Forbes: Baby Bell accounting fraud uncovered

[Dave Farber <dave () farber net>]

------ Forwarded Message
From: Daniel Berninger <dan () pulver com>
Date: Thu, 24 Apr 2003 20:14:42 -0400
To: dave () farber net
Subject: Forbes: Baby Bell accounting fraud uncovered

http://www.forbes.com/forbes/2003/0512/082.html

Companies, People, Ideas
Shortchanged
Scott Woolley, 05.12.03

The Baby Bells may have bilked consumers out of billions by inflating the
cost of their networks. Regulators seem content to overlook the matter.

Front-page headlines in June 2000 hailed a historic deal that dramatically
cut phone rates for the nation's consumers. The Federal Communications
Commission, in persuading the Baby Bells to slash the access fees they
charge long-distance carriers for routing calls to their local lines, said
it would save customers $3.2 billion a year. The FCC's claim to have enacted
"the largest rate cut in the history of federal telephone regulation" was
the New York Times' lead story.

The true saving, it turns out, fell far short of that. While the Bells
agreed to chop their access fees, they also won the right to offset that
reduction by boosting flat monthly fees charged to local customers. These
offsetting fee increases now approach $5 billion a year and, even in a world
of telecom deflation, have sent local phone bills climbing. Today customers
of Verizon (nyse: VZ - news - people ), the biggest of the four surviving
Bell companies, see the $72 annual fee--up $30 a year per line so
far--listed as the "FCC line charge" on their phone bills, though the Bell
gets the cash.

The little-noticed shift in fees was part of an extraordinary agreement the
FCC negotiated with the Bells and a few long-distance titans in a series of
secret meetings ending in early 2000. One FCC person present likens the
talks to "Al Capone and Bugs Moran in there, cutting up Chicago. Consumers
were not at the table." The resulting deal was officially named Calls, for
the Coalition for Affordable Local and Long Distance Service, no irony
intended. But it also was a way for the Bells to bury what could have become
a multibillion-dollar accounting scandal.

Funny numbers have always defined the phone business--arbitrary rate caps
imposed by regulators; 40-year depreciation for gear that nowadays loses its
value in only a few years; access fees that charge more for carrying calls
across town than it costs to carry them across the country. And in the Calls
agreement, the Bells managed to paper over some funny numbers indeed: some
$10 billion in equipment that FCC auditors found to be missing, nonexistent
or untraceable. The total could end up being several times that. The massive
discrepancy--which Bell officials vehemently deny--turned up in an FCC audit
in the months leading up to the Calls settlement three years ago. Most
regulators attribute the overstatement to sloppy recordkeeping rather than
to a Bell conspiracy to intentionally mislead.

Either way, though, the result would be the same: Bells reaping billions of
dollars more in revenue over the years than they otherwise would have been
allowed to collect. That is because local rates and access fees were all
originally justified by carriers' cost bases. Assets carried at erroneously
(or intentionally) inflated costs on the books naturally lead to higher
regulated prices.

<snip>



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