The individual responsible for directing the project needs to head a group consisting of accountants, economists, engineers, and attorneys whose function will be revising the USOA. We do not take a position regarding whether this group needs to be a task force as FCC proposed initially, or ought to be attached to a particular division as the recently resigned Bureau Chief proposed; however, we do believe that revising the USOA should be this group's primary responsibility. To further introduce accountability, we believe FCC needs to issue within a short timeframe (3 months would seem reasonable) a schedule for the completion of the USOA revision and report annually to its legislative committees its progress in meeting this schedule. 1/ Regarding the direction and structure of the USOA, we believe, at a minimum the USOA must be revised to reflect in its accounts the current technologies used to provide telecommunications services and the current functions of the telecommunications business. To the extent FCC intends to restructure AT&T's tariffs in private line as well as other services (as was discussed in chapter 4) into generic components the accounts and these components must be closely coordinated. We believe the issue of whether the revised USOA ought to be a cost accounting system must be resolved once and for all. The Commission needs cost of service data. Therefore, cost accounting needs to be part of the USOA revision so that the needed allocation data can be captured in the Primary Allocation Records, in a systematic manner which can be audited and thus monitored for potential manipulation. We believe there is merit in the concept of coordinating the revision of the separations process and the revision of the USOA. Certainly, it makes sense to have the same plant categories in both systems, thus eliminating the process of transferring costs from one to the other. In addition, the basic studies used in separations for interstate/intrastate allocations may apply to the division of interstate costs among services. Clearly defining when and how the studies will be done and capturing the study results in the USOA could resolve some of the problems of manipulation discussed in chapter 4. How much of this might be done in the USOA and how much through revisions in the separations manual is an issue FCC will have to resolve as the project progresses. On the issue of direct attribution, we, in principle, favor as much direct attribution as possible. We recognize that the 1/While this report was being finalized, the Congress passed the Omnibus Budget Reconciliation Act of 1981, P.L. 97-35 (95 stat. 357) which requires FCC to complete the revision of the USOA as soon as practicable and to report its progress annually to each House of the Congress. additional costing precision which such attribution might gain is obtained at a cost of more detailed accounting and a concomitant increase in the amount of auditing needed to have confidence in the data. Overall, we believe FCC's goal needs to be a USOA which reflects current technology and business functions and captures allocation data in a clear, usable form. The net result must balance, however, the ideal of a highly detailed system-probably articulated best in FCC's June 1978 Notice of Proposed Rulemaking--with the realities of what FCC reasonably can digest and audit while at the same time having confidence in the cost of service data the system produces. RECOMMENDATIONS TO THE CHAIRMAN, FCC To produce a revised USOA we recommend that the Commission --Establish a group consisting of accountants, engineers, economists, and attorneys to work primarily on the USOA revision. --Appoint an individual, with demonstrated leadership --Develop a timetable establishing a swift but realistic --Update the USOA to reflect current technology and business functions and to capture necessary allocation data in a form which can be audited and reviewed. As part of this effort, FCC should explore opportunities to merge the separations process and the USOA to increase the accountability and reduce the overlap in both systems and examine opportunities for direct attribution while balancing the benefits of such attribution with its cost. CHAPTER 6 DEREGULATION OF ENHANCED SERVICES AND CUSTOMER PREMISES EQUIPMENT--USING SEPARATE SUBSIDIARIES AS A PROCOMPETITIVE TOOL The question of how best to promote competition in the domestic telecommunications industry, along with its benefits of more rapid innovation and broadened consumer choice, is one which for a number of years has occupied the attention of FCC, the Congress, the courts, and the National Telecommunications and Information Administration, among others. The question essentially centers on considerations of how to nurture and protect competition during the transition from a highly concentrated industry structure, dictated in part by an earlier technology, to a less concentrated and more diversified, competitive structure made possible by new technologies. FCC, in its Computer II Decision (Docket 20828) adopted in 1980 and in a series of less comprehensive and less far-reaching decisions adopted earlier, has embraced an approach to the transition-to-competition issue which allows for the relatively free entry of new firms as well as the participation in new and emerging product and service areas by long established, monopoly-based common carriers. This approach is predicated on the use of a separate subsidiary device to insulate a dominant carrier's newly "competitive" operations from its traditional monopoly offerings as a way of preventing the abuse of market power generally and, particularly, as a means of preventing cross-subsidization of the firm's competitive offerings by its regulated monopoly offerings. The separate subsidiary requirement does not in itself eliminate even significantly reduce a firm's incentives to engage in anticompetitive behavior, but, combined with the proper safeguards and regulatory oversight, it can render anticompetitive conduct easier to detect and penalize. FCC's adopted approach is novel and largely untested, certainly in the manner and on the scale proposed in the Computer II proceeding. How successful it will be in protecting the competition and securing its benefits for the public only time will tell. We believe that FCC will have to go well beyond the safeguards currently provided for in Computer II if there is to be any assurance of success in encouraging and protecting competition in the domestic telecommunications industry. FCC's SECOND COMPUTER INQUIRY The FCC rulemaking proceeding officially referred to as the "Second Computer Inquiry" (popularly known as Computer II) (77 FCC 2d 384 (1980)) represents the culmination of a more than decade-long effort on the part of FCC to address the regulatory The questions and problems raised by the confluence and interdependence of communications and data processing technologies. First Computer Inquiry (Computer I) (28 FCC 2d 267 (1971)) initiated in 1966 and concluded in early 1971 sought information regarding actual and potential computer uses of communications facilities and services as well as views and recommendations concerning whether a need existed for new or improved common carrier services or for revised rates, regulations and practices of carriers to meet the emerging requirements for the provision of data processing, or other computer services involving the use of communication facilities. Two basic regulatory issues were addressed by FCC in the First Computer Inquiry: (1) whether data processing services should be subject at all to FCC regulation under title II of the Communications Act and (2) whether, under what circumstances and subject to what conditions or safeguards, common carriers should be permitted to engage in data processing. In addressing the first issue, FCC determined that data processing services should not be regulated even though transmission over common carrier communications facilities was involved in linking user terminals to central computers. This "forbearance" from regulation regarding data processing entailed a necessity to distinguish regulated communications services from unregulated data processing services and led to the adoption of a set of definitions to assist in making such determinations. In addressing the issue of common carrier participation in data processing offerings, FCC observed that common carriers, "as part of the natural evolution of the developing communications art, were rapidly becoming equipped to enter into the data processing field, if not by design, by virtue of the fact that computers used for conventional communications services could readily be programed to perform data processing services. Regarding whether common carriers should be permitted to participate in competitive data processing offerings, the Commission stated that it could not find the necessary social, economic or public policy considerations which would require or even justify an outright prohibition against the furnishing of data processing services by common carriers. Accordingly, the Commission decided to permit common carrier participation in the data processing area under a regulatory scheme embodying various conditions and safeguards in a concept of "maximum separation" of activities which are subject to common carrier regulation (title II of the act) from nonregulated activities involving data processing. Under FCC's maximum separation scheme, common carriers desiring to provide data processing services would be permitted to do so only through separate corporate affiliates using separate books of account, separate officers, separate operating personnel, and separate equipment and facilities devoted exclusively to rendering data processing services. Such conditions, it was felt, would obviate foreseeable abuses, including derogation of carrier communications services to the public, abuses or limitations regarding free competition (because of the carrier's access to customers as a provider of communications services) as well as cross-subsidization and improper pricing. The maximum separation requirement applied to any carrier with annual revenues in excess of $1 million. In addition to permitting the offering of data processing services only through a separate affiliate, FCC in its Computer I Decision provided that: (1) no carrier subject to its proposed rules would be permitted to engage in the sale or promotion of data processing activities on behalf of its data processing affiliate, (2) a data affiliate would be prohibited from using the name of its related common carrier in its promotions and from using in its corporate name any words or symbols contained in the name of its affiliated carrier, and (3) a carrier would be barred from obtaining any data processing service from its data affiliate. The purpose of this last prohibition was to prevent any arbitrary manipulation in the allocation of revenues and expenses between a carrier's regulated and unregulated service offerings, since, among other effects, excessive payments by carriers to data processing affiliates would enable the affiliates to unfairly underprice their competitors in the data processing market. The First Computer Inquiry was a vehicle for identifying and better understanding the problems spawned by the convergence of computer and communications technologies taking place at that time. However, many of its basic assumptions as well as its definitions and distinctions were rendered outmoded by fast-moving technological developments, particularly advances in large-scale integrated circuitry and micro-processor technology which permitted fabrication of mini-computers, micro-computers and other special purpose devices which are capable of duplicating many of the data processing capabilities which were previously available only at centralized locations housing large-scale, generalpurpose computers. "Distributed processing" which allowed computers and "smart" terminals to perform both data processing and communications control functions within the communications network and at the customer's premises revealed the inadequacy of the Computer I definitional structure. The advent of this process compelled a thorough reexamination of the approach used by FCC to distinguish regulated communications services from unregulated data processing services. Moreover, an issue which had been skirted in the First Computer Inquiry; namely, AT&T's ability to participate in competitive data processing offerings in light of the terms of a 1956 antitrust settlement with the Department of Justice could no longer easily be ignored after FCC's 1977 Dataspeed 40/4 decision. The decision included the issue of computer processing applications incorporated into terminal equipment devices and the need to determine whether such equipment should be offered as part of a regulated communications service. The Commission determined that AT&T could offer its Dataspeed 40/4 terminal as part of a tariffed communications service. This determination, however, |