a change from top-down costing to an approach where costs of a particular service are aggregated from the bottom up. We would also anticipate that the long-term approach would incorporate the private line restructuring now under consideration. Certainly, we would expect the revised USOA to incorporate accounts which would reflect and capture the costs of the generic private line components.

The overall goal needs to be a methodology which provides clear, unambiguous allocation of costs among service categories. This methodology should provide a benchmark for detecting and measuring cross-subsidy. As competitive conditions warrant, pricing deviations should be allowed.

Other noncost approaches should also be vigorously pursued which can compliment the methodology's effectiveness in preventing cross-subsidy. In this regard, we favor the relaxation of resale and sharing restrictions on all services. This should allow arbitrage of a carrier's services if it attempts to cross-subsidize one service with another. We also believe FCC needs to evaluate the feasibility of using generic components in services beyond the private line services currently under consideration.

We also believe that an expansion of FCC's authority to allow it to prescribe interim tariffs would be an important compliment to the development of a viable allocation methodology and the use of noncost approaches. Interim prescription would go a long way toward increasing a carrier's incentives to supply cost data to clearly support its rates. Amending the Communications Act to provide such authority would also bring the tariff provisions into line with the reality of developing competition and the potential for cross-subsidy.

RECOMMENDATION TO THE CONGRESS

We recommend that the Congress amend section 205 of the Communications Act to give FCC the authority to prescribe an interim tariff based on the cost data which a carrier submits in support of its tariff. The interim tariff would go into effect at the end of any suspension period FCC might designate. The interim tariff should have a limited lifespan. During this time FCC will hold a hearing and at the hearing's conclusion FCC, based on the data presented in the hearing, will prescribe a permanent tariff.

RECOMMENDATIONS TO THE CHAIRMAN, FCC

We recommend that the Commission develop a clear, unambiguous cost allocation methodology in the near term by

--Revising the Interim Cost Manual to (1) expand the
number of service categories and (2) develop an
independent set of allocation factors which would
allow minimal carrier discretion in their measure-
ment and application.

We also recommend that over time the Commission

--Revise the Uniform System of Accounts to provide a cornerstone for an acceptable long-term costing approach.

--Coordinate the system of accounts' development with revision of separations procedures and the restructuring of private line services.

a

--Develop, based on the revised system of accounts, costing approach which aggregates costs of a particular service from the bottom up.

--Initiate a proceeding to evaluate the feasibility of using generic components in services beyond the private line services currently under consideration.

CHAPTER 5

FCC HAS MADE LITTLE PROGRESS IN REVISING

THE UNIFORM SYSTEM OF ACCOUNTS

The Uniform System of Accounts is a fundamental source of regulatory information. Adopted by FCC in 1935, subsequent rapid technological change and the subsequent introduction of competition have brought about the need for its revision. The system of accounts cannot provide the cost of service data FCC needs to address the problem of cross-subsidy by a carrier operating in both monopoly and competitive markets. FCC has since 1978 been attempting to revise the system but without success. Management problems we identified in a November 1979 report 1/ are still uncorrected and FCC has not decided on the overall direction or structure for the system. We are making a series of recommendations to resolve the management problems in order to have this project receive the priority it deserves. WHY REVISE THE UNIFORM SYSTEM OF ACCOUNTS?

The Uniform System of Accounts FCC requires for domestic common carriers provides a means for classifying, recording, interpreting, and reporting a carrier's financial facts. such, it is a fundamental source of information for the regulator. FCC adopted the current USOA in 1935 when its basic concern was the overall financial results of the regulated firm. The USOA is broad and provides data for reviewing overall investment and expense levels, property valuation and depreciation rates. The USOA has also provided a basis for review of carriers' overall revenue requirements, including the determination of a fair rate of return computed on an appropriate rate base.

Two events have served as a catalyst for revising the existing USOA. First, technological change has created new means of providing telecommunications services which are not reflected in the antiquated accounts. For example, current plant accounts do not reflect the use of microwave and satellite facilities for interexchange communications. This same technological change has created a variety of new services not envisioned when the USOA was established. Thus, a revision of the USOA is needed to reflect current technologies and business functions which were not contemplated when the original USOA was formulated. Second, in response to technological change competitive entry has been allowed. As noted in the previous chapter, this has created an incentive for cross-subsidy. Thus, the Commission has been concerned with the costs (and rates) for individual services. Because it focuses on companywide results the USOA has proved to be little, if any, help in resolving issues regarding the

1/"Outlook Dim For Revised Accounting System Needed For Changing Telephone Industry," (FGMSD-80-9, Nov. 13, 1979).

appropriate rates for various services. To obtain service level cost data several special studies must be performed. 1/

The use of the special studies raised the potential for inaccurate distribution of costs and, thus, raised the potential for cross-subsidy. FCC has recognized this problem for some time noting in Docket 19129

"Without belaboring the problems relating to the
accounting system or enumerating all its deficiencies,
we need simply say that we recognize the inadequacies
of the uniform system of accounts for our regulatory
purposes. In recent decisions involving AT&T inter-
state services, *** we were hampered in our ability
to determine the lawfulness of Bell's rates and rate
structures by the lack of information as to invest-
ment, expenses and revenues associated with specific
services and sub-services. Although AT&T conducted
special studies for this purpose, even these,
found, were inadequate."

Subsequently, in June 1978 FCC began a proceeding to revise the USOA.

WHAT FCC SET OUT TO DO

In June 1978, the Commission adopted a Notice of Proposed Rulemaking entitled "Revision of Accounts and Financial Reporting for Telephone Companies." The notice outlined a proposal for extensively revising the USOA, the data collection, and recordkeeping and reporting requirements for telephone companies. Commission set forth several objectives for a new system:

--"It will form the basis for financial reports, includ-
ing both balance sheet and income statement reporting.
--"It will serve as a data base and a foundation for
managerial decisionmaking and internal management re-
ports by the carriers."

--"It will provide sufficiently detailed disaggregated
cost and revenue information for derivation of costs
and revenues of individual services and rate elements,
for pricing decisions and other managerial decision-
making by the carriers.

--"It similarily will provide detailed disaggregated

cost and revenue information for derivation of costs

The

1/To obtain the unit costs of plant used in a particular service, two special studies are done. The first identifies the characteristics of telecommunications plant associated with the service. The second determines the cost of identified plant

characteristics.

and revenues of individual services and rate elements
for rate review and continuing surveillance purposes
of this Commission (and other regulatory bodies which
adopt the revisions) and provide a basis for rate
prescriptions, where appropriate.

--"It will facilitate the breakdown of costs between
interstate and intrastate jurisdictions ('jurisdic-
tional separations').

--"It will permit analysis of facility and plant util-
ization, including studies of the causes for each
category of expenditure and review of service quality
and service efficiency.

--"It will be structured so as to allow for regulatory
and independent auditing and tracing of questioned
entries."

FCC proposed a detailed system of accounts for revenues, plant, and expenses. It also proposed to capture within the USOA in Primary Allocation Records information which could be used to allocate costs which could not be directly attributed within the system of accounts. The revision was intended to support the FDC-7 cost methodology information needs and, in the process, improve on AT&T's August Manual which relied on special studies. The revised USOA was expected to be useful in supporting other costing methodologies such as FDC-1. It was also intended to provide the information needed to facilitate separations procedures discussed in chapter 4.

The Commission received a series of comments from telecommunications common carriers, State public utility commissions, and other interested individuals. After analyzing the comments, the Commission, in August 1979, issued a Supplemental Notice of Proposed Rulemaking to further clarify issues and request additional comments on the proposed system. The Commission has not issued any additional notices.

MANAGEMENT WEAKNESSES IN FCC's

ATTEMPT AT USOA REVISION

In November 1979 we reported on the status of the USOA revisons. We identified a series of management problems which indicated that the revision might encounter difficulties in its implementation and use. To address these problems we recommended, among other things, that the Commission Chairman appoint an official to head the project, define the needs of intended users of the revised system, and coordinate the revision with other proceedings, including the development of cost allocation

methodologies.

In its formal reply to our report, the Commission stated that our report was critical, but very constructive. Therefore,