Competitive Implications of Forbearance Petitions (Cost Assignment and ARMIS) and the Special Access Debate

Presentation to NARUC Staff Subcommittee on Accounting and Finance

October 14, 2008

Ron Hilyer, Director – Regulatory Accounting, AT&T

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Reality

There are no negative competitive implications from the Forbearance Petitions. In fact, cost assignments and ARMIS reporting have been totally unrelated to special access pricing for many years – since the FCC transitioned from cost based rate-of-return regulation to price caps.

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Overview

Cost Assignment Forbearance Relief Granted Requirements/Conditions Remaining FCC Rationale for Forbearance Issues with Cost Assignment ARMIS Data

ARMIS Forbearance Relief Granted Requirements/Conditions Remaining FCC Rationale for Forbearance

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Cost Assignment – Relief Granted

AT&T Petition granted April 24, 2008; same relief granted to Verizon and Qwest on September 6, 2008

Forbearance from Part 32.23 (Non-regulated activities) Part 32.27 (Transactions with affiliates) Part 64, Subpart I (Allocation of Costs) Part 36 (Jurisdictional Separations Procedures) Part 69, Subparts D and E (Cost Apportionment)

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Cost Assignment – Relief Granted(continued) Forbearance from

ARMIS 43-04, Access Report FCC Form 492, Rate of Return Monitoring

Report FCC Form 495A, Reg/Non-reg Forecast

Report FCC Form 495B, Reg/Non-reg Actual Usage

Report

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Cost Assignment – Related Accounting Requirements/Conditions Remaining

ARMIS 43-01, Annual Summary Report* ARMIS 43-02, USOA Report ARMIS 43-03, Joint Cost Report* Part 32, USOA (except for 32.23 and 32.27) Upon request by the FCC, useable information must be

provided on a timely basis Section 272(e)(3) Section 254(k) and Annual Certification Approval of a Compliance Plan

* except for data generated by application of the Cost Assignment Rules

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Cost Assignment – FCC Rationale for Granting Forbearance Enforcement of the regulations not necessary to

ensure that charges and practices are just, reasonable, or not unjustly or unreasonably discriminatory in a price cap regulation environment where prices are not set based on costs

Consumers are protected from unjust and unreasonable rates through price regulation and competition

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Cost Assignment – FCC Rationale for Granting Forbearance (continued)

Costs incurred to comply with the Cost Assignment Rules outweigh the benefits. These costs likely distort the market for telecommunications services by diverting resources that would otherwise be directed to “positive activities that generate consumer benefit”

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Cost Assignment – Issues with ARMIS Data

Jurisdictional and Part 69 element specific cost assignment results are not reliable and thus couldn’t be used for pricing decisions anyway

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Cost Assignment – Issues with ARMIS Data – continued

Regulatory bodies have recognized that cost assignment rules in place did not produce meaningful and reliable results FCC: separations rules were “outdated regulatory mechanisms

that are out of step with today’s rapidly-evolving telecommunications marketplace.” (Separations Freeze Order, May 2001)

State members of the Separations Joint Board: “concern that then-existing separations process was cumbersome, pretended to accuracy it could not achieve, and was fundamentally disconnected from pricing decisions.” (Glide Path Paper, December 2001)

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Cost Assignment – Issues with ARMIS Data – continued

The Separations Freeze implemented by the FCC in 2001 coupled with the evolving internet and broadband technologies even further deteriorated the reliability of the data especially for service-specific ratemaking purposes

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Cost Assignment – Issues with ARMIS Data – continued

Under the separations freeze, most revenues were based on current period actual results and not impacted by allocations. However, costs were based on arbitrary allocations of total book costs using allocation factors that were several years old and based on the way carriers operated in the late 1990s. Thus, the results reflected a mis-match of revenues and costs

The impact of this mismatch is particularly apparent in special access because of the significant growth in special access traffic driven by the rapidly increasing use of the internet and broadband technologies

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Total BOC Access Lines and Revenue Trends (In Millions)

  1999 2007 Cumulative % Growth

Special Access Lines 48.8 270.4 453.9%

Special Access Revenue

$7,119 $17,123 140.5%

Switched Access Lines 164.6 110.1 -33.1%

Common Line And Traffic-Sensitive

Revenue

$18,238 $12,111 -33.6%

Source: ARMIS 43-08, Table III for Access Lines. ARMIS 43-01 for Revenue.

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Source of underlying data is ARMIS 43-01 report, rows 1090, 1650, 1660 and 1690, columns (s) and (f).

Total BOC IS-SA Revenue as a % of Total STS to IS-SA Plant In Service as a % of Total STS

0%

5%

10%

15%

20%

25%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% of

STS

Revenues COE Transmission Cable and Wire Facilites Total Plant In Service

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Source of underlying data is ARMIS 43-04.

Total BOC IS-SA Revenues as a % of Total STS Compared to IS-SA Expenses as a % of Total STS

0%

5%

10%

15%

20%

25%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% o

f Tot

al S

TS

Revenues Expenses

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ARMIS – Relief Granted

AT&T Petition granted September 6, 2008; same relief granted to all carriers

Forbearance from ARMIS 43-05, Service Quality Report

Installation & Repair Intervals Common truck blockage reports Total Switch Downtime Occurrences of 2 minutes or more downtime Customer Service Quality complaints

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ARMIS – Relief Granted(continued) Forbearance from

ARMIS 43-06, Customer Satisfaction Report Results of ILEC customer satisfaction surveys

ARMIS 43-07, Infrastructure Report Number of local switches Length of loop and transport facilities by cable type

(e.g. sheath kilometers of copper cable) ARMIS 43-08, Operating Data Report

Outside plant statistics (e.g. kilometers of aerial cable) Access lines in service by state Call volumes by state

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ARMIS – Remaining Requirements/Conditions Carriers will continue to file ARMIS 43-05 and 43-06

for 24 months Carriers will continue to maintain the ARMIS 43-07

and 43-08 data for 24 months No forbearance granted for business switched

access lines and total switched access lines reported in ARMIS 43-08

NPRM seeking comments on whether and how data on an industry-wide basis should be collected

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ARMIS – FCC Rationale for Granting Forbearance Reports not necessary to ensure carriers’ rates, terms, and

conditions were just and reasonable, or not unjustly or unreasonably discriminatory

“Reports were adopted to monitor the “theoretical concern” that price cap carriers might reduce service quality or network investment to increase short-term profits, rather than being designed to address the rates, terms, and conditions under which carriers offered their services”. That was nearly 20 years ago

There is no federal need for the data in these reports (except for business and total switched access lines)

Partial and uneven data collection limit usefulness as a consumer protection tool

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Key Takeaways

Cost assignment data no longer relevant in a price cap environment

Cost assignment data was never intended to be used for service-specific ratemaking

Cost assignment data no longer reliable due to evolving technology and separations freeze

ARMIS forbearance has no immediate impact due to commitment/condition to file or maintain data in ARMIS 43-05, 43-06, 43-07, and 43-08 for 24 months