******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. 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 ) ) Southwestern Bell Telephone Company) AAD No. 95-32 ) ) CONSENT DECREE 1. This is a Consent Decree entered into by the Federal Communications Commission ("Commission") and the Southwestern Bell Telephone Company ("SWBT") (collectively referred to sometimes as the "Parties"). 2. Auditors from the Commission and the five state utility regulatory agencies within SWBT's territory initiated a joint audit ("Joint Audit") of transactions between SWBT and the following affiliates of SWBT: SBC Communications Inc. ("SBC"); Southwestern Bell Technology Resources, Inc.; Southwestern Bell Asset Management, Inc. ("AMI"); Southwestern Bell Telecommunications, Inc. ("SWB Telecom"); and Southwestern Bell Mobile Systems, Inc. The scope of the Joint Audit included transactions for the four year period from 1989 to 1992. 3. The Joint Audit had two general objectives. One was to evaluate compliance with the Commission's affiliate transactions rules. The other was to determine whether any noncompliance with these rules had adversely affected interstate and intrastate telephone ratepayers through the flow of cross-subsidies to nonregulated affiliates. The Joint Audit team reported its audit findings in a joint audit report dated March 1994 ("Audit Report"). 4. On March 3, 1995, the Commission released an Order to Show Causedirecting SWBT to respond to certain of the audit findings in the Audit Report and to show cause why certain transactions between SWBT and two of its affiliates (SBC and AMI) should not be found in violation of the Commission's affiliate transactions rules. On May 2, 1995, SWBT responded to the Commission's Order to Show Cause and contested and denied each of the Audit Report findings listed in the Commission's Order. By public notice dated June 20, 1995, the Common Carrier Bureau invited public comment on SWBT's response. Only MCI Communications Corporation filed comments, and SWBT replied on September 1, 1995. 5. The Commission's Order to Show Cause and SWBT's Response to the Order to Show Cause are incorporated into this Agreement by reference. The positions of the parties on the contested issues are generally as follows: SBC Time Reporting, Documentation (a) The Order to Show Cause, based on the Joint Audit team's conclusions, questioned whether the accuracy of certain SBC employees' charges for time spent working on SWBT activities could be substantiated by contemporaneous documentation. (b) In response, SWBT asserted, inter alia, that the Joint Audit team's conclusions ignored ample, contemporaneous documentation that exceeded the applicable audit trail documentation standard; that the Joint Audit team also failed to properly consider SBC's comprehensive time reporting system and the team's interviews with a substantial number of SBC employees; and that the findings extend the marketing time reporting documentation standards to affiliates' nonmarketing employees without prior notice. SBC General Allocator (c) Because SBC does not include costs that are retained, i.e., not assigned to any subsidiary or affiliate of SBC, in its calculation of the General Allocator, the Order to Show Cause questioned whether SBC's General Allocator is consistent with the General Allocator prescribed by the Commission in the Joint Cost Order: "the ratio of all expenses assigned or attributed to regulated and nonregulated activities." The Commission reasoned that because the Joint Cost Order described the General Allocator as being "based on total company expense", the denominator of the ratio must include the aggregate costs incurred by the affiliate, regardless of the nature of such costs. (d) SWBT responded that SBC's General Allocator is proper because it does indeed allocate residual costs using the ratio of all expenses assigned or attributed to SWBT as compared to all expenses assigned or attributed to all of SBC's affiliates, including SWBT. In further response, SWBT explained that the Commission has not previously required the denominator of the General Allocator to include total company expenses; that certain types of costs have been excluded previously, such as non- operating costs, costs of goods sold, lobbying, losses on sale of plant, etc.; that the Commission's position would re-write the definition of the General Allocator to include costs that are neither assigned nor attributed; and that the Commission's position would lead to erroneous and inconsistent results, especially as applied to affiliates not subject to the Commission's Uniform System of Accounts or different organizational structures. Hotel Majestic (e) The Order to Show Cause questioned certain affiliate transactions involving room charges for employees and guests staying at the Hotel Majestic, a hotel located near SWBT headquarters in St. Louis. Under the contract with the hotel, a large block of rooms was reserved at a contract rate for SBC and its affiliates, including SWBT. According to the Audit Report, SWBT apparently paid more than an equitable allocation of the room charges. Specifically, SWBT was charged for all of the reserved rooms that were unoccupied and for a portion of the contract rate for rooms occupied by employees and guests of SBC and other affiliates. The Order to Show Cause also questioned whether a lower publicly available weekend price, rather the contract rate, should have been charged for certain rentals. (f) In its Response, SWBT explained in detail how its allocation of costs was consistent with the affiliate transactions rules. For example, SWBT explained that under the applicable valuation method, SWBT did not book more than the fully distributed cost of the rooms included in the block of rooms. SWBT also explained that, as the cost-causer and true beneficiary of the contract, the costs allocated to it were appropriate. Further, SWBT explained that it was reimbursed appropriately from its affiliates. 6. The Commission and SWBT agree that the expeditious resolution of issues raised by the Joint Audit in accordance with the terms of this Agreement is in the public interest. 7. The Commission and SWBT have reached a mutually agreeable resolution of each area of the Audit described in paragraph 5 above, as detailed below. (a) SBC Time Reporting Documentation. SWBT agrees to implement the following enhancements to its procedures: (1) On an annual basis, SBC agrees to issue a Payroll Distribution Summary Report ("Payroll Report") to each SBC employee. The Payroll Report will reflect the current accounting information, the proper charging direction(s), and the proper percentage distribution(s) among the charging directions for that employee in the payroll system. SBC will require each employee to review the Payroll Report, to note any changes needed to his or her accounting or charging direction information, to sign the report as correct and to retain the report for one year after the close of the calendar year to which it relates. In addition, the employee will indicate which of the following four methods were used to determine the correct charging direction(s) and percentages for that employee: (i) Discussion of job activities with supervisor (This could include, but not be limited to, a review of exception time reporting for the year, historical departmental time averages, actual work products produced by the employee); (ii) Review of the employee's personal planning calendar, or other appropriate documentation such as work logs or work product, to confirm functions/charging directions (Employee must retain calendars or other records for one year after the close of the calendar year to which the records relate); (iii) Review of a written job description for the employee's position (Employee must retain job description for as long as his or her payroll record remains the same or at least one year after the close of the calendar year to which it relates, whichever is longer); (iv) A survey time study of four weeks duration (If the employee indicates a survey time study was used, it must be attached to the signed Payroll Report). (2) SBC will further instruct its employees that, if there is a permanent change in the circumstances of their job, this review process should occur again as soon as the change is known, rather than at the employee's annual review date. Exceptions that occur during a payroll cycle would continue to be handled by standard exception reporting procedures. (3) SBC will have the supervisor of each employee review the Payroll Report and sign it, if correct. (4) SWBT will have its internal audit organization perform a compliance audit of SBC time reporting within two years of the release of the Consent Decree Order described herein to determine compliance with the terms set out in paragraphs 7(a)(1) - (3). Audit workpapers and results of such internal audit will be reviewed by the independent auditors who review SWBT's CAM and affiliate transactions, and the results of such internal audit will be filed with the Commission as part of the work papers associated with the annual independent audit required by Section 64.904 of the Commission's Rules. (b) SBC General Allocator. The Commission represents that it plans to take administrative action to prescribe expressly how all carriers are to apply the General Allocator to an affiliate. Until this ruling is issued, the Commission agrees to allow the continued use of SBC's method of applying the General Allocator. Once such ruling is issued, however, and in view of the specific circumstances and organizational structure of SBC, if SBC's General Allocator is inconsistent with the ruling, the Commission reserves the right to enforce such ruling prospectively against SWBT with respect to SBC's General Allocator. (c) Hotel Majestic. SWBT represents that it no longer guarantees a block of rooms at the Hotel Majestic and that it was reimbursed by affiliates to SWBT in 1994 for the room rate differential. Based on these representations, the Commission agrees not to pursue any alleged violations of its rules by SWBT based on the previous arrangements with the Hotel Majestic. (d) Price Cap Adjustment. SWBT agrees to make a permanent exogenous adjustment to its price cap indexes to reflect the removal of $50,000 in costs. SWBT shall make this prospective adjustment within 60 days after the effective date of this Consent Decree. 8. In the event SWBT fails to comply with the requirements set forth in paragraph 7 of this Consent Decree, the Commission reserves the right to pursue legal action against SWBT. If SWBT complies with the terms set forth in paragraph 7 of this Consent Decree, then the accounting treatments, procedures and documentation adopted in compliance with paragraph 7 shall be regarded by the Commission as presumptively reasonable and lawful. The Commission, however, reserves its right under law to change accounting requirements prospectively and retroactively, as long as no penalty attaches to such retroactive application. Likewise, SWBT shall be authorized to make changes to its accounting treatments, procedures and documentation to implement or reflect changes in the law or rules or waivers of the Commission's rules, and shall not thereby be in violation of any part of this Consent Decree. 9. In light of SWBT's covenants and representations contained in paragraph 7 of this Consent Decree, and in express reliance thereon, the Commission has issued a final order formally authorizing the Secretary to execute this Consent Decree ("Consent Decree Order") without change, addition or modification and without a finding of wrongdoing, violations or liability by SWBT and further agrees not to begin, on the motion of the Commission or its staff, any proceeding, formal or informal, concerning matters that were the subject of the Audit Report. Nothing herein, however, shall preclude the Commission from using the information underlying the findings and observations in the Audit Report for other lawful regulatory purposes provided that SWBT shall have all opportunities afforded by law to contest that use and that information. 10. SWBT admits the jurisdiction of the Commission to adopt this Consent Decree. 11. SWBT waives any rights it may have to judicial review, appeal or rights otherwise to challenge or contest the validity of the Consent Decree Order, provided the Commission adopts this Consent Decree without change, addition or modification. 12. The Parties agree not to engage in conduct inconsistent with the terms of this Consent Decree. The Parties may comment publicly, however, on the nature of the Consent Decree, and the merits of their respective positions, after it has been adopted by the Commission. 13. It is understood that SWBT's agreement to this Consent Decree does not constitute an adjudication of any factual or legal issues or an admission by SWBT of wrongdoing, violations or of any inconsistency between its position, on the one hand, and, on the other hand, (i) the Communications Act of 1934, as amended, and (ii) the rules and policies of the Commission. As a result, SWBT shall not be precluded or estopped from litigating de novoany and all of the issues subject to this Consent Decree in any forum. 14. The Parties agree that this Consent Decree and the Consent Decree Order may not be used in any fashion by either of the Parties to this Consent Decree in any legal proceeding except as set forth in this Consent Decree. 15. Adoption by the Commission of this Consent Decree shall conclude action in the proceeding commenced by the Order to Show Cause, 10 FCC Rcd 4407, and the Audit Report without a finding of wrongdoing, violations or liability on the part of SWBT. The Parties agree that the effectiveness of this Consent Decree is expressly contingent upon issuance of the Consent Decree Order described herein, and compliance by SWBT with the terms of this Consent Decree. If this Consent Decree is not signed by SWBT and the Commission, or is otherwise rendered invalid by any court of competent jurisdiction, it shall become null and void and may not become part of the record in this proceeding. 16. If the Commission brings an action in any court of competent jurisdiction to enforce the terms of the Consent Decree order or the Consent Decree, SWBT agrees that it will not contest the validity of either the Consent Decree Order or the Consent Decree, will waive any statutory right to contest the validity of the Consent Decree Order or this Consent Decree through a trial de novo, and will consent to a judgment incorporating the terms of this Consent Decree without change, addition or modification provided, however, that the Commission has complied with all of its obligations under the Consent Decree. 17. This agreement may be signed in counterparts. FEDERAL COMMUNICATIONS COMMISSION By:_____________________________________ Acting Secretary Signed this ______ day of February, 1997 SOUTHWESTERN BELL TELEPHONE COMPANY By:_____________________________________ Its_____________________________________(Title) Signed this ______ day of February, 1997