December 17, 1999

PRESS STATEMENT OF

**COMMISSIONER FURCHTGOTT-ROTH**

*Re*: *1998 Biennial Regulatory Review -- Review of Depreciation
Requirements for Incumbent Local Exchange Carriers, United States
Telephone Association's Petition for Forbearance from Depreciation
Regulation of Price Cap Local Exchange Carriers*, Report and Order in CC
Docket 98-137, Memorandum Opinion and Order in ASD 98-91.

I find it encouraging that the Commission has streamlined some of the
costly and burdensome depreciation prescription requirements that are
currently imposed on the large incumbent local exchange carriers. I
would have gone a good deal further, however. Because I believe that the
Commission's depreciation requirements no longer serve a useful purpose,
and because I believe that the requirements of section 10 have been
satisfied, I would have granted USTA's petition for regulatory
forbearance.

***Background.*** Depreciation expenses were at one time a significant
part of the regulatory equation. Under rate-of-return regulation, which
the Commission abandoned for large carriers in 1990, a carrier's
interexchange access prices were calculated based on its costs,
including its depreciation expenses. Although I certainly do not endorse
rate-of-return price regulation, I accept the proposition that if an
agency employs that approach, it needs to monitor the costs of the
companies it regulates.

The Commission no longer sets prices for large local exchange carriers'
services based on costs. Beginning in 1990, it adopted the fundamentally
different price-cap methodology, which directly governs a carrier's
access charges, and the carrier retains whatever profit it is able to
make. From 1990-1997, the Commission took something of a hybrid approach
to rate regulation, since carriers were required to "share" all or some
portion of their earnings over a specified rate of return. In addition,
the Commission's methodology included a "low-end adjustment" mechanism,
which guaranteed that a local exchange carrier would not be forced to
charge unreasonably low prices. Again, although I do not endorse either
the "sharing" or "low-end adjustment" mechanisms --indeed, they are
nonsensical from an economic standpoint, since they both limit the
efficiency gains of price-cap regulation -- I understand that
depreciation expenses were relevant to this hybrid regulatory approach.

***The Low-End Adjustment Does Not Support the Retention of the
Depreciation Requirements.*** In 1997, however, the Commission
eliminated the "sharing" mechanism altogether, finding that it blunted
the efficiency incentives of price-cap regulation. At this point, with
respect to rate regulation, carriers' depreciation expenses continued to
be relevant only to the "low-end adjustment" mechanism. But I do not
think that the low-end adjustment is an essential component of price-cap
regulation, and I would support eliminating it entirely. Without the
low-end adjustment, there would no longer be any legitimate reason for
continuing to regulate incumbent carriers' depreciation expenses.

The Commission has traditionally reasoned that the "low-end adjustment"
is necessary to avoid unconstitutional takings problems. I do not think
this theory is a sufficient basis for retaining the low-end adjustment,
particularly since it means retaining the Commission's burdensome and
costly depreciation requirements. To prevail on such a claim, carriers
would have to make the very difficult showing that the Commission's
price-cap requirements had threatened their "financial integrity" or
"otherwise impeded\[d\] their ability to attract capital," *Illinois
Bell Tel. Co. v. FCC*, 988 F.2d 1254, 1263 (1993). In any event, the
carriers themselves have indicated that they are ready to give up the
low-end adjustment as part of a regulatory adaptation to increased
competition. And if the Commission thinks it necessary to guard against
the possibility of a regulatory taking, I think there are alternatives
to the low-end adjustment that would not require incumbent carriers to
continue to comply with its depreciation regulations.

***The Commission's Other Justifications for its Depreciation
Requirements Do Not Withstand Scrutiny.*** The Commission also justifies
its refusal to forbear from depreciation regulation on the ground that,
if carriers were allowed to set their own depreciation expenses,
incumbent carriers might request exogenous treatment of past reserve
deficiencies, or make above-cap filings based on past reserve
deficiencies. In the first place, I think it extremely unlikely that
incumbent carriers could succeed on either of these theories. The
Commission has consistently refused to permit carriers to treat changes
in depreciation expenses as exogenous costs, and there is no basis for
thinking that policy is unsound. Nor is there any reason to think that
carriers could make the showing that they are entitled to the
"extraordinary remedy" of an above-cap filing.

More important, however, I do not think that the possibility that, if
the depreciation requirements were lifted, carriers might take positions
adverse to the Commission is any basis for declining to forbear from
depreciation regulation. What the Commission seems to be saying is that,
if lifting its regulations would somehow enable carriers to challenge
the effects that those requirements have had, it must continue to impose
those requirements -- whether or not the regulations continue to serve
any other, useful purpose. This reasoning is quite simply indefensible.
An administrative agency has a fundamental obligation to engage in
reasoned decisionmaking, which in turn means that the agency must be
prepared to explain and defend its regulations. If carriers can
legitimately claim that the Commission's past requirements would support
a low-end adjustment or an above-cap filing, it is in the public
interest for the Commission fairly to address those claims. It is most
certainly *not* in the public interest for the Commission to continue to
impose meaningless requirements on incumbent carriers simply because it
is afraid it might have to defend those regulations.

Nor do I believe the other reasons the Commission has raised for
refusing to forbear from its depreciation regulation withstand scrutiny.
The Commission contends that State commissions have used
Commission-prescribed depreciation rates in setting prices for
interconnection and unbundled network elements, and forbearance would
deprive State commissions of this information. I question whether it is
appropriate to continue to require incumbent carriers to comply with
burdensome federal depreciation regulations simply to provide State
commissions with information that they could themselves gather from many
other sources. Nor do I agree with the Commission that its requirements
are necessary for it to determine which depreciation inputs it should
use in the universal service high-cost support model. To the extent such
inputs are needed for what has always been described as a
forward-looking model, the Commission could easily come up with many
simpler ways of setting the values of those inputs.

***Conclusion.*** In my opinion, there is no valid reason for continuing
to require the large incumbent local exchange carriers to comply with
the Commission's burdensome and anachronistic depreciation regulations.
In light of this conclusion, I believe that USTA's forbearance petition
should have been granted, and I do not believe the Commission possesses
the authority to require carriers to comply with the waiver conditions
that it has devised.