Subd. 1. Financial requirements.

1. (a) This subdivision governs a proceeding initiated under section 237.075 or 237.081 to change the rates for noncompetitive services. Subdivision 1a governs a proceeding under section 237.075 or 237.081 to change the rates for noncompetitive services and for services subject to emerging competition. The company shall elect that rate changes be made in accordance with either this subdivision or subdivision 1a, and that election is binding on the commission in all respects.

2. (b) A company electing to use this subdivision may demonstrate the revenue requirement for its noncompetitive services by providing:

   1. (1) revenues, expenses, and embedded investments directly related to the provision of the noncompetitive services;
   2. (2) a reasonable portion of the net income generated jointly or arising from jointly competitive and noncompetitive services, and net income received by a telephone company as a result of the sale of telephone number listings, charges and advertising for use in white pages, yellow pages, other directory and other related services, must be treated as arising jointly from competitive and noncompetitive services; and
   3. (3) a reasonable portion of the company's total joint and common costs to be attributable to the provision of the noncompetitive services.
3. (c) For purposes of this subdivision, when a telephone company uses an investment to provide competitive services to end-user customers and another company provides a competing service that requires, in part, the use of a similar investment to provide the telephone company's noncompetitive services or service elements, the telephone company shall treat both investments and related costs as though they are providing noncompetitive services and shall attribute revenues to the noncompetitive category using the rates for the noncompetitive service or service elements multiplied by the appropriate current volumes for the telephone company's competitive service instead of determining the investment, associated expenses, and common and joint costs under paragraph (b), clauses (1) and (3) to determine the revenue requirement for the noncompetitive category.

4. (d) A telephone company that receives annual revenues from Minnesota intrastate services of less than $100,000,000 may demonstrate the revenue requirement for its noncompetitive services by removing from the telephone company's total revenues, expenses, and embedded investments the revenues, expenses, and embedded investments of:

   1. (1) interstate services, determined using:

      1. (i) the specific jurisdictional separations procedures adopted by the Federal Communications Commission, if the telephone company is an actual cost company for interstate services; or
      2. (ii) applicable jurisdictional separations principles, if the telephone company is an average schedule company for interstate services; and

   2. (2) competitive intrastate services, determined as follows:

      1. (i) revenues must be directly assigned based on the related services;
      2. (ii) revenues from services with both competitive and noncompetitive elements must be assigned first to noncompetitive elements based on tariffs, with the remainder assigned to competitive elements;
      3. (iii) expenses must be directly assigned to either competitive or noncompetitive services when possible, based on the origin of those expenses;

      4. (iv) joint expenses, which are those that cannot be directly assigned to any single competitive or noncompetitive service, must be allocated using a cost causal methodology in accordance with the following hierarchy:

         (A) whenever practicable, the allocation of expenses must be based on a measurable assignment method; then

         (B) other expenses, to the extent practicable, must be allocated by employing surrogate measures; and then

         (C) any remaining joint expenses must be allocated to competitive services based on the ratio of related direct and joint expenses assigned to the competitive services to total related direct and joint expenses;

      5. (v) expenses that are common to all services must be allocated based on the ratio of all direct and joint expenses of competitive and noncompetitive services; and
      6. (vi) embedded investments must be assigned and allocated using a hierarchy comparable to the hierarchy used for the assignment and allocation of expenses.
5. (e) A telephone company shall also treat the net income from the sale of telephone number listings, charges, and advertising for use in the white pages directory, yellow pages directory, other directories, and other related services as provided in paragraph (b), clause (2).

6. (f) Unless otherwise ordered by the commission, a telephone company may omit the determination and removal of the revenues, expenses, and embedded investments related to competitive services that:

   1. (1) generate, in the aggregate, annual revenues less than $50,000; or

   2. (2) individually generate annual revenues less than one-tenth of one percent of the company's annual gross revenues for the test-year period.

      However, the telephone company shall not omit determination based on clauses (1) and (2).

Subd. 1a. Alternative method.

1. (a) A telephone company electing to use this subdivision shall demonstrate the combined revenue requirement for its noncompetitive services and services subject to emerging competition in accordance with paragraphs (b) to (d).
2. (b) The telephone company shall use the procedures prescribed by subdivision 1 to allocate and remove the cost of providing services that are subject to effective competition, except that those procedures do not apply to central office-based dial switching systems that, by January 1, 1984, have been approved by the commission as obsolete and that are not available to new customers.
3. (c) Except as provided in paragraph (d), a combined revenue requirement for noncompetitive services and services subject to emerging competition must be determined under section 237.075. Once the revenue requirement has been established, the commission shall determine the telephone company's rates for services subject to emerging competition and noncompetitive services so that the revenue requirement can be met. The telephone company shall provide an embedded direct cost and an incremental cost study for each service subject to emerging competition that generates annual revenues in excess of the greater of one-tenth of one percent or $100,000 of the company's annual gross revenues for the test-year period. An embedded direct cost is the sum of current expenses and a return of and a return on the current net book investment directly incurred to provide a service.
4. (d) On the date that a telephone company becomes subject to this section under section 237.58, the company shall begin an accounting of rate changes for services generally offered before January 1, 1988, that are subject to emerging competition. If the net effect of those rate changes is a lower revenue amount than would have been realized had the rates remained unchanged, the combined revenue requirement established under paragraph (c) must be reduced by an amount equal to the difference in revenues. The commission shall, as part of these proceedings, permit the telephone company to increase the prices for services subject to emerging competition to recover the revenue reduction. To determine whether a rate change has resulted in lower or higher revenues from a service subject to emerging competition, the rate in effect when the accounting requirement prescribed by this paragraph became effective must be subtracted from the rate in effect on the date the rate proceeding is commenced. For services priced on an individual basis, the change in rates must be calculated by subtracting the average revenue per unit for the service on the date the accounting requirements of this paragraph became effective from the average revenue per unit for the service in the test year used in the rate case. The difference for both individually priced and nonindividually priced services must be multiplied by the number of units sold in the test year used in the rate case. A rate change resulting from a pass-through of cost increases or decreases, approved or reallocated by a government entity, must be excluded from the revenue calculations under this paragraph.

Subd. 2. Cross-subsidization.

A telephone company may not subsidize its competitive services from its noncompetitive services through allocations of costs, cost-sharing agreements, or other means, direct or indirect. When an investment is for both noncompetitive and competitive services, the company shall demonstrate that its proposed methods of cost recovery between competitive and noncompetitive services are reasonable. If the commission determines that the methods chosen by the company are not reasonable, the commission may order changes in the methods used and make necessary adjustments in rates being charged to reflect the changes.

Subd. 3. Additional information.

The commission may require a telephone company to provide information regarding the revenues, expenses, investments, and costs for all of its services.