Settling Accounts

by on April 10, 2008 · 11 comments

The Federal Communications Commission is facing another deadline at the end of this month to accept or reject a petition for regulatory forbearance. The petition would relieve AT&T of several unnecessary, burdensome and anticompetitive accounting requirements.

The accounting rules at issue were designed to restrain telephone prices when AT&T was a monopoly entitled to recover its costs plus a reasonable profit. Rate-of-return or cost-plus regulation, as it was known, was a complete failure. It gave companies like AT&T an incentive to inflate, misallocate and manipulate costs. The companies responded, according to critics, by gold-plating their operations.

AT&T hasn’t been subject to rate-of-return regulation at the FCC or in any of the states in which it operates for 10 years. And no one is proposing to bring it back.

The FCC and the states now merely set maximum prices AT&T can charge (“price caps”), which is why the rules cited in the petition are no longer necessary. The data derived from the legacy accounting procedures simply isn’t used anymore to regulate revenue or set prices.

There are one and perhaps two reasons why the rules have survived.

First is that AT&T’s competitors, who aren’t subject to a similar requirement, have assumed the information AT&T has to file might be useful to them.

Second, the rules continue to provide employment for accountants.

In 1999, Congress was determined to eliminate many if not all of the rules until, at the last minute, the complaints of these two groups were heard.

Now it’s the FCC’s turn.

Regulation which is unnecessary to protect consumers and which imposes costs and madates detailed disclosure on some competitors but not others is almost always wrong. The justification for these rules has evaporated. Eliminating the rate-of-return accounting rules is at least 10 years overdue.

Also, don’t we have a better use for bureaucrats who administer unnecessary rules like these? For example, just yesterday the FCC asked Congress for $25 million to conduct new audits and investigations for the purpose of preventing and remedying waste, fraud and abuse in the Universal Service Fund.

The forbearance process, which I discussed here, has recently come under some criticism from regulatory enthusiasts who claim it deprives the FCC of the right to set its own agenda (which is code for the right to bury and never vote on proposals for meaningful regulatory reform). The rate-of-return accounting rules are a good example why we need the forbearance process.

(Note: The AT&T petition was filed Jan.25, 2007, and if the FCC stored the entire document in a single place I would have included a hyperlink. But they didn’t. The document is divided into multiple files which aren’t linked to one another. Brilliant. To see the files, go to: and search for documents filed on behalf of AT&T on the date above.)

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