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 ) ) Pacific Bell ) AAD No. 93-150 ) ) CONSENT DECREE ORDER Adopted: October 15, 1996 Released: November 1, 1996 By the Commission: 1. At the direction of the Commission, the National Exchange Carrier Association, Inc. ("NECA") hired Ernst and Young to conduct an independent audit of carrier- reported adjustments to the common line revenue pool for 1988 and the first quarter of 1989. On December 9, 1991, NECA submitted to the Commission Ernst and Young's report ("Adjustments Report"). 2. The independent auditor reported numerous apparent violations of the Commission's rules committed by the Bell Operating Companies, including Pacific Bell ("Pacific"). These apparent violations generally involve failures to keep accounts, memoranda and records in the manner prescribed by the Commission. 3. On March 3, 1995, the Commission released an Order to Show Cause directing Pacific to show cause why the Commission should not: (1) issue a Notice of Apparent Liability for Forfeiture for apparent violation of Section 220(d) of the Communications Act of 1934, as amended; (2) require Pacific to adjust its price cap indexes; and (3) require Pacific to improve its internal processes to bring them into compliance with Commission rules and orders. 4. On May 2, 1995, Pacific responded to the Commission's Order to Show Cause and contested and denied each of the Adjustment Report findings listed in the Commission's Order. By public notice dated June 20, 1995, the Common Carrier Bureau invited public comment on Pacific's response. Only MCI Telecommunications Corporation filed comments, and Pacific replied on September 11, 1995. 5. This Commission and Pacific have reached an agreement with respect to these audit findings. The terms and conditions of this agreement are contained in the attached Consent Decree. 6. We have reviewed the terms of the Consent Decree and evaluated the circumstances of the case. We believe the public interest would be served by approving the Consent Decree, the terms of which are incorporated herein by reference. 7. Accordingly, IT IS ORDERED, pursuant to Sections 4(i) and 4(j) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i) and (j), that the Consent Decree, incorporated by reference herein and attached to this Order, IS HEREBY ADOPTED, and the Secretary shall sign such Consent Decree on behalf of the Commission. 8. IT IS FURTHER ORDERED that this Order is effective upon execution of the Consent Decree by all parties to the Agreement. 9. IT IS FURTHER ORDERED that proceedings under the March 3, 1995 Order to Show Cause, 10 FCC Rcd 5503, ARE HEREBY TERMINATED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of) ) Pacific Bell ) AAD No. 93-150 ) ) CONSENT DECREE 10. This is a Consent Decree entered into by the Federal Communications Commission ("Commission") and Pacific Bell ("Pacific") (collectively referred to as the "Parties"). 11. The common line revenue pool is administered by the National Exchange Carrier Association, Inc. ("NECA") and allows incumbent local exchange carriers ("LECs") to participate in a tariff filed by NECA that establishes uniform access rates on a nation-wide basis for all participants. Monthly distributions from the pool are computed using monthly revenue, expense and investment figures reported by the participating LECs. Initially the figures are only estimates, but in later months the incumbent LECs adjust them to actual monthly figures. At the direction of the Commission, NECA hired Ernst and Young to conduct an independent audit of carrier-reported adjustments to the common line revenue pool for 1988 and the first quarter of 1989. The Ernst and Young audit report ("Adjustments Report") included numerous audit findings against the Bell Operating Companies, including Pacific, concerning apparent rule violations and conduct. These findings generally involve failures to keep accounts, memoranda and records in the manner prescribed by the Commission. 12. On March 3, 1995, the Commission released an Order to Show Cause directing Pacific to respond to certain of the findings in the Adjustments Report. On May 2, 1995, Pacific responded to the Commission's Order to Show Cause and contested and denied each of the Adjustments Report findings listed in the Commission's Order. By public notice dated June 20, 1995, the Common Carrier Bureau invited public comment on Pacific's response. Only MCI Telecommunications Corporation filed comments, and Pacific replied on September 11, 1995. The positions of the parties to this consent decree are as follows: (a) The Commission found that Pacific's actions appear to be inconsistent with its statutory obligation to maintain its accounts, records, and memoranda as prescribed by the Commission. Generally, the Commission found that Pacific had apparently misstated or miscalculated interstate costs and revenues from January 1988 through March 1989. The Commission's specific findings included: (i) The Commission found two apparent violations of its rules in Pacific's calculation of cash working capital. Pacific used average daily cash balances instead of the required minimum bank balances. Also, Pacific used in its computations the normalized amounts representing the book-to-tax timing difference recorded in Account 7250, which are non-cash items. (ii) The Commission found an apparent violation of its rules because Pacific misclassifying its presubscription revenues in Account 32.5081. (iii) The Commission found an apparent violation of its rules because Pacific recorded unfunded pension accruals in Account 4360, Other deferred credits, instead of Account 4310, Other long-term liabilities. (iv) The Commission found other apparent rule violations, including failure to document common line revenue true-up adjustments, and erroneous reporting of uncollectibles to the common line pool. (b) Pacific's position is that Section 220(d) does not authorize forfeitures for any conduct described in the Adjustments Report. Pacific says that none of the "apparent violations" identified by the Commission were willful actions; that in some instances the applicable rules were ambiguous or there were no rules; and that the limitations period had expired for many of the "apparent violations." Pacific contests the findings in the Adjustments Report and the Commission's Order to Show Cause, on the following grounds: (i) Pacific contends that no Commission decision or rule defines "minimum bank balance." Pacific states that, under its efficient cash management practices, its average daily cash balances were, in fact, the minimum cash amounts needed for cash outlays and transfers to meet operating expenses and that Pacific was legally entitled to include such amounts in its rate base. (ii) Pacific contends that the Commission was aware that Pacific was recording presubscription revenues in Account 5081 for some time and did nothing about it. Pacific states that it informed the Commission of this accounting practice in a tariff filing and the Commission allowed the tariff to go into effect. Pacific further states that recording these revenues in Account 5082 is inconsistent with the definition of that account because that account is limited to federally-tariffed charges assessed charges to interexchange carriers for excess to local exchange facilities. 13. The Commission and Pacific agree that the expeditious resolution of issues raised by the Adjustments Report in accordance with the terms of this Consent Decree is in the public interest. 14. Accordingly, and in consideration of the agreement of the Commission and Pacific to conclude action on the Adjustments Report on the terms set forth in this Consent Decree, Pacific agrees to act as specified in this paragraph: (a) Pacific warrants that it has corrected former accounting and recordkeeping practices that might have contributed to the apparent violations set forth in the Order to Show Cause. (b) Pacific agrees to establish procedures to prevent the specific apparent deficiencies from recurring in the future. (c) Pacific agrees to exclude Account 7250 balances from cash working capital calculations. (d) Pacific agrees not to include in Account 5081 revenues from customers for the predesignation of their primary interexchange carrier in compliance with the requirements of Section 32.5081 of the Commission's rules. (e) Pacific agrees to record unfunded pension accruals in Account 4310, in compliance with the requirements of Section 32.4310 of the Commission's rules. (f) Pacific has reduced its price cap indices to reflect the impact of these rule interpretations or clarifications and agrees to make any further prospective adjustments to its price cap indices that the Commission may require within thirty days after the release of the Consent Decree Order to address paragraphs 3(a)(i) through 3(a)(iv) of the Consent Decree. Pacific shall be permitted to increase its price cap indices, if necessary, to reflect and be in accord with the Commission's waiver of Section 65.820(d) (minimum bank balance requirements). (g) Pacific agrees to conduct an independent audit of its internal accounting controls as specified in Attachment A of this Consent Decree. 15. In the event Pacific fails to comply with the requirements set forth in paragraph 5 and Attachment A of this Consent Decree, the Commission reserves the right to pursue legal action against Pacific. If Pacific complies with the terms set forth in paragraph 5 and Attachment A of this Consent Decree, then the accounting treatments, procedures and documentation adopted in compliance with the requirements of Paragraph 5 and Attachment A shall be regarded by the Commission as presumptively reasonable and lawful. The Commission, however, reserves its rights under law to change accounting requirements prospectively and retroactively as long as no penalty attaches to such retroactive application. Likewise, Pacific shall be authorized to make changes to its accounting treatments, procedures and documentation to implement or reflect changes in the law or rules or waivers of the Commission's rules, and shall not thereby be in violation of any part of this Consent Decree. 16. In light of Pacific's covenants and representations contained in paragraph 5 and Attachment A of this Consent Decree, and in express reliance thereon, the Commission agrees to issue a final order formally adopting this Consent Decree ("Consent Decree Order") without change, addition or modification and without a finding of wrongdoing, violations or liability by Pacific and further agrees not to begin, on the motion of the Commission or its staff, any proceeding formal or informal, concerning matters that were the subject of the Adjustments Report. Nothing herein, however, shall preclude the Commission from using the information underlying the findings and observations in the Adjustments Report for other lawful regulatory purposes provided that Pacific shall have all opportunities afforded by law to contest that use and that information. 17. Pacific admits the jurisdiction of the Commission to adopt this Consent Decree. 18. Pacific waives any rights it may have to judicial review, appeal or rights otherwise to challenge or contest the validity of the Consent Decree Order, provided the Commission adopts this Consent Decree without change, addition or modification. 19. The Parties agree not to engage in conduct inconsistent with the terms of this Consent Decree. The Parties may comment publicly, however, on the nature of the Consent Decree, and the merits of their respective positions, after it has been adopted by the Commission. 20. It is understood that Pacific's agreement to this Consent Decree does not constitute an adjudication of any factual or legal issues or an admission by Pacific of wrongdoing, violations or of any inconsistency between its position, on the one hand, and, on the other hand, (i) the Communications Act of 1934, as amended, and (ii) the rules and policies of the Commission. As a result, Pacific shall not be precluded or estopped from litigating de novo any and all of the issues subject to this Consent Decree in any forum, except as provided herein. 21. The Parties agree that this Consent Decree and the Consent Decree Order may not be used in any fashion by either of the Parties to this Consent Decree in any legal proceeding except as set forth in this Consent Decree. 22. Adoption by the Commission of this Consent Decree shall conclude action in the proceeding commenced by the Order to Show Cause, 10 FCC Rcd 5503, and the Adjustments Report without a finding of wrongdoing, violations or liability on the part of Pacific. The Parties agree that the effectiveness of this Consent Decree is expressly contingent upon issuance of the Consent Decree Order described herein, and compliance by Pacific with the terms of this Consent Decree. If this Consent Decree is not signed by Pacific and the Commission, or is otherwise rendered invalid by any court of competent jurisdiction, it shall become null and void and may not become part of the record in this proceeding. 23. If the Commission brings an action in any court of competent jurisdiction to enforce the terms of the Consent Decree Order or the Consent Decree, Pacific agrees that it will not contest the validity of either the Consent Decree Order or the Consent Decree, will waive any statutory right to contest the validity of the Consent Decree Order or this Consent Decree through a trial de novo, and will consent to a judgment incorporating the terms of this Consent Decree without change, addition or modification provided, however, that the Commission has complied with all of its obligations under the Consent Decree. 24. This agreement may be signed in counterparts. FEDERAL COMMUNICATIONS COMMISSION By:_____________________________________ Acting Secretary Signed this ______ day of October, 1996 PACIFIC BELL By:_____________________________________ Its_____________________________________(Title) Signed this ______ day of October, 1996 Attachment A Independent Review of Pacific Internal Controls Pacific will engage an independent auditing firm to review the adequacy of internal controls in the automated and manual input processes for the company's Part 36 separations system. The scope of this independent review will be the following three areas: 1. Review of existing internal processes that enable detection and correction of accounting errors on a timely basis; 2. Review of automated systems that serve to eliminate or reduce the potential for clerical errors and that provide an appropriate trail for data verification; and 3. Review of controls and processes for appropriate implementation of the Commission's Part 36 rules and related interpretations. The independent review will be completed within one year of the release of the Commission's Consent Decree order. Upon completion of the review, Pacific will submit to the Commission an implementation plan for each recommendation that the independent auditing firm determines has the potential for material impact on the magnitude of the company's interstate cost allocations. All aspects of the implementation plan will be instituted 180 days after the independent review is completed.