ATTACHMENT B

FILE: 890.0205
Birmingham, Alabama
July 14, 1995
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To :
From:
Managers - Economic Cost
Lynn Moore, Manager - Economic Cost
Subject: Investment Inflation Factors
The 1995 investment inflation factors by account have been ~
completed and placed on REGNET (under file name L:\INFL1995).
These factors are to be used in lieu of the FEN cost model to
develop levelized investment for cost studies. These factors
trend investment in base year dollars to a levelized amount
that is valid for a three to five year planning period.
Since, in most cases, investment is used to provide more than
one service, use of account demand seems more appropriate in
levelizing inflation than does service-specific demand.
The development of these investment inflation factors is
consistent with the development of the annual cost factors,
i.e. based on the relationship of 1994 end-of-year actual
data plus three to five years projected data. Since most of
our cost studies are for three to five year periods, these
factors will be appropriate for trending investment projected
out to three, four, or five years. First, use the Telephone
Plant Index (TPI) to inflate the investment to a base year,
which is the year prior to the first full annual period of
the cost study, then the subsequent years will be the three
to five year planning period. For example, a 1994 investment
can be inflated by the cost analyst to 1995 by applying the
appropriate TPI. Next, trend the base year investment using
the investment inflation factor. Finally, when the trended
investment is multiplied by the most recent annual cost
factor, which has already been trended, the result is a
forward-looking annual cost for the next three to five years.
For the RCAP or GENCAP cost models, use the same investment
inflation factor for both the FEN and FER calculations. This
will, in - effect, ------ eliminate . these two steps in the model.
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These factors are intended for use within the BellSouth
Telecommunications Economic Cost organization. Our sources
for the data used to derive the factors are company reports
and the latest available Telephone Plant Indexes (TPI).
We are in hopes that these inflation factors will simplify
the calculations required for cost studies.
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