3. The History of Inter-company Settlements

The inter-company settlements process between Pacific and the Small LECs dates back to the 1960's and has permitted all telephone companies that participate in the process to charge the same basic toll rate for a similar call of a given duration over the same distance. Prior to implementation of the intraLATA toll settlement pools, small telephone companies established additional charges to cover their own cost of receiving and sending toll messages. For example, on a call from a Pacific customer to a Small LEC customer, the Small LEC would add an increment of about 20 cents to a typical three minute call, whether the call was initiated in its service area or Pacific's.

For the past 30 years, intraLATA toll rates of all LECs that participate in the pooling arrangement have been uniform. The term "Settlements" refers to an accounting procedure based on a LEC's total investment in telephone equipment used to provide intrastate telephone service. Under the inter-company settlements process, all participating companies place all of their intrastate telephone property into a common pool and charge the same toll rates, even though their individual costs for provisioning toll service vary widely.

The basic concepts underlying pooling arrangements are: 1) a single uniform rate for a service, b) the revenues billed at this uniform rate are not "kept" by the billing LEC, but rather are reported to the administrator of the pool (Pacific) who has the responsibility of collecting the billed revenues of every participating LEC, and c) the billed revenues are then redistricted to the participating LECs, based on each LEC's costs and the pool rate of return.

Within each specific pool, each LEC, including Pacific, will receive its cost of providing the intrastate service plus an amount based on its investment allocated to providing the service. This rate of return on investment is common to all LECs in the pool and is known as the "settlement ratio" or "pool" rate of return.

The excess revenues derived from the pooling arrangements were used by the Small LECs to subsidize local exchange rates. Thus, the inter-company settlements process has helped keep toll and access rates uniform and has also kept basic telephone rates reasonable by using contributions from statewide toll rates of all participating carriers.