FCC audit riles RBOC nerves

The long-awaited FCC staff audit of regional Bell operating company equipment drew the expected chorus of boos from local carriers and cheers from long-distance carriers. Still unresolved is what the FCC will do with the report and whether it will have any effect on future decisions.

In a report made public March 12, the commission staff said RBOCs as a group are overstating the value of their networks by as much as $5 billion. Analyzing RBOCs' continuing property records, which provide descriptive inventories and costs for equipment used in regulated services, the commission's Accounting Safeguards Division of the Common Carrier Bureau compared record entries for hard wired equipment, such as switches and transmission gear, with the physical assets in the central offices.

The discrepancies between the two numbers result in higher access charges, according to several interexchange carriers. Just before the public release of the audit, AT&T said local telcos collect $10 billion more annually than they can justify in access fees. "The audits reinforce the point that any reliance in regulatory proceedings on embedded or historic costs is faulty," said Jim Cicconi, AT&T general counsel.

But according to several RBOCs, the statistical methodology used in the audit was unfair. At the same time, FCC auditors often classified equipment as "not found" if it was not in the exact location as detailed in the continuing property record.

"The methodology is simply wrong," said Ed Wynn, vice president of regulatory policy for Ameritech. "They used the wrong extrapolation methods, and second, when they identified errors in the record, they amplified them."

In some cases, FCC auditors classified equipment as missing although it had been moved or was in a different bay than listed in the continuing property record, he said. However, Wynn acknowledged the misplacement of some equipment is inevitable when dealing with large entities. "Any time you're involved in assets with as large a base as we have, there's going to be a small amount that's not going to be detailed."

As part of the audit, which has not been approved by the full commission, the staff recommended telcos write off many unfound assets, something most will fight.

"We do not agree that an asset write-off is appropriate because many of the items the FCC staff claims don't exist do exist," Robert Sutherland, BellSouth's general attorney for FCC matters, said in a statement.

BellSouth and Ameritech also hired PricewaterhouseCoopers and Arthur Andersen, respectively, as outside auditors to review the results. Both auditors found problems with the audit.

"The FCC's procedures were biased as they were solely directed at detecting potential overstatement of property records," said Carl Geppert, an Arthur Andersen partner in telecommunications.