NOTICE ************************************************************************* NOTICE ************************************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file pnmc5021. File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* Before the Federal Communications Commission Washington, D.C. 20554 ) ) In the Matter of ) ) Waiver of the Minimum Bank Balance ) Requirement in Section 65.820(d), ) Cash Working Capital ) ) ORDER Adopted: October 15, 1996 Released: November 1, 1996 By the Commission: 1. By this Order, we are waiving Section 65.820(d) of the Commission's rules to allow the seven regional Bell Operating Companies ("RBOCs") to use actual balances rather than "minimum bank balances" to compute the amount of cash working capital that they may add to their rate bases. This waiver is based upon the record developed in proceedings in which the Commission issued Orders to Show Cause against the RBOCs as a result of an independent audit of their adjustments for 1988 and the first quarter of 1989 to the common line revenue pool administered by the National Exchange Carrier Association, Inc. ("NECA"). 2. One of the elements a telephone company includes when it calculates its rate base is "cash working capital." Section 65.820(d) of the Commission's rules provides that minimum bank balances may be added to the amount of cash working capital otherwise calculated. The rule only allows a telephone company to add bank balances to cash working capital when the telephone company has a minimum bank balance arrangement with a bank. An independent audit of adjustments reported by the RBOCs to the common line pool administered by NECA has revealed that the RBOCs do not typically operate under minimum bank balance arrangements with their banks. This is the case because, today, an RBOC generally maintains only enough cash in its accounts to conduct its business, typically less than the amount needed to avoid all banking fees. Banks calculate a credit based on the average actual balance in the account and apply that credit as an offset to the total fees incurred by the RBOC. The RBOC then pays the bank any fees that exceed the credits earned by the RBOC. The RBOCs contend that this is a more efficient method of cash management and results in lower costs to the RBOC and the public than maintaining minimum balances sufficient to cover all fees. For example, NYNEX states that it would have to increase its cash working capital allowance by $128 million on a total company basis and its interstate revenue requirements would increase by $3 million if it added minimum, rather than actual, bank balances to its cash working capital. Southwestern states that its actual cash balances were $28 million less than it would have had to maintain under minimum balance arrangements and that it is able to invest that extra capital in its business at higher returns than the banks would give it in foregone bank fees. Southwestern states that its interstate revenue requirement would have increased approximately $480,000 if it had used the minimum balance approach rather than the average cash balance approach it actually used. 3. In WAIT Radio v. FCC, 418 F.2d 1153 (D.C. Cir. 1969), the United States Court of Appeals for the District of Columbia held that a waiver of the Commission's rules is appropriate only if special circumstances warrant a deviation from the general rule and such deviation will serve the public interest. The court further stated that an agency must explain why deviation better serves the public interest and must articulate the nature of the special circumstances to prevent discriminatory application and to put future parties on notice as to its operation. Id. at 1156. In Northeast Cellular v. FCC, 897 F.2d 1164 (D.C. Cir. 1990), the court stated that one of the requirements for a waiver was that the agency articulate a standard by which the court could determine the policy underlying the agency's waiver. 4. The RBOCs' use of actual, rather than minimum, balances results in lower overall costs, even after those carriers pay residual bank fees. Requiring the RBOCs to maintain minimum cash balances as a precondition to allowing them to include such balances in cash working capital may cause them to reevaluate their banking practices and return to the use of minimum balances. The Commission's current rule fails to reward those RBOCs that improve the efficiency of their operations by adopting improved cash management techniques and reducing their overall total costs. 5. As stated above, the Commission became aware of these facts as a result of a comprehensive audit of significant adjustments to the common line pool that is administered by NECA. On November 9, 1990, the Commission required NECA to retain an independent auditor to perform the audit that reviewed individual adjustments of $100,000 or more that the RBOCs reported to the common line pool for 1988 and the first quarter of 1989. NECA hired the independent audit firm of Ernst and Young to perform this audit and issue the report that NECA submitted to the Commission on December 9, 1991. Because of the comprehensive scope and unusual depth of the audit, the report disclosed numerous audit findings against the RBOCs concerning apparent rule violations and conduct, some of which apparently continue to the present. One of these findings led to the questions described above regarding the RBOCs' use of minimum bank balances and allowed the Commission to develop a record through subsequent pleadings that support this waiver. 6. We, therefore, on our own motion, waive Section 65.820(d) to the extent necessary to allow Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Bell, Southwestern Bell and U S West to include their actual bank account balances in cash working capital to the extent indicated below. This waiver will only be in effect until the Commission completes a rulemaking on the proper treatment of minimum bank balances in cash working capital. This waiver will benefit ratepayers by giving the RBOCs a clear incentive to reduce their total costs by efficiently managing their cash and will benefit the RBOCs by allowing them to receive credit in their cash working capital calculations for the account balances they actually maintain. The actual balances that an RBOC includes in cash working capital, however, shall not exceed the compensating balances that would be required to offset bank fees that the RBOC would otherwise pay. 7. Accordingly, IT IS ORDERED, pursuant to Section 1.3 of the Commission's rules, 47 C.F.R.  1.3, that a waiver, as described herein, of Section 65.820(d) of the Commission's rules, 47 C.F.R.  65.820(d), IS GRANTED to the Ameritech Telephone Operating Companies, Bell Atlantic Telephone Operating Telephone Companies, BellSouth Telephone Operating Companies, NYNEX Telephone Operating Companies, Pacific Bell, Southwestern Bell Telephone Company, and US West Communications, Inc. 8. IT IS FURTHER ORDERED, that this action is EFFECTIVE UPON RELEASE of this Order. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary