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A. 1. a.(1)(a) i) a) I. 1. 1. a.(1)(a) i) a)X01Í ÍX01Í Í  yO'fu Before the Federal Communications Commission  yO '9Washington, D.C. 20554#Xw PE37XP#  X4\  X4#Xw P_7XP#In the Matter of hhCq)  X4` `  hhCq)pp  X4Implementation of the hhCq)  Xu4Telecommunications Act of 1996:hhCq)ppCC Docket No. 96150  X^ 4` `  hhCq)pp  XG 4Accounting Safeguards Under thehhCq)  X0 4Telecommunications Act of 1996 hhCq)  X '0 REPORT AND ORDER  X4  X's* Adopted: December 23, 1996 Released: December 24, 1996  X4 \By the Commission: ;TABLE OF CONTENTS \   X\I. INTRODUCTION p>"(# 1 X\II. BACKGROUND AND OVERALL GOALS p>"(# 3 XX` ` A. Summary of the Relevant Statutory Provisions ` p>"(# 3 XX` ` B. Goals of the Proceeding ` p!(# 13 XX` ` C. Scope of Commission's Authority ` p"(# 29 XX` ` D. Structure of this Order ` p"(# 47 X\III. SAFEGUARDS FOR INTEGRATED OPERATIONS p"(# 48 XX` ` A. General ` p"(# 48 XX` ` B. Specific Services ` p"(# 51 XX` ` X ` ` 1. Section 260 Telemessaging Service p"(# 51 XX` ` X ` ` 2. Section 271 InterLATA Telecommunications Services p"(# 61 XX` ` X X a. Incidental InterLATA Services p"(# 62 XX` ` X X b. Integrated Provision of InterLATA Services p"(# 66 XX` ` X X c. Other Matters p"(# 77 XX` ` X ` ` 3. Section 275 Alarm Monitoring Services p"(# 88 XX` ` X ` ` 4. Section 276 Payphone Services p"(# 93"$0*''ZZ"" X\IV. SAFEGUARDS FOR SEPARATED OPERATIONS p!(# 101 XX` ` A. General ` p!(# 101 XX` ` B. Specific Services ` p!(# 110 XX` ` X ` ` 1. Section 272 Manufacturing and InterLATA Services p!(# 110 XX` ` X X a. Statutory Language p!(# 110 XX` ` X X b. "Arm's Length" Requirement of Section 272(b)(5) p!(# 111 XX` ` X XXhhCi. Prevailing Company Prices hp!(# 125 XX` ` X XXhhCii. Valuation Methods for Assets and Services. hp!(# 138 XX` ` X XXhhCiii. Fair Market Value hp!(# 149 XX` ` X XXhhCiv. Tariffedbased Valuation hp!(# 155 XX` ` X XXhhCv. Return Component for Allowable Costs hp!(# 160 XX` ` X X c. Accounting Requirements of Sections 272(b)(2) and (c)(2) p!(# 167 XX` ` X X d. Application to InterLATA Telecommunications Affiliates p!(# 171 XX` ` X X e. Application to Sharing of Services p!(# 179 XX` ` X X f. Audit Requirements p!(# 184 XX` ` X ` ` 2. Section 273 Manufacturing by Certifying Entities p!(# 206 XX` ` X X a. Statutory Language p!(# 206 XX` ` X X b. Comparison of Sections 273 and 272 p!(# 208 XX` ` X ` ` 3. Section 274 Electronic Publishing p!(# 213 XX` ` X X a. Statutory Language p!(# 213 XX` ` X X b. Comparison of Sections 274 and 272 p!(# 214 XX` ` X X c. Compliance Review p!(# 220 XX` ` X X d. Section 274(f)'s Reporting Requirement p!(# 227 XX` ` X X e. Section 274 Transactional Requirements p!(# 231 XX` ` X X f. Miscellaneous p!(#245 XX` ` X ` ` 4. Separated Operations under Sections 260 and 271 through 276 p!(#248 X\V. OTHER MATTERS p!(#259 XX` ` A. Price Caps ` p!(#259 XX` ` X ` ` 1. General p!(#259 XX` ` X ` ` 2. Exogenous Costs and Part 64 p!(#260 XX` ` X ` ` 3. Part 64 and Sharing p!(#267 XX` ` B. Section 254(k) ` p!(#272 X\VI. FINAL REGULATORY FLEXIBILITY ACT ANALYSIS p!(#277 X\VII. FINAL PAPERWORK REDUCTION ACT ANALYSIS p!(#284 X\VIII. ORDERING CLAUSES p!(#285 "#0*''ZZ!"  X':J I. INTRODUCTION א\  X41.` ` In this Report and Order ("Order") we address the accounting safeguards necessary to satisfy the requirements of sections 260 and 271 through 276 of the  X4Communications Act of 1934, as amended by the Telecommunications Act of 1996. O yO'ԍTelecommunications Act of 1996, Pub. L. No. 104104, 110 Stat. 56 ("1996 Act"). The 1996 Act amended the Communications Act of 1934. Hereinafter, the Communications Act of 1934, as amended by the 1996 Act, will be referred to as "the Act," and all citations to the sections of the Act will be to the Act as it will be codified in the United States Code. This Order prescribes the way incumbent local exchange carriers, including the Bell Operating Companies ("BOCs"), must account for transactions with affiliates involving, and allocate costs incurred in the provision of, both regulated telecommunications services and nonregulated services, including telemessaging, interLATA telecommunications, information, manufacturing, electronic publishing, alarm monitoring and payphone services, to ensure compliance with the Act. In particular, the Order adopts the tentative conclusion in the  X 4Notice of Proposed Rulemaking ("NPRM") in this proceeding that our current cost allocation rules generally satisfy the Act's accounting safeguards requirements when incumbent local exchange carriers, including the BOCs, provide services permitted under sections 260 and 271  X 4through 276 on an integrated basis (i.e., within the telephone operating companies).kH O yO 'ԍSee Accounting Safeguards Under the Telecommunications Act of 1996, Notice of Proposed  yO'Rulemaking, CC Docket No. 96112, 11 FCC Rcd 9054, 9060 para. 11, 9066 para. 27 (1996) ("NPRM"). The Commission has adopted a comprehensive system of accounting safeguards now found in Parts 32 and 64 of our  yOb'rules. Computer III Remand Proceedings: Bell Operating Company Safeguards and Tier 1 Local Exchange  yO*'Company Safeguards, CC Docket No. 90623, 6 FCC Rcd 7571,75917605 paras. 4674 (1991) ("Computer III  yO'Remand"). See 47 C.F.R.  64.901903. These requirements apply not only to the BOCs, but to all incumbent  yO'local exchange carriers with annual operating revenue greater than the applicable interim revenue threshold. Id. The interim revenue thresholds applicable to annual operating revenues from 1993, 1994, and 1995 are $102 million, $104 million, and $107 million, respectively. Implementation of the Telecommunications Act of 1996:  yO'Reform of Filing Requirements and Carrier Classifications, Order and Notice of Proposed Rulemaking, CC  yO'Docket No. 96193, FCC 96370, para. 12 (rel. Sept. 12, 1996) ("402 Order and NPRM"). Smaller incumbent local exchange carriers, other than average schedule companies, must comply with accounting rules, cost allocation standards, and affiliate transactions rules and are subject to Commission audit.Separation of Costs of  yO2'Regulated Telephone Service from Costs of Nonregulated Activities, Order on Reconsideration, CC Docket No.  yO'86111, 2 FCC Rcd 6283, 6300 paras. 154157 (1987) ("Joint Cost Reconsideration Order"), further recon. 3  yO'FCC Rcd 6701 (1988) ("Joint Cost Further Reconsideration Order"), aff'd sub nom. Southwestern Bell Corp. v.  yO 'FCC, 896 F.2d 1378 (D.C. Cir. 1990). See 47 C.F.R.  64.901903.k The  X4Order also adopts the tentative conclusion in the NPRM that our current affiliate transactions rules generally satisfy the Act's accounting safeguards requirements when incumbent local exchange carriers, including the BOCs, are required to, or choose to, use an affiliate to"h0*%%ZZ"  X4provide services permitted under sections 260 and 271 through 276.O yOy'ԍSee NPRM, 11 FCC Rcd at 9060 para. 11, 908384 para. 64, 910910 para. 118. The Order adopts most  X4of the NPRM's proposed modifications to the affiliate transactions rules to provide greater protection against subsidization of competitive activities by subscribers to regulated  X4telecommunications services.XO yO'ԍSee id. A subsidy occurs when the reasonable costs associated with a service are not covered by the revenues generated by that service, but are instead covered by revenues generated by one or more other services.  X42.` ` By applying our current cost allocation rules and modified affiliate transactions rules to incumbent local exchange carriers, including the BOCs, that provide services permitted under sections 260 and 271 through 276, we seek to protect regulated service ratepayers from bearing the risks and costs of carriers' nonregulated ventures. We also seek to promote competition by preventing carriers from using their market power in local exchange services to obtain an anticompetitive advantage in the markets that they seek to enter. We will monitor the development of competition to determine whether further changes to these accounting safeguards are needed to achieve the objectives of the Act.  X '  vII. BACKGROUND AND OVERALL GOALSא X 4\  X' A. Summary of the Relevant Statutory Provisions   Xd43.` ` The Act permits the BOCs to engage in previously proscribed activities if the vBOCs satisfy certain conditions that are intended to prevent them from recovering costs of their new ventures from subscribers to local exchange and exchange access services and from  X4discriminating against their competitors in these new markets.$( O yO'ԍThe Modified Final Judgment ("MFJ") originally prohibited the BOCs from providing information services, providing interLATA services, or manufacturing and selling telecommunications equipment or  yO'manufacturing customer premises equipment. United States v. AT&T, 552 F.Supp. 131 (D.D.C. 1982), aff'd sub  yO'nom. Maryland v. United States, 460 U.S. 1001 (1983), vacated sub nom. United States v. Western Elec. Co., slip op. CA 820192 (D.D.C. Apr. 11, 1996). The theory behind this prohibition in the MFJ was that the BOCs could leverage their market power in the local market to impede competition in the interLATA services, manufacturing, and information services markets. The information services restriction was modified in 1987 to  yO'allow BOCs to provide voice messaging services and to transmit information services generated by others. See  yO'United States v. Western Elec. Co., 673 F.Supp. 525 (D.D.C. 1987); United States v. Western Elec. Co., 714  yO 'F.Supp. 1 (D.D.C. 1988); United States v. Western Elec. Co., 767 F.Supp. 308 (D.D.C. 1991). In 1991, the  yOP!'restriction on BOC ownership of contentbased information services was lifted. United States v. Western Elec.  yO"'Co., 767 F.Supp. 308 (D.D.C. 1991), stay vacated, United States v. Western Elec. Co., 19912 Trade Cases (CCH)  69,610 (D.C.Cir. 1991).$ The Act places similar"0*%%ZZU" conditions on other incumbent local exchange carriers electing to enter or continue to  X4participate in certain markets.jO yOb'ԍSee, e.g., 47 U.S.C.  260(a), 275(b).j  X44.` ` The Act prescribes structural and nonstructural safeguards that are intended to protect ratepayers, consumers, and competitors against the effects of potential improper cost allocation and discrimination. These structural and nonstructural safeguards apply to activities such as payphone services that BOCs are currently permitted to provide and to activities such as alarm monitoring services that BOCs are currently permitted to provide in certain markets. In addition, these safeguards apply to other activities that incumbent local exchange carriers may now provide as a result of the Act.  X 45.` ` Sections 260 and 271 through 276 outline the conditions under which incumbent local exchange carriers may offer telemessaging and alarm monitoring services and under which the BOCs may manufacture and provide telecommunications equipment, may manufacture customer premises equipment ("CPE"), and may offer interLATA telecommunications, information, electronic publishing and payphone services. While the Act requires that many of these services must be provided through separate affiliates, it also  Xy4permits some to be offered on an integrated basis.jyXO yO'ԍSee, e.g., id.  260(a), 276(a).j  XK46.` ` Sections 260 and 275 generally prohibit an incumbent local exchange carrier, including the BOCs, from subsidizing its telemessaging and alarm monitoring services with revenues from regulated telecommunications services. Section 260 provides that an incumbent local exchange carrier, including a BOC, that provides telemessaging service "shall not subsidize its telemessaging service directly or indirectly from its telephone exchange  X4service or its exchange access," but does not require a separate affiliate.JO yOq'ԍId.  260(a)(1).J Section 275(b)(2) bars an incumbent local exchange carrier, including a BOC, that provides alarm monitoring services from "subsidiz[ing] its alarm monitoring services either directly or indirectly from  X4telephone exchange service operations," but does not require a separate affiliate.y xO yO'ԍSee, e.g., id.  275(b)(2), 276(a).y  Xe47.` ` Section 271(b) authorizes the BOCs to immediately provide "outofregion" interLATA services but requires the BOCs to obtain Commission approval before providing"N 0*%%ZZN"  X4"inregion" interLATA services. XO yOy'ԍId.  271(b), 271(d)(3). "Inregion services" refers to the provision by "[a] Bell operating company, or any affiliate of that Bell operating company, . . . [of] interLATA services originating in any of its inregion  yO 'States... if the Commission approves the application of such company for such State...." Id. 271(b)(1).Ĭ Section 271(g) lists specific "incidental interLATA  X4services"H O yO'ԍId.  271(g). H that BOCs and their affiliates may provide after February 8, 1996.G xO yO'ԍId.  271(b).G Section 271(h) states that "[t]he Commission shall ensure that the provision of services authorized under [section 271(g)] by a Bell operating company or its affiliate will not adversely affect  X4telephone exchange service ratepayers or competition in any telecommunications market."G O yO] 'ԍId.  271(h).G  Xv48.` ` Section 272 permits a BOC (including any affiliate) that is subject to section  X_4251(c) to manufacture equipment (as defined in the AT&T consent decree),G_O yO'ԍId.  273(h).G originate inregion interLATA telecommunications services, other than incidental and previously  X14authorized interLATA services, andprovide certain interLATA information servicesh1( O yO 'ԍId.  272(a)(2)(B), 272(a)(2)(C). Ġh only if it does so through one or more separate affiliates. Each of the separate affiliates must "maintain [separate] books, records, and accounts in the manner prescribed by the Commission" and "shall conduct all transactions with the Bell operating company of which it  X 4is an affiliate on an arm's length basis."Y O yO>'ԍId.  272(b)(2), 272(b)(5).Y In its dealings with the separate affiliate, each BOC must "account for all transactions... in accordance with accounting principles  X 4designated or approved by the Commission."J H O yO'ԍId.  272(c)(2).J  Xy49.` ` Section 273(d)(3) imposes separate affiliate requirements for the manufacture of telecommunications equipment and customer premises equipment upon entities that certify the same class of telecommunication equipment and customer premises equipment produced  X44by unaffiliated entities.J4O yO"'ԍId.  273(d)(3).J "h0*%%ZZ"Ԍ X4 10.` ` Section 274(a) prohibits any "Bell operating company or any affiliate [from] engag[ing] in the provision of electronic publishing that is disseminated by means of such Bell operating company's or any of its affiliates' basic telephone service," other than through  X4"a separated affiliate or electronic publishing joint venture."GO yO4'ԍId.  274(a).G This separated affiliate or electronic publishing joint venture must, among other requirements, "maintain separate books,  X4records, and accounts and prepare separate financial statements."JXO yO'ԍId.  274(b)(1).J  X_4 11.` ` Section 276(b)(1)(C) directs the Commission to prescribe rules for BOC provision of payphone service that, "at a minimum, include the nonstructural safeguards equal  X14to those adopted in the Computer Inquiry-III (CC Docket No. 90-623) proceeding."s1O yO 'ԍId.  276(b)(1)(C). See also Amendment of section 64.702 of the Commission's Rules and Regulations  yO'(Computer III), CC Docket No. 85-229, Phase I, 104 FCC 2d 958 (1986) ("Phase I Order"), recon., 2 FCC Rcd  yOZ'3035 (1987) ("Phase I Recon. Order"), further recon., 3 FCC Rcd 1135 (1988) ("Phase I Further Recon. Order"),  yO"'second further recon., 4 FCC Rcd 5927 (1989) ("Phase I Second Further Recon."), Phase I Order and Phase I  yO'Recon. Order vacated, California v. FCC, 905 F.2d 1217 (9th Cir. 1990) ("California I"); Phase II, 2 FCC Rcd  yO'3072 (1987) ("Phase II Order"), recon., 3 FCC Rcd 1150 (1988) ("Phase II Recon. Order"), further recon., 4  yOz'FCC Rcd 5927 (1989) ("Phase II Further Recon. Order"), Phase II Order, vacated, California I, 905 F.2d 1217  yOB'(9th Cir. 1990); Computer III Remand Proceedings, CC Docket No. 90368, 5 FCC Rcd 7719 (1990) ("ONA  yO 'Remand Order"), recon., 7 FCC Rcd 909 (1992), pets. for review denied, California v. FCC, 4 F.3d 1505 (9th  yO'Cir. 1993) ("California II"); Computer III Remand, 6 FCC Rcd 7571; BOC Safeguards Order vacated in part and  yO'remanded, California v. FCC, 39 F.3d 919 (9th Cir. 1994) ("California III"), cert. denied, 115 S.Ct. 1427 (1995).""s Section 276(a)(1) states that any BOC that provides payphone service after the effective date of those rules "shall not subsidize its payphone service directly or indirectly from its telephone  X 4exchange service operations or its exchange access operations."X H O yO'ԍ47 U.S.C.  276(a)(1). Implementation of the Pay Telephone Reclassification and Compensation  yO'Provisions of the Telecommunications Act of 1996, Report and Order, CC Docket No. 96128, FCC 96388 (rel.  yOu'Sept. 20, 1996) ("Pay Telephone Reclassification Order"), recon., FCC 96439 (rel. Nov. 8, 1996).  X 4 12.` ` Finally, section 254(k) imposes a more general prohibition against crosssubsidization by barring telecommunications carriers from "us[ing] services that are not  X4competitive to subsidize services that are subject to competition."MhO yO 'ԍ47 U.S.C.  254(k).M "y0*%%ZZ/"Ԍ X' B. Goals of the Proceeding  X4 13.` ` In our NPRM, we set forth two goals for this proceeding: (1) preserving for the benefit of interstate telephone ratepayers legitimate economies of scope that could be realized by BOCs and other incumbent local exchange carriers when entering markets from which  X4they were previously barred or in which they continue to participate;O yO'ԍEconomies of scope occur when it is less costly for a single firm to produce a bundle of goods or services together, than it is for two or more firms, each specializing in distinct product lines, to produce them  yO'separately. See, e.g., John C. Panzar and Robert D. Willig, Economies of Scope, 71 AMER. ECON. REV. OF  yO` 'PAPERS AND PROC. 268 (1981); William J. Baumol, John C. Panzar, and Robert D. Willig, CONTESTABLE  yO( 'MARKETS AND THE THEORY OF INDUSTRY STRUCTURE 7179 (1982); Daniel F. Spulber, REGULATION AND  yO 'MARKETS 11415 (1989). and (2) discouraging, and facilitating detection of, improper cost allocations in order to prevent incumbent local exchange carriers from imposing the costs of their competitive ventures on interstate  XJ4telephone ratepayers.eJ@O yO;'ԍNPRM, 11 FCC Rcd at 905960 paras. 910.e In the NPRM, we asked the threshold question: to what, if any, extent  X54should we rely on our existing accounting safeguards in Parts 32 and 64 of our rulesU5O yO'ԍSee 47 C.F.R. Parts 32 and 64.U to  X 4achieve these two goals.Y ` O yO/'ԍNPRM, 11 FCC Rcd at 9060 para. 11.Y We tentatively concluded that our existing accounting safeguards,  X 4with the modifications described in the NPRM, would best meet the requirements and underlying goals of sections 260 and 271 through 276. We invited comment on this tentative conclusion. We also sought comment on whether less detailed accounting safeguards would  X 4suffice to achieve the objectives of the Act.G O yOe'ԍId. at para. 12.G   X4 14.` ` To the extent that BOCs or other incumbent local exchange carriers maintain control over the bottleneck facility, these BOCs or other incumbent local exchange carriers  Xh4could potentially engage in predatory behavior. In the NPRM, we also sought comment on how the extent to which a BOC or other incumbent local exchange carrier has the  X<4opportunities to engage in predatory behavior should affect our decisions in this proceeding.L< O yOm 'ԍId. at 9062 para. 16.L "%0*%%ZZ"Ԍ X' Comments:  X415.` ` Worldcom contends that the Act does not support the Commission's statement  X4in the NPRM concerning the need to preserve "economies of scope" for the BOCs.JO yO4'ԍWorldcom Comments at 68.J SBC, however, maintains that, except to the extent Congress imposed temporary separation requirements as well as other restrictions such as the nondiscrimination provisions on incumbent local exchange carriers, Congress did not deny incumbent local exchange carriers  Xa4the benefits of their own efficiencies.BaXO yOj 'ԍSBC Reply at 78.B  X3416.` ` Several parties, including NYNEX, contend that existing accounting safeguards are more than adequate to meet the requirements of sections 260 and 271 through 276 and no  X 4additional safeguards are required.  O yO'ԍCincinnati Bell Comments at 3; NYNEX Comments at 910; PacTel Comments at 5; US West Comments at 1; Coalition Reply at 1. In particular, Cincinnati Bell argues that incumbent local exchange carriers will not be able to raise prices based upon improperly allocated costs given  X 4the choices that will be available to customers in a competitive market.O! @O yO'ԍCincinnati Bell Comments at 4.O Many parties, including States, interexchange carriers, and trade associations, generally support our proposal  X 4to use current Part 32 and Part 64 accounting rules, with some modifications."X O yO*'ԍAT&T Comments at 2; California Comments at 6; CTA Comments at 4; GSA Comments at 3; Missouri PSC Comments at 3; NYDPS Comments at 8; Puerto Rico Telephone Comments at 2; Sprint Comments at 4; TRA Comments at 5. USTA and SBC argue that given the procompetitive, deregulatory goals of the Act and the increase in  X{4competition since the adoption of the accounting safeguards in the Joint Cost and Computer  Xf4III Proceedings, we should not impose more stringent rules.W#f O yO'ԍUSTA Comments at 2; SBC Comments at 2.W Ameritech contends that we should adopt less detailed accounting rules consistent with the Act's mandate to foster a  X:4national deregulatory policy framework.J$: O yOk 'ԍAmeritech Comments at 12.J  X 417.` ` Sprint, GSA, Puerto Rico Telephone and several BOCs argue that a new system of accounting safeguards would require the BOCs to develop new systems and retrain employees, requiring substantial investments of time and resources without any assurance that" $0*%%ZZn"  X4a new system will be more effective.%O yOy'ԍGSA Comments at 34; PacTel Comments at 5; Puerto Rico Telephone Comments at 2; Sprint Comments at 4; US West Comments at 2. Ameritech adds that the substantial costs associated with the adoption of a different accounting safeguards approach would not be justified by the  X4benefit.J& O yO'ԍAmeritech Comments at 19.J  X418.` ` USTA maintains that where we determine that current accounting safeguards will continue to apply to incumbent local exchange carriers, we should streamline those safeguards to the extent possible to ensure fair competition and to make the rules clear and  X_4predictable.p'_O yO 'ԍUSTA Comments at 2. See also Ameritech Reply at 1.p USTA recommends streamlining our current rules as follows: (1) modify the shared forecast investment rules; (2) modify the affiliate transactions valuation standards; (3) simplify the Part 64 administrative process; and, (4) modify the frequency of the independent  X 4audit.O( @O yO"'ԍSee USTA Comments at 14.O Ameritech and SBC recommend adoption of USTA's streamlining proposals to  X 4implement provisions under the Act related to both separated and integrated operations.t) O yO'ԍAmeritech Comments at 13; SBC Comments at 15; Ameritech Reply at 2.t Several parties, including USTA, allege that competition and a number of existing safeguards, most notably price cap regulation, provide the most effective constraints on the ability of  X 4incumbent local exchange carriers to crosssubsidize.r* wO yO'ԍPacTel Comments at 4043; SBC Comments at 14; USTA Comments at 4.r  X419.` ` In contrast, APCC argues that existing safeguards have not adequately  Xy4prevented crosssubsidization.A+y O yO1'ԍAPCC Reply at 5.A In particular, APCC suggests that we should make extensive changes to the cost allocation manuals, impose additional requirements to annual attestation audits, and reconsider the allocation methodology presently employed by incumbent local  X44exchange carriers.R,4 O yO|'ԍSee APCC Comments at 1118.R ESI recommends that we adopt rules that ensure that vertically integrated telecommunications carriers with proven market power be more strictly regulated than carriers  X4without the potential to price squeeze.@-' O yO"'ԍESI Reply at 2.@ " -0*%%ZZ"Ԍ X420.` ` MCI maintains that the Act clearly recognizes the incentives for incumbent local exchange carriers to shift costs between their new competitive activities and their  X4monopoly local exchange and exchange access operations.C.O yOK'ԍMCI Comments at 6.C Accordingly, MCI asserts that we must adopt safeguards stricter than our existing accounting safeguards to account for the increased opportunities for BOCs to enter new lines of nonregulated businesses and for the increased incentives and opportunities for incumbent local exchange carriers to shift costs  Xv4following passage of the 1996 Act.@/vXO yO 'ԍId. at 3.@ In particular, MCI suggests that we adopt a rule requiring carriers to maintain a complete audit trail of all cost allocations and affiliate  XH4transactions.x0HO yO 'ԍId. at 9. See also Ohio Reply at 4; TIA Reply at 25.x  X 421.` ` GTE agrees with our contention that any commenter urging us to adopt more detailed accounting safeguards than those in our current rules or those specifically mandated  X 4by the Act bears a heavy burden of persuading us to adopt such safeguards.M1 xO yO'ԍSee GTE Comments at 9.M Ameritech alleges, however, that we have not satisfied this heavy burden of persuasion test with regard  X 4to the more detailed accounting safeguards proposed in the NPRM.t2 O yOw'ԍAmeritech Reply at 9; but see Worldcom Comments at 89.t  X422.` ` With respect to our concerns regarding opportunities for incumbent local exchange carriers to engage in predatory behavior, Worldcom argues that "the very act of competing headon with the BOCs creates a heightened degree of reliance on the BOCs'  XM4bottleneck facilities that did not exist before."H3MO yO'ԍWorldcom Comments at 5.H AT&T alleges that the BOCs still control bottleneck facilities and that as long as their control continues, the BOCs will be able to engage in predatory behavior, forcing nonaffiliated interexchange carriers to absorb high access charges as a real cost and allowing the BOCs and their interexchange affiliates to  X4underprice these nonaffiliated carriers.4( O yO 'ԍAT&T Comments at 3. See also CTA Comments at 6; MCI Comments at 4; ESI Reply at 3, 5.  X423.` ` Ameritech and USTA, however, contend that predatory behavior is not likely to  X4occur.^5 O yO%'ԍAmeritech Comments at 9; USTA Comments at 12.^ In particular, USTA argues that given the difference in resources between incumbent" H 50*%%ZZ(" local exchange carriers and competitors, such as AT&T and MCI in the interexchange market, it is more likely that incumbent local exchange carriers will be the victims of predatory  X4behavior, not the perpetrators of it.E6O yOK'ԍUSTA Comments at 12.E SBC maintains that predatory behavior concerns prices  X4in competitive markets and has no place in an accounting safeguards proceeding.D7XO yO'ԍSBC Comments at 11.D   X' Discussion:  X_424.` ` In addressing the issues in this proceeding, we adopt and follow the two  XH4fundamental goals for this proceeding articulated in the NPRM and discussed above. We are committed to facilitating the development of competitive telecommunications service offerings and, in particular, to giving effect to the provisions relating to incumbent local exchange carrier entry into, or expansion within, the markets covered by sections 260 and 271 through 276. We affirm that protecting ratepayers from crosssubsidizing competitive ventures is a primary goal behind all our cost allocation and affiliate transactions rules. The 1996 Act clarifies the meaning of what constitutes just and reasonable rates by adding to the Communications Act of 1934 section 254(k), which provides that incumbent local exchange carriers may "not use services that are not competitive to subsidize services that are subject to  X{4competition."G8{O yO'ԍ47 U.S.C.  254(k).G  XM425.` ` Many commenters endorse adoption of the goals we set forth in the NPRM. The primary objective of this proceeding is to examine whether our existing accounting safeguards adequately respond to new competitive opportunities created by the 1996 Act.  X 4These accounting safeguards consist of cost allocationP9 xO yO3'ԍ47 C.F.R.  64.901.904.P and affiliate transactions rulesF: O yO'ԍId.  32.27.F that were designed to keep incumbent local exchange carriers from imposing the costs and risks of their competitive ventures on interstate telephone ratepayers, and to ensure that interstate ratepayers share in the economies of scope realized by incumbent local exchange carriers  X4when they expand into additional enterprises.?;O yO!'ԍSeparation of Costs of Regulated Telephone Service from Costs of Nonregulated Activities, Report and  yO"'Order, CC Docket No. 86111, 2 FCC Rcd 1298, 131214 paras. 109117 & 1335 para. 290 (1987) ("Joint Cost  yO#'Order"), recon., Joint Cost Reconsideration Order, 2 FCC Rcd 6283, further recon. Joint Cost Further  yOO$'Reconsideration Order, 3 FCC Rcd 6701, aff'd sub nom. Southwestern Bell Corp., 896 F.2d 1378 (D.C. Cir. 1990). ? Our cost allocation and affiliate transactions" H ;0*%%ZZ" rules, in combination with audits, tariff review, and the complaint process, have proven successful at protecting regulated ratepayers from bearing the risks and costs of incumbent local exchange carriers' competitive ventures.  X426.` ` With respect to affiliate transactions, we note that the Act requires BOCs to create a separate affiliate for certain services. While the volume of affiliate transactions may increase as the result of this requirement, we do not believe that the nature and type of such transactions will raise any accounting concerns that our current rules do not already address. Similarly, the 1996 Act will also likely increase the scope of nonregulated activities in which BOCs participate because they may now provide, on an integrated basis, services that they were previously prohibited from providing. Since the inception of our Part 64 cost allocation rules, the type and level of nonregulated activities have continued to grow. We designed our cost allocation rules to accommodate the growth of these nonregulated activities and affiliate transactions. We conclude that our existing cost allocation and affiliate transactions rules, as modified herein, are appropriate for any of the new activities described in Sections 260 and 271 through 276. Where we find that our accounting safeguards should be strengthened, we do so in this Order. We therefore find that adoption of the existing cost allocation rules and the affiliate transactions rules, as modified herein, will successfully achieve our goals.  XK427.` ` We noted in the NPRM that any commenter urging us to adopt more detailed accounting safeguards than those in our current rules or those specifically mandated by the  X4Act bears a heavy burden in demonstrating the necessity to adopt such safeguards.b<O yO'ԍNPRM, 11 FCC Rcd at 906061 para. 12.b The imposition of this burden is consistent with the requirement of the Administrative Procedure Act that our actions be supported by the language of the Act as well as substantial evidence  X4in the record.M=XO yO'ԍSee 5 U.S.C.  706.M  X428.` ` Finally, we see no need for additional accounting safeguards designed specifically to prevent predatory behavior by incumbent local exchange carriers. We believe that the accounting rules we adopt here will effectively prevent predatory behavior that might result from crosssubsidization. None of the commenters proposed any additional accounting rules to guard against predatory behavior.  X"' C. Scope of Commission's Authority  X429. ` ` In the NPRM, we asked whether the Act grants the Commission authority to establish accounting safeguards for the intrastate services described in sections 260 and 271" =0*%%ZZk"  X4through 276.>O yOy'ԍSee NPRM, 11 FCC Rcd at 9070 para.34, 9076 para. 43, 907778 para. 48, 9080 para. 54, 9082 para. 61, 9099 para. 94, 910102 paras 99100, 9108 paras 114115. With respect to interLATA services of the types described in sections 271 and 272, we tentatively concluded, in accordance with the analysis developed and discussed in the  X4BOC InRegion NPRM, that the Commission has authority to set the accounting safeguards for both interstate and intrastate interLATA services and interLATA information services  X4governed by these sections.m?X O yOw'ԍId. at 907678 paras. 4348. Regulatory Treatment of LEC Provision of Interexchange Services  yO? 'Originating in the LEC's Local Exchange Area, Notice of Proposed Rulemaking, CC Docket No. 96149, FCC  yO '96308, para. 21 (rel. July 18, 1996) ("BOC InRegion NPRM").m With respect to payphone service, we tentatively concluded that the language of section 276 specifically grants the Commission jurisdiction to preempt any  Xx4State regulations that may be inconsistent with the Commission's regulations.@Xx@O yOi 'ԍNPRM, 11 FCC Rcd at 9082 para. 61. 47 U.S.C.  276(c). See also In the Matter of New England  yO1'Public Communications Council Petition for Preemption Pursuant to Section 253, Memorandum Opinion and  yO'Order, CCBPol 9611, FCC 96470 (rel. Dec. 10, 1996). See generally Pay Telephone Reclassification Order.  With respect to manufacturing by certifying entities, we tentatively concluded that the provisions of section  XJ4273 apply to all BOC manufacturing activities, irrespective of any jurisdictional distinctions.YAJ` O yO['ԍNPRM, 11 FCC Rcd at 9101 para. 99.Y  X 430.` ` We sought comment in the NPRM on the role the states might have in  X 4implementing the accounting safeguards provisions of sections 260 and 271 through 276.B O yO'ԍId. at 907071 para. 35, 9078 para. 49, 9080 para. 55, 9082 para. 61, 910102 para. 100, 910809 para. 116. We also sought comment on whether, if these sections do not specifically grant the Commission jurisdiction over intrastate services, the Commission has the authority to preempt State regulation with respect to accounting matters addressed by these sections pursuant to  X 4Louisiana Public Service Commission v. F.C.C. ("Louisiana PSC").C H O yO'ԍLouisiana Public Service Commission v. F.C.C., 476 U.S. 355, 375, n. 4 (1986) ("Louisiana PSC").(#(#Ĭ We tentatively  X4concluded that if the Commission has the authority to preempt pursuant to Louisiana PSC, we should refrain from exercising that authority and retain our policy of not preempting States  Xj4from using their own accounting safeguards for intrastate purposes.DjO yO 'ԍSee NPRM, 11 FCC Rcd at 9071 para. 36, 907879 para. 50, 9080 para. 56, 910809 para. 116. "ShD0*%%ZZ"Ԍ X' Comments:  X431.` ` Sprint asserts that the Act grants the Commission jurisdiction over section 260  X4telemessaging services without regard to either State or LATA boundaries.FEO yO4'ԍSprint Comments at 5.F VoiceTel maintains that the inherent interstate nature of telemessaging services permits the Commission to preempt States even with respect to an individual local exchange carrier operating in a  Xv4single state.JFvXO yO 'ԍVoiceTel Comments at 13.J BellSouth, however, argues that there is no basis for the Commission to  X_4preempt State Commission actions that are consistent with section 260 and the Part 64 rules.JG_O yO 'ԍBellSouth Comments at 15.J  X1432.` ` In general, interexchange carriers contend that sections 271 and 272 grant the Commission authority to regulate all interLATA services including intrastate, interLATA services because sections 271 and 272 expressly address BOC provision of interLATA  X 4services, making no distinction between interstate and intrastate aspects of those services.H xO yO'ԍAT&T Comments at 45; CTA Comments at 1112; MCI Comments at 40; Sprint Comments at 4; Worldcom Comments at 18.  X 4NARUC and the States generally disagree.IIZ O yOV'ԍCalifornia Comments at 35; Florida PSC Comments at 23; Missouri PSC Comments at 23; NARUC Comments at 24; NYDPS Comments at 28; Wisconsin PSC Comments at 35; Ohio Reply at 4; Washington  {O'Reply at 2. See also BellSouth Reply at 16.I CTA and Sprint contend that the Commission should preempt the States with regard to intrastate, intraLATA telecommunications services and information services if the lack of sufficient crosssubsidization safeguards by a State will hinder the development of competition and allow the BOCs to abuse their market power in  Xy4the intraLATA market.\Jy O yO'ԍCTA Comments at 13; Sprint Comments at 67.\ California and Wisconsin PSC allege that the Commission has no authority to preempt States from using their own accounting safeguards unless individual  XK4State rules compromise the goals and intent of the Act.gKK O yO~'ԍCalifornia Comments at 4; Wisconsin PSC Comments at 5.g US West argues that we should consider the necessity of preemption on a casebycase basis because there is no record to justify a blanket preemption of State accounting safeguards procedures for intrastate  X4purposes.GLO yO#'ԍUS West Comments at 3.G "L0*%%ZZ"Ԍ X4 33.` ` Sprint and AICC argue that the Act grants the Commission jurisdiction over  X4alarm monitoring under section 275 without regard to either State or LATA boundaries.\MO yOb'ԍAICC Comments at 45; Sprint Comments at 5.\ AICC argues that even if section 275 does not, by its terms, grant the Commission jurisdiction over all alarm monitoring services, the Commission has the power to preempt State regulation in order to ensure that alarm monitoring services are not subsidized by  X4exchange and exchange access ratepayers.PNXO yO'ԍAICC Comments at 5.P Florida PSC contends, however, that the Commission has no authority to preempt the States from applying their own cost allocation  X_4systems for intrastate alarm monitoring services.KO_O yO 'ԍFlorida PSC Comments at 3.K  X14!34.` ` BellSouth and NYNEX contend that section 276 contains express language that, with respect to payphone service, specifically grants the Commission authority to  X 4preempt any State regulations that may be inconsistent with the Commission's regulations.P xO yO,'ԍBellSouth Comments at 20; NYNEX Comments at 18. See also Sprint Comments at 5. California and NYDPS contend that the Act does not authorize the Commission to preempt  X 4States from imposing accounting safeguards on payphone service._Q O yO'ԍCalifornia Comments at 9; NYDPS Comments at 6._  X 4"35.` ` Sprint and TIA maintain that the Commission has jurisdiction over all manufacturing activities under section 273 because manufacturing cannot be segregated into  Xy4interstate and intrastate portions.WRyO yO'ԍSprint Comments at 5; TIA Reply at 28.W NYDPS, however, argues that the Act does not limit  Xb4States from exercising jurisdiction over manufacturing.ESb( O yO;'ԍNYDPS Comments at 6.E  X44#36.` ` All commenters that addressed the Commission's scope of authority over electronic publishing services agree that section 274 covers both interLATA and intraLATA  X4electronic publishing.T O yOo!'ԍYPPA Comments at 3; NAA Comments at 45; BellSouth Comments at 45; NYDPS Comments at 6. YPPA contends that if Congress had intended to distinguish between interLATA and intraLATA electronic publishing, it would have done so, as it did in section  X4272.JUH O yO$'ԍYPPA Comments at 3.J NYDPS argues that the Act does not preclude States from exercising jurisdiction over"U0*%%ZZ"  X4electronic publishing.uVO yOy'ԍNYDPS Comments at 6. See also BellSouth Comments at 45.u NAA maintains that the requirements of section 274 apply when the  X4electronic publishing is disseminated by means of a BOC's "basic telephone service."EWXO yO'ԍNAA Comments at 45.E Thus, NAA argues that the Commission's authority with respect to complaints and cease and desist orders applies to interstate and intrastate electronic publishing. NAA contends, however, that  X4Congress has manifested no intent to preclude the States from also enforcing section 274.:XO yO= 'ԍId.:  Xv4$37.` ` AT&T contends that the role of the States in implementing the Act's various  X_4prohibitions against crosssubsidization arises in the auditing process.DY_xO yO 'ԍAT&T Comments at 6.D According to AT&T, States will also continue to have authority to use their own accounting methods for intrastate services that have not been preemptively deregulated by the Commission or for which  X 4jurisdiction has not been expressly vested in the Commission under the Act.:Z O yO'ԍId.:  X 4%38.` ` With respect to the Commission's authority to preempt State accounting  X 4regulations pursuant to Louisiana PSC, NYDPS contends that because two sets of accounting regulations can coexist and have coexisted in the past, the Commission's tentative  X 4conclusion to refrain from preempting States under Louisiana PSC is correct as a matter of  X4law.G[O yO'ԍNYDPS Comments at 78.G TIA contends that any State regulation with respect to BOC manufacturing that is inconsistent with the requirements of section 272 or 273 would necessarily "thwart or  Xf4impede" federal policies and should therefore be preempted.D\f( O yO?'ԍTIA Reply at 2829.D "O \0*%%ZZ"Ԍ X' Discussion:  X4&39. ` ` Sections 260, 271,]O yOK'ԍWe note that section 271(h)'s prohibition against subsidization applies only to the incidental interLATA services authorized under subsection (g) of section 271. 274, 275 and 276=^X O yO'ԍWith regard to payphone services, section 276(c) provides that "[t]o the extent that any State requirements are inconsistent with the Commission's regulations, the Commission's regulations on such matters shall preempt such State requirements." 47 U.S.C.  276(c).= of the Communications Act of 1934 all expressly prohibit BOCs and, in some cases, other incumbent local exchange carriers from  X4subsidizing services permitted under those sections from their "telephone exchange service"m_@O yO 'ԍId.  260(a)(1), 271(h), 275(b)(2), 276 (a)(1).m  X4or their "basic telephone service."M`O yO'ԍId.  274(a).M The term "telephone exchange service" as defined under  Xv4section 3(47) of the Act is a primarily intrastate service.Hav` O yO'ԍId.  153(47).H Moreover, the term "basic  X_4telephone service" as defined under section 274(i)(2) is a primarily intrastate service.Jb_ O yO'ԍId.  274(i)(2).J Therefore, by barring BOCs and, in some cases, other incumbent local exchange carriers from subsidizing activities permitted pursuant to sections 260, 271, 274, 275 and 276 from their "telephone exchange service" or their "basic telephone service," these sections of the Act expressly reach intrastate services. In addition, section 273(g) states that the Commission may prescribe such additional rules and regulations as may be necessary to prevent crosssubsidization.  X 4'40. ` ` The relevant statutory references to intrastate services are extensive. Section 260(a)(1) provides that "[a]ny local exchange carrier subject to the requirements of section  Xy4251(c) that provides telemessaging service . . . (1) shall not subsidize its telemessaging  Xd4service directly or indirectly from its telephone exchange service or its exchange access."[cd O yO'ԍId.  260(a)(1) (emphasis added).[ Section 274(a) provides that "[n]o Bell operating company or any affiliate may engage in the provision of electronic publishing that is disseminated by means of such Bell operating  X!4company's or any of its affiliates' basic telephone service."Xd!O yO"'ԍId.  274(a) (emphasis added).X Similarly, section 275(b)(2) provides that an incumbent local exchange carrier shall "not subsidize its alarm monitoring" d0*%%ZZ"  X4services either directly or indirectly from telephone exchange service operations,"[eO yOy'ԍId.  275(b)(1) (emphasis added).[ while section 276(a)(1) prohibits any BOC that provides payphone service from subsidizing its  X4payphone service "directly or indirectly from its telephone exchange service operations or its  X4exchange access operations."[fXO yO'ԍId.  276(a)(1) (emphasis added).[ Further, section 271(h), pertaining to BOC entry into interLATA services, states that the "Commission shall ensure that the provision of services  X4authorized under subsection (g) by a Bell operating company or its affiliate will not adversely  X|4affect telephone exchange service ratepayers or competition in any telecommunications  Xg4market."XggO yO 'ԍId.  271(h) (emphasis added).X  X94(41. ` ` In addition, we note that in the companion NonAccounting Safeguards Order, we conclude that sections 271 and 272 give us jurisdiction over all interLATA services  X 4covered by those sections, including intrastate, interLATA services.h@ xO yO6'ԍWe incorporate by reference the jurisdictional analysis in Implementation of the NonAccounting  yO'Safeguards of Sections 271 and 272 of the Communications Act of 1934, as Amended, Report and Order, CC  yO'Docket No. 96149, FCC 96489, paras. 2324, 3049 (rel. Dec. 24, 1996) ("NonAccounting Safeguards Order").  yO'Many States contain more than one LATA. The state of Texas, for example, contains sixteen BOC LATAs. See  yOV'Local Exchange Routing Guide  3, at4. Thus, interLATA traffic may be either interstate or intrastate. For example, a call from San Francisco to Los Angeles is an intrastate interLATA call. Approximately 30 percent of  yO'interLATA traffic in 1994 was intrastate. See Industry Analysis Division, Telecommunications Industry  yO'Revenue: TRS Fund Worksheet Data, Table 6 (Com. Car. Bur. Feb. 1996). The Act defines "interLATA services" as "telecommunications between a point located in a [LATA] and a  X 4point located outside such area."Hi O yO'ԍ47 U.S.C.  153(21).H The definition does not distinguish between domestic and international interLATA services. Further, international telecommunications services, which originate in a LATA and terminate in a country other than the United States, or vice versa, fit within the statutory definition of interLATA services. Thus, we conclude, as we do in the  X4NonAccounting Safeguards Order that Congress intended the section 272 safeguards to apply  Xl4to all domestic and international interLATA services.cjlO yO- 'ԍNonAccounting Safeguards Order at para. 58.c Because the scope of sections 271 and 272 extends to both interstate and intrastate services, carriers must comply with the requirements of those sections for both interstate and intrastate services. We emphasize, however, that the scope of the Commission's authority under sections 271 and 272 extends only to matters covered by those sections. Those sections do not alter the jurisdictional division of authority with respect to matters falling outside their scope. For example, rates"j0*%%ZZw" charged to end users for intrastate interLATA service have traditionally been subject to state authority, and will continue to be.  X4)42. ` ` Based on the express statutory language prohibiting crosssubsidization, as well  X4as our interpretation of the term "interLATA," as discussed in the NonAccounting Safeguards  X4Order, and our interpretation of the terms "telephone exchange service" and "basic telephone service," as discussed above, we conclude that the reach of sections 260, 271, 272 and 274 through 276 extends to intrastate services, and that the Commission has jurisdiction, under the crosssubsidization prohibitions contained in these sections, to adopt regulations governing intrastate services. Again, we emphasize that the scope of the Commission's authority under sections 260, 271, 272, and 274 through 276 extends only to matters covered by those sections. Those sections do not alter the jurisdictional division of authority with respect to matters falling outside their scope, including rates charged to end users for intrastate interLATA service.  X 4*43.` ` We also find, as discussed in the NonAccounting Safeguards Order, that section 2(b) of the Communications Act of 1934 does not limit the Commission's authority to  X4establish regulations governing intrastate matters under these sections.KkO yO'ԍId. at paras. 3945.K For the reasons explained below, however, we decline to impose any additional accounting rules on carriers' intrastate services. We note that the language of sections 260, 271, 272 and 274 through 276 that extends our jurisdiction to include certain intrastate activities is both more recent and more specific than section 2(b). As a result, the language of these more recent provisions is controlling.  X4+44. ` ` As we discuss in section II.B. above, we already have an accounting safeguards system in place that prevents incumbent local exchange carriers from imposing the costs and risks of their competitive ventures on interstate telephone ratepayers and ensures that interstate ratepayers share in the economies of scope that incumbent local exchange carriers may realize upon expansion into additional enterprises. In this Order, we apply our existing accounting safeguards system, consisting of our cost allocation and modified affiliate transactions rules in Parts 32 and 64 of our rules, to the services permitted by sections 260, 271, 272 and 274 through 276. Our experience with these safeguards has demonstrated their  X&4ability to protect interstate ratepayers from improper crosssubsidization. The crosssubsidization prohibitions of sections 260, 271, 272 and 274 through 276, however, cover  X4certain intrastate services, as noted in the previous paragraph. Neither the information contained in the record nor our experience provides us with any basis to conclude that existing state accounting systems that differ from our federal system will result in the type of subsidization of competitive activities prohibited by sections 260, 271, 272 and 274 through 276. Therefore, we decline to impose any additional accounting rules on intrastate services.""Xk0*%%ZZ "Ԍ X4ԙ,45. ` ` Regardless of whether we or the States adopt accounting rules to prevent subsidies flowing from regulated services within our respective jurisdictions to the services permitted under sections 260, 271, 272 and 274 through 276, carriers must comply with the  X4crosssubsidization prohibitions in those sections of the Act.YlO yO4'ԍ47 U.S.C.  260, 27172, 274276.Y Any ratepayer or other person alleging a violation of these provisions by a carrier may file a complaint with the Commission  X4pursuant to section 208 of the Communications Act.DmXO yO'ԍId.  208.D In the event that a carrier or customer believes that any State has imposed accounting rules that may force a carrier to violate the crosssubsidization prohibitions of sections 260, 271, 272 and 274 through 276, then the carrier or customer may seek declaratory relief from the Commission pursuant to section 1.2  X14of the Commission rules on a casebybase basis.n1O yO 'ԍ47 C.F.R.  1.2 (authorized by section 554(e) of the Administrative Procedure Act, 5 U.S.C.  554(e)).  X 4-46. ` ` With regard to the manufacturing activities covered by section 273, we conclude that States are preempted from implementing any part of that section, including its  X 4accounting safeguards provisions.Do xO yO'ԍ47 U.S.C.  273.D We base this conclusion on the fact that such manufacturing activities cannot be separated between the interstate and intrastate jurisdictions, rendering any separation between interstate and intrastate jurisdictions infeasible. As a result, we must preempt States from implementing accounting safeguards related to manufacturing activities. Moreover, while section 2(b) of the Communications Act of 1934 limits the Commission's authority over "charges, classifications, practices, services, facilities, or  XK4regulation for or in connection with intrastate communications service,"GpKO yO'ԍId.  152(b).G we find that the manufacturing activities addressed by section 273 do not fit within any of these categories and therefore are not within the scope of section 2(b). We therefore conclude that section 2(b) does not preclude our assertion of jurisdiction over manufacturing activities, as required by section 273.  X' D. Structure of this Order  X4.47.` ` Section III of this Order addresses accounting safeguards that apply when an incumbent local exchange carrier, including a BOC, provides on an integrated basis a service within the ambit of sections 260 and 271 through 276. Section IV discusses the accounting safeguards that apply when an incumbent local exchange carrier, including a BOC, uses an affiliate to provide a service within the ambit of sections 260 and 271 through 276. Within"7p0*%%ZZE" sections III and IV, we address the application of accounting safeguards to meet the individual requirements of each statutory section addressed in this Order. Section V of this Order presents our analysis as to why price cap regulation does not obviate the need for accounting safeguards to ensure against the subsidization of services permitted under sections 260 and 271 through 276 with revenues from regulated telecommunications services.  Xv'  III. SAFEGUARDS FOR INTEGRATED OPERATIONS    XH'\ A. General   X 4/48.` ` In this section of the Order, we discuss the provisions in sections 260, 271, 275, and 276 relating to accounting safeguards for telemessaging, certain interLATA telecommunications and information, alarm monitoring, and payphone services that the BOCs and other incumbent local exchange carriers may provide on an integrated basis. In the  X 4NPRM, we tentatively concluded that our existing Part 64 cost allocation rules, developed in  X 4our Joint Cost and Computer III proceedings, satisfy the requirements of these sections of the Act that certain competitive telecommunications and information services not be subsidized  X}4by subscribers to regulated telecommunications services.Yq}O yO'ԍNPRM, 11 FCC Rcd at 9066 para. 27.Y We invited comment on this  Xf4tentative conclusion. In the NPRM, we asked whether the benefits of a fundamentally different approach to cost allocation would be outweighed by the costs that implementation of  X:4such a change would impose.Gr:XO yOC'ԍId. at para. 28.G Alternatively, we asked commenters to discuss how, if necessary, we might adapt the existing cost allocation system to accommodate the services  X 4discussed in section III of the NPRM.  X' Comments:  X4049.` ` Most parties, including several BOCs, support the Commission's tentative conclusion that our existing Part 64 cost allocation rules generally satisfy the requirements of the Act that certain competitive and information services not be subsidized by subscribers to  Xm4regulated telecommunications services.smO yO 'ԍCTA Comments at 8; PacTel Comments at 9; Sprint Comments at 7; US West Comments at 3. See  yO 'also BellSouth Comments at 12; NYNEX Comments at 11. In particular, Puerto Rico Telephone contends that we need not modify our cost allocation rules because competition in the local exchange and exchange access markets will ensure that local exchange carriers do not shift costs of  X(4nonregulated services to regulated ratepayers.Ut(@O yO%'ԍPuerto Rico Telephone Comments at 2.U In contrast, MCI maintains that additional"(t0*%%ZZ"  X4safeguards for integrated operations are necessary to protect the public interest.uO yOy'ԍMCI Comments at 11. See also Sprint Comments at 4; Worldcom Comments at 10; Worldcom Reply at 3. Ameritech  X4argues that our current cost allocation rules exceed the statutory requirements of the Act.Iv O yO'ԍAmeritech Comments at 3.I  X' Discussion:  X4150.` ` We developed our cost allocation rules in the Joint Cost and Computer III  Xx4Proceedings to help ensure that interstate ratepayers do not bear the costs and risks of the  Xc4telephone companies' nonregulated activities.JwXcO yO 'ԍThese rules, along with the affiliate transactions requirements in section 32.27 of the Commission's rules, represent the nonstructural accounting safeguards adopted in the Computer III proceedings (CC Docket No.  yOT'90-623). See 47 U.S.C.  276(b)(1)(C).J These rules prescribe how subject carriers must separate the costs of activities regulated under Title II from the costs of nonregulated activities when the nonregulated activities are performed directly by the carrier rather than  X 4through an affiliate.x O yO'ԍBy nonregulated activities, we mean activities not regulated under Title II of the Act or equivalent state statutes. This category generally consists of activities that have never been subject to regulation under Title II; activities subject to Title II regulation that we have preemptively deregulated; and activities subject to Title II regulation that have been deregulated at the interstate level, but not preemptively deregulated, that we conclude  yO'should be classified as nonregulated activities for Title II accounting purposes. See 47 C.F.R. 32.23(a). Under these rules, incumbent local exchange carriers may not apportion the costs of nonregulated activities to regulated products and services. We adopt our tentative conclusion that our existing Part 64 cost allocation rules satisfy the requirements of sections 260, 271, 275, and 276 that certain competitive telecommunications and information services not be subsidized by subscribers to regulated telecommunications services. Incumbent local exchange carriers have implemented internal cost allocation systems to help ensure their compliance with these rules. No commenter has presented a plan for redesigning these internal systems to accommodate a fundamentally different cost allocation approach. We discuss below the application of our cost allocation rules to services permitted under sections 260, 271, 275, and 276.  X!' B. Specific Services  X'1. Section 260 Telemessaging Service   X4251.` ` Section 260(a)(1) provides that each "local exchange carrier subject to the requirements of section 251(c) that provides telemessaging service . . . shall not subsidize its" x0*%%ZZ" telemessaging service directly or indirectly from its telephone exchange service or its  X4exchange access."JyO yOb'ԍ47 U.S.C.  260(a)(1).J Section 251(c), in turn, applies to every "incumbent local exchange  X4carrier."$z XO yO'ԍId.  251(c). Section 251(h)(1) defines "an incumbent local exchange carrier" as: the local exchange carrier, with respect to an area, that XX` `  (A) on the date of enactment of the Telecommunications Act of 1996, provided telephone exchange service in such area; andx` XX` `  (B)(i) on such date of enactment, was deemed to be a member of the exchange carrier association pursuant to section 69.601(b) of the Commission's regulations (47 C.F.R. 69.601(b)); orx` XX` `  (ii) is a person or entity that, on or after such date of enactment, became a successor or assign of a member described in clause (i). x`  yO'Id.  251(h)(1). $ Section 260(c) defines "telemessaging service" as "voice mail and voice storage and retrieval services, any live operator services used to record, transcribe, or relay messages (other than telecommunications relay services), and any ancillary services offered in  X4combination with these services."G{O yON'ԍId.  260(c).G  X_4352.` ` In the NPRM, we tentatively concluded that applying our Part 64 rules to  XJ4telemessaging will safeguard against the crosssubsidies prohibited by section 260(a)(1).b|JO yO'ԍNPRM, 11 FCC Rcd at 9070 para. 33.qb  X34We also tentatively concluded, as we did in a companion NPRM, the BOC InRegion NPRM, that telemessaging is an information service and that our authority under sections 271 and 272 over interLATA information services extends to intrastate, interLATA information services  X 4provided by BOCs or their affiliates.b} 0O yO'ԍBOC InRegion NPRM at para. 21.b Therefore, BOC provision of telemessaging service on an interLATA basis would be subject to the separate affiliate requirements of section  X 4272.~ O yOJ 'ԍId. at para. 54. For a more complete discussion of this issue, see section IV.B.4., infra. We invited comment on these tentative conclusions. " g~0*%%ZZ "Ԍ X' Comments:  X4453.` ` In general, incumbent local exchange carriers assert that the existing Part 64  X4rules will effectively prevent crosssubsidization of telemessaging services.O yO4'ԍAmeritech Comments at 19; BellSouth Comments at 14; PacTel Comments at 9; USTA Comments at 19; US West Comments at 4. ATSI contends that existing rules applicable to telemessaging are not sufficient to safeguard against the  X4subsidies prohibited by section 260 because they fall short of equalizing cost attributions.D O yO^ 'ԍATSI Comments at 5.D  X_4554.` ` VoiceTel maintains that existing accounting safeguards in Parts 32 and 64 cannot ensure that telemessaging services that are marketed and provided by incumbent local  X14exchange carriers on an inhouse basis will not be subsidized by ratepayers.I1O yO'ԍVoiceTel Comments at 5.I VoiceTel argues that because telemessaging is part of basic service offered by a local exchange carrier and is marketed by customer service representatives at the same time that other basic service options are presented, there are no easily identifiable separate marketing activities that can be  X 4isolated and separately costed.: @O yO'ԍId.: Telemessaging often uses the same facilities that are used for other basic and optional services provided by the local exchange carrier, and the switch is  X 4not necessarily partitioned in a manner that permits direct allocation.@ O yO('ԍId. at 7.@ VoiceTel contends that even if the switch can be partitioned, it is questionable whether the use of lines and trunks can be properly allocated because most telemessaging services permit access to a  Xb4mailbox by dialing either a special number or by dialing one's own number.@b` O yOs'ԍId. at 8.@ In both cases, there is no separate trunk or line cost to allocate. Accordingly, VoiceTel's advocates that we should require all incumbent local exchange carriers that wish to offer telemessaging services  X4to do so through a separate affiliate in order to meet the goals of section 260.D O yO'ԍId. at 1213.D  X4655.` ` MCI and VoiceTel contend that telemessaging is an information service, and that when a BOC provides telemessaging on an interLATA basis, it must do so in accordance  X4with the section 272 separate affiliate requirements. O yO$'ԍMCI Comments at 11; VoiceTel Comments at 13; but see PacTel Comments at 10. Certain local exchange carriers argue"0*%%ZZK" that section 272 only requires that interLATA information services, not intraLATA information services such as many existing telemessaging services, be offered through a  X4separate affiliate.sO yOK'ԍBell Atlantic Reply at 8; BellSouth Reply at 14; NYNEX Reply at 8.s BellSouth asserts that the requirement of a separate subsidiary for the provision of interLATA information services facially violates incumbent local exchange  X4carriers' First Amendment right to freedom of speech.MXO yO'ԍBellSouth Comments at 1415.M  Xv' Discussion:  XH4756.` ` We concur with the incumbent local exchange carriers that assert that our existing accounting safeguards will effectively prevent crosssubsidization of telemessaging services in accordance with section 260(a)(1). We presently classify telemessaging service as  X 4a nonregulated activity for Title II accounting purposes.W O yO'ԍSee note 120, supra.W Consequently, costs associated with the provision of telemessaging services are already addressed by our Part 64 cost allocation rules and, to the extent telemessaging is provided through affiliates, our affiliate  X 4transactions rules also apply.O xO yO'ԍSee note 2, supra.O Our Part 64 rules require carriers to allocate a portion of their network investment plant used to provide telemessaging services to nonregulated accounts.  Xy4857.` ` We find unpersuasive VoiceTel's assertion that existing accounting safeguards in Parts 32 and 64 cannot ensure that telemessaging services that are marketed and provided by incumbent local exchange carriers on an inhouse basis will not be subsidized by ratepayers. Our Part 64 cost allocation rules require local exchange carriers providing services in addition to local exchange service to use a cost allocation methodology based on  X4fully distributed costs ("FDC"). O yO'ԍA fully distributed costing system allocates all of the costs of a group of services among those services using direct assignment and allocation factors based on relative use or estimates of relative use. The assignments  yOO'and allocations determine each service's share of total cost. See MCI Telecommunications Corp. v. FCC, 675  yO'F.2d 408, 410 (D.C. Cir. 1982); Joint Cost Order, 2 FCC Rcd at 131213 paras. 109117.  This methodology establishes a hierarchy of cost apportionment rules designed to prevent crosssubsidies. These rules are applied to costs recorded in the accounts specified in the Uniform System of Accounts ("USOA") set out in  X4Part 32 of our rules.C O yOb#'ԍ47 C.F.R. Part 32.C The methodology requires carriers to assign costs directly, wherever" 0*%%ZZ"  X4possible, to regulated or nonregulated activities.O yOy'ԍ#c Pm7P#Costs are directly assigned when they can be traced to a service or activity without the use of an allocator. If costs cannot be directly assigned, they  X4are considered "common costs" and must be placed in homogenous cost pools.cX O yO'ԍ"Homogenous cost pools" are comprised of logical groupings of similar costs that maximize the extent to which costcausative allocation factors can be used to divide the costs between regulated and nonregulated  yOJ'activities. See Joint Cost Order, 2 FCC Rcd at 1319 para. 164.c The carrier must then divide the costs in each pool between regulated and nonregulated activities using formulas or factors known as "allocators." Depending upon the information available, carriers must apply these allocators in the following order. Whenever possible, common costs must be directly attributed based upon a direct analysis of the origins of those costs. Common costs that cannot be directly attributed must be indirectly attributed based on an indirect, but costcausative, linkage to another cost pool or pools for which a direct assignment or  XH4attribution is possible.H@O yO9'ԍ"Direct attribution occurs when common costs are allocated between regulated and nonregulated activities based on direct measures of cost causation or direct analysis of the origin of the costs themselves. For example, if motor vehicle investment is apportioned between regulated and nonregulated based on analysis of the usage of those motor vehicles, the costs are directly attributed. Indirect attribution occurs when common costs are allocated between regulated and nonregulated activities based on indirect measures of costcausation. For example, if investment in garage work equipment is apportioned between regulated and nonregulated activities in proportion to the overall apportionment of motor vehicle investment, the costs are indirectly attributed."  yO'Implementation of Further Cost Allocation Uniformity, Order Inviting Comments, AAD 9242, 7 FCC Rcd 6688, 6689 para. 9 (Com. Car. Bur. 1992). Only if direct or indirect attribution factors are not available may the carrier allocate a pool of common costs using what is known as a "general allocator." Our Part 64 cost allocation rules are designed to prevent crosssubsidization of nonregulated activities such as telemarketing by establishing a methodology for allocating joint and common costs such as those described by VoiceTel between regulated and nonregulated activities.  X 4958.` ` Our cost allocation and affiliate transactions rules have been in place for approximately ten years. As already observed, these rules and procedures, in combination with audits, tariff review, and the complaint process, have proven successful at protecting regulated ratepayers from bearing the risks and costs of incumbent local exchange carriers'  XK4competitive ventures.jKO yO !'ԍSee discussion in section II.B., infra. j Since the inception of our Part 64 cost allocation rules, the types of nonregulated activities have continued to grow. The Commission designed the cost allocation system in such a way that it can accommodate the evolving nature of nonregulated activities, such as telemessaging services. Thus, we conclude that our current rules protect local"0*%%ZZf" exchange service subscribers from subsidizing telemessaging services that are marketed and provided by incumbent local exchange carriers on an integrated basis.  X4:59.` ` Based upon the analysis set forth in our companion item, the NonAccounting  X4Safeguards Order, we adopt our tentative conclusion that telemessaging is an information  X4service.dO yO 'ԍNonAccounting Safeguards Order at para. 145.d We also adopt, as we do in our companion item, our tentative conclusion that BOCs providing telemessaging services that meet the definition of interLATA information services must comply with the section 272 separate affiliate requirements, in addition to the  XL4section 260 requirements.LXO yOU 'ԍId. One example of a telemessaging service that is an interLATA information service might be a voicemail service that is bundled with a personal 800 number for access.  X 4;60.` ` BellSouth has argued that requiring BOCs to provide outofregion interLATA  X 4information services through a section 272 separate affiliate violates the First Amendment.M O yOh'ԍBellSouth Comments at 1415.M As noted above, we find that this result is required by the Act. Although the courts have ultimate authority to determine the constitutionality of this and other statutes, we find it  X 4appropriate to state that we find BellSouth's argument to be without merit.X @O yO'ԍThe Commission has previously offered its opinion on the constitutionality of other statutory provisions.  yO{'See Inquiry into Section 73.1910 of the Commission's Rules and Regulations Concerning the General Fairness  yOC'Doctrine Obligations of Broadcast Licensees, 102 F.C.C. 2d 143, 155156 para. 18 (1985). BellSouth bases its argument on an assertion that information services are commercial speech entitled to First  X4Amendment protections.J` O yO'ԍBellSouth Comments at 14.J We conclude, first, that with respect to certain information services, a BOC neither provides, nor exercises editorial discretion over, the content of the  Xf4information associated with those particular services, and therefore provision of those  XO4information services does not constitute speech subject to First Amendment protections.O O yO'ԍ Cf. Turner Broadcasting System, Inc. v. FCC, 114 S. Ct. 2445, 2456 (1994). Second, to the extent that BOC provision of other interLATA information services constitutes speech for First Amendment purposes, the section 272 separate affiliate requirement neither prohibits the BOCs from providing such services, nor places any restrictions on the content of  X4the information the BOCs may provide.]X O yO$#'ԍLike the mustcarry rules at issue in Turner Broadcasting System, the section 272 separate affiliate requirement "on [its] face impose[s] burdens and confer[s] benefits without reference to the content of speech."  yO$'Turner Broadcasting System, 114 S. Ct. at 2460.] Instead, the section 272 separate affiliate"0*%%ZZw" requirement is a contentneutral restriction on the manner in which BOCs may provide interLATA information services, intended by Congress to protect against improper cost allocation and discrimination concerns. Thus, we conclude that the separate affiliate requirement imposed by section 272 of the Communications Act on BOC provision of  X4interLATA information services does not violate the First Amendment.PXO yO'ԍContentneutral time, place, and manner restrictions that serve a substantial government interest are  yO'constitutionally permissible. See, e.g., City of Renton v. Playtime Theatres, Inc., 475 U.S. 41, reh'g denied, 475 U.S. 1132 (1986). P  Xv4 2. Section 271 InterLATA Telecommunications Services    XH4<61.` ` The NPRM noted that section 272(a)(2)(B) permits BOCs to provide on an integrated basis certain regulated, interLATA telecommunications services, including outof X 4region services and certain types of incidental services.Y O yO'ԍNPRM, 11 FCC Rcd at 9073 para. 39.Y In our Interim BOC OutofRegion  X 4Order, xO yO0'ԍBell Operating Company Provision of OutofRegion Interstate, Interexchange Services, Report and  yO'Order, CC Docket No. 9621, FCC 96288 (rel. July 1, 1996) ("Interim BOC OutofRegion Order"). we determined that the BOCs must provide outofregion interstate, interexchange services (including interLATA and intraLATA services) through separate affiliates, at least on an interim basis, in order to qualify for nondominant regulatory treatment in the provision of  X 4those services. Under the Interim BOC OutofRegion Order, however, a BOC could still choose to provide these services on an integrated basis, subject to dominant carrier  X4regulation.@O yO'ԍIn the Interexchange NPRM the Commission asked whether we should modify or eliminate the separation requirements imposed on independent local exchange carriers other than the BOCs as a condition for nondominant treatment of their interstate, domestic, interexchange services originating outside their local exchange areas. Policy and Rules Concerning the Interstate, Interexchange Marketplace; Implementation of  yO9'Section 254(g) of the Communications Act of 1934, Notice of Proposed Rulemaking, CC Docket No. 9661, 11  yO'FCC Rcd 7141, 7174 (1996) ("Interexchange NPRM"). The Commission also sought comment on whether, if we modify or eliminate these separation requirements for independent local exchange carriers, we should apply  yO'the same requirements to BOC provision of outofregion interstate, domestic, interexchange services. Id. Accordingly, this Order addresses the cost allocation rules that should be applied to BOCs that choose to provide certain regulated, interLATA telecommunications services, including outofregion services and certain types of incidental services, on an integrated basis.  X%' ` ` a. Incidental InterLATA Services  X4  X4=62.` ` Section 271(h) states that "[t]he Commission shall ensure that the provision of services authorized under [section 271(g)] by a Bell operating company or its affiliate will not"0*%%ZZ-" adversely affect telephone exchange service ratepayers or competition in any  X4telecommunications market."GO yOb'ԍ47 U.S.C.  271(h).G In the NPRM, we sought comment on whether our present Part 64 cost allocation rules are adequate to prevent the adverse effects proscribed by section  X4271(h) with respect to incidental interLATA services.YXO yO'ԍNPRM, 11 FCC Rcd at 9073 para. 38.Y We asked commenters to describe in detail the modifications or additions to Part 64 they believe necessary, to explain how these modifications or additions would better enable the Commission to fulfill its obligations under section 271(h), and to identify the category of ratepayers or markets the proposed modifications or additions would protect.  X3' Comments:  X 4>63.` ` Incumbent local exchange carriers generally assert that our current cost allocation rules are adequate to "ensure that the provision of services authorized under [section 271(g)] by a Bell operating company or its affiliate will not adversely affect telephone exchange service ratepayers or competition in any telecommunications market" in  X 4accordance with section 271(h). O yOB'ԍAmeritech Comments at 20; BellSouth Comments at 16; PacTel Comments at 10; US West Comments at 5.  X{4?64.` ` Worldcom contends that the language of section 271(h) strongly implies that the Commission's current cost allocation rules are not adequate to ensure that the BOC's provision of incidental interLATA services would not adversely affect ratepayers and  X64competitors.^6@O yO''ԍWorldcom Comments at 14; Worldcom Reply at 9.^ Worldcom asserts that at a minimum we should apply the same cost allocation requirements to incidental interLATA services as are applied to other interLATA  X4services provided by the BOCs on an integrated basis.IO yO'ԍWorldcom Comments at 14.I  X' Discussion:  X4@65.` ` We incorporate our conclusions regarding the accounting safeguards necessary to prevent the adverse effects proscribed by section 271(h) with respect to the integrated provision of incidental interLATA services by the BOCs in our discussion of accounting safeguards to be applied to BOC provision of interLATA services. That discussion appears in Section III.B.2.b. below."P` 0*%%ZZh"Ԍ  X'` ` b. Integrated Provision of InterLATA Services   X4A66.` ` The NPRM tentatively concluded that we should apply our Part 64 cost allocation rules to regulated services other than local exchange and exchange access services, including outofregion services and certain types of incidental services, provided by BOCs on  Xx4an integrated basis in accordance with section 272(a)(2)(B).HxO yO'ԍNPRM at para. 39.H We invited comment on this tentative conclusion. We also asked whether we needed to develop different cost allocation rules for these regulated services other than local exchange and exchange access to prevent allocation of the costs of such regulated services to local exchange and exchange access  X 4customers.To XO yO< 'ԍIn section IV.B.4, infra, we discuss the application of affiliate transactions rules to transactions between the BOCs and any of their affiliates engaged in activities, other than outofregion interLATA services, that are permitted under section 271 of the Communications Act of 1934.T We suggested two possible solutions: (1) the creation of a separate category for Title II accounting purposes to include regulated services other than local exchange and  X 4exchange access services,? O yO.'ԍThe creation of a separate category for Title II accounting purposes would result in subaccounts for regulated local exchange and exchange access services and for regulated services other than local exchange and exchange access services. This would parallel the approach we took with respect to video dialtone in Telephone  yO'CompanyCable Television Cross Ownership Rules, Sections 63.5463.58, Memorandum Opinion and Order on  yON'Reconsideration and Third Further Notice of Proposed Rulemaking, CC Docket No. 87266, 10 FCC Rcd 244,  yO'326 para. 173 (1994) ("VDT Recon Order"). See Responsible Accounting Officer Letter 25, 10 FCC Rcd 6008  yO'(Accounting and Audits Division, April 3, 1995), revoked by Implementation of Section 302 of the  yO'Telecommunications Act of 1996, Report and Order and Notice of Proposed Rulemaking, CS Docket 9646, FCC  yOn'9699 at para. 75 (rel. March 11, 1996). ? or (2) the classification of any regulated services other than local exchange and exchange access services that are provided on an integrated basis as  X 4nonregulated activities for Title II accounting purposes.}X _ O yO'ԍThis would parallel the approach we took in the Interim BOC OutofRegion Order where we determined that outofregion interstate, interexchange services provided by BOC affiliates should be treated like  yO`'nonregulated services for accounting purposes. Interim BOC OutofRegion Order at paras. 3840.} We invited comment on these solutions.  X4B67.` ` In the NPRM, we asked whether, if incumbent local exchange carriers provide outofregion interstate interexchange services on an integrated basis, our accounting rules for  Xf4such incumbent local exchange carriers should be similar to those we adopt for the BOCs.YfO yO!'ԍNPRM, 11 FCC Rcd at 9074 para. 40.Y "O0*%%ZZ"Ԍ X' Comments:  X4C68.` ` Many parties support our proposal to apply our Part 64 cost allocation rules to regulated interLATA telecommunications services, including outofregion services and certain types of incidental services, that may be provided by BOCs on an integrated basis and contend that such services should be treated like nonregulated activities for federal accounting  Xv4purposes.vO yO'ԍAT&T Comments at 19; CTA Comments at 10; GSA Comments at 4; Sprint Comments at 9; TRA  yO'Comments at 2526; Worldcom Comments at 13. See also NYNEX Comments at 14. In particular, TRA maintains that treating such services like nonregulated activities for federal accounting purposes will lessen the chance that costs associated with  XH4such services are inadvertently assigned to a local exchange or exchange access category.DH O yO 'ԍTRA Comments at 26.D Worldcom asserts that the potential for improper cost allocation is greater between two  X 4regulated categories than between regulated and nonregulated activities.I O yO{'ԍWorldcom Comments at 13.I  X 4D69.` ` SBC argues that it would be improper to treat all incidental interLATA services like nonregulated activities for federal accounting purposes because a number of the activities  X 4that these incidental interLATA services support would be regulated Title II activities.G @O yO'ԍSBC Comments at 2021.G SBC contends that the costs of such incidental services are supposed to flow through the Part  X436 process to separate integrated plant serving state and interstate jurisdictions.AO yO'ԍId. at 21.A  Xb4E70.` ` MCI proposes that, as in the Video Dialtone Proceeding, we should create a separate category for Title II accounting purposes to include regulated services other than local exchange and exchange access services in order to clearly identify the allocation of costs  X4between a BOC's local and interLATA operations.D` O yO0'ԍMCI Comments at 14.D In contrast, the BOCs generally argue that no separate regulated category is needed for interLATA telecommunications services provided on an integrated basis, such as outofregion services and certain types of incidental services, because our current accounting safeguards rules ensure that ratepayers do not  X4subsidize interexchange operations. O yOd#'ԍBellSouth Comments at 16; PacTel Comments at 10; US WEST Comments at 5. See also Ameritech Comments at 20; NYNEX Reply at 5; PacTel Comments at 11; SBC Comments at 22; USTA Comments at 20. In particular, several of the BOCs assert that Part 36 will separate the costs of these services into state and interstate portions, and Part 69 will" H 0*%%ZZ(" allocate the costs of all regulated, interLATA telecommunications services to the  X4interexchange basket separate from local exchange and exchange access costs.O yOb'ԍAmeritech Comments at 20; PacTel Comments at 11; USTA Comments at 20; NYNEX Reply at 5; but  yO*'see AT&T Reply at 13. BellSouth and PacTel argue that there is also no need to treat these services like nonregulated activities for federal accounting purposes because the Commission can review the costs of providing  X4such services, including the allocation of overhead, during the tariff review process.a O yOu'ԍBellSouth Comments at 16; PacTel Comments at 10.a  Xv4F71.` ` Several parties contend that we should require all incumbent local exchange carriers, including nonBOCs, to treat any regulated services other than local exchange and exchange access like nonregulated services for Title II accounting purposes to ensure the  X14prevention of subsidies flowing from the latter services to the former.i1O yO'ԍGSA Comments at 4; TRA Comments at 25; AT&T Reply at 12.i  X 4G72.` ` Cincinnati Bell and USTA argue that sections 271 through 276 apply solely to BOCs and the Commission has no authority to apply additional accounting safeguards to non X 4BOC incumbent local exchange carriers.c @O yO'ԍCincinnati Bell Comments at 3; USTA Comments at 3.c  X ' Discussion:  Xy4H73.` ` Section 254(k) prohibits a "telecommunications carrier" from using "services  Xb4that are not competitive to subsidize services that are subject to competition."GbO yO'ԍ47 U.S.C.  254(k).G We conclude that section 254(k) bars all incumbent local exchange carriers, including BOCs, from subsidizing competitive interLATA telecommunications services, such as outofregion services and certain types of incidental interLATA services, with revenues from exchange services and exchange access that are not subject to competition. Section 271(h) specifically requires the Commission to ensure that the provision of incidental interLATA telecommunications services by a BOC or its affiliate "will not adversely affect telephone  X4exchange service ratepayers or competition in any telecommunications market."G` O yO!'ԍId.  271(h).G Accordingly, we concur with the parties that assert that our Part 64 cost allocation rules should apply to interLATA telecommunications services, including outofregion services and"! 0*%%ZZ" certain types of incidental services, that may be provided by incumbent local exchange carriers on an integrated basis.  X4I74.` ` Our Part 64 cost allocation rules require a carrier to assign costs directly, wherever possible, to regulated or nonregulated activities. These rules protect subscribers to interstate exchange and exchange access services from bearing the costs and risks of the carrier's nonregulated activities provided on an integrated basis. These rules do not, however, protect against improper cost allocations from one regulated activity to another regulated activity. Therefore, if interLATA telecommunications services, including outofregion services and certain types of incidental services, that may be provided by incumbent local exchange carriers on an integrated basis, were treated as regulated for accounting purposes, our Part 64 rules would not prevent any improper cost allocations that may occur between local exchange and exchange access services and these interLATA telecommunication services.  X 4J75.` ` For these reasons, we agree with TRA, GSA and AT&T that under our current cost allocation rules we can most efficiently and comprehensively satisfy sections 254(k) and 271(h) if, solely for federal accounting purposes, we treat like nonregulated activities both outofregion and certain types of incidental interLATA services that may be provided by incumbent local exchange carriers on an integrated basis. We believe that this should sufficiently safeguard against crosssubsidization without imposing additional accounting  X4requirements on carriers. This would parallel the approach taken in the Interim BOC Outof X4Region Order that classified outofregion interstate, interexchange services provided by BOC  X4affiliates as nonregulated activity for accounting purposes.mO yOl'ԍInterim BOC OutofRegion Order at paras. 3840.m Because incumbent local exchange carriers currently have internal accounting systems in place to allocate costs fairly between nonregulated activities and regulated services provided on an integrated basis, such a  X4requirement will not impose extensive expense upon incumbent local exchange carriers.]XO yO'ԍCf. id. at para. 40.]  X4K76.` ` We agree with several of the BOCs that assert that Part 36 will jurisdictionally separate the costs of regulated, interLATA telecommunications services into state and interstate portions, and Part 69 will allocate the costs of all regulated interstate, interLATA telecommunications services to the interexchange basket separate from local exchange and exchange access costs. We conclude, however, that the Part 36 jurisdictional separations process and the Part 69 access charge process were not designed to prevent subsidization of competitive telecommunications services by subscribers to exchange and exchange access services. Although the Part 36 and Part 69 processes produce the secondary effect of assigning the costs of regulated interstate, interLATA telecommunications services to the" "0*%%ZZH" interexchange basket, classifying both outofregion and certain types of incidental interLATA services as nonregulated activities for federal accounting purposes will achieve greater accuracy in safeguarding against crosssubsidization. Classifying such services as nonregulated activities allows the allocation of costs for these activities to occur immediately after such costs are assigned to Part 32 accounts. Such treatment avoids the necessary imprecisions inherent in the Part 36 jurisdictional separations process, the Part 69 access charge process, and our Part 61 price cap rules. Moreover, we concur with TRA that treating such services like nonregulated activities for federal accounting purposes will lessen the chance that costs associated with such services are inadvertently assigned to a local exchange or exchange access category.  X '` ` c. Other Matters   X 4L77.` ` Section 272(e)(3) requires that "[a] Bell operating company . . . impute to itself (if using [exchange] access for its provision of its own services), an amount for access that is  X 4no less than the amount charged to any unaffiliated interexchange carriers for such service."[ O yO 'ԍ47 U.S.C.  272(e)(3) (emphasis added).[  X4In the NPRM, we invited comment on how BOCs should account for these access charges.YXO yO'ԍNPRM, 11 FCC Rcd at 9075 para. 41.Y  X{4The NPRM suggested that one possible approach would be for BOCs to record these imputed exchange access charges as an expense that would be directly assigned to nonregulated activities with a credit to the regulated access revenue account. We invited comment on this approach as well as alternative approaches.  X 4M78.` ` Section 272(e)(4) states that "[a] Bell operating company and an affiliate that is subject to the requirements of section 251(c) . . . may provide any interLATA or intraLATA facilities or services to its interLATA affiliate if such services or facilities are made available to all carriers at the same rates and on the same terms and conditions, and so long as the  X4costs are appropriately allocated."PO yOG'ԍ47 U.S.C.  272(e)(4).P In the NPRM, we invited comment on whether and, if so, how the requirements of sections 272(e)(3) and (4) should affect our rules for allocating costs between activities regulated under Title II and nonregulated activities for those BOCs  Xk4that provide interLATA services on an integrated basis.YkxO yO!'ԍNPRM, 11 FCC Rcd at 9075 para. 42.Y We also requested comment on whether, in light of section 272(e)(4), we may require BOCs that provide interLATA or intraLATA facilities or services on an integrated basis to provide these facilities or services to their own internal operation only at the same rates as those facilities or services are made"&#0*%%ZZ" available to all carriers. When those rates differ for different carriers, we sought comment on which rate should be applicable to BOC affiliate transactions. We also invited comment on whether we should adopt specific accounting procedures to address the difference, if any, between those rates and the costs that would be appropriately allocated for the underlying facilities or services.  Xv' Comments:  XH4N79.` ` AT&T and Worldcom agree with the tentative conclusion in the NPRM that BOCs should record imputed exchange access charges as an expense that would be directly  X 4assigned to nonregulated activities with a credit to the regulated access revenue account.^ O yO 'ԍAT&T Comments at 19; Worldcom Comments at 15.^ In general, incumbent local exchange carriers disagree with the tentative conclusion stated in the  X 4NPRM. XO yO'ԍAmeritech Comments at 21; US West Comments at 7; GSA Reply at 7. See also Bell Atlantic Comments at 16; NYNEX Comments at 15; PacTel Comments at 1213; NYNEX Reply at 6. In particular, PacTel contends that the approach suggested in the NPRM is only workable for structurally separate affiliates where revenues and expenses of the BOC and its affiliate are each stated correctly for regulated reporting purposes (each entity separately  X 4reports the results of its own operations).G O yO 'ԍPacTel Comments at 12.G US West and GSA argue that recording imputed access charges as a nonregulated expense might result in a doubling of overhead costs allocated to the nonregulated activity because the imputed charge would already contain an  Xf4element of overhead.Wf@O yOW'ԍUS West Comments at 7; GSA Reply at 7.W  X84O80.` ` Several incumbent local exchange carriers argue that we should require imputed access charges to be recorded as debits to nonregulated revenues and credits to  X 4regulated access charge revenues. O yO'ԍAmeritech Comments at 21; Bell Atlantic Comments at 16; PacTel Comments at 1213; US West Comments at 7; GSA Reply at 7; NYNEX Reply at 6. In general, incumbent local exchange carriers maintain that section 32.5280 of our rules defines the accounting treatment for regulated services provided on an integrated basis: "[the nonregulated operating revenue] account shall be debited, and regulated revenue accounts credited at tariffed rates when tariffed services are  X4provided to nonregulated activities."( O yO#'ԍ47 C.F.R.  32.5280(b). See Ameritech Comments at 21; BellSouth Comments at 17; PacTel Comments at 1213; SBC Comments at 24; US West Comments at 7; NYNEX Reply at 6; USTA Reply at 7."$ 0*%%ZZ"Ԍ X4ԙP81.` ` NYNEX contends that imputing exchange access charges is not necessary because treating interexchange service as nonregulated would trigger the application of the Part 64 requirement that nonregulated services record the use of the underlying tariffed services at tariff rates, satisfying section 272(e)(3)'s requirements and ensuring against cross X4subsidization.FO yO'ԍNYNEX Comments at 15.F  Xv4Q82.` ` AT&T and Worldcom assert that we must ensure that the full access charge is reflected in a BOC's enduser rates, and is not merely a book entry in the case of a BOC that  XH4uses exchange access for the provision of its own services.aHXO yOQ 'ԍAT&T Comments at 19; Worldcom Comments at 1516.a AT&T argues that in order to ensure that the full access charge is reflected in a BOC's enduser rates, we should establish price floors at a level equal to the amount of the access charge plus the incremental cost of  X 4the nonaccess portions of the service.k O yO'ԍAT&T Comments at 19; but see NYNEX Reply at 6.k Wisconsin PSC states that it presently makes use of price floors such that when a carrier subject to Wisconsin PSC's regulations uses a noncompetitive service in the provision of its own competitive service, the competitive  X 4service must be priced to exceed total service longrun incremental cost ("TSLRIC").N xO yO'ԍWisconsin PSC Comments at 12.N Accordingly, like AT&T, Wisconsin PSC argues that we should adopt a price floor to prevent  X4crosssubsidization.qO yOI'ԍId. at 13. See also Florida PSC Reply at 45.q  Xb4R83.` ` With respect to whether the requirements in sections 272(e)(3) and (e)(4) should affect our rules for allocating costs between activities regulated under Title II and nonregulated activities for those BOCs that provide interLATA services on an integrated basis, SBC argues that sections 272(e)(3) and (e)(4) relate solely to inregion interLATA services that BOCs are required to provide through an affiliate and are not relevant to the  X4interLATA services that the BOCs are permitted to provide on an integrated basis.GO yO8'ԍSBC Comments at 2425.G  X4S84.` ` TRA and Worldcom argue that when a BOC charges different rates to different unaffiliated carriers for facilities or services, the BOC must impute the highest rate paid for  X4the same facilities or services to the BOC's integrated operations.]( O yOl$'ԍTRA Comments at 26; Worldcom Comments at 17.] USTA, however, alleges"% 0*%%ZZ" that an approach requiring the BOC's integrated operations to pay the highest rate paid for the same facilities or services by unaffiliated carriers would unnecessarily constrain a BOC from  X4volume discount purchases.AO yOK'ԍUSTA Reply at 8.A  X4T85.` ` Bell Atlantic and US West assert that what local exchange carriers charge for interLATA services is not an accounting issue, but rather a pricing issue and has no place in  Xv4this proceeding.cvXO yO 'ԍBell Atlantic Comments at 16; US West Reply at 12.c  XH' Discussion:  X 4U86.` ` We conclude that we should not require BOCs to record imputed exchange access charges required under section 272(e)(3) as an expense that would be directly assigned to nonregulated activities with a credit to the regulated access revenue account. We conclude  X 4that the approach suggested in the NPRM would result in an overstatement of operating revenues. Instead, we concur with the BOCs that the logic of section 32.5280 of our rules  X 4provides the proper framework for recording imputed exchange access charges.R O yOB'ԍSee 47 C.F.R.  32.5280.R Accordingly, to record imputed exchange access charges required under section 272(e)(3), BOCs should debit the nonregulated operating revenue account by the amount of the imputed exchange access charges and credit the regulated revenue account by the amount of the imputed exchange access charges. By requiring BOCs to account for imputed exchange access charges in this manner, the accounting for this imputed revenue will be consistent with  X4our current accounting rules adopted in the Joint Cost Proceeding for imputing revenues  X 4derived from services provided to nonregulated affiliates.~ xO yO3'ԍSee Joint Cost Reconsideration Order, 2 FCC Rcd at 6307 para 208.~  X4V87.` ` Section 272(e)(3) requires a BOC to impute to itself an amount for access it provides to its telephone exchange service "that is no less than the amount charged to any  X4unaffiliated interexchange carriers for such service."JO yOg 'ԍ47 U.S.C.  272(e)(3).J Accordingly, where a BOC charges different rates to different unaffiliated carriers for access to its telephone exchange service, the BOC must impute to its integrated operations the highest rate paid for such access by unaffiliated carriers. In determining the highest rate paid by unaffiliated carriers, the BOC may consider the comparability of the service provided. If, for example, rates charged unaffiliated carriers vary based on the volume purchased, the BOC may consider comparable";&0*%%ZZE" volume in determining the highest rate to impute to its integrated operations. Accordingly, a BOC's integrated operations may take advantage of the same volume discount purchases  X4offered to its interLATA affiliate and other unaffiliated carriers.nO yOK'ԍSee NonAccounting Safeguards Order at para. 257.n As for AT&T's and Worldcom's concerns regarding the reflection of the full access charge in a BOC's enduser rates, we agree with Bell Atlantic and US West that those concerns involve pricing issues,  X4rather than accounting issues, and therefore lie beyond the scope of this proceeding.:XO yO'ԍId.:  X_' 3. Section 275 Alarm Monitoring Services   X14W88.` ` Section 275(e) defines "alarm monitoring service" as "a service that uses a device located at a residence, place of business, or other fixed premises (1) to receive signals from other devices located at or about such premises regarding a possible threat at such premises to life, safety, or property, from burglary, fire, vandalism, bodily injury, or other emergency, and (2) to transmit a signal regarding such threat by means of transmission facilities of a local exchange carrier or one of its affiliates to a remote monitoring center to  X 4alert a person" about the emergency.N O yO@'ԍ47 U.S.C.  275(e). N Section 275(a)(1) delays entry by the BOCs not already providing alarm monitoring services until five years from the date of enactment of the  Xy41996 Act.DyxO yO'ԍId.  275(a)(1).D If a BOC or BOC affiliate provided alarm monitoring services as of November 30, 1995, it may continue to do so, but cannot expand its alarm monitoring business by acquiring "any equity interest in, or obtain financial control of, any unaffiliated alarm  X44monitoring service entity" during the fiveyear period after the date of enactment of the 1996 Act.J4O yO'ԍId.  275(a)(2).J  X4X89.` ` Section 275(b)(2) specifies that an incumbent local exchange carrier engaged in the provision of alarm monitoring services "not subsidize its alarm monitoring services either  X4directly or indirectly from telephone exchange service operations."QO yO! 'ԍId.  275(b)(2). Q As with the prohibition against subsidizing telemessaging services, this prohibition against subsidizing alarm  X4monitoring services specifically applies to incumbent local exchange carriers.X( O yO#'ԍThe provisions of the 1996 Act prohibiting the subsidy of alarm monitoring services "apply to incumbent exchange carriers rather than to all common carriers." S. Conf. Rep. No. 104230, 104th Cong., 2d Sess. 42 (1996). "'H 0*%%ZZ"Ԍ X4ԙY90.` ` In the NPRM, we asked whether our present Part 64 cost allocation rules are necessary or sufficient to prevent subsidization of alarm monitoring services either directly or  X4indirectly from telephone exchange service operations in accordance with section 275(b)(2).YO yOM'ԍNPRM, 11 FCC Rcd at 9079 para. 53.Y  X' Comments:  Xx4Z91.` ` Commenters generally agree that the Commission's present Part 64 cost allocation rules are sufficient to prevent subsidization of alarm monitoring services from telephone exchange service operations because alarm monitoring services are presently treated as nonregulated activities for Title II accounting purposes and the Commission's Part 64 cost allocation rules require carriers to allocate the costs of alarm monitoring services to  X 4nonregulated activities. XO yO'ԍMCI Comments at 15. See also AICC Comments at 34; Ameritech Comments at 21; USTA Comments at 21; US West Comments at 9. SBC believes that the language of section 275 does not require the  X 4imposition of any accounting safeguards with respect to alarm monitoring services.D O yOO'ԍSBC Comments at 16.D  X ' Discussion:  X4[92.` ` We concur with the numerous commenters that assert that application of our present Part 64 cost allocation rules to alarm monitoring services will adequately safeguard against the subsidies prohibited by section 275(b)(2) because our rules require that the fully distributed cost of providing alarm monitoring service be removed from the carrier's regulated activities. We presently classify alarm monitoring services as nonregulated activities for Title II accounting purposes. Consequently, our cost allocation rules and affiliate transaction rules apply to alarm monitoring services. Carriers are required to allocate a portion of their network investment plant used to provide alarm monitoring services to these nonregulated activities. We already have experience with the application of our existing rules to alarm monitoring services because some companies already provide alarm monitoring services on a nonregulated basis.  X~' 4. Section 276 Payphone Services  XP4\93.` ` Section 276(a)(1) states that "any Bell operating company that provides payphone service shall not subsidize its payphone service directly or indirectly from its  X"4telephone exchange service operations or its exchange access operations."S"@O yO%'ԍ47 U.S.C.  276(a)(1).S This prohibition""(0*%%ZZ" against crosssubsidization is an integral part of the statutory plan "to promote competition among payphone providers and promote the widespread deployment of payphone services to  X4the benefit of the general public."JO yOK'ԍId.  276(b)(1).J To implement the prohibition, section 276(b)(1)(C) directs the Commission to prescribe nonstructural safeguards for BOC payphone service that, "at a minimum, include the nonstructural safeguards equal to those adopted in the Computer  X4Inquiry-III (CC Docket No. 90-623) proceeding."VXO yO'ԍId.  276(b)(1)(C).V In Computer III, we examined our  Xx4regulatory regime for the provision of enhanced services and replaced the Computer II requirements with a series of nonstructural safeguards. These safeguards included the Part 64  XL4cost allocation rules and the affiliate transactions rules that we developed in the Joint Cost  X74Order.  X 4]94.` ` In the NPRM, we tentatively concluded that we should apply accounting  X 4safeguards identical to those adopted in the Computer III proceedings to prevent the crosssubsidization of payphone services by BOC telephone exchange service or exchange access  X 4operations in accordance with sections 276(a)(1) and (b)(1)(C).Y O yOc'ԍNPRM, 11 FCC Rcd at 9081 para. 58.Y We invited comment on this tentative conclusion.  X4^95.` ` The provision of payphone service by local exchange carriers has traditionally  Xn4been treated as a regulated activity for Title II accounting purposes.qnxO yO'ԍSee 47 C.F.R.  32.2351, 32.6351, 32.6623, 32.5010.q In the NPRM, we tentatively concluded that we should reclassify payphone service as a nonregulated activity for accounting purposes so that its costs will be separated from telephone exchange service and  X+4exchange access operations.Y+O yO'ԍNPRM, 11 FCC Rcd at 9081 para. 59.Y Under this proposal, BOCs would classify their payphone investment, expenses and revenues as nonregulated for Title II accounting purposes while continuing to use the Commission's Part 32 accounts to record their payphone service activities. We invited comment on this tentative conclusion and asked whether this proposal would provide nonstructural accounting safeguards equivalent to those adopted in the  X4Computer III proceeding and whether such changes would prevent subsidization of payphone services by BOC telephone exchange service or exchange access operations.  Xu4_96.` ` Section 276 does not prescribe accounting safeguards to govern the provision of payphone service by incumbent local exchange carriers other than the BOCs. We also  XG4asked in NPRM whether we should require nonBOC incumbent local exchange carriers to"G)0*%%ZZE" reclassify their payphone service operations as a nonregulated activity for Title II accounting  X4purposes.LO yOb'ԍId. at 9082 para. 60.L  X' Comments:  X4`97.` ` In general, BOCs and interexchange carriers contend that payphone service  Xv4should be treated like a nonregulated activity for federal accounting purposes.vXO yO 'ԍAmeritech Comments at 2122; CTA Comments at 11; PacTel Comments at 14; Sprint Comments at 9;  yOG 'US West Comments at 10; Worldcom Comments at 19. See also APCC Reply at 12. Several  X_4BOCs assert that adoption of the Computer III safeguards is sufficient to prevent cross XJ4subsidization of payphone services.JO yO 'ԍAmeritech Comments at 21; BellSouth Comments at 19; NYNEX Comments at 16; SBC Comments at 17. Coalition argues that section 276(b) specifically  X34identifies the nonstructural safeguards in Computer III as an appropriate standard.F3O yO'ԍCoalition Reply at 5.F MCI maintains that any new safeguards or revisions adopted pursuant to our reconsideration of  X 4Computer III on remand should also apply to the provision of payphone service.} O {OP'ԍMCI Comments at 15. See also US West Comments at 9.}  X 4a98.` ` Worldcom, CTA and APCC argue that Computer III safeguards are insufficient  X 4to satisfy section 276. * O yO'ԍAPCC Comments at 3; CTA Comments at 11; Worldcom Comments at 19; Worldcom Reply at 10. APCC asserts that our Computer III safeguards were devised to  X 4incorporate concerns regarding efficiency that are outside the realm of section 276.D O yO'ԍAPCC Comments at 4.D APCC also contends that incumbent local exchange carriers have dominated the payphone industry for some time and their payphone operations have traditionally benefitted from cross Xl4subsidization.flJ O yO~'ԍId.; but see Coalition Reply at 10.f Accordingly, APCC concludes that stronger safeguards are needed in the  XU4payphone context.JU O yO 'ԍAPCC Comments at 4.J ">*0*%%ZZ."Ԍ X4b99.` ` Several parties maintain that the Computer III safeguards should be applied to  X4all incumbent local exchange carriers providing payphone service.O {Od'ԍMCI Comments at 15. See also California Comments at 10; GSA Comments at 4. APCC contends that any proposed accounting safeguard should apply, at a minimum, to all incumbent local exchange carriers with greater than $100 million in annual revenues, as well as local exchange carriers  X4serving island territories such as Puerto Rico and the Virgin Islands.JZO yO'ԍAPCC Comments at 5, n. 4.J  Xx' Discussion:  XJ4c100.` ` The Commission reclassified pay telephone service as a nonregulated service in  X34the Pay Telephone Reclassification Order.y3O yO 'ԍSee Pay Telephone Reclassification Order at para. 157.y As a result, carriers must apportion payphone service costs to nonregulated and common cost pools, ensuring that subscribers to interstate exchange services and exchange access do not bear the costs and risks of the carrier's  X 4payphone service. Our Pay Telephone Reclassification Order also requires that BOCs and incumbent local exchange carriers providing payphone service on an integrated basis follow  X 4the nonstructural safeguards described in Computer III in order to provide sufficient protection against the possibility that payphone service could be subsidized by local exchange  X4service or exchange access operations.SzO yO'ԍId. at paras. 157, 199, 201.S The nonstructural safeguards in Computer III include our Part 64 cost allocation rules and our Part 32 affiliate transactions rules adopted in  Xl4the Joint Cost Order. This requirement satisfies both the prohibition against crosssubsidization in section 276(a)(1) and the requirement in section 276(b)(1)(C) that we adopt a  X@4set of nonstructural safeguards at least equal to those adopted in Computer III. Although  X+4Worldcom, CTA and APCC argue that Computer III safeguards are insufficient to satisfy section 276, these parties offer no substitute safeguards to implement the requirements of  X4section 276. Our experience with accounting safeguards in Computer III has demonstrated that these safeguards can effectively guard against the subsidization of competitive activities by regulated ratepayers, which section 276 prohibits. In fact, section 276(b) specifically  X4identifies the Computer III safeguards as the appropriate standard for nonstructural safeguards  X4regarding payphone service.Q O yOb!'ԍSee 47 U.S.C.  272(b).Q Accordingly, we adopt our tentative conclusion that we should  X4apply accounting safeguards identical to those adopted in Computer III to BOCs and incumbent local exchange carriers providing payphone service on an integrated basis. Xd' "d+0*%%ZZh"Ԍ X'U IV. SAFEGUARDS FOR SEPARATED OPERATIONS    X'\ A. General   X4d101.` ` Section 272(a)(2) allows BOCs to provide the following services only through a separate subsidiary: the sale of telecommunications equipment and manufacturing of  Xv4telecommunications equipment and customer premises equipment;vO yO'ԍPursuant to section 273(h), "manufacturing has the same meaning as such term has under the AT&T  yO'Consent Decree." Id.  273(h). origination of interLATA telecommunications services, other than incidental, outofregion, and previously authorized services; and interLATA information services other than electronic publishing and alarm  X14monitoring services.P1 O yO 'ԍId.  272(a)(2).P Section 273(d)(3) requires "any entity which certifies telecommunications equipment or customer premises equipment manufactured by an unaffiliated entity... only [to] manufacture a particular class of telecommunications equipment or customer premises equipment for which it is undertaking or has undertaken, during the previous eighteen months, certification activity for such class of equipment through  X 4a separate affiliate."oX O yO'ԍId.  273(d)(3). Section 273(d)(8)(D) defines "certification" as "any technical process whereby a party determines whether a product, for use by more than one local exchange carrier, conforms with the specified  yO'requirements pertaining to such product." Id.  273(d)(8)(D).o Section 274(a) requires that BOCs providing electronic publishing  X 4must do so only through a "separated affiliate" or electronic publishing joint venture.> O yO('ԍId.  274(a). Section 274(h)(1) generally defines electronic publishing to mean the "[dissemination], provision, publication, or sale to an unaffiliated entity or persons" of certain enumerated services, such as news, entertainment, business, financial and legal information. Section 274(h)(2) exempts from the definition of electronic publishing various services, like email, language translation services and network services upgrades.  yOH'Id.  274(h)(1), 274(h)(2).> These requirements for "separate" or "separated" affiliates or joint ventures implicitly assume that structural safeguards limit the carrier's ability to engage in crosssubsidization and discrimination, and enhance the ability of the Commission or a State to detect crosssubsidization and discrimination.  X4e102.` ` In the NPRM, we tentatively concluded that, except where the Act imposes specific additional requirements, our current affiliate transactions rules generally satisfy the Act's requirements on safeguards to ensure that the services that section 272, 273 and 274 require BOCs to provide through a separate or "separated" affiliate are not subsidized by  X4subscribers to regulated telecommunications services.\ O yO$'ԍNPRM, 11 FCC Rcd at 908384 para. 64.\ We invited comment on this tentative",0*%%ZZ" conclusion as well as whether the benefits of any fundamentally different approach to affiliate transactions would be outweighed by the costs that implementation of such a system would entail.  X4f103.` ` We also sought comment in the NPRM on whether we should modify our  X4affiliate transactions rules in certain respects.LO yO'ԍId. at 9084 para. 65.L In 1993, we released an Affiliate  Xz4Transactions Notice proposing certain rule changes, including changes in how subject carriers would value for Title II accounting purposes services they provide, or receive from, nonregulated affiliates in order to provide more complete protection against cross X74subsidization.wX7XO yO@ 'ԍSee Amendment of Parts 32 and 64 of the Commission's Rules to Account for Transactions Between  yO 'Carriers and Their Nonregulated Affiliates, CC Docket No. 93251, Notice of Proposed Rulemaking, 8 FCC Rcd  yO '8071, 8076 para. 9 (1993) ("Affiliate Transactions Notice").w In the NPRM, we invited comment on whether, in implementing the Act's provisions regarding crosssubsidization, we should amend the current affiliate transactions  X 4rules to incorporate certain of the modifications proposed in the Affiliate Transactions Notice or any other changes. We also sought comment on whether the affiliate transactions rules we adopt in this proceeding should apply to all transactions between incumbent local exchange carriers and their affiliates, or simply to entities that engage in activities for which the Act  X 4requires the use of a separate or separated subsidiary.K xO yO'ԍ47 U.S.C.  27274.K  X' Comments:  XU4g104.` ` Most parties support our tentative conclusions that our current affiliate transactions rules generally satisfy the Act's requirements except where amendments made by  X'4the 1996 Act impose specific additional requirements.'O yO'ԍAT&T Comments at 8; California Comments at 7; CTA Comments at 14; Puerto Rico Telephone Comments at 3; SBC Comments at 26; Sprint Comments at 10; TRA Comments at 5; US West Comments at 10.  yOp'See also PacTel Comments at 10. We note that our discussion in section V.A. of this Order addresses the BOCs' arguments that, though adequate, the affiliate transactions rules are no longer necessary because of price cap regulation with no sharing. In particular, AT&T contends that existing accounting rules could be extended to new separated operations with a minimum of disruption because incumbent local exchange carriers have already implemented internal accounting systems designed to ensure compliance with the Commission's existing accounting  X4rules.D O yO4$'ԍAT&T Comments at 8.D MCI, however, maintains that we must adopt more stringent affiliate transactions rules to account for the increased opportunities for BOCs to enter new lines of nonregulated"-H 0*%%ZZ" businesses and for the increased incentives and opportunities for incumbent local exchange  X4carriers to shift costs.CO yOb'ԍMCI Comments at 3.C Specifically, MCI argues that we should adopt a rule requiring  X4carriers to maintain a complete audit trail for all cost allocations and affiliate transactions.{XO yO'ԍMCI Comments at 9. See also Ohio Reply at 4; TIA Reply at 25.{  X4h105.` ` TIA sets forth three justifications for strengthening the affiliate transactions  X4rules in the manner described in the NPRM. First, TIA contends that the Commission has had almost a decade of experience with the existing affiliate transactions rules and that the  Xa4Commission found the current rules to be inadequate as far back as 1993 in its Affiliate  XL4Transactions NPRM.GLO yO 'ԍTIA Reply at 15.G Second, TIA alleges that a number of recent State and federal audits  X74have indicated improper allocations of costs by the BOCs under the current rules.:7xO yO`'ԍId.: Finally, TIA contends that the removal of the MFJ's restrictions on BOC entry into competitive  X 4markets has increased the risk of crosssubsidization.A O yO'ԍId. at 16.A  X 4i106.` ` The BOCs generally oppose the modifications to the affiliate transactions rules  X 4that we proposed in the NPRM. O yO 'ԍAmeritech Comments at 14; NYNEX Comments at 1920; PacTel Comments at 2; SBC Comments at 26; USTA Comments at 16; US West Comments at 10. They assert that any benefits of new or modified affiliate transactions rules would be outweighed by the costs of implementing these new or modified  X4rules. O yO9'ԍSee PacTel Comments at 16; SBC Comments at 2728; USTA Comments at 16; US West Comments at 10. In particular, SBC maintains that parties advocating additional and more detailed affiliate transactions rules have not provided sufficient justification to outweigh the increased  Xj4burden that would result._jH O yOc'ԍSee SBC Comments at 19; SBC Reply at 10._ SBC and US West contend that, if we decide to modify our affiliate transactions rules, we should apply those modifications only to transactions involving  X<4BOCs and their section 272 separate affiliates.\<O yO"'ԍSBC Comments at 39; US West Comments at 11.\  X%' "%.h0*%%ZZ "Ԍ X'Discussion:  X4j107.` ` In the Joint Cost Order, we adopted rules to govern how costs are recorded, for Title II accounting purposes, when a regulated carrier does business with nonregulated  X4affiliates.xO yO'ԍSee Joint Cost Order, 2 FCC Rcd at 133537 paras. 290301. x These affiliate transactions rules were designed to protect ratepayers from subsidizing the competitive ventures of incumbent local exchange carriers' affiliates. The affiliate transactions rules do not require carriers or their affiliates to charge any particular price for assets transferred or services provided; rather, the rules require carriers to use certain specified valuation methods in determining the amounts to record in their Part 32 accounts,  X34regardless of the prices charged.P3XO yO< 'ԍSee 47 C.F.R.  32.27.P   X 4k108.` ` In agreement with most commenters, O yO'ԍSee, e.g., AT&T Comments at 8; California Comments at 7; TRA Comments at 5. we adopt our tentative conclusion that,  X 4except where the 1996 Act imposes specific additional requirements,g xO yO'ԍSee, e.g., section IV.B.1.b., infra.g our current affiliate transactions rules generally satisfy the statute's requirement of safeguards to ensure that these  X 4services are not subsidized by subscribers to regulated telecommunications services.P O yOy'ԍ47 U.S.C.  260, 27276.P We have previously concluded that these rules provide effective safeguards against cross X4subsidization.gO yO'ԍComputer III Remand, 6 FCC Rcd at 7591 para. 46.g Moreover, incumbent local exchange carriers have already implemented internal accounting systems for affiliate transactions to help ensure compliance with these rules. These systems have proven generally effective and we see no reason to require a change to a different system. ` `  X4l109.` ` While we decline to alter our prescribed accounting treatment of affiliate transactions, we do adopt several of the modifications to the affiliate transactions rules  X4initially proposed in the NPRM. We now have had approximately ten years experience with  X4the cost allocation and affiliate transactions regime created by the Joint Cost Order. This experience has convinced us that amending certain aspects of the affiliate transactions rules  X4would provide more complete protection against crosssubsidization.( O yO#'ԍSee Affiliate Transactions Notice, 8 FCC Rcd at 8076 para. 9. See also TIA Reply at 15. We first presented in  X4the 1993 Affiliate Transaction Notice some of the proposed modifications incorporated in our"/ 0*%%ZZ"  X4NPRM. We discuss these modifications and present our rationale for adopting or rejecting them below. We note that modifications that we make to improve the affiliate transactions rules will apply to all transactions between incumbent local exchange carriers currently subject to these rules and their affiliates, not just to transactions between a BOC and an  X4affiliate required under the Act.O yO'ԍFor example, as discussed in section IV.B.4., infra, the Act does not require a nonBOC incumbent local exchange carrier to use an affiliate to provide telemessaging services. We conclude, however, that our affiliate transactions rules should apply to transactions between a nonBOC incumbent local exchange carrier and any  yOw'affiliate that it has chosen to create to provide telemessaging services. This Order also mandates application of the affiliate transactions rules to transactions between an incumbent local exchange carrier and its affiliate not engaged in services specifically addressed in sections 260 and 271 through 276.  Xx' _B. Specific Services   Xa'  XJ'1. Section 272 Manufacturing and InterLATA Services   X '` ` a. Statutory Language   X 4m110.` ` Section 272(a) prohibits a "Bell operating company (including any affiliate)_ which is a local exchange carrier that is subject to the requirements of section 251(c)" from "provid[ing] any service described in [section 272(a)(2)] unless it provides that service through one or more affiliates that (A) are separate from any operating company entity that is subject to the requirements of section 251(c); and (B) meet the requirements of [section  X{4272(b)]."F{@O yOl'ԍ47 U.S.C.  272(a)F Section 272(a)(2) states that: X[t]he services for which a separate affiliate is required by [section 272(a)(1)] are: (A) [m]anufacturing activities (as defined in section 273(h)); (B) [o]rigination of interLATA telecommunications services, other than (i) incidental interLATA services described in [section 271(g)(1)(3) and (5)(6)]; (ii) outofregion services described in section 271(b)(2); or (iii) previously authorized activities described in section 271(f); [and] (C) [i]nterLATA information services, other than electronic publishing (as defined in section  X4274(h)) and alarm monitoring services (as defined in section 275(e)).JO yO-!'ԍId.  272(a)(2).J  Section 272(b)(2) requires each of these separate affiliates to "maintain books, records, and accounts in the manner prescribed by the Commission which shall be separate from the"g0` 0*%%ZZW"  X4books, records, and accounts maintained by the [BOC] of which it is an affiliate."JO yOy'ԍId.  272(b)(2).J Under section 272(b)(5), each of these separate affiliates must "conduct all transactions with the [BOC] of which it is an affiliate on an arm's length basis with any such transactions reduced  X4to writing and available for public inspection."JXO yO'ԍId.  272(b)(5).J Pursuant to section 272(c)(2), BOCs must account for all transactions with these affiliates "in accordance with accounting principles  X4designated or approved by the Commission."JO yO& 'ԍId.  272(c)(2).J  X_'` ` b. "Arm's Length" Requirement of Section 272(b)(5)   X14n111.` ` Section 272(b)(5) requires that transactions between the BOC and its affiliates engaged in the manufacturing activities, origination of interLATA telecommunications services, and offering of interLATA information services described in section 272(a)(2) be  X 4conducted on "an arm's length basis."P  xO yO'ԍId.  272(b)(5).P In the Computer II Final Decision,   O yO'ԍAmendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry),  yOm'Final Decision, Docket No. 20828, 77 FCC 2d 384 (1980) ("Computer II Final Decision"), recon., 84 FCC 2d 50  yO5'(1980), further recon., 88 FCC 2d 512 (1981), aff'd sub nom. Computer and Communications Industry Ass'n v.  yO'FCC, 693 F.2d 198 (D.C. Cir. 1982), cert. denied, 461 U.S. 938 (1983). we required AT&T to provide enhanced services and customer premises equipment only through a "separate corporate entity" that would "deal with any affiliated manufacturing entity only on  X 4an 'arm's length'" basis.  O yOJ'ԍComputer II Final Decision, 77 FCC 2d at 498 (emphasis added) (adopting section 64.702(c)(3) of the  yO'Commission's rules). See also id. at 482. We stated that "the transfer of any products" between this separate corporate entity and "any affiliated equipment manufacturer must be done at a price  X}4that is compensatory."B }H O yOv'ԍId. at 482.B In the NPRM, we asked commenters to address whether we should  Xh4adopt requirements similar to those in the Computer II Final Decision in order to implement  XS4section 272(b)(5).Y SO yO!'ԍNPRM, 11 FCC Rcd at 9087 para. 70.Y We also asked whether a requirement that all transfers of products between the BOC and its affiliates be done at a price that is compensatory would be  X%4consistent with the congressional intent behind section 272(b)(5). In Computer III and the  X4Joint Cost Proceeding, we reexamined our regulatory regime for the provision of enhanced"1h 0*%%ZZ"  X4services and replaced the Computer II requirements with a series of nonstructural safeguards,  X4including affiliate transactions rules. In the NPRM, we invited comment on whether our affiliate transactions rules, incorporating some of the changes proposed in the Commission's  X4Affiliate Transactions NPRM to provide greater protection against crosssubsidization, would be necessary or sufficient to ensure compliance with the "arm's length" requirement of section  X4272(b)(5).O yO 'ԍId. at 9089 para. 73. See Affiliate Transactions Notice, 8 FCC Rcd 8071.  Xe4o112.` ` In the NPRM, we sought comment on whether and, if so, how we should amend our rules to address section 272(b)(5)'s requirement that all transactions be "reduced to  X94writing and available for public inspection."t9XO yOB 'ԍNPRM, 11 FCC Rcd at 9089 para. 74. 47 U.S.C.  272(b)(5).t We also asked whether Internet access to information about these transactions would be sufficient to comply with the "public inspection" requirement and whether we need to adopt safeguards to protect any confidential or sensitive information contained in these publicly available documents.  X 4p113.` ` In the NPRM, we tentatively concluded that a "request" by an affiliate to its BOC for telephone exchange service or exchange access constitutes a "transaction" within the meaning of section 272(b)(5) which must be "reduced to writing and available for public  X4inspection."tO yO'ԍNPRM, 11 FCC Rcd at 9089 para. 75. 47 U.S.C.  272(b)(5).t We invited comment on this tentative conclusion and asked whether we need to adopt safeguards to protect any confidential or sensitive information related to these types of transactions.  X'' Comments:  X4q114.` ` The BOCs generally contend that we need not prescribe any particular accounting methods to ensure that the "arm's length" requirement of section 272(b)(5) is  X4met.xO yO'ԍSee Ameritech Comments at 14; Bell Atlantic Comments at 13; BellSouth Comments at 23; PacTel Comments at 2; USTA Comments at 22; US West Comments at 2; NYNEX Reply at 13. In contrast, MCI argues that our existing affiliate transaction rules, without modification, do not satisfy the "arm's length" requirement because the existing rules give the  X4BOCs too much latitude in valuing their affiliate transactions.DO yO"'ԍMCI Comments at 16.D MCI and AT&T assert that we should adopt the modifications to the existing affiliate transactions rules proposed in the"2` 0*%%ZZ"  X4Affiliate Transactions NPRM.O yOy'ԍAT&T Comments at 1213; MCI Comments at 21. See also TRA Comments at 8. TRA maintains that in order to successfully demonstrate satisfaction of the "arm's length" requirement of section 272(b)(5), a BOC must be able to provide evidence that the terms and conditions of its transactions with affiliates are  X4comparable to the terms and conditions that would have been secured from nonaffiliates.CXO yO'ԍTRA Comments at 7.C Accordingly, TRA suggests that we should require each BOC to accumulate and retain  X4information regarding affiliate transactions.jO yO( 'ԍId. at 8. See also TIA Reply at 1213.j  Xa4r115.` ` TIA contends that section 272(b)(5)'s requirement that affiliate transactions be conducted on an "arm's length basis" requires that all transfers of assets or services between a BOC and its affiliate required under section 272(a) must occur at a price that is  X 4"compensatory."G xO yOE'ԍTIA Reply at 11.G TIA and TRA argue that the affiliate transactions rules, with the  X 4modifications proposed in the NPRM, would help ensure that BOCs are fully compensated for any goods or services provided to an affiliate and that BOCs pay reasonable prices for any  X 4goods or services procured from an affiliate.N O yO'ԍId.; TRA Comments at 9.N Several of the BOCs assert that because the  X 4Commission, in its Computer III decision, retained the notion of compensatory pricing in Parts 32 and 64, existing affiliate transactions rules already ensure that such transactions are  X4conducted at compensatory prices.O yO'ԍPacTel Comments at 18; USTA Comments at 22. See also US West Comments at 13.  Xh4s116.` ` MCI argues that section 272(b)(5)'s requirement that transactions be "reduced to writing and available for public inspection" indicates that Congress contemplated vigorous involvement by interested third parties in deterring crosssubsidization and discriminatory  X#4activity by BOCs.G#( O yO'ԍMCI Comments at 2930.G Accordingly, MCI suggests that BOCs should be required to provide to the Commission and make publicly available a complete list of transaction activities with their interLATA and manufacturing affiliates on a periodic basis, at least quarterly, specifying all contracts, arrangements, and other agreements between the BOC and its affiliates, providing a"3 0*%%ZZn" description of the asset or service transferred, the transfer price, and the method of  X4valuation.|O yOb'ԍId. at 30; MCI Reply at 11. See also TIA Reply at 1213.|  X4t117.` ` The BOCs generally argue that there is no need for the Commission to amend its rules to address section 272(b)(5)'s requirement that transactions be "reduced to writing and available for public inspection" because the Commission's rules already require carriers to disclose certain information regarding affiliate transactions in section V of their cost  X_4allocation manuals._XO yOh 'ԍAmeritech Comments at 23; PacTel Comments at 19; SBC Comments at 45; US West Comments at 13.  yO0 'See also PacTel Comments at 1920. 47 C.F.R.  64.903(a)(4). MCI, however, asserts that the "reduced to writing and available for public inspection" requirement of section 272(b)(5) cannot be satisfied by the Commission's existing cost allocation manual filing requirements because the information in the BOCs' cost  X 4allocation manuals is not sufficiently detailed.y O {O{'ԍMCI Reply at 11. See also Worldcom Reply at 16.y  X 4u118.` ` MCI and Worldcom contend that Internet access to information about transactions between BOCs and their affiliates required under section 272(a) would be sufficient to comply with section 272(b)(5)'s requirement that transactions be "reduced to  X 4writing and available for public inspection." BO {O'ԍMCI Comments at 30; Worldcom Comments at 2425; MCI Reply at 11. See also TIA Reply at 13, n. 29. Although US West agrees that Internet access would meet the obligations of section 272(b)(5), US West maintains that we should not require companies to post internal documents on the Internet because the companies could not  Xb4monitor who was inspecting the documents.ubO yO'ԍUS West Comments at 13. See also Ameritech Reply at 19.u In contrast, TRA and APCC argue that, while the Commission should encourage Internet access to information concerning affiliate transactions, Internet access alone does not satisfy section 272(b)(5)'s "available for public  X4inspection" requirement because Internet access is still unavailable to many.[, O yO'ԍAPCC Comments at 25; TRA Comments at 910.[ USTA asserts that we should simply require that documents related to affiliate transactions be available at a  X4location designated by the carrier.l  O yO\"'ԍUSTA Comments at 23. See also MCI Reply at 12.l Several parties oppose a rule that would allow BOCs to choose a single location where documents concerning affiliate transactions are available to the"4L 0*%%ZZn" public and contend that such a rule would severely limit a third party's ability to gain access  X4to such information.r!O yOb'ԍSee APCC Reply at 8; TIA Reply at 12; Worldcom Reply at 16.r  X4v119.` ` With regard to concerns about the protection of confidential or sensitive information contained in any documents that BOCs make "available for public inspection" in accordance with section 272(b)(5), APCC contends that pricing information based upon tariffed rates, prevailing market prices, or fair market value should not involve proprietary  X_4information.E"_XO yOh 'ԍAPCC Comments at 23.E According to APCC, only pricing based upon fully distributed costs might be considered proprietary, and, for the sake of ensuring arm's length transactions, the Commission should impose a heavy burden on BOCs and independent local exchange carriers  X 4of demonstrating that such information warrants proprietary status.# O yO'ԍId. See also MCI Comments at 32; Worldcom Comments at 2425; APCC Reply at 8; Worldcom Reply at 16. TIA asserts that to the extent that relevant documents contain proprietary information, the Commission should use  X 4reasonable nondisclosure agreements to ensure that such information is not misused.H$ @O yO'ԍTIA Reply at 13, n. 29.H The BOCs urge the Commission to adopt and apply the standards for the protection of confidential information are contained in the Comments of the Joint Parties in response to the  X 4Commission's Confidential Information Notice.%  O yO('ԍAmeritech Comments at 23; PacTel Comments at 19; SBC Comments at 46; USTA Comments at 23; US West Comments at 13. In the Matter of Examination of Current Policy Concerning the Treatment of  yO'Confidential Information Submitted to the Commission, Notice of Inquiry and Notice of Proposed Rulemaking,  yO'GC Docket No. 9655, FCC 96109 (rel. March 25, 1996) ("Confidential Information Notice").  X{4w120.` ` Several interexchange carriers support our tentative conclusion that a request by an affiliate to its BOC for telephone exchange service or exchange access constitutes a "transaction" within the meaning of section 272(b)(5) which must be "reduced to writing and  X64available for public inspection."r&6 O yO'ԍAT&T Comments at 13; MCI Comments at 31; Worldcom Comments at 25.r TRA asserts that only by requiring all requests by affiliates to their BOCs for telephone exchange service or exchange access to be available for public inspection will the public and the Commission be able to evaluate the BOCs'  X4compliance with section 272(e)(1).D'H O yO#'ԍTRA Comments at 10.D US West disagrees with our tentative conclusion and"5'0*%%ZZw" contends that only once the BOC and its affiliate have agreed upon the terms and conditions  X4for telephone exchange and exchange access does the agreement constitute a "transaction."H(O yOb'ԍUS West Comments at 14.H  X' Discussion:  X4x121.` ` We decline to adopt Computer II type requirements in order to implement  Xx4section 272(b)(5). We agree with several of the BOCs that because our Computer III decision retained the concept of compensatory pricing in Parts 32 and 64, our existing affiliate transactions rules already ensure that affiliate transactions are conducted at compensatory  X54prices.)5XO yOU 'ԍPacTel Comments at 18; USTA Comments at 22. See also US West Comments at 13. We conclude that our affiliate transactions rules, developed in Computer III and the  X 4Joint Cost Proceeding, with some of the changes proposed in the Commission's Affiliate  X 4Transactions NPRM, will ensure compliance with the "arm's length" requirement of section 272(b)(5). We discuss the requirements of these rules in section IV.B.1.b.ii. below.  X 4y122.` ` To satisfy section 272(b)(5)'s requirement that transactions between section 272 affiliates and the BOC of which they are an affiliate be "reduced to writing and available for public inspection," we require the separate affiliate, at a minimum, to provide a detailed written description of the asset or service transferred and the terms and conditions of the transaction on the Internet within 10 days of the transaction through the company's home page. The broad access of the Internet will increase the availability and accessibility of this information to interested parties, while imposing a minimal burden on the BOCs. We require that the description of the asset or service and the terms and conditions of the transaction should be sufficiently detailed to allow us to evaluate compliance with our accounting rules. This information must also be made available for public inspection at the principal place of  X4business of the BOC.*O yO'ԍThe principal place of business refers to the corporate headquarters of a BOC, not the RBOC corporate headquarters or the corporate headquarters of the BOC's holding company. The information made available at the principal place of business of the BOC must include a certification statement identical to the certification statement currently required to be included with all Automated Reporting and Management Information  X4System ("ARMIS") reports.-+XWO yO'ԍSee, e.g., Automated Reporting Requirements for Certain Class A and Tier 1 Telephone Companies  yOm '(Parts 31, 43, 67, and 69 of the FCC's Rules), Order, CC Docket No. 86182, 4 FCC Rcd 1040, 1124 (Com. Car. Bur. 1989).- Such certification statement declares that an officer of the BOC has examined the submission and that to the best of the officer's knowledge all statements of fact contained in the submission are true and the submission is an accurate"o6w+0*%%ZZq"  X4statement of the affairs of the BOC for the relevant period.:,O yOy'ԍId.: Information contained in a BOC's cost allocation manual is not sufficiently detailed to satisfy section 272(b) because the BOC's cost allocation manual contains only a general description of the asset or service and does not describe all of the terms and conditions of each transaction. While section 272(b)(5) requires BOCs to reduce their transactions to writing and make them "available for public inspection," we will continue to protect the confidential information of BOCs, as well as other  Xv4incumbent local exchange carriers.-vXO yO 'ԍWe are currently examining the protection of confidential information in CC Docket No. 9655.  XH4z123.` ` We recognize a need to clarify how the requirements of section 273(e)(5) relate to the full scope of a BOC's reporting obligations under section 272(b)(5) of the Act. Section 273(e)(5)'s general mandate that BOCs "shall protect the proprietary information submitted for procurement decisions from release not specifically authorized by the owner of such information" neither curtails nor obviates section 272(b)(5)'s requirement that transactions between BOCs and their manufacturing affiliates be reduced to writing and made available for public inspection. Section 273(e)(5) addresses a BOC's duties solely with regard to submissions for procurement decisions, either by an affiliate or a third party. Only after a BOC consummates a transaction with a manufacturing affiliate would the reporting requirements of section 272(b)(5) trigger. Transactions between BOCs and third parties are not subject to the reporting requirements of section 272(b)(5). Section 272(b)(5)'s requirement that BOCs reduce their transactions with manufacturing affiliates to writing and make them available for public inspection permits the Commission and competitors to ensure that the BOCs are complying with the nondiscrimination and accounting safeguards of the Act.  X4{124.` ` We decline to adopt our tentative conclusion that a "request" by an affiliate to its BOC for telephone exchange service or exchange access constitutes a "transaction" within the meaning of section 272(b)(5) which must be "reduced to writing and available for public  X4inspection."r.O yO,'ԍAT&T Comments at 13; MCI Comments at 31; Worldcom Comments at 25.r We note, however, that once the BOC and its affiliate have agreed upon the terms and conditions for telephone exchange and exchange access such agreement would  Xe4constitute a "transaction."H/exO yO!'ԍUS West Comments at 14.H For clarification, we also find that agreements between a BOC and its affiliate for the provision of unbundled elements and facilities pursuant to explicit terms and conditions also constitutes a "transaction." " 7/0*%%ZZ"Ԍ X' ` `  i. Prevailing Company Prices   X4|125.` ` In the NPRM, we asked whether affiliate transactions conducted "on an arm's length basis" would necessarily entail the same marketing efforts and transactional costs as  X4transactions with nonaffiliates.Y0O yO'ԍNPRM, 11 FCC Rcd at 9092 para. 80.Y We also solicited comment on the impact that any differences in marketing efforts and transactional costs might have in accurately valuing affiliate transactions and how such differences should affect our use of the prevailing price method to record affiliate transactions between the BOCs and their affiliates engaged in activities described in section 272(a)(2).  X 4}126.` ` We also sought comment on whether we should eliminate the use of the prevailing price method as a valuation method for recording affiliate transactions between the  X 4BOCs and their affiliates engaged in activities described in section 272(a)(2).L1 XO yO'ԍId. at 9093 para. 82.L The prevailing price describes the price at which a company offers an asset or service to the  X 4general public.2 O yOY'ԍSee Affiliate Transactions Notice, 8 FCC Rcd at 807780 paras. 1522. A carrier subject to our current affiliate transactions rules records nontariffed assets or services at their prevailing prices if such prices exist. Prevailing price currently represents one component in the hierarchy of methods for valuing transactions between a carrier and its affiliate. A carrier subject to our current affiliate transactions rules uses one of the following methods to value asset transfers for regulated accounts: (1) tariffed  XM4rates,O3MxO yOv'ԍ47 C.F.R.  32.27(c).O (2)prevailing company prices,]4MO yO'ԍId.  32.27(b), 32.27(c).] (3) net book cost,v5MO yO'ԍNet book cost refers to costs less all applicable valuation reserves.v or (4) estimated fair market  X64value.]66( O yO'ԍ47 C.F.R.  32.27(b), 32.27(c).] These valuation methods apply when the carrier is either the purchaser or seller of the asset according to the following set of rules. First, carriers must record each asset transferred to an affiliate pursuant to tariff at the tariffed rate. Second, if no tariff exists and an affiliate that transfers or sells an asset to its regulated carrier also sells the same kind of asset to third parties at a generally available price, then the carrier must record the asset sale or transfer at that prevailing company price. Nontariffed assets that are sold or transferred by the carrier to its affiliates and are sold to third parties at a generally available price, must also be recorded by the carrier at that price. Third, all other asset transfers must be recorded"8 60*%%ZZ" at the higher of net book cost and estimated fair market value when the carrier is the seller, and at the lower of net book cost and estimated fair market value when the carrier is the  X4buyer (i.e., from the affiliate).:7O yOK'ԍId.: The United States Court of Appeals for the District of Columbia Circuit affirmed the valuation methods for asset transfers, finding them "reasonably  X4designed to prevent systematic abuse of ratepayers."{8XO yO'ԍSouthwestern Bell Corp. v. FCC, 896 F.2d 1378, 1378 (D.C.Cir. 1990).{  Xx4~127.` ` In comparison to our method for valuing asset transfers, carriers must record transactions involving services in their Part 32 accounts according to one of three valuation  XJ4methods: (1)tariffed rates,I9JO yO 'ԍ47 C.F.R.  32.27(c).I (2) prevailing company prices,Y:JxO yOs'ԍId.  32.27(b), 32.27(c).Y or (3) fully distributed cost.O;JO yO'ԍId.  32.27(d).O These valuation methods are applied when the carrier is either the purchaser or seller of the service according to the following set of rules. First, carriers must record services provided to an affiliate pursuant to tariff at the tariffed rate. Second, if no tariff exists and a carrier transfers or sells a service to its regulated affiliate that it also provides to third parties, the carrier must record the transaction at the prevailing company price. Nontariffed services that are sold or transferred by an affiliate to its regulated carrier and are also sold to third parties at a generally available price, must also be recorded by the carrier at that price. Third, all other services provided to affiliates must be recorded at the service provider's fully distributed  X{4costs.:<{O yO'ԍId.:  XM' Comments:  X4128. TRA argues that a company transacting business with its affiliate will benefit from lower or nonexistent marketing costs because the company is already known to the  X4affiliate, thereby minimizing transactional costs during affiliate transactions.P=( O yO 'ԍTRA Comments at 12.P Therefore, according to TRA, if a BOC is permitted to use prevailing price to value a transaction with its affiliate, both parties will be able to transfer all avoided marketing and transactional costs  X4to their advantage.l> O yO%'ԍId. See also Worldcom Reply at 15.l Several other parties, including PacTel and Sprint, contend that the idea"9H >0*%%ZZ" that an entity operating in a highly competitive market does not need to devote the same amount of effort and resources to win business from its affiliates as it does from nonaffiliates  X4is incorrect.?O yOK'ԍPacTel Comments at 27; Sprint Comments at 12; PacTel Reply at 15. See also GTE Comments at 5; SBC Comments at 33. In particular, Sprint maintains that "in a competitive market with a variety of suppliers offering a plethora of price and service options, an entity has to work just as hard to sell to its affiliates as it does to nonaffiliates. Otherwise, its affiliates will look to other  X4suppliers."G@ O yOu'ԍSprint Comments at 12.G  X_4129.` ` Several parties support the Commission's proposal to eliminate the use of the prevailing price method to record affiliate transactions between the BOCs and their affiliates  X14engaged in the activities described in section 272(a)(2).A1O yO 'ԍCTA Comments at 16; MCI Comments at 24; TRA Comments at 13; Florida PSC Reply at 2; TIA Reply at 1920. These parties contend that the Commission's present prevailing price method is difficult to apply and affords carriers too  X 4much discretion.B O yO'ԍSee CTA Comments at 16; MCI Comments at 24; TRA Comments at 13; TIA Reply at 1920. A number of other parties, including the BOCs, AT&T and Sprint, argue  X 4against the Commission's proposal to eliminate the prevailing price method.C O yOL'ԍAT&T Comments at 15; NYNEX Comments at 28; Puerto Rico Telephone Comments at 5; Sprint Comments at 12; GTE Reply at 3. Puerto Rico Telephone, in particular, maintains that the importance of using prevailing prices will increase  X 4in the future as interconnection agreements are established and tariffs are eliminated.UD  O yOv'ԍPuerto Rico Telephone Comments at 5.U APCC argues that the prevailing price method is more objective than fair market value or  X4fully distributed costs.HE O yO'ԍAPCC Comments at 2728.H SBC and US West argue that if we eliminated the prevailing price method, BOCs would be required to conduct fully distributed costs studies of their affiliate transactions even if all of the products and services involved in the transaction are available  XK4to third parties at a prevailing price.\FK' O yO# 'ԍSBC Comments at 31; US West Comments at 16.\ BellSouth contends that the elimination of the prevailing price valuation method would impose significant administrative costs and burdens  X4on the BOCs with virtually no additional protection for customers.JGO yO#'ԍBellSouth Comments at 31.J ":GG0*%%ZZ"Ԍ X4130.` ` AT&T recognizes the difficulties in determining prevailing price; AT&T, however, maintains that rather than eliminating prevailing price, the Commission should modify its rules so that prevailing price is only available if the affiliate sells a substantial  X4percentage by quantity of that product line to nonaffiliated customers.uHO yO4'ԍAT&T Comments at 15. See also SBC Reply at 1516.u TIA contends that the Commission should adopt a rule that allows a carrier to value affiliate transactions at prevailing price only when the affiliate can demonstrate that it has made substantial sales of  Xv4the same product to third parties.tIvXO yO 'ԍTIA Reply at 21 n. 54. See also PacTel Comments at 28.t Sprint argues that sales to third parties cannot reliably be used to establish prevailing price when an affiliate operates in a noncompetitive market or a  XH4market where there are few thirdparty transactions.GJHO yO 'ԍSprint Comments at 13.G In addition, TRA argues that if the percentage of thirdparty business is small, there will be little assurance that an affiliate  X 4transaction would truly be conducted at arm's length.uK xO yOC'ԍTRA Comments at 13. See also BellSouth Reply at 1011. u  X 4131.` ` NYNEX contends that the adoption of a clear definition of what constitutes  X 4prevailing price would clarify our rules and establish consistency.FL O yO'ԍNYNEX Comments at 28.F In particular, NYNEX argues that if the Commission should determine that some baseline percentage of thirdparty sales is necessary to establish prevailing price, then the Commission should adopt a baseline  X4percentage much less than the 75 percent figure proposed in the Commission's Affiliate  X{4Transactions Notice.M {O yO'ԍId. But see BellSouth Comments at 3031 (arguing that the Commission need not establish a fixed percentage of sales to determine prevailing price); SBC Reply at 16 (arguing that the Commission need not  yOT'establish an arbitrary baseline percentage to establish prevailing price). Affiliate Transactions Notice, 8 FCC Rcd at 8080 para. 22. MCI maintains that the prevailing price method is particularly difficult to apply because of the difficulties in determining whether a substantial portion of an  XO4affiliate's production is being provided to third parties.WNO O yO'ԍMCI Comments at 234; MCI Reply at 10.W MCI argues that in order to correct such difficulties, the Commission would need to apply any baseline percentage necessary to  X!4establish prevailing price on a productbyproduct basis.DO!O yO"'ԍMCI Comments at 24.D " ;O0*%%ZZ"Ԍ X' Discussion:  X4132.` ` We find unpersuasive TRA's argument that a company transacting business with its affiliate will significantly benefit from lower or nonexistent marketing costs because the company is already known to the affiliate. In competitive markets, companies devote significant resources to attracting and retaining customers through sales presentations,  Xv4advertising campaigns, volume purchase discounts, or longterm commitments.QPvO yO'ԍSee Sprint Comments at 12.Q In addition, any potential benefits to a carrier in transacting business with its affiliate are diminished to some extent by the system and transaction costs incurred in complying with our affiliate transactions rules. Accordingly, we conclude that any differences in marketing efforts and transactional costs that might exist are not significant and should not affect our use of the prevailing price method to record affiliate transactions.  X 4133.` ` We decline to adopt our proposal to eliminate prevailing price as a valuation method under our affiliate transactions rules. Initially, we selected prevailing price as a valuation method because we believed that those prices would provide a reliable measure of  X4fair market value.QXO yO'ԍSee generally Joint Cost Reconsideration Order, 2 FCC Rcd at 6296 para. 120; Joint Cost Order, 2 FCC Rcd at 1336 para. 295. Our experience in auditing carriers' application of the prevailing price method to determine how interaffiliate transfers of services should be recorded has revealed  Xb4difficulties in determining what is necessary to establish a prevailing price.cRbO yO'ԍSee NPRM at 909293 para. 81.hhCc Rather than rejecting prevailing price valuation, however, we conclude that these difficulties are best  X44addressed by modification and clarification of the prevailing price valuation method.S4@O yO%'ԍOur decision to modify and clarify the prevailing price method rather than to eliminate prevailing price as an acceptable valuation method recognizes the BOCs contention that elimination of prevailing price would  yO'impose additional burdens on subject carriers. BellSouth Comments at 31; SBC Comments at 31; US West Comments at 16; Letter from Maurice P. Talbot, Jr., Executive DirectorFederal Regulatory, BellSouth, to William F. Caton, Acting Secretary, FCC, filed November 12, 1996 (commemorating an ex parte meeting between the Commission's Common Carrier Bureau of the Commission and representatives from all of the BOCs); Letter from Jane Knox, DirectorFederal Regulatory, SBC, to William F. Caton, Acting Secretary, FCC, filed October 15, 1996 (commemorating an ex parte meeting between the Common Carrier Bureau's Accounting  yOe 'and Audits Division and representatives from all of the BOCs except NYNEX).   X4134.` ` One of the difficulties we have identified with respect to prevailing price valuation has been determining when carriers should apply the prevailing price method to transfers of particular assets or services. The mere offering of an asset or service to unaffiliated entities is not sufficient to establish a prevailing price. A substantial quantity of"<S0*%%ZZ" business must be conducted with unaffiliated third parties in order to establish a true  X4prevailing price.fTO yOb'ԍAffiliate Transactions Notice at 8077 para. 15.f Specifically, if the percentage of thirdparty business is small, there can be no assurance that the price agreed upon by the carrier and its affiliate represents the true market price, thus raising legitimate questions as to whether the parties actually negotiated  X4"on an arm's length basis."JUXO yO'ԍ47 U.S.C.  272(b)(5).J In such situations, the use of prevailing prices to value transactions could permit an affiliate to charge inflated prices to its affiliated regulated carrier, possibly leading to higher prices for customers purchasing the regulated services.  XH4135.` ` Our previous rules did not clarify the meaning of a "substantial" amount of thirdparty business for the purpose of establishing a true prevailing price. We agree with MCI that without clarification of the meaning of "substantial" in this context, the retention of the prevailing price method places a difficult burden on the Commission in verifying  X 4compliance with the affiliate transactions rules.FV O yO'ԍMCI Comments at 234.F Accordingly, we find that a clear definition of what constitutes prevailing price is necessary to clarify our affiliate transactions rules and  X 4establish consistency.[W xO yO'ԍSee id.; NYNEX Comments at 28.[ We conclude that annual sales, as measured by quantity, of greater than 50 percent of a particular product or service to third parties must occur to satisfy the requirement that there be a "substantial" amount of outside business in order to produce a true prevailing price for that particular product or service. We find that thirdparty sales of 50 percent or less are evidence of the fact that a party's primary function is to provide products or services to affiliates, rather than to outside market participants, and, consequently, those sales to unaffiliated entities are not sufficient to establish a true prevailing price. We note that our modifications here to clarify the prevailing price method apply to all assets and services transactions governed by our affiliate transactions rules.  X4136.` ` We conclude that the 50 percent threshold established in this Order must be applied on a productbyproduct and servicebyservice basis, rather than on a productline or  X4serviceline basis.NXO yOc 'ԍSee MCI Comments at 24.N Application of the 50 percent threshold on a productline or serviceline basis would give carriers the incentive to define product lines and service lines as broadly as possible in order to be able to value as many transactions as possible at prevailing price. Additionally, if the 50 percent threshold were applied to a product line or service line, then products or services that are sold to third parties in quantities of 50 percent or less could be grouped in the same line with different products or services that are sold primarily to third"7=X0*%%ZZE" parties, qualifying the entire line of products for prevailing price valuation. Such grouping would allow products or services for which no true prevailing price exists to be valued by a carrier at a fabricated prevailing price to the harm of ratepayers if the cost or market value of such products or services is actually different from this fabricated prevailing price. Moreover, verifying that product lines and service lines have been properly defined would place a significant burden on the Commission.  X_4137.` ` We do allow one exception to our rule that only a product or service for which annual sales to third parties, measured by quantity sold, exceed 50 percent of total sales of that product or service may be recorded by carriers at prevailing price. Section 272 requires BOCs to charge their section 272 affiliates the same rates as unaffiliated third parties for  X 4facilities, services, and information.fY O yO| 'ԍSee 47 U.S.C.  272(c)(1), 272(e).f Because the rates for services subject to section 272 must be made generally available to both affiliates and third parties, we adopt a rebuttable presumption that these rates represent prevailing company prices. Accordingly, products and services subject to section 272 need not meet the 50 percent threshold in order for a BOC to record the transaction involving such products and services at prevailing price.  Xy' ` `  ii. Valuation Methods for Assets and Services.    XK4138.` ` In the Joint Cost Order, we did not prescribe uniform valuation methods for all  X64affiliate transactions.wZ6XO yO?'ԍSee Joint Cost Order, 2 FCC Rcd at 133637 paras. 294301.w The Part 64 cost allocation rules direct subject carriers to use  X4different methods to value transfers of assets and transfers of services.[O yO'ԍWe discuss the valuation methods contained in the existing current affiliate transactions rules in section IV.B.1.b.ii. of this Order. In the NPRM, we proposed to direct carriers to apply the valuation method currently prescribed for asset  X4transfers to service transfers.\@O yO'ԍNPRM, 11 FCC Rcd at 9091 para. 78. We note that the services we are discussing here are not tariffed. The NPRM did propose, however, to continue to define the cost of asset transfers in terms of net book cost and the cost of service transfers in terms of  X4fully distributed costs.] O yO!'ԍThe net book cost of an asset includes all costs necessary to put the asset in place for its intended purpose. The fully distributed cost of a service includes all direct costs as well as the proper share of joint and common costs necessary to fully perform the service. Accordingly, the net book cost of an asset is comparable to the fully distributed cost of a service. We sought comment on whether these proposed modifications to the affiliate transactions rules would meet the objectives of section 272 better than the existing"> ]0*%%ZZ" rules. We asked commenters to discuss whether, and under what circumstances, we should allow carriers and their affiliates to use any alternative valuation methods. We also sought comment on how the elimination of a sharing obligation from our price cap rules would affect  X4the validity of our tentative conclusion in the Affiliate Transactions NPRM that our treatment of the provision of services that are neither tariffed nor subject to prevailing company prices may reward a carrier's imprudent acts of buying services from affiliates for more than, and  Xx4selling services to affiliates for less than, fair market value.w^xO yO'ԍSee Joint Cost Order, 2 FCC Rcd at 133637 paras. 294301.w  XJ4139.` ` Section 272(e)(3) requires that "[a] Bell operating company and an affiliate that is subject to the requirements of section 251(c) . . . shall charge the affiliate described in subsection (a) or impute to itself (if using the access for its provision of its own services), an amount for access that is no less than the amount charged to any unaffiliated interexchange  X 4carriers for such service."J_ XO yO'ԍ47 U.S.C.  272(e)(3).J Section 272(e)(4) states that "[a] Bell operating company and an affiliate that is subject to the requirements of section 251(c) . . . may provide any interLATA or intraLATA facilities or services to its interLATA affiliate if such services or facilities are made available to all carriers at the same rates and on the same terms and conditions, and so  X4long as the costs are appropriately allocated."J`O yO+'ԍId.  272(e)(4).J We also sought comment on how these requirements should affect our rules for implementing the "arm's length" requirement of  Xd4section 272(b)(5).YadxO yO'ԍNPRM, 11 FCC Rcd at 9092 para. 79.Y In addition, we invited comment on whether we should adopt specific accounting procedures to address the difference, if any, between the rates charged by BOCs when they provide interLATA or intraLATA facilities or services on a separated basis and  X4"the costs [that would be] appropriately allocated" for the underlying facilities or services.:bO yO'ԍId.:  X' Comments:  X4140.` ` Many commenters, including AT&T, Wisconsin PSC and GSA, support the Commission's proposal to conform the valuation methods under the affiliate transactions rules  X4governing service transfers and asset transfers. cXO yO"'ԍAT&T Comments at 14; GSA Comments at 6; Wisconsin PSC Comments at 6. See also CTA Comments at 16; MCI Comments at 2122; TIA Reply at 16; TRA Comments at 11; Washington Reply at 5; Worldcom Comments at 25.  Several of these commenters argue that the"? c0*%%ZZ" current valuation method for services does not adequately ensure compliance with section 272(b)(5)'s "arm's length" requirement because it rewards a carrier for buying services from  X4affiliates at more than, and selling them to affiliates for less than, fair market value.dO yOK'ԍSee, e.g., APCC Comments at 26; AT&T Comments at 14; GSA Comments at 6; MCI Comments at 21; TIA Reply at 16. AT&T further contends that our current valuation rules, by allowing a carrier to sell services for less than fair market value, would allow carriers to violate section 254(k)'s prohibition against  X4crosssubsidizing competitive operations.Ee O yO^ 'ԍAT&T Comments at 14.E  X_4141.` ` The BOCs and Sprint oppose the Commission's proposed change to the  XH4affiliate transactions rules.fHO yO 'ԍSee, e.g., NYNEX Comments at 21; Sprint Comments at 14; NYNEX Reply at 13. See also Puerto Rico Telephone Comments at 5. They argue that any attempt to establish fair market value for  X14services would prove inherently subjective.g1O yO'ԍSee, e.g., Ameritech Comments at 1617; PacTel Comments at 22; Sprint Comments at 14; SBC Reply  yO'at 14. ľ USTA and several BOCs note that in our  X 4reconsideration of the Joint Cost Order, we rejected a similar proposal to utilize estimates of fair market value for the transfer of services, stating that "such a valuation standard is fraught  X 4with potential for abuse, and would be difficult to monitor."{h ` O yO'ԍBellSouth Comments at 2429; NYNEX Reply at 15; USTA Comments at 18.{ PacTel argues that section  X 4272(e)(2)'s nondiscrimination requirement has eliminated any potential for harm.Gi O yOx'ԍPacTel Comments at 21.G PacTel further contends that the Commission should not require fair market valuation for governance  X 4functions provided to carriers by their regional holding companies.Aj O yO'ԍId. at 25.A BellSouth contends that application of the "asset transfer rules" to transactions involving services will require the BOCs and their affiliates to incur hundreds of millions of dollars in increased annual  Xd4administrative cost.!kXdO yO% 'ԍBellSouth Comments at 3233 (citing a study by Theodore Barry and Associates claiming that the application of the proposed rule to three BellSouth affiliates would result in annual increased administrative costs of more than $14.4 million).!  X64142.` ` APCC argues that the Commission should adopt a rule that requires carriers to value services at the lower of fully distributed costs and estimated fair market value when it"@0k0*%%ZZ"  X4is the purchaser with a price ceiling set at prevailing price.ElO yOy'ԍAPCC Comments at 28.E APCC contends that prevailing price serves as a check to ensure that the carrier has not overstated the price determined using the lower of fully distributed costs and estimated fair market value, preventing an affiliate  X4from charging its affiliated carrier more than a competitor.:mXO yO'ԍId.: APCC similarly argues that the  X4Commission should set a price floor at prevailing price when the carrier is the seller.:nO yO= 'ԍId.:  Xv4143.` ` AT&T argues that with regard to the requirements of section 272(e)(3), the  X_4BOC must charge its affiliate, at a minimum, the tariffed rate for access services.Eo_xO yO 'ԍAT&T Comments at 10.E AT&T maintains that the Commission should require a BOC's interLATA affiliate to reflect these access charges in enduser rates, at least as long as the BOC retains dominance in the provision of exchange access services. AT&T asserts that the Commission should impose price floors for interLATA services at a level equal to a BOC's access charges plus the incremental cost of the nonaccess portions of the service to ensure an affiliate's imputation  X 4of access charges.Ap O yO'ԍId. at 11.A  X ' Discussion:  Xy4144.` ` In the Joint Cost Proceeding, we considered identical valuation methods for assets and services. These methods would have required carriers to record all affiliate transactions that are neither tariffed nor subject to prevailing company prices at the higher of cost and estimated fair market value when it is the seller, and at the lower of cost and estimated fair market value when the carrier is the purchaser. As USTA and several BOCs  X4point out,{qO yOQ'ԍBellSouth Comments at 2429; NYNEX Reply at 15; USTA Comments at 18.{ however, the Joint Cost Order ultimately did not prescribe uniform valuation  X4methods for all affiliate transactions.sr( O yO 'ԍSee Joint Cost Order, 2 FCC Rcd at 1336 paras. 29499.s In the case of services, the Joint Cost Order requires carriers to record all non-tariffed services other than those having prevailing company prices at the providers' fully distributed costs while all nontariffed assets other than those having prevailing company prices must be recorded at the higher of cost and estimated fair market"A r0*%%ZZ(" value when it is the seller, and at the lower of cost and estimated fair market value when the  X4carrier is the purchaser.DsO yOb'ԍSee id.D  X4145.` ` The Commission based its decision not to apply the asset transfer rules to services on commenters' suggestions that those rules would reduce or eliminate "the incentive for certain service activities to be provided in a more efficient manner than that which the  Xv4regulated entity would alone achieve."HtvXO yO 'ԍId. at para. 294.H Since the adoption of the affiliate transactions rules, we have adopted price cap regulation that gives the largest incumbent local exchange carriers efficiency incentives far stronger than those the valuation methods for affiliate services sought  X14to preserve.u 1O yO 'ԍPolicy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87313, 5 FCC Rcd 6786,  yO'6807 para. 165 (1990) ("LEC Price Cap Order"), Erratum, 5 FCC Rcd 7664 (Com. Car. Bur. 1990), modified on  yOZ'recon., 6 FCC Rcd 2637 (1991) ("LEC Price Cap Reconsideration Order"), aff'd, National Rural Telecom Ass'n  {O"'v. FCC, 988 F.2d 174 (D.C. Cir. 1993), (citing Policy and Rules Concerning Rates for Dominant Carriers, CC  yO'Docket No. 87313, Notice of Proposed Rulemaking, 2 FCC Rcd 5208 (1987)); Further Notice of Proposed  yO'Rulemaking, 3 FCC Rcd 3195 (1988); Report and Order and Second Further Notice of Proposed Rulemaking, 4  yO|'FCC Rcd 2873 (1989) ("AT&T Price Cap Order"), Erratum, 4 FCC Rcd 3379 (1989), modified on recon., 6  yOD'FCC Rcd 665 (1991) ("AT&T Price Cap Reconsideration Order"), remanded, AT&T v. FCC, 974 F.2d 1351  yO '(D.C.Cir. 1992), vacated, Order and Notice of Proposed Rulemaking, 8 FCC Rcd. 3715 (1993).  These changes in regulation have caused us to reevaluate the effect of our valuation methods for affiliate services on carrier incentives. That reevaluation makes clear that our current treatment of services that are neither tariffed nor subject to prevailing  X 4company prices made generally available|v O yOW'ԍWe discuss the prevailing price method in section IV.B.1.b.i., supra.| may in fact reward a carrier that acts imprudently when buying services from affiliates for more than, and selling services to affiliates for less  X 4than, fair market value.ww J O yO'ԍSee Joint Cost Order, 2 FCC Rcd at 133637 paras. 294301.w Our current valuation rules require a carrier to record services sold to nonregulated affiliates at the carrier's fully distributed cost. These rules apply even when the carrier's fully distributed cost for the service is less than the fair market value of that service. Under these circumstances, our current valuation rules result in a smaller profit for the carrier in a service transaction with its nonregulated affiliate than would a similar transaction with a third party for the same service. Our current valuation rules also require a carrier to record services purchased from a nonregulated affiliate at the affiliate's fully distributed cost. These rules apply even when the affiliate's fully distributed cost for the service is greater than the fair market value of that service. Accordingly, our current valuation rules may entice a carrier to pay its nonregulated affiliate more for a service than"Bw0*%%ZZ]"  X4the carrier would pay a third party for the same service.,xO yOy'ԍAnother way this can occur is through chain transactions. Chain transactions are transactions in which an asset, service or product is supplied by either a third party or an affiliate of the carrier first to another affiliate of that carrier and next to the carrier itself. We believe that our current valuation methods for services may enable an affiliate to use chain transactions to pass assets or services to the affiliated carrier at inflated charges. For example, nonregulated affiliate A could buy a product from a third party. A could then sell the product to  yOa'nonregulated affiliate B at any price ( e.g., with a 50 percent profit). B could then sell the product to the affiliated carrier at a price that includes not only its authorized profit, but also the profit earned by A. Because carriers generally value and record such transactions based on the affiliate transactions rules governing service transfers, the transaction would be recorded at fully distributed costs., In either set of circumstances, ratepayers may be harmed if the carrier's smaller profits or increased costs as a result of our services valuation rules are reflected in rates for regulated telecommunications services. Ratepayers and service providers not affiliated with carriers may also be harmed if the valuation methods for affiliate transactions induce carriers and their affiliates to "use services  X4that are not competitive to subsidize services that are subject to competition,"GyO yO'ԍ47 U.S.C.  254(k).G thereby putting service providers not affiliated with the carrier at a competitive disadvantage.   XH4146.` ` We believe that requiring carriers to use the same valuation methods for both services and asset transfers would also reduce the incentive to record an affiliate transaction as a service transfer, rather than an asset transfer, especially in the context of procurement activities. Under our current rules for recording transfers of services, carriers may record services sold to their affiliates at cost even if the fair market value of such services is actually much higher, allowing the carrier's affiliates to take advantage of services at below market costs to the detriment of the carrier's ratepayers. With respect to the sale of assets, however, carriers must record the sale at the higher of cost or fair market value. Our current rules also allow carriers to record services purchased from their affiliated carriers at cost even if the fair market value of such services is actually much lower, allowing the carrier's affiliates to receive the benefit of higher than market value sales to the detriment of the carrier's ratepayers. In the case of the purchase of an asset, however, carriers must record the purchase at the lower of cost or fair market value. Requiring a carrier to value transfers of services using the same valuation methods currently used for asset transfers would reduce the carrier's ability to value a transfer so that a carrier can pass on to their affiliates any financial advantages flowing from how they choose to characterize the transaction.   X4147.` ` Because of the concerns identified in the preceding paragraph, we believe that the current rules regarding the valuation of affiliate services may not be consistent with the  X4requirement of section 272(b)(5) that transactions be conducted "on an arm's length basis."Jz( O yOl$'ԍId.  272(b)(5).J "C z0*%%ZZ" The rule we adopt aboverequiring carriers to record all affiliate transactions that are neither tariffed nor subject to prevailing company prices at the higher of cost and estimated fair market value when the carrier is the seller or transferor, and at the lower of cost and estimated fair market value when the carrier is the buyer or transfereeappears more likely to ensure that the transactions between carriers and their nonregulated affiliates take place on an "arm's length" basis, guarding against crosssubsidization of competitive services by subscribers to regulated telecommunication services. This rule will conform the valuation methods under the affiliate transactions rules for the provision of services to those methods we currently use to value asset transfers. We continue, however, to define the cost of asset transfers in terms of net book cost and the cost of service transfers in terms of fully distributed costs because the net book cost of an asset is comparable to the fully distributed cost of a service.  X 4148.` ` We do allow one exception to our rule conforming the valuation methods under the affiliate transactions rules for the provision of services to those methods we currently use to value asset transfers. Under the rule adopted in this Order, when a carrier purchases from its affiliate services that are neither tariffed nor subject to prevailing company prices and such affiliate exists solely to provide services to members of the carrier's corporate family, the carrier would be required to value the transaction at the lower of fair market value and fully distributed cost. Under our existing valuation rules, however, such service transactions would simply be valued at fully distributed cost because insufficient thirdparty sales exist to substantiate a prevailing price for these services that are often tailored to the corporate  X4family's unique needs. We conclude that these transactions where a carrier purchases from its affiliate services that are neither tariffed nor subject to prevailing company prices and such  X4affiliate exists solely to provide services to members of the carrier's corporate family should continue to be valued at fully distributed cost. We find that when an affiliate is established to provide services solely to the carrier's corporate family in an effort to take advantage of economies of scale and scope, the benefits of such economies of scale and scope are reflected in such affiliate's costs and are ultimately transferred to ratepayers through transactions with the carrier for such services valued at fully distributed costs. Requiring carriers to perform fair market valuations for such transactions would increase the cost to ratepayers while providing limited benefit.  X 4  X '` `  iii. Fair Market Value  X4149.` ` In the NPRM, we proposed to require carriers to make good faith determinations of fair market value, rather than specifying methodologies that carriers must follow to estimate fair market value, where such a valuation is required under the affiliate  X"4transactions rules.Y{"O yO%'ԍNPRM, 11 FCC Rcd at 9094 para. 83.Y We invited comment on this proposal. We sought comment on whether""DX{0*%%ZZ " we should set criteria for determining what constitutes a good faith estimate of market  X4value.G|O yOb'ԍId. at para. 84.G We also asked whether we should require carriers to support their valuations by reasonable and appropriate methods in situations involving transactions that are not easily  X4valued.G}XO yO'ԍId. at para. 85.G  X' Comments:  X_4150.` ` Several State PUCs and TIA favor the adoption of the proposed good faith  XH4requirement on estimates of fair market value.~HO yO 'ԍTIA Reply at 22; Washington Reply at 6. See also NYDPS Comments at 9; Wisconsin PSC Comments at 7. Most interexchange carriers, however,  X14oppose its adoption.1@O yO"'ԍSee AT&T Comments at 1516; MCI Comments at 2526; Worldcom Comments at 27. MCI argues that adoption of the proposed good faith requirement  X 4would make it easier for the BOCs to shift costs.D O yO'ԍMCI Comments at 25.D Worldcom contends that the Commission should establish a uniform set of requirements for fair market value to apply to all the  X 4BOCs.I ` O yO'ԍWorldcom Comments at 27.I AT&T argues that, at a minimum, the Commission should apply the criteria  X 4discussed in the NPRM.Z O yOv'ԍAT&T Comments at 1516; AT&T Reply at 11.Z AT&T further asserts that the Commission should require a carrier that applies fair market valuation to a transaction to retain records documenting the methodology used in a form that would enable third parties to reproduce the analysis in the  X4context of an audit or investigation.x O yO'ԍAT&T Comments at 1516. See also TRA Comments at 17.x TRA maintains that because transactions between a carrier and its affiliate do not involve a "willing" buyer and seller, the Commission should  Xd4establish specific criteria to determine fair market value.tdO yO% 'ԍTRA Comments at 1416. See also MCI Comments at 2526.t TRA asserts that the Commission should not allow carriers to use alternative valuation methods without obtaining a waiver from  X64the Commission based on a clear demonstration of the alternative method's accuracy.M6O yO#'ԍTRA Comments at 1617.M "6E00*%%ZZ."Ԍ X4151.` ` GTE contends that purchases by unaffiliated companies provide an excellent  X4benchmark because unaffiliated purchasers have no reason to pay unreasonably high prices.CO yOb'ԍGTE Comments at 8.C In particular, GTE argues that if sales to unaffiliated companies of a product at a particular price generate large revenues then this is "strong evidence" that the price is "a valid price in  X4market terms.":XO yO'ԍId.:  Xv4152.` ` While most of their objections appear to relate to the use of fair market value if the use of prevailing price is eliminated, USTA and several BOCs argue against a good  XH4faith requirement because of the difficulties in determining fair market value.HO yO 'ԍSee, e.g., BellSouth Comments at 33; SBC Comments at 34; USTA Comments at 18; NYNEX Reply at 13. US West  X14contends that there is no need to impose a good faith requirement on carriers.H1@O yO"'ԍUS West Comments at 18.H  X ' Discussion:  X 4153.` ` We find that the procedures carriers use in estimating fair market value should vary with the circumstances of each transaction. We consequently conclude that we should not specify the methodologies that carriers must follow to estimate fair market value where such a valuation method is required under the affiliate transactions rules. While many  Xy4commenters attack the use of fair market value generally in the affiliate transactions rules,yO yO'ԍSee section IV.B.1.b.ii. and IV.B.1.b.iii., supra, for a discussion of the use of fair market value. we find that no commenters have provided a sufficient reason why, having determined that fair market value should be used, we should not impose a good faith requirement. We believe that allowing carriers to make good faith determinations of fair market value, rather than prescribing specific methodologies, will provide them with the flexibility to use a methodology appropriate for the circumstances of the transaction. We find that the good faith requirement will help ensure that transactions involving a BOC and its section 272 affiliate  X4satisfy the "arm's length" requirement of section 272.J` O yO 'ԍ47 U.S.C.  272(b)(5).J We therefore adopt our proposal to require carriers to make good faith determinations of fair market value for purposes of our affiliate transactions rules. We further conclude that we should impose a good faith requirement on all affiliate transactions between an incumbent local exchange carrier currently"F 0*%%ZZ" subject to our affiliate transactions rules and any of its affiliates, not just to affiliate transactions involving the activities described in section 272(a).  X4154.` ` While we decline to specify the methodologies that carriers must follow to estimate fair market value, we do set the baseline for a good faith determination of fair market value by requiring carriers to use methods that are routinely used by the general business community. For example, when carriers can estimate the market value of transactions using independent valuation methods, carriers should apply such methods to ascertain fair market value. Depending on the type of transaction, examples of methods for determining fair market values for both assets and services include appraisals, catalogs listing similar items, competitive bids, replacement cost of an asset, and net realizable value of an asset. We agree with GTE that sales to third parties can provide a benchmark and we conclude that if sales to third parties of a product at a particular price generate large revenues then the sale price is strong evidence of a good faith estimate of fair market value. When situations arise involving transactions that are not easily valued by independent means, we require carriers to maintain records sufficient to support their value determination. Specifically, the valuation method chosen by the carrier must succeed in capturing the available supporting information regarding the transaction and must utilize generally accepted techniques and principles regarding the particular type of transaction at issue. We note that nothing discussed here exempts carriers from their statutory obligation under section 220(c) to  X44justify their accounting entries.G4O yO'ԍId.  220(c).G  X'` `  iv. Tariffedbased Valuation  X4155.` ` Under section 252, incumbent local exchange carriers may submit agreements adopted by negotiations or arbitration to State commissions for approval or rejection without  X4filing a tariff.GXO yO'ԍId.  252(e).G Alternatively, they may file statements of generally available terms pursuant to section 252(f) that state terms on which these incumbent local exchange carriers would  X|4provide services to all customers who desire them.P|O yO'ԍId.  252(f)(1).P In the NPRM, we sought comment on whether, and to what extent, our affiliate transactions rules should be amended to substitute  XP4rates appearing in such publicly filed agreements and statements for tariffed rates.YPxO yOy"'ԍNPRM, 11 FCC Rcd at 9095 para. 86.Y We also"PG0*%%ZZ4" sought comment on whether such amendments would be consistent with, or required by,  X4sections 272(e)(3) and 272(e)(4).:O yOb'ԍId.:  X' Comments:  X4156.` ` Most BOCs argue that the Commission should amend its affiliate transactions rules to allow them to use rates appearing in publicly filed agreements submitted to a State commission pursuant to section 252(e) or statements of generally available terms pursuant to  XH4section 252(f) in the place of tariffed rates.HXO yOQ 'ԍSee, e.g., BellSouth Comments at 35; NYNEX Comments at 29; PacTel Comments at 29; US West Comments at 19. NYNEX contends that such rates reflect "arm's  X14length" transactions.F1O yO'ԍNYNEX Comments at 29.F PacTel argues that because such rates will be subject to review by State regulators similar to tariff review, such rates provide the same protection against cross X 4subsidization.G @O yO'ԍPacTel Comments at 29.G Ameritech and USTA, however, argue that the Commission need not amend the affiliate transactions rules in this instance because under the current rules, BOCs must value transactions at either the prevailing price or cost, which would include rates filed in  X 4interconnection and collocation agreements. O yO?'ԍSee, e.g., Ameritech Comments at 23; USTA Comments at 24. SBC and TRA maintain that the Commission should allow BOCs to use terms contained in negotiated or arbitrated interconnection agreements or statements of generally available terms and conditions only to the extent a  Xy4tariff is not available.[y` O yO'ԍTRA Comments at 1819; SBC Comments at 40.[  XK4157.` ` Worldcom argues that amending the affiliate transactions rules to substitute rates appearing in such publicly filed agreements and statements for tariffed rates would be premature because the Commission has not yet proposed to eliminate the tariff requirements  X4for BOCs' local exchange and exchange access services.I O yO 'ԍWorldcom Comments at 28.I AT&T contends that such an  X4amendment to the Commission's rules is unnecessary.E O yO #'ԍAT&T Comments at 16.E AT&T argues that section 272(b)(1)'s requirement that an affiliate operate independently from the BOC of which it is an affiliate prohibits any integration of exchange and interexchange facilities, including the"H0*%%ZZe"  X4purchase of interconnection and collocation services and network elements.:O yOy'ԍId.: AT&T maintains that the Commission should prohibit BOC affiliates from offering any exchange service, except through total service resale at tariffed rates, and should require them to obtain  X4all transmission capacity from the BOC pursuant to tariff as was the case under Computer  X4II.:XO yO'ԍId.:  Xz' Discussion:  XL4158.` ` We concur with the majority of BOCs that we should amend our affiliate transactions rules to allow incumbent local exchange carriers to use charges appearing in publiclyfiled agreements submitted to a State commission pursuant to section 252(e) or statements of generally available terms pursuant to section 252(f) in the place of tariffed rates  X 4when tariffed rates are not available. O yO'ԍSee, e.g., BellSouth Comments at 35; NYNEX Comments at 29; PacTel Comments at 29; US West Comments at 19. Because charges appearing in such publiclyfiled agreements and statements are subject to State review, we find it unlikely that allowing incumbent local exchange carriers and their affiliates to record nontariffed transactions using such rates when available would lead to the subsidization of competitive services by subscribers to regulated telecommunications services. Because carriers must comply with the crosssubsidization prohibitions of the Act regardless of what accounting rules we or the States adopt, neither a carrier nor its affiliate may use a charge appearing in publiclyfiled agreements or statements of generally available terms if the use of such charge would violate the Act. We do not believe that the fact we have not yet eliminated the tariff requirements for a BOC's local exchange and exchange access services forecloses us from establishing accounting safeguards now in anticipation of changes in the telecommunications market  X4permitted by Section 252.]@O yO'ԍBut see Worldcom Comments at 28.]  X4159. ` ` We do not read section 272(b)(1)'s requirement that a BOC affiliate "operate independently" from the BOC so broadly, as AT&T suggests, that it prohibits all integration of exchange and interexchange facilities, including the purchase of interconnection and  X4collocation services and network elements by such an affiliate.O yO#'ԍSee NonAccounting Safeguards Order at sections IV and VIII. We conclude that section 272(b)(1) does not prohibit BOC affiliates from receiving the same rates that any unrelated party could receive through publiclyfiled agreements submitted to a State commission"RI` 0*%%ZZh" pursuant to section 252(e) or statements of generally available terms pursuant to section 252(f) instead of a tariffed rate.  X'` `  v. Return Component for Allowable Costs   X4160.` ` In the Joint Cost Proceeding, the Commission determined that fully distributed costs should include a return on investment, but no "profit" in excess of the return then  Xa4prescribed for the carrier's interstate regulated activities.aO yO'ԍJoint Cost Reconsideration Order, 2 FCC Rcd at 6296 para. 119, 6298 para. 133, 6315 n. 203. Consequently, carriers that utilize fully distributed cost to value affiliate transactions include in their cost computations a  X34component for rate of return. In the NPRM, we proposed that all carriers providing services subject to section 272 should use a uniform rate of return to determine the fully distributed  X 4costs associated with affiliate transactions.Y XO yO'ԍNPRM, 11 FCC Rcd at 9095 para. 87.Y The Commission has prescribed a unitary, overall rate of return for those incumbent local exchange carriers still subject to rateofreturn regulation to use in computing interstate revenue requirements, unless a carrier can show that  X 4such use would be confiscatory.FX O yO['ԍAmendment of Parts 65 and 69 of the Commission's Rules to Reform the Interstate Rate of Return  yO#'Represcription and Enforcement Processes, Report and Order, CC Docket No. 92133, 10 FCC Rcd 6788 (1995)  yO'("Rate of Return Order").F The current prescribed rate of return on interstate services  X 4is 11.25 percent.aX O yOd'ԍThe Bureau has released a Public Notice seeking comment on whether the Commission should commence a represcription proceeding. Common Carrier Bureau Sets Pleading Schedule for Preliminary Rate of  yO'Return Inquiry, Public Notice, DA 96139, 61 Fed. Reg. 6641 (rel. Feb. 21, 1996).a We sought comment on our proposal.Y ( O yO'ԍNPRM, 11 FCC Rcd at 9096 para. 88.Y  X}' Comments:  XO4161.` ` Most commenters that address this issue argue that the Commission should require the BOCs to use the prescribed interstate rate of return for valuing transactions with  X!4their affiliates engaged in activities permitted under section 272.! O yO 'ԍSee, e.g., AT&T Comments at 17; GSA Comments at 6; PacTel Comments at 29; SBC Comments at 41; TRA Comments at 19; GSA Reply at 10. PacTel and SBC contend that the prescribed interstate rate of return is consistent with the return on investment that a  X4BOC could anticipate if it were to use its investment to provide services to third parties.[O yO$'ԍPacTel Comments at 29; SBC Comments at 41.[ "J0*%%ZZ]" TRA argues that allowing carriers to select their own rate of return, instead of using the prescribed interstate rate of return, would run counter to the Commission's efforts to promote arm's length transactions and would unduly burden the Commission with numerous rateof X4return prescription proceedings.DO yO4'ԍTRA Comments at 19.D  X4162.` ` US West, however, disagrees. US West argues that the Commission should permit any BOC to determine the return component included in its cost computations for valuing affiliate transactions using a composite of the prescribed interstate rate of return and  XH4the intrastate rates of return prescribed or authorized for that carrier.SXHXO yOQ 'ԍUS West Comments at 20. See also NYNEX Reply at 18 (arguing that an incumbent local exchange carrier should have "the option of using a different rate of return so that [it] could meet its obligations to both federal and State regulators and reduce its recordkeeping burden").S US West contends that this approach would recognize that transactions between a BOC and its affiliate benefit  X 4both the interstate and intrastate services that a BOC provides to third parties.: xO yOC'ԍId.: USTA argues that the current rules are adequate because they permit a BOC to utilize a rate of return that is "appropriate for affiliate transactions" and require the carrier to reference that rate of return, if different from the prescribed interstate rate of return, in its cost allocation  X 4manual.E O yOw'ԍUSTA Comments at 24.E  X4163.` ` MCI argues that the Commission should set the uniform rate of return for determining the fully distributed costs associated with affiliate transactions involving the services permitted by section 272 at 10.25 percent, the lowest point of the range that the  XK4Commission allows under its price cap plan.DKO yO'ԍMCI Comments at 28.D MCI maintains that an affiliate relationship  X44reduces a supplier's business risks and therefore lowers the necessary return.D4( O yO 'ԍId. at 2829.D NYNEX argues that the Commission should reject MCI's suggestion. NYNEX contends that the fact that a price cap carrier subject to sharing/lowend adjustments can seek a lowend adjustment if its interstate earnings fall below 10.25 percent does not provide a basis to establish 10.25  X4percent as a reasonable return component.C O yOA#'ԍNYNEX Reply at 19.C NYNEX notes that many carriers are not subject"KH 0*%%ZZT"  X4to sharing/lowend adjustments.:O yOy'ԍId.: Finally, NYNEX argues that determination of business risk, cost of capital and rate of return for particular nonregulated affiliates would be  X4extremely complicated.:XO yO'ԍId.:  X'  X'Discussion:  Xv4164.` ` When an incumbent local exchange carrier provides services or assets to an affiliate, or an affiliate provides services or assets to an incumbent local exchange carrier, where the transferred goods or services are not provided pursuant to tariff or eligible for prevailing price valuation (i.e. substantial amount of the transferred goods or services are not provided to unaffiliated third parties), the transactions typically do not involve the risk inherent in providing services or assets in a competitive market. This is because any investment required to provide the service or asset will not be subject to competitive pressure from alternative suppliers. The cost of capital to be imputed in such transactions should meet two criterion: one, it should impute a reasonable rate of return, and two, it should be uniform for all carriers and transactions. The latter criteria, uniformity, avoids the unduly burdensome calculation of a rate of return and timeconsuming carrierspecific rate of return prescription.  Xb4165.` ` We conclude that a reasonable rate of return to be used by all incumbent local exchange carriers in determining the fully distributed costs associated with affiliate transactions is the rate of return on interstate services, as amended periodically by the Commission. In establishing the prescribed interstate rate of return, the Commission considered the cost of capital to provide interstate access services and prescribed a rate of  X4return of 11.25% for the local exchange carriers.O yO'ԍReprescribing the Authorized Rate of Return for Interstate Services of Local Exchange Carriers, Order, CC Docket No. 89624, 5 FCC Rcd 7507 (1990). The Commission concluded that this rate of return for the regulated activities of local exchange carriers would maintain the carriers' financial integrity and enable them to attract new capital necessary to serve the public. The  X4Commission followed the Supreme Court's holding in FPC v. Hope Natural Gas Co. that the rate prescribed should be "commensurate with returns on investments in other enterprises  X~4having corresponding risks."J~@O yOo!'ԍ320 U.S. 591, 603 (1944).J In concluding that the prescribed interstate rate of return is a reasonable rate of return to be used in affiliate transactions, we agree with PacTel and SBC that the prescribed interstate rate of return is consistent with the return on investment that an incumbent local exchange carrier could anticipate if it were to use its investment to provide services to third parties. We also disagree with the approach of US West to use a blended""L0*%%ZZ" rate of return for interstate and intrastate services because there are states that no longer prescribe a rate of return for intrastate services. The approach of US West and that of USTA  X4also would not allow the application of a uniform or easily determinable rate of return.(#(#  X4166.` ` In the Interconnection Order, we concluded that "the currently authorized rate of return at the federal or state level is a reasonable starting point . . . and incumbent [local exchange carriers] bear the burden of demonstrating with specificity that the business risks that they face in providing unbundled network elements and interconnection services would  XJ4justify a different riskadjusted cost of capital."JO yO 'ԍInterconnection Between Local Exchange Carriers and Commercial Mobile Radio Service Providers,  yO 'Report and Order, CC Docket Nos. 95185, 9698, FCC 96325, para. 702 (rel. Aug. 8, 1996) ("Interconnection  yOS 'Order"), Order on Reconsideration, 11 FCC Rcd 13042 (1996), further recon. pending, pet. for review pending  yO 'sub nom. and partial stay granted, Iowa Utilities Board v. FCC, No. 963221 and consolidated cases (8th Cir.  yO 'filed Sept. 6, 1996), partial stay lifted in part, Iowa Utilities Board v. FCC, No. 963321 and consolidated cases, 1996 WL 589284 (8th Cir Oct. 15, 1996).  We similarly conclude that for all affiliate  X34transactions, incumbent local exchange carriers bear the burden of demonstrating with specificity that the business risks that they face in providing services to their affiliates would justify a riskbased adjustment to the cost of capital that would result in a rate of return different than 11.25%. We note, however, that we apply the prescribed rate of return on interstate services to affiliate transactions solely to determine the fully distributed costs associated with such transactions for accounting purposes and not to determine the prices charged for these services.  X{' ` ` c. Accounting Requirements of Sections 272(b)(2) and (c)(2)   XM4167.` ` Section 272(b)(2) requires the separate affiliates prescribed under section 272(a)(2) to "maintain books, records, and accounts in the manner prescribed by the Commission which shall be separate from the books, records, and accounts maintained by the  X4[BOC] of which it is an affiliate."J@O yO'ԍ47 U.S.C.  272(b)(2).J In the NPRM, we asked what steps the Commission should take in order to implement this requirement and, in particular, whether we should mandate that separate affiliates required under section 272(a)(2) maintain their books, records, and accounts in accordance with generally accepted accounting principles ("GAAP") or whether it is necessary for the Commission to adopt any additional accounting, bookkeeping  X4or recordkeeping requirements for affiliates prescribed under 272(a)(2).YO yO"'ԍNPRM, 11 FCC Rcd at 9086 para. 68.Y "M` 0*%%ZZz"Ԍ X' Comments:  X4168.` ` Most parties, including several BOCs, argue that at most we should require separate affiliates under section 272(a)(2) to maintain their books, records, and accounts in  X4accordance with GAAP.>XO yO'ԍAmeritech Comments at 22; APCC Comments at 22; Bell Atlantic Comments at 13; BellSouth Comments at 23; CTA Comments at 15; TRA Comments at 6; USTA Comments at 22; US West Comments at 12; Worldcom Comments at 22; NYNEX Reply at 13; TIA Reply at 10; Worldcom Reply at 13.> TRA contends that GAAP will ensure that costs are based upon reliable data and will create a more uniform audit trail with minimal cost and without a  Xv4drastic restructuring of carriers' accounting systems.DvO yO 'ԍTRA Comments at 6. D US West maintains that GAAP is a  X_4reasonable requirement because it is widely employed and commonly understood.E_xO yO 'ԍUS West Comments 12.E  X14169.` ` AT&T and MCI argue that all BOC affiliates except noncarrier affiliates  X 4should maintain their books pursuant to the Commission's Uniform System of Accounts.` O yO'ԍAT&T Comments at 9, 12; MCI Comments at 17, 18.` In particular, MCI contends that standardization of Part 32 accounting between a BOC and its inregion interLATA affiliate will enable the Commission to make earnings comparisons and comparisons of investment and expenses that are critical to the Commission's ability to  X 4identify instances where a BOC is possibly subsidizing an interLATA affiliate.D O yO'ԍMCI Comments at 18.D Worldcom maintains that we should require all BOC affiliates to maintain books in  X4conformance with Part 32's Uniform System of Accounts to facilitate auditing.L( O yOi'ԍWorldcom Comments at 2223.L  Xb' Discussion:  X44170.` ` We conclude that the separate affiliates prescribed under section 272(a)(2) must maintain their books, records, and accounts in accordance with GAAP. We concur with TRA that a requirement that these affiliates maintain their books, records, and accounts in accordance with GAAP will result in a uniform audit trail at minimal cost. Moreover, a requirement of GAAP for separate affiliates required under section 272(a)(2) imposes some degree of uniformity upon these affiliates. We are not persuaded by parties' comments, however, that we should impose Part 32 accounting systems on BOC affiliates in order to facilitate auditing. We currently do not impose Part 32 accounting on the interexchange"N 0*%%ZZ"  X4telecommunications affiliates of nonBOC incumbent local exchange carriers.O yOy'ԍFor example, GTE, Cincinnati, Rochester, and Sprint presently operate interexchange telecommunications affiliates that are not subject to Part 32 accounting. Moreover, BOCs are currently required to clearly and completely document the manner in which affiliates' accounting systems flow into the BOCs' Part 32 accounts. Accordingly, we find no reason to impose the additional burden of requiring separate affiliates required under Section 272(a)(2) to maintain their books, records, and accounts in accordance with the Part 32 Uniform System of Accounts.   X_4  ` ` d. Application to InterLATA Telecommunications Affiliates   X14171.` ` Our existing affiliate transactions rules are designed solely for transactions  X 4between regulated carriers and their nonregulated affiliates. O yO 'ԍSee Joint Cost Reconsideration Order, 2 FCC Rcd at 6297 para. 122. InterLATA telecommunications services, however, are subject to Title II of the Act, and, absent a Commission determination to the contrary, the affiliates that offer those services would classify interLATA  X 4telecommunications services as "regulated" for Title II accounting purposes. In the NPRM, we tentatively concluded that we should apply our affiliate transactions rules to transactions between each BOC and any regulated interLATA telecommunications affiliate it establishes  X4under section 272(a).YO yO'ԍNPRM, 11 FCC Rcd at 9097 para. 89.Y We invited comment on this tentative conclusion and asked how we would need to modify our affiliate transactions rules if applied to such transactions.  XM4172.` ` Section 272 does not prohibit a BOC from providing more than one  X64nonregulated service (e.g., manufacturing and an interLATA information service) through the same affiliate. It also does not prohibit an affiliate that provides regulated services such as interLATA telecommunications services, from engaging in other activities not regulated under  X4Title II. In the NPRM, we sought comment on whether, in this context, we should apply our cost allocation rules to prevent subsidization of nonregulated activities by subscribers to interLATA telecommunications services, and whether section 254(k) authorizes such an  X4application of our cost allocation rules.G@O yO'ԍId. at para. 90.G  X' Comments:  XT4173.` ` Most commenters addressing this issue argue that the Commission should treat interLATA telecommunications services, such as inregion interLATA services, like a"=O0*%%ZZ8"  X4nonregulated activity for accounting purposes.+XO yOy'ԍSee, e.g., AT&T Comments at 9; CTA Comments at 15; GSA Reply at 6; PacTel Comments at 29; US  yOA'West Comments at 21; USTA Comments at 24; Worldcom Reply at 13. See also MCI Comments at 33; TRA Comments at 20.+ As a result, these commenters maintain that the existing affiliate transactions rules will prevent subsidization between local exchange and exchange access services and these interLATA telecommunications services.  X4174.` ` BellSouth, however, opposes application of the affiliate transactions rules to transactions between a BOC and its affiliate established under section 272(a). BellSouth contends that there is no need to apply these rules because both the BOC and the new interLATA telecommunications affiliate are subject to Title II of the Act and, therefore, must establish just, reasonable and nondiscriminatory rates. In addition, BellSouth argues that, because the separate affiliate requirement of section 272 sunsets after three years, the costs incurred to create internal accounting and tracking systems to comply with the affiliate  X 4transactions rules would increase administrative costs with no corresponding benefit.J O yO'ԍBellSouth Comments at 37.J  X 4175.` ` Worldcom and MCI argue that the Commission should apply its cost allocation  X 4rules to prevent subsidization of nonregulated activities by interLATA services.c xO yO'ԍMCI Comments at 34; Worldcom Comments at 29.c USTA and all of the BOCs that address this issue, however, oppose the application of cost allocation rules to prevent subsidization of nonregulated activities by subscribers to interLATA  Xy4telecommunications services.yO yO2'ԍAmeritech Comments at 24; BellSouth Comments at 38; PacTel Comments at 29; SBC Comments at 41; USTA Comments at 25. They contend that BOC affiliates have no incentive to subsidize nonregulated activities by subscribers to interLATA telecommunications services  XK4because both services are competitive.K` O yO\'ԍSee, e.g., Ameritech Comments at 24; PacTel Reply at 17; SBC Comments at 47. Bell Atlantic further argues that the Commission  X44has no authority to regulate transactions within or among affiliates.N4 O yO'ԍBell Atlantic Comments at 14.N  X' Discussion:  X4176.` ` Section 272(b)(5) requires BOC affiliates established under section 272(a), such as an affiliate providing inregion services, to "conduct all transactions with the Bell operating company of which it is an affiliate on an arm's length basis." Our existing affiliate"P 0*%%ZZ" transactions rules are designed solely for transactions between regulated carriers and their  X4nonregulated affiliates.O yOb'ԍSee Joint Cost Reconsideration Order, 2 FCC Rcd at 6297 para. 122. These rules therefore do not currently protect against a flow of subsidies from a BOC's exchange services and exchange access to its affiliate providing regulated interLATA telecommunications services, such as inregion services. We conclude that under the current affiliate transactions rules, we can satisfy section 272(b)(5)'s "arm's length" requirement by treating interLATA telecommunications services like a nonregulated activity strictly for accounting purposes. We therefore adopt our tentative conclusion that we should apply our affiliate transactions rules to transactions between each BOC and any interLATA telecommunications affiliate it establishes under section 272(a), such as an affiliate providing inregion services, and order that the BOCs treat such services like nonregulated activities for accounting purposes.  X 4177.` ` We find unpersuasive BellSouth's assertion that there is no need to apply our affiliate transactions rules to transactions between each BOC and any interLATA telecommunications affiliate it establishes under section 272(a), such as an affiliate providing inregion services. Despite BellSouth's assertion that interLATA telecommunications affiliates established under section 272 are subject to Title II of the Act and, therefore, must establish just, reasonable and nondiscriminatory rates, we believe we should apply our affiliate transactions rules, as modified in this Order, to satisfy our obligation to ensure that all transactions between BOCs and their section 272 affiliates are conducted at "arm's  X44length."J4XO yO='ԍ47 U.S.C.  272(b)(5).J Moreover, we disagree with BellSouth's contention that the administrative costs of imposing our affiliate transactions rules outweigh the corresponding benefit. To the greatest extent possible, we have relied upon our existing affiliate transactions rules to minimize the administrative burden associated with the implementation of a new system of accounting safeguards.   X4178.` ` When a BOC affiliate provides both regulated Title II services permitted under sections 271 and 272, such as interLATA telecommunications services, and nonregulated activities, such as interLATA information services, we conclude that we need not apply our cost allocation rules to prevent subsidization of nonregulated activities by subscribers to these interLATA telecommunications services. We agree with those commenters that argue that market forces leave BOC affiliates with little ability to subsidize nonregulated activities by interLATA telecommunications services. " Q0*%%ZZ"Ԍ X4  ` ` e. Application to Sharing of Services   X4179.` ` In the NPRM, we tentatively concluded that if our companion NonAccounting  X4Safeguards Order were to conclude that an affiliate may share marketing personnel with a BOC then we should apply our cost allocation and affiliate transactions rules, as we proposed  X4to modify them in our NPRM, to the BOC's Part 32 accounts to govern any joint marketing  X|4of interLATA and local exchange services.Y|O yO'ԍNPRM, 11 FCC Rcd at 9098 para. 91.Y We invited comment on whether any additional accounting safeguards may be necessary.  X7' Comments:  X 4180.` ` MCI, NYNEX, Worldcom and TRA argue that if the BOC InRegion Order concludes that an affiliate may share marketing personnel with a BOC, the Commission's cost allocation and affiliate transactions rules must apply to the joint marketing of interLATA and  X 4local exchange services. XO yO'ԍMCI Comments at 36; NYNEX Comments at 30; TRA Comments at 22; Worldcom Comments at 30; Worldcom Reply at 17. MCI contends that the BOCs' cost allocation manuals must specify how they plan to estimate the fair market value of the marketing services they provide  X4to their interLATA affiliates.DO yO'ԍMCI Comments at 36.D  Xj4181.` ` Washington maintains that the Commission should require that the affiliate employ and pay for the shared marketing personnel with the costs allocated to the BOC based  X<4on time reporting and other auditable documentation.G<@O yO-'ԍWashington Reply at 6.G USTA and several BOCs argue that the Commission need not impose any additional safeguards when a separate affiliate subject  X4to the requirements of section 272(b)(3) shares inhouse or outside services with a BOC.O yO'ԍPacTel Comments at 30; USTA Comments at 25; US West Comments at 21. See also Ameritech Comments at 25. USTA contends that although section 272 prohibits the BOCs and their affiliates from sharing employees, nothing in the language of that section prohibits a BOC and its affiliate from entering into "arm's length" transactions that allow the affiliate to purchase administrative  X4functions from the BOC.E( O yO#'ԍUSTA Comments at 25.E "R 0*%%ZZ"Ԍ X' Discussion:  X4182.` ` Our NonAccounting Safeguards Order concludes that BOCs are permitted to share inhouse services other than operating, installation, and maintenance services with their section 272 affiliates if the agreement to share inhouse services complies with the requirements of section 272, including section 272(b)(1)'s "operate independently" requirement, section 272(b)(3)'s "separate officers, directors, and employees" requirement, section 272(b)(5)'s "arm's length" requirement, and section 272(c)(1)'s nondiscrimination  XJ4requirements.xJO yO 'ԍSee NonAccounting Safeguards Order at paras. 17883.x Earlier in this Order, we determined that our affiliate transactions rules should apply to transactions between BOCs and their section 272 affiliates in order to satisfy section 272(b)(5)'s "arm's length" requirement. We conclude, therefore, that our affiliate transactions rules apply to transactions between BOCs and their section 272 affiliates for the sharing of inhouse services, including joint marketing services. Moreover, the sharing of inhouse services by a BOC and its section 272 affiliate constitutes a "transaction" within the meaning of section 272(b)(5) that must be "reduced to writing and available for public  X 4inspection."J XO yO'ԍ47 U.S.C.  272(b)(5).J  X{4183. ` ` Our NonAccounting Safeguards Order further concludes that section 272(b)(3) does not preclude an affiliate of the BOC, such as a services affiliate, or the parent company of both the BOC and its section 272 affiliate from performing functions for both the BOC and its section 272 affiliate. Our affiliate transactions rules apply to transactions between the BOC and a nonregulated affiliate of the BOC, such as a services affiliate, and to transactions  X 4between the BOC and its parent company. Under the principle of "chain transactions,"Q O yO'ԍSee note 376, supra.Q our affiliate transactions rules also apply to any transactions between the section 272 affiliate and a nonregulated affiliate of the BOC, such as a services affiliate, that ultimately result in an  X4asset or service being provided to the BOC.0XxO yO'ԍNYNEX Telephone Companies' Permanent Cost Allocation Manual for the Separation of Regulated and  yO'Nonregulated Costs, Memorandum Opinion and Order, 3 FCC Rcd 5978, 5981 para. 25 (1988) ("NYNEX CAM  yO~'Order").0  X' ` ` f. Audit Requirements   Xi4184.` ` Section 272(d) requires that a company required to operate a separate subsidiary under section 272 "shall obtain and pay for a joint federal/State audit every two years conducted by an independent auditor to determine whether such company has complied";S0*%%ZZ+" with this section and the regulations promulgated under this section, and particularly whether such company has complied with the separate accounting requirements under [section  X4272(b)]."OO yOK'ԍ47 U.S.C.  272(d)(1)O  X4185.` ` In the NPRM, we tentatively concluded that the independent auditor's report required under section 272(d) should be filed with the Commission and each relevant State commission and should include a discussion of: (1) the scope of the work conducted, including a description of how the affiliate's or joint venture's books were examined and the extent of the examination; (2) the auditor's conclusion on whether the examination of the books has revealed compliance or noncompliance with the affiliate transactions rules and any nondiscrimination requirements in the Commission rules; (3) any limitations imposed on the auditor in the course of its review by the affiliate or joint venture or other circumstances that might affect the auditor's opinion; and (4) a statement by the auditor that the carrier's cost allocation methodologies conform to the Act and the Commission's rules and that the carrier  X 4has accurately applied the methodologies described in those rules.Y XO yO'ԍNPRM, 11 FCC Rcd at 9098 para. 93.Y We invited comment on this tentative conclusion. We also asked whether the independent auditor's report should address the carrier's compliance with sections 272(e)(3) and 272(e)(4).  Xd' Comments:  X64186.` ` With respect to the form and content of the audit report, TRA and TIA support the Commission's conclusion regarding the information that should be provided in the  X4independent auditor's report required by section 272(d).RO yO'ԍTIA Reply at 24; TRA Reply at 23.R In contrast, Ameritech, Kiesling, US West, and USTA contend that the independent auditor, in conformance with professional  X4standards, should determine the content and report format.xO yO'ԍAmeritech Comments at 25; Kiesling Comments at 1; US West Reply at 8; USTA Comments at 25. BellSouth and PacTel state that the Commission should not adopt its proposal to require a statement by the auditor that the  X4carrier's cost allocation methodologies conform to the Act.aO yOe 'ԍBellSouth Comments at 39; PacTel Comments at 31.a BellSouth contends that this requirement is redundant in light of the Commission's proposal that the auditor include a conclusion as to whether examination of the books has revealed compliance with the affiliate  Xg4transactions rules and any nondiscrimination requirements.JgO yO$'ԍBellSouth Comments at 39.J PacTel argues that this"gT( 0*%%ZZ" requirement exceeds what Congress intended, compelling a broader and more costly audit  X4than required by the plain language of section 272(d).GO yOb'ԍPacTel Comments at 31.G  X4187.` ` Worldcom, Missouri PSC and CTA state that the audit report should address  X4whether the carrier has complied with sections 272(e)(3) and 272(e)(4).yXO yO'ԍCTA Comments at 16; Missouri PSC Comments at 5; Worldcom Comments at 30.y Worldcom further argues that the independent audit required by section 272(d) should include a detailed  Xv4examination of the BOCs' methods of access imputation.IvO yO 'ԍWorldcom Comments at 16.I TRA recommends that the Commission require the audit to include a "positive opinion" concerning the carrier's obligation to charge its affiliate or impute to itself an amount for access no less than that charged to an unaffiliated carrier, the carrier's obligation to provide facilities and services to affiliates at the same rates and on the same terms as all other carriers, and the carrier's  X 4obligation to allocate all costs in accordance with Commission rules.D xO yO,'ԍTRA Comments at 24.D  X 4188.` ` The commenters also addressed other aspects of the joint federal/State audit required under section 272(d). Regarding the timing of the audit, MCI, AT&T and NARUC maintain that the Commission should not wait two years to initiate the first audit of BOC  X4compliance with section 272.O yOI'ԍMCI Comments at 37; AT&T Comments at 17; NARUC Comments at 15 (Resolution). See also CTA Comments at 17. NARUC states that an audit should be performed and submitted for the first full year of operations after the new subsidiary begins to provide  Xb4services.Fb` O yOs'ԍNARUC Comments at 15.F AT&T and CTA contend that the Commission should time the first audit so that one additional audit can be performed before section 272's provisions sunset under section  X44272(g).V4 O yO'ԍCTA Comments at 17; AT&T Reply at 12.V AT&T and MCI further argue that the Commission should require an annual  X4audit.V O yON!'ԍAT&T Comments at 17; MCI Reply at 15.V They maintain that while section 272(d) requires an audit every two years, nothing precludes the Commission from exercising its general authority with regard to accounting  X4matters to require annual audits.:O yO$'ԍId.: Several BOCs argue that the most logical reading of"U0*%%ZZ" section 272 is that the first audit should not occur until two years after a BOC's section 272  X4affiliate commences operation.uO yOb'ԍSee, e.g., Ameritech Reply at 2021; US West Reply at 8.u They contend that a Commission requirement of an annual  X4audit would directly conflict with the congressional mandate in section 272.XO yO'ԍSee, e.g., Ameritech Reply at 17; SBC Reply at 21; US West Reply at 7.  X4189.` ` With respect to coverage of the audit, MCI and NARUC maintain that audits should be required of all affiliates whose activities involve or whose revenues are derived  Xv4from the services specified in section 272, including resale.WvO yO 'ԍMCI Reply at 15; NARUC Comments at 16.W MCI and NARUC recommend that one audit be submitted for each of the three services required by section 272 and that  XH4each audit cover the last two years of operations.ZHxO yOq'ԍMCI Reply at 16; NARUC Comments at 1618.Z  X 4190.` ` Regarding access to audit workpapers, O yO'ԍAudit workpapers consist of schedules, statistics, and additional information that provide support for an auditor's findings. PacTel and US West urge the Commission to state that workpapers, including material obtained from the examined entities, will receive confidential treatment consistent with section 220(f) and the Commission's policy  X 4for Part 64 audits._ ` O yO'ԍPacTel Comments at 31; US West Comments at 27._ Ameritech and USTA, however, contend that section 272(d)'s requirements on access to documents, as well as scope and distribution, are clearly articulated  X 4and require no further specification by the Commission._ O yOH'ԍAmeritech Comments at 25; USTA Comments at 25._ MCI and NARUC maintain that access should be given to all working papers with no restriction or time limit placed upon  Xy4access to data from prior years.Wy O yO'ԍMCI Reply at 16; NARUC Comments at 14.W NARUC indicates that any State commission having access to the audit workpapers should have provisions in place to ensure the protection of proprietary  XK4information as required by section 272(d)(3)(C).FKO yO !'ԍNARUC Comments at 56F NYDPS contends that federal and State regulators should have access to the auditor's workplan and correspondence with the BOC and should be able to attend meetings between the auditor and the BOC where audit"V0*%%ZZ "  X4procedures and findings are discussed.FO yOy'ԍNYDPS Comments at 10.F APCC disagrees that access to auditors' workpapers should be limited only to State utility commissions, the Commission, and any joint audit team formed. APCC argues that access should be provided to any interested party so that such  X4parties can challenge the audit results.hXO yO'ԍAPCC Reply at 8. See also TIA Reply at 25.h  X4191.` ` To facilitate the biennial audit, AT&T states that the Commission should require all BOC affiliates to make available to the public on a quarterly basis financial  X_4reports, an income statement, a balance sheet, and a statement of cash flows.E_O yO 'ԍAT&T Comments at 18.E  X14192.` ` Regarding the relation of the biennial audit to the cost allocation manual audit under Part 64, MCI, NYNEX and TIA state that the Commission should clarify that the audit specified in section 272(d) supplements the annual audit required by section 64.904 of the  X 4Commission's rules. xO yO'ԍSee MCI Comments at 37; NYNEX Comments at 30; TIA Reply at 24. See also 47 C.F.R. 64.904. To the extent that these audits overlap, PacTel contends that the Commission should permit the audit required by section 272(d) to meet the requirement of the  X 4section 64.904 annual audit.G O yOw'ԍPacTel Comments at 31.G Ameritech, BellSouth and US West argue that the Commission should conduct the section 64.904 audit in alternate years from the audit required  X4by section 272(d).|O yO'ԍAmeritech Comments at 25; BellSouth Comments at 39; US West Comments at 27.| Ameritech further maintains that each audit should cover only the most  Xy4recent fiscal period.Jy( O yOR'ԍAmeritech Comments at 25.J  XK4193.` ` A number of parties offered recommendations in their comments, replies, and  X44ex parte presentations regarding the audit process and the manner in which the Commission,  X4States and the particular BOC should participate in the audit process. O yO 'ԍSee Florida PSC Comments at 34; Missouri PSC Comments at 4; NARUC Comments at 56; NYDPS Comments at 10; Wisconsin PSC Comments at 13; NYNEX Reply at 20; Ohio Reply at 4. NYDPS recommends that the BOC, the Commission and the State affected by the audit should jointly select the"W0*%%ZZ"  X4auditor.FO yOy'ԍNYDPS Comments at 10.F NYNEX states that each carrier subject to a section 272 audit should have the  X4opportunity to participate in the formulation of the audit to ensure its fairness.CXO yO'ԍNYNEX Reply at 20.C  X4194.` ` In its comments, NARUC proposed that the Commission adopt specific audit  X4guidelines for the federal/State joint participation in the audit process.`O yO= 'ԍNARUC Comments at 56 and Appendices A, B, C. ` These guidelines would require that a separate federal/State joint audit team be established to oversee the audit process as it relates to compliance with section 272. The NARUC guidelines would establish procedures for selecting the independent auditor through a competitive bidding process using Requests for Proposals ("RFP"). The RFP would address audit purpose and scope, auditor selection criteria, project controls, audit report content, and protection of proprietary data. The federal/State joint audit team would develop a set of standards or objectives that every audit must meet. These standards or objectives also would be incorporated into the RFP.  X 4195.` ` The NARUC guidelines would require that a staff member of the federal/State joint audit team follow the progress of the audit and determine whether deadlines and objectives are being met. Upon completion of the audit, the NARUC guidelines would require that the federal/State joint audit team verify that the audit program objectives have been met and determine whether it is necessary for the independent auditor to perform additional audit work.  X44196.` ` Several State public service commissions recommended that the Commission  X4adopt the proposals advanced by NARUC.xO yOF'ԍSee Florida PSC Comments at 34; Missouri PSC Comments at 4; Wisconsin PSC Comments at 13; Ohio Reply at 4. USTA and several BOCs, however, argue that the NARUC proposals far exceed the statutory requirements of the Act, and that the  X4Commission should therefore reject them.rO yOp'ԍAmeritech Reply at 21; Bell Atlantic Reply at 7; USTA Reply at 8.r US West specifically objects to NARUC's proposal to require incumbent local exchange carriers to use an RFP process to select an independent auditor. US West claims that the premise behind NARUC's RFP proposal is apparently that an independent auditor can only be "independent" if selected through a competitive bidding process. US West disagrees, stating that independence is one of the  X|4central tenets of the public accounting profession.D|` O yO$'ԍUS West Reply at 9.D US West also opposes NARUC's"|X 0*%%ZZ" proposal to permit the federal/State audit team to participate in developing the audit program  X4and in determining the scope of the audit.:O yOb'ԍId.: US West argues that this proposal could unnecessarily interfere with the independent auditor's professional responsibility under  X4General Accepted Auditing Standards.xXO yO'ԍId. See also Ameritech Reply at 22; SBC Reply at 20.x  X' Discussion:  X_4197.` ` We conclude that some of the recommendations in the NARUC comments should be adopted. The purpose of the required audits is to determine whether the BOCs and their separate subsidiaries are complying with the accounting and structural safeguards required by section 272 and to report the audit results to the Commission and the state regulatory agencies. To obtain a fair assessment of BOC compliance, we must ensure adequate oversight. From our experience with the cost allocation manual audits under Part 64, we have learned that Commission guidance of the audit process is crucial to assuring that the accounting and structural safeguards are in place and functioning properly. Because of the critical nature of accounting safeguards in promoting competition in the telecommunication marketplace and the critical role the biennial audit will play in ensuring that the safeguards are working, it is essential that we establish effective biennial audit rules at the outset. We conclude that the Commission and the States need to oversee the scope, terms and conditions of the biennial audit. Without such oversight, it would be uncertain whether the audits will achieve their primary objective of ensuring that the carriers have, in fact, complied with section 272 of the Act and our rules.  X4198.` ` We therefore adopt the NARUC recommendations with certain modifications. Under the rules we now adopt, we delegate authority to the Chief, Common Carrier Bureau to form a federal/State joint audit team with the States having jurisdiction over a BOC's local exchange service. This joint audit team will review the conduct of the audit and direct the independent auditor to take such action as the team finds necessary to ensure compliance with the audit requirements. The new rules require that the structural and transactional requirements and the nondiscrimination safeguards set forth in sections 272(b) 272(c) and 272(e) be subject to audits. The rules, however, do not require the BOCs to choose the independent auditor through a competitive bidding process using a request for proposals as NARUC recommends. The rules preclude the BOCs from hiring independent auditors who have participated during the two years preceding the biennial audit in designing any of the systems under review in the audit. As with the cost allocation manual audits, we conclude"Y0*%%ZZ" that the independent auditor who designs a system should not be the one to certify that it is  X4operating properly.eO yOb'ԍJoint Cost Order, 2 FCC Rcd at 1333 para. 273.e  X4199.` ` The rules set an orderly schedule for conducting the audit and for submitting the audit report to the Commission and the States as well as to interested parties for comment. The rules call for participation and agreement by the BOC and by the federal/State  Xv4joint audit team in defining the scope and purpose of the audit prior to its commencement. vXO yO 'ԍThe joint audit team may, for example, conclude that there is a need for more compliance testing or substantive testing than the auditor planned to perform. Compliance testing gives evidence that the company is actually adhering to its internal controls. Substantive testing directly tests account balances shown on the financial statements or the transactions that produce them. The rules also allow the federal/State joint audit team to review and, if necessary, direct  XH4modifications to the design of the independent auditor's audit program.xH@O yO9'ԍIn planning an audit, the auditor should consider the nature, extent and timing of the work to be performed and should prepare a written audit program (or a set of written audit programs). That program should set forth in reasonable detail the audit procedures that the auditor believes are necessary to accomplish the objectives of the audit. In developing the program, the auditor should be guided by the results of its planning considerations and procedures. As the audit progresses, changed conditions may make it necessary to modify the  yO!'planned audit procedures. See AICPA Professional Standards, Volume 1, U.S. Auditing Standards AU 311.05 (June 1, 1990). Allowing the federal/State joint audit team to participate in this manner at the beginning of the audit is consistent with section 272, because the audit is being conducted to satisfy the Commission and the State public service commissions that the prescribed nonstructural and accounting safeguards have been implemented and are working. Early input from federal/State joint audit team will ensure that the needs of the Commission and the States will be met.  X 4200.` ` The rules prescribe a number of deadlines that parties must meet to avoid prolonged delays in the audit's completion. The final audit report must include: (1) the findings and conclusions of the independent auditor; (2) exceptions of the federal/State joint audit team to the auditor's findings and conclusions; (3) response of the BOC to the auditor's findings and conclusions, and (4) reply of the independent auditor to both the exceptions of the federal/State joint audit team and the response of the BOC. Because the final audit report will become a single source for the audit findings and any exceptions or comments regarding them, interested parties wishing to comment on a particular audit could obtain this information without difficulty.  X4201.` ` With one exception, discussed below, we have decided to adopt our tentative conclusion regarding the form and content of the auditor's section of the report. We disagree"Z 0*%%ZZ" with the parties that contend that we should permit independent auditors to select the content  X4and format of the audit reports.O yOb'ԍSee Ameritech Comments at 25; Kiesling Comments at 1; US West Reply at 8; USTA Comments at 25. By prescribing a specific report format, we will ensure the consistency and adequacy of all such audit reports. Therefore, in our rules governing the biennial audits required by section 272(d), we will require that the independent auditor's section of the audit report include a discussion of: (1) the scope of the work conducted, with a description of how the affiliate's or joint venture's books were examined and the extent of the examination; (2) the auditor's findings and conclusions on whether examination of the books, records and operations has revealed compliance or noncompliance with section 272 and with the affiliate transactions rules and any applicable nondiscrimination requirements; and (3) a description of any limitations imposed on the auditor in the course of its review by the affiliate or joint venture or other circumstances that might affect the auditor's opinion.  X 4202. ` ` We do not require a statement by the auditor that the carrier's cost allocation methodologies conform to the Act. The carrier's conformance is already reviewed in our cost allocation manual audits under Part 64. Biennial audits review subsidiaries' transactions with the BOCs to which our affiliate transactions rules apply. Based on the reasoning presented in comments filed by CTA, Missouri PSC and Worldcom, we will require that the auditor's section of the report address whether the carrier has complied with sections 272(e)(3) and  Xb4272(e)(4).ybXO yO'ԍCTA Comments at 16; Missouri PSC Comments at 5; Worldcom Comments at 30.y These sections contain provisions that are intended to deter crosssubsidization by the BOCs and, thus, we must know whether the BOCs are complying with them. It is not necessary, however, to adopt TRA's recommendation and require a separate "positive opinion" concerning carrier compliance with sections 272(e)(3) and 272(e)(4) because we are including these requirements as part of the biennial audit.  X4203.` ` We agree with MCI, AT&T and NARUC that we should not wait two years to require the first audit of BOC compliance with section 272 and we adopt NARUC's  X4suggestion to require the audit to begin at the close of the first full year of operations.O yOZ'ԍMCI Comments at 37; AT&T Comments at 17; NARUC Comments at 15. See also CTA Comments at 17. We agree with these commenters that nothing in the Act compels us to wait two years after the subsidiary is formed and offering service to begin the audit. The next audit will begin two years later and will cover the operations of the previous two years. This schedule should assure an operational period with adequate information and data to audit. Moreover, such a schedule will allow at least one, and possibly two, audits before the sunset provision of section 272(f) is considered. We will also require that each BOC obtain one audit that covers all affiliates engaged in services specified in section 272(a)(2), including resale, rather than requiring individual audits for each of these services. We believe that one audit of such"[W0*%%ZZ" affiliates should provide the same degree of assurance as could be derived from audits of individual services and has the advantage of providing a comprehensive overview. We do not order an annual audit under our general accounting powers as suggested by AT&T and CTA, because there is no indication that the twoyear requirement in the Act will not be sufficient.  X4204.` ` Workpapers related to the biennial audits, including material obtained from the examined entities, will receive confidential treatment consistent with section 220(f) and the  X_4Commission's policy for Part 64 audits.__O yO'ԍPacTel Comments at 31; US West Comments at 27._ We believe that the requirements in section 272(d)(3) regarding access by the Commission and State commissions to audit workpapers and documents, are clearly articulated and require no further specification by the Commission at this time. As suggested by MCI and NARUC, we interpret these provisions to require access by the Commission and States to all working papers with no restriction or time limit  X 4placed upon access to prior years' papers.sX XO yO'ԍMCI Reply at 16; NARUC Comments at 14. Section 272(d)(3) requires that the auditor's workpapers and supporting materials be made available to the Commission and relevant States. In contrast, section 272(d)(2) addresses only the final audit results, requiring that these results be made available for public inspection. s Any State commission having access to the audit workpapers should have provisions in place to ensure the protection of proprietary  X 4information as required by section 272(d)(3)(C).G xO yO'ԍNARUC Comments at 56.G Without such provisions in place, a State commission could neither be represented on the federal/State joint audit team nor participate in the biennial audit. Section 272(d)(3) limits access to audit workpapers and documents under section to representatives of the Commission and of the State public utility  Xb4commissions.AbO yO'ԍSection 272(d)(3)(a) allows the independent auditor access to "the financial accounts and records of each company and of its affiliates necessary to verify transactions conducted with that company that are relevant to the specific activities permitted under [section 272] and that are necessary for the regulation of rates." 47 U.S.C.  272(d)(3)(a). It is from such financial accounts and records that the independent auditor develops audit workpapers and other supporting materials necessary for completion of the audit. A We will not extend this access to other parties as suggested by APCC.hb O yO'ԍAPCC Reply at 8. See also TIA Reply at 25.h This is clearly beyond the scope of section 272(d). We have already addressed NYDPS's contention that federal and State regulators should have access to the auditor's workplan and correspondence with the BOC and should be able to attend meetings between the auditor and  X4the BOC where audit procedures and findings are discussed.FH O yO"'ԍNYDPS Comments at 10.F "\0*%%ZZ]"Ԍ X4205.` ` We agree with the commenters that suggest that, to the extent the biennial audit and the cost allocation manual audit under Part 64 overlap, we should permit the biennial audit to meet the requirement of the section 64.904 annual audit. This requirement will meet our needs and reduce audit costs for the companies. For a biennial audit to satisfy any part of a cost allocation manual audit, we will require a statement by the auditor that the carrier's cost allocation methodologies conform to the Act. We also note that, unlike the biennial audits, the cost allocation manual audits under Part 64 do not involve State participation. Thus, by relying on the biennial audit, we will allow State participation in the overlapping areas of the audits. In their cost allocation manual audit workpapers, the independent auditors should include copies of the audit work performed under the biennial audit.  X ' 2. Section 273 Manufacturing by Certifying Entities  X 4  X '` ` a. Statutory Language   X 4206.` ` Section 273(d) requires entities that certify telecommunications or customer premises equipment to maintain separate affiliates in order to engage in certain types of  Xy4manufacturing activities.GyO yO'ԍ47 U.S.C.  273(d).G Under section 273(d)(3), when such an entity certifies telecommunications equipment or customer premises equipment manufactured by an unaffiliated entity, the certifying entity "shall only manufacture a particular class of telecommunications equipment or customer premises equipment for which it is undertaking or has undertaken, during the previous eighteen months, certification activity . . . through a  X4separate affiliate."JXO yO'ԍId.  273(d)(3).J "[N]otwithstanding [section 273(d)(3)]," section 273(d)(1)(B) prohibits "Bell Communications Research, Inc., or any successor entity or affiliate" from "engag[ing] in manufacturing telecommunications equipment or customer premises equipment as long as it is an affiliate of more than 1 otherwise unaffiliated [BOC] or successor or assign of any such  X4company."MO yOZ'ԍId.  273(d)(1)(B).M  X|4207.` ` Section 273(d)(3)(B) requires the separate affiliate to "maintain books, records, and accounts separate from those of the entity that certifies such equipment, consistent with  XN4generally acceptable accounting principles[,]"PNO yO!'ԍId.  273(d)(3)(B)(i).P and to "have segregated facilities and separate  X74employees" from the certifying entity.R7O yO$'ԍId.  273(d)(3)(B)(iii).R Section 273(g) permits "[t]he Commission [to] prescribe such additional rules and regulations as the Commission determines necessary to" ]0*%%ZZ"" carry out the provisions of this section, and otherwise to prevent discrimination and cross X4subsidization in a [BOC's] dealings with its affiliates and with third parties."GO yOb'ԍId.  273(g).G  X'` ` b. Comparison of Sections 273 and 272   X4208.` ` Both sections 272 and 273 require the use of a separate affiliate to engage in  Xv4different specified activities. In the NPRM, we asked whether section 273's different statutory language requires or permits different accounting treatment for standardsetting organizations and their manufacturing affiliates from that required or permitted for BOCs  X34under section 272.\3XO yO< 'ԍNPRM, 11 FCC Rcd at 910001 para. 97.\ We also asked whether we should apply our affiliate transactions rules, as we proposed to modify them, to transactions between all certifying entities, whether regulated carriers or not, and the affiliates they must maintain under section 273(d).  X 4209.` ` In the NPRM, we tentatively concluded that application of our affiliate transactions rules, as we proposed to modify them, would be sufficient to satisfy section 273(g)'s requirement that the Commission "prescribe such additional rules and regulations as the Commission determines necessary . . . to prevent subsidization in a [BOC's] dealings with  X}4its affiliates and with third parties."L }O yO'ԍId. at 9101 para. 98.L We invited comment on this tentative conclusion.  XO' Comments:  X!4210.` ` Several local exchange carriers argue that the affiliate transactions rules should not be modified to govern transactions between a certifying entity and its affiliate if that  X4certifying entity is not also a regulated carrier. xO {O'ԍAmeritech Comments at 2526; Bell Atlantic Comments at 14. See also USTA Comments at 26. In particular, these local exchange carriers argue that it is not within the Commission's authority under the Act to impose regulations on  X4nonregulated affiliates.:  O yO'ԍId.: Ameritech contends that the provisions of section 273(d)(3)(B) that require compliance with GAAP are sufficient and affiliate transactions rules need not be  X4applied to certifying entities and their manufacturing affiliates.J O yO"'ԍAmeritech Comments at 26.J Ameritech and USTA"^* 0*%%ZZ" contend that to the extent our affiliate transactions rules are considered necessary, these rules  X4satisfy the requirements of section 273(g).P O yOb'ԍId.; USTA Comments at 26.P  X4211.` ` TIA argues that the Commission's affiliate transactions rules must be applied, in particular, to transactions between Bellcore and any manufacturing affiliate that it may create in order to prevent crosssubsidization because Bellcore is currently owned by the seven regional BOCs and may remain affiliated with regulated carriers even after it is  X_4permitted to manufacture pursuant to section 273.A_XO yOh 'ԍTIA Reply at 27.A On the other hand, Bellcore argues that  XH4its accounting system already provides the protection required by section 273.HHO yO 'ԍBellcore Comments at 3.H  X ' Discussion:  X 4212.` ` We conclude that our affiliate transactions rules, as modified here, satisfy section 273(g)'s requirement that we "prescribe such additional rules and regulations as [we] determine are necessary to . . . prevent . . . crosssubsidization in a [BOC's] dealings with its affiliate." Elsewhere in this Order, we concluded that BOCs are subject to the modified affiliate transactions rules in their dealings with their affiliates engaged in activities permitted under section 272(a), including manufacturing affiliates, in order to assure compliance with  Xb4the "arm's length" requirement of section 272(b)(5).hbxO yO'ԍSee discussion in section IV.B.1.b., supra.h Accordingly, BOCs that perform certification activities are already subject to the affiliate transactions rules in dealings with their manufacturing affiliates under section 272(b)(5) and current conditions do not warrant additional rules to satisfy section 273(g). In addition, under the principle of "chaining," as  X4long as a certifying entity, such as Bellcore,xO yO'ԍSince its creation on January 1, 1984, under the Plan of Reorganization as part of the divestiture of AT&T, Bellcore has been owned and controlled jointly by the regional holding companies of the BOCs. The regional holding companies, however, have recently announced their agreement to sell Bellcore to Science  yO'Applications International Corporation, a large defense contractor. Bellcore Owners Sell Business to Defense  yO'Contractor, #c PE37P#C#c PE37P#OMMUNICATIONS #c PE37P#D#c PE37P#AILY, Nov. 22, 1996, at 1. If and when such sale occurs, Bellcore will no longer be affiliated with a regulated BOC and, accordingly, will no longer be subject to the affiliate transactions rules discussed in this section of the Order. remains affiliated with a regulated BOC, our affiliate transactions rules apply to any transactions between that certifying entity and its"_H 0*%%ZZ]" section 273 separated, nonregulated manufacturing affiliate that ultimately result in an asset or  X4service being provided to the BOC.sO yOb'ԍSee NYNEX CAM Order, 3 FCC Rcd at 5981 para. 25.s  X' 3. Section 274 Electronic Publishing   X'` ` a. Statutory Language  Xv4  X_4213.` ` Section 274 prescribes the terms under which a BOC may offer electronic  XH4publishing. In the NPRM, we noted that section 274(a) permits a BOC or its affiliate to provide electronic publishing over its own or its affiliate's basic telephone service only  X 4through a "separated affiliate" or an "electronic publishing joint venture." XO yO% 'ԍNPRM, 11 FCC Rcd at 9102 para. 101. See also 47 U.S.C.  274(a). "Joint venture" is not defined in section 274 or in other sections of the Act. Black's Law Dictionary defines "joint venture" as "a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit" or "a onetime grouping of two or more persons in a business undertaking." Unlike a partnership, a joint venture does  yOE'not require a continuing relationship among the parties. BLACK'S LAW DICTIONARY 584 (abridged 6th ed. 1991). Section 274(i)(9) defines "separated affiliate" as "a corporation under common ownership or control with a Bell operating company that does not own or control a Bell operating company and is not owned or controlled by a Bell operating company and that engages in the provision of electronic publishing which is disseminated by means of such Bell operating company's or any of its  X 4affiliate's basic telephone service."P O yOb'ԍ47 U.S.C.  274(i)(9).P Section 274(i)(8), in turn defines "own" as having "a direct or indirect equity interest (or the equivalent thereof) of more than 10 percent of an entity, or the right to more than 10 percent of the gross revenues of an entity under a revenue  Xd4sharing or royalty agreement."JdO yO'ԍId.  274(i)(8).J Section 274(i)(4) states that "'control' has the meaning that it has in 17 C.F.R. 240.12b2, the regulations promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) or any  X4successor provision to such section."J( O yO'ԍId.  274(i)(4).J Section 274(i)(5) defines an "electronic publishing joint venture" as "a joint venture owned by a Bell operating company or affiliate that engages in the provision of electronic publishing which is disseminated by means of such Bell  X4operating company's or any of its affiliates' basic telephone service."J O yOC#'ԍId.  274(i)(5).J "`H 0*%%ZZ1"Ԍ X'` ` b. Comparison of Sections 274 and 272   X4214.` ` In the NPRM, we noted that the language of section 274's structural and transactional requirements differs from that of the structural and transactional requirements of  X4section 272.]O yO'ԍNPRM, 11 FCC Rcd at 910405 para. 105.] We invited comment on whether the distinction between a "separated" affiliate under section 274 and a "separate" affiliate under section 272 requires or permits different accounting treatment for affiliate transactions. Specifically, we sought comment on whether we should apply our affiliate transactions rules, as we proposed to modify them, to transactions between a BOC and its "separated" electronic publishing affiliate or joint venture. We sought comment on whether application of these rules would provide adequate accounting safeguards for the joint activities permitted under section 274(c)(2). We also invited comment on whether, because section 274 allows a BOC to provide electronic publishing through either a "separated" affiliate or a joint venture, we should distinguish for Title II accounting purposes between transactions involving a BOC and its "separated" affiliate and those involving a BOC and its electronic publishing joint venture.  X' Comments:  Xd4215.` ` NAA and several BOCs contend that the differences in language between sections 274 and 272 do not require the Commission to impose different accounting treatments for those affiliate transactions governed by section 274 and those governed by  X4section 272.XO yO('ԍSee, e.g., Ameritech Comments at 26; NAA Comments at 2; PacTel Comments at 32; SBC Comments at 48; US West Comments at 16 & 20. They also argue that the Commission's affiliate transactions rules provide  X4adequate accounting safeguards for the joint activities permitted under section 274(c)(2).O yOi'ԍSee, e.g., Ameritech Comments at 26; BellSouth Comments at 41; NAA Comments at 2; NYNEX  yO1'Comments at 30; US West Comments at 22. See also USTA Comments at 26. In contrast, YPPA argues that, by placing electronic publishing in a separate section of the Act, Congress intended the Commission to implement different accounting requirements for  X4sections 272 and 274.DO yO|'ԍYPPA Comments at 2.D YPPA does not, however, suggest how the requirements should differ. In addition, USTA and several BOCs argue that the Commission need not distinguish for Title II accounting purposes between transactions involving a BOC and its "separated"  X~4affiliate and those involving a BOC and its electronic publishing joint venture. ~O yO#'ԍSee, e.g., Ameritech Comments at 26; Bell South Comments at 41; NYNEX Comments at 30; USTA Comments at 26; US West Comments at 22."~a 0*%%ZZ"Ԍ X4ԙ216.` ` SBC notes that the Commission's existing affiliate transactions rules would not apply to transactions between a BOC and certain "separated" affiliates and joint ventures when the BOC has insufficient ownership interest in the "separated" affiliate or joint venture for those entities to qualify as BOC affiliates under section 32.9000 of the Commission's  X4rules. DO yO'ԍSBC Comments at 48.D  Xv4217.` ` BellSouth maintains that section 274's requirement of a "separated" affiliate for the provision of interLATA information services facially violates BOCs' First Amendment  XH4right of freedom of speech and constitutes an unconstitutional Bill of Attainder.JHXO yOQ 'ԍBellSouth Comments at 40.J  X ' Discussion:  X 4218.` ` We conclude above that our affiliate transactions rules must be applied to transactions between BOCs and their section 272 affiliates in order to satisfy section  X 4272(b)(5)'s "arm's length" requirement.h O yOW'ԍSee discussion in section IV.B.1.b., supra.h The language of section 274's structural and transactional requirements differs from that of the structural and transactional requirements of section 272. Section 274 does not specifically use the phrase "arm's length" to describe the required nature of transactions between BOCs and their section 274 "separated" electronic publishing affiliates or joint ventures. Section 274(b), however, requires that "separated" electronic publishing affiliates or joint ventures "be operated independently from the  X44[BOC],"G 4xO yO]'ԍ47 U.S.C.  274(b).G and section 274(b)(3)(A) requires that transactions between a "separated" electronic publishing affiliate or joint venture and its affiliated BOC be carried out "in a  X4manner consistent with such independence."M!O yO'ԍId.  274(b)(3)(A).M Moreover, section 254(k) prohibits incumbent local exchange carriers, including the BOCs, from using noncompetitive exchange service  X4and exchange access to subsidize competitive services, such as electronic publishing.G"O yO! 'ԍId.  254(k).G We conclude that in order to satisfy sections 274(b) and 254(k), we must apply our affiliate transactions rules, as modified in this Order, to transactions between BOCs and their "separated" electronic publishing affiliates or joint ventures. Applying our affiliate transactions rules to transactions between BOCs and their "separated" electronic publishing affiliates or joint ventures will serve as a safeguard against the misallocation of costs from a"eb( "0*%%ZZ" BOC's nonregulated services, such as electronic publishing services, to regulated telecommunication services. Our affiliate transactions rules, as modified in this Order, prevent the BOCs' ratepayers from bearing the costs of competitive services provided by BOC affiliates and are, therefore, sufficient to implement section 254(k)'s requirement that carriers not "use services that are not competitive to subsidize services that are subject to  X4competition.":#O yO'ԍId.:  X_4219.` ` BellSouth has argued that requiring BOCs to provide electronic publishing  XH4services through a "separated" affiliate or joint venture violates the First Amendment.J$HXO yOQ 'ԍBellSouth Comments at 40.J As noted above, we find that this result is required by the Act. Although the courts have ultimate authority to determine the constitutionality of this and other statutes, we find it  X 4appropriate to state that we find BellSouth's argument to be without merit.W% O yO'ԍSee note 148, supra.W To the extent that BOC provision of electronic publishing services constitutes commercial speech for First Amendment purposes, the section 274 "separated" affiliate or joint venture requirement neither prohibits the BOCs from providing such services, nor places any restrictions on the  X 4content of the information the BOCs may provide.]&X xO yO'ԍLike the mustcarry rules at issue in Turner Broadcasting System, the section 272 separate affiliate requirement "on [its] face impose[s] burdens and confer[s] benefits without reference to the content of speech."  yO`'Turner Broadcasting System, 114 S. Ct. at 2460.] Instead, the section 274 "separated" affiliate or joint venture requirement is a contentneutral restriction on the manner in which BOCs may provide electronic publishing services, intended by Congress to protect against improper cost allocation and discrimination concerns. Thus, we conclude that the "separated" affiliate or joint venture requirement imposed by section 274 on BOC provision of electronic  X44publishing services does not violate the First Amendment.'4O yO}'ԍContentneutral time, place, and manner restrictions that serve a substantial government interest are  yOE'constitutionally permissible. See, e.g., City of Renton, 475 U.S. 41.  BellSouth has also argued that requiring BOCs to provide electronic publishing services through a "separated" affiliate or joint venture constitutes an unconstitutional Bill of Attainder. Although the courts have ultimate authority to determine the constitutionality of this and other statutes, we find it  X4appropriate to state that we find BellSouth's argument to be without merit.Q( O yOy"'ԍSee note 148, supra.Q We agree with"c (0*%%ZZ:" NAA that section 274 does not single out the BOCs for punishment, but merely imposes  X4temporary, narrowlyfocused, economic regulations.J)O yOb'ԍSee NAA Reply at 2.J  X' ` ` c. Compliance Review   X4220.` ` Section 274(b)(8) requires that a BOC and its electronic publishing "separated" affiliate or joint venture each perform an annual compliance review conducted by "an  X_4independent entity" to determine compliance with section 274.P*_XO yOh 'ԍ47 U.S.C.  274(b)(8).P In the NPRM, we sought comment on how such compliance reviews should be conducted and specifically what matters  X34the reviews should encompass.Z+3O yO 'ԍNPRM, 11 FCC Rcd at 9105 para. 106.Z We proposed to require the independent entity to prepare and file with the Commission reports describing: 1) the scope of its compliance review, including a description of how the affiliate's or joint venture's books were examined and the extent of the examination; (2) the independent entity's conclusion on whether examination of the books has revealed compliance or noncompliance with the affiliate transactions rules and any other nondiscrimination requirements imposed by Commission rules; (3) a description of any limitations imposed on the independent entity in the course of its review by the affiliate or joint venture or other circumstances that might affect the entity's opinion; and (4) statements by the independent entity as to whether the carrier's accounting and affiliate transactions methodologies conform to the Act and the Commission's rules and whether the carrier has accurately applied the methodologies. We sought comment on the necessity or desirability of this approach. We also sought comment on what safeguards we may need to adopt to protect proprietary information contained in the compliance review report "from  X4being used for purposes other than to enforce or pursue remedies under [section 274]."},xO yO1'ԍId. at 9106 para. 107. See also 47 U.S.C.  274(b)(9).}  X' Comments:  X4221.` ` NAA is the only commenter to support the Commission's proposal related to  X4the method for conducting, and the scope of, annual compliance reviews.C-O yON!'ԍNAA Comments at 3.C Ameritech and PacTel contend that section 274(b)(8) clearly establishes the requirements of the annual compliance review and therefore argue that the Commission should not specify any"gd-0*%%ZZ"  X4procedures for conducting the annual compliance reviews.d.O yOy'ԍAmeritech Comments at 27; PacTel Comments at 3233.d USTA proposes that the annual compliance reviews be conducted in accordance with standards set forth by the American  X4Institute of Certified Public Accountants./XO yO'ԍUSTA Comments at 27. See also Bell Atlantic Comments at 10. YPPA argues that the independent compliance review required by section 274(b)(8) should consist only of an examination of the written records of transactions between a BOC and its electronic publishing "separated" affiliate or joint venture and should include a report detailing the scope and conclusion of the examination and any limitations placed on the examiner. Wisconsin PSC recommends the use of NARUC's resolution discussed in section IV.B.1.f. above as a "starting point for discussions between the states and the FCC concerning [compliance reviews under section  X14274]."N01O yO 'ԍWisconsin PSC Comments at 14.N  X 4222.` ` PacTel recommends that to the extent overlap exists, the Commission should allow the annual compliance review under section 274 to satisfy the requirement of an annual  X 4cost allocation manual audit.G1 xO yO'ԍPacTel Comments at 33.G US West recommends that the Commission require the annual cost allocation manual audit to be conducted biennially to streamline current  X 4regulations and reduce redundancy.H2 O yO`'ԍUS West Comments at 27.H  Xy4223.` ` YPPA notes that the timing of the annual compliance review may vary, depending on whether the affiliate provided electronic publishing services at the time of the enactment of the 1996 Act. YPPA argues that the first audit for grandfathered services should be conducted by February 8, 1998 because affiliates need not comply with the requirements of section 274 until February 8, 1997. For nongrandfathered services, YPPA contends that the first audit should be conducted one year after the affiliate starts to engage in  X4electronic publishing activities.D3O yO8'ԍYPPA Comments at 4.D  X4224.` ` Most commenters that address the matter argue that the Commission's policies regarding protection of proprietary information would adequately protect proprietary"e( 30*%%ZZ"  X4information contained in the compliance review report.4O yOy'ԍSee, e.g., Ameritech Comments at 27; NAA Comments at 3; PacTel Comments at 33; USTA Comments at 27; US West Comments at 27; YPPA Comments at 3. PacTel does contend, however, that the BOCs should be allowed to exclude any competitivelysensitive information from the compliance review report because of the competitive nature of the electronic publishing  X4business.G5 O yO'ԍPacTel Comments at 33.G BellSouth recommends the Commission allow the BOCs and their electronic publishing "separated" affiliates or joint ventures to file two versions of the compliance review reporta public version with proprietary information omitted and a confidential version. BellSouth argues that the Commission should release the confidential version under a protective order only after a persuasive showing that access is necessary to enforce or  XH4pursue remedies under section 274.J6HO yO 'ԍBellSouth Comments at 42.J  X ' Discussion:  X 4225.` ` We decline to adopt the proposal presented in the NPRM related to the method for conducting, and the scope of, annual compliance reviews. We note that the language of section 274(b)(8) provides less stringent requirements than section 272(d)'s audit  X 4requirement.`7 @O yO'ԍSee 47 U.S.C.  272(d), 274(b)(8).` For example, section 274(b)(8) only requires a compliance review performed by an independent entity, rather than a federal/State joint audit conducted by a trained  X{4independent auditor.J8{O yO'ԍId.  274(b)(8).J Under section 274(b)(8), the party obtaining the compliance review need only file a report of exceptions and corrective action to the Commission for public  XM4inspection, making the compliance review itself available only to "lawful authorities.":9M` O yO^'ԍId.: In contrast, section 272(d) requires the BOC to file the final audit report required under that section with the Commission and with the State commission of each state in which the BOC  X4provides service, which will make such report available for public inspection and comment.G: O yO 'ԍId.  272(d).G Moreover, section 274(e) provides a right of action to any person claiming that an act or practice of the BOC, affiliate, or "separated" affiliate has violated the requirements of section"f :0*%%ZZn"  X4274.G;O yOy'ԍId.  274(e).G In view of this, we find that an oversight mechanism similar to the one we adopt in this Order for section 272(d) is not necessary to implement the provisions of section 274(b)(8) and we conclude that we need not adopt any rules regarding the compliance review beyond the plain language of section 274(b)(8)(A). Because of the differences between a compliance review under section 274 and an audit, we further conclude that a carrier may not use the electronic publishing compliance review to satisfy any portion of the annual cost allocation  Xv4manual audit required by section 64.904 of the Commission's rules.G<vXO yO 'ԍ47 C.F.R.  64.904.G  XH4226.` ` Section 274(b)(9) requires the BOC and its electronic publishing "separated" affiliate or joint venture to file a report with the Commission of any exceptions and corrective  X 4action resulting from the compliance review.J= O yO'ԍ47 U.S.C.  274(b)(9).J Section 274(b)(9) further requires the Commission to "allow any person to inspect and copy such report subject to reasonable safeguards to protect any proprietary information contained in such report from being used for  X 4purposes other than to enforce or pursue remedies under [section 274].":> xO yO'ԍId.: We find that these requirements of section 274(b)(9) are selfeffectuating and, therefore, we need not adopt any rules regarding this requirement beyond the plain language of section 274(b)(9). We will apply the same treatment to confidential information in such reports as we apply to  Xy4confidential information contained in other Commission filings.?yO yO2'ԍWe are currently examining the protection of confidential information in the Confidential Information  yO'Notice.  XK' ` ` d. Section 274(f)'s Reporting Requirement   X4227.` ` Section 274(f) requires any "separated" affiliate under section 274 to file annual reports with the Commission "in a form substantially equivalent to the Form 10K  X4required by regulations of the Securities and Exchange Commission."M@` O yO 'ԍ47 U.S.C.  274(f).M In the NPRM, we tentatively concluded that to minimize burdens on the filing companies, we should require the  X4"separated" affiliate to file the Form 10K with us as well as the SEC.ZA O yOd#'ԍNPRM, 11 FCC Rcd at 9106 para. 108.Z We recognized, however, that not all "separated" affiliates providing electronic publishing services would be"g A0*%%ZZ(" subject to the SEC's 10K requirement and sought comment on what "substantially equivalent to the Form 10K" means with regard to these "separated" affiliates.  X' Comments:  X4228.` ` BellSouth agrees that the filing requirements we proposed in the NPRM will  Xx4satisfy section 274(f).dBxO yO'ԍBellSouth Comments at 4344; BellSouth Reply at 21.d For those electronic publishing "separated" affiliates not subject to the SEC's Form 10K requirement, BellSouth recommends that the Commission adopt a standard report that solicits information relevant to the concerns outlined in section 274 and  X34not require the Form 10K itself.:C3XO yO< 'ԍId.: BellSouth argues that this report should contain a description of the entity filing the report, summary financial statements with representations of management, a list of the officers and directors of the entity, a description of any financing activity the entity undertakes, and specific transactional compliance results obtained from the  X 4annual compliance review required by section 274(b)(8).:D O yOp'ԍId.:  X 4229.` ` YPPA and NAA argue that the Commission should accept the electronic  X4publishing "separated" affiliate or joint venture's Form 10K if its stock is publicly traded.ExO {O'ԍNAA Comments at 34; YPPA Comments at 5. See also PacTel Comments at 33. YPPA contends that if the "separated" affiliate's stock is not publicly traded, the Commission  Xd4should accept the Form 10K of the "separated" affiliate's holding company.Fd O {O'ԍYPPA Comments at 5. See also US West Comments at 2324. NAA  XM4disagrees.@GMO yO'ԍNAA Reply at 3.@ NAA maintains that the language of the Act clearly requires "[a]ny separated  X64affiliate," not the holding company, to file the annual report.:H6, O yO'ԍId.: NAA argues that the Form 10K of a holding company would fail to provide the Commission and third parties with  X4essential financial and other information about the "separated" affiliate's operations.:I O yOu!'ԍId.: Instead, NAA proposes that the "separated" affiliate should file a report containing the same information as in a Form 10K, except for such information that would only be relevant to a"vhL I0*%%ZZ"  X4publiclytraded corporation.EJO yOy'ԍNAA Comments at 34.E YPPA argues that, if neither the "separated" affiliate nor the holding company are required to file a Form 10K with the SEC, then the Commission should  X4require the "separated" affiliate to complete and file a Form 10K with the Commission.DKXO yO'ԍYPPA Comments at 5.D  X' Discussion:  Xv4230.` ` To minimize burdens on the filing companies, we adopt our tentative conclusion that when an electronic publishing "separated" affiliate already files a Form 10K with the SEC, the "separated" affiliate may file the same Form 10K with the Common Carrier Bureau within 90 days after the end of the "separated" affiliate's fiscal year in satisfaction of section 274(f)'s requirements. We disagree with BellSouth that, for electronic publishing "separated" affiliates not subject to the SEC's Form 10K filing requirement, we should adopt a standard report that solicits only "that information that is relevant to the  X 4concerns outlined in section 274."JL O yOn'ԍBellSouth Comments at 44.J Such a requirement would not satisfy the explicit language of section 274, that requires that "separated" affiliates "file with the Commission  X 4annual reports in a form substantially equivalent to the form 10K required by [the SEC]."XM xO yO'ԍ47 U.S.C.  274(f) (emphasis added).X Moreover, we believe that by requiring all electronic publishing "separated" affiliates to file annual reports containing the same information in the same format, we will improve our ability to ensure compliance with the provisions of section 274. We agree with NAA that the Form 10K of a "separated" affiliate's holding company would fail to provide the Commission and third parties with adequate information about the "separated" affiliate's  X4operations to ensure compliance with section 274.FNO yO'ԍNAA Reply at 6.F Because the Form 10K of the holding company would present only consolidated information, the Commission and third parties could not identify from that form the account balances related to the activities of the electronic publishing "separated" affiliate. For each "separated" affiliate not subject to the SEC's Form 10K requirement, however, we conclude that the "separated" affiliate need not file an actual SEC Form 10K with the Commission. Instead, such affiliates must file with the Commission a report containing the same information as is required in the SEC's Form 10K. In accordance with section 274(f), the report must be organized "in a form  Xe4substantially equivalent to the Form 10K required by regulations of the [SEC]."GOeO yO$'ԍ47 U.S.C.  274(f).G "ei( O0*%%ZZ"Ԍ X'ԙ` ` e. Section 274 Transactional Requirements   X4231.` ` Section 274(b)(1) requires the "separated" affiliate or joint venture and the BOC with which it is affiliated to "maintain separate books, records, and accounts and  X4prepare separate financial statements."JPO yO'ԍId.  274(b)(1).J In the NPRM, we invited comment on the steps we  X4should take to implement this provision.ZQXO yO'ԍNPRM, 11 FCC Rcd at 9106 para. 109.Z We also asked commenters to address whether it is necessary for the Commission to adopt any additional accounting, bookkeeping,or recordkeeping requirements for these affiliates and joint ventures and, if so, what those additional requirements should be.  X 4232.` ` Section 274(b) requires the "separated" affiliate or joint venture to "be operated  X 4independently from the [BOC]."MR O yO'ԍ47 U.S.C.  274(b).M Pursuant to section 274(b)(3), the "separated" affiliate or joint venture and the BOC with which it is affiliated must "carry out transactions (A) in a manner consistent with such independence, (B) pursuant to written contracts or tariffs that are filed with the Commission and made publicly available, and (C) in a manner that is auditable  X 4in accordance with generally accepted auditing standards."JS xO yO'ԍId.  274(b)(3).J We also sought comment on the meaning of "in a manner consistent with such independence." In addition, we sought comment on whether any regulations are necessary to implement the provisions of section  Xd4274(b)(3)(A) and (B).]TdO yO'ԍNPRM, 11 FCC Rcd at 910607 para. 110.]  X64233.` ` In the NPRM, we further sought comment on whether, and if so, how we should amend our rules to implement the requirement under section 274(b)(3)(C) that  X 4transactions be "auditable in accordance with generally accepted auditing standards."U O yOS'ԍId. at 9107 para. 111. See also 47 U.S.C.  274(b)(3)(c). We noted that generally accepted auditing standards refer to standards and guidelines promulgated by the American Institute of Certified Public Accountants that an independent auditor must follow when preparing for and conducting an audit of a company's financial statements.  X4These standards require, inter alia, that the auditor review a company's internal controls and determine whether adequate documentation exists to verify that the company has recorded"j( U0*%%ZZ" transactions on its books in a manner consistent with generally accepted accounting  X4principles.VO yOb'ԍSee section IV.B.1.c., supra, for a discussion of generally accepted accounting principles.  X4234.` ` Section 274(b)(4) requires the "separated" affiliate or joint venture to "value any assets that are transferred directly or indirectly from the [BOC] to a separated affiliate or joint venture, and record any transactions by which such assets are transferred, in accordance with such regulations as may be prescribed by the Commission or a State commission to  X_4prevent improper cross subsidies."JW_XO yOh 'ԍ47 U.S.C.  274(b)(4).J We proposed elsewhere in the NPRM to conform our valuation methods under the affiliate transactions rules governing provision of services to those governing asset transfers. Regardless of the resolution of that issue in this proceeding, because section 274 specifically addresses asset transfers between a BOC and its "separated"  X 4affiliate or joint venture, we sought comment in the NPRM on whether we should distinguish between asset transfers and the provision of services in the context of electronic publishing  X 4affiliate transactions.ZX O yOr'ԍNPRM, 11 FCC Rcd at 9107 para. 112.Z  X ' Comments:  X}4235.` ` NAA and PacTel argue that section 274(b)(1)'s requirement of separate books, records, accounts, and financial statements is selfeffectuating and, therefore, the Commission  XO4need not establish any additional regulations.YOxO yOx'ԍNAA Comments at 4; PacTel Comments at 34. See also US West Comments at 22; YPPA Comments at 6. BellSouth and NYNEX contend that the Commission should direct the "separated" affiliate or joint venture to keep their books,  X!4records, and accounts in accordance with GAAP in order to satisfy section 274(b)(1).`Z!O yO'ԍBellSouth Comments at 44; NYNEX Comments at 31.` Ameritech argues that application of the SEC's Form 10K reporting regulations, discussed in section IV.B.3.d. above, would ensure that a "separated" affiliate maintains its books, records, and accounts in accordance with GAAP and would therefore obviate the need for any  X4additional rules to implement section 274(b)(1).[` O yO!'ԍAmeritech Comments at 2728 (making the same argument for section 274(b)(3)(C)).  X4236.` ` NAA argues that section 274(b)(3)(A)'s requirement that transactions be carried out "in a manner consistent with such independence" requires transactions to occur as they"k [0*%%ZZ"  X4would between unrelated parties (i.e., on an "arm's length basis").C\O yOy'ԍNAA Comments at 4.C PacTel and US West contend that the requirements of section 274(b)(3)(A) are selfeffectuating and, therefore, the  X4Commission need not establish any additional regulations.]XO yO'ԍPacTel Comments at 34; US West Comments at 23. See also BellSouth Comments at 45; YPPA Comments at 6.  X4237.` ` NAA contends that section 274(b)(3)(B)'s requirement that transactions be carried out "pursuant to written contracts or tariffs that are filed with the Commission and made publicly available" is selfeffectuating and, therefore, the Commission need not establish  Xa4any additional regulations.m^aO yO 'ԍNAA Comments at 4. See also YPPA Comments at 6.m  X34238.` ` BellSouth maintains that section 274(b)(3)(C)'s requirement that transactions be carried out "in a manner that is auditable in accordance with generally accepted auditing standards" requires that the section 274 "separated" electronic publishing affiliate or joint  X 4venture maintain its books in accordance with GAAP.J_ @O yO'ԍBellSouth Comments at 45.J PacTel and US West contend that the requirements of section 274(b)(3)(C) are selfeffectuating and, therefore, the Commission  X 4need not establish any additional regulations.` O yOA'ԍPacTel Comments at 34; US West Comments at 23. See also YPPA Comments at 6.  X4239.` ` Ameritech contends that to the extent the affiliate transactions rules apply, the Commission need not distinguish between asset transfers and services in the case of electronic  Xd4publishing.Jad` O yOu'ԍAmeritech Comments at 28.J  X6' Discussion:  X4240.` ` We agree with NAA and PacTel that section 274(b)(1)'s requirement of separate books, records, accounts, and financial statements is selfeffectuating and, therefore, we need not adopt any rules regarding this requirement beyond the plain language of section 274(b)(1). "l a0*%%ZZ"Ԍ X4241.` ` We agree with NAA that section 274(b)(3)(A)'s requirement that transactions  X4be carried out "in a manner consistent with such independence"MbO yOb'ԍ47 U.S.C.  274(b)(3)(A).M requires that transactions between a "separated" electronic publishing affiliate or joint venture and its affiliated BOC  X4occur on an arm's length basis, as the transaction would occur between unrelated parties.McXO yO'ԍSee NAA Comments at 4.M The phrase "such independence" in section 274(b)(3)(A) refers to section 274(b)'s requirement that a "separated" electronic publishing affiliate or joint venture "be operated  Xv4independently from the [BOC]."GdvO yO 'ԍ47 U.S.C.  274(b).G Consistent with this conclusion, we determined in section IV.B.3.b. above that we should apply our affiliate transactions rules, as modified in this order, to transactions between BOCs and their "separated" electronic publishing affiliates or joint  X14ventures. ` `  X 4242.` ` We are unpersuaded by NAA's argument that the language of section 274(b)(3)(B) is selfeffectuating. We find the language of section 274(b)(3)(B) to be ambiguous. Pursuant to this section, a BOC and its separated affiliate shall carry out transactions "pursuant to written contracts or tariffs that are filed with the Commission and  X 4made publicly available."Me xO yO'ԍId.  274(b)(3)(B).M From this language it is unclear whether written contracts must  X4be filed with the Commission or whether only tariffs are required to be filed with the Commission. It is also unclear whether written contracts must be made publicly available or whether only tariffs are required to be made publicly available. We therefore intend to seek further comment on the meaning of section 274(b)(3)(B) in CC Docket No. 96152.  X4243.` ` We agree with BellSouth that the section 274 "separated" electronic publishing affiliate or joint venture must maintain its books, records, and accounts in accordance with GAAP in order to satisfy section 274(b)(3)(C)'s requirement that transactions be "auditable in  X4accordance with generally accepted auditing standards."MfO yO'ԍId.  274(b)(3)(C).M A requirement of GAAP imposes a set of uniform accounting principles. Such uniformity will assist the Commission in ensuring that transactions between "separated" affiliates or joint ventures required under section 274 and their affiliated BOCs are conducted "in a manner consistent with such independence" in accordance with section 274(b)(3)(A).  XN4244.` ` For the same reasons discussed in section IV.B.1.b. above with regard to section 272, we conclude that we should conform our valuation methods governing the"7mf0*%%ZZE" provision of services between an electronic publishing "separated" affiliate or joint venture and the BOC with which it is affiliated to those governing asset transfers. We therefore will require all nontariffed affiliate transactions to be recorded at prevailing price if such price exists, and otherwise at the higher of cost and estimated fair market value when the carrier is the seller or transferor, and at the lower of cost and estimated fair market value when the carrier is the buyer or transferee. We will continue to define the applicable cost benchmarks as net book cost for asset transfers and fully distributed costs for service transfers. Although section 274(b)(4) only refers to asset transfers, we read section 274's requirement that the "separated" affiliate or joint venture and the BOC with which it is affiliated "carry out transactions . . . in a manner consistent with such independence" to prohibit the "separated" affiliate or joint venture and the BOC with which it is affiliated from subsidizing electronic publishing services from regulated telecommunications services. We designed our affiliate transactions rules to prevent such crosssubsidization. We therefore conclude that the affiliate transactions rules, as we modify them in this Order, should apply to all transactionsboth asset transfers and the provision of servicesbetween a BOC and its "separated" affiliate or joint venture engaged in electronic publishing activities permitted under section 274.  Xy'` ` f. Miscellaneous   XK4245.` ` Section 274(d) requires a BOC under common ownership or control with a electronic publishing "separated" affiliate or joint venture to "provide network access and interconnections for basic telephone service to electronic publishers at just and reasonable rates that are tariffed (so long as rates for such services are subject to regulation) and that are not higher on a perunit basis than those charges for such services to any other electronic  X4publisher or any separated affiliate engaged in electronic publishing."GgO yOQ'ԍId.  274(d).G In the NPRM, we tentatively concluded that we should apply our modified affiliate transactions rules to the provision of "network access and interconnections for basic telephone service" by a BOC under common ownership or control with an electronic publishing "separated" affiliate or joint venture to such a "separated" affiliate or joint venture to ensure compliance with the  Xg4requirements of section 274(d).ZhgXO yOp'ԍNPRM, 11 FCC Rcd at 9110 para. 118.Z We sought comment on this tentative conclusion.  X9' Comments:  X 4246.` ` BellSouth and NAA support the Commission's tentative conclusion that our affiliate transactions rules should be applied to the provision of "network access and interconnections for basic telephone service" by a BOC under common ownership or control with an electronic publishing "separated" affiliate or joint venture to such a "separated"" nh0*%%ZZH"  X4affiliate or joint venture to ensure compliance with the requirements of section 274(d).]iO yOy'ԍBellSouth Comments at 46; NAA Comments at 5.]  X4YPPA disagrees.DjXO yO'ԍYPPA Comments at 8.D YPPA maintains that the Act requires that network access and interconnection be just, reasonable, and according to a filed tariff (so long as rates for such services are subject to regulation). Therefore, YPPA asserts that section 274(d) requires that  X4the rates charged to affiliated and unaffiliated electronic publishers must be the same.:kO yO= 'ԍId.:  X'  Xv'Discussion:  XH4247.` ` We adopt our tentative conclusion that our modified affiliate transactions rules apply whenever a BOC under common ownership or control with an electronic publishing "separated" affiliate or joint venture provides network access and interconnections for basic telephone service to such "separated" affiliates or joint venture. YPPA's argument that section 274(d) requires that the rates charged to affiliated and unaffiliated electronic  X 4publishers must be the same was raised, and will be addressed, in a separate proceeding.l xO yO'ԍSee id. Telemessaging, Electronic Publishing, and Alarm Monitoring Services, CC Docket No. 96152,  yO'FCC 96310, Notice of Proposed Rulemaking at para. 67 (rel. July 18, 1996).  X ' 4. Separated Operations under Sections 260 and 271 through 276   Xy4248.` ` Even when sections 260 and 271 through 276 do not require BOCs or other incumbent local exchange carriers to offer services through a separate affiliate, an incumbent LEC might choose to perform these activities through an affiliate. At paragraph 118 of the  X44NPRM, we tentatively concluded that application of our affiliate transactions rules, as we proposed to modify them, to transactions between an incumbent local exchange carrier and any of its affiliates engaged in activities that sections 260, 275, and 276 might permit or require the carrier to offer through a separate affiliate would safeguard against the subsidies prohibited by sections 260, 275, and 276. We invited comment on this tentative conclusion.  X4249.` ` In the NPRM, we also asked commenters to identify any interLATA telecommunications services, besides the interLATA telecommunications services that section 272 requires BOCs to provide through a separate affiliate, that the BOCs might choose to provide through a separate affiliate and for which we should develop appropriate affiliate"iol0*%%ZZq"  X4transactions rules.(mO yOy'ԍNPRM, 11 FCC Rcd at 9110 para. 119. Such interLATA telecommunications services may include  yOA'"outofregion" interstate, interexchange services. See also Interexchange Notice at paras. 5662.( We tentatively concluded that we should apply our affiliate transactions rules to transactions between each BOC and any interLATA telecommunications services affiliate it establishes. We invited comment on this tentative conclusion. We also asked whether and how we should adapt our affiliate transactions rules for such transactions and whether we should adopt special valuation methodologies for these transactions that would recognize the regulated status of the affiliates on both sides of the transactions.  X_' Comments:  X14250.` ` Most parties, including interexchange carriers, BOCs, and trade associations agree with the Commission's proposal to apply affiliate transactions rules to transactions between a BOC and its separate affiliates, even if the Act does not require the activities at  X 4issue in the transactions to be conducted through a separate affiliate.n O yO'ԍSee Ameritech Comments at 28; APCC Comments at 21; AT&T Comments at 8; CTA Comments at 14; USTA Comments at 27; US West Comments at 25; Worldcom Comments at 31; AT&T Reply at 5. In particular, AT&T contends that any contrary rule would allow a BOC to transfer operations that it could offer on an integrated basis to an affiliate in order to circumvent affiliate transactions rules and  X 4engage in crosssubsidization.Do xO yO'ԍAT&T Comments at 8.D APCC argues that the "available for public inspection" requirement of section 272(b)(5) should cover all transactions between BOCs or other  Xy4incumbent local exchange carriers and these "voluntary" affiliates.EpyO yO2'ԍAPCC Comments at 24.E  XK' Discussion:  X4251.` ` We agree with the commenters that assert that our affiliate transactions rules should apply to transactions between an incumbent local exchange carrier and any of its affiliates engaged in activities of the types permitted by sections 260 and 271 through 276, regardless of whether the Act requires those activities to be conducted through a separate affiliate. As discussed in detail below, various provisions of the Act prohibit crosssubsidization through transactions between incumbent local exchange carriers and any affiliates that these incumbent local exchange carriers choose to establish in order to provide the competitive activities permitted under sections 260 and 271 through 276.  XN4252.` ` Earlier we concluded that telemessaging is an information service and that BOC provision of telemessaging on an interLATA basis is subject to the separate affiliate"7pp0*%%ZZ+"  X4requirements of section 272.mqO yOy'ԍSee discussion in section III.B.1., supra.m NonBOC incumbent local exchange carriers, however, are not required to offer telemessaging services through a separate affiliate, but rather may choose to do so subject to section 260's requirement that "[a]ny local exchange carrier subject to the requirements of section 251(c) . . . shall not subsidize its telemessaging service directly or  X4indirectly from its telephone exchange service or its exchange access."JrXO yO'ԍ47 U.S.C.  260(a)(1).J In order to protect against the subsidies prohibited by section 260, we conclude that we must apply our affiliate transactions rules to all transactions between nonBOC incumbent local exchange carriers and their affiliates engaged in telemessaging activities.  X14253.` ` Although section 272(a)(2)(B) does not require BOCs to provide certain types of incidental interLATA services, defined in section 271(g), through an affiliate, a BOC could still choose to provide these services through an affiliate subject to section 271(h)'s requirement that provision of these services by a BOC "will not adversely affect telephone  X 4exchange service ratepayers or competition in any telecommunications market."Gs O yOn'ԍId.  271(h).G In order to protect against the subsidies prohibited by section 271(h), we conclude that we must also apply our affiliate transactions rules to all transactions between BOCs and their affiliates providing incidental interLATA services.  Xb4254.` ` NonBOC incumbent local exchange carriers, although not required to do so, may choose to offer alarm monitoring services through a separate affiliate subject to section 275's requirement that an incumbent local exchange carrier "not subsidize its alarm monitoring services either directly or indirectly from telephone exchange service  X4operations."GtxO yO/'ԍId.  275(b).G In order to protect against the crosssubsidies prohibited by section 275, we conclude that we must apply our affiliate transactions rules to all transactions between nonBOC incumbent local exchange carriers and their affiliates engaged in alarm monitoring activities.  X4255.` ` Incumbent local exchange carriers, including BOCs, although not required to  X|4do so, may choose to offer payphone service through a separate affiliate.Wu|O yO5"'ԍSee id.  276(a).W Our Pay  Xg4Telephone Reclassification Order reclassified payphone service as a nonregulated activity and  XR4required that the nonstructural safeguards described in our Computer III Orders, which include our affiliate transactions rules, be applied to the provision of payphone services by local";qu0*%%ZZE"  X4exchange carriers.ivO yOy'ԍPay Telephone Reclassification Order at para. 157.i As a result, our existing affiliate transactions rules apply to transactions between incumbent local exchange carriers and their affiliates engaged in payphone service.  X4256.` ` Although section 272(a)(2)(B) does not require BOCs to provide outofregion interLATA telecommunications services through an affiliate, a BOC could still choose to do so. Moreover, nonBOC incumbent local exchange carriers, although not required to do so, may choose to provide interLATA telecommunications services of the types described in section 271 through an affiliate. Sections 271 and 272, however, contain no language prohibiting crosssubsidization in the case of activities voluntarily provided through affiliates. Although sections 271 and 272 contain no language prohibiting crosssubsidization, Section 254(k) mandates that "[a] telecommunications carrier may not use services that are not  X 4competitive to subsidize services that are subject to competition."Mw XO yO 'ԍ47 U.S.C.  254(k).M The language of section 254(k) is broad in scope, prohibiting crosssubsidization in all transactions between an incumbent local exchange carrier and any affiliate that provides any of the competitive services permitted under sections 260 and 271 through 276. Accordingly, in order to protect against the subsidies prohibited by section 254(k), we conclude we must apply our affiliate transactions rules to all transactions between incumbent local exchange carriers and their affiliates providing any of the competitive services of the types permitted under sections 260 and 271 through 276.  X44257.` ` Our existing affiliate transactions rules do not protect against subsidies from an incumbent local exchange carrier's exchange services and exchange access flowing to its affiliate providing regulated telecommunications services, such as inregion services, outof X4region services, or certain types of incidental services.xO yO'ԍSee Joint Cost Reconsideration Order, 2 FCC Rcd at 6297 para. 122. đ Our affiliate transactions rules, however, are necessary to ensure that crosssubsidization of these services is prevented as required by sections 271(h) and 254(k). Earlier we concluded that interLATA telecommunications services, including inregion services, outofregion services and certain types of incidental services, should be treated by the BOCs like nonregulated activities for  X|4federal accounting purposes.yy|xO yO 'ԍSee discussions in sections III.B.2.a. and IV.B.1.d., supra.y This treatment will prevent crosssubsidization by triggering the application of our affiliate transactions rules. Accordingly we conclude that interLATA telecommunications services should be treated like nonregulated activities for federal accounting purposes whenever these services are provided by any incumbent local exchange carrier through an affiliate." ry0*%%ZZ"Ԍ X4ԙ258.` ` We find unpersuasive APCC's assertion that the requirement in section 272(b)(5) that transactions be "available for public inspection" should apply to all transactions between incumbent local exchange carriers and their affiliates. The language of section 272(b)(5) clearly imposes the "available for public inspection" requirement only upon transactions between BOCs and their affiliates that are specifically required under section 272, and not to transactions involving activities that a BOC merely chooses to provide through an  Xv4affiliate.TzvO yO'ԍSee 47 U.S.C.  272(b)(5).T Moreover, the "available for public inspection" requirement of section 272(b)(5) does not apply to transactions involving nonBOC incumbent local exchange carriers and their  XH4affiliates.N{HoO yOh 'ԍSee id.  272.N  X '1 _V. OTHER MATTERS    X '\ A. Price Caps   X '  X '1. General   X4259.` ` Our existing Part 64 cost allocation rules were developed when all local_ exchange carriers were still subject to costbased, rateofreturn regulation. Today, we rely upon price cap, rather than rateofreturn regulation to ensure that rates for the interstate services of the largest incumbent local exchange carriers, including the BOCs, are reasonable. In adopting the federal price cap plan, we were influenced by some State plans that moved  X4away from the traditional rateofreturn regulation.|O yO'ԍFor example, the New York State Department of Public Service had a rate freeze in effect. The California Public Utilities Commission was establishing a similar alternative regulatory framework. Under the Commission's plan, price cap indices limit the prices that incumbent local exchange carriers may charge for their regulated interstate services. The indices are adjusted each year in accordance with a formula that  X4accounts for changes in inflation and industrywide changes in productivity.  X4  X' 2. Exogenous Costs and Part 64   X|4260.` ` Under our price cap rules for incumbent local exchange carriers, most changes in a carrier's costs of providing regulated services are treated as "endogenous," which means they do not result in adjustments to the carrier's price cap indices. Certain cost changes, however, triggered by administrative, legislative, or judicial action that are beyond the control of the carriers may result in adjustments to those indices. The Commission concluded that failing to recognize these cost changes by adjusting price cap indices would either unjustly" sW|0*%%ZZ"  X4punish or reward the carrier.h}O yOy'ԍLEC Price Cap Order, 5 FCC Rcd at 6807 para. 166.h Price cap carriers may claim adjustments to their indices based on costs that are beyond their control if those costs are not otherwise accounted for in  X4the price cap formula. Such costs are defined as "exogenous."S~XO yO'ԍSee 47 C.F.R.  61.45(d).S The Commission has found that those types of cost changes should be treated "exogenously" to ensure that price cap  X4regulation does not lead to unreasonably high or unreasonably low rates.O yO= 'ԍThe Commission has determined, however, that not all changes beyond the carrier's control should be treated exogenously. For example, a general change in tax rates is outside the carrier's control, but will be reflected in the inflation factor used to adjust price caps annually. Exogenous treatment of a tax change would thus unfairly "double count" its impact. The Commission concluded that only changes that "uniquely or  yO] 'disproportionately affect LECs" would be considered for exogenous treatment. LEC Price Cap Order, 5 FCC  yO% 'Rcd at 6808 para. 177. In a subsequent order, GNPPI, the gross national product price index, was replaced by  yO 'the gross domestic product price index (GDPPI) as the inflation factor in the price cap formula. Price Cap  yO'Performance Review for Local Exchange Carriers, Report and Order, CC Docket No. 941, 10 FCC Rcd 8961,  yO}'9116 para. 351 (1995) ("LEC Price Cap Performance Review") aff'd sub nom. Bell Atlantic Telephone  yOE'Companies v. FCC, 79 F.3d 1195 (D.C. Cir. 1996).  Xv4261.` ` Our price cap rules for incumbent local exchange carriers specify that "[s]ubject to further order of the Commission, those exogenous cost changes shall include cost changes caused by . . . [t]he reallocation of investment from regulated to nonregulated  X14activities pursuant to [section 64.901 of the Commission's rules]." 1 O yOb'ԍ47 C.F.R.  61.45(d)(1)(v). We only treat accounting cost changes attributable to changes in USOA requirements exogenously to the extent they represent economic cost changes caused by administrative,  yO'legislative, or judicial requirements beyond the control of the carriers that are not reflected in the GDPPI. LEC  yO'Price Cap Performance Review, 10 FCC Rcd at 9090 para. 293. In the NPRM, we tentatively concluded that a strict reading of our price cap rules requires exogenous adjustments to price cap indices only to the extent amounts are reallocated "from regulated to  X 4nonregulated activities."Z hO yO'ԍNPRM, 11 FCC Rcd at 9114 para. 125.Z We invited comment on this tentative conclusion and asked whether all such reallocation to nonregulated activities that may result from the provision of telemessaging service should trigger an adjustment to lower price cap indices. We also sought comment on the potential exogenous treatment of new investment in network plant to be used for telemessaging service. "{t0*%%ZZ/"Ԍ X' Comments:  X4262.` ` The BOCs argue, without exception, that section 61.45(d)(1)(v) does not require a price cap adjustment for reallocation of network investment from regulated to  X4nonregulated activities.O yO'ԍAmeritech Comments at 10; Bell Atlantic Comments at 11; BellSouth Comments at 48; NYNEX Comments at 31; PacTel Comments at 3740; SBC Comments at 4950; US West Comments at 28. Several of the local exchange carriers argue that the exogenous cost rule in section 61.45(d)(1)(v) was only intended to deter underforecasting of  Xv4nonregulated usage pursuant to section 64.901(b)(4).v O yOG 'ԍAmeritech Comments at 10; PacTel Comments at 3740; SBC Comments at 50; USTA Comments at 9. USTA, US West and Bell Atlantic assert that exogenous treatment would act as a disincentive for future investment in  XH4telecommunications capabilities.HO yO 'ԍBell Atlantic Comments at 11; NYNEX Comments at 31; USTA Comments at 8; US West Comments at 28; NYNEX Reply at 2021. NYNEX, Bell Atlantic, USTA, Ameritech and US West all assert that exogenous treatment would result in a double counting of the cost of network  X 4investment. O yO'ԍAmeritech Comments at 10; Bell Atlantic Comments at 11; NYNEX Comments at 3; USTA Comments at 89; US West Comments at 28; NYNEX Reply at 2021. NYNEX further argues that a reallocation of costs from regulated to nonregulated activities would only result in a change in how costs are recorded and not a  X 4change in economic cash flow which would require exogenous treatment.\ ` O yO'ԍNYNEX Comments at 31; NYNEX Reply at 2021.\  X 4263.` ` Parties other than local exchange carriers generally contend that exogenous adjustments to price cap indices are required when costs are reallocated from regulated to  X4nonregulated activities. O yO1'ԍGSA Comments at 8; Sprint Comments at 15; AT&T Reply at 15. See also MCI Comments at 38. In particular, Sprint maintains that the current price cap indices do not reflect the reallocated costs and therefore would not amount to a double counting of  Xb4network investment.Cb O yO'ԍSprint Reply at 5.C Furthermore, because exogenous treatment does not apply to new  XK4investment, Sprint argues that no disincentive is created.:KO yO !'ԍId.: "4u0*%%ZZ"Ԍ X4264.` ` Sprint and GSA contend that new investment associated with nonregulated  X4services should initially be associated to a nonregulated activity.ZO yOb'ԍGSA Comments at 8; Sprint Comments at 16.Z  X' Discussion:  X4265.` ` Under the current regulatory scheme, only exogenous treatment can ensure that the benefits of competition are in fact shared with regulated ratepayers. When the Commission adopted its cost allocation requirements, it specifically found that "the reallocation rules are essential to the integrity of a cost allocation system . . . which seeks to prevent regulated activities from absorbing nonregulated costs, either at the start of a forecast  X 4period or subsequently."z XO {O# 'ԍJoint Cost Reconsideration Order, 2 FCC Rcd at 6291 para. 64.z We find unpersuasive the argument that exogenous treatment of reallocated costs would in some way discourage local exchange companies from investing in telecommunications capabilities. We agree with Sprint that exogenous treatment of reallocated costs will not result in double counting of network investment because those costs are not reflected in the current price cap indices. Moreover, while it is true that exogenous treatment of reallocated costs will reduce the rate base for noncompetitive services, such as exchange service and exchange access, the 1996 Act allows local exchange companies to take advantage of new competitive markets with new resulting revenue streams virtually unfettered by regulation. Thus, we conclude that when costs are reallocated from regulated to nonregulated activities, exogenous adjustments must be made to price cap indices in accordance with section 61.45(d)(1)(v). Exogenous adjustments to the price cap indices will only be eliminated when competition in the local service market eliminates the need for cost allocation rules altogether.  X4 266.` ` We agree with Sprint and GSA that any portion of new investment associated with nonregulated services should be booked initially to a nonregulated activity and, therefore, will not receive exogenous treatment.  X|' 3. Part 64 and Sharing   XN4 267.` ` Under our price cap rules, incumbent local exchange carriers can select the  X74productivity factor they will use to determine annual adjustments to their price cap indices.S7O yO!'ԍSee 47 C.F.R.  61.45(b).S If they choose not to select the highest productivity factor permitted under our rules, they are required to "share." Under sharing, incumbent local exchange carriers earning in excess of prescribed earnings levels must refund a portion of the excess earnings in subsequent rate"vz0*%%ZZ"  X4periods by reducing their price cap indices. O yOy'ԍSee LEC Price Cap Performance Review, 10 FCC Rcd at 9049 para. 197 (tentatively concluding that  yOA'we should "eventually" eliminate sharing and move to a system of pure price caps). See also Price Cap  yO 'Performance Review, Fourth Further Notice of Proposed Rulemaking, CC Docket No. 941, 10 FCC Rcd 13659, 13679 para. 127 (1995). Those earnings are equal to the incumbent local exchange carrier's interstate revenues less the regulated interstate costs. Improper cost allocation can increase the incumbent local exchange carrier's regulated interstate costs and therefore can reduce the carrier's sharing obligations. We note, however, that in their most recent annual tariff filings all but four price cap local exchange carriers elected the highest interim productivity factor we had prescribed, which exempts them from sharing obligations  Xv4for the 199596 access year.vO yO 'ԍIn the LEC Price Cap Performance Review, the Commission adopted interim price cap rules establishing three productivity factors from which local exchange carriers could select: 4.0 percent, 4.7 percent and 5.3 percent. No sharing obligation for the interim period is required of local exchange carriers that choose the  yO/'highest factor. LEC Price Cap Performance Review, 10 FCC Rcd 8961. The four carriers that did not elect the highest interim productivity factor we had prescribed (5.3 percent) are Southern New England Telephone  yO'Company, NYNEX, US West and a portion of GTE.  XH4 268.` ` In the NPRM, we asked commenters to address whether our elimination of sharing obligations permanently for price cap carriers would eliminate the need for Part 64  X 4cost allocation processes in our regulation of these companies.Z ( O yO'ԍNPRM, 11 FCC Rcd at 9113 para. 124.Z We also sought comment on how the relationship of our cost allocation rules to price cap local exchange carriers should influence the outcome of this proceeding.  X ' Comments:  X 4   X4 269.` ` The BOCs generally argue that we should eliminate our accounting safeguards or forebear from enforcing them under section 10 of the Act on the ground that our current price cap plan removes any incentive or ability for local exchange carriers to crosssubsidize  XM4competitive services.XM O yO'ԍAmeritech Comments at 4, 11; Bell Atlantic Comments at 3; BellSouth Comments at 46; NYNEX Comments at 2,5; PacTel Comments at 2,40; SBC Comments at 45, 26; USTA Comments at 57, 12; Coalition Reply at 2. The BOCs generally emphasize that nosharing price cap carriers cannot crosssubsidize because no link between costs and rates exists in the absence of a  X4sharing requirement.O yO#'ԍAmeritech Comments at 4,16; PacTel Comments at 2,6,40; SBC Comments at 4,6. See also Coalition Reply at 2; PacTel Reply at 13; USTA Comments at 59. Ameritech argues that even if it were possible to misallocate costs, it"w00*%%ZZ" would be practically insignificant because local exchange carriers would have to incorporate the increased costs into higher rates while competing with other providers to retain  X4customers.JO yOK'ԍAmeritech Comments at 17.J USTA argues that any attempt to misallocate costs from nonregulated to regulated activities would serve no purpose because economies of scope are realized through  X4the productivity offset.DXO yO'ԍUSTA Comments at 7.D  Xv4 270.` ` Parties other than local exchange carriers generally maintain that there is a linkage between costs and rates under price caps that justifies the continued application of our  XH4accounting safeguards.HO yO 'ԍAT&T Comments at 3; GSA Comments at 7; APCC Reply at 4; MCI Reply at 3; TIA Reply at 7; Worldcom Reply at 4. These parties generally argue that under our current price cap plan, local exchange carriers retain the annual option of selecting a productivity factor subject to sharing requirements that are dependent on rate of return, thereby preserving the incentive to  X 4shift costs. @O yO'ԍSee AT&T Comments at 3; APCC Reply at 4; MCI Reply at 3; TIA Reply at 7. These parties also generally contend that our accounting safeguards are necessary to monitor the BOCs' rates of return for regulated services in order to evaluate whether the price cap system is in the public interest, and determine whether adjustments to  X 4the productivity factor must be made.*Z O yO?'ԍMCI Comments at 39; Sprint Comments at 1718; Worldcom Comments at 32; APCC Reply at 4; Ohio  {O'Reply at 23; TIA Reply at 7. See also AT&T Comments at 34; GSA Reply at 3; MCI Reply at 4; Sprint Reply at 2.* Sprint and APCC argue that even in the absence of a sharing requirement, carriers are able to request adjustments to their price cap indices for  X4exogenous cost changes, which requires the Commission to review costs.T O yO3'ԍAPCC Reply at 4; Sprint Reply at 2.T  Xb' Discussion:   X44271.` ` The fact that an incumbent local exchange carrier subject to the Commission's price cap regulation does not currently have a potential sharing obligation does not obviate the need for rules governing their allocations of costs between regulated and nonregulated activities. As described above, our interim price cap rules permit incumbent local exchange carriers to select the productivity factor they will use to determine annual adjustments to their  X4price cap indices.z O yO$'ԍSee 47 C.F.R.  61.45(b).#c PE37P#z Incumbent local exchange carriers may select among three productivity"x0*%%ZZ1" factor choices, two of which impose sharing obligations if the local exchange carrier's interstate earnings exceed specified benchmarks and permit lowend adjustments if interstate earnings fall below specified benchmarks. In addition, our price cap rules permit incumbent local exchange carriers to file rate increases that exceed their applicable price cap indices,  X4provided they can satisfy a stringent cost showing.O yO'ԍPolicy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87313, Second Report and  yO'Order, 5 FCC Rcd 6786, 6823 paras. 30304 (1990). Consequently, our current system of interstate price cap regulation does not eliminate the need for cost allocation rules. Moreover, because these incumbent local exchange carriers' intrastate services may be subject to costofservice regulation or to a form of price cap regulation that involves potential sharing obligations or periodic earnings reviews, the incumbent local exchange carriers may still have an incentive to assign a disproportionate share of costs to regulated accounts. We recognize that changes in the competitive conditions of local telecommunications markets in the future may cause us to reexamine the continued need for our Part 64 cost allocation rules; but, based on the record in this proceeding, those rules remain important to our efforts to ensure that the rates for regulated services are just, reasonable, and nondiscriminatory.  X ' B. Section 254(k)   Xy4272.` ` In the NPRM, we sought comment on whether our proposals related to sections 260 and 271 through 276 are sufficient to implement section 254(k)'s requirement that carriers not "use services that are not competitive to subsidize services that are subject to  X64competition."6 O yO'ԍNPRM, 11 FCC Rcd at 9114 para. 125. See also 47 U.S.C.  254(k).  X' Comments:   X4273.` ` NYNEX and BellSouth contend that the Commission's accounting safeguards  X4are sufficient to satisfy the requirements of section 254(k)._O yO$'ԍBellSouth Comments at 49; NYNEX Comments at 3._  X4274.` ` Several commenters addressed the portion of section 254(k) that requires "[t]he Commission, with respect to interstate services . . . [to] establish any necessary cost allocation rules, accounting safeguards, and guidelines to ensure that services included in the definition of universal service bear no more than a reasonable share of the joint and common costs of  X94facilities used to provide those services."9@O yO*$'ԍ47 U.S.C.  254(k). See, e.g., Bell Atlantic Comments at 5; PacTel Comments at 43; USTA Comments at 5; US West Comments at 29."9y0*%%ZZ"Ԍ X'ԙ Discussion:   X4275.` ` We conclude that the accounting safeguards that we adopt in this Order with respect to sections 260 and 271 through 276 are sufficient to implement section 254(k)'s requirement that carriers not "use services that are not competitive to subsidize services that are subject to competition." Our existing accounting safeguards, with the modifications that we adopt in this Order, prevent subsidization of competitive nonregulated services, such as those addressed in Sections 260 and 271 through 276 by subscribers to an incumbent local exchange carrier's regulated telecommunications services. We find that the Act does not require additional safeguards for these particular statutory services.  X 4276.` ` We note that the portion of section 254(k) that requires "[t]he Commission, with respect to interstate services . . . [to] establish any necessary cost allocation rules, accounting safeguards, and guidelines to ensure that services included in the definition of universal service bear no more than a reasonable share of the joint and common costs of facilities used to provide those services" will not be addressed in this Order but will be the subject of a separate rulemaking proceeding.  Xb'@  VI. FINAL REGULATORY FLEXIBILITY ACT ANALYSIS  XK4\  X44277.` ` As required by section 603 of the Regulatory Flexibility Act ("RFA"), as  X4amended,NO yO'ԍSee 47 U.S.C.  603.N an Initial Regulatory Flexibility Analysis ("IRFA") was incorporated in the  X4NPRM. In the NPRM, the Commission certified that the rules it proposed to adopt in this proceeding would not have a significant economic impact on a substantial number of small  X4entities because the proposed rules did not pertain to small entities.]XO yO'ԍNPRM, 11 FCC Rcd at 911314 para. 127.] No comments were received concerning the proposed certification. For the reasons stated below, we certify that the rules adopted herein will not have a significant economic impact on a substantial number  X4of small entities.FO yO.'ԍ5 U.S.C.  605(b).F This certification conforms to the RFA, as amended by the Small  X~4Business Regulatory Enforcement Fairness Act of 1996 ("SBREFA").~xO yO 'ԍId.  601611. SBREFA was enacted as Subtitle II of the Contract With America Advancement Act of 1996 ("CWAAA"), Pub.L. No. 104121, 110 Stat. 847 (1996). "gz0*%%ZZq"Ԍ X4278.` ` The RFA defines a "small business" to be the same as a "small business  X4concern" under the Small Business Act.jO yOb'ԍ5 U.S.C.  601(6) (adopting 15 U.S.C.  632(a)(1)).j Under the Small Business Act, a "small business concern" is one that: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) meets any additional criteria established by the Small Business  X4Administration.XO yO'ԍ15 U.S.C.  632. See, e.g., Brown Transport Truckload, Inc. v. Southern Wipers, Inc., 176 B.R. 82 (N.D.Ga. 1994). Section 121.201 of the Small Business Administration regulations defines a small telecommunications entity in SIC code 4813 (Telephone Companies Except Radio  Xv4Telephone) as any entity with 1,500 or fewer employees at the holding company level.HvO yO 'ԍ13 C.F.R.  121.201.H Entities directly subject to these rule changes are engaged in the provision of local exchange and exchange access telecommunications services. These entities are generally large corporations that are dominant in their fields of operations and thus, are not "small entities"  X 4as defined by the Act.J @O yO 'ԍ15 U.S.C.  632(a)(1).J While these companies may have fewer than 1,500 employees and thus fall within the SBA's definition of small telecommunications entity, we do not believe that such entities should be considered small entities within the meaning of the RFA. Because the small incumbent LECs subject to these rules are either dominant in their field of operations or are not independently owned and operated, consistent with our prior practice,  X 4they are excluded from the definition of "small entity" and "small business concerns."o O yO('ԍSee Interconnection Order at paras. 132830, 1342.o Accordingly, our use of the terms "small entities" and "small businesses" does not encompass small incumbent LECs. Out of an abundance of caution, however, for regulatory flexibility analysis purposes, we will consider small incumbent LECs within this analysis and use the term "small incumbent LECs" to refer to any incumbent LECs that arguably might be defined  X44by SBA as "small business concerns."D4` O yOE'ԍSee id.D  X4279.` ` The rules adopted in this Order are threefold. First, the rules adjust the methodologies by which a carrier must account for transactions or sales of assets and services  X4with its affiliates ("accounting modifications").i O yOy"'ԍSee discussions in section IV.B.1.b., supra.i Second, the rules require that BOCs operating separate affiliates under section 272 of the 1996 Act obtain and pay for a"{ 0*%%ZZK"  X4Federal/State joint audit every two years by an independent auditor.hO yOy'ԍSee discussion in section IV.B.1.f., supra.h Finally, BOC electronic publishing "separated" affiliates must file either a Securities and Exchange Commission ("SEC") Form 10K or a report "substantially equivalent" to an SEC Form 10K  X4with the Commission.hXO yO'ԍSee discussion in section IV.B.3.d., supra.h We consider these in turn.  X4280.` `  Accounting Modifications.  We certify that although there are a substantial number of small entities affected by the accounting modifications adopted herein, the accounting modification rules we adopt in this Order will not have a substantial economic impact on those affected small entities. Entities directly subject to the rules adopted herein either provide local exchange and exchange access telecommunications services or are owned by or affiliated with entities that provide such services, and, in the case of smaller incumbent local exchange carriers, settle their NECA cost pool on an actual cost basis. We note that prior to the adoption of this Order, these small entities could already provide nonregulated services and were already subject to our affiliate transactions rules. Neither of the two changes to these rules will have a substantial economic impact on small entities. We note that the accounting modifications adopted here are simply accounting changes with no substantial longterm economic impact. Moreover, we do not believe that the smaller entities that are affected by these rules operate with as many affiliates as do larger entities, and thus the changes will not have a substantial economic impact on small entities. Under the rules  XL4modified here, the prevailing price methodology will be retained in a modified form.pLO yO'ԍSee discussion in section IV.B.1.b.i., supra.p Previously, a carrier could use the prevailing price method only when a substantial amount of business was conducted with third parties. Our previous rules, however, did not clarify the meaning of a "substantial" amount of thirdparty business for the purpose of determining whether the carrier could set a prevailing price. Under the rules modified here, if an entity's annual sales, as measured by quantity, to unaffiliated third parties exceed 50 percent of total annual sales of a particular product or service then the "substantial" amount of thirdparty business requirement has been satisfied and a prevailing price has been established for that particular product or service. Also, these entities will have to value assets in a similar manner as they value services. As the companies already are familiar with this method of valuation, there will not be a substantial economic impact from the transition to the new methodology. We therefore certify that the accounting modifications adopted in this Order  X84will not have a significant economic impact on a substantial number of small entities.F8xO yOa#'ԍ5 U.S.C.  605(b).F "!|0*%%ZZ"Ԍ X4281.` ` Periodic Audit. Under the rules adopted herein, a BOC operating a separate subsidiary under section 272 is required to obtain and pay for a biennial Federal/State joint audit conducted by an independent auditor to determine whether the BOC has complied with the rules promulgated under section 272. None of the BOCs is a small entity, since each BOC is an affiliate of a Regional Holding Company ("RHC"), and all of the BOCs or their RHCs have more than 1,500 employees. We therefore certify that the periodic audit requirements adopted in this Order will not have a significant economic impact on a substantial number of small entities.  X24282.` ` Filing Form 10K with the Commission. Finally, our rules will require that BOC affiliate entities engaged in electronic publishing file a report "substantially equivalent" to an SEC Form 10K with the Commission. BOC affiliates that already file a Form 10K with the SEC may satisfy this requirement by simply filing a copy of that Form 10K with the Commission. BOC affiliates that are not subject to the SEC's 10K filing requirement, however, must file with the Commission a report containing the same information in the same format as the SEC's Form 10K. These rules do not apply to small entities because the entities subject to this rule are BOCs or entities associated or affiliated with the BOCs. None of the BOCs is a small entity, since each BOC is an affiliate of a Regional Holding Company ("RHC"), and all of the BOCs or their RHCs have more than 1,500 employees. Moreover, the entities affected by this rule that are affiliated or associated with the BOCs are not independently owned and operated, and therefore do not meet the definition of small entities. We therefore certify that the SEC Form 10K filing requirement adopted in this Order will not have a significant economic impact on a substantial number of small entities."}0*%%ZZ"  X4 ~ 283.` ` The Commission shall provide a copy of this certification to the Chief Counsel for Advocacy of the SBA, and include it in the report to Congress pursuant to the  X4SBREFA.MO yOK'ԍId.  801(a)(1)(A).M The certification will also be published in the Federal Register.GXO yO'ԍId.  605(b).G  X'|  VII. FINAL PAPERWORK REDUCTION ACT ANALYSIS  \  Xv4284.` ` The decision herein has been analyzed with respect to the Paperwork Reduction Act of 1995, Pub. L. 10413, and has been approved in accordance with the provisions of that  XH4Act.qHO yO 'ԍThis Order has been approved under OMB Control Number 30600734.q The Office of Management and Budget ("OMB") encouraged the Commission, to the greatest extent possible, to use its existing cost allocation and affiliate transactions rules to address the requirements established in sections 260 and 271 through 276 of the 1996 Act. Furthermore, OMB recommended that the FCC should, where possible, establish industry and market conditions that, once met, would allow certain provisions of this collection to be eliminated or mitigated. First, we believe we have complied with OMB's request to use the existing cost allocation and affiliate transactions rules wherever possible. We have amended the existing rules only where we are certain that the existing rules will not fulfill the overall goals of the Communications Act of 1934, as amended by the 1996 Act. Second, in accordance with the overall policy underlying the 1996 Act, we will revisit these issues in the future to determine if our regulations are still necessary once competition increases."b~x0*%%ZZ"  X' VIII. ORDERING CLAUSES  \  X4285.` ` Accordingly, IT IS ORDERED that, pursuant to sections 4(i), 4(j), 201205, 218, 220, 260, 27176, 303(r), 403 of the Communications Act of 1934, as amended by the 1996 Act, 47 U.S.C.  154(i), 154(j), 201205, 218, 220, 260, 271176, 303(r), 403, the rules, requirements and policies discussed in this Order ARE ADOPTED and sections 32.27, 53.209, 53.211, and 53.213 of the Commission's rules, 47 C.F.R.  32.27, 53.209, 53.211, and 53.213 ARE AMENDED as set forth in Appendix B.  X14286. IT IS FURTHER ORDERED that the requirements and regulations established in this decision shall become effective upon approval by OMB of the new information collection requirements adopted herein, but no sooner than thirty days after publication in the Federal Register. ` `  _FEDERAL COMMUNICATIONS COMMISSION ` `  William F. Caton ` `  Acting Secretary_ !N   X' !N sO yO'z6#c PE37P#As\ #Xw PE37XP#Appendix A (#  X'(## List of Commenters in CC Docket No. 96150 Đ\ AT&T Corp. ("AT&T") Alarm Industry Communications Committee ("AICC") American Public Communications Council ("APCC") Ameritech Operating Companies ("Ameritech") Association of Telemessaging Services International ("ASTI") Bell Communications Research, Inc. ("Bellcore") Bell Atlantic Telephone Companies ("Bell Atlantic") BellSouth Corporation and BellSouth Telecommunications, Inc. ("BellSouth") Cincinnati Bell Telephone Company ("Cincinnati Bell") Competitive Telecommunications Association ("CTA") Florida Public Service Commission ("Florida PSC")  X"4GTE Service Corporation and its affiliated domestic telephone operating, long distance and (#(#wireless companies ("GTE") General Services Administration ("GSA")"h$0*%%ZZ""ԌKiesling Associates LLP ("Kiesling") LDDS Worldcom ("Worldcom") MCI Telecommunications Corporation ("MCI") Missouri Public Service Commission ("Missouri PSC") NYNEX Telephone Companies ("NYNEX") National Association of Regulatory Utility Commissioners ("NARUC") National Newspaper Association ("NNA") New York State Department of Public Service ("NYDPS") Newspaper Association of America ("NAA") Pacific Telesis Group ("PacTel")  X 4People of State of California & Public Utilities Commission of the State of California (#(#("California") Public Service Commission of Wisconsin ("Wisconsin PSC") Puerto Rico Telephone Company ("Puerto Rico Telephone") SBC Communications Inc. ("SBC") Sprint Corporation ("Sprint") Telecommunications Resellers Association ("TRA") U S West, Inc. ("US West") United State Telephone Association ("USTA") Voice Tel ("VoiceTel") Yellow Pages Publishers Association ("YPPA")"40*%%ZZD"  X'  List of Reply Commenters in CC Docket No. 96150 Đ\ AT&T Corp. ("AT&T") American Public Communications Council ("APCC") Ameritech Operating Companies ("Ameritech") Bell Atlantic Telephone Companies ("Bell Atlantic") BellSouth Corporation and BellSouth telecommunications, Inc. ("BellSouth") Economic Strategy Institute ("ESI") Florida Public Service Commission ("Florida PSC")  X14GTE Service Corporation and its affiliated domestic telephone operating, long distance and (#(#wireless companies ("GTE") General Services Administration ("GSA") LDDS Worldcom ("Worldcom") MCI Telecommunications Corporation ("MCI") Missouri Public Service Commission ("Missouri PSC") Newspaper Association of America ("NAA") NYNEX Telephone Companies ("NYNEX") Pacific Telesis Group ("PacTel") Public Utilities Commission of Ohio ("Ohio") RBOC Payphone Coalition ("Coalition") SBC Communications Inc. ("SBC") Sprint Corporation ("Sprint") Telecommunications Industry Association ("TIA") US West, Inc. ("US West") United States Telephone Association ("USTA") Washington Utilities and Transportation Commission ("Washington") !N   Xe4sO yO'{:#c PE37P#BsX#Xw PE37XP# Appendix B (#  X7'(#\] Final Rules   X 'z AMENDMENTS TO THE CODE OF FEDERAL REGULATIONS \  X4 1. Part 32 of Title 47 of the Code of Federal Regulations (C.F.R.) is amended to read as follows:  X"'/  PART 32 UNIFORM SYSTEM OF ACCOUNTS  FOR TELECOMMUNICATIONS COMPANIES "h$0*%%ZZ""Ԍ\Subpart B General Instructions  X - 32.27` ` Transactions with affiliates.  Y-x*` ` *  **hh* x(b) Assets sold or transferred between a carrier and its affiliate pursuant to a tariff,  YL-including a tariff filed with a state commission, shall be recorded in the appropriate revenue accounts at the tariffed rate. Nontariffed assets sold or transferred between a carrier and its affiliate that qualify for prevailing price valuation, as defined in part (d) below, shall be recorded at the prevailing price. For all other assets sold by or transferred from a carrier to its affiliate, the assets shall be recorded at the higher of fair market value and net book cost.  Y-For all other assets purchased by or transferred to a carrier from its affiliate, the assets shall be recorded at the lower of fair market value and net book cost. For purposes of this section carriers are required to make a good faith determination of fair market value. x(c) Services provided between a carrier and its affiliate pursuant to a tariff, including a tariff filed with a state commission, shall be recorded in the appropriate revenue accounts at the tariffed rate. Nontariffed services provided between a carrier and its affiliate pursuant to publiclyfiled agreements submitted to a state commission pursuant to section 252(e) of the Communications Act of 1934 or statements of generally available terms pursuant to section 252(f) shall be recorded using the charges appearing in such publiclyfiled agreements or statements. Nontariffed services provided between a carrier and its affiliate that qualify for prevailing price valuation, as defined in part (d) below, shall be recorded at the prevailing price. For all other services provided by a carrier to its affiliate, the services shall be recorded at the higher of fair market value and fully distributed cost. For all other services received by a carrier from its affiliate, the service shall be recorded at the lower of fair market value and fully distributed cost, except that services received by a carrier from its affiliate that exists solely to provide services to members of the carrier's corporate family shall be recorded at fully distributed cost. For purposes of this section carriers are required to make a good faith determination of fair market value. "$'0*((P("Ԍx(d) In order to qualify for prevailing price valuation in sections (b) and (c) of this rule, sales of a particular asset or service to third parties must encompass greater than 50 percent of the total quantity of such product or service sold by an entity. Carriers shall apply this 50 percent threshold on a assetbyasset and servicebyservice basis, rather than on a product line or service line basis. In the case of transactions for assets and services subject to section 272, a BOC may record such transactions at prevailing price regardless of whether the 50 percent threshold has been satisfied.  YH-x*` ` * **hh*  Y1-"10*((p"  Y-2.xPart 53 of Title 47 of the C.F.R. is added to read as follows:  X-  PART 53 SPECIAL PROVISIONS CONCERNING  BELL OPERATING COMPANIES TP Subpart C Separate Affiliate; Safeguards.  XH- 53.209` ` Biennial audit x(a) A Bell operating company required to operate a separate affiliate under section 272 of the Act shall obtain and pay for a Federal/State joint audit every two years conducted by an independent auditor to determine whether the Bell operating company has complied with the rules promulgated under section 272 and particularly the audit requirements listed in paragraph (b) of this section. x(b) The independent audit shall determine:  Yb-x` ` (1) Whether the separate affiliate required under section 272 of the Act has: x` `  (i) Operated independently of the Bell operating company; x` `  (ii) Maintained books, records, and accounts in the manner prescribed by the Commission that are separate from the books, records and accounts maintained by the Bell operating company; x` `  (iii) Officers, directors and employees that are separate from those of the Bell operating company; x` `  (iv) Not obtained credit under any arrangement that would permit a creditor, upon default, to have recourse to the assets of the Bell operating company; and x` `  (v) Conducted all transactions with the Bell operating company on an arm's length basis with the transactions reduced to writing and available for public inspection, x` ` (2) Whether or not the Bell operating company has: x` `  (i) Discriminated between the separate affiliate and any other entity in the provision or procurement of goods, services, facilities, and information, or the establishment of standards; x` `  (ii) Accounted for all transactions with the separate affiliate in accordance with the accounting principles and rules approved by the Commission. "#'0*((P("Ԍx` ` (3) Whether or not the Bell operating company and an affiliate subject to section 251(c) of the Act: x` `  (i) Have fulfilled requests from unaffiliated entities for telephone exchange service and exchange access within a periodno longerthan the period in which it provides such telephone exchange serviceand exchange access to itself or its affiliates; x` `  (ii) Have made available facilities, services, or information concerning its provision of exchange access to other providers of interLATA services on the same terms and conditions as it has to its affiliate required under section 272 that operates in the same market; x` `  (iii) Have charged its separate affiliate under section 272, or imputed to itself (if using the access for its provision of its own services), an amount for access to its telephone exchange service and exchange access that is no less than the amount charged to any unaffiliated interexchange carriers for such service; and x` `  (iv) Have provided any interLATA or intraLATA facilities or services to its interLATA affiliate and made available such services or facilities to all carriers at the same rates and on the same terms and conditions, and allocated the associated costs appropriately. x(c) An independent audit shall be performed on the first full year of operations of the separate affiliate required under section 272 of the Act, and biennially thereafter. x(d) The Chief, Common Carrier Bureau, shall work with the regulatory agencies in the states having jurisdiction over the Bell operating company's local telephone services, to attempt to form a Federal/State joint audit team with the responsibility for overseeing the planning of the audit as specified in section 53.211 and the analysis and evaluation of the audit as specified in section 53.213. The Federal/State joint audit team may direct the independent auditor to take any actions necessary to ensure compliance with the audit requirements listed in paragraph (b) of this section. If the state regulatory agencies having jurisdiction choose not to participate in the Federal/State joint audit team, the Chief, Common Carrier Bureau, shall establish an FCC audit team to oversee and direct the independent auditor to take any actions necessary to ensure compliance with the audit requirements in paragraph (b) of this section.  X!-  53.211` ` Audit planning. x(a) Before selecting a independent auditor, the Bell operating company shall submit preliminary audit requirements, including the proposed scope of the audit and the extent of compliance and substantive testing, to the Federal/State joint audit team organized pursuant to section 53.209(d); "#'0*((P("Ԍx(b) The Federal/State joint audit team shall review the preliminary audit requirements to determine whether it is adequate to meet the audit requirements in paragraph (b) of section 53.209. The Federal/State joint audit shall have 30 days to review the audit requirements and determine any modifications that shall be incorporated into the final audit requirements. x(c) After the audit requirements has been approved by the Federal/State joint audit team, the Bell operating company shall engage within 30 days an independent auditor to conduct the biennial audit. In making its selection, the Bell operating company shall not engage any independent auditor who has been instrumental during the past two years in designing any of the accounting or reporting systems under review in the biennial audit. x(d) The independent auditor selected by the Bell operating company to conduct the audit shall develop a detailed audit program based on the final audit requirements and submit it to the Federal/State joint audit team. The Federal/State joint audit team shall have 30 days to review the audit program and determine any modifications that shall be incorporated into the final audit program. x(e) During the course of the biennial audit, the independent auditor, among other things, shall: x` ` (1) Inform the Federal/State joint audit team of any revisions to the final audit program or to the scope of the audit. x` ` (2) Notify the Federal/State joint audit team of any meetings with the Bell operating company or its separate affiliate in which audit findings are discussed. x` ` (3) Submit to the Chief, Common Carrier Bureau, any accounting or rule interpretations necessary to complete the audit.  X|-  Xe- 53.213` ` Audit analysis and evaluation. x(a) Within 60 dates after the end of the audit period, but prior to discussing the audit findings with the Bell operating company or the separate affiliate, the independent auditor shall submit a draft of the audit report to the Federal/State joint audit team. x` ` (1) The Federal/State joint audit team shall have 45 days to review the audit findings and audit workpapers, and offer its recommendations concerning the conduct of the audit or the audit findings to the independent auditor. Exceptions of the Federal/State joint audit team to the finding and conclusions of the independent auditor that remain unresolved shall be included in the final audit report. x` ` (2) Within 15 days after receiving the Federal/State joint audit team's recommendations and making appropriate revisions to the audit report, the independent auditor shall submit the audit report to the Bell operating company for its response to the"#'0*((P(" audit findings and send a copy to the Federal/State joint audit team. The independent auditor may request additional time to perform additional audit work as recommended by the Federal/State joint audit team. x(b) Within 30 days after receiving the audit report, the Bell operating company will respond to the audit findings and send a copy of its response to the Federal/State joint audit team. The Bell operating company's response shall be included as part of the final audit report along with any reply that the independent auditor wishes to make to the response. x(c) Within 10 days after receiving the response of the Bell operating company, the independent auditor shall make available for public inspection the final audit report by filing it with the Commission and the state regulatory agencies participating on the joint audit team. x(d) Interested parties may file comments with the Commission within 60 days after the audit report is made available for public inspection.!0j  !N   !N