Legislative and Regulatory Actions Needed To Deal With a Changing Domestic Telecommunications Industry

CED-81-136: Published: Sep 24, 1981. Publicly Released: Sep 24, 1981.

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The Federal Communications Commission, supported by the courts, has issued a series of decisions which have allowed competition in the manufacture of telecommunications terminal equipment and in the interstate provisions of telecommunications services. GAO conducted a review to evaluate the Commission's program for regulating domestic telecommunications common carriers in light of the changing industry structure.

Commission monitoring of the still-changing telecommunications industry structure would provide a basis for determining which carriers are dominant and which programs and policies can be applied to these carriers and would enable the Commission to measure its effectiveness in encouraging competition. In implementing the program of price/earnings regulation, the Commission has focused on establishing carriers' rates of return and has paid little attention to carrier investment cost and expenses. Uncertainty exists regarding the Commission's authority to authorize the construction of carrier facilities, particularly when it extends to carrier switching equipment. Allocating costs appropriately among various telecommunications services is a critical aspect in preventing potential cross-subsidy between monopoly and competitive services. The Commission has had limited success in implementing its broad principle that costs should be fully distributed among all services. To develop a long-term costing approach, the Commission needs to revise its Uniform System of Accounts. The Commission has had difficulty in obtaining carriers' cost data from which it can prescribe a lawful tariff. The separate subsidiary approach proposed by the Commision does not go far enough in providing for organizational restructuring and separation conditions, and the Commission has moved too quickly in implementing this approach. The Commission has not resolved questions regarding the methods and procedures needed to set new depreciation rates and the problem of access discrimination.

Matters for Congressional Consideration

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: Congress should amend the Communications Act of 1934 to establish the basic framework necessary to create the existence of nondiscriminatory access conditions.

  2. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: Congress should amend section 205 of the Communications Act to give the Federal Communications Commission (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 and based on the data presented in the hearing, FCC will prescribe a permanent tariff.

  3. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: Congress should clarify the Federal Communications Commission (FCC) facility authorization authority by amending section 214 of the Communications Act of 1934 to explicitly authorize FCC to require carriers to file long-term facilities construction plans in lieu of, or in addition to, such applications and to establish such conditions and reporting requirements as are necessary to assure that such plans are followed.

  4. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: Congress should clarify the Federal Communications Commission (FCC) facility authorization authority by amending section 214 of the Communications Act of 1934 to explicitly authorize FCC to authorize carriers to submit to it for approval applications to construct any new facilities or extensions thereof which are subject to its regulatory jurisdiction.

  5. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: If Congress wishes to endorse the development of competition, it should amend title II of the Communications Act to allow the Federal Communications Commission, upon finding that it is in the public interest, to exempt any carrier from any or all provisions of title II.

  6. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: If Congress wishes to endorse the development of competition, it should amend title I of the Communications Act to direct the Federal Communications Commission to rely on competition and the private sector to the maximum extent possible to achieve the overall goals of the Act.

Recommendations for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission (FCC) should establish within the Common Carrier Bureau an industry analysis section whose analyses should provide a framework for future Commission decisions for regulating dominant and nondominant carriers in light of changing market conditions and would enable FCC to measure the effectiveness of its policies designed to foster and encourage competition.

    Agency Affected: Federal Communications Commission

  2. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission should revise the Uniform System of Accounts to provide a cornerstone for an acceptable long-term costing approach.

    Agency Affected: Federal Communications Commission

  3. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission should 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 measurement and application.

    Agency Affected: Federal Communications Commission

  4. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission should establish a program within the Common Carrier Bureau to improve overall coordination between the Bureau's regulatory activities, including its rate base and expense analysis functions and those of State public utility commissions.

    Agency Affected: Federal Communications Commission

  5. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission (FCC) should increase the scope of the Common Carrier Bureau's audit program to enable it to review, appraise, and report on carriers' operations and activities to support the FCC rate of return/rate base regulatory responsibilities.

    Agency Affected: Federal Communications Commission

  6. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission should reestablish within the Common Carrier Bureau's Economics Division a group with clear responsibility and adequate resources to: (1) develop methods for testing the reasonableness of carrier investment costs and expenses; (2) identify and investigate deviations by carriers from cost standards and recommend corrective action; and (3) monitor rate base components and recommend action in those cases where the amounts appear unreasonable or inappropriate. This group's activities should be fully coordinated with those of other groups within the Bureau that have related functions.

    Agency Affected: Federal Communications Commission

  7. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission should resolve the issues relating to the American Telephone and Telegraph 1978 apparent excess earnings by completing the October 1979 notice of inquiry.

    Agency Affected: Federal Communications Commission

  8. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission should initiate a project with the Common Carrier Bureau to examine dominant carriers' efficiency and productivity. This inquiry should explore possibilities for linking carriers' rates of return to efficiency and productivity gains.

    Agency Affected: Federal Communications Commission

  9. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission (FCC) should initiate a proceeding to explore changes needed to facilitate or otherwise improve the FCC rate-of-return-setting process for dominant carriers including: (1) opportunities for coordinating its rate-of-return determinations with those of State public utility commissions; (2) the possible use of formats for presentations of cost of equity capital; and (3) methods which could be used to adjust carriers' rates of return between formal rate of return proceedings.

    Agency Affected: Federal Communications Commission

  10. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission should coordinate the system of accounts' development with the revision of separations procedures and the restructuring of private line services.

    Agency Affected: Federal Communications Commission

  11. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission should develop, based on the revised system of accounts, a costing approach which aggregates costs of a particular service from the bottom up.

    Agency Affected: Federal Communications Commission

  12. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission should initiate a proceeding to evaluate the feasibility of using generic components in services beyond the private line services currently under consideration.

    Agency Affected: Federal Communications Commission

  13. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission should initiate a project within the Common Carrier Bureau to develop a long-term plan for carrying out the tasks necessary to establish an access charges system in light of the framework described in this report. It should use this plan as a basis for evaluating the need for and desirability of any interim action which it proposes.

    Agency Affected: Federal Communications Commission

  14. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: Before implementing its Computer II decision to deregulate new customer premises equipment and continue regulating embedded customer premises equipment, the Federal Communications Commission should first identify the depreciation reserve deficiencies by plant account, develop a method for their recovery, and establish a framework for deregulating all customer premises equipment.

    Agency Affected: Federal Communications Commission

  15. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: Before prescribing depreciation rates based on changes adopted in Dockets 20188 and 79-105, the Federal Communications Commission should: (1) develop specific procedures for evaluating and monitoring a carrier's depreciation rates based on equal life group depreciation; (2) require depreciation reserves by vintage for a carrier implementing equal life group depreciation; (3) identify the requirement units and methods for depreciating the outside plant of station connections; and (4) audit, through random selection, the carrier's division of the station connections account.

    Agency Affected: Federal Communications Commission

  16. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission should initiate a proceeding to evaluate the need for structural separation of a dominant carrier's interexchange facilities and activities from its purely interexchange operations.

    Agency Affected: Federal Communications Commission

  17. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: In place of a single conglomerate subsidiary for all of the dominant carrier's deregulated enhanced service and customer premises equipment offerings, the Federal Communications Commission should, in the context of its intended review of subsidiary capitalization plans, include an assessment of requiring the dominant firm to establish multiple, fully separated subsidiaries.

    Agency Affected: Federal Communications Commission

  18. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: In using the separate subsidiary device for enhanced services and customer premises equipment, the Federal Communications Commission should adopt an approach which more closely approximates true maximum separation. This implies separate directors, officers, and operating personnel; separate books of accounts, records, and reports; separate physical facilities and space; appropriate restrictions on the rotation of officers and operating personnel among the corporate entities; and separate subsidiaries performing for themselves the bulk of basic operating functions such as marketing, advertising, applied research and development, procurement, manufacturing, and administrative services provided by the parent to the separate subsidiaries on a fully cost compensatory, fully auditable basis.

    Agency Affected: Federal Communications Commission

  19. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: As part of implementing any deregulatory scheme for enhanced services and customer premises equipment offerings based on the use of fully separated subsidiaries, the Federal Communications Commission should give full and careful consideration to the potential benefits to be gained through a requirement of outside equity participation in separate subsidiaries and prescribe appropriate capitalization and financing arrangements for the separate subsidiaries.

    Agency Affected: Federal Communications Commission

  20. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: As part of implementing any deregulatory scheme for enhanced service and customer premises equipment offerings based on the use of fully separated subsidiaries, the Federal Communications Commission should assemble, organize, and train a staff for the essential tasks of monitoring, auditing, and enforcing compliance with its structural separation requirements and associated conditions.

    Agency Affected: Federal Communications Commission

  21. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: As a part of implementing any deregulatory scheme for enhanced service and customer premises equipment offerings based on the use of fully separated subsidiaries, the Federal Communications Commission should resolve outstanding costing, accounting, and depreciation issues which must be implemented prior to establishing separate subsidiaries.

    Agency Affected: Federal Communications Commission

  22. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Federal Communications Commission (FCC) should update the uniform system of accounts 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 uniform system of accounts 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.

    Agency Affected: Federal Communications Commission

  23. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: To produce a uniform system of accounts, the Federal Communications Commission should develop a timetable establishing a swift but realistic schedule for completing the project.

    Agency Affected: Federal Communications Commission

  24. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: To produce a revised uniform system of accounts, the Federal Communications Commission should appoint an individual, with demonstrated leadership ability and sufficient knowledge of the project, to head the group and give this person clear authority over the group.

    Agency Affected: Federal Communications Commission

  25. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: To produce a uniform system of accounts, the Federal Communications Commission should establish a group consisting of accountants, engineers, economists, and attorneys to work primarily on the uniform system of accounts revision.

    Agency Affected: Federal Communications Commission

 

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