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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** 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 **** ****