The FCC is proposing to make major revisions to the Uniform System of Accounts for price cap LECs.  These changes, if approved, might give those carriers more room to manipulate prices for Special Access and other bottleneck services.  Both competitors and large customers should, therefore, consider participating in the new rulemaking proceeding to ensure the FCC will have sufficient data to examine price cap LEC costs for bottleneck services.

In 1935, the FCC imposed a uniform system of accounts (“USOA”) on regulated telephone companies.  The FCC is required take such action by Section 220 of the Communications Act of 1934, as amended (“Act”), 47 U.S.C. §220.

In 1986, the FCC made major revisions to the USOA to recognize the advent of competition and explosion in new products and services.  Further, to the extent reasonable, the Part 32 rules were also made consistent with Generally Accepted Accounting Principles (“GAAP”).  At the same time, the FCC also adopted simplified accounting rules for smaller LECs.[1]

Because of the 1991 introduction of price cap regulation for larger LECs and the subsequent adoption of price caps by most mid-sized LECs, the FCC has also simplified its accounting and rate setting rules.  Later, the FCC also elected to forebear from the application of specific accounting rules for price cap LECs.

Now, the Commission is proposing to streamline Part 32 further by allowing price cap LECs to use the simplified accounts already used by small carriers and further aligning Part 32 with GAAP.[2]  The FCC is even considering one option that would eliminate Part 32 in favor of other FCC-directed accounting practices, such as for calculating pole attachment rates, ensuring non-competitive services do not subsidize competitive ones.  The rest of a price cap LEC’s operations would be free from the USOA.

At first blush, it looks reasonable for price cap LECs to move from legacy accounting rules to GAAP, as they are price cap regulated (often for both interstate and intrastate services) and their overall market shares are down considerably, most especially for commodity services.  However, despite major changes in technology and markets, price cap LECs maintain considerable pricing power for some key services and facilities, most especially Special Access services.[3]  Special Access for Price Cap Local Exchange Carriers, Report & Order and Further Notice of Proposed Rulemaking, 27 FCC Rcd 10557 (2012) (“Special Access R&O”).  See also, Suspension and Investigation of AT&T Special Access Tariff, Order, 28 FCC Rcd 16525 (2013) (suspending for investigation AT&T’s Special Access tariffs that proposed to withdraw 60-month term discounts); Order, 29 FCC Rcd 1782 (2014) (closing the tariff investigation in light of AT&T’s withdrawal of its proposed tariff change eliminating 60-month term discounts).

Similarly, in the future, as the FCC completes its phase-out of per-minute Switched Access charges, price cap LECs may well have market power over other access services and facilities, such as neighborhood or building nodes where IP networks become dedicated to individual customers.  The ability of competitors to purchase access to future bottleneck facilities may well be critical to their market success.  The rates charged by price cap LECs will likely be important.  With bottleneck facilities, cost of service is important for competitors and customers even under a price cap regulatory regime.[4]  Indeed, the FCC has adopted a definition of “market power” that is “the ability to set prices above marginal cost without attracting entry.”  Special Access R&O, at ¶29, n.63.  Obviously, some cost information must be available, even under protective order, to determine whether price cap LEC rates for bottleneck facilities are set above their marginal cost.  Price cap regulation has not eliminated this need.

To the extent the FCC loosens the Part 32 accounting rules for the large price cap carriers, it becomes more likely they will be able to manipulate any required cost study or display of costs.  There has always been a fear of manipulation of Special Access rates under price cap regulation even with the application of more strenuous accounting rules.  Price Cap Regulation of Local Exchange Carriers, Second Report & Order, 5 FCC Rcd 6786, at ¶221 (1990).  Given the fact the FCC is still investigating Special Access rates almost 24 years later, those fears are not unfounded.[5]

Competitors and customers of Special Access services provided by price cap LECs may wish to consider participating in the FCC’s new USOA reform proceeding.  They may wish to argue the FCC would be violating its Section 220 obligations by permitting large price cap LECs to design, use and manipulate their own accounting systems.  Given that these LECs still possess some market power over services and facilities, costs of service are still relevant, such that the FCC must retain some standardized accounting system for price cap LECs.

The FCC has not set due dates for comments and replies.  If you are interested in learning more about the potential impact of relaxed accounting rules on price cap LECs or filing comments in the FCC’s new docket, please contact Robert Jackson, rhj@commlawgroup.com, 703-714-1316.