By Christopher Stern
Washington Post Staff Writer Saturday, August 17, 2002; Page E01
Federal Communications Commission Chairman Michael K. Powell said yesterday that he is backing off proposals to reduce his agency's record-keeping requirements, saying a change of course is warranted because of the accounting scandals that have swept through the telecommunications industry.
Unlike the Securities and Exchange Commission, the FCC is not responsible for protecting investors against fraud. Instead, the regulatory agency is charged with reviewing financial and other corporate data to ensure that telephone companies are not overcharging customers or gouging rivals that rely on their equipment.
In March, Powell disbanded the agency's Accounting Safeguard Division and scattered its auditors and accountants to other units. He has also proposed a reduction in the amount of corporate data that companies must provide the agency, although he announced yesterday that he has placed a moratorium on any relaxation of the rules.
During a Senate hearing last month, Powell said the financial accounting scandals that have plagued companies such as WorldCom Inc., Qwest Communications International Inc. and Global Crossing Ltd. have caused him to question his deregulatory approach.
"Chairman Powell continues to be outraged and troubled by the drumbeat of scandals within the telecommunications sector and believes that it is important and prudent to aggressively reexamine the data collection requirements of not only the FCC but the states as well," FCC spokeswoman Robin Pence said yesterday.
Powell plans to ask Congress for stricter fines and penalties. He also wants to work with state regulators to ensure that the data supplied by phone companies is "adequate, truthful and thorough," Pence said.
The data collected by the FCC has proved useful in rooting out problems in the past. However, the agency has had difficulty resisting the extensive lobbying campaigns of major telecommunications companies to counter the findings of agency audits, according to consumer groups and state regulators.
As an example, several critics point to an audit conducted in 1997 that found the major local telephone companies were carrying as much as $20 billion worth of equipment on their books that could not be found.
The auditors determined that by keeping the missing equipment on their books, the telephone companies were able to justify setting higher rates, effectively overcharging customers for years.
To punish the phone companies, the agency's staff proposed unusually steep fines totaling $2.3 billion, according to internal documents. At the time, the FCC had never fined a company more than $2 million. But the FCC ultimately settled the matter without imposing any penalty.
"Here we have the FCC finding a problem and never following up on it," said Loretta Lynch, president of the California Public Utilities Commission. "That seems to be the kind of lax regulation that has led to so many corporate shenanigans."
Lynch blames the FCC's inaction partly on the lobbying of local telephone companies at the agency and on Capitol Hill. "We don't have a lobbyist at the FCC, and every single company has several," Lynch said.
FCC spokesman David Fiske said this week that the agency does not comment on the details of specific audits. In addition, Fiske noted that the agency's commissioners never voted to accept the results of the 1997 audit, so the findings are moot.
Nevertheless, Gene Kimmelman, director of the Washington office of Consumers Union, said yesterday that the FCC should take another look at the findings. "This is not so much for the benefit of investors but to protect rate-payers," Kimmelman said.
Instead of insisting on fines, the FCC used the 1997 audit to settle a separate, 15-year dispute between the local phone companies and long-distance giants such as AT&T Corp. and Sprint Corp. Both AT&T and Sprint claimed that the local phone companies (corporate behemoths such as SBC Communications Inc., BellSouth Corp. and the former Bell Atlantic) overstated their costs in an effort to charge inflated rates for connecting a long-distance call to a local network. As part of the compromise, rates were revised and long-distance companies dropped their support of the audit.
Former FCC chairman William E. Kennard, who presided over the agency when the deal was reached, defended the commission's actions during an interview this week.
"From where I sat, it was a resource issue," Kennard said. "I could fight the Bell companies for 10 years or get everyone to the table and provide consumers with an immediate and significant reduction" in their monthly bills.
But Brian Moir, a lawyer who represents big-business customers at the FCC, said the compromise allowed the long-distance companies to lower their costs but provided only short-term gains for consumers. "Over a five-year period, we are still worse off," said Moir. "The FCC took a dive."
FCC auditors first became suspicious that the telephone companies were padding their filings with nonexistent equipment after state regulators found problems during spot checks at several local facilities. The FCC did its own investigation and also had difficulty locating the equipment the companies claimed they had.
The regional telephone companies dispute the agency's findings, saying the results were inaccurate. Auditors, for instance, unfairly counted equipment as missing even after it was eventually found in another location, the companies said.
"We are not talking about missing equipment," BellSouth spokesman Bill McCloskey said. "We are talking about equipment that wasn't in the drawer it was supposed to be in."
Priscilla Hill-Ardoin, senior vice president for federal regulation at SBC Communications, said commission members carefully reviewed the conflicting claims before deciding to ignore the audit.
"This was not something that was swept under the rug," said Hill-Ardoin. "Competent policymakers deliberated on this for more than a year before determining this was not a substantive issue worth pursuing."
McCloskey also noted that the FCC no longer regulates telephone companies based on their cost of providing service to customers. Instead, the agency now caps prices and leaves it to the telephone companies to make a profit under the ceiling.
But the FCC's own auditors warned that by overstating their costs, the telephone companies tricked the agency into setting those caps higher than they should have been. "As a result of overstated plant investment, initial price cap rates were set too high, and because plant investment accounts have never been corrected, price cap rates remain too high today," states one report written after the audit was completed in 1997.
