$// BellSouth MO&O Petition for Waiver DA 95-20 //$ $/ Section 901(b)(4), Cost allocaltion /$ Before the Federal Communications Commission Washington, D.C. 20554 DA 95-20 In the Matter of ) ) BellSouth Telecommunications, Inc. ) Petition for Waiver of Section 64.901(b)(4) ) of the Commissions Rules that Govern ) the Separation of Costs of Regulated ) Telephone Service from Costs of ) AAD 94-22 Nonregulated Activities) MEMORANDUM OPINION AND ORDER Adopted: January 9, 1995 ; Released: January 13, 1995 By the Chief, Accounting and Audits Division: I. INTRODUCTION 1. On November 18, 1993, BellSouth Telecommunications, Inc. ("BellSouth"), a regulated telephone company, filed a petition for waiver ("petition") of Section 64.901(b)(4) of the Commission's rules. In its petition, BellSouth requests permission to reallocate to its regulated activities the portion of three voice messaging systems now allocated to nonregulated activities. To accomplish this, it would transfer these three systems from the cost pool for common network plant to the cost pool for common official communications plant in Account 2212, Digital electronic switching. MCI Telecommunications, Inc. ("MCI") filed an opposition, and BellSouth filed a reply. As discussed below, we grant BellSouth permission to make the requested reallocation, effective January 1, 1994. II. BACKGROUND 2. In the Joint Cost Orders, the Commission specified that, absent a waiver, certain investment allocated to nonregulated use may not be reallocated to regulated use. This policy is intended to insure that investment risks of nonregulated ventures are not shifted to a carrier's regulated operations. The Commission stated, however, that it would permit such reallocation if a carrier submits a convincing case showing that (a) its regulated activities require the use of the plant capacity allocated to nonregulated activities, and (b) the carrier cannot obtain the needed capacity elsewhere at a lower cost. If a waiver is granted, the investment must be transferred at lower of the plant's depreciated cost or its fair market value. The joint cost rules are contained in Section 64.901 of the Commission's rules. Section 64.901(b)(4), of which BellSouth seeks a waiver, deals specifically with the allocation of central office equipment and outside plant investment costs. Under our rules, these costs are allocated between regulated and nonregulated activities based on the carrier's highest projected nonregulated use over the following three-year period. Absent a waiver, the carriers are not allowed to reduce the nonregulated allocation. III. PLEADINGS 3. BellSouth uses voice messaging equipment for its own internal communications, which it refers to as official communications, and for the internal communications of its affiliates and to provide voice messaging services to the public, a nonregulated activity. BellSouth explains that when the same voice messaging equipment is used for its internal communications and either for internal communications of a nonregulated affiliate or to provide voice messaging to the public, it assigns the investment in the system to the cost pool for common network plant, which is allocated between regulated and nonregulated activities based upon a projected forecast use. 4. BellSouth proposes to transfer its investment in three voice messaging systems to the "support equipment" cost pool in Account 2212 where equipment used for official communications is classified. BellSouth allocates this cost pool between regulated activities and nonregulated activities based upon the investment value of Account 2212, excluding amounts assigned to this cost pool. This proposed transfer would increase the costs BellSouth allocates to regulated activities. 5. BellSouth states that these three systems were originally purchased during 1990 and 1991. BellSouth provides documentation showing that these three voice messaging systems are state-of-the-art, and are similar to the equipment the vendor currently offers for sale. 6. BellSouth states that two of these voice messaging systems are located in Georgia and were originally purchased for regulated telephone company internal communications and for internal communications of BellSouth Services, Inc. ("BellSouth Services"), a nonregulated affiliate. BellSouth Services was created to provide regulated support services to the two BellSouth operating telephone companies that existed at that time. Effective January 1, 1992, BellSouth Services and the operating telephone companies were merged and renamed BellSouth Telecommunications, Inc. BellSouth states that the basic purpose of these voice messaging systems has not changed; they continue to be used for internal communications. Therefore, BellSouth proposes to transfer them to the cost pool for official communications plant. 7. BellSouth provides documentation showing that its official communications use of voice messaging in Georgia is increasing. It states that these two systems are operating at 80 percent capacity, the maximum number of ports are being utilized and there are no physical connections available to provide nonregulated services. BellSouth also provides documentation showing the net book cost, the fair market value, and the cost to purchase new systems as of January 1, 1994. This documentation shows that, as of that date, the two systems in Georgia had a net book cost of $725,248, fair market value of $851,000, and replacement cost for new systems of $938,714. 8. BellSouth states that the third voice messaging system that it proposes to transfer is located in North Carolina. BellSouth explains that it had three voice messaging systems in North Carolina that were used for both internal communications and to provide voice messaging service to the public. BellSouth refers to these systems as System #1, System #2, and System #3. BellSouth states that in 1993 it reconfigured these three voice messaging systems so that System #2 would be used entirely for internal communications in North and South Carolina, and Systems #1 and #3 would be used entirely to provide voice messaging service to the public. Because these systems are currently allocated based upon projected forecast use, BellSouth needs Commission approval to transfer System #2 to the cost pool for official communications plant. 9. BellSouth provides documentation showing that its use of voice messaging services for internal communications in North and South Carolina is increasing. It also shows that its provision of voice messaging services to the public in these states is expanding. BellSouth states that it needs the capacity of System #2 to support its internal communications for operations in North and South Carolina and that this system is operating at 80 percent capacity. BellSouth provides documentation showing the net book cost, the fair market value, and the cost to purchase a new system as of January 1, 1994. This documentation shows that, as of January 1, 1994, System #2 had a net book cost of $273,277, fair market value of $375,000, and replacement cost for a new system of $415,957. 10. In its opposition, MCI argues that BellSouth has not met the Commission's waiver requirements. MCI states that BellSouth did not provide proof from an outside vendor that it could not obtain the systems elsewhere at a lower cost, nor did it provide documentation that the systems are state-of-the-art. On August 22, 1994, BellSouth submitted additional information in response to a Commission request. In a letter dated September 6, 1994, MCI states that this submission does not provide information necessary to compare BellSouth's systems with new systems. In an October 28, 1994, meeting, which MCI attended, BellSouth provided additional information that, in MCI's view, shows that BellSouth's proposal would not burden regulated ratepayers with obsolete equipment. IV. DISCUSSION 11. Waiver of Commission rules is appropriate only if special circumstances warrant a deviation from the general rule and such deviation will serve the public interest. Generally, a waiver request must be consistent with the principles underlying the rule for which a waiver is requested. The Commission will grant a waiver to reallocate investment from nonregulated to regulated activities only if the carrier has made a showing that (a) there is a need for the equipment in regulated service and (b) the carrier cannot obtain this equipment at a lower cost elsewhere. For the reasons set forth below, we find that BellSouth has shown that a waiver to reallocate a portion of three voice messaging systems from nonregulated activities to regulated activities is warranted. 12. We conclude that BellSouth should be granted a waiver to transfer the two voice messaging systems located in Georgia to the cost pool for official communications plant in Account 2212. These systems were originally placed in the cost pool for common network plant because they were used in part for internal communications of BellSouth Services, a nonregulated affiliate. After the merger between BellSouth Services and the operating telephone companies, the use of voice messaging on these two systems became official communications of the regulated telephone company. Moreover, although BellSouth Services was a nonregulated affiliate, it provided services almost exclusively to the BellSouth regulated telephone companies. For this reason, most of its costs were recovered from the operating telephone companies and were ultimately borne by their ratepayers. Therefore, the requested reallocation for these two voice messaging systems would have almost no impact on regulated costs. Accordingly, we find no reason to prevent BellSouth from transferring the investment in these two systems to the cost pool for official communications. 13. We also conclude that BellSouth should be granted a waiver to transfer System #2 in North Carolina to the cost pool for official communications. BellSouth reconfigured its voice messaging systems so that System #2 would be dedicated entirely to official communications. We believe it is appropriate to transfer this equipment because this transfer is consistent with the company's operations and does not contradict the purpose behind Section 64.901. The purpose of the rule was to prevent shifting the risk of nonregulated activities to regulated services, which could happen, for example, if costs incurred to start a nonregulated service that failed could be shifted to regulated operations. In this case, however, the public voice messaging service is still being offered and has shown substantial growth. Voice messaging for official communications has also grown significantly. Thus, the reconfiguration and resultant reallocation here has occurred as a result of growth of the services rather than the failure of a nonregulated activity. 14. BellSouth demonstrates that it meets the Commission's criteria for reallocating investment from nonregulated activities to regulated activities. It shows that the capacity of these systems is needed to support its official communications activities. In addition, BellSouth provides a statement from on outside vendor which shows that comparable capacity cannot be obtained elsewhere at a cost lower than the systems' net book value as of January 1, 1994. 15. Even though BellSouth dedicated these systems to official communications use prior to January 1, 1994, we believe that our waiver should reflect the circumstances as of that date. BellSouth waited until the end of 1993 to file its waiver request. The Commission's intent in the Joint Cost Orders was to allow carriers who meet the criteria for reallocation of nonregulated investment to do so on a timely basis. Therefore, we authorize BellSouth to transfer its investment in the three voice messaging systems from nonregulated activities to regulated activities as of January 1, 1994. We thus permit BellSouth to reassign its investment in these systems from its "common use information storage, forward retrieval" cost pool in Account 2212 to its "support equipment" cost pool in Account 2212. V. ORDERING CLAUSE 16. Accordingly, IT IS ORDERED, pursuant to Sections 4(i), 201-205, 215, and 218-220 of the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 201-205, 215, and 218-220 that BellSouth's petition for waiver of Section 64.901(b)(4) of the Commission's rules to reallocate a portion of its investment in three voice messaging systems IS GRANTED as specified herein. FEDERAL COMMUNICATIONS COMMISSION Kenneth P. Moran Chief, Accounting and Audits Division