjustifiably recovered in consumer rates. Under a five-year amortization proposal, the differential between the carriers' financial and regulatory books would be eliminated in five years. We seek comment on whether an above-the-line amortization of the difference between the price-cap carriers' regulated and financial book costs over a five-year period, combined with a commitment not to seek recovery of the amortization and not to base any application for federal or state rate increases (through a low-end adjustment or other means) on any portion of the amortization over the course of the five year period adequately protects consumers from adverse rate impacts and otherwise meets the policy goals of the Depreciation Order. If not, are there additional steps that would eliminate or minimize these concerns? We specifically invite state commissions to comment on whether the depreciation changes discussed herein will have an adverse impact on local rates or competition. If so, we seek comment from states on specific actions we might take to protect against such adverse impacts. 13. We also seek comment on whether it is appropriate, under a five-year amortization approach, coupled with a commitment not to seek recovery of any portion of the amortization from federal or state rates, to include the amortization amount in the calculation of regulated earnings in the carriers' reports to the Commission. If so, what protections, if any, will ensure that the carriers' reported earnings, which would include the amortization expense, are not used in applications for rate increases under low-end adjustment, above cap price filings, or other mechanisms to justify rate increases. For example, should price-cap ILECs be required to periodically report costs that reflect what their costs would have been had the write-off been taken as a one-time below-the-line event or maintain records that reflect the amortization factored-in and factored-out, particularly where the carrier may be seeking price increases under low-end adjustments or some other mechanism? We seek comment on whether a five-year amortization accounting treatment has an adverse impact on reported earnings, and if so, what, if any, action the Commission should take to address these impacts. We also seek comment on what measures we should take to account for and monitor the proposed amortization process. 14. In the Depreciation Order, we found that, in order to prevent any inappropriate and undesirable fluctuations in high cost support or the rates for interconnection and UNEs due to changes in depreciation factors or rates caused by carriers no longer subject to the Commission's depreciation requirements, we would continue to maintain realistic ranges of depreciable life and salvage factors for each of the major plant accounts for use in the cost models. Thus, we required that carriers agree to provide information about their depreciable plant accounts, including forecast additions and retirements for major network accounts, replacement plans for digital central offices, and information concerning relative investments in fiber and copper cable. We seek comment on the timing of the carriers' data submissions to the Commission and the scope of such submissions that will be needed to periodically update depreciation factors for use in the cost models. 15. Finally, we note that audits of the continuing property records (CPR) of the Regional Bell Operating Companies (RBOCs) are before the Commission, as are the results of a joint State-Federal audit of GTE's CPRs. The CPR audits found that, combined, these carriers could not account for approximately $5 billion of central office equipment and recommended that these amounts be written-off their regulatory books of account. We estimate that a five-year amortization, if applied to these carriers, would result in a reduction of approximately $28 billion in asset value from their regulated books of accounts. Given the size of the write-off proposed by the audits, we seek comment on whether, if the RBOCs and GTE bring their regulatory book balances to the levels of their financial book levels, the CPR audit findings are rendered moot. In particular, we seek comment on whether an accounting treatment that results in a non-recoverable amortization of a substantial portion of a carrier's investment provides a legitimate basis to terminate the CPR audits. IV. PROCEDURAL ISSUES A. Ex Parte Presentations 16. 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 C.F.R.  1.1202, 1.1203, and 1.1206. B. Supplemental Initial Regulatory Flexibility Analysis 17. 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." The RFA generally defines "small entity" as having the same meaning as the terms "small business," "small organization," and "small governmental jurisdiction." In addition, the term "small business" has the same meaning as the term "small business concern" under the Small Business Act. Under the Small Business Act, a "small business concern" is one that: (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). The SBA has defined a small business for Standard Industrial Classification (SIC) category 4813 (Telephone Communications, Except Radiotelephone) to be small entities when they have no more than 1,500 employees. 18. This rulemaking action is supported by sections 4(i), 4(j), 201-205, 254, and 403 of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 201-205, 254, and 403. 19. This Further Notice seeks comment on what conditions would be appropriate to eliminate the prescription of depreciation rates for price-cap ILECs. As noted above, a "small business" under the RFA is one that, inter alia, meets the pertinent small business size standard (e.g., a telephone communications business having 1,500 or fewer employees), and "is not dominant in its field of operation." The SBA's Office of Advocacy contends that, for RFA purposes, small ILECs are not dominant in their field of operation because any such dominance is not "national" in scope. We have therefore included small ILECs in the RFA analysis, although we emphasize that this RFA action has no effect on FCC analyses and determinations in other, non-RFA contexts. We note, however, that the action we propose in this rulemaking proceeding does not apply to small ILECs, but would apply only to price-cap ILECs subject to Commission depreciation requirements. 20. We certify that the proposal in this Further Notice, if adopted, will not have a significant economic impact on a substantial number of small entities. Pursuant to long-standing rules, ILECs with annual operating revenues exceeding the indexed revenue threshold must comply with the Commission's depreciation prescription process. This Further Notice proposes, under appropriate conditions, to eliminate these depreciation requirements. These changes should be easy and inexpensive for ILECs to implement and will not require costly or burdensome procedures. We therefore expect that the potential impact of the proposed rules, if such are adopted, is beneficial and does not amount to a possible significant economic impact on affected entities. If commenters believe that the proposals discussed in the Further Notice require additional RFA analysis, they should include a discussion of these issues in their comments. 21. The Commission's Office of Public Affairs, Reference Operations Division, will send a copy of this Further Notice, including this initial certification, to the Chief Counsel for Advocacy of the Small Business Administration. A copy will also be published in the Federal Register. C. Paperwork Reduction Act 22. This Further Notice seeks comment on the timing of price-cap ILECs' data submissions to the Commission and the scope of such submissions that are needed by the Commission to periodically update depreciation factors for use in the cost models. As part of our continuing effort to reduce paperwork burdens, we invite the general public to take this opportunity to comment on information collections contained in this Further Notice of Proposed Rulemaking, as required by the Paperwork Reduction Act of 1995, Pub. L. No. 104-13. Public and agency comments are due at the same time as other comments on this Further Notice of Proposed Rulemaking. 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. D. Comment Filing Procedures 23. Pursuant to Sections 1.415 and 1.419 of the Commission's rules, 47 C.F.R.  1.415, 1.419, interested parties may file comments on or before April 17, 2000. Interested parties may file reply comments on or before April 28, 2000. Comments may be filed using the Commission's Electronic Comment Filing System (ECFS) or by filing paper copies. 24. Comments filed through the ECFS can be sent as an electronic file via the Internet to . Generally, only one copy of an electronic submission must be filed. If multiple docket or rulemaking numbers appear in the caption of this proceeding, however, commenters must transmit one electronic copy of the comments to each docket or rulemaking number referenced in the caption. In completing the transmittal screen, commenters should include their full name, Postal Service mailing address, and the applicable docket or rulemaking number. Parties may also submit an electronic comment by Internet e-mail. To get filing instructions for e-mail comments, commenters should send an e- mail to ecfs@fcc.gov, and should include the following words in the body of the message, "get form