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                                               FEDERAL COMMUNICATIONS COMMISSION
                     Washington, D.C.  20554


                        September 3, 1986


                                 In reply refer to:RAO LETTER 1
                                                               
Responsible Accounting Officer
FCC Form M
                                                               
                                                               
Dear Sir:

     On May 27, 1986, the Supreme Court of the United States decided that the Federal
Communications Commission could not preempt state regulation over depreciation of dual
jurisdiction property for intrastate ratemaking purposes (Louisiana Public Service Com'n v. FCC,
106 S. Ct. 1890 (1986) (LPSC)). This decision has prompted a number of inquiries on the proper
accounting treatment for depreciation under Parts 31 and 33 when state-mandated depreciation
practices differ from those prescribed by the FCC. Because of the volume of these inquiries, we
believe some formal clarification is necessary, both with respect to our reading of the decision and
our handling of the depreciation differences that may result.

     In its decision, the Supreme Court noted that conflicting arguments had been advanced
regarding the authority conferred on the Commission by Section 220 of the Communications Act
of 1934, as amended. However, the Supreme Court found it unnecessary to "define fully the
scope" of Section 220 "in order to decide this case." LPSC, supra, at 1903. Rather, the Court held
"only that Section 220 does not operate to pre-empt state depreciation regulation for intrastate
ratemaking purposes."  (Emphasis added and footnote omitted). Id.  Since the Court chose not to
define the scope of Section 220 for accounting purposes, we do not read the decision as affecting
this Commission's ability to prescribe and administer the accounting systems to be maintained by
carriers subject to its jurisdiction. We view that ability as extending to the computation of
depreciation for accounting purposes. Thus, the core books maintained by the carriers' should
reflect the depreciation rates prescribed by the FCC with various state jurisdictional depreciation
maintained on a "side record" basis. This is necessary to enable the FCC to oversee the rates
charged by carriers for interstate services. For example, were the carriers' core books to reflect
state prescribed depreciation rates, the FCC would be greatly hindered in performing the
separations analysis necessary to evaluate tariffs for interstate services. The interpretation rendered
in this letter is in no way intended to intrude on the states' legitimate role in evaluating rates for
intrastate services.

     When the new Part 32 Uniform System of Accounts becomes operational, differences
attributable to state treatment of items like depreciation will be reflected in accounts for
jurisdictional differences. Parts 31 and 33, which will remain in effect through December 31,
1987, provide no jurisdictional accounts. In the interim, we are requiring carriers to report these
differences as footnote disclosures in Form M, as shown in the attached example, and attributed
to the specific state. For carriers affected by state represcriptions, this disclosure would begin with
calendar year 1986.

     Your cooperation in this matter will be appreciated.

                                        Sincerely,
          
                                                                                Albert Halprin
                                                                                Chief, Common Carrier Bureau

                     EXAMPLE OF FOOTNOTE DISCLOSURE OF JURISDICTIONAL 
                                 DEPRECIATION DIFFERENCES

A. Underlying Assumptions: Cost of Asset - $100,000
                                        Depreciation Method - Straight Line for both FCC and State purposes
                                        Depreciable Life - 5 year life for FCC
                                                                10 year life for State
                                        Separation between interstate and intrastate business is 30% and 70%, respectively

          Subject to Separations             Footnoted                     Footnoted                
             Assets                               Jurisdictional            
    Total        Interstate        Intrastate     Difference     Depreciation Expense   Difference  
  Cost       Reserve   NBV    Cost   Reserve  NBV          Cost    Reserve   NBV       Assets                   Total     Interstate     Intrastate     Exp.                        
                 (Under FCC Rules) 
100,000  20000 80000     30000   6000  24000    70000    14000   56000      7000          20000     6000 14000     <7000>
100,000  40000 60000     30000 12000  18000     70000    28000   42000     14000          20000     6000 14000     <7000>
100,000  60000 40000     30000 18000  12000     70000    42000   28000     21000          20000     6000 14000     <7000>
100,000  80000 20000     30000 24000   6000     70000    56000   14000     28000          20000     6000 14000     <7000>
100,000 100000     0     30000 30000    0       70000    70000      0 35000          20000     6000 14000     <7000>
                                        28000                            7000   
                                        21000                            7000
                                        14000                            7000
                                        7000                        7000
                                            0                            7000   
B. Footnote Disclosure Year 2

    The state-mandated depreciation practices of several states differ from 
those prescribed by the FCC . If these jurisdictional differences were aggregated,
the financial effect of this jurisdictional ratemaking variation would increase 
intrastate assets for the current year by $7,000 and there would be a corresponding
$7,000 decrease in intrastate operating expenses. The cumulative impact of this
jurisdictional ratemaking practice has been a $14,000 increase in assets as shown 
below by state.

        Previous         Current Year
        Years            Total
State 1 ****        ****
State 2 ****        ****
State 3 ****        ****