Accounting Simplification

1
Accounting Simplification

• One More Time?
• Bill Johnston
• September 16, 2003

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DEJA VU ALL OVER AGAIN

• Part 32 was ordered 5/15/86 and became effective
  1/1/88
• Very little accounting reform for large carriers
  over this time period, even though reform was
  triggered by the Telecom Act of 1996.
• We have been discussing accounting reform for 7
  Years.
• Long Term changes started as Phase 2 but were
  moved to Phase 3 and have gone through three
  comment cycles (00-199 Biennial Review 2000 NPRM,
  00-199 Further Notice, 02-269 Joint Conference
  Docket)
• The relook of Phase 2 began 9/5/02 with
  establishment of Federal/State Joint Conference.

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VERY LITTLE REFORM FOR LARGE CARRIERS OVER THIS
PERIOD

• 3/20/96 (CC Docket 96-23)
• quarterly ARMIS 43-05 became annual.
• 9/12/96 (CC Docket 96-193)
• quarterly 43-01, semi-annual 43-06 and quarterly
  CAM updates became annual
• 6/30/99 (CC Docket 96-117)
• ARMIS 43-02 reporting burdens streamlined for
  midsize
• ARMIS 43-01and 43-04 reports updated for all
  carriers
• 9/10/99 (CC Docket 98-81)
• Class B and CAM biennial (vs. annual) attest
  audit for midsize
• For all carriers, consolidation of 3 plant
  support accounts, kept the revenue requirement
  study for accounting changes but eliminated the
  three-year projection study, adopted GAAP
  accounting for software.

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VERY LITTLE REFORM FOR LARGE CARRIERS OVER THIS
PERIOD

• 3/8/00 Phase 1 (CC Docket 99-253)
• Phase 1 (short term)
• Phase 2 (long term changes as markets become
  competitive)
• Eliminated expense matrix, biennial audit report
  for large carriers, EFMV threshold for service
  affiliate transactions, eliminated certain
  pre-notification requirements, further
  streamlined 43-02
• 11/5/01 Phase 2 (CC Docket 00-199)
• Phase 3 (Long Term)
• Reduced accounts by 27, eliminated most ARMIS
  reports and all CAM filings and audits for
  midsize
• Reduced accounts by 45 and then added new
  accounts for broadband, streamlined ARMIS reports
  for large
• For all carriers, adopted SFAS 116, eliminated
  certain inventory requirements, EFMV threshold
  for asset affiliate transactions and more
  affiliate transaction flexibility, simplified
  recording of nonreg revenues, taxes, incidental
  activities, eliminated revenue requirement study
  for accounting changes

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WHAT WAS MY MESSAGE IN 2001?

• Part 32 did not envision competition
• The regulatory landscape had changed dramatically
• Price Caps
• Alternative Forms of Regulation
• Deregulation
• 1996 Telecommunications Act
• Separations Freeze
• The industry was changing dramatically
• Wireless growth
• Cable competitors
• Business competition
• CLECs

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What is happening to competition now?
ILEC lines are decreasing
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What is happening to competition now?
LEC End-User Switched Access Lines and Wireless
Subscribers (Source Tables 8.1, 11.2 Trends in
Telephone Service 8/03 - Form 477)
ILEC market share is down 25
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What is happening to competition now?

• Local Service Wireless Revenue (excluding
  roaming)
• (Source Tables 8.7-Form 499 TRS, 11.3 - CTIA
  Trends in Telephone Service 8/03)

ILEC revenue is barely over 50
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What is happening to competition now?
ILEC Competitors have dramatically increased
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What is happening to competition now?

• An analysis of CLECs by Zip Codes in Qwests 14
  state region confirms the pervasiveness of
  competitors
• An analysis of CLECs by state (50 plus DC)
  further supports competition
• 0 1 to 6
  7 to 11 12 to
  29
• Competitors Competitors
  Competitors Competitors
• 0 18
  20
  13
• 0 35
  39 26

1 to 6 Competitors 6,899,809 67
7 to 11 Competitors 2,855,899 28
0 Competitors 529,475 5
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What is happening to competition now?

• The impact in urban areas is even greater!
• In Omaha NE Qwests market share for end user
  wireline customers is less than 60 (based on
  total connections.
• Less than 35 when including wireless providers
• This does not even consider the impact of
  broadband which Scott will discuss later
• Voice over Internet Protocol (VoIP) will be a
  huge competitive factor in the future

ILEC Competitors have dramatically increased
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Purpose of regulation is to protect
ratepayers from unjust and unreasonable rates

• Movement away from rate based/rate-of-return
  regulation
• Forward-looking and market-based pricing
• Telecom Act reliance on competition

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Need for USOA Accounting and FCC ARMIS
Reporting has Diminished

• USOA applies to ILECs, not Telecom Industry
• ARMIS only includes BOCs and some larger midsize
• SEC publicly filed financial reports

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Phase II Relook

• Directory Revenue Account
• Depreciation Accounts
• Services wholesale/retail
• Loop Sheath Kilometers
• New Accounts for
• Optical Switching
• Switching Software
• Loop and Interoffice Transport
• Interconnection Revenue
• Interconnection Expense
• Universal Service Revenue
• Universal Service Expense
• Joint Conference Recommendation Items

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Phase II in context of broader realities.

• Regulatory Accounting and ARMIS no longer
  directly linked to prices for large ILECs
• No comparable wireless or CLEC data in ARMIS
• Sarbannes-Oxley protects BOTH consumers and
  shareholders
• Other FCC data collection mechanisms such as Form
  477 and Form 499 provide for industry data
• USF Monitoring Report
• FCC Broadband and Local Competition Reports
• FCC Study on Telephone Trends

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Phase III achieved with 3-step plan

• Step 1- No increase in accounting
  detail/reporting
• New Accounts not necessary
• Detailed Accounts need not be reinstated and
  wholesale/retail subaccounts need not be
  implemented
• Loop sheath kilometers not necessary.
• Relief already implemented by mid-size should be
  granted to large carriers
• Streamline affiliate transaction rules by
  eliminating higher/lower calculations
• Allow carriers to more easily keep CPR records
• Streamline or eliminate Part 64 shared network
  investment forecasting

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Phase III achieved with 3-step plan

• Step 2 - Assess regulatory needs
• Insure comparability of all competitive carriers,
  not just selected ILECs
• Look to existing FCC non-ARMIS reports.
• Step 3 - No longer require regulatory accounting
  for BOCs
• Forbear from USOA for large ILECs and eliminate
  current ARMIS reports.
• Pole Attachment information can be provided
• Financial information necessary for tariff
  filings, UNEs or USF will still be available.
• States with special requirements will continue to
  work directly with carriers.