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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** FEDERAL COMMUNICATIONS COMMISSION WASHINGTON, D.C. 20554 IN REPLY REFER TO: 1600E RAO Letter 26 DA 98-855 Adopted: May 6, 1998 Released: May 6, 1998 Responsible Accounting Officer Re: Cost Allocation Manuals - Section V. Transactions With Affiliates This letter revises the guidelines carriers must follow in preparing the affiliate transactions section of their cost allocation manuals (CAMs). Through this letter, we accomplish three objectives. First, we address discrepancies in the CAM filing format that Commission staff uncovered during our recent review of the CAMs. Second, we revise the CAM filing format to ensure that carriers understand and comply with the changes to the Commission's affiliate transactions rules adopted in the Accounting Safeguards Order. Finally, we streamline the CAM filing format by eliminating approximately 40% of the required pages in order to reduce the reporting burden on carriers. In the Accounting Safeguards Order, the Commission amended the Part 32 affiliate transactions rules. In particular, four of these amendments may require carriers to change their CAMs. These amendments include: (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 prices appearing in certain publicly-filed agreements in the place of tariffed rates when tariffed rates are not available; and (4) applying the authorized rate of return on interstate services, currently 11.25%, when determining fully distributed cost. We address the necessary changes to the CAM filing format in the appendices to this letter. Appendix A provides the list of terms as set forth in Section 32.27 of the Commission's rules that carriers should use in their CAMs when describing transactions between regulated and nonregulated affiliates. Appendix B presents the format for the affiliate transactions section of the CAM and details the information that carriers must provide in this section. Finally, Appendix C contains an example of the revised affiliate transactions matrix format. The guidance in this RAO letter supersedes the CAM uniformity requirements for affiliate transactions set forth in Section A.4 of the Appendix to RAO Letter 19, released December 23, 1991, but it does not supersede any other aspect of RAO Letter 19. Carriers that are required to file CAMs must use the format established in this RAO letter no later than December 31, 1998, although such carriers are permitted to revise their CAMs accordingly before that date. This letter is issued pursuant to authority delegated under Section 0.291 of the Commission's Rules, 47 C.F.R.  0.291. Applications for review under Section 1.115 of the Commission's Rules, 47 C.F.R.  1.115, must be filed within 30 days of the date of this letter. See 47 C.F.R.  1.4(b)(2). If you have any questions, please contact Jos‚-Luis RodrĄguez at (202) 418-0810. FEDERAL COMMUNICATIONS COMMISSION Kenneth P. Moran, Chief Accounting Safeguards Division The affiliate transactions rules specify the valuation methodologies that carriers must use in accounting for transactions between regulated and nonregulated affiliates. In the course of our cost allocation manual (CAM) review experience, we have noted that the descriptions that many carriers use in their CAMs lack the necessary detail to determine whether the carrier fully understands and complies with the Commission's accounting rules. For example, carriers have used the word "cost" to describe the method used to value certain affiliate transactions. The word "cost," by itself, lacks precision and may be interpreted in a number of ways. In order to prevent confusion arising from multiple definitions of similar terms, and also to ensure uniformity for CAM reporting purposes, we require carriers to use the definitions listed in Section A below when describing affiliate transactions. In Sections B and C below, we describe terms used in valuing asset and service transactions. A. General Definitions: (1) "tariffed rates" -- rates provided pursuant to documents filed with state or federal regulatory authorities. (2) "publicly-filed agreements/statements of generally available terms" -- charges appearing in publicly-filed agreements submitted to a State commission pursuant to section 252(e) or statements of generally available terms pursuant to section 252(f) in place of tariffed rates when tariffed rates are not available. (3) "prevailing price" -- the price at which a company offers an asset or service to the general public. In order to qualify for prevailing price valuation, 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 an asset-by-asset and service-by-service basis, rather than on a product line or service line basis. (4) "fair market value" -- the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. (5) "net book cost" -- the original cost of an asset adjusted by the associated valuation reserves (e.g., accumulated depreciation, deferred taxes, etc.). (6) "fully distributed cost" -- cost determined in a manner that complies with the standards and procedures for the apportionment of special, joint, and common costs between the regulated and nonregulated operations of the carrier. A fully distributed costing methodology apportions the total costs of a group of services or products--including the authorized interstate rate of return--among the individual services or products in that group. In general, this process directly assigns some of the costs to individual services or products. The remaining costs are allocated among individual services or products based on relative use measurements or estimates of relative use. The resulting cost apportionments determine the share of total cost that is attributed to each service or product. B. Valuation Methods for the Sale or Transfer of Assets: (1) "tariffed rate" -- is to be used when assets are sold or transferred between a carrier and its affiliates pursuant to existing tariffs, including a tariff filed with a state commission. (2) "prevailing price" -- is to be used when non-tariffed assets are sold or transferred between a carrier and its affiliates that qualify for prevailing price. To qualify for prevailing price, the sale of a particular asset must encompass greater than 50% of the total quantity of such product sold by an entity. Carriers shall apply this 50 percent threshold on an asset-by-asset basis rather than on a product-line basis. In the case of transactions for assets subject to 47 U.S.C.  272, a Bell operating company may record such transactions at prevailing price regardless of whether the 50 percent threshold has been satisfied. (3) "higher of fair market value and net book cost" -- is to be used for all other assets sold by or transferred from the carrier to its affiliates. For each asset listed under this classification, the carrier must include the specific valuation method in effect at the date of the CAM filing by inserting either FMV (fair market value) or NBC (net book cost) next to each asset listed. (4) "lower of fair market value and net book cost" -- is to be used for all other assets purchased by or transferred to the carrier from its affiliates. For each asset listed under this classification, the carrier must include the specific valuation method in effect at the date of the CAM filing by inserting either FMV or NBC next to each asset listed. C. Valuation Methods for the Provision of Services: (1) "tariffed rate" -- is to be used when services are sold or transferred between a carrier and its affiliates pursuant to existing tariffs, including a tariff filed with a state commission. (2) "rate pursuant to a publicly-filed agreement" rate -- is to be used when non-tariffed services are sold or transferred between a carrier and its affiliates pursuant to publicly filed agreements submitted to state commissions pursuant to section 252(e) of the Communications Act of 1934, as amended, (the Act) or statements of generally available terms pursuant to section 252(f). (3) "prevailing price" -- is to be used when non-tariffed services are sold or transferred between a carrier and its affiliates that qualify for prevailing price. To qualify for prevailing price, the sale of a particular service must encompass greater than 50% of the total quantity of such service sold by an entity. Carriers shall apply this 50 percent threshold on a service-by-service basis rather than on a service-line basis. In the case of transactions for services subject to 47 U.S.C.  272, a Bell operating company may record such transactions at prevailing price regardless of whether the 50 percent threshold has been satisfied. (4) "higher of fair market value and fully distributed cost" -- is to be used for all other services sold by or transferred from the carrier to its affiliates. For each service listed under this classification, the carrier must include the specific valuation method in effect at the date of the CAM filing by inserting either FMV or fully distributed cost (FDC) next to each service listed. (5) "lower of fair market value and fully distributed cost" -- is to be used for all other services purchased by or transferred to the carrier from its affiliates (except that services received by a carrier from its affiliates that exist solely to provide services to members of the corporate family shall be recorded at FDC, as shown below in item (6)). For each service listed under this classification, the carrier must include the specific valuation method in effect at the date of the CAM filing by inserting either FMV or FDC next to each service listed. (6) "fully distributed cost" -- is to 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. In order to qualify for this classification, the services affiliate must not have any sales with outside parties. Section V of the CAM should be organized in the following manner and include the following topics: A. Introduction -- In this section, carriers should include a description of our affiliate transactions rules and how they apply them. Inclusion of this information provides assurance that the carrier is aware of, and is appropriately applying, the affiliate transactions rules. When describing the "terms" of the affiliate transactions, carriers must use the definition of terms as specified in Appendix A. In this section, carriers must also include a statement that fully distributed cost includes a return component calculated using the authorized interstate rate of return. This statement must specify the interstate rate of return in use. (Note: the current prescribed interstate rate of return is 11.25 percent). B. List of Affiliates -- This section must include the following information: (1) A listing of affiliates with which the carrier engages in, or will engage in, affiliate transactions. For each affiliate listed, provide a brief narrative describing the nature of its business. (2) When listing the affiliates, any separate affiliate(s) established to meet the requirements of Section 272 of the Act, must be so identified (i.e., XYZ Long Distance Co., (Section 272 affiliate)). (3) When listing the affiliates, any affiliate that exists solely to provide services to members of the carrier's corporate family must be so identified (i.e., ABC Company. For transactions with this affiliate, the FDC exception applies). C. List of Assets and Services Provided -- As discussed in Appendix C, we streamline the matrix for reporting transactions between the carrier and its affiliates. As shown in that matrix, we allow carriers to list assets and services by category. In this section, carriers must list and describe each of those asset and service categories, as presented on that matrix. The description can be a narrative explaining these assets or services, or it can contain a list of activities that are provided under each service. To conform to the matrix format, this list must be separated into two sections: assets and services provided by the carrier to its affiliates; and assets and services received by the carrier from its affiliates. For CAM presentation purposes, a carrier may combine various types of assets or services into homogeneous groups. These groups must separate regulated activities from nonregulated activities. For assets or services that, under different circumstances, are provided at a combination of more than one of the following: prevailing price, fair market value, and/or fully distributed cost, an explanation must be provided in the description to explain these circumstances. Below, we provide several examples of asset or service categories that may appear on the matrix and describe how they should be presented in this section. (1) Examples of Assets or Services Provided by the Telephone Company to its Affiliates: (a) Marketing Services -- includes market research, strategic planning, market surveys, consulting services. (b) Real Estate Services -- includes lease arrangements and tenant improvement management. Leasing arrangements can be offered in some office buildings at prevailing price, and in other office buildings at the higher of fully distributed cost or fair market value. (Provide an explanation of why this occurs.) (c) Public Relations -- (1) support: includes communication consultation, writing services, production management for media, and presentation design and development and (2) television services: includes scripting production, editing, duplication, and live broadcasting. (d) Telecommunications Services -- includes basic exchange and intraLATA toll services. (e) Voice Messaging -- allows subscribers to leave, direct, and retrieve voice messages. (2) Examples of Assets or Services Received by the Telephone Company from its Affiliates: (a) Marketing Services -- marketing of telecommunications services and products. (b) Directory Advertising -- advertising in both white and yellow pages. (c) Legal Services -- includes legal representation in areas of commercial litigation, labor law, and corporate transactions. D. Matrix -- This section must contain a matrix showing each type of asset or service involved in the affiliate transaction, and the terms and the frequency of each type of transaction. The matrix must be grouped into two categories: transactions from the carrier to its affiliates and transactions from the affiliates to the carrier. In the 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 in, or will engage in, those transactions. The following codes must be used when describing the frequency of the transactions: D = Daily W = Weekly M = Monthly Q = Quarterly A = Annually O = Occasionally The matrix must include a legend of the codes used. In the event that these codes do not fit a particular circumstance, contact the Accounting Safeguards Division for prior approval before adding a code. If approval is authorized, the new code must be included in the legend. See Appendix C for an example of the matrix. The matrix must be designed as shown in this Appendix. As noted in Appendix B, the matrix must contain each type of asset or service, the affiliate involved, and the terms and the frequency of each type of transaction. The matrix must be grouped into two categories: transactions from the carrier to its affiliates and transactions from the affiliates to the carrier. In preparing the matrix, please keep the following in mind: A. The matrix must be organized using the "terms" of affiliate transactions as major headings in column 1. Carriers must use the "terms" as defined in Appendix A. Each type of affiliate transaction (assets and services provided or received) is then entered into the matrix according to the terms with which it is provided or received. B. When listing assets or services under the category "Higher of Fair Market Value and Net Book Cost", "Higher of Fair Market Value and Fully Distributed Cost", "Lower of Fair Market Value and Net Book Cost", and "Lower of Fair Market Value and Fully Distributed Cost", designate the specific valuation method used to value the transaction by inserting either FMV (fair market value), NBC (net book cost), or FDC (fully distributed cost), in parenthesis, next to each service listed. The valuation method identified must be the method in effect at the date of the CAM filing. C. Services listed under the category "Fully Distributed Cost" must include only those services received by a carrier from its affiliates that exist solely to provide services to members of the carrier's corporate family. Other services offered or provided at FDC which must meet the "higher or lower" test, as discussed above, are included in that section of the matrix, and so identified.