On April 17th, 2017, the IRREGULATORS filed comments with the FCC calling for the Agency to do audits and investigations of the FCC’s “Big Freeze”. The FCC’s accounting rules were ‘frozen’ so that the expenses are allocated to different services based on the year 2000, 17 years ago. This ‘freeze’ has created massive financial cross-subsidies, making local phone customers pay the majority of expenses for all services, from the capital expenditures for the wireless companies, to Broadband Data Services (BDS). Auditing the impacts of the ‘freeze’ is important because it documents that the FCC has been negligent and is creating new public policies without accurate financial data.
With those comments we submitted a series of reports written by experts, forensic auditors and lawyers. This included “The Hartman Memorandum”, which was written with the assistance of a former FCC Assistant Chief of the Pricing Policy Division (PPD) who was also a member of the Federal-State Joint Board and a specialist in the cost allocation rules.
On May 15th, the FCC issued an order. The Reports were ignored and the comments made by the FCC about the work lacked sense as the FCC never dealt with any of the specific findings outlined in the reports or comments. Instead, the FCC decided to continue the freeze for an additional 18 months. This appears to be nothing but a cover-up to remove all of the accounting rules without any analysis, audits or investigations. However, it will immortalize the financial cross-subsidies that benefit the incumbent phone companies, especially AT&T, Verizon and CenturyLink.
We recognize that the Commission has chosen to deregulate the so-called Price Cap Carriers such that to the limited extent that they are subject to rate regulation, it is via a price cap mechanism, not the traditional Uniform System of Accounts. Hence only the Rate of Return Carriers are directly subject to the separations mechanism for the computation of their interstate rates. However, even in the case of the Price Cap Carriers, Separations is a joint federal-state matter, and the freeze imposed by the Commission directly impacted state rates and, even more importantly, policies. Fictitious accounting leads to bad decision-making. Hence the costs of more accurate separations are not an undue burden. Rate of Return Carriers already are required to provide detailed regulatory accounting in order to determine their appropriate rate and subsidization levels. Price Cap Carriers, especially the Bells (including their successors-in-interest) are large companies with ample accounting resources. Thus, the issues we raise are not moot, even when dealing with the largest carriers.
The Federal-State Joint Board has asked:
- Re: Federal-State Joint Board on Jurisdictional Separations Seeks to Refresh Record on Issues Related to Jurisdictional Separations, FCC 17J-1
- Re: Federal-State Joint Board on Separations Seeks Comment on Referral for Recommendations of Rule Changes to Part 36 as a Result of Commission Revisions to Part 32 Accounting Rules, FCC 17J-2
To protect the Public Interest, the Joint Board must act – and stop the FCC’s plans from erasing the accounting rules, but instead implement a fix that stops the massive cross-subsidies that have been put into place and benefit the companies and their affiliates over the Public Interest.
The Freeze and the FCC’s accounting rules have distorted every aspect of telecom. From the proceeding to ‘shut off the copper’, where the FCC has neglected to mention that the wires are part of the state utility or that the networks are ‘unprofitable’ through a manipulation of the accounting of expenses, to the Business Data Services (special access) proceeding, where the FCC never acknowledges, again, that the wires are part of the state utility or that the services are paying a fraction of common costs because of the FCC’s freeze of the cost allocation rules. There has been no serious oversight for 16 years and the FCC has created a financial shell game that has gone hidden from view, but is making severely flawed and harmful public policies.
And there are other ‘freezes’ that are even more disturbing, such as the 75-25% rule: The Hartman Memorandum details how the FCC has never examined or fixed the 75-25% rule—which assigns 75% of much of the network expenses to “intrastate”, and this has been a rule since the dawn of the Digital Age.
In toto, all of these financial machinations make the local networks appear unprofitable, when they are not. They have made local phone customers defacto investors in the companies’ interstate and nonregulated businesses, which was not supposed to occur. And worse, through manipulations of the access line accounting, though the FCC wants to ‘shut off the copper’, it can’t tell America exactly how many total copper wires are used for services that are not being counted—everything from DSL and VOIP services to special access ATM and alarm services, or even the wires used by AT&T for its copper-to-the-home service, U-verse.
We are also concerned by recent comments of Chairman Pai during an interview with Re/Code, May 5th 2017, where he specifically singles out Part 32. He had asked his staff “When was the last time you looked at these (Part 32) reports?” They replied, “Pretty much, never”. The Joint Board must examine whether the FCC failed to properly review and analyze all of the implications of eliminating the Uniform System of Accounting (USOA) before the Agency’s action on February 23, 2017.
As if in some rush, now, the FCC wants to simply erase the rules as if they were a serious burden, and to keep the cross-subsidies in place, which will have no financial audit trail to follow. Considering that the companies have to prepare annual taxes and that with billions of dollars in revenues per state and expenses that are itemized, the only burden has been on communications customers and the economic growth of America.
We refresh this record, again, with “Fixing Telecom”, a report series done as an independent voice, without corporate or political financing, because sometimes the Public should come first.
- Report 5: The Hartman Memorandum
- Report 6: The History & Rules of Setting Phone Rates in America —The FCC’s ‘Big Freeze’ & Cross Subsidies
- Report 1: Executive Summary: Verizon’s Manipulated Financial Accounting & the FCC’s Big “Freeze”
- Report 2: Full Data Report
- Report 3: SPECIAL REPORT: How Municipalities and the States can Fund Fiber Optic Wireline and Wireless Broadband Networks.
- REPORT 4: Data Report Proving Verizon’s Wireline Networks Diverted Capex for Wireless Deployments Instead of Wiring Municipalities, and Charged Local Phone Customers for It.
- Letter to the FCC for an Investigation of Cross Subsidies as detailed in the Hartman Memorandum.
- FCC Filings: Cover Letter. On December 16th, 2015, we filed the first reports in 31 separate FCC proceedings
- FCC List of FCC Proceedings in which reports were filed
- Joint Filings with Consumer Federation of America in the Special Access, (Business Data Services) proceeding
Discussion Section: We have added a separate section to summarize and discuss the impacts of the Big Freeze, the mal-formed cost allocation rules, and why investigations and audits are an imperative, as compared to the FCC’s current plans to cover up and immortalize the financial shell game in place today.
David Bergmann, Esq.
Kenneth Levy, Esq.
- Scott McCollough, Esq.
May 24th, 2017
In April 2017, a new group called the “IRREGULATORS” was formed. The core of the IRREGULATORS is an independent consortium of retired and semi – retired telecom experts, analysts, policy wonks, forensic auditors, and lawyers who are former senior staffers from the FCC, state advocate and Attorneys General Office experts and lawyers, as well as former telco staff and consultants. Members of the group have been working together, in different configurations, since 1999.
Some of the documents and comments were submitted by New Networks Institute. Established in 1992, NNI has been a consortium of independent communications-focused experts, analysts, auditors and lawyers over the last 5 years.
 See FCC 17-55 (May 15, 2017), ¶ 12.