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Inc.,  Bn Approval of Cost Accounting Plan DA 952083 //$ $/ Part 32 Uniform Systems of Accounts /$ $/ 64.903 Cost Allocation Manuals /$  X_- J(ԊBefore the W FEDERAL COMMUNICATIONS COMMISSION  X1-Washington, D. C. 20554 l lU  Y -In the Matter of: hh,V)ppDA 952083   ` `  hh,V)  Y-The Southern New England Telephone Company)  Yy-` `  hh,V)pp  Yb-Accounting and Cost Allocation PlanV)ppTransmittal No. 641  YK-` `  hh,V)pp  X-R ORDER ĐlU  Y-Adopted: September 29, 1995 hh,V;ppReleased: September 29, 1995 By the Bureau Chief, Common Carrier Bureau: X|-l l  XN-)BI. INTRODUCTION ĐlU  Y - ` ` 1.  In this Order, we address issues related to Southern New England   Telephone Company's ("SNET") accounting plan that was filed with tariff material provided   under Transmittal No. 641, which proposes rates for SNET's Video Dialtone ("VDT") market  Y-  trial service.f YU"-ԍ SNET Transmittal No. 641, D&J at 1115, filed March 9, 1995.f Four parties filed comments and SNET filed a reply.vy Y$-  Mԍ The following four parties filed comments regarding Transmittal No. 641: MCI   Telecommunications Corporation ("MCI") filed an Opposition to Waiver Request and Petition   to Reject, or in the Alternative, to Suspend and Investigate; Cablevision Systems Corporation   and The New England Cable Television ("Cablevision/NECTA") filed a Petition to Reject or,   xin the Alternative, to Suspend and Investigate SNET's Accounting and Cost Allocation Plan;   National Cable Television Association, Inc. ("NCTA") filed comments on SNET's Accounting"(0*0*0*("   and Cost Allocation Plan; and TeleCommunications Inc., ("TCI") filed a Petition to Reject   SNET's VDT Tariff for the West Hartford System. Only MCI addressed the accounting plan.  On June 19, 1995, SNET"K0*0*0* "   filed supplemental information regarding its accounting plan. Three parties filed comments in  Y-  response to SNET's supplemental material and SNET filed a reply.K Y-  ԍ MCI filed comments, Cablevision/NECTA and NCTA each filed a Response to SNET Supplemental Information Supporting SNET Cost Accounting Plan. For the reasons set forth   herein, we approve SNET's accounting plan. This Order does not address issues pertaining to SNET's cost allocation plan because they will be addressed in the tariff review process.  X-+] II. BACKGROUND ĐlU  Y_- R ` ` 2.  On November 12, 1993, the Commission issued the SNET Trial Order_ Y-  ԍ See The Southern New England Telephone Co., 9 FCC Rcd 1019 (1993) (SNET Trial  Y-Order).   ;granting, in part, SNET's application filed pursuant to Section 214 of the Communications Act  Y3-  iof 1934, as amended,3  Yg-  ԍ 47 U.S.C. 214. Generally Section 214 requires Commission authorization before LECs   Jextend a new line of interstate communication. For Section 214 purposes, a "line" means "any   =channel of communication established by appropriate equipment, other than a channel of   communication established by the interconnection of two or more existing channels." 47 U.S.C. 214(a). and Sections 63.01 and 63.54 of the Commission's rules,I3 Y-ԍ 47 C.F.R. 63.01, 63.54.I as amended  Y -  by the Commission's VDT Order.^  YV-  ԍ Telephone CompanyCable Television CrossOwnership Rules, Sections 63.5463.58, 7  Y?-  FCC Rcd 5781 (1992) (VDT Order), aff'd & modified on recon., 10 FCC Rcd 244 (1994) (VDT  Y*-Recon Order). ^ The SNET Trial Order approved SNET's proposal to conduct   a technology and market trial of VDT service for one year in its West Hartford, Connecticut  Y -telephone service area, subject to certain considerations.  Y -  ԍ In its application, SNET proposed to serve 1,600 subscribers through a hybrid fiber opticcoaxial cable distribution network.  Y - 3 ` ` 3.  On November 7, 1994, the Commission issued the VDT Recon Order. In  Y -  Zthat Order, the Commission reaffirmed its basic VDT framework adopted in the VDT Order   xand, among other things, set forth accounting and reporting requirements for local exchange   -carriers ("LECs") that offer VDT service. The Commission required LECs offering VDT to   ;establish two sets of subsidiary accounting records: one set to capture the investment, expense"h0*((+"   and revenue wholly dedicated to VDT; the other set to capture the investment, expense and  Y-  revenue shared between VDT and other services.^  Yb-ԍ VDT Recon Order, 10 FCC Rcd at 326, para. 173.^ Wholly dedicated refers to investment,   expense and revenue related exclusively to providing VDT service. Shared refers to investment,   [expense and revenue related to providing VDT and other telephone services on a joint or common basis.  Yv-  ` ` 4.  On November 22, 1994, the Commission released the Expanded Trial  Ya-  JOrder, a{ Y -  -ԍ See Southern New England Telephone Company, 9 FCC Rcd 7715 (1994) (Expanded  Yx -Trial Order). which granted SNET authority to construct a hybrid fiber optic/coaxial cable network  YL-  ;in two additional geographic areas for a one year market and technical trial.I L Y-  ԍ One geographic area is comprised of the northern Connecticut towns of West Hartford   <(excluding previously approved areas), New Britain, Farmington and Hartford. The second geographic area is comprised of Stamford, Norwalk, Darien, Westport and Fairfield.I SNET proposed   to make video dialtone service available to 150,000 homes during the course of the trial, and   jSNET estimated that approximately 20,000 homes would subscribe to VDT. SNET's 214   application stated that it would initially provide only video service over its network. The  Y -  xExpanded Trial Order permitted SNET to offer video service; it directed SNET, however, to   submit and obtain approval of accounting and cost allocation plans prior to offering local  Y -exchange and exchange access telephone services over the upgraded network during the trial.b  Y-ԍ Expanded Trial Order. 9 FCC Rcd at 7748, para. 58.b  Y-   ` ` 5. On March 9, 1995, SNET filed a petition for expedited waiver of Sections  Y-  69.110 and 69.112 of the Commission's rules.Q O  Y-ԍ 47 C.F.R.  69.110 and 69.112. Q The waiver would allow SNET to introduce   a rate structure and tariff rate element for its initial VDT market trial service offering. In its   [waiver, SNET also seeks to establish a broadcast connection charge, which is a recurring  Y;-  monthly rate to be charged to programmercustomers on a 6 MH#c P7P#Z#Xw P7[hXP# basis. On the same day   SNET filed its petition for waiver, it also filed Transmittal No. 641, revising its Tariff F.C.C.   No. 40 to introduce its proposed VDT market trial service in two additional geographic areas   in Connecticut in accordance with its waiver request. Because SNET planned to offer telephony   services over its upgraded network during the trial, it filed accounting and cost allocation plans,  Y-  as required under the Expanded Trial Order,Z  Yy$-  ԍ The Commission granted SNET's Section 214 application for the expanded market trial   Jon the condition that, among other things, "[i]n the event SNET wishes to offer local exchange   ,and exchange access telephone service over the upgraded network during the trial, SNET must  Y4'-  first submit and obtain approval of an accounting and cost allocation plan." See Expanded Trial"4' 0*((X'"  Y-Order. 9 FCC Rcd at 7748, para. 58.Z as part of its Description and Justification to"{0*(("  Y-  <Transmittal No. 641. On March 29, 1995, four parties filed commentsG{ Y,-ԍ See supra note 2.G on Transmittal 641   and, on April 28, 1995, SNET filed reply comments. On June 19, 1995, SNET filed  Y-  winformation to supplement its accounting plan. Y-  ԍ The supplemental information provides a more detailed description of SNET's proposed   accounting methodology and defines the process and underlying principles associated with the   identification of telephone and VDT revenues, investments and costs contained in SNET's subsidiary accounting records. to comply with the Commission's VDT specific  Y-  haccounting requirements contained in Responsible Accounting Officer Letter Number 25.$ Y -  ԍ Responsible Accounting Officer Letter 25, 10 FCC Rcd 6008 (1995) (RAO 25).  RAO 25   >provides guidance on accounting methods for VDT for LECs that receive Section 214  Y-  ,authorization to provide VDT service on either a trial or commercial basis. RAO 25 sets forth   hspecific guidance on the requirements for accounting classifications, subsidiary records, and on required amendments to cost allocation manuals.$ On   /June 23, 1995, the Common Carrier Bureau ("Bureau") solicited comment on SNET's  Y-  ,supplemental information.&  Y1-  /ԍ Public Notice, Southern New England Telephone Company Files Supplemental   iInformation In Support of Its Cost Accounting Plan Filed In SNET Transmittal No. 641, DA 951419 (Com. Car. Bur. released, June 23, 1995). & Three parties filed commentsAx Y-ԍ See supra note 3.A and SNET filed reply comments.+ Yi-  ԍ On July 28, 1995 SNET filed an ERRATA to its reply to replace two pages of   Connecticut Department of Public Utilities Control ("CDPUC") transcript of State VDT hearings.   In this Order we address the accounting plan. We will defer consideration of the cost allocation plan to the tariff review process.  X1-l U A.  Responsible Accounting Officer Letter No. 25  Y - ` ` 6.  In the VDT Recon Order, the Commission delegated authority to the   Bureau to determine the content and format of both the subsidiary accounting records and the  Y -  quarterly reports.  Y6$-  Ѝ VDT Recon Order, 10 FCC Rcd at 326, para 173. In RAO 25, we address only the   accounting classifications, format and content requirements for LEC subsidiary records and   CAM filing requirements. The Bureau will address the format and content for LEC VDT  Y&-  quarterly reports in a separate proceeding. See Reporting Requirements on Video Dialtone Costs"&0*(('"   and Jurisdictional Separations for Local Exchange Carriers Offering Video Dialtone Services, 60 FR 35548 (July 10, 1995). On April 3, 1995, the Bureau released RAO 25 which provides guidance on" b0*((l "   jaccounting classifications, subsidiary records, and amendments to cost allocation manuals  Y-  w("CAMs") for LECs authorized to provide VDT service.cb Y-  ԍ See 47 C.F.R. 64.903. LECs with annual operating revenues of $100 million or more   <are required to file a CAM with the Commission. CAMs contain information regarding the  Y-LECs' allocation of costs between regulated and nonregulated activities. c Under RAO 25, LECs must maintain  Y-  subsidiary records, by accounts established under Part 32 of the Commission's rules,= Yl -  [ԍ 47 C.F.R. Part 32. All LECs subject to the Commission's rules are required to use   balance sheet and income statement accounts and accounting procedures prescribed in Part 32 of the Commission's Rules, the Uniform System of Accounts ("USOA").= that   capture all wholly dedicated and shared investment, expense, and revenue associated with  Y-providing VDT service.j  Y-  ԍ In the VDT Recon Order, the Commission determined that it was not necessary to make   permanent changes to the Commission's USOA for LEC provision of VDT. The Commission,   Yhowever, required that LECs offering VDT service create subsidiary records to capture wholly  Y~-dedicated and shared VDT costs. See VDT Recon Order at para 173.  Yx- `  ` ` 7. Investment. RAO 25 specifies that for accounting classification purposes,   VDT investment includes all plant wholly dedicated to VDT or shared between VDT and other  YL-  services.>L Y-ԍ RAO 25 at 3. > Wholly dedicated investment is defined as investment that is used exclusively for the   Yprovision of VDT service; while shared investment is defined as investment that is common, or  Y -  used jointly, to provide VDT and other services.3  Y\-ԍ Id.3 RAO 25 also requires that LECs separately  Y -  track both wholly dedicated and shared VDT investment. @ Y-  ԍ LECs are required to use tracking codes that allow VDT costs to be extracted and   summarized from the USOA expense accounts. LECs are permitted to create tracking codes that   jare compatible with their existing internal accounting systems. These codes include field   yreporting codes, job function codes, location codes, or any other identification codes that  Y!-facilitate audits. RAO 25 at 5.  LECs must track both new  Y -  investments and existing plant that is converted to provide VDT.<  Y:$-ԍ RAO 25 at 3.< In order to track net   investment, subsidiary records must identify, for each plant account, all accumulated   depreciation, amortization and deferred income taxes associated with wholly dedicated and" J0*(( "  Y-  shared VDT investment.3 Yy-ԍ Id.3 In addition, LECs are required to maintain subsidiary records to   identify, by USOA plant account, the cost of plant that is replaced or retired due to either the   Ydeployment of VDT plant or the deployment of fiber optic network upgrades made pursuant to  Y-state authority in study areas where VDT deployment occurs.3{ Y-ԍ Id.3  Y-  ` ` 8. Expense. RAO 25 defines VDT expense to be all expenses identified with   the provision of VDT service including expenses incurred during the initial development and   .deployment stages of VDT, such as research and development expense and legal services  YJ-  ,expense.3J. Y) -ԍ Id.3 RAO 25 requires that LECs maintain separate subsidiary records for dedicated and  Y5-  shared VDT expenses.: 5 Y-ԍId.: LECs are required to identify depreciation and amortization expense   associated with wholly dedicated and shared VDT investment separately by each USOA plant  Y -  account.3!  YL-ԍ Id.3 RAO 25 also states that support expenses, such as network support, general support,   corporate operations and general administrative, need not be tracked by function code. These   ,expenses are considered "shared" expenses and a percentage of them must be allocated to VDT  Y -  service.9" G  Y-ԍ Id. at 4.9 In addition, RAO 25 requires that LECs track employee work time associated with  Y -VDT by using existing time reporting procedures and VDT specific function codes.]#  YZ-  ԍ Id. For example, LECs that currently use time reporting tracking mechanisms in order   + to identify regulated and nonregulated activities of support functions, such as legal services, must continue to use similar accounting tracking mechanisms to identify VDT expenses. ]  Y-  ` ` 9. Revenue. RAO 25 requires that LECs maintain subsidiary accounting  Yl-  records to separate VDT revenues from other intrastate and interstate services. $l Y -  ԍ RAO 25 requires LECs to record revenues in USOA accounts consistent with the  Y!-category of VDT service set forth in their tariffs. RAO 25 at 4. See also 47 C.F.R. 32.4999.  It also requires that LECs identify by subsidiary record category any nonregulated VDT revenues.   Y'- ~ ` `  10. Accounting Records. Pursuant to RAO 25, LECs that receive Section 214  Y-  ;authorization to provide VDT service are required to establish subsidiary accounting records.<% Y&-ԍ RAO 25 at 4.< "%0*(("   ,LEC subsidiary accounting record entries must be readily identifiable by account title, account   number, subaccount identification, and study area and must include all initial and ongoing  Y-  transactions that directly affect investment, expense and revenue accounts.3& YK-ԍ Id.3 RAO 25 further   requires that LECs maintain subsidiary accounting records so that the content of these records  Y-  can be traced from the LEC's continuing property records ("CPRs")'{ Y-  ԍ Part 32 of the Commission's Rules requires that LECs establish and maintain as part of   their accounting system, CPRs for each unit of property that reflect, among other things, the  Y -  -identity, vintage, location, original cost and ongoing financial transactions. See 47 C.F.R. 32.2000. through the accounting  Y-  system to the general ledger and to the equipment's physical location.<( Y) -ԍ RAO 25 at 5.< In addition, RAO 25   requires that LECs provide internal accounting controls, a complete audit trail for each   xsubsidiary account record, and subsidiary accounting records that are reconcilable with total  YL-amounts reported in the USOA accounts.9)L Y-ԍ Id. at 4.9  X - B.SNET's Accounting Plan  Y -   ` `  11.  SNET's accounting plan proposes mechanisms to capture revenue,   investments and expenses related to the provision of VDT for the following three categories: (1) video only, (2) telephony only, and (3) shared between video and telephony.  Y-  ` `  12.  Investment. In its accounting plan, SNET states that it currently tracks   1business costs such as capital, removal, maintenance, and repair associated with  Yh-  telecommunications plant and equipment through field reporting codes ("FRCs").l*HhM  Yf-  [ԍ According to SNET, FRCs are part of the accounting system used to expedite field   ,reporting. Each code is composed of a number to indicate the type of plant asset involved and   a letter to indicate the nature of the work performed. For example, the FRC 77C indicates new   ianalog switching equipment, i.e., 77 indicates analog switching equipment and C designates   hconstruction. The letter X indicates removal, therefore, 77X would indicate removal of analog  Y -  switching equipment. See Attachment A of Southern New England Telephone Company's June   K19, 1995, Ex Parte Filing concerning SNET Transmittal No. 641, Supplemental Information Supporting SNET's Cost Accounting Plan. l A FRC is   hassigned to each investment component at the time of purchase and, based on the original FRC,   hadditional FRCs are developed to track expense associated with the investment. Under SNET's   ;accounting plan, for purposes of tracking VDT costs, a series of FRCs would be established to   identify all costs incurred during the VDT trial and to categorize the costs into the three VDT" ]*0*(("  Y-  wcategories.I+ Yy-  ԍ According to SNET, a retirement unit will be accounted for in the most appropriate of   hthe three categories. For example, since fiber is predominantly shared by video and telephony,  YK-it will be categorized as shared. Id. at 3. I SNET stresses that its categorization relies on current knowledge regarding future   use of investment components to provide services. The accounting plan provides that all plant   investment in place prior to VDT construction would be evaluated and categorized. In addition,   Yin order to ensure that employee time is coded to an appropriate FRC, SNET'S accounting plan   states that specific instructions and job aids would be given to construction, installation, and maintenance personnel.  Y_- o ` `  13.  Depreciation and Deferred Taxes. SNET states that it does not account for   depreciation and deferred taxes on a detailed equipment basis therefore it must use an allocation   jmethod to derive depreciation and deferred tax expense associated with VDT investment.   SNET's accounting plan would allocate depreciation and deferred taxes to each investment FRC based on the ratios of investment in each of the three categories to total plant in service.  Y -  ` `  14.  Plant Related and NonPlant Related Expense. The accounting plan states   that, for plant related expense, employees would code their work time to a unique FRC created   jfor expense associated with the investment. For nonplant related expense, employees are   assigned function codes based on the work they perform. These function codes are used to track   employees' time and other expenses through the accounting system. Under the accounting plan,   new VDTspecific function codes would be used to track employees' time and costs for inclusion   in the VDT categories. The accounting plan states that SNET would review all organizational   entities in order to determine how each entity's work functions relate to the three categories.   Based on that review, entities would be assigned function codes to enable categorization of costs  Y-  for organizational projects, or for use by other entities that assist on the project.{,M Y-  ԍ For example, the legal department normally provides services to other entities for specific   projects. Other entities, by establishing VDT function codes, would be able to provide   Jattorneys in the legal department with projectspecific function codes for their use in reporting time.{ For example,  Y-  KSNET's end user customer service organization would be assigned telephony function codes   because SNET does not plan to offer end user customer services that relate to VDT service.  Y-  Organizations that perform duties related to access services would, however, be assigned shared   function codes because they would perform duties, that relate to both interexchange services and video services.  Yg-  ` ` 15.  Retirements. The accounting plan assumes that telephone network plant   would be retired as part of SNET's network upgrade, not as a result of VDT service. It therefore does not provide subaccounts for plant retirement costs. "#,0*(("Ԍ Y-  ` ` 16.  Revenue. According to SNET's accounting plan, SNET currently tracks   revenue by using universal service order codes ("USOC"s). SNET uses USOCs to identify   ;sources of revenues in order to assign revenues to the appropriate subsidiary records within its   accounting system. SNET currently uses these codes to track various regulated services by   assigning a USOC to each transaction after receiving a service order, message, or adjustment.   USOCs thus enable SNET to continue to identify a particular revenue source after it has been   assigned to specific accounts within the accounting system. Under its accounting plan, SNET  Y`-  would create separate USOCs for regulated VDT revenue,-` Y-ԍ SNET anticipates only regulated interstate and intrastate revenue for its VDT services. which would be included in unique subaccounts identified as subsidiary records for VDT.  X - III. Comments and Discussion ĐlU  X -  A.SNET is Required to Maintain Subsidiary Records for Plant Assets Retired as a Result of ISNET Construction  Y -  Y - R` ` 17.  NCTA argues that the Commission should reject SNET's proposed cost  Y-  accounting plan because SNET failed to adhere to RAO 25's requirement that subsidiary records   identify, by USOA account, the cost of plant replaced or retired due to either the deployment  Yf-  of VDT plant or the deployment of fiber optic network upgrades.G.fy Y-ԍNCTA comments at 34. G NCTA also claims that   SNET incorrectly argues that it is not required to identify costs associated with its fiber optic   znetwork upgrade (ISNET) because these costs will not be specifically incurred for the   deployment of VDT. NCTA contends that SNET must report the costs associated with the "I Y -  SNET" network upgrade because RAO 25 requires identification of the cost of plant "due to  Y-  xdeployment of either VDT plant or fiber optic upgrades."=/* Y-ԍId. = NCTA and Cablevision/NECTA  Y-  argue that SNET's proposed upgrades, to a great extent, are for VDT.f0 Yl-ԍ NCTA comments at 34. Cablevision/NECTA Comments at 1112. f Cablevision/NECTA   state that SNET's decision to offer VDT would result in $1 billion in depreciation costs for early  Y-retirement of telephone plant that should be reflected in SNET's cost allocation plan.N1 Y -ԍ Cablevision/NECTA Comments at 1112.N  Y- ~ ` ` 18. In response, SNET asserts that the fiber optic network upgrades associated   ,with its ISNET project were not initiated specifically to provide video dialtone nor to comply  YU-  with any state mandate. SNET, therefore, argues that it is in compliance with RAO 25.:2U?  YE&-ԍ SNET Reply at 8.: SNET   ;further asserts that Cablevision/NECTAs' arguments concerning additional depreciation caused"@ 20*((j"   by technology deployment are inappropriate in this proceeding because there is no basis for   ,assuming there will be any change to the Commission's prescribed asset lives specific to SNET  Y-and there is no regulatory finding that results in the level of cost to which commentors refer.43 YK-ԍ Id. 4  Y-  " ` ` 19. RAO 25 requires "that LEC's keep subsidiary records to identify, by Part   32 account, the cost of plant that is replaced or retired due to either the deployment of video   dialtone plant or the deployment of fiber optic upgrades as mandated under state authority in  Ya-  Kstudy areas where VDT deployment occurs."<4a{ Y -ԍ RAO 25 at 3.< SNET claims that its decision to upgrade its   ,network facilities with fiber optic coaxialcable facilities was not influenced by its decision to  Y3-  ;offer VDT service and thus it is not required under RAO 25 to maintain subsidiary records for   the costs of retired plant. We believe that SNET's accounting plan should contain provisions   for recording retired plant irrespective of the underlying reasons that support SNET's decision   to construct its ISNET network. We realize it may be difficult for SNET to determine whether   Yspecific retirements are VDT related; however, we believe that SNET is able to determine total   retirements resulting from construction of the ISNET network and therefore we require that   SNET include total retirements in its VDT reports. As SNET's VDT trial progresses the   ZCommission will collect and analyze cost data related to the trial. The data and information   reported during the course of the trial will allow the Commission to make informed decisions   wregarding appropriate costing methodologies for VDT services. To ensure that the Commission   has sufficient data to make such decisions, we require that SNET's accounting plan include   subsidiary records that contain the costs for retirements of transmission facilities within the   Lgeographic area in which the trial is conducted. We therefore require SNET to maintain   -subsidiary records on plant assets replaced as a result of its ISNET network upgrade and to   amend its accounting plan to reflect this requirement within 30 days of publication of this Order in the Federal Register.  X- B.Adequacy of Existing Accounting Controls for VDT  Y-   ` ` 20. Cablevision/NECTA state that the record reveals that SNET's accounting   methodology may be inadequate. For example, Cablevision/NECTA claim that SNET admits   that reported labor expenses associated with the trial are an estimate even though SNET purports  Y<-  to have a tracking mechanism in place.P5<. Y"-ԍ Cablevision/NECTA Comments at 12 n.33.P Cablevision/NECTA also claim that SNET fails to   explain the internal controls it plans to implement to confirm the integrity of the accounting   plan. Without adequate controls, these commenters believe field reporting codes and function  Y-codes are useless because they would not be properly applied by company personnel.=6 Y&-ԍ Id. at 1213.= " 60*(( !"Ԍ Y-  ` ` 21. SNET contends that adequate accounting controls presently exist and VDT   transactions will be subject to existing controls and audits. In addition, SNET maintains that its   controls are constantly under review both internally and by external audits conducted by the  Y-CDPUC, Arthur Andersen and Coopers and Lybrand.=7 Y5-ԍ SNET Reply at 910.=  Y- a` ` 22.  As stated above, RAO 25 requires that LECs "have internal accounting  Yy-  controls and a complete audit trail for each subsidiary account record."<8yy Y -ԍ RAO 25 at 4.< SNET's accounting   Jplan proposes to meet this requirement by establishing accounting codes and methods to ensure   that employees apply the proper codes. Commenters argue that if employees fail to accurately   record the codes for time spent on a particular project, the costs for that project will be   misstated. Based on our review of SNET's accounting plan, it appears that SNET has developed   adequate controls. For example, the plan proposes disseminating lists of VDT projects and   corresponding accounting codes to employees responsible for VDT related work. Moreover,   ,the specific codes identified by SNET in its accounting plan are not unique to VDT, but rather   represent a system SNET uses to identify costs associated with several projects over a range of   ;service offerings, including VDT. Because SNET's accounting codes are an integral part of its   + accounting system, we believe that SNET will be subjected to the necessary accounting discipline   and review to produce accurate results. Nevertheless, because we consider the development and   maintenance of internal controls to be crucial to the accuracy of reported VDT costs, we require   <SNET to provide a more detailed explanation, including documentation, of how its controls   ,provide sufficient safeguards to ensure accurate information. In addition, we require SNET to   Jinclude an evaluation of its internal controls for VDT allocations and assignments as part of its   hannual independent CAM audits. Moreover, we will also proactively evaluate SNET's internal   accounting controls for VDT through our own audit program. We believe that these safeguards will provide adequate oversight of SNET's internal controls.  X-  C. SNET Compliance With the Requirements for Separating Regulated and  X-Nonregulated Costs  Y-  Yh-  Q ` ` 23. Cablevision/NECTA argue that SNET performs nonregulated activities on   behalf of its nonregulated affiliate, Diversified Group. Cablevision/NECTA claim that these   hnonregulated activities include negotiating contracts with programmers that contain obligations   : that benefit Diversified Group, hiring consultants to engage in scheduling enhanced pay per view   ("EPPV") and video on demand ("VOD") programming, and publishing a programming guide   and paying viewing fees that would normally be charged to end users of EPPV and VOD  Y-  iprogramming.N9, Y%-ԍ Cablevision/NECTA Comments at 911. N Cablevision/NECTA state that SNET's cost accounting plan fails to provide   sufficient information regarding SNET's activities on behalf of Diversified Group, and suggests   that the Commission require SNET to provide a list of all of its nonregulated services and"! 90*((""   .products associated with VDT. Cablevision/NECTA also suggest that SNET provide the   KCommission with account data for investments, expenses, revenues and sources of funds for  Y-Diversified Group.3: YK-ԍ Id.3  Y-  ` ` 24. S NET contends that it does not provide nonregulated services. SNET   maintains that, although its standard contract with programmers includes nonregulated service   provisions, such nonregulated services are actually provided by Diversified Group and that   accounting mechanisms are in place to ensure that nonregulated costs are charged to Diversified   Group. SNET, in response to Cablevision/NECTA's suggestion that it provide financial   information for Diversified Group, states that it is not required to provide financial information  Y -on an nonregulated subsidiary.:; { YG -ԍ SNET Reply at 7.:  Y -  ` ` 25.  We conclude that SNET has complied with the Commission's requirements   for separating regulated costs from nonregulated costs. Cablevision/NECTA have not persuaded   us that the existence of SNET contracts covering both regulated and nonregulated activities is   evidence of crosssubsidization between SNET and its nonregulated subsidiary, Diversified   LGroup. Under the Commission's rules, carriers are permitted to offer both regulated and   nonregulated services. LECs, however, are required to follow the cost allocation rules specified   in Section 64.901 and to adhere to the separations procedures specified in their cost allocation  YM-  manuals.<M, Y*-  ԍ On June 30, 1995 SNET filed a quarterly update of its cost allocation manual that  Y-incorporates the requirements contained in RAO 25. In order to correctly separate costs between regulated and nonregulated activities,   employees and organizations must properly code costs and activities as either regulated or   .nonregulated. Accurate cost coding relies on adequate accounting controls and, through   independent CPA and FCC audits, we believe we will be able to provide adequate oversight for these accounting controls.  X- D. Cost Allocation Plans are Not Addressed in This Order  Y-  5 ` ` 26.  MCI, Cablevision/NECTA and NCTA argue that the cost allocation   jmethods employed by SNET are deficient because they fail to comply with the standards   established in the Commission's VDT proceeding. Cablevision/NECTA argue that SNET's   accounting plan is unlawful because SNET's cost allocation plan is flawed and, therefore,   requests that the Commission reject or investigate SNET's proposed accounting and cost  Y#-  allocation plans.<=# Y%-ԍ SNET reply at 34.< SNET replies that the Commission sought comment on the accounting plan, not the numerous cost allocations issues raised by commenters. " y=0*(( "Ԍ Y- p ` ` 27.  This order addresses only SNET's accounting plan. We believe that, if   VDT costs are properly recorded in the accounts, adjustments can be made at a later date if   changes in allocation methodologies warrant changes to subsidiary records. As stated above,   in this order we only address SNET's VDT accounting plan. Cost allocation issues pertaining to VDT will be addressed in the tariff review process.  Y-` `  Yw-  IV. ORDERING CLAUSES  Ya-  YJ- ` ` 28.  Accordingly, IT IS ORDERED, pursuant to authority contained in Sections   1, 4(i), 218220 and 403 of the Communications Act of 1934, as amended, 47 U.S.C.  151,   J154(i), 218220 and 403 and Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R.     0.91 and 0.291, that Southern New England Telephone Company's video dialtone marketing trial accounting plan, IS APPROVED subject to the following conditions:  a) That within 30 days of publication of this Order in the Federal Register, SNET shall   jrevise its accounting plan to include subsidiary records that reflect replacement of retired   transmission plant with fiber optic and coaxial cable facilities within the VDT trial's geographic areas.  0b) That within 30 days of the release of this Order, SNET shall provide a detailed   explanation, including appropriate documentation, regarding the sufficiency of its internal controls.  Y- yc) That SNET's annual CAM audit for 1995 shall include an evaluation of VDT internal controls.  Y- ` ` 29.  IT IS FURTHER ORDERED pursuant to authority contained in Sections   1, 4(i), 218220 and 403 of the Communications Act of 1934, as amended, 47 U.S.C.  151,   J154(i), 218220 and 403 and Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R.    L0.91 and 0.291, that the Cablevision Systems Corporation's and The New England Cable   ZTelevision Association's Petition to Reject or, in the Alternative, to Suspend and Investigate   SNET's Accounting and Cost Allocation plan is DENIED to the extent that petitioners seek rejection of the accounting plan.  Y- ` `  hh,VFEDERAL COMMUNICATIONS COMMISSION  ` `  hh,VKathleen M.H. Wallman  YU%- hh,VChief, Common Carrier Bureau