A Little Accounting Nostalgia

Generally_accepted_accounting_principles,_GAAPThe FCC is looking to modify and simplify Part 32, which is their rules on how regulated telephone companies must keep their books. While every company must keep a set of books for tax purposes, the specialized accounting that is unique to the telephone industry is becoming less relevant over time.

There was a time when the way a telco accounted for things was of paramount importance. This was due to the fact that telcos were rate-of-return regulated, meaning that they were guaranteed a modest profit. And the rates they charged and the profits they were allowed were determined by how they spent money and by the way they kept their books. I spent the first twenty years of my career knee deep in these accounting issues, and looking back at the historic telco accounting practices is nostalgic for me.

This process of increasing or changing customer rates was referred to as rate-making and the formal proceedings at Commissions for doing so was known as rate cases. Every state Commission, and even the FCC had a slew of rate case experts on staff. This process is just about extinct since all of the big telcos have elected price-cap regulation. This means that they have agreed to not raise residential telephone rates more than a certain amount, and for that agreement they are mostly free to charge what they want for other products and services.

But until price-cap regulation came along, rate cases were the lifeblood for large telcos. Telcos scrutinized how they accounted for everything, because different accounting categories had a different impact when it came time to calculate the costs of their products. For example, a phone company might closely scrutinize the way that time spent by repair technicians since there were often options of accounting for that time in several different expense accounts or even capitalizing of it, meaning that the expense could be considered as part of an assets. By constantly reviewing their accounting, telcos could maximize the amount of money they could justify charging for rates.

Accounting was even more critical for smaller telcos. In addition to rate-making for local rates small telcos also used their accounting to drive the separations process. These are rules that are detailed in the FCC Part 67 and Part 69 rules. Part 67 determined how much of their costs were associated with long distance and Part 69 defined how those long distance costs were allocated to various access charges that were billed to long distance companies that wanted access to their networks.

Accounting and separations often drove the behavior of telcos. I can remember many instances when separation rules would indicate doing something one way while good engineering practices would suggest doing it a different way. And this still happens today. Just recently NECA (the National Exchange Carriers Association), which is a voluntary pool where small telcos still pool their costs and access charges, told members telcos that the separation rules still strongly favor a company owning their own standalone voice switch. However, it has become far more economical in many cases to share switches in the cloud. And yet companies will forego moving their switching to the cloud as long as the arcane accounting and separations rules will pay them more to stick with the less efficient practice.

The separations process was a huge deal for small telcos. Before Part 67 came along in the 1960’s the small rural LECs were often operated on a shoestring by farmers or other rural folks who just wanted their neighbors to have telephone service. But Part 67 required AT&T, who had a monopoly on long distance, to chip in to cover the long distance share of the operating costs for these small companies. For the first time ever these small rural companies made enough money to be able to expand their networks and to improve technology.

And this was all driven by the way they kept their books. There were specialized consultants and accountants who advised small telcos on the best way to keep their books in order to make the most money. To some extent, the world of small telcos was a world of accountants.

To a large degree this has either gone away, as in the case of the large telcos, or has shrunk in importance for smaller telcos. The industry is in the midst of a multi-year phase-down of access charge rates with the expectation that access will probably eventually go to zero, and when those revenues are gone the need for separations will also be gone. But it was an interesting time. I helped hundreds of telcos navigate the accounting and separations rules and to file local rate cases. It is an interesting part of the history of the industry that helped to build a robust rural telephone environment, but those old practices will be completely gone in a few more years.

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