Summary: In a review of the Federal Communications Commission's (FCC) regulatory program, GAO assessed the methods used by FCC for implementing a system of price/earnings for common carriers and examined the actions FCC has taken to prevent anticompetitive behavior against new entrants. Over the past 20 years, FCC decisions have allowed competition into the manufacture of telecommunications terminal equipment and into the interstate provision of telecommunications services, which have altered the structure of the industry. FCC has used a system of price/earnings regulation which relies on the rate of return/rate base regulation to govern prices charged by carriers. Instead of implementing such a program by establishing and monitoring rates of return, reviewing the reasonableness of investments and expenses, and approving individual rates for carriers' services, FCC has focused on establishing carriers' rates of return and paid little attention to carrier investment costs and expenses. Although FCC has established the broad principle that costs should be fully distributed among all services, it has had limited success in developing a method to implement this principle. The separate subsidy approach proposed by FCC does not completely provide for organizational restructuring and separating conditions. FCC should initiate a proceeding to evaluate the need for structural separation of a dominant carrier's long distance and local operations. In implementing changes for setting depreciation rates, FCC has not resolved questions regarding the methods and procedures needed to set new depreciation rates. GAO believes that, if Congress wishes to endorse the trend toward competition in the telecommunications industry, it should amend the Communications Act of 1934 to direct FCC to rely on competition and the private sector to the maximum extent possible to achieve the overall goals of the Act. GAO believes that, until a competitive environment exists, FCC should strengthen its regulatory approach. GAO believes that Congress should amend the Act to reestablish the basic framework to create nondiscriminatory access conditions to local exchange facilities, including expansion of the FCC authority to allow regulation of all long-distance telecommunications facilities and services.
