Opinion ID: 2362262
Heading Depth: 3
Heading Rank: 2

Heading: Compliance with Commission Cost Criteria

Text: In its continuing efforts to obtain the detailed cost information it perceived to be essential to a proper evaluation of the company's rate-increase requests, the commission, in docket No. 1475, spelled out four explicit criteria for an acceptable comprehensive fully allocated cost study: First, the study should be comprehensive in that it analyzes all the costs incurred by the company that would be reflected in its aggregate revenue requirement. Second, the study should be fully allocated in that the overhead costs now reflected in an EDA's common cost category would be distributed among various specific services. Third, the study should identify all costs associated with each and every particular service contained in the company's tariffs. And fourth, while the exact format is left to the company, the study should be organized in a logical and comprehensible manner so that it can be understood by anyone willing to devote a reasonable amount of time and effort   . Re New England Telephone & Telegraph Co., 39 P.U.R.4th at 535-36. The commission also specified five conditions under which a change in rates might be allowed despite NET's failure to present a cost study meeting the above specifications. The exceptions applicable to this case will be discussed infra. The specific cost studies presented by NET in the case at bar consisted of (1) an embedded direct analysis (EDA), (2) a so-called fully allocated cost study (FACS), (3) five specialized studies of specific service areas (multielement service, extension station-line service, semipublic coin-telephone service installation differential, semipublic coin-telephone service differential over single-line measured business service, and local coin-telephone service), and (4) numerous incremental individual cost analyses in the general-service categories of private-line and vertical services. For purposes of our review, the studies concerning the vertical-services category can be disregarded as these services fall on the competitive side of the company's offerings. NET describes its embedded direct analysis as a study that reviews historical revenue-cost relationships for the provision of telephone services in this state based upon the company books and records. According to Brian R. Lane, NET division manager for the pricing research division, the EDA grouped individual services into the following broad service categories: exchange, toll, vertical, private line, and other. [2] An additional category denominated common was also included to indicate additional revenue needs resulting from costs common to all service categories but not caused by or directly attributable to specific services. Such costs include legal, treasury, and executive expenses. For all but the common category, the analysis showed the costs and revenues associated with each service category for the year 1979. The broad service categories of exchange and toll were subdivided to provide somewhat more detailed information. The exchange category was disaggregated to reflect revenues and costs according to the general service areas of residence, business, coin, and local directory assistance. The toll category was divided between intrastate and interstate elements of service, and the intrastate element was then further divided to list revenues and costs for the provision of direct-distance-dialed, operator-handled, WATS, and toll directory-assistance services. In total, the 1979 EDA reflected eighteen service lines and the company's aggregate common costs. The study that NET characterized as a fully allocated cost study was derived directly from its 1979 EDA. As noted by Mr. Lane, the only distinction between the EDA and the FACS is that common costs that were listed as a separate category in the EDA were distributed in the FACS among the five broad service categories based on the percentage of investment in each category in relation to the company's total investment in its services. In chart form, the FACS may be illustrated in the following manner: EXCHANGE TOLL VERTICAL PRIVATE-LINE OTHER Usage Interstate Residence Interstate Network access Intrastate Business Intrastate / / Residence Direct-distance-dialed / Business Operator-handled / / Coin WATS / / Local directory- Toll directory- assistance assistance Judging the evidence in the light most favorable to the company, the commission concluded that the cost information supplied by NET in its EDA and FACS failed to conform to the four criteria expressed in docket No. 1475, specifically criteria 2 and 3. Citing the studies' deficiencies, the commission stated: While Chart B [the FACS] does distribute the overhead costs otherwise reflected in the EDA's Common Cost category, it distributes those costs only among the EDA's broad categories of service rather than `among various specific services.' And with regard to the third criterion that `the study should identify all costs associated with each and every particular service contained in the Company's tariffs,' both Charts A [the EDA] and B are patently inadequate in that they analyze only broad categories of service. The commission emphasized that in contrast to the broad-category format of these studies, NET's tariff listed rates for hundreds and perhaps thousands of specific service and product lines for which it sought the commission's approval. Therefore, NET's so-called FACS was determined to be unacceptable because it was not possible to identify which portion of the cost for each broad category is associated with each and every particular service contained within the category. NET argues that its EDA and FACS satisfy the requirements set forth in docket No. 1475 in that the assignment of costs according to the level of services to which these studies were disaggregated is all that was mandated. It contends that the commission misinterpreted the standards articulated in its previous decision and order and applied an entirely new standard in these proceedings calling for a fully allocated cost study broken down for each and every one of the hundreds of products and services in the Company's tariff. Such an unanticipated departure from the regulatory standards operative at the time of the docket No. 1560 hearings, NET asserts, not only constitutes arbitrary and capricious agency action but also runs counter to due-process norms governing rulemaking by adjudication. Although the zeal of the company's counsel is commendable, we submit that it is NET that has misinterpreted the meaning of the cost specifications delineated in docket No. 1475. NET's interpretation requires the incorporation of language limiting the focus of these standards to broad service categories or general-customer classes of services offered by the company. A reading of the docket No. 1475 criteria as well as statements contained in prior commission decisions evinces no support for the engraftment of such textual limitations. In its decision in docket No. 1024, for instance, the commission referred to revenue and cost data of the company's various services, listing as examples its centrex, supplemental-equipment, key-telephone, private-line, mobile-telephone, residence-connection, and secretarial-line services. See Re New England Telephone & Telegraph Co., 39 P.U.R.4th at 529-30. These examples certainly transcend the broad service categories contained in the FACS. Further, in the decision in docket No. 1092, Re New England Telephone & Telegraph Co., 99 P.U.R.3d at 236, the commission spoke in terms of detailed cost information for individual services.  (Emphasis added.) It is our opinion that the reasonable import of the commission's statement that a proper comprehensive cost study `identify all costs associated with each and every particular service contained in the company's tariffs,' is that such cost information must be disaggregated to that level which corresponds with the level to which NET's proposed rates are disaggregated. An example will perhaps best highlight the difficulties with the construction NET advances and the reasons we uphold the commission's determination that the company has not satisfied its requirement. The cost-revenue relationships provided in the FACS for the private-line-service category have been disaggregated only to the next major subdivision within that category, the interstate and intrastate aspects of the service. In the tariff filing, however, private-line-service is classified by channel series, which in turn are further classified by specific channel types. [3] Four such series are listed  series 1000 channels, series 2000 channels, services 3000 channels, and series 6000 channels. Numerous different channel types were also listed. In striking contrast to its FACS, the various rates NET proposed in its tariff for the private-line-service category are disaggregated according to both channel series and type.