d understand. Depreciation has to take into account both the natural failure rate of old equipment and the economic impact of obsolescence. No one ever accused the old Western Electric of shoddy manufacturing; its gear was manufactured to last. Forty-year life spans for electronic equipment such as telephone switches seem almost absurd in today's fast-paced world, but they were the norm for dec- ades. For many years, AT&T did not even selectively depreciate its capital plant based on actual life span; instead, all capital expenditures for a given year were lumped into a "vintage group" and depreciated at one rate. Thus telephone The Great Telecom Meltdown poles, switches, and cars were all depreciated together, generally at rates set by state regulators. (A second set of books was needed for tax purposes, since state regulators and the Internal Revenue Service had different depreciation schedules.) The Smith Decision and Universal Service One of the policy goals of the FCC's early years was to promote universal service, making the telephone a standard part of every American home. This had both public and private benefits. The public, of course, benefited from policies that made telephones affordable. This was, to some extent, used to justify the monopoly: Monopoly profits (i.e., prices in excess of what they would be in a competitive market) could be used to subsidize the price of service for those who otherwise might not be able to afford it. This largesse was divided between two broad classes of recipients. Rural telephone service is far costlier to provision than urban; since most of the cost of service is in outside wire, the low density of rural areas leads to very high capital expenditure requirements. Residential subscribers in general also got a break: Business line rates were kept much higher than residence line rates, SO that the former could subsidize the latter. The mechanisms of the subsidy were anything but transparent. Besides the disparate rates for residential and business lines, AT&T charged far