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 ) ) Southwestern Bell Telephone Company ) AAD No. 93-151 ) ) 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 apparent violations of the Commission's rules committed by the Bell Operating Companies (BOCs) including the Southwestern Bell Telephone Company ("SWBT"). The apparent violations alleged that the BOCs failed to comply with Parts 32, 36, 43, 65 and 69 of the Commission's rules in certain instances. 3. On March 3, 1995, the Commission released an Order to Show Cause directing SWBT 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 SWBT to adjust its price cap indexes; and (3) require SWBT to improve its internal processes to bring them into compliance with Commission rules and orders. 4. On May 2, 1995, SWBT responded to the Commission's Order to Show Cause and contested and denied each of the NECA audit report findings listed in the Commission's Order. By public notice dated June 20, 1995, the Common Carrier Bureau invited public comment on SWBT's response. Only MCI Telecommunications Corporation filed comments, and SWBT replied on September 11, 1995. 5. This Commission and SWBT 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 conclude that the public interest would be served by approving the Consent Decree, the terms of which are incorporated herein by reference. Among other things, the Consent Decree requires SWBT to make on a prospective basis an exogenous cost reduction of $1.5 million in its price cap indexes. Under Section 61.45(d) of our price cap rules, local exchange carriers may make exogenous cost changes only if permitted or required by Commission rule, waiver or declaratory ruling. On our own motion, we find it in the public interest to issue a waiver of Section 61.45(d) of our rules to permit SWBT to adjust its price cap indexes to make the exogenous cost reduction specified in the Consent Decree. A waiver of Section 61.45(d) is appropriate because strict compliance with the rule would prevent or delay the adjustment required by the Consent Decree and, thus, would be inconsistent with the public interest. 7. We delegate authority to the Common Carrier Bureau to: (1) review, but not audit, the price cap recalculations of SWBT; (2) review, but not audit, the updated independent audit that verifies that SWBT's internal controls are working properly; and (3) take such other appropriate action as is needed. 8. 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 and its Attachment A, 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. 9. IT IS FURTHER ORDERED that SWBT is permitted to adjust its price cap indexes to make the exogenous cost reduction as required by and specified in the Consent Decree. 10. IT IS FURTHER ORDERED that this Order is effective upon execution of the Consent Decree by all parties to the Agreement. 11. IT IS FURTHER ORDERED that proceedings under the March 3, 1995 Order to Show Cause, 10 FCC Rcd 5306, ARE HEREBY TERMINATED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of) ) Southwestern Bell Telephone Company)AAD No. 93-151 ) ) CONSENT DECREE 12. This is a Consent Decree entered into by the Federal Communications Commission ("Commission") and the Southwestern Bell Telephone Company ("SWBT") (collectively referred to sometimes as the "Parties"). 13. 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 audit findings against the Bell Operating Companies, including SWBT, concerning apparent rule violations and misconduct. 14. On March 3, 1995, the Commission released an Order to Show Cause directing SWBT to respond to certain of the findings in the Adjustments Report. On May 2, 1995, SWBT 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 SWBT's response. Only MCI Communications Corporation filed comments, and SWBT replied on September 11, 1995. The positions of the parties to this consent decree are as follows: (a) The FCC alleged that SWBT'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 alleged that SWBT had apparently misstated or miscalculated interstate costs and revenues from January 1988 through March 1989. The Commission's specific findings included: (i) The Commission alleged apparent violations of its Cash Working Capital ("CWC") requirements by SWBT that included: (1) SWBT's use of average daily ledger balances instead of minimum bank balances in computing its cash working capital allowances; (2) SWBT's taking six months to correct calculations in one of its study areas; (3) SWBT's use of outdated lead-lag factors for revenue and tax; (4) SWBT's apparent failure to review data from at least a three-month period in developing the coin box revenue lag factor; (5) SWBT's apparent inability to locate studies used to develop federal excise tax and excise taxable revenue; and (6) SWBT's use of factors apparently inconsistent with related supporting documentation for determining the Account 1220, Materials and supplies, rate base portion. (ii) The Commission alleged apparent violations of its rules because SWBT may have used a rate other than prime to calculate its Allowance For Funds Used During Construction ("AFUDC") and, thus, may have violated Commission rules. (iii) The Commission alleged apparent violations of its rules because SWBT may have improperly separated, for jurisdictional purposes, its (1) information origination/termination ("IOT") equipment costs, (2) cable and wire facilities investment in one of its study areas, because the costs were not directly assigned to Category 2 - Wideband and Exchange Trunk, and (3) investment in wideband and exchange trunk cable and wire facilities because of allegedly improper development of the basic study factors used to apportion these costs. (iv) The Commission alleged apparent violations of its rules because SWBT may have misclassified its presubscription revenues in Account 32.5081, and may have failed to submit a prior period adjustment to the Commission for review before recording it on the books of accounts. (v) The Commission alleged apparent violations of its rules because SWBT may have improperly included inside wiring costs from prior periods in the NECA Common Line pools for 1988 and 1989. (vi) Finally, the Commission alleged apparent violations of its rules as a result of alleged clerical and computer errors. (b) SWBT contests the allegations in the Adjustments Report and the FCC's Order to Show Cause, on the following grounds: (i) Generally, SWBT states that: (1) the statute of limitations bars further action by the Commission; (2) the specified accounting practices of SWBT were not violations of the Commission's rules or requirements, but reasonable interpretations of the rules; (3) the net impact of the specified SWBT accounting practices did not result in any harm to the ratepayer; and (4) these specified accounting practices did not result in any adverse impact on the implementation of price caps and the calculation of price cap indexes. (ii) Regarding the alleged violations of the Commission's CWC requirements, SWBT states that there was no effect on SWBT's price cap indexes. With respect to each of the Commission's six allegations concerning CWC, respectively, SWBT contends that: (1) SWBT's treatment of minimum bank balances was a correct and reasonable interpretation of the Commission's rules, that resulted in a lower minimum bank balance, reduced revenue requirements, reduced SWBT receipts from the NECA pool, and ultimately benefited the ratepayers; (2) SWBT's correction of its calculations for its study area was well within the 24 months allowed by NECA Rules, was a simple timing issue that had no impact on the ratepayers, and was an issue on which the Commission specifically required no further action; (3&4) the alleged violations for lead-lag factors involved deviations from SWBT's own internal guidelines and in no way violated Commission or NECA Rules; (5) SWBT ultimately located and produced the supporting documentation for its excise tax studies; and (6) SWBT pointed out that no corrective action could be taken because of NECA's 24-month guidelines; also, the statute of limitations barred further action on this issue. (iii) Regarding the alleged violation for failure to use the prime rate in its AFUDC calculation, SWBT states that the prime rate had been used in its calculation of AFUDC, and that SWBT had simply made a clerical error in its calculation. This had been corrected on a prospective basis effective January 1, 1991. Furthermore, the statute of limitations barred further action on this issue. (iv) Regarding the alleged violations for improperly separating costs between the interstate and intrastate jurisdictions, SWBT states that prior to the audit, SWBT had recognized that its procedures for assigning IOT investment were inconsistent with Commission rules, had corrected its procedures prospectively for all of its study areas, and had made retroactive adjustments for all but one of its study areas. The Commission specifically required no further action on this issue. SWBT states that the inconsistency of not directly assigning cable and wire facilities in one of its study areas had also been discovered through its own internal review prior to the audit, and SWBT had made retroactive adjustments in March 1990, to the extent they were possible within NECA's 24 month retroactive adjustment period. The Commission specifically required no further action on this issue. SWBT states that its procedures for developing the basic study factors used to apportion wideband and exchange trunk cable and wire facilities were accurate, used the most representative information available, were consistent with industry practices, and constituted no Commission rule violation. (v) Regarding the alleged misclassification of presubscription revenues, SWBT states that the description of Account 5081 in Part 32 of the Commission's rules is most characteristic of presubscription revenues. Additionally, SWBT states that Part 32 rules should control in determining how these revenues are reported to NECA. (vi) Regarding the alleged inclusion of inside wiring cost from prior periods, SWBT states that its inside wire depreciation methods were reasonable and in compliance with CC Docket 79-105. Additionally, SWBT argues that the statute of limitations barred pursuit of this issue. (vii) Regarding the alleged violations based on input and clerical errors, SWBT states that the alleged errors affected only 1988 data and, thus, did not impact the 1990 tariff filing and/or SWBT's price cap indexes. Also, these errors were isolated occurrences barred from further pursuit by the statute of limitations. Further, SWBT contends that the findings did not indicate internal control problems, because they were a statistically insignificant sample of the thousands of transactions for the period under review. SWBT indicates that it has greatly improved and enhanced its controls since the review period, with computerized input and edit checks virtually eliminating clerical errors. 15. The Commission and SWBT agree that the expeditious resolution of issues raised by the Adjustments Report and the Commission's Order to Show Cause in accordance with the terms of this Consent Decree is in the public interest. 16. Accordingly, and in consideration of the agreement of the FCC and SWBT to conclude action on the Order to Show Cause on the terms set forth in this Consent Decree, SWBT agrees to act as specified in paragraphs 5(a) through 5(e) of this Consent Decree: (a) SWBT warrants that it has prospectively corrected former accounting and recordkeeping practices to which the Order to Show Cause referred. (b) SWBT warrants that it has established procedures to prevent these reporting deficiencies from occurring in the future. (c) SWBT agrees to classify and report presubscription revenues in Account 32.5082, Switched Access Revenue, prospectively from the date of this Consent Decree. (d) SWBT agrees to make a permanent exogenous adjustment to its price cap indexes to reflect the removal of $1.5 million in costs. SWBT shall make this prospective adjustment within 60 days after the effective date of this Consent Decree. (e) SWBT agrees to have an independent audit of its internal accounting controls performed as specified in Attachment A of this Consent Decree. 17. In the event SWBT 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 SWBT. If SWBT 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 paragraph 5 and Attachment A shall be regarded by the Commission as presumptively reasonable and lawful. The Commission, however, reserves its right under law to change accounting requirements prospectively and retroactively, as long as no penalty attaches to such retroactive application. Likewise, SWBT 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. 18. In light of SWBT's covenants and representations contained in paragraph 5 and Attachment A of this Consent Decree, and in express reliance thereon, the Commission has issued a final order formally authorizing the Secretary to execute this Consent Decree ("Consent Decree Order") without change, addition or modification and without a finding of wrongdoing, violations or liability by SWBT 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 SWBT shall have all opportunities afforded by law to contest that use and that information. 19. SWBT admits the jurisdiction of the Commission to adopt this Consent Decree. 20. SWBT 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. 21. 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. 22. It is understood that SWBT's agreement to this Consent Decree does not constitute an adjudication of any factual or legal issues or an admission by SWBT 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, SWBT shall not be precluded or estopped from litigating de novo any and all of the issues subject to this Consent Decree in any forum. 23. 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. 24. Adoption by the Commission of this Consent Decree shall conclude action in the proceeding commenced by the Order to Show Cause, 10 FCC Rcd 5306, and the Adjustments Report without a finding of wrongdoing, violations or liability on the part of SWBT. 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 SWBT with the terms of this Consent Decree. If this Consent Decree is not signed by SWBT 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. 25. 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, SWBT 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. 26. This agreement may be signed in counterparts. FEDERAL COMMUNICATIONS COMMISSION By:_____________________________________ Acting Secretary Signed this ______ day of October, 1996 SOUTHWESTERN BELL TELEPHONE COMPANY By:_____________________________________ Its_____________________________________(Title) Signed this ______ day of October, 1996 Attachment A Independent Review of SWBT Internal Controls SWBT will engage an independent auditing firm to review the adequacy of internal controls associated with the automated and manual input processes related to the company's Part 36 cost allocation system. The scope of this independent review will focus on the following three areas: 1. Review of existing internal processes that enable detection and correction of Part 36 input accounting errors on a timely basis; 2. Review of automated systems that have served to eliminate or reduce the potential for clerical errors experienced in or reported from Part 36, and that provide an appropriate trail for data verification in those processes; 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, SWBT will submit to the Commission, for mutual agreement, an implementation plan for each recommendation which the independent auditing firm determines has the potential for material impact on the results of the company's Part 36 cost allocations. All aspects of the implementation plan will be instituted 180 days after completion and release of the independent audit report by the independent auditor.