Congress to FCC: Fall Into GAAP

Washington -- Congress is close to sending the White House
a bill that includes provisions that would curtail the Federal Communications
Commission's ability to police the books and records of the largest phone companies.

The FCC is opposed to the legislation, claiming that it
needs to play accounting cop in order to ensure that consumers don't get gouged and
that new entrants that lease network elements from incumbent phone carriers get cost-based
rates, as envisioned under the Telecommunications Act of 1996.

The cable industry is watching the bills closely, concerned
that phone companies no longer subject to strict FCC accounting standards could jack up
their pole-attachment fees with impunity.

State regulators, consumer groups and large business
customers of local phone companies aren't staying on the sidelines, either. All of
them fear that abandoning the status quo would be a huge setback for competition.

"We will forcefully request that this language be
eliminated," said Gene Kimmelman, Washington office co-director of the Consumers

The House version (H.R. 2670) was sponsored by Rep Billy
Tauzin (R-La.), chairman of the House Telecommunications Subcommittee, and Rep. John
Dingell (D-Mich.), the Commerce Committee's most senior Democrat. The Senate version
was the work of Sen. Mike Enzi (R-Wyo.).

But stopping the bill won't be easy because the
formidable United States Telephone Association -- which represents the collective
interests of the five Baby Bells and GTE Corp. -- is urging Congress to brush aside the

In a recent press release, USTA president Roy Neel accused
opponents of using "scare tactics" to block a perfectly legitimate effort to
reduce burdensome regulation. "Simplifying these rules will eliminate excessive
record-keeping and reporting requirements," Neel said.

The clash is over a provision added to legislation that
would fund the FCC's fiscal-year-2000 budget. Although the House and Senate have
passed similar provisions, a House-Senate conference committee must meet to iron out any
differences before a final version can be shipped to the White House.

In the legislation, the FCC would no longer be allowed to
force the Bells and GTE to comply with an accounting system called the Uniform System of
Accounts. First employed in the 1930s and retooled in the late 1980s, USOA is used so that
the agency can consistently monitor the phone companies' costs and determine from
these costs the reasonableness of various rates.

The FCC does not rely on the more widely employed
accounting system -- Generally Accepted Accounting Principles -- because USOA proponents
say GAAP allows firms too much flexibility in reporting various cost items, such as

USOA is "an essential tool used by state and local
regulators to protect consumers," New Hampshire public utility commissioner Nancy
Brockway said at a recent Capitol Hill press conference.

FCC chairman William Kennard, drawing on an analysis by the
commission's Common Carrier Bureau, is telling key lawmakers that terminating USOA
would cripple the FCC's ability to enforce key provisions of communications law
designed not only to protect consumers, but also to break the local phone monopoly.

In a Sept. 14 letter to Sen. Ted Stevens (R-Alaska),
chairman of the Appropriations Subcommittee, Kennard said the benefits of USOA far
outweighed the burdens on the phone companies.

Without USOA, the phone companies could manipulate their
depreciation rates to show a reduction in earnings. This would entitle them to raise their
rates for connecting long-distance calls by $1.5 billion per year, Kennard said. That, in
turn, would lead to higher long-distance rates for consumers.

Universal service -- the system that subsidizes high-cost
carriers to keep local phone rates affordable nationwide -- would also be affected, he

Under the current compensation formula, high-cost carriers
get less money when the nationwide cost average rises. Because the nationwide average
would rise without USOA, Kennard said, universal service would be harmed. He noted that
Stevens' home state of Alaska would see a reduction of $4.8 million, or 14 percent,
in long-distance charges.

Lastly, Kennard said, losing USOA would "seriously
compromise" the FCC's ability to promote local phone competition. He added that
the agency could not carry out its obligation to prevent cross-subsidization or to prevent
the major phone carriers from overcharging when leasing network pieces to competitors.

"Accordingly, incumbents could unilaterally increase
competitors' costs, increase their own revenue and discourage potential competitors
from entering the market altogether," Kennard said.

The cable industry's concern relates to Kennard's
last point. Since 1978, the cable industry has relied on USOA data to determine whether it
is paying reasonable rates for access to telephone poles and conduits.

Without the current accounting system, cable operators
would face higher pole-attachment rates, and they would bear the costs of proving that the
rates were too high.

"At a minimum, Congress has to make it clear that the
[FCC] retains the authority, under the Pole Attachment Act, to collect the accounting
information to make the pole-attachment regime work," said Paul Glist, an attorney
with Cole, Raywid & Braverman, based here, who is tracking the issue for the National
Cable Television Association.

Neel said the FCC's insistence on the use of USOA
forces large phone companies to keep two sets of books, because the use of GAAP is
required by the Internal Revenue Service and the Securities and Exchange Commission. This
costs the telcos at least $270 million per year.

"No other industry has to do this. It is unfair for
one segment of the telecommunications industry to be treated differently from the
others," he added.

Neel said the legislation would in no way limit the
FCC's ability to preserve and advance universal service or restrict the states from
using USOA.