Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matters of ) ) BellSouth Corporation ) BellSouth Telecommunications, Inc. ) Southwestern Bell Telephone Company ) Pacific Bell ) Nevada Bell ) ) Applications for Review of ) ASD No. 98-65 Responsible Accounting Officer Letter 26 ) ORDER Adopted: May 28, 1999 Released: July 15, 1999 By the Commission: I. The Commission has before it two Applications for Review: one filed on June 4, 1998 by BellSouth Corporation and BellSouth Telecommunications, Inc. ("BellSouth"); the second filed on June 5, 1998 by Southwestern Bell Telephone Company, Pacific Bell and Nevada Bell (collectively referred to as "SBC"). We have consolidated these applications for administrative convenience because they present similar issues. The parties request review of Responsible Accounting Officer Letter No. 26 ("RAO 26"), released on May 6, 1998, that revised the manner by which carriers must structure Section V of their cost allocation manuals ("CAMs"). 1. Since 1987, the Commission has used Responsible Accounting Officer Letters to provide regulatory accounting guidance to carriers in response to accounting questions. These letters are issued to provide accounting guidance to carriers and to maintain uniformity within the system of accounts prescribed in our Part 32 rules. 2. Acting under delegated authority, the Accounting Safeguards Division ("Division") of the Common Carrier Bureau ("Bureau") issued RAO 26 primarily to provide guidance to carriers on how to revise their CAMs in accordance with the modified affiliate transactions requirements of the Accounting Safeguards Order. The Accounting Safeguards Order amended the Part 32 affiliate transactions rules by, among other things: (1) establishing uniform valuation methodologies for the provision of services and the transfer of assets between regulated and nonregulated affiliates; (2) establishing an exception to the valuation rules for nonregulated service affiliates providing services to a regulated affiliate; (3) allowing carriers to use prices appearing in certain publicly filed agreements in lieu of tariffed rates when tariffed rates are not available to value certain transactions; and (4) applying the authorized rate of return on interstate services, currently 11.25 percent, when determining fully distributed cost. 3. To account for these changes to our affiliate transactions rules, RAO 26 requires carriers to report additional information in Section V of their CAMs. First, carriers are to include a description of how they apply our affiliate transactions rules. Second, for each affiliate with which the carrier conducts business, a brief narrative describing the nature of the affiliate's business must be provided. Third, all separate affiliates established to meet the requirements of section 272 of the Telecommunications Act of 1996 (1996 Act) must be so identified. Fourth, carriers must report in more detail their asset transfers with affiliated entities. Fifth, as part of the affiliate transactions matrix, carriers must identify the affiliate transactions they engage in, or will engage in, by using a code denoting the frequency with which they engage, or will engage, in those transactions. 4. In their Applications for Review, the parties challenge the basis for the requirements established in RAO 26. Specifically, SBC argues that RAO 26 is inconsistent with section 11 of the 1996 Act. Section 11 requires the Commission, in every even-numbered year beginning in 1998, to review its regulations applicable to providers of telecommunications services to determine whether the regulations are no longer in the public interest due to meaningful economic competition between providers of such service and whether such regulations should be repealed or modified. Section 11 further instructs the Commission to "repeal or modify any regulation it determines to be no longer necessary in the public interest." SBC argues that section 11 requires the Commission to review its CAM requirements to determine the extent to which they are still necessary, instead of expanding and reorganizing the detail of the affiliate transactions reporting requirements. BellSouth similarly argues that RAO 26 increases the reporting burden placed on the carriers and also causes confusion in the reporting of asset transfers. 5. We reject SBC's contention that RAO 26 is inconsistent with section 11. Section 11 requires that the Commission examine its existing regulations to determine whether they continue to be necessary; it does not, as SBC implies, prohibit the Bureau from imposing new or modified filing and reporting requirements that are reasonable and would carry out provisions of the Communications Act of 1934, as amended. The RAO 26 reporting requirements will ensure that carriers uniformly meet the requirements established in the Accounting Safeguards Order. The establishment of uniform reporting requirements is essential to verify compliance with our Part 32 rules. Moreover, we do not agree that the reporting requirements adopted in RAO 26 will place increased burdens on carriers. Some carriers already report this information. In other cases, the RAO 26 requirements will actually decrease carriers' burdens by eliminating the need for textual descriptions of affiliate transactions. 6. SBC further argues that the Bureau exceeded its authority by adding a condition to one of the rulings of the Accounting Safeguards Order. In the Accounting Safeguards Order, the Commission requires that carriers use the fully distributed cost methodology to value affiliate transactions involving services that are neither tariffed nor subject to prevailing company prices if, and only if, the affiliate exists solely to provide services to members of the carrier's corporate family. RAO 26 requires that the fully distributed cost methodology "be used only when a carrier purchases services from an affiliate that exists solely to provide services to members of the carrier's corporate family." RAO 26 further requires that, in order to qualify for this classification, the services affiliate must not have any sales with outside parties. SBC contends that the Bureau acted outside of its authority when it interpreted the phrase "exists solely" to prohibit all sales with outside third parties. 7. We reject SBC's contention that the RAO 26 requirements are outside the scope of the Bureau's authority. The Accounting Safeguards Order provides that the fully distributed cost methodology may be used when an affiliate provides services solely to its corporate affiliates. Use of the fully distributed cost methodology in this manner is warranted because, "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." Such reasoning makes little sense unless the affiliate continues to provide services solely to the carrier's corporate family. Otherwise, a carrier could completely avoid the use of the other mandated cost methodologies simply by claiming that an affiliate was initially established to provide services solely to its corporate family, regardless of whether services are actually provided to unaffiliated third parties. Such an interpretation would allow unlimited use of the fully distributed cost methodology for transactions with affiliates, thereby completely eviscerating our affiliate transactions rules. RAO 26 provides instruction to carriers concerning transactions that may be valued using the fully distributed cost methodology; it does not change the requirements established in the Accounting Safeguards Order. We therefore conclude that the Bureau did not exceed its authority. 8. BellSouth argues that requiring detailed information on asset transfers in the CAM is redundant because this information is reported in the ARMIS 43-02 Report as well as in the audit workpapers for the CAM audits. BellSouth also argues that the filing dates differ for the year-end CAMs and ARMIS reports. Because the information to be included in the year-end CAM must be compiled before year end, asset transfers occurring late in November and December may not be included in the year- end CAM, whereas the ARMIS Report includes transactions for the entire year. BellSouth asserts that the incompleteness of the CAM revisions would cause confusion among both the users of the CAM and the users of the asset transfer schedules filed with the ARMIS report. BellSouth also asserts that compiling the information in November/December for the CAM and again in February for the ARMIS Report places an unnecessary hardship on the carriers preparing the asset transfer information to be included in the CAM. 9. We reject BellSouth's argument that requiring detailed information on asset transfers in the CAM is redundant because this information is reported in the ARMIS 43-02 Report as well as in the audit workpapers for the Joint Cost Order audit. The details of the asset transfers reported in the CAM differ somewhat from the information reported in the ARMIS Report and are thus, not duplicative or redundant. Although both the CAM and the ARMIS Report identify the affiliates involved and the terms at which the asset transfer is valued, the ARMIS information is reported on an aggregate basis, including an aggregate dollar amount, but contains no description of the assets transferred. Alternatively, the CAM does not provide a dollar figure but, more importantly, includes a detailed description of the assets transferred. 10. As a result, although the ARMIS Report allows the Commission to collect the financial and operating data required to administer our accounting, joint cost, jurisdictional separations, rate base disallowance, and access charge rules, it provides relatively minor information and assistance in identifying cross-subsidization and discriminatory practices, as disclosed through the CAM, that the affiliate transactions rules are intended to prevent. Commission staff is aware that the ARMIS Report may include transactions not reported in the CAM due to filing date differences. The asset transfer information reported solely in the CAM, however, is an integral part of our regulatory oversight and far outweighs any concerns related to filing timing differences. 11. We disagree with BellSouth's contention that RAO 26 imposed duplicative and unnecessarily burdensome requirements. The disclosure of asset transfers in a CAM allows the Commission to identify discriminatory and improper asset transfer pricing. The affiliate transactions requirements are becoming more important as the Commission attempts to create conditions favorable to competition by establishing safeguards against discrimination. The Commission's longstanding requirement that incumbent local exchange carriers report their affiliate transactions with their subsidiaries in their CAMs implements those safeguards. We therefore conclude that the Bureau's Order requiring reporting asset transfers in detail in the CAM does not place any unnecessary hardship on the carriers; the burden is slight and outweighed by the benefits. 12. Other than the procedural and burden arguments previously discussed, SBC and BellSouth raise no substantive challenge to RAO 26. We find that the Bureau properly decided the matters raised in the Applications for Review, and we uphold the Bureau decisions for the reasons stated therein. 13. Accordingly, IT IS ORDERED that, pursuant to sections 4(i), 5(c), 201-205, 218- 220 of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 155(c), 201-205, and 218-220, and sections 1.115, 32.17, and 64.903 of the Commission's rules, 47 C.F.R.  1.115, 32.17, and 64.903, the Applications for Review filed by BellSouth Corporation and BellSouth Telecommunications, Inc., and by Southwestern Bell Telephone Company, Pacific Bell, and Nevada Bell ARE DENIED. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary