Nonregulated Cost Allocations & Affiliate Transactions
Course Outline Overview of Part 64 Rules Cost allocation manuals Review of a sample CAM Affiliate transaction pricing rules Annual cost allocations Cost allocation examples Be thinking of questions 2
Nonregulated Activities Types of nonregulated activities: Sale of customer premise equipment (CPE) Installation and maintenance of inside wire CATV Long distance Internet Cellular 3
The Goal of Part 64 Regulated services may not subsidize nonregulated services Services included in the definition of universal service may not bear more than a reasonable share of joint and common costs of the facilities used to provide those services. 4
FCC Rules Part 64 Cost Allocations
FCC Rules Part 32 Accounting Rate Base = $10,000,000 Expenses & Taxes = $5,000,000 Part 64 Cost Allocations Nonregulated Rate Base = $500,000 E&T = $200,000 Regulated Rate Base = $9,500,000 E&T = $4,800,000 Part 36 Separations Intrastate Interstate Part 69 Access Charges Part 69 Access Charges Access Elements Non-Access Services Access Elements Non-Access Services 6
FCC Rules Part 64 Part 64 is a compilation of Miscellaneous Rules Relating to Common Carriers 64.901 through 64.905 cover some very important issues 64.901 Allocation of Costs 64.902 Transactions with Affiliates 64.903 Cost Allocation Manuals 64.904 Independent Audits 64.905 Annual Certification 7
Part 64 Cost Allocations There are 3 different types of costs identified in Part 64 Regulated Costs costs solely associated with regulated activities Nonregulated Costs costs solely associated with nonregulated activities Common Costs costs that are associated with regulated and nonregulated activities Specific Cost Allocation Manual (CAM) requirements 8
Part 64 Cost Allocations Costs are to be directly assigned to regulated and nonregulated operations whenever possible Common costs are those that cannot be directly assigned to either regulated or nonregulated Direct analysis of costs Cost causative linkage to another cost category General allocator of directly assigned or attributed to regulated and nonregulated 9
Cost Allocation Manuals
Part 64 Cost Allocation Manuals Description of each of the nonregulated activities Description of incidental activities A chart showing corporate affiliates Statement identifying each affiliate that engages in transactions with carrier Cost apportionment table Description of the time reporting procedures 11
Cost Allocation Manual Sample Telephone Company Trial Balance - Cost Allocation Manual Trial Balance Cost Allocation Manual YE 12/31/04 YE 12/31/14 Total Non- Dr/Cr Type 2004 Regulated Regulated Classification Assignmnet Allocation Factor 2110.00 LAND AND GENERAL SUPPORT ASSETS D A 0 2110.10 LAND D A 50,000 48,408 1,592 Common Indirect Assignment Labor Hours 2110.20 BUILDINGS D A 750,000 708,854 41,146 Common Indirect Assignment Building Allocation 2110.30 FURNITURE AND OFFICE EQUIPMENT D A 75,000 72,611 2,389 Common Indirect Assignment Labor Hours 2110.40 VEHICLES * D A 250,000 242,038 7,962 Common Indirect Assignment Labor Hours 2110.41 OTHER WORK EQUIPMENT D A 260,000 251,720 8,280 Common Indirect Assignment Labor Hours 2110.50 OTHER COMMUNICATIONS EQUIPMENT D A 5,000 4,841 159 Common Indirect Assignment Labor Hours 2110.60 COMPUTER HARDWARE D A 100,000 96,815 3,185 Common Indirect Assignment Labor Hours 2210.00 CENTRAL OFFICE SWITCHING D A 0 2210.10 DIGITAL SWITCHING EQUIPMENT D A 1,950,000 1,920,000 30,000 Common Direct Assignment Internet Equipment Allocation 2210.30 OTHER SWITCHING EQUIPMENT D A 75,000 0 75,000 Non-Regulated Direct Assignment N/A 2230.00 CENTRAL OFFICE TRANSMISSION EQUIPMENT D A 0 2230.10 INTEREXCHANGE CIRCUIT EQUIPMENT D A 605,000 605,000 0 Regulated Direct Assignment N/A 2230.11 INTEREXCHANGE CIRCUIT EQUIPMENT - RADIO D A 240,000 240,000 0 Regulated Direct Assignment N/A 2230.20 SUBSCRIBER CIRCUIT EQUIPMENT ANALOG D A 185,000 185,000 0 Regulated Direct Assignment N/A 2230.21 SUBSCRIBER CIRCUIT EQUIPMENT DIGITAL D A 460,000 460,000 0 Regulated Direct Assignment N/A 2230.22 DSL EQUIPMENT D A 80,000 80,000 0 Regulated Direct Assignment N/A 2310.00 INFORMATION ORIGINATION/TERMINATION ASSETS D A 0 2310.10 PAYSTATIONS D A 25,000 0 25,000 Non-Regulated Direct Assignment N/A 2410.00 CABLE AND WIRE FACILITIES ASSETS D A 0 2410.10 POLE LINES D A 50,000 50,000 0 Regulated Direct Assignment N/A 2410.20 UNDERGROUND CABLE D A 225,000 225,000 0 Regulated Direct Assignment N/A 2410.30 BURIED CABLE D A 4,500,000 4,500,000 0 Regulated Direct Assignment N/A 2410.40 BURIED CABLE - FIBER D A 2,500,000 2,500,000 0 Regulated Direct Assignment N/A 2410.50 AERIAL CABLE - METALLIC D A 225,000 225,000 0 Regulated Direct Assignment N/A 12
Cost Allocation Manual Steps Step 1: Classify all relevant trial balance accounts Regulated nonregulated Common Step 2: Determine account assignment by classification Regulated direct assign to regulated nonregulated direct assign to nonregulated Common indirect assignment by factor or analysis 13
Direct Expenses By definition - costs of assets and resources incurred exclusively for providing either regulated or nonregulated activities. If separate trial balances for nonregulated companies, identified by account numbers If included with telephone company, normally in 7xxx.xx or 8xxx.xx accounts. 14
Cost Allocation Manual Steps Step 3: Determine appropriate method of allocating common costs Direct Analysis of Costs analyze each journal entry or invoice by account Cost Causative Linkage costs associated with other accounts with a direct analysis General Allocator use of measurable factors to spread costs (appropriate factors are not defined) Labor Hours Volume of Use (Minutes, Bandwidth, Square Footage, etc.) End Users/Revenue Etc. 15
Cost Allocation Manual Steps Step 4: Develop general allocators based on best available information Use actual data where available Employee/expert estimates secondary Nonregulated usage should be forecast for 3 years Use the greatest nonregulated usage from 3-year forecast 16
Cost Allocation Manual Steps Step 5: Apply factors to common costs in trial balance Step 6: Adjust cost study inputs to reflect nonregulated allocations Show beginning balance with nonregulated removed as an adjustment, even if the entire account is nonregulated 17
Cost Allocation Manual Sample Telephone Company Labor Hours Allocation YE YE 12/31/04 12/31/14 2004 Account Description Classification Hours 2003.20 CONSTRUCTION WORK IN PROGRESS SHORT TERM Regulated 800 6110.10 VEHICLES AND OTHER WORK EQUIPMENT EXPENSE Common 100 6120.10 LAND AND BUILDING EXPENSE Common 200 6210.00 CENTRAL OFFICE SWITCHING EXPENSE Regulated 2,500 6230.00 CENTRAL OFFICE TRANSMISSION EXPENSE Regulated 600 6410.40 BURIED CABLE EXPENSE Regulated 6,000 6410.60 AERIAL WIRE EXPENSE Regulated 50 6530.30 NETWORK OPERATIONS OTHER Regulated 200 6530.50 ENGINEERING EXPENSE Regulated 100 6620.30 CUSTOMER SERVICES Regulated 4,000 6620.50 CUSTOMER BILLING TOLL Regulated 250 6620.60 CUSTOMER BILLING OTHER Regulated 600 6620.70 CARRIER ACCESS BILLING (CABS) Regulated 100 6710.10 EXECUTIVE DEPARTMENT Common 1,500 6720.10 GENERAL ACCOUNTING AND FINANCE Common 2,500 6720.20 INFORMATION MANAGEMENT Common 0 7990.10 NON REGULATED INSIDE WIRE MAINTENANCE REVENUE Non-Regulated 225 7990.12 NON REGULATED MISC REVENUE AND EXPENSE Non-Regulated 25 7990.50 INTERNET EXPENSE Non-Regulated 250 Total Hours 20,000 Allocation Hours Factor Regulated 15,200 96.82% Non-Regulated 500 3.18% Common 4,300 N/A Total Hours 20,000 100.00% 18
Cost Allocation Manual Building AllocationBuilding Allocation YE 12/31/14 YE 12/31/04 Sample Telephone Company Allocation Regulated Non-Reg. Regulated Non-Reg. Building Use Factor Investment Factor Factor Allocation Allocation Alpha Business Office Common Labor Hours 350,000 96.82% 3.18% 338,854 11,146 Alpha Central Office Common Rack Sq. Ft. 150,000 80.00% 20.00% 120,000 30,000 Delta Central Office Regulated N/A 100,000 100.00% 0.00% 100,000 0 Gamma Central Office Regulated N/A 50,000 100.00% 0.00% 50,000 0 Kappa Central Office Regulated N/A 100,000 100.00% 0.00% 100,000 0 Total 750,000 708,854 41,146 Alpha Central Office - Rack Square Footage Regulated Investment 144 Non-Regulated Investment 36 Total 180 94.51% 5.49% 19
Cost Allocation Manual Sample Telephone Company Trial Balance - Cost Allocation Manual YE 12/31/04 Trial Balance Cost Allocation Manual YE 12/31/14 Total Non- Dr/Cr Type 2004 Regulated Regulated Classification Assignmnet Allocation Factor 2110.00 LAND AND GENERAL SUPPORT ASSETS D A 0 2110.10 LAND D A 50,000 48,408 1,592 Common Indirect Assignment Labor Hours 2110.20 BUILDINGS D A 750,000 708,854 41,146 Common Indirect Assignment Building Allocation 2110.30 FURNITURE AND OFFICE EQUIPMENT D A 75,000 72,611 2,389 Common Indirect Assignment Labor Hours 2110.40 VEHICLES * D A 250,000 242,038 7,962 Common Indirect Assignment Labor Hours 2110.41 OTHER WORK EQUIPMENT D A 260,000 251,720 8,280 Common Indirect Assignment Labor Hours 2110.50 OTHER COMMUNICATIONS EQUIPMENT D A 5,000 4,841 159 Common Indirect Assignment Labor Hours 2110.60 COMPUTER HARDWARE D A 100,000 96,815 3,185 Common Indirect Assignment Labor Hours 2210.00 CENTRAL OFFICE SWITCHING D A 0 2210.10 DIGITAL SWITCHING EQUIPMENT D A 1,950,000 1,920,000 30,000 Common Direct Assignment Internet Equipment Allocation 2210.30 OTHER SWITCHING EQUIPMENT D A 75,000 0 75,000 Non-Regulated Direct Assignment N/A 2230.00 CENTRAL OFFICE TRANSMISSION EQUIPMENT D A 0 2230.10 INTEREXCHANGE CIRCUIT EQUIPMENT D A 605,000 605,000 0 Regulated Direct Assignment N/A 2230.11 INTEREXCHANGE CIRCUIT EQUIPMENT - RADIO D A 240,000 240,000 0 Regulated Direct Assignment N/A 2230.20 SUBSCRIBER CIRCUIT EQUIPMENT ANALOG D A 185,000 185,000 0 Regulated Direct Assignment N/A 2230.21 SUBSCRIBER CIRCUIT EQUIPMENT DIGITAL D A 460,000 460,000 0 Regulated Direct Assignment N/A 2230.22 DSL EQUIPMENT D A 80,000 80,000 0 Regulated Direct Assignment N/A 2310.00 INFORMATION ORIGINATION/TERMINATION ASSETS D A 0 2310.10 PAYSTATIONS D A 25,000 0 25,000 Non-Regulated Direct Assignment N/A 2410.00 CABLE AND WIRE FACILITIES ASSETS D A 0 2410.10 POLE LINES D A 50,000 50,000 0 Regulated Direct Assignment N/A 2410.20 UNDERGROUND CABLE D A 225,000 225,000 0 Regulated Direct Assignment N/A 2410.30 BURIED CABLE D A 4,500,000 4,500,000 0 Regulated Direct Assignment N/A 2410.40 BURIED CABLE - FIBER D A 2,500,000 2,500,000 0 Regulated Direct Assignment N/A 2410.50 AERIAL CABLE - METALLIC D A 225,000 225,000 0 Regulated Direct Assignment N/A 20
Affiliate Transaction Pricing Rules
Affiliate Transactions Asset transfers between regulated and nonregulated affiliates Tariffed rate Prevailing price valuation > 25% of asset sales to 3rd parties qualifies for PPV All other transactions Reg to Nonreg Higher of fair market value and net book Nonreg to Reg Lower of fair market value and net book $500K Threshold Average Schedule Exemption 22
Part 32 Affiliate Transactions Services provided between regulated and nonregulated affiliates Tariffed or contract rate Prevailing price valuation > 25% of service sales to 3rd parties qualifies for PPV All other transactions Reg to Nonreg Higher of fair market value and fully distributed cost Nonreg to Reg Lower of fair market value and fully distributed cost $500K Threshold Average Schedule Exemption 23
Intercompany Accounts Ensure that intercompany accounts between affiliate companies agrees. A/R from affiliate in one company should agree to A/P to affiliate in other company. Revenues agree to expenses. Should be able to identify all intercompany transactions between affiliates. 24
Annual Cost Allocations Each year we need to: Revisit our allocation methods and look at new accounts, services or changes to the network. Determine the most appropriate method to allocate common costs (direct analysis, general allocator, etc.). Develop the cost allocators & apply to common costs. The results are either book or off-book entries (i.e., study adjustments). 25