******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. 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 ) ) CC Docket No. 98-108 Beehive Telephone Company, Inc. ) Beehive Telephone, Inc. Nevada ) ) Transmittal No. 11 Tariff F.C.C. No. 1 ) ORDER DESIGNATING ISSUES FOR INVESTIGATION Adopted: October 7, 1998 Released: October 7, 1998 Filing Schedule Direct Case: October 21, 1998 Opposition or Comments: October 28, 1998 Reply Comments: November 4, 1998 By the Deputy Chief, Common Carrier Bureau: I. INTRODUCTION 1. On June 16, 1998, Beehive Telephone Company, Inc. and Beehive Telephone, Inc. of Nevada (collectively "Beehive") filed Transmittal No. 11, which proposes to revise its interstate access service rates in accordance with the Commission's Access Charge Reform Order. On June 30, 1998, the Competitive Pricing Division of the Common Carrier Bureau (Bureau) suspended Beehive's Transmittal No. 11 for one day, initiated an investigation into the lawfulness of this tariff filing, and imposed an accounting order. In this Order, we designate issues for the investigation of Beehive's Transmittal No. 11 and we direct Beehive to file additional supporting documentation. II. BACKGROUND 2. As a cost schedule carrier, Beehive filed Transmittal No. 11 pursuant to Section 61.39 of the Commission's rules. Section 61.39 requires cost schedule carriers that make changes to traffic sensitive and common line rates to file cost-of-service studies. Cost schedule carriers also must file estimates of how the changes affect the traffic and revenues for the service and estimates of how any changes to a service affect the traffic and revenues of the carrier's overall services. Further, the rates of incumbent LECs subject to cost-of-service regulation may not reflect a rate of return that exceeds 11.25 percent. 3. Beehive's proposed rates for Transmittal No. 11 are based, in part, on cost information from 1996. That same historical period was also used to calculate the rates reflected in Transmittal Nos. 6 and 8, Beehive's 1997 and 1998 annual access tariffs. As explained below, in the investigation of Beehive's 1998 annual access tariff, the Commission prescribed rate reductions that reflected an 11.25 percent rate of return and disallowances to Beehive's reported operating expenses. This investigation of Transmittal No. 11 addresses the reasonableness of Beehive's tandem switched transport facility, tandem switched transport termination, and transport interconnection charge rates and the reliability of the data used to calculate these rates. a. Beehive's 1997 and 1998 Annual Access Tariffs 4. On January 6, 1998, the Commission released the 1997 Beehive Tariff Investigation Order, concluding its investigation of the rates filed by Beehive in its 1997 annual access tariff. The Commission determined that Beehive's premium and non-premium local switching access rates filed in its 1997 annual access tariff were unjust and unreasonable. The Commission also found that Beehive's local switching rates reflected an unexplained sharp increase in operating costs and corporate expenses in 1995 and 1996 without commensurate increases in plant investment and business operations. The Commission further found that the rate of return Beehive used in calculating its rates was unjust and unreasonable because it exceeded the prescribed overall rate of return of 11.25 percent. The Commission prescribed rates for Beehive's premium and non-premium local switching charge based on an 11.25 percent return and total operating expenses equal to 25 percent of Beehive's total plant in service (TPIS). The Commission disallowed Beehive's operating expenses in excess of 25 percent of its TPIS. The 25 percent factor was derived by first calculating the average total operating expense to the TPIS ratio among LECs with a comparable number of access lines. The industry wide sample of comparable LECs yielded a ratio of 21.55 percent. The Commission then increased the ratio to 25 percent to account for the possibility that Beehive is a higher than average cost carrier. The Commission's calculations produced a prescription of premium local switching rates and non-premium local switching rates of $0.009443 and $0.004249, respectively. 5. On June 1, 1998, the Commission released the 1998 Beehive Tariff Termination Order, concluding its investigation of Beehive's rates filed in accordance with the Commission's Access Charge Reform Order. The Commission concluded that, due to various inconsistencies and unexplained entries in Beehive's supporting information, Beehive failed to meet its burden of proof under Section 204(a)(1) of the Communications Act of justifying its proposed local transport facility and local transport termination charges. The Commission also found that Beehive's cost and investment information was unreliable. Accordingly, the Commission prescribed Beehive's premium and non-premium local switching rates by (1) computing a total interstate revenue requirement based on the average total plant in service and net investment of similar companies using the same sample of comparable telephone companies in the National Exchange Carrier Association (NECA) that we used in our 1997 access tariff investigation; (2) computing the ratio of this revenue requirement to the total interstate revenue requirement reported in Beehive's Direct Case; and, (3) multiplying each of Beehive's filed rates by this ratio. These calculations resulted in a prescription of a premium local switching rate of $0.009607 per minute of use, a non-premium local switching rate of $0.004323 per minute of use, a premium local transport facility rate of $0.000181 per mile per minute of use, and a non-premium local transport facility rate of $0.000082 per mile per minute of use. b. Beehive's Transmittal No. 11 6. On June 16, 1998, Beehive filed Transmittal No. 11 proposing to revise its F.C.C. Tariff No. 1 to establish rates for the tandem switched transport facility, tandem switched transport termination, and transport interconnection pursuant to the Commission's Access Charge Reform Order. Beehive also proposed modifying the prescribed premium and non-premium local switching rates to per-minute switching rates of $0.028252 for premium local switching and $0.01815 for non-premium local switching. Beehive included cost and investment data for calendar years 1996 and 1997 in support of its filing. On June 30, 1998, the Bureau released the Beehive Suspension Order rejecting Beehive's proposed local switching rates and suspending that portion of the tariff that proposed tandem switched transport rates pursuant to the Access Charge Reform Order. III. ISSUES DESIGNATED FOR INVESTIGATION 7. In the Access Charge Reform Order, we directed the LECs to eliminate the unitary pricing option for tandem switched transport, effective July 1, 1998, and to establish the following three-part rate structure: (1) a per minute charge for traffic carried over common transport facilities between the end office and the tandem office; (2) a per minute tandem switching charge; and (3) a flat rated charge for the transport of traffic over dedicated transport facilities between wire center and tandem switching office. The order also directed the LECs to establish flat rated charges on January 1, 1998 to recover the costs of the dedicated trunk ports on the wire center side of the tandem and to reallocate the tandem switching revenues currently recovered through the Transport Interconnection Charge (TIC) to the tandem switching rate element. 8. Beehive's Transmittal No. 11 established premium tandem switched transport facility rates of $0.000483 per minute per mile and tandem switched transport termination rates of $0.002376 per minute per mile. The filing proposed non-premium tandem switched transport facility rates of $0.000483 per minute per mile and non-premium tandem switched transport termination rates of $0.009903 per minute per mile. 9. In conjunction with its filing of Transmittal No. 11, Beehive, on June 16, 1998, also filed the following cost support documents: Traffic Sensitive Rate Development with Restructure; Access Minutes; Part 69 Revenue Requirements (Utah-1997,1996, Nevada-1997,1996); and Auditor's Report and Financial Statements for Beehive Telephone Company, Inc. and Beehive Telephone Company , Inc., Nevada 10. Preliminary review of Beehive's cost support documents indicates that they suffer from problems very similar to those that caused us to disregard the cost support filed in Transmittal No. 8. It appears that Beehive has not met the standard for cost support to qualify to file as a cost company under Part 61.39. It appears that Beehive has merely moved substantial amounts of its expenses from Utah to Nevada and from corporate operations and plant specific accounting categories to customer operations expense accounts. Beehive also reports an increase in interstate net plant from Transmittal No. 8 to Transmittal No. 11 of over 26 percent. This increase includes a doubling of its previously reported interstate net plant for Nevada in 1996. The substantial irregularities and significant amounts of questionable expenses noted in Transmittal No. 8 seem merely to have been moved from one expense category to another. No explanations are provided for these changes. Beehive supplies an auditor's statement, but this statement addresses only the representativeness of the balance sheet and income statement, and does not attest to the validity of the cost support or rate development material. Therefore, we require Beehive to comply with our regulations as set forth at  61.39(a) by providing an explanation of all the apparent inconsistencies and irregularities detailed above. We also require Beehive to explain how it calculated its proposed premium and non-premium tandem switched transport facility rates, tandem switched transport termination rates, and transport interconnection charge rates. 11. Beehive's provision of the information requested is necessary to determine whether the proposed rates are just and reasonable. Failure to provide convincing explanations and justifications of these expense levels may result in the prescription of rates that are just and reasonable, and these rates may reflect large disallowances of certain costs claimed by Beehive. If Beehive fails to justify its costs, the Commission may prescribe rates using a methodology similar to that used in the 1998 Beehive Tariff Termination Order. 12. We may also consider alternate methodologies for rate prescription. First, we could prescribe the same rates as used by average schedule companies. Second, we could use the same methodology we used to prescribe local switching and local transport rates in the 1998 Beehive Tariff Termination Order. That is, we could compute a hypothetical revenue requirement for an average company of similar size and base our prescription on the ratio of this hypothetical revenue requirement to the revenue requirement calculated by Beehive. We request comments on these or other proposals. IV. PROCEDURAL MATTERS a. Filing Schedules 13. This investigation will be conducted as a notice and comment proceeding to which the procedures set forth below shall apply. Beehive shall file a direct case addressing the issues designated above no later than October 21, 1998. 14. Pleadings responding to the direct case may be filed no later than October 28, 1998, and must be captioned "Opposition to Direct Case" or "Comment to the Direct Case." "Rebuttals" to the opposition or comments may be filed no later than November 4, 1998. 15. An original and seven copies of all pleadings must be filed with the Secretary of the Commission. In addition, one copy must be delivered to the Commission's commercial copying firm, International Transcription Service, 1231 20th Street, N.W., Washington, D.C. 20036. Also, one copy must be delivered to the Competitive Pricing Division, Room 518, 1919 M Street, N.W., Washington, D.C. 20554. Members of the general public who wish to express their views in an informal manner regarding the issues in this investigation may do so by submitting one copy of their comments to the Secretary, Federal Communications Commission, 1919 M Street, N.W., Room 222, Washington, D.C. 20554. Such comments should specify the docket number of this investigation. Parties are also encouraged to submit their pleadings electronically through the Electronic Tariff Filing System. b. Ex Parte Requirements 16. This proceeding is designated permit but disclose for purposes of the Commission's ex parte rules. Ex parte contacts, (i.e., written or oral communications that address the procedural merits of the proceeding and are directed to any member, officer or employee of the Commission who may reasonably be expected to be involved in the decisional process in this proceeding) are permitted in this proceeding until the commencement of the Sunshine Agenda period. The Sunshine Agenda period terminates when a final order is released and the final order is issued. Written ex parte contacts and memoranda summarizing oral ex parte contacts must be filed on the day of the presentation with the Secretary and Commission employees receiving each presentation. For other requirements, see generally Section 1.1200 et seq. of the Commission's Rules, 47 C.F.R.  1.1200 et seq. V. ORDERING CLAUSES 17. Accordingly, pursuant to Sections 4(i), 201(b), 202(a), 204(a), and 205 of the Communications Act, 47 U.S.C.  154(i), 201(b), 202(a), 204(a), and 205, and Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R.  0.91 and 0.291, the issues set forth in this Order ARE DESIGNATED FOR INVESTIGATION. 18. IT IS FURTHER ORDERED that Beehive Telephone Company, Inc. and Beehive Telephone, Inc. Nevada SHALL BE PARTIES TO THIS PROCEEDING. 19. IT IS FURTHER ORDERED that Beehive Telephone Company, Inc. and Beehive Telephone, Inc. Nevada SHALL FILE a direct case addressing the issues designated and providing the information required above by October 21, 1998. 20. IT IS FURTHER ORDERED that Pleadings responding to the direct case SHALL BE FILED by October 28, 1998 and must be captioned "Opposition to Direct Case" or "Comment to the Direct Case." 21. IT IS FURTHER ORDERED that "Rebuttals" to any opposition or comments or opposition to the direct case SHALL BE FILED by November 4, 1998. FEDERAL COMMUNICATIONS COMMISSION James D. Schlichting Deputy Chief, Common Carrier Bureau