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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 ) ) Southwestern Bell Telephone Company) AAD 96-57 ) Application for Review of Memorandum ) Opinion and Order Concerning the Proper ) Treatment of Affiliate Transactions) ORDER ON REVIEW Adopted: February 5, 1997 Released: February 6, 1997 By the Commission: I. INTRODUCTION 1. On April 22, 1996, the Chief, Common Carrier Bureau ("Bureau") issued a Memorandum Opinion and Order ("MO&O") denying reconsideration of the Bureau's determination that affiliate transactions involving nonregulated services must comply with the Commission's affiliate transactions rules. In a May 21, 1996 application for review of the MO&O, Southwestern Bell Telephone Company ("Southwestern Bell") argues that the Bureau erroneously applied the affiliate transactions rules to transactions involving nonregulated activities. Southwestern Bell asserts that the Bureau has exceeded its delegated authority by extending the scope of these rules without proper notice and comment required by the Administrative Procedures Act. 2. In response to a public notice released on June 13, 1996, five parties submitted comments and three submitted replies. After carefully reviewing these submissions, we conclude that Southwestern Bell's argument is without merit. We thus deny Southwestern Bell's application for review. II. BACKGROUND 3. On December 31, 1993, Citizens Utilities Company ("Citizens") filed its initial cost allocation manual ("CAM") in compliance with Section 64.903 of the Commission's rules. The CAM described Citizens' proposal to allocate its costs between regulated and nonregulated activities and the manner in which it intended to account for transactions with affiliates. On December 27, 1994, the Bureau released an Order approving Citizens' CAM, subject to several conditions ("Citizens CAM Order"). Under the terms of the Citizens CAM Order, full approval would be granted if Citizens resubmitted its CAM with certain additional information, including the identity and description of nonregulated services provided to its affiliates. The terms of these transactions had to comply with the Commission's affiliate transactions rules. 4. Several parties, including Southwestern Bell, filed petitions for reconsideration of the Citizens CAM Order. All the petitioners argued that the Bureau erroneously determined that transactions involving nonregulated services between a carrier and its affiliates must comply with the affiliate transactions rules. Specifically, Petitioners presented four arguments to support their position: (1) that the affiliate transactions rules do not apply to transactions involving the provision of nonregulated activities; (2) that applying those rules to transactions involving nonregulated services would not prevent cross-subsidization because such risk is nonexistent in these transactions; (3) that applying the affiliate transactions rules to nonregulated transactions would have the effect of regulating the prices at which these transactions occur, in violation of the Joint Cost Order; and (4) that the Citizens CAM Order is inconsistent with a previous order released on July 10, 1992. 5. After carefully considering these arguments, the Bureau released the MO&O affirming its findings with respect to affiliate transactions as provided by the Citizens CAM Order. The Bureau elaborated on its earlier finding that a carrier providing nonregulated services to its affiliates is subject to the Commission's affiliate transactions rules if the nonregulated service is recorded in the carrier's regulated books of account. The Bureau explained that the determining factor is whether the service is recorded in a regulated or nonregulated set of books; a nonregulated service provided to a carrier's nonregulated affiliate is governed by the affiliate transactions rules only if it is recorded in a regulated set of books. Consequently, the affiliate transactions rules would not apply to transactions where a carrier provides a nonregulated activity to an affiliate and the carrier records that nonregulated activity in a separate set of books. III. COMMENTS AND DISCUSSION 6. On May 21, 1996, Southwestern Bell filed an application for review of the MO&O. The gravamen of Southwestern Bell's application is that the Bureau erroneously applied the affiliate transactions rules to nonregulated services recorded in regulated books of account. The arguments presented in Southwestern Bell's application are essentially similar to those raised in its earlier petition for reconsideration. Specifically, Southwestern Bell argues that the Bureau "has exceeded the proper scope of its delegated authority" by attempting to change the affiliate transactions rules without complying with the notice and comment procedures required by the Administrative Procedures Act ("APA"). Furthermore, Southwestern Bell argues that the Citizens CAM Order is inconsistent with the Joint Cost Order, the United Order, and the Commission's Affiliate Transaction NPRM. GTE, the Sprint LECs, BellSouth, USTA, and Pacific filed comments in support of Southwestern Bell's application and raise no additional arguments. US West, APCC and California Cable filed replies. US West supports Southwestern Bell's position; APCC and CCTA oppose Southwestern Bell's Application. 7. Southwestern Bell bases its argument on its interpretation of 47 C.F.R. Section 32.27, which states in pertinent part: Services provided by an affiliate to the regulated activity, when the same services are also provided by the affiliate to unaffiliated persons or entities, shall be recorded at the market rate. Southwestern Bell cites this provision for the proposition that only transfers between affiliates and the carrier's regulated operations or vice versa fall under the purview of Section 32.27. According to Southwestern Bell, "[i]f Citizens receives services from a nonregulated affiliate which are not used in connection with a regulated activity of Citizens, then Section 32.27 does not apply." Southwestern Bell asserts that the Citizens CAM Order represents a material shift in the policy of the Bureau because the Order would require that all transactions with affiliates comply with Section 32.27, even if the service provided to the affiliate involves a nonregulated activity. In support of its argument, Southwestern Bell cites the Joint Cost Order and the United Order for additional authority that nonregulated services provided to a carrier's affiliates are beyond the reach of the affiliate transactions rules. 8. In general, the affiliate transactions rules define how a carrier must record affiliate transactions in its regulated books of account. With respect to services, the rules are specifically designed to prevent a carrier from circumventing the Part 64 cost allocation rules by providing services to affiliates at unreasonably low rates or receiving services from affiliates at unreasonably high rates, which may have the effect of transferring overstated expenses to the ratepayer to the advantage of the carrier and its affiliates. This objective is accomplished by prescribing the method by which carriers must value transactions regarding services furnished to affiliates. The Commission's rules merely establish the method by which a carrier must record these transactions on its books of account; the affiliate transactions rules do not govern the actual price the carrier charges its affiliates for these services. 9. Carriers regularly provide both regulated and nonregulated services to their affiliates. All transactions that occur between a carrier and its nonregulated affiliates are subject to the affiliate transactions rules. This includes transactions involving the provision of nonregulated services to nonregulated affiliates. We note, however, that when a transaction is conducted between two nonregulated affiliates of the same carrier, the transaction is not governed by our rules. Similarly, when a carrier's nonregulated division conducts a transaction with a nonregulated affiliate and records the transaction on nonregulated books of account, the transaction is not subject to our affiliate transactions rules. The general rule thus can be stated as follows: when both parties to a particular transaction are nonregulated and the transaction is not recorded in regulated books of accounts, the transaction is not subject to our affiliate transactions rules. This differs from our treatment of transactions conducted between a regulated carrier and a nonregulated entity, whether it be a nonregulated affiliate or a nonregulated division. Such transactions are subject to our affiliate transactions rules in accordance with the principles outlined above. 10. A carrier may conduct a nonregulated activity through a division within its company using a separate, nonregulated set of books only if the activity does not share assets and resources with the regulated entity. A transaction that uses the carrier's common (or joint) assets or resources in the provision of a nonregulated service to a nonregulated affiliate must be recorded in regulated accounts pursuant to Section 32.23(c) of our rules and is also subject to the affiliate transactions rules. 11. This finding does not change or reinterpret the existing rules. Section 32.23(c) states that "[w]hen a nonregulated activity does involve the common or joint use of assets and resources in the provision of regulated and nonregulated products and services, carriers shall account for these activities within accounts prescribed in this system for telephone company operations." Those accounts are regulated accounts. As used here, the phrase "joint or common assets and resources" describes those assets and resources used to provide both regulated and nonregulated activities. The Bureau's finding in the MO&O, and restated here, is a correct interpretation of Section 32.23(c). 12. The proper interpretation was articulated by the Joint Cost Order proceeding and the United Order. Specifically, the Bureau's Order on reconsideration of the Joint Cost Orderstated that "[t]he operation of the affiliate transaction rules applies . . . to transactions between regulated and nonregulated entities[.]" The United Order then clarified this finding by drawing a distinction between transactions recorded in regulated versus nonregulated accounts. The United Order stated, as we do here, that only those services recorded in a carrier's regulated books of account are governed by the requirements of Section 32.27. We also note that, contrary to Southwestern Bell's argument, the Affiliate Transaction NPRM merely sought to clarify the Bureau's position that the Commission's rules apply to transactions involving nonregulated activities and did not attempt to change or reinterpret a previously existing rule. 13. Based on the foregoing, we find no basis to conclude that the Bureau erred when it required Citizens to report in its CAM transactions for nonregulated services provided to nonregulated affiliates. The Bureau applied the Commission's rules consistently in accordance with the requirements of Sections 32.23 and 32.27. The application of the affiliate transactions rules depends on whether the transaction is recorded in the carrier's Part 32 books of account or in a separate nonregulated set of books rather than on the nature of the transaction. Thus, anytransaction between a carrier subject to Part 32 and its nonregulated affiliate is governed by the affiliate transactions rules when the transaction is recorded in a regulated account. 14. For these reasons, the Citizens CAM Order and subsequent MO&O do not change the Commission's policy governing the treatment of nonregulated services provided to nonregulated affiliates. Instead, they are consistent with prior interpretation of the Commission's long-standing policy on this subject. For this reason, the Bureau was not required to comply with the notice and comment procedures under the APA. IV. ORDERING CLAUSE 15. Accordingly, IT IS ORDERED, pursuant to Sections 5(c)(5), 218, and 220 of the Communications Act of 1934, as amended, 47 U.S.C. 155(c)(5), 218, and 220, and Section 1.115 of the Commission's rules, 47 C.F.R. 1.115, that the Application for Review filed by the Southwestern Bell Telephone Company is DENIED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary