WPCX 2B'J Courier#dp@~rM@#E37PCG Timeset 4_230_1HPLAS4.PRS 4x  @\oeX@26]m Z1#|d'@~rM@##|d'"i~'K2^18MSS888S8888SSSSSSSSSS88Jxir{icx{8Aui{x`xoYi{xxxl888SS8JSJSJ8SS..S.SSSS>A.SSxSSJJSJS+SSSSS8SSSSSSSSS.xJxJxJxJxJorJiJiJiJiJ8.8.8.8.{SxSxSxSxS{S{S{S{SxSxJ{SxSxSxS{S`SxIxSxIqIqIrSrS{dgIiSiSgIxSxSxSxSxS{S{S8.SSSS8Sz]SSuSg/g><q*"xxxxWWxxxWWkkxxx><q*"xxxxWWxxxWWkkxxx,?2?2>,H2H2H2H2H2J2J2!2222!2I822F2>>$?2@>J2:J2J2H2H2YHB$B$C26&6&6&62>$>?2J2J2J2J2J2J2^HH2@,@,@,J2?2J262?2H2<!22!!!WddddddddddddddddddddddddddddddddddddddddddddddddxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNHHH222!,))22X222YY2#2222Y#!!442Ydd22==Ld2d2H2;SS88Y!42^x#"ddddHHddd2Hdd4HHYYddd2YYddd Y2!!dddddH=dYHHHHHHHHHH!d2H282YdHdC2!2H,29HNAddHHHHHHHHHHddddd.dHHHHdddddddddddddddddddHHddddddSC=NdHddd+;HHHHddddddHHH2HHdHHdddHHH,HHHH,HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH!HHH!HHH!HHH!HHHHHHHHHHHHHH=?8=8C,?'A,J2H,!F,C8[8J,C2H,H=92=22?,H,C=H8N===H?J!2HHH=,====I!!2222HJ222HHH=!92,!ddhrZz.lZrrvvnFFZ8NECA, 5 FCC Rcd 7183 (1990). The letter identified "significant adjustments" as individual adjustments of  d(#$100,000 or more that the BOCs had reported to the CL pool for 1988 and 1989 other than the adjustments that  d(#had been addressed in the Commission audit. The independent audit covered the fifteen data months from January  d(#1, 1988 through March 31, 1989, after which time participation in the CL pool became voluntary and all BOCs left  d(#[that pool. The letter, however, also required that the independent audit "include adjustments reported after [the  d(#BOCs] left the pool on April 1, 1989" since carriers were allowed to submit adjustments for up to twentyfour  xP- d(#months following a particular data month. Id. As a result, the independent audit examined reported CL pool adjustments through March 1991._  Y- v  5. NECA hired the public accounting firm of Ernst & Young to conduct the independent  Y- d(#audit. Ernst & Young issued its report which NECA submitted to the Commission.E xP - d(#ԍ The Ernst & Young audit report is hereafter referred to as the "Adjustments Report." On February 11, 1993,  d(#the Commission concluded that this audit had complied with Commission directives and had been performed "with  d(#a high degree of skill and care," and that the independent auditor had "exercised sound professional judgment  xP]- d(#reflecting purposes of the [audit] and the information gathered during [its] course." See Letter from Donna R.  d(#Searcy, Secretary, FCC, to Robert A. McArton, Chairman of the Board of Directors, NECA, 8 FCC Rcd 1315 (1993).  That report  d(#wincluded numerous audit findings against the BOCs, including US West. The conduct noted by  d(#wErnst & Young has had a substantial impact on the CL pool as well as on the carriers' interstate  d(#Ytelecommunications services customers. This is because NECA distributes access tariff revenue  d(#ybased on reported data. Moreover, since the reported adjustments to the CL pool involve  d(#misstatements or miscalculations of interstate costs and revenues historically used to develop the  d(#;reporting carrier's access charges, and, after 1988, its price cap indexes, the reporting carrier's  d(#=interstate access customers, as well as end users, are affected. Although the independent  d(#auditor's report addressed the effects of the BOCs' conduct only on the CL pool, Commission  d(#xauditors are examining the effect on all interstate telecommunications services. Those of the  d(#independent auditor's findings that were directed against US West and that appear to warrant  d(#Commission action are the subject of our action here. These findings are summarized below.  d(#Attachment A provides the specific details of each finding, the Commission rules that were  d(#apparently violated, and the company's response to the findings. Attachment B presents, in  d(#tabular form, a summary of the apparent violations and their revenue impacts as revealed by the record to date.  Y5- QII. The Findings  Y- v  6. Section 220(a) of the Communications Act grants to the Commission specific authority  d(#,to "prescribe the forms of any and all accounts, records, and memoranda to be kept by carriers  Y- d(# subject [to the Act]...."?E xP%-ԍ 47 U.S.C. 220(a).? In turn, Section 220(d) authorizes the Commission to impose  d(#forfeitures on carriers who do not keep such accounts, records, and memoranda in the manner  d(#prescribed by the Commission. The findings in Attachment A appear to reveal conduct by US"0*(("  d(#wWest that violates Section 220 for the period that is the subject of the audit, namely, the period  Y-beginning January 1, 1988, and ending March 31, 1989.yxE xPb- d(#kԍ The apparent violations roughly fall into two categories for purposes of potential remedies. First, certain  d(#<apparent violations found to fall outside the applicable limitations period for assessing forfeitures may, nevertheless,  d(#necessitate corrective action by the Commission. For example, the Commission may require adjustments to carrier  d(#price cap indexes to eliminate distortions caused by unlawful conduct. Second, other apparent violations, if found  d(#to be continuing or to have continued into the period covered by the limitations period, could support Notices of  d(#kApparent Liability for Forfeiture under Section 1.80 of the Commission's Rules, 47 C.F.R. 1.80, as well as support other remedies, such as price cap adjustments.y  Y- v  7. The independent auditor's findings that we address here involve the misstatement or  d(# miscalculation of $16.2 million of interstate costs and revenues for the period from January 1988  d(#jthrough March 1989. In the aggregate, these misstatements or miscalculations apparently  Yw- d(#.benefited US West to the detriment of the users of US West's interstate services.z wE xP0- d(#.ԍ These figures are based on estimates US West provided to the independent auditor. See Letter from Bruce  d(#Baldwin, President, National Exchange Carrier Association, Inc., to Mr. Gerald P. Vaughan, Deputy Chief,  xP- d(#Operations, Common Carrier Bureau, at US West Attachment (Oct. 12, 1992) (October 12 Letter). Although those  d(#estimates encompass most of the independent auditor's findings, US West did not provide estimates of the impact of certain findings on interstate rates and revenue requirements.z $FNN  These  d(#Mmisstatements or miscalculations shifted costs between or among access elements, thus  d(#Yapparently overstating or understating US West's interstate revenue requirements for particular  d(#,services. The seriousness of the misstatements is compounded here not only because of the net  d(#impact and the extent of understatements and overstatements, but also because of the scope of  d(#Jthe errors or apparent violations and the fact that some of them may have continued to the date  d(#of this Order to Show Cause. The findings reveal the US West carriers' failure to maintain their  d(#;accounts, records, and memoranda in the manner prescribed by the Commission. To the extent  d(#that this conduct has continued, it must seriously undermine the Commission's confidence that  d(#US West's accounts accurately reflect Commissionmandated accounting practices and reveal the  d(#true and lawful costs of US West's interstate services. Moreover, and as explained more fully  d(#below, the apparent rule violations and misstatements may very well have led US West to compute price cap indexes which require correction.  Y5- v y  8. In the following paragraphs we describe the accounting irregularities that have led us to issue this Order to Show Cause.  X- A. Apparent Cash Working Capital Violations  Y- v   9. The independent auditor found twelve instances in which US West's calculation of  Y- d(#;cash working capital allowances apparently violated Commission rules.D  E xP%-ԍ Attachment A, at 16.D These allowances are  d(#supposed to reflect the average amount of investorsupplied capital needed to fund carriers' day"H 0*((}"ԫ Y- d(#today operations.] E xPy-ԍ See Attachment A, at 6 n.34.] The cash working capital allowance is added to a carrier's ratebase, thereby  d(#increasing the earnings a carrier is allowed. The independent auditor's findings present apparent  d(#violations of varying seriousness. In computing its cash working capital allowance for the  d(#audited period, US West did not make certain adjustments in a consistent manner, improperly  d(#.excluded certain cash expenses, and used average daily cash balances instead of required  Y- d(#;minimum bank balances.D XE xP-ԍ Attachment A, at 36.D From the record, it appears that these practices may have continued beyond the audit period.  XH- B. Apparent Rate Base and Net Income Calculation Violations  Y - v  10. In the 86497 Order,  E xP- d(#<ԍ Amendment of Part 65 of the Commission's Rules to Prescribe Components of the Rate Base and Net Income  xP{-of Dominant Carriers, CC Docket No. 86497, Report and Order, 3 FCC Rcd 269 (1987)(86497 Order). the Commission amended Part 65 of its rules to prescribe  d(#<principles for determining rate base and net income for all dominant carriers. The amended  Y - d(#rules took effect January 1, 1988. @E xP- d(# ԍ Id. at 269, para. 2. These rules codified and extended to carriers, which had not been part of the Bell System, many of the practices prescribed in Docket 19129. To implement the new rules, US West made a retroactive  d(#adjustment with NECA in October 1988. The independent auditor found that this adjustment  d(# failed to comply with the amended rules because US West failed to treat certain account balances  Y -in a manner consistent with Part 65.s E xP-ԍ Attachment A, at 68. See Adjustments Report at 9798.s  Xz- C. Apparent Jurisdictional Separations Violations  YL- v [  11. Responsibility for regulating telephone services is shared between this Commission,  d(#which regulates interstate service, and state commissions, which regulate intrastate service.  d(#Carriers must use a process called jurisdictional separations to apportion their costs and revenues  d(#between the state and interstate jurisdictions. The separations procedures are set forth in Part  Y- d(#36 of our rules.;( E xP -ԍ 47 C.F.R. Part 36.; The independent auditor found violations in the way that US West performed  d(#separations calculations, including the improper assignment of Information  d(#Origination/Termination investment and the improper separations treatment of leased operator  Y-equipment.E E xP%-ԍ Attachment A, at 810.E  Y- ` ` ` `  X~- D. Other Apparent Errors "gH 0*(("Ԍ Y- v   12. The independent auditor also found a number of other apparent rule violations,  d(#including violation of Section 32.4999(d) (improper shifting of revenues between accounting  Y- d(#periods);kE xPL-ԍ 47 C.F.R. 32.4999(d). See Attachment A, at 1011. k violation of Section 69.406 (improper calculation of end user carrier access line  Y- d(#charge);gXE xP-ԍ 47 C.F.R. 69.406. See Attachment A, at 1213. g and the incorrect reporting of end user revenue.CE xPU-ԍ Attachment A, at 11.C Some apparent rule violations could  d(#be characterized as clerical errors. For example, the independent auditor found that US West  d(#Koperating companies could not provide adequate documentation to support revenue and cost  Yw- d(#adjustments, or did not report such adjustments in a timely manner.<wxE xP -ԍ Id. at 1112.< In still other cases, US  d(#West improperly adjusted its cost allocation manuals and, as a result, submitted incorrect data  YI- d(#to the related CL pool.9IE xP-ԍ Id. at 12.9 As such errors and other violations accumulate, the data carriers  Y2- d(#report to NECA under Section 69.605 of our rules>2E xP{-ԍ 47 C.F.R. 69.605.> and to us under Parts 43 and 65 of our  Y - d(#rules@ ( E xP-ԍ 47 C.F.R. Parts 43, 65.@ become increasingly unreliable. Although these errors may have no current impact on  d(#US West's interstate rates, their number and scope persuade us to order US West to show cause  d(#I why its internal accounting and accountingrelated processes should not generally be brought into compliance with Commission rules and orders.  Y-m III. Discussion and Conclusion  Xd- A. NALs  Y6- v >  13. We find that the US West carriers' conduct appears to be inconsistent with their  d(#xstatutory obligation to maintain their accounts, records, and memoranda as prescribed by the  d(#Commission. Carriers must accumulate, process, and report their financial and operating data  d(#in accordance with very specific Communication requirements because we rely on those data to  d(# ensure that interstate telephone rates are just and reasonable. Moreover, we cannot evaluate how  d(#well our accounting rules work if carriers disregard or misinterpret these rules. Therefore,  d(#wwhere, as appears to be the case with US West, carriers either intentionally violate our rules or  d(#fail to maintain the internal systems necessary to ensure compliance with those rules, we believe  Y-forfeitures may be appropriate under Section 220 of the Act. E xP&- d(#[ԍ Section 220(d) provides for forfeitures if a carrier fails to keep its accounts, records and memoranda in the manner prescribed by the Commission. 47 U.S.C. 220(d). "0*(("Ԍ Y- v ԙ  14. Section 220(d) of the Act authorizes us to impose forfeitures of up to $6000 per  Y- d(#icarrier per day for accountingrelated violations.E xPc- d(#.ԍ 47 U.S.C. 220(d). Prior to December 19, 1989, the forfeiture amount was fixed at $500 per violation per day. Obviously, any violations that continued  d(#throughout the audit period and to the present could trigger substantial sums for the three US  d(#West companies. In order to make a determination about the amount of any forfeitures that may  d(#wlie, we direct US West to state when the conduct cited in paragraphs 8 through 11 and detailed  d(#in Attachment A ceased, if ever, and otherwise show cause why notices of apparent liability  Yw- d(#Zpursuant to section 1.80 of the Commission's rules should not issue.?w E xPH -ԍ 47 C.F.R. 1.80. ? Although US West's  d(#apparent violations began January 1, 1988, we would assess forfeitures only for the period  YI- d(#;allowed for by the limitations period.LIE xP -ԍ See 47 C.F.R. 1.80(c)(2).L US West's response should include a discussion of the  d(#.appropriate application of the limitations period, and also should identify any mitigating  Y -circumstances we should consider in determining forfeiture amounts.H @E xP -ԍ See 47 U.S.C. 504(b).H  X - B. Adjustment to Price Cap Indexes  Y -  Y - v  15. As indicated above, US West did not provide estimates of the impact on interstate  d(#service rates and revenue requirements of certain conduct described in the independent auditor's  Y- d(#hfindings.E xP-ԍ See supra note 9. These findings are discussed in paragraphs 13, 20 and 34 of Attachment A. So that we may assess the full impact of US West's conduct, we order the US West  d(#icarriers to estimate the interstate impact of each of these findings, and to file those estimates  d(#-with the Commission. This filing shall include estimates of the annual effect of each of the  d(#findings on US West's CL, TS, special access, billing and collection, and interexchange costs  d(#and revenues for the period beginning January 1, 1988 to the public release date of this Order  d(#to Show Cause. We also order US West to submit certain information pertaining to Accounts  d(#+ 4310, 4360 and 7150 as identified in paragraphs 15 through 18 of Attachment A. We also direct  d(#US West to provide estimates of the impact on the operating companies' interstate revenue  d(#=requirements attributable to all conduct discussed in this Order and in Attachment A that continued beyond the period of the audit, and to file these estimates with its response.  Y- v \ 16. Since January 1, 1991, the Commission has regulated US West's interstate access  Y- d(#Ycharges using the LEC price cap rules. ` E xP$- d(#Lԍ See Policies and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87313,  5 FCC Rcd 6786  xPX%- d(#(1990) (LEC Price Cap Order), Erratum, 5 FCC Rcd 7664 (Com.Car. Bur.1990), modified on recon., 6 FCC Rcd  xP &- d(#2637 (1991) (LEC Reconsideration Order), aff'd, National Rural Telecom Ass'n v. FCC, 988 F.2d 174 (D.C. Cir. 1993). Under these rules, US West's initial price cap indexes  d(#,were established based upon its projected interstate access revenue requirements for the period"hH 0*(("  d(#JJuly 1, 1990 to June 30, 1991. US West's calculation of those revenue requirements may have  d(#reflected the practices detailed in Attachment A. Because, under price cap regulation, each  d(#succeeding price cap index for a basket of services is a function of an initial price cap index for  d(#=that basket, US West's price cap indexes for its interstate services (and, by definition, its  Y- d(#interstate rates) would have continued to reflect the impact of any improper practices.] E xP-ԍ See 47 C.F.R. 61.44(b), 61.45(b )(c).] Absent  d(#Commission action, US West's future indexes would reflect any overstatement as well.  d(#wTherefore, we order US West to show cause why we should not require it to reduce its current  Y_-price cap indexes to remove any overstatement.! _XE xPh - d(#ԍ To achieve this, US West would need to reduce its price cap indexes by the percentage change in its July 1,  d(#1990 to June 30, 1991 projected interstate access revenue requirement that results from the removal of any  d(#=overstatement. These reductions to the price cap indexes would need to be apportioned among the baskets based on the relative July 1, 1990 to June 30, 1991 projected interstate access revenue requirements in each basket.   X1- C. Corrective Action  Y - v  17. Finally, we tentatively conclude that we should direct the US West carriers to  d(#improve their internal processes to bring them into compliance with Commission rules and  d(#Yorders, and we order those carriers to show cause why such action should not be required. We  d(#iwill take any additional actions we believe appropriate, including issuing a further Order to Show Cause, based on US West's response.  Yc-@ IV. Ordering Clauses ă  Y6- v k 18. Accordingly, IT IS ORDERED, pursuant to Sections 4(i), 4(j), 220(d), and 504(b)  d(#hof the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 154(j), 220(d), & 503(b),  d(#and Section 1.701 of the Commission's rules, 47 C.F.R. 1.701, that the US West Telephone  d(#Operating Companies SHALL SHOW CAUSE within sixty (60) days of the release of this Order  d(#to Show Cause why the Commission should not issue Notices of Apparent Liability for  d(#Forfeiture against these companies for failure to keep their accounts, records, and memoranda  d(#;on the books and in the manner prescribed by the Commission as set out in this Order to Show  d(#Cause, including Attachments A and B which are hereby incorporated by reference, and  d(#Jtherewith SHALL FILE any and all data and other information required by this Order to Show Cause, including information requested in Attachment A.  Y:- v   19. IT IS FURTHER ORDERED, pursuant to Sections 4(i), 4(j), 201-203, 205, 215,  d(#w217-219, and 220 of the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 154(j),  d(#201-03, 205, 215, 217-19, & 220, and Section 1.701 of the Commission's rules, 47 C.F.R.  d(#h1.701, that the US West Telephone Operating Companies SHALL FILE within sixty (60) days  d(#of the release date of this Order to Show Cause interstate cost and revenue impact estimates, and  Y -certain other information, as specified in paragraph 14, supra. " @!0*((!"Ԍ Y- v ԙ 20. IT IS FURTHER ORDERED, pursuant to Sections 4(i), 4(j), 201-203, 205, 215,  d(#w217-219, and 220 of the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 154(j),  d(#201-03, 205, 215, 217-19, & 220, and Section 1.701 of the Commission's rules, 47 C.F.R.  d(#1.701, that the US West Telephone Operating Companies SHALL SHOW CAUSE within sixty  d(#(60) days of the release date of this Order to Show Cause why they should not be required to  Y-adjust their price cap indexes as specified in paragraph 15, supra.  Y`- v  21. IT IS FURTHER ORDERED, pursuant to Sections 4(i), 4(j), 201-203, 205, 215,  d(#w217-219, and 220 of the Communications Act of 1934, as amended, 47 U.S.C. 154(i), 154(j),  d(#i201-03, 205, 215, 217-19, and 220, and Section 1.701 of the Commission's rules, 47 C.F.R.  d(#1.701, that the US West Telephone Operating Companies SHALL SHOW CAUSE within sixty  d(#(60) days of the release date of this Order to Show Cause why they should not be required to  d(#improve their internal processes to bring them into compliance with Commission rules and orders.  Y - v  22. IT IS FURTHER ORDERED that the Secretary shall send by certified mail a copy  d(#,of this Order to Show Cause to US West Communications, 1801 California Street, Suite 5200, Denver, Colorado 80202. ` `  FEDERAL COMMUNICATIONS COMMISSION ` `  William F. Caton ` `  Acting Secretary  I. 1. a. a.(1)(a) i) a) I. 1. a.(1)(a)(i) 1) a) XwLP  P7 " !0*((@"  Y- J    J  I. 1. a.(1)(a)(i) 1) a) I. 1. a.(1)(a)(i) 1) a) XwLP  P7 ![ Attachment A ă  Y- v l   1. We present below the apparent violations of the US West carriers based on the  Y- d(#;findings in the Ernst & Young report that prompt us to issue the accompanying Order to Show  Y- d(#Cause. For each apparent violation, we summarize the independent auditor's finding and any  d(#US West reply. We also present our preliminary evaluation of the record. In general, the  d(#iviolations are categorized according to the ratemaking component affected. This attachment  d(#separates the violations into the following categories: cash working capital, rate base and net  d(#,income calculations, jurisdictional separations, and other apparent errors. In attachment B, we  d(#present the information in the record that describes the impact of these apparent violations on the US West carriers' interstate revenue requirements for the fifteenmonth audit period.  Y -  X - A. Cash Working Capital  Y - v M 2. We find twelve  instances in which US West's calculation of cash working capital  d(#allowances apparently violated Commission requirements. Specifically, US West's development  d(#of those allowances apparently violated Sections 65.800 and 65.820(d) and (e) of the  Y|- d(#Commission's rules, which instruct carriers on how to calculate the interstate rate base. |E xP- d(#ԍ 47 C.F.R. 65.800, 65.820(d)(e). These rules require carriers, such as the US West operating companies,  d(#to calculate the cash working capital component of their interstate rate bases either by performing leadlag studies  d(#Mof interstate revenue and expense items or by applying a specified formula. The US West carriers elected to perform leadlag studies. As a  d(#result of its cash working capital calculations, US West has been reporting incorrect information  YN- d(#to NECA in apparent violation of Section 69.605 of the rules?NE xP-ԍ 47 C.F.R. 69.605.? and to the Commission in  Y7- d(#apparent violation of Section 65.600 of the rules.7@E xP(- d(#jԍ 47 C.F.R. 65.600. In these rate of return reports to the Commission, US West is required to "provide full and specific answers to all questions propounded and information requested...." 47 C.F.R. 65.600(b), (d)(1). To the extent this information has been  d(# reported in the Commission's automated database, Automated Reporting Management  d(#Information System (ARMIS), US West is also apparently violating Section 43.21 of the rules,  d(#wwhich requires that data filed in ARMIS to be accurate, complete, and responsive, and certified  Y-as such by a senior carrier officer.AE xP$ -ԍ 47 C.F.R. 43.21(a).A  Y- v [ 3. The elements of leadlag studies used to calculate cash working capital were set forth  Y- d(#xin Docket No. 19129X( E xPp$- d(#ԍ American Telephone & Telegraph Co., Docket No. 19129, Phase II Final Decision, 64 FCC 2d 1, 7273,  xP8%- d(#para. 187 (1977) (19129 Phase II Final Decision), aff'g Phase II Initial Decision, 64 FCC 2d 131 (1976) (19129  xP&-Phase II Initial Decision).ć and reaffirmed in Docket No. 86497. H E xP- d(#-ԍ Amendment of Part 65 of the Commission's Rules to Prescribe Components of the Rate Base and Net Income  xPX- d(#of Dominant Carriers, CC Docket No. 86497, Report and Order, 3 FCC Rcd 269 (1987) (86497 Order), recon.  xP - d(#4 FCC Rcd 1697 (1989) (86497 Reconsideration Order), remanded sub nom. Illinois Bell Telephone Co. v. FCC,  xP- d(#y911 F.2d 776 (D.C. Cir. 1990) (Illinois Bell I), on remand, 7 FCC Rcd 296 (1991) (84497 Decision on Remand),  xP-affirmed sub nom. Illinois Bell Telephone Co. v. FCC, 988 F.2d 1254 (D.C. Cir. 1993) (Illinois Bell II).  Leadlag studies measure cash" x0*(("  d(#inflows and outflows in relation to the time service is rendered. Revenue and expense items that  d(#are received or paid before a service is rendered are considered "lead" items, and revenue and  Y- d(#<expense items that are received or paid after service is rendered are considered "lag" items.xE xP- d(#jԍ Related terms include "expense lag" (the average net lag of all of a carrier's cash expenses); "revenue lag" (the average net lag of a carrier's revenues); and "net lag" (the net of a carrier's expense lag and revenue lag).  d(#Leadlag studies determine the number of days between receipt of revenues and payment of  d(#expenses. The net number of revenue lag days is then multiplied by the average daily cash  Y- d(#[expenses to determine cash working capital.E xP- cLP  P7Ap э 86497 Decision on Remand, 7 FCC Rcd at 297, para. 9. A positive net lag results in a positive cash  d(#working capital allowance, which increases the rate base; a negative one results in a negative  Y_- d(#Jallowance, which reduces the rate base. _` E xPp-ԍ Annual 1990 Access Tariff Filings, Memorandum Opinion and Order, 5 FCC Rcd 4177, 4219 (1990). In previous orders, we have set forth the criteria for  d(#the inclusion and exclusion of various items in cash working capital calculations, but the general  Y1-rule is that the net lead or lag is applied to the average daily cash expenses.  Y - v  4. In November 1989, the US West carriers reported adjustments to NECA to remove  d(#compensated absences and management incentive payments from their cash working capital  d(#calculations. The independent auditor stated that, during its review of these adjustments, it  d(#asked US West to document its revised cash working capital studies, but US West informed the  d(#independent auditor that the original studies were unavailable. As a substitute, the independent  d(#auditor had US West recreate the study it had performed for Iowa, and this recreated study was  Yz- d(#reviewed as a sample for all states. That review revealed nine errors in the Iowa study.M z E xP-ԍ Adjustments Report at 10607.M The  d(#independent auditor stated that these errors understated US West's CL revenue requirements for  d(#Iowa by $70,223 between January 1988 through March 1989. The independent auditor also  d(#Jstated that an assumption that Iowa is representative of all US West study areas would indicate  d(#;that these errors caused US West's CL and total interstate revenue requirements for that period  Y- d(#to be understated by $1,053,345 and $2,634,000, respectively.S X E xP8"- d(#ԍ Id. at 107; Letter from Bruce Baldwin, President, National Exchange Carrier Association, Inc., to Mr.  d(#Gerald P. Vaughan, Deputy Chief, Operations, Common Carrier Bureau, US West Attachment at 2 (October 12,  xP#-1992) (October 12 Letter).S The specifics of the twelve  d(#cash working capital violations that the independent auditor found in the Iowa study area are discussed below.  Y- v  5. Apparent Violation No. 1: Several errors found by the independent auditor illustrate"  0*(("  d(#US West's apparent failure to comply with internal company guidelines that were designed to  d(#ensure accurate cash working capital calculations. The independent auditor found that US West  d(#included management incentive payments in cash working capital calculations in violation of  Y- d(#internal guidelines.J E xP4-ԍ Adjustments Report at 106.J It is a fundamental accounting principle that companies should treat similar  d(#transactions consistently. US West, first of all, has the obligation to establish and maintain good  d(#waccounting guidelines. Second, it must follow them. If it follows them only part of the time, its results will be distorted.  YH- v  6.  Apparent Violation No. 2:  The independent auditor also found that Mountain Bell  d(#had introduced a new leadlag study in May 1989, revised this study in November 1989 to  d(#exclude compensated absences and management incentive payments, and introduced the revisions  Y - d(#hretroactive to January 1989.4  XE xP -ԍ Id. 4 The independent auditor and US West agree that this retroactive  Y - d(#implementation is inconsistent with US West's normal procedures.D E xP-ԍ Id. at 10607.D US West explains that it  d(#reported adjustments for these revisions to NECA along with other adjustments, that the other  d(#wadjustments were supposed to be retroactive to January 1989, and that it erroneously treated all  Y -the adjustments identically.< xE xP-ԍ Id. at 107. <  Yz- v  7. Apparent Violation No. 3:  The independent auditor found that in 1988 and 1989  d(#Northwestern Bell and Pacific Northwest Bell used a March 1988 leadlag study that incorrectly  d(#included management incentive payments. After discovering this error, the independent auditor  d(#stated that US West revised the study to exclude management incentive payments. The revision  Y- d(#;also updated the basic study using expense data for the entire year of 1988.5E xP-ԍ Id. 5 The independent  d(#iauditor concluded that US West implemented this revised study retroactive to January 1989,  Y- d(#inconsistently with US West's normal procedures.3E xP:-ԍ Id.3 US West does not comment on whether the  d(#.adjustments were inconsistent with its normal procedures, but asserts that the retroactive  d(#adjustments resulted in better and more current data. US West, however, provides no support for this assertion.  Y~- v < 8. Apparent Violations Nos. 4 through 9: Other independent auditor findings focus  Yh- d(#upon specific components of US West's cash working capital computations.  The independent  d(#auditor found that US West improperly excluded particular expenses from its corporate"Q ( 0*((z"  Y- d(#operations expense lag,XE xPy- d(#<ԍ Id. The independent auditor stated that the improperly excluded costs were those recorded in Accounts 6724,  d(#Information management; 6725, Legal; 6726, Procurement; and 6728, Other general and administrative expense,  xP -as well as in US West's financial services subaccount within Account 6721, Accounting and finance.ĥ customer service expense lag,E xP- d(#ԍ Id. The independent auditor stated that the improperly excluded costs were those recorded in US West's  xPa-billing and collection services subaccount within Account 6623, Customer services. plant nonspecific expense lag,@E xP- d(#ԍ Id. The independent auditor stated that the improperly excluded costs were those recorded in Account 6540,  xP-Access expense.  and  Y- d(#plant specific expense lag calculations. E xP2 - d(#ԍ Id. The independent auditor stated that the improperly excluded costs were those recorded in US West's  d(#motor vehicle clearance subaccount within Accounts 6112, Motor vehicle expense; originating fixed wing aircraft  d(#clearances subaccount within Account 6113, Aircraft expense; and originating special tools clearances and originating other tools subaccount within Account 6116, Other work equipment expense.  The independent auditor also found that US West  d(#incorrectly included Account 6533, Testing expense, in its plant specific lag study instead of its  Y- d(#zplant nonspecific lag study.3 E xP-ԍ Id.3 The plant nonspecific lag factor was applied to all plant  d(#hnonspecific expenses, including Account 6533. The independent auditor further found that US  d(#West incorrectly excluded payments required by the Federal Insurance Contribution Act (FICA),  d(#the Federal Unemployment Tax Act (FUTA), and the State Unemployment Tax Act (SUTA)  d(#<from the revised relief and pension leadlag calculations. These payments should have been  d(#included in the calculation of plant specific, plant nonspecific, customer operations, and  Y1-corporate operations expense lags, according to the independent auditor.;1E xP-ԍ Id. at 106.;  Y - v > 9. Apparent Violation No. 10:  The independent auditor indicated that US West  d(#deducted the portion of federal excise taxes allocated to its interstate operations from its cash  d(#Kworking capital allowance. The independent auditor stated that this is unnecessary and that  d(#funds to pay the federal excise tax are available for the companies' use from the time they are  Y - d(#,collected from customers until they are remitted to the government.; E xP-ԍ Id. at 103.; The independent auditor  d(#-also stated that this practice understated US West's total interstate revenue requirements for  Yz-January 1988 through March 1989 by $843,000.[z0E xP["-ԍ October 12 Letter, US West Attachment at 1.[  YL- v   10. US West's apparent failures to follow its own guidelines and to calculate its cash  d(#jworking capital allowances properly strongly suggest that US West's internal accounting  d(#,safeguards systems may be defective. We are particularly concerned with US West's apparent  d(#Jinability to provide the independent auditor with the studies on which its cash working capital  d(#calculations were based. This inability made it necessary for US West to replicate its Iowa" 0*(("  d(#study. If this replicated study is representative of all US West study areas, we can only  d(#conclude that US West's other cash working capital calculations lacked reliability, given the  d(#xnumber of apparent defects in the replicated study. In these circumstances, it appears that in  d(#each of its states, US West apparently failed to calculate its cash working capital requirements  d(#in accordance with Commission requirements. So we may determine the effect of this failure  d(#jon interstate rates and revenue requirements, we require US West to show the amounts it  d(#claimed for cash working capital for each of its study areas for the audit period and for each  d(#;succeeding year, as well as the support for those claims. This showing should also include US West's most recent cash working capital study for each study area.  Y - v   11. Apparent Violation No. 11  : The independent auditor found that US West  d(#incorrectly added noncash items to its cash working capital allowance. The independent auditor  d(#explained that US West calculated the federal income tax component of the cash working capital  d(# allowance by multiplying the sum of the average daily book balance of Account 7220, Operating  d(#income taxes, and the federal portion of Account 7250, Provision for deferred operating income  d(#taxesnet, by the federal income tax lag factor (composite revenue lag less federal income tax  d(#lag). According to the independent auditor, these amounts do not represent cash transactions,  d(#because the amounts in Account 7250 represent the normalization of book to tax timing  Yc- d(#differences and do not reflect actual tax payments.McE xP-ԍ Adjustments Report at 10304.M The independent auditor stated that this  d(#practice understated US West's interstate revenue requirements for January 1988 through March  Y5-1989 by $1,201,000.[5XE xP>-ԍ October 12 Letter, US West Attachment at 1.[  Y- v   12. In Docket 19129, the Commission determined that the Bell System's cash working  d(#icapital calculations should not reflect the lag between the time tax liability was incurred for  Y- d(#;accounting purposes and its collection from customers.E xPs- d(#ԍ 19129 Phase II Final Decision, 64 FCC 2d at 76, n.101. Deferred operating income taxes do not reflect cash transactions. That policy remains in effect today.W@E xP-ԍ See 86497 Reconsideration Order.W  d(#;As a consequence, we find US West's treatment of deferred operating income taxes apparently inconsistent with Commission requirements.  Y~- v [  13.  Apparent Violation No. 12:  The independent auditor found that US West used  d(#,average daily cash balances, instead of minimum bank balances and working cash advances, to  YQ- d(#compute cash working capital. NQN xP$-ԍ Adjustments Report at 9899. N US West objects to this finding. US West states that the  d(#balances used in computations were not the balances in Account 1130, Cash, but were the  d(#iaverage minimum daily amounts needed to eliminate overdrafts and other unfunded charges.  d(#US West maintains that this procedure complies with sound techniques of modern cash" ` 0*((,"  Y-management, as well as our cash working capital requirements.;E xPy-ԍ Id. at 103.;  Y- v   14. Minimum bank balance are balances "maintained in an account to compensate banks,  Y- d(#in lieu of fees, for services provided to that account." XE xP-#c PE37ApP#э Docket 19129 Phase II Final Decision, 64 FCC 2d at 76, para. 195 n.102. In Docket 19129, the Commission  d(#Kdetermined that minimum bank balances and working cash advances, rather than actual cash  Y- d(#-balances, should be used to calculate cash working capital.1!E xP' - d(#\ԍ 19129 Phase II Final Decision, 64 FCC 2d at 76, para. 195; 19129 Phase II Initial Decision, 64 FCC 2d  xP -at 40910, paras. 90508; accord 86497 Reconsideration Order, 4 FCC Rcd at 169899, paras. 17, 22.1 The purpose behind including  d(#minimum bank balances is to protect carriers from loss of a return if their money is encumbered  d(#because of a bank requirement. The purpose is not to allow carriers to earn a return on  YI- d(#whatever money they may have in the bank based on cash management techniques.y"I@E xP:-ԍ The ALJ emphasized that: ` `  `F ` ` working capital is intended to provide only for the current daytoday needs of  `6the business and not for any of the capital requirement. Second, working capital   `Eis the amount of dollars that are necessary to meet current needs, not the amount   `of dollars that a public utility would like to have on hand or might actually have on hand.  xPz- ` `  Docket 19129 Initial Decision, 64 FCC 2d at  403, para. 881.y We reserve  d(#judgement on this issue pending our review of US West's support that the bank balances used  d(#in its cash working capital calculations were the minimum necessary to avoid bank charges. US  Y -West shall provide that support in its response to the accompanying Order.  Y -  X - B. Rate Base and Net Income Calculations  Y -  Y - v  15. In the 86497 Order, the Commission amended Part 65 of its rules to prescribe  d(#principles for determining rate base and net income for all dominant carriers. To calculate its  d(#rate base, US West relied upon ISAACS, which is a separations and access charge software  d(#system designed to calculate revenue requirements using the procedures specified in Parts 36 and  YM- d(#69 of the Commission's rules. After the amended Part 65 rules took effect January 1, 1988,#ME xP!- d(#ԍ 89497 Order, 3 FCC Rcd at 269, para. 2. These rules codified and extended to carriers which had not been part of the Bell System many of the practices prescribed in Docket 19129.  d(#US West made a retroactive adjustment in October 1988, using a new version of ISAACS. The  d(#independent auditor found that this adjustment failed to comply with the amended rules because,  d(#in calculating its adjustment, US West failed to treat certain account balances as Part 65  Y-required.L$hE xP '-ԍ Adjustments Report at 9798.L The details of these failures are explained below."$0*(("Ԍ Y- v ԙ 16. Apparent Violation No. 13:  Section 65.830(a)(3) of the Commission's rulesE%E xPy-ԍ 47 C.F.R. 65.830(a)(3).E  d(#requires carriers to deduct the interstate portion of unfunded pension costs in Account 4310,  d(#Other longterm liabilities, from the interstate rate base. The independent auditor found that US  d(#West did not make an Account 4310 deduction. The independent auditor did not address,  d(#,however, whether US West had recorded any unfunded pension costs in Account 4310 during  Y-1988.O&XE xP-ԍ Adjustments Report at 98.O  Y`- v y 17.  Apparent Violation No. 14:  Section 65.830(a)(4) of the rulesE'`E xP -ԍ 47 C.F.R. 65.830(a)(4).E requires carriers  d(#to deduct the interstate portion of Account 4360, Other deferred credits, from the interstate rate  d(#.base to the extent that portion arises from the provision of regulated telecommunications  d(#hservices. The independent auditor found that US West did not deduct its other deferred credits  d(#for 1988, but did not specify whether any portion of those credits arose from regulated  Y -telecommunications services.V( xE xP-ԍ Adjustments Report  at 98.V  Y - v  18. Apparent Violation No. 15:  Section 65.450(b)(2) of the Commission's rulesE) E xPy-ԍ 47 C.F.R. 65.450(b)(2).E  d(#requires that balances in Account 7150, Gains and losses from the disposition of land and  d(#artwork, be included in net income for interstate ratemaking purposes, to the extent the property  d(#had been used in regulated operations and included in the rate base. The independent auditor  d(#hstated that US West excluded the balances in Account 7150 from net income. The independent  d(#auditor did not address whether US West had used the associated property in regulated  Y7-operations and included it in the rate base.L*7E xP-ԍ Adjustments Report at 9899.L  Y - v ^ 19. In each of these cases, the question whether US West violated Commission  d(#requirements appears to be depend on details of US West's accounting that the independent  d(#,auditor did not examine. To determine whether a violation has occurred, we require US West  Y- d(#to clarify the contents of these accounts during 1988 in its response to the accompanying Order. That response shall state:  Y- v X(a) How much, if any, unfunded pension costs US West had recorded in Account 4310 during 1988.(#  Y;- v NX(b) How much, if any, of US West's balance in Account 4360 for 1988 arose from regulated telecommunications services.(#"$( *0*((Z"Ԍ v >ԙX(c) How much, if any, of US West's gains and losses from the disposition of land and artwork for 1988 had been used in regulated operations and included in the rate base.(#  Y- v y 20. Apparent Violation No. 16:  Section 65.450(a) of the rulesB+E xP4-ԍ 47 C.F.R. 65.450(a).B requires carriers to  d(# treat the interstate portions of their balances in Accounts 7110, Income from custom work, 7140,  d(#Gains and losses from foreign exchange, and Account 7160, Other operating gains and losses,  d(#as deductions from the expenses used to calculate net income. The independent auditor found  Y`- d(#that US West's October 1988 adjustment made no such deductions.L,`XE xPi -ԍ Adjustments Report at 9899.L We find that these failures apparently violated Section 65.450(a).  X - C. Jurisdictional Separations  Y - v  21.  Apparent Violation No. 17:  Effective January 1, 1988, the Commission adopted  Y - d(#Section 36.142(a) of the rules,f- E xPp- cLP  P7Ap э 47 C.F.R. 36.142(a).f which requires certain carriers, including the US West carriers,  Y - d(#to apportion all their information origination/termination (IOT) equipment costs,. xE xP- d(#ԍ IOT equipment consists of electronic devices and supporting equipment used to originate and terminate  xP- d(#telecommunication messages at the end users' premises. See 47 C.F.R. Part 36, Appendix. It includes station  d(#apparatus such as telephone and miscellaneous equipment, teletypewriter equipment, small private branch exchanges,  d(#zand radio equipment (excluding mobile) installed for the end users' use. It also includes embedded customer  d(#premise wiring, large private branch exchanges, public telephone terminal equipment, and other terminal equipment.  xP-See 47 C.F.R. 36.141(a).  other than  d(# those for coinless pay telephone equipment and detariffed customer premises equipment, between  d(#the federal and state jurisdictions. Section 69.303(b) of the Commission's rules, in turn,  d(#requires LECs to apportion the interstate portion of that investment between the special access  Yd-and CL elements "on the basis of the relative number of equivalent lines in use."B/d E xP-ԍ 47 C.F.R. 69.303(b).B  Y6- v  22. The independent auditor found that US West directly assigned a portion of its IOT  d(#investment for 1988 to special access. The independent auditor also found that US West should  d(# have retroactively reversed this direct assignment, thus increasing the average net investment that  Y- d(#iwould ultimately have been reported to the CL pool.K0 E xP##-ԍ Adjustments Report at 117. K Because US West did not provide an  d(#estimate of this finding's interstate revenue requirement impact, the independent auditor did not estimate its revenue requirement impact.  Y- v  23. US West states it is unable to find a Commission decision, letters of interpretation,  d(#or other Commission document, that existed in 1988 that precluded the direct assignment of IOT"00*(("  d(#investment. US West asserts that, consequently, it appropriately changed its treatment of IOT beginning in 1989.  Y- v  24. The interpretative document US West seeks is Section 36.142(a) of the  d(#;Commission's rules. That rule distinguishes among three types of IOT equipment: coinless pay  d(#telephone equipment, customer premises equipment, and other IOT. With regard to other IOT type, the rule states:  XThe costs of other information origination/termination equipment are allocated  2pursuant to the factor that is used to allocate subcategory 1.3 Exchange Line  Y -C&WF [cable and wire facilities].B1 E xP -ԍ 47 C.F.R. 36.142(a).B   d(#Section 36.142(a) makes clear that US West's direct assignment of IOT to private line is  Y - d(#improper. Because Section 36.142(a) took effect January 1, 1988,42X XE xP- d(#ԍ MTS and WATS Market Structure, Amendments to Part 67 (New Part 36) of the Commission's Rules and  xP- d(#Establishment of a FederalState Joint Board, CC Docket Nos. 7872 and 86271, Report and Order, 2 FCC Rcd 2639 (1987).4 US West should have eliminated its direct assignment of IOT investment as of that date.  Y- v  25.  Apparent Violation No. 18: Section 36.2(c)(1) of the Commission's rulesC3xE xP-ԍ 47 C.F.R. 36.2(c)(1).C requires  d(#that, if substantial in amount, revenues and expenses related to property rented by a telephone  d(#Jcompany to an affiliate be excluded from the jurisdictional separations process. Mountain Bell  d(#leased traffic operator position system (TOPS) consoles and other equipment to US West Service  d(#Link, another US West subsidiary. The independent auditor found that Mountain Bell excluded  d(#>the investment, reserves, and expenses, but not the lease revenues associated with this  d(#ytransaction, from the jurisdictional separations process. These revenues were recorded in  d(#Account 5240, Rent revenue. Because rent revenues are deducted from plant expenses in the  d(#separations process, the expenses reported to the CL pool were understated, according to the  Y-independent auditor.J4E xP|-ԍ Adjustments Report at 110.J  Y- v  26. In addition, the independent auditor found that Mountain Bell excluded too much  d(#investment, thus understating the investment reported to the CL pool. According to the  d(#,independent auditor, this understatement occurred because Mountain Bell had misclassified the  d(#leased equipment. In accordance with US West accounting procedures, the leased equipment  d(#should have been recorded in Account 2220, Operator system, under field reporting code 117C.  d(#Using this account and field code, US West instituted a separations procedure to identify and  d(#exclude the equipment. The equipment, however, had been misclassified in Account 2212,  d(#,Digital electronic switching, under field reporting code 377C. The independent auditor stated"40*(( "  d(#that this misclassification resulted in an overstatement of the investment excluded from the  Y-jurisdictional separations process.35E xPb-ԍ Id.3  Y- v / 27. We find that these US West practices apparently violate Section 36.2(c)(1). The  d(#independent auditor stated that these violations understated US West's total interstate revenue  d(#hrequirements for January 1988 through March 1989 by $295,000. This understatement reflects  d(#;a $194,000 understatement in US West's CL revenue requirements, a $607,000 understatement  d(#in US West's TS revenue requirements, a $121,000 overstatement in US West's special access  d(#revenue requirements, and a $2000 understatement in US West's billing and collection category,  Y2-according to the independent auditor.[62XE xP; -ԍ October 12 Letter, US West Attachment at 2.[  Y -  X - E. Other Apparent Errors  Y - v x 28. Apparent Violation No. 19:  The independent auditor found that in nine states, US  d(#West shifted special access revenues from the pooling period beginning January 1, 1988 and  d(#ending March 31, 1989 to the pooling period beginning April 1, 1989 and ending February 28,  Y- d(#=1990.7E xP+- d(#ԍ Adjustments Report at 113. The nine states are Arizona, Colorado, Minnesota, Montana, Nebraska, New Mexico, South Dakota, Utah, and Wyoming. The independent auditor states that US West shifted these revenues by reporting  Y{- d(#adjustments to Account 5083, Special access revenue.>8{@E xPl-ԍ Id. at 11314.> US West explains that it processed a  d(#large number of billing credits to special access customers over several months. US West states  d(#that it "back[ed] out" the credit estimates from the month they were booked and reported them  d(#as adjustments to past months in which the overbillings originated. US West states that these  Y-"normalizing" adjustments were routine.49E xP-ԍ Id. 4  Y- v \ 29. We find, however, that this conduct appears to violate Section 32.4999(d) of the  Y- d(#Commission's rules,C:` E xP -ԍ 47 C.F.R. 32.4999(d).C which requires carriers to record revenue when it is actually earned. We  d(#find unpersuasive US West's explanation that these were normalizing adjustments compelled by  Y- d(#Kits processing large numbers of billing credits to special access surcharge customers. Under  d(#Section 32.4999(d), US West should have recorded the special access surcharge credits in the  Y- d(#accounting period of their issuance, not during a prior period.4; E xP!&-ԍ Id. 4 These apparent violations shifted a total of $151,583 in credits between periods, according to the independent auditor."i ;0*(("Ԍ Y- v xԙ 30.  Apparent Violation No. 20:  The independent auditor found that in Minnesota, US  d(#West booked prior period revenue adjustments for premium and nonpremium access revenues  Y- d(# in 1988, instead of in the periods in which they originated.J<E xPL-ԍ Adjustments Report at 116.J The independent auditor stated that  Y- d(#this practice shifted $671,000 in revenues from prior periods into 1988.[=XE xP-ԍ October 12 Letter, US West Attachment at 3.[ US West  d(#Yacknowledges that it inadvertently failed to report these adjustments as pertaining to the month  d(#the adjustment originated, but instead reported them in the month the revenues were booked.  d(#US West states, in addition, that this finding involves only a timing difference, since it reported  Y`- d(#all revenues to NECA.M>`E xP -ԍ Adjustments Report at 11617.M Again, US West's arguments as to inadvertent error do not alter the  d(#fact that its conduct apparently violates Section 32.4999(d), which requires carriers to record revenue when it is actually earned.  Y - v  31. Apparent Violation No. 21:  The independent auditor found that in September  d(#-1988, US West erroneously overstated its end user revenues in Iowa, Minnesota, Nebraska,  d(#North Dakota, and South Dakota by a total of $184,164. The independent auditor also found  d(#;that in October 1988, US West reversed this error twice, thus understating its CL revenues for  Y - d(#1988 by the same amount.;? xE xP-ԍ Id. at 114.; Both the original error and this double reversal resulted in apparent  d(#violations of Section 32.5081 of the Commission's rules, because end user revenue was not  Y{-properly recorded.@@{E xP4-ԍ 47 C.F.R. 32.5081.@  YM- v  32.   Apparent Violation No. 22:  The independent auditor found that US West could  d(#.not document $187,005 in revenues it reported to the CL pool for September 1988. The  d(#-independent auditor stated that these revenues were for carrier access billing adjustments in  Y - d(#jNebraska relating to 1986 and 1987.JA E xPR-ԍ Adjustments Report at 115.J US West acknowledges that these adjustments are  d(#Zunsupported by original source documentation. We conclude that in this instance, US West  Y- d(#apparently failed to comply with Section 32.12(b) of the Commission's rules,AB( E xP!-ԍ 47 C.F.R. 32.12(b).A which requires  d(#carriers to keep their financial records with sufficient particularity to show fully the facts pertaining to their accounting entries.  Y- v   33.  Apparent Violation No. 23:  The independent auditor also found that US West was  d(#Yunable to document $191,018 in revenues it reported to the CL pool for July 1988. According  d(#to the independent auditor, these revenues were for carrier access billing adjustments to AT&T's"R B0*(("  Y- d(#Lbill in Nebraska.;CE xPy-ԍ Id. at 116.; US West acknowledges that it could supply only worksheets from its  Y- d(#interexchange carrier service center to detail the adjustment and identify the originating period.4DXE xP-ԍ Id. 4 In this instance, US West also apparently failed to comply with Section 32.12(b).  Y- v  !34.  Apparent Violation No. 24:  In the Joint Cost Order,'E E xP= - d(#zԍ Separation of Costs of Regulated Telephone Service from Costs of Nonregulated Activities, Report and  xP - d(#zOrder, CC Docket No. 86111, 2 FCC Rcd 1298 (Joint Cost Order) recon., 2 FCC Rcd 6283 (1987) (Joint Cost  xP - d(#Reconsideration Order), further recon., 3 FCC Rcd 6701 (1988) (Further Reconsideration Order), aff'd sub nom. Southwestern Bell Corp. v. FCC, 896 F.2d 1378 (D.C. Cir. 1990).' the Commission required  d(#LECs with annual operating revenues of $100 million or more to file manuals that allocate their  Yw- d(#costs between regulated and nonregulated activities.FwE xP-ԍ This policy is now codified at Section 64.903 of the Commission's rules, 47 C.F.R. 64.903. The independent auditor noted that US  d(#West estimated its nonregulated costs in early 1988, and in October 1988, updated these  d(#estimates based on the cost allocation manual approved by the Commission. One of the updates  d(#concerned a subaccount US West maintained within Account 5240, Rent revenues, to track  Y - d(#xcompensation its intrastate operations pay each other for support.]GX ` E xP,- d(#ԍ The RBOCs frequently centralize at one facility certain operations serving several states. The affiliated  d(#<companies in the states served by the facility must compensate the company in the state where the facility is located for use of the facility, usually by paying rent. ] The independent auditor  d(#Jfound that US West included the nonregulated portion of this subaccount in its cost studies for  d(#January through August 1988, and that this caused CL expenses to be overstated for some states  d(#(overstatements totalling $222,419) and understated for others (understatements totalling  Y - d(#$223,158).LH E xP-ԍ Adjustments Report at 9697.L This inclusion of nonregulated rent revenue in interstate revenue requirement  Y -calculations appears inconsistent with our joint cost requirements.  Yz- v  "35.  Apparent Violation No. 25:  Section 69.406(a)(7)EIzE xP;-ԍ 47 C.F.R. 69.406(a)(7).E of the Commission's rules  d(#irequires that the interexchange payment and collection expenses in Account 6620, Customer  d(#services, that are attributable to the interstate switched access and message toll services, be  d(#apportioned among the common line, local switching, and transport rate elements in the same  Y- d(#proportion as Section 69.309 of the rules?JE xPp$-ԍ 47 C.F.R. 69.309.? apportions investments to these three rate elements.  d(#The independent auditor found that, instead of apportioning these expenses as prescribed, US  Y- d(#West assigned them to the billing and collection category. This apparent error caused US West  d(#[to understate its CL revenue requirement by $954,000 and its TS revenue requirement by"0J0*(("  d(#<$731,000, and to overstate its billing and collection category by $1,685,000, for the fifteen  Y- d(#wmonth period from January, 1988 to March 1989.JKE xPb-ԍ Adjustments Report at 108.J US West made no response to this finding. We note this as an apparent violation of Section 69.406(a)(7).  Y- v  #36. Apparent Violation No. 26:  Section 69.406(a)(4) of the Commission's rulesELXE xP-ԍ 47 C.F.R. 69.406(a)(4).E  d(# requires that the interstate portion of end user payment and collection expenses in Account 6620,  d(#Customer services, that are attributable to end user common line access billing be assigned to  d(#the CL rate element. According to the independent auditor, US West's jurisdictional separations  d(#system properly calculated these expenses. The independent auditor found, however, that US  d(#West failed to establish procedures for moving the payment and collection expenses from the  Y - d(#,jurisdictional separations process into the Part 69 calculations.JM E xP-ԍ Adjustments Report at 109.J Consequently, these expenses  d(#were not included in the Part 69 assignment to the CL rate element, thus shifting $5,713,000  d(#in US West's CL revenue requirements for January 1988 through March 1989 to the billing and  Y - d(#collection category, according to the independent auditor.[N xE xP-ԍ October 12 Letter, US West Attachment at 2.[ We find that this shift apparently violated Section 69.406(a)(4).  Y- v - $37. Apparent Violation No. 27:  The independent auditor stated that in January 1987,  d(#the Washington Utilities and Transportation Commission (WUTC) ordered Pacific Northwest  d(#hBell (PNB) to capitalize $16,163,000 of interest for intrastate ratemaking purposes. In addition  d(#to recording the capitalized interest, PNB recorded deferred taxes of $7,430,000 to recognize  d(#,that the capitalized interest had been deducted as an expense for tax purposes. Because the tax  d(#deferral was wholly intrastate and had to be excluded from interstate allocations, US West  d(#instituted procedures to deduct the deferral amount from Account 4100, Net current deferred  d(#federal income tax, prior to the separations process and, then, to add the amount to the intrastate  d(#-jurisdiction in the WUTC reports. US West planned to use this procedure until the WUTC made a final resolution of the capitalized interest.  Y- v M %38. In July 1987, the WUTC reversed its decision to require capitalized interest, and  Y- d(#PNB reversed the entries related to that requirement.MOE xP8"-ԍ Adjustments Report at 11011.M According to the independent auditor,  d(#jhowever, the separations personnel who were responsible for carrying out the temporary  d(#I regulatory accounting procedure for the deferred tax were never informed of the WUTC decision  Y:- d(#and continued to deduct the tax deferral from Account 4100 until July 1989.4P:E xP&-ԍ Id. 4 This error  d(#Kresulted in a $7,430,000 understatement of US West's deferred tax liability for 1988 with a"#( P0*((Z"  d(#hresulting overstatement of its interstate rate base. The rate base overstatement, in turn, resulted  Y- d(#in a $193,000 overstatement of US West's interstate revenue requirement for 1988.[QE xPb-ԍ October 12 Letter, US West Attachment at 2.[ According  d(#to the independent auditor, US West decided not to correct this error retroactively because, in  Y-its judgment, this $193,000 interstate impact was small.MRXE xP-ԍ Adjustments Report at 11011.M  Y- v z &39. If US West had properly accounted for the ratemaking adjustment ordered by the  d(#hWUTC, the temporary procedure to eliminate the effect of the deferral on interstate allocations  d(#would not have been necessary. When a state commission orders ratemaking treatment that is  d(#different from the accounting required by this Commission, Part 32 requires that the affected  d(#Mcarriers enter the amounts in their regulated accounts in the manner prescribed by this  d(#hCommission. Any differences between amounts so recorded and amounts recognized by a state  d(#for ratemaking purposes are to be recorded in accounts specifically established for jurisdictional  d(#differences. These accounts are Account 1500, Other jurisdictional assetsnet, Account 4370,  d(#ZOther jurisdictional liabilities and deferred creditsnet, and Account 7910, Income effect of  Y - d(#jurisdictional ratemaking differencenet.VS E xPX-ԍ 47 C.F.R. 32.1500, 32.4370, 32.7910.V If US West had used these accounts to record the  d(#WUTC capitalized interest requirement, there would have been no need to adjust Account 4100  d(#before separations. Thus, we find that US West not only performed an erroneous adjustment  Yz- d(#for two years, but also apparently violated the accounting rules related to jurisdictional differences.  Y5- v  '40. The apparent errors detailed in paragraphs 27 through 39, above, suggest that US  d(#West's internal controls apparently failed to function properly in multiple instances. As a result  d(#of such errors, it may be necessary to require adjustments to US West's price cap indexes and  d(#take other remedial action depending on the additional information we have directed US West to submit. "xS0*((}"  Y-  ` `  hhCqpp  )Attachment B#d6X@`7Oe@#  r5- ` `  hhCqpp  ) Page 1 of 3  s4- US WEST Summary of Apparent Violations INTERSTATE REVENUE REQUIREMENT " OVERSTATEMENT FOR THE AUDIT PERIOD (See Note) p($000) ` `  hhCqpp  ) OTHER  s4z-COMMISSION hhCqpp COMMON  ) INTERSTATE  s4!- g %p< FINDING  CARRIERq TOTALpp LINE  )ACCESS ELEMENTS  r5-#d6X@`7Oe@# ==============================================================================  r5o-X` hp x (#%'0*,.8135@8: