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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of: ) ) Local Exchange Carriers ) Permanent Cost Allocation Manual ) for the Separation of Regulated ) and Nonregulated Costs ) ) Cost Allocation Manual Revisions of: ) Aliant Communications Co. ) AAD 97-9 ALLTEL Telephone Systems ) AAD 97-3 Ameritech Operating Cos. ) AAD 96-119 and 97-4 The Bell Atlantic Telephone Companies ) AAD 97-5 and 97-31 BellSouth Corporation ) AAD 96-129 Cincinnati Bell Telephone Co. ) AAD 96-83, 96-118 and 97-6 Citizens Telephone Co. ) AAD 97-7 GTE Telephone Operating Cos. ) AAD 97-8 Nevada Bell Telephone Co. ) AAD 96-92 and 97-10 NYNEX Telephone Companies ) AAD 96-84 , 97-11, and 97-32 Pacific Bell Telephone Co. ) AAD 96-91 and 97-12 Puerto Rico Telephone Co. ) AAD 96-85 and 97-13 Rochester Telephone Corp. ) AAD 97-14 Southern New England Telephone Co. ) AAD 97-15 Southwestern Bell Telephone Co. ) AAD 96-86, 97-16, and 97-42 United and Central Telephone Companies ) AAD 96-87 and 97-17 US West, Inc. ) AAD 97-18 MEMORANDUM OPINION AND ORDER Adopted: June 13, 1997 Released: June 13, 1997 By the Chief, Accounting and Audits Division: I. INTRODUCTION 1. As required by the Commission in its Payphone Order, seventeen incumbent local exchange carriers ("ILECs") filed revisions to their cost allocation manuals ("CAMs"), in conjunction with the deregulation of their payphone operations. Fifteen of these filings revise the CAMs to establish nonregulated cost pools for payphone assets, expenses, and revenues to reflect the reclassification of payphone service to nonregulated status. In two instances the payphone service will be conducted by nonregulated affiliates, which requires revision of the affiliate transactions section of the CAMs. The Common Carrier Bureau issued Public Notices seeking comment on the ILECs' CAM revisions, and comments and replies were filed by twenty parties or groups of parties. 2. In this Order, we find that the ILECs' CAM revisions regarding payphone operations are generally acceptable, except as discussed below. In those instances where CAMs require further revision, we direct the carriers to file revisions to their CAMs within 60 days of the release of this Order. II. BACKGROUND 3. The Telecommunications Act of 1996. Section 276 of the Communications Act of 1934, as amended by the Telecommunications Act of 1996 ("1996 Act") establishes nondiscrimination safeguards applicable to Bell Operating Companies ("BOCs") that provide payphone service. Section 276(a) prohibits any BOC from subsidizing its payphone service from its basic telephone service or exchange access operations, and forbids each BOC to discriminate in favor of its own payphone services. Section 276(b)(1) seeks to promote competition among payphone service providers ("PSPs") and widespread deployment of public payphone services for the benefit of the general public. For purposes of the provisions of this section of the Act, "payphone service" is defined to include public or semi-public pay telephones, including the provision of inmate telephone service in correctional institutions and any ancillary services. 4. On September 20, 1996 and November 8, 1996, respectively, the Commission released the Payphone Order and the Payphone Reconsideration Order, which implement Section 276. In the Payphone Order the Commission concluded, inter alia, that ILEC payphones must be deregulated and detariffed and treated as customer premises equipment ("CPE") for regulatory purposes. The Commission allowed ILECs to implement that change either by providing payphones as a nonregulated activity of the carrier or by transferring the payphone activity to a nonregulated affiliate. The Commission further directed that: (1) all facilities related to payphone service, including associated accumulated depreciation and deferred income tax liabilities be reclassified as nonregulated; and (2) expenses related to the provision of payphones must be reclassified as nonregulated on a going-forward basis. The Commission did not deregulate "the loops connecting the payphones to the network, the central office 'coin-service,' or operator service facilities supporting incumbent LEC payphones, because these facilities are part of network equipment necessary to support basic telephone services." Consistent with its deregulation of ILEC payphone operations, the Commission also determined that all ILECs required to file CAMs must submit CAM revisions necessary to reflect the reclassification or transfer of payphone assets and expenses to nonregulated status. 5. Commission Rules Governing Nonregulated Activities. In 1987 the Commission adopted the Joint Cost Order, which was designed to ensure that regulated operations do not improperly subsidize nonregulated activities. The Commission established two complementary sets of rules, one governing how carriers allocate their costs between regulated and nonregulated activities and the other governing transactions between carriers and their nonregulated affiliates. Both sets of rules are applicable to large ILECs, who are required to file CAMs setting out in detail the manner in which they propose to separate the costs of regulated telephone services from the costs of nonregulated services and to implement the affiliate transaction rules. 6. Section 64.903 of the Commission's rules requires that a CAM include the following elements: (a) a description of each carrier's nonregulated activities; (b) a list of all incidental activities and the justification for treating each activity as incidental; (c) a chart showing all of the carrier's corporate affiliates; (d) a statement that describes affiliates that engage in or will engage in transactions with the carrier and that describes the nature, terms, and frequency of such transactions; and (e) for each Part 32 account, a detailed description of the cost pools to which amounts in the account will be assigned and the basis on which each cost pool will be allocated. In addition, ten of the accounts must be assigned to cost pools and allocated using specific procedures prescribed by the Bureau in the CAM Uniformity Order. Finally, the CAMs must contain a description of the carrier's time reporting procedures including the methods used to allocate nonproductive time, such as vacation and sick leave. 7. Section 32.27 of the Commission's rules prescribes rules that govern transactions between a carrier and its nonregulated affiliates. Section 32.27(b) protects ratepayers by requiring that when an unregulated affiliate transfers assets to or performs services for the carrier, those assets or services are not charged to the carrier's regulated operations at an inflated price. Similarly, when the carrier transfers assets to or performs services for an unregulated affiliate, section 32.27(c) ensures that the regulated operations are compensated for the full value of such assets or services. These rules protect against subsidization of unregulated affiliates by regulated operations, which could be both anticompetitive and detrimental to ratepayers. 8. Related Bureau Orders. On April 15, 1997, the Common Carrier Bureau issued orders regarding implementation of the comparably efficient interconnection requirements applicable to the BOCs under the terms of the 1996 Act and of the Commission's orders. In those orders, the Bureau indicated that accounting issues raised in those proceedings would be addressed in the review of CAM revisions pertaining to payphone operations. The Accounting and Audits Division of the Common Carrier Bureau also issued a brief order that allowed the CAM revisions filed by the carriers to go into effect and indicated that specific issues relating to the revisions would be addressed in a later order. III. DISCUSSION A. Quantification of CAM Changes 9. As a threshold matter, we note that the Commission's rules require that a carrier filing proposed changes to the cost apportionment tables in its CAM must include in its filing "a statement quantifying the impact of each change on regulated operations." Most of the carriers submitting CAM revisions in these proceedings have provided the requisite quantification, but five carriers have not quantified the impacts of the changes. Those carriers are Citizens, Nevada Bell, Rochester, Sprint, and US West. We therefore direct those carriers to refile their CAM revisions, including the quantification required by Section 64.903(b) of the Commission's rules, within 60 days of the date of this order. B. Public Telephone Terminal Equipment 10. In accordance with the Payphone Order, carriers that do not transfer their payphone assets to a separate affiliate must reclassify all assets in Account 2351, Public telephone terminal equipment, from a regulated cost pool to a nonregulated cost pool. APCC and ICSPC commented that several ILECs' CAMs do not indicate clearly whether the nonregulated cost pool containing public telephone terminal equipment costs, as recorded in Account 2351, also includes costs associated with booths, enclosures and pedestals. APCC and ICSPC maintain that these items should be deregulated, as well as the payphone equipment itself. They believe that some ILECs may record costs associated with booths, enclosures and pedestals in other Part 32 accounts. APCC and ICSPC request that the Commission require ILECs to amend their CAMs to specify in which accounts these costs are recorded, and to specify the proposed accounting treatment for these costs. 11. In reply, several ILECs state that they record costs associated with booths, enclosures, and pedestals in Account 2351. They also maintain that their CAM filings comply with the Commission's cost allocation rules, which do not require carriers to include detailed Part 32 account descriptions in their CAMs. Further, they state that as required by the Commission in RAO 10, carriers have on file with the Commission their complete property record retirement lists, which show that they record costs associated with booths, enclosures, and pedestals in Account 2351. 12. Discussion. As specified in RAO 6, ILECs must record costs associated with booths, enclosures, and pedestals in Account 2351. Our rules do not, however, require carriers to include detailed account descriptions in their CAMs. Moreover, all ILECs addressing this issue have indicated that they do, in fact, record the costs of payphone booths, enclosures, and pedestals in Account 2351. We therefore shall not require carriers to revise their CAMs to indicate where such costs are recorded. 13. In our review of Account 2351 in the CAMs, we find that three carriers, Puerto Rico, U S West, and Sprint, still have regulated cost pools for this account. As stated previously, the Payphone Order requires that all investment recorded in Account 2351 must be classified as nonregulated. We therefore direct Puerto Rico, U S West, and Sprint to assign no costs to the regulated cost pools of this account after the effective date for deregulation of payphone service and to remove the regulated cost pools for this account in their next CAM revisions. C. Public Telephone Revenue 14. Account 5010, Public telephone revenue, is the account prescribed in Part 32 for revenues received from payphone service. With the deregulation of payphones, all revenues recorded in Account 5010 on a going forward basis must be classified as nonregulated. In reviewing the CAM revisions submitted by the ILECs, we find that several carriers still have regulated cost pools in Account 5010. In addition, one commenter, APCC, points out that Ameritech's CAM reflects nonregulated cost pools in several revenue accounts in addition to Account 5010, Public telephone revenue, and that Ameritech determines the amounts of nonregulated revenues to be allocated to those accounts through a "'revenue analysis.'" These other accounts include Accounts 5081, 5083, 5084, 5100, 5262, and 5263. APCC believes the Commission should require Ameritech to provide more detailed explanation as to why it is reassigning revenues from regulated to nonregulated cost pools in these accounts. 15. In reply, Ameritech states that its CAM complies with the requirements set forth in the Payphone Order relating to CAM revisions, and that its revisions are consistent with the Commission's cost allocation rules. Ameritech explains that it uses a study to allocate nonregulated revenues associated with payphone service to various revenue accounts, including Account 5010. 16. Discussion. Ameritech's creation of nonregulated cost pools in revenue accounts other than Account 5010 reflects a misunderstanding of the Payphone Order. The cost allocation treatment described by Ameritech seems to be premised on the assumption that all telecommunications services provided to payphone users have been deregulated. That assumption is incorrect. The Payphone Order deregulated only the provision of payphone CPE and local coin payphone service. Accordingly, only revenues from those services should be classified as nonregulated, and those revenues, in accordance with the Commission's rules, must be recorded in Account 5010. 17. We therefore direct Ameritech and all other carriers required to file CAMs to use only Account 5010 to record revenues from nonregulated payphone service, as described above, and to remove nonregulated cost pools from Accounts 5081, 5083, 5084, 5100, 5262, and 5263 and any other revenue account other than Account 5010. In addition, we direct that carriers who still have regulated cost pools in Account 5010 assign no revenues to those regulated cost pools after the effective date for deregulation of payphone service, and that they remove the regulated pools from Account 5010 in their next CAM revisions. D. Inmate Calling Service Revenues and Uncollectibles 18. APCC and ICSPC claim that ILECs should be required to amend their CAMs to make clear that they identify revenues, including uncollectible revenues, from inmate calling service (ICS) calls as nonregulated revenue. They claim that ICS calls generate an extraordinarily high percentage of uncollectibles, and that if uncollectible revenues from ICS calls are not identified as nonregulated, regulated services could subsidize ICS, in violation of Section 276(a)(1) of the 1996 Act. Finally, APCC and ICSPC allege that the ILECs providing billing service to independent ICS providers charge them for the actual uncollectibles from their payphones, but do not follow the same policy for their own ICS operations. APCC and ICSPC maintain that this different treatment of uncollectibles results in discrimination against independent payphone owners and, hence, violates Section 276(a)(2) of the 1996 Act. 19. In reply comments, Bell Atlantic states that it properly allocates uncollectibles based on the ratios of gross regulated and nonregulated revenues within each class of activities. GTE explains that the Commission's Payphone Order and Payphone Reconsideration Order require that the provision of payphone equipment be deregulated, but that "operator service or intraLATA toll revenue from inmate collect calls handled by GTE are regulated revenues and should definitely not be identified as nonregulated operating revenue." GTE also disputes the allegations of discriminatory treatment, pointing out that uncollectibles are not billed by GTE on behalf of its ICS operation, so none can be charged back to its ICS operation. 20. Discussion. We do not believe that ILECs should classify revenues from collect ICS calls as nonregulated. In the payphone proceeding, the Commission focused upon the deregulation of local coin payphone rates, but did not initiate action to deregulate non- coin payphone calls. As the Common Carrier Bureau concluded in its CEI orders, there is no support in the Payphone Order or the Payphone Reconsideration Order for the contention that BOCs or other ILECs are required to provide collect calling as a nonregulated service when used with inmate payphones. Because it is appropriate for ILECs to continue to treat inmate collect calling as a regulated service, we reject the argument advanced by APCC and ICSPC that the uncollectibles associated with inmate collect calling must be included in nonregulated cost pools. For that reason, we need not reach the issue of how ILECs should identify uncollectibles for collect calls placed over ICS facilities. Finally, we decline to address the discrimination argument raised by APCC and ICSPC. That contention, premised upon APCC and ICSPC's representation that some ILECs charge independent ICS providers for actual uncollectibles, bears no direct relationship to the CAMs under consideration in these proceedings. E. Transfer of Payphone Assets to a Separate Nonregulated Affiliate 21. BellSouth and SNET are the only carriers at this time that have elected to transfer their payphone operation to a separate nonregulated affiliate. APCC and SPCC filed comments on BellSouth's CAM revisions and BellSouth filed a reply. APCC requests that BellSouth refile its CAM, "quantifying the impact on its regulated operations, of all transactions it anticipates with BellSouth Public Communications." In addition, APCC asks that BellSouth be required to quantify the impact on its regulated operations of the transfer of the regulated payphone assets to BellSouth's unregulated subsidiary, in order to ensure that BellSouth has conformed with the affiliate transaction rules, which require that the transfer "be at the higher of net book or fair market value." SPCC argues that "the Commission should require BellSouth to show all relevant details of its proposed relationship with BSPC," including both the valuation of transferred assets and a description of services that BellSouth will provide to BSPC. 22. In reply, BellSouth maintains that "[t]he criticisms of APCC and SPCC are premature." BellSouth explains that Section V of its CAM does not require advance notice of anticipated affiliate transactions, and that when transactions between BellSouth and BSPC are finalized, BellSouth will report them in Section V of its CAM in compliance with Section 64.903 of the Commission's rules. BellSouth also states that the information sought by SPCC and APCC is competitively sensitive and beyond the scope of the Commission's CAM filing requirements, which do not require that BellSouth report in its CAM a quantification of the gain or loss on the sale of fixed assets, such as the payphone assets transferred to BSPC by BellSouth. BellSouth argues that the Commission "gains assurance of compliance with the asset transfer rules through the independent audit required by 47 C.F.R.  64.904, and through the Commission's own staff audits." 23. Discussion. BellSouth has, in fact, quantified the changes in its cost apportionment tables as a result of reclassifying payphone operations as nonregulated. Moreover, there is no requirement that carriers quantify in their CAMs the the gain or loss on fixed assets transferred to nonregulated affiliates. 24. Although the Commission's rules require that proposed changes in the statement concerning affiliate transactions "be quantified in $100,000 increments at the account level," BellSouth argues that "[a]t the time of BellSouth's CAM filing, internal business planning had not advanced to the point where future transactions between BST and BSPC could be identified and quantified." While BellSouth presents a reasonable explanation for the absence of this quantification in its November 25, 1996, CAM filing, we observe that more than six months have elapsed since that time, affording adequate opportunity to identify and quantify future transactions between BellSouth and its affiliate. Accordingly, we shall require that within 60 days, BellSouth must provide the quantification required by Section 64.903 of the Commission's rules, rather than waiting until the transactions are finalized, as BellSouth proposes. IV. ORDERING CLAUSES 25. Accordingly, IT IS ORDERED, pursuant to Section 4(i) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), and Section 0.291 of the Commission's rules, 47 C.F.R.  0.291, that the Cost Allocation Manual revisions filed by Aliant Communications Co, ALLTEL Telephone Systems, Ameritech Operating Cos., the Bell Atlantic Telephone Companies, BellSouth Corporation, Cincinnati Bell Telephone Co., Citizens Telephone Co., GTE Telephone Operating Cos., Nevada Bell Telephone Co., NYNEX Telephone Companies, Pacific Bell Telephone Co., Puerto Rico Telephone Co., Rochester Telephone Corp., Southern New England Telephone Co., Southwestern Bell Telephone Co., United and Central Telephone Companies, and US West, Inc., ARE APPROVED, subject to the conditions noted in this Order. 26. IT IS FURTHER ORDERED, that any required revisions of Cost Allocation Manuals shall be submitted within 60 days of the release date of this Order. FEDERAL COMMUNICATIONS COMMISSION Kenneth P. Moran Chief, Accounting and Audits Division Common Carrier Bureau