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                            Before the
                Federal Communications Commission
                     Washington, D.C.  20544



In the Matter of                        )    File No. EB-03-IH-
0245
                              )                             
Verizon Telephone Companies, Inc.       )    NAL/Acct. No. 
200332080014
                              )
Apparent Liability for Forfeiture            )    FRN No. 
0008988438
          

           NOTICE OF APPARENT LIABILITY FOR FORFEITURE 


Adopted:  August 6, 2003                 Released:  
                                         September 8, 2003

By the Commission:  Commissioner Copps and Commissioner 
               Adelstein concurring and issuing a joint 
               statement.

                        I.   INTRODUCTION

     1.   In   this  Notice   of   Apparent  Liability   for 
Forfeiture,  we find  that the  Verizon Telephone  Companies 
(``Verizon'')1 apparently  violated section 32.27(c)  of the 
Commission's rules, which regulates accounting practices for 
transactions  between  Verizon's  New  York  Bell  Operating 
Company (``BOC'') and its affiliates established pursuant to 
section 272(c) of the Communications Act of 1934, as amended 
(``the Act'').  This  rule is important because  it helps to 
ensure  that  Verizon's  affiliates do  not  receive  better 
treatment than Verizon's competitors.   We find that Verizon 
is  apparently  liable  for  forfeiture  in  the  amount  of 
$283,800 under  section 220(d) of  the Act for  its apparent 
violations of  section 32.27(c).   We also  admonish Verizon 
for  violating  section 272(b)(5)  of  the  Act and  section 
53.203(e) of  the Commission's rules  by failing to  post on 
the  Internet  accurate  and   timely  descriptions  of  all 
transactions between the BOC and its section 272 affiliates.  

                         II.  BACKGROUND

     2.   Section  271  of  the   Act  prohibits  BOCs  from 
providing  in-region interLATA  services without  Commission 
authorization.2  To receive such  authorization, a BOC must, 
on  a  state-by-state basis,  show  the  Commission that  it 
satisfies   the   14-point   competitive   checklist,   that 
authorization is  in the  public interest,  convenience, and 
necessity,  and that  it  will carry  out its  long-distance 
operations through  a separate affiliate in  accordance with 
section 272.3   Section 272 establishes  certain structural, 
transactional, and nondiscrimination  safeguards that govern 
the  relationship   between  a  BOC  and   its  section  272 
affiliate.  These statutory  safeguards and the Commission's 
rules thereunder  are designed  to prevent BOCs  from giving 
unfair,  anti-competitive   advantage  to  their   own  long 
distance  affiliates   to  the  detriment   of  unaffiliated 
carriers.4  

     3.   In a series of  orders, the Commission implemented 
the section  272 separate affiliate safeguards  by designing 
rules to  deter BOCs from unfairly  favoring their in-region 
interLATA  operations  by   cross-subsidizing  or  otherwise 
discriminating in favor of their long-distance operations to 
the  detriment of  unaffiliated long-distance  competitors.5  
For example,  the rules  at issue in  this case  ensure that 
BOCs do  not provide services  to their affiliates  at rates 
lower than those available  to unaffiliated competitors, and 
that  all  rates and  other  terms  between  a BOC  and  its 
affiliate are available for  public scrutiny.  In short, the 
rules prohibit a BOC from  providing to its affiliate in the 
long distance market an advantage  that the BOC derived from 
its  dominant  position  in  local  markets.   To  help  the 
Commission determine if a BOC  is complying with section 272 
and  the  Commission's  implementing rules  after  receiving 
section 271  authority in  a state, section  272(d) requires 
the BOC to  obtain a joint Federal/State  audit conducted by 
an  independent  auditor.6   In  the  Accounting  Safeguards 
Order, the Commission also adopted rules governing the joint 
Federal/State  audit of  the BOCs'  compliance with  section 
272.   These rules  address,  inter alia,  oversight of  the 
independent auditor and the filing of the audit report.7   

     4.   The Commission  authorized Verizon to  provide in-
region interLATA service  in New York on  December 22, 1999, 
effective   January  3,   2000.8    At  the   time  of   the 
authorization, Verizon stated that  it had established three 
New  York   section  272   affiliates.9   Pursuant   to  the 
requirements   of  section   272(d),  Verizon   retained  an 
independent  auditor to  perform a  section 272(d)  biennial 
audit  for its  first full  year of  in-region long-distance 
operations, i.e., January 3, 2000 through January 2, 2001.10  
Verizon's independent auditor submitted a publicly-available 
audit report on  February 6, 2002 that,  among other things, 
identified   the  apparent   violations  discussed   here.11  
Verizon responded,  and, after  a public  notice,12 WorldCom 
and AT&T  filed comments  proposing enforcement  action, and 
Verizon responded to those comments.

                       III. DISCUSSION

     5.   Under section 220, any  carrier subject to the Act 
that fails to  keep its accounts, records,  and memoranda on 
the books  in the  manner prescribed  by the  Commission, or 
fails   to  submit   such   accounts,  records,   memoranda, 
documents, papers,  and correspondence to the  inspection of 
the  Commission  or its  authorized  agents,  is liable  for 
forfeiture.13   To impose  such  a  forfeiture penalty,  the 
Commission  must issue  a notice  of apparent  liability and 
send it to  the person against whom the  notice is issued.14  
The Commission  must then give  the person against  whom the 
notice has been  issued an opportunity to  show, in writing, 
why  a  forfeiture penalty  should  not  be imposed.15   The 
Commission will then issue a forfeiture if it finds that the 
person has violated the Act  or a Commission rule.16  As set 
forth  in more  detail below,  we conclude  that Verizon  is 
apparently liable for a  forfeiture under section 220(d) for 
its  apparent   violations  of   section  32.27(c)   of  the 
Commission's rules.

     6.   The fundamental  issues in  this case  are whether 
Verizon violated section 32.27(c) of the rules by failing to 
estimate  fair market  value  for  certain transactions  and 
failing  to  record  the  correct value  for  certain  other 
transactions, and whether  Verizon violated the Commission's 
Internet  posting rules,  section 53.203(e),  by failing  to 
post    accurate   and    timely   affiliate    transactions 
descriptions.   Based  on the  record  in  this case,  which 
includes   the  February   6,  2002   report  of   Verizon's 
independent auditor, as well as the comments of WorldCom and 
AT&T and  Verizon's reply,  we find that  Verizon apparently 
failed   to   comply   with   the   Commission's   affiliate 
transactions rules as  set forth in section  32.27(c) of the 
Commission's  rules.17  Based  on the  record, we  also find 
that  Verizon  apparently failed  to  post  on the  Internet 
accurate   and   timely   descriptions  of   its   affiliate 
transactions  between its  BOC  and  section 272  affiliates 
contrary to the requirements of section 272(b)(5) of the Act 
and section 53.203(e) of the Commission's rules.18

     A.   Verizon's Apparent Violations 

          1.   Section 32.27(c)

     7.   Section   32.27(c)  of   the  Commission's   rules 
requires a BOC  to record transactions with  its section 272 
affiliate at the tariffed rate, prevailing company price, or 
the higher  or lower of cost  or fair market value,  in that 
mandatory order of preference (depending on the direction of 
the  transaction).19   If  there  is  no  tariffed  rate  or 
prevailing company  price, the  BOC must  make a  good faith 
estimate of fair market value.20  For transfers from the BOC 
to its section  272 affiliate, the BOC must  then record the 
higher  of  cost  or  fair  market value  in  its  books  of 
account.21  For transfers from  the section 272 affiliate to 
the  BOC, the  BOC must  record the  lower of  cost or  fair 
market  value  in its  books  of  account.22  Based  on  the 
independent   auditor's  report,   we   find  that   Verizon 
apparently violated this affiliate transactions rule. 

          (a)  Verizon  Failed to  Record the  Correct Value 
     for Transactions

     8.   We  find that  Verizon apparently  failed to  book 
nine transactions, approximately 13  percent out of a sample 
of 70, at either tariffed rate, prevailing company price, or 
the higher of cost or  fair market value as section 32.27(c) 
of our rules require it  to do.23  The independent auditor's 
report  shows  that  Verizon   recorded  the  costs  of  the 
transactions   at   some  different   amount.24    Verizon's 
arguments   that  it   did   not  violate   our  rules   are 
unpersuasive.  According to Verizon,  it contracted with its 
affiliates  at appropriate  rates, but  then failed  to bill 
them  at   the  contract   rates  ``due   to  administrative 
error.''25  But the  rule, which is designed  to ensure that 
carriers  do not  charge their  affiliates less  than market 
value  for  services,  thereby  giving  their  affiliates  a 
competitive  advantage   over  unaffiliated   carriers,  has 
apparently   been  violated,   regardless  of   whether  the 
violation may have been  caused by ``administrative error.''  
Strict enforcement will help  ensure that the Commission can 
detect  any anticompetitive  behavior.  Thus,  we find  that 
Verizon apparently violated section 32.27(c) of our rules.      

          (b)  Verizon Failed to  Make a Good-Faith Estimate 
     of Fair Market Value

     9.   Verizon  booked  34  of  70  sampled  transactions 
(apart from the nine above) at cost, without engaging in the 
mandated   comparison  of   cost  versus   market.   Verizon 
apparently  failed to  make a  good faith  estimate of  fair 
market  value for  the  34 transactions  in the  independent 
auditor's sample.26  As a  result, Verizon failed to perform 
the required comparison between  fair market value and fully 
distributed  cost for  the  34  transactions, which  totaled 
$15,177,531  when  measured  at  cost.27   Instead,  Verizon 
simply booked the 34  transactions at cost.28  Thus, Verizon 
apparently  violated  section  32.27(c),  and  is  therefore 
apparently liable for forfeiture under section 220(d).  As a 
result of Verizon's failure to follow the Act and rules when 
booking the cost of these  transactions, it may have charged 
its section  272 affiliate  less than  market value  for the 
services, giving the affiliate  a competitive advantage over 
unaffiliated long-distance carriers.

     10.  Verizon argues that  it nevertheless complied with 
the Act  and the Commission's rules.   Verizon asserts that:  
(1) it  could not obtain  fair market valuations  from third 
parties; (2) the services at  issue are unique, precluding a 
fair  market  value  analysis;  and, (3)  the  Act  and  the 
Commission's  affiliate transactions  rules require  Verizon 
merely to make a good faith attempt at obtaining fair market 
value but do not require Verizon to arrive at an estimate of 
fair   market  value.29    We   reject   all  of   Verizon's 
contentions.   Although   the  Commission's  rules   do  not 
prescribe  a specific  method  for  determining fair  market 
value,30  they  do  require  a  BOC to  make  a  good  faith 
estimate,  not merely  a  good faith  attempt  at making  an 
estimate.31   As the  Commission  stated  in the  Accounting 
Safeguards  Order,  carriers  have  a  variety  of  ways  to 
estimate  fair  market  value,  e.g.,  appraisals,  catalogs 
listing similar items, competitive bids, replacement cost of 
an  asset, and  net  realizable value  of  an asset.32   The 
Commission has also recognized that not all transactions can 
be  valued using  such independent  valuation methods.   The 
Commission has not exempted  such transactions from the fair 
market  value  requirement,  but   has  said  that  ``[w]hen 
situations arise involving transactions  that are not easily 
valued by independent means, we require carriers to maintain 
records sufficient to support their value determination.''33  
Therefore, even if a  third-party consultant reports that it 
cannot estimate fair  market value for the BOC,  the BOC may 
not ignore its  obligation to do so, and  to keep supporting 
records.34  Based on the record  before us, we also disagree 
that  the  services  -  most  of  which  are  some  form  of 
telemarketing or  call center operations -  are sufficiently 
unique to justify Verizon's  departure from the Commission's 
rules.  In  any event, while  the unique nature  of services 
might serve as a basis for a waiver of the rule, Verizon did 
not  even ask  for such  a  waiver, let  alone receive  one.  
Finally,  Verizon  is  incorrect  that it  can  satisfy  its 
obligation  by  merely  making   a  good  faith  attempt  at 
obtaining faith  market value.  Nothing  in the rule  or the 
Accounting  Safeguards  Order   so  suggests.   Rather,  its 
failure  to provide  the requisite  estimate constitutes  an 
apparent violation  of section 32.27(c) of  the Commission's 
rules.  

          2.   Section 272(b)(5)

     11.  Section  272(b)(5) of  the Act  requires that  all 
transactions between a BOC and its section 272 affiliates be 
``reduced    to   writing    and   available    for   public 
inspection.''35   The  Commission's   rules  implement  this 
requirement by directing BOCs  to post all transactions with 
their section 272 affiliates on  the Internet within 10 days 
of  their   occurrence.36   The  postings  must   include  a 
``detailed  written  description  of the  asset  or  service 
transferred   and   the   terms  and   conditions   of   the 
transaction.''37  The audit results show that Verizon failed 
to  comply   with  this   requirement  in   numerous  cases.  
Specifically,  of  839  postings reviewed,  the  independent 
auditor identified  the following errors:  129  web postings 
that did  not match the underlying  agreements, including 44 
with  multiple  errors;  four   missing  postings;  51  late 
postings; and  68 postings that  did not contain all  of the 
required disclosures.38    

     12.  Verizon states  that:  (1) these  transactions are 
``complex'';39  (2) the postings  represent only one percent 
of  Verizon's  total postings;40  and  (3)  the errors  were 
clerical  in   nature.41   Verizon's  contentions   are  not 
persuasive.  It  is not  clear whether Verizon  believes the 
purported  complexity  of  the transactions  means  that  we 
should  not consider  the audit  findings violations  of the 
Commission's rules or  that we should use  discretion in not 
pursuing the violations.  To  the extent Verizon argues that 
complexity  should compel  us to  not find  a violation,  we 
disagree.  The purported complexity of the transactions does 
not  excuse the  large  number of  errors  uncovered by  the 
audit.  To the extent Verizon  argues that we should use our 
discretion, we address the  proper enforcement action below.  
Although  the  identified  errors   may  represent  a  small 
fraction of Verizon's total postings, they represent a large 
percentage  of the  transactions sampled.   And even  if the 
errors  were ``clerical,''  they  nevertheless constitute  a 
failure to comply  with our rules.  Therefore,  we find that 
Verizon violated  section 272(b)(5)  of the Act  and section 
53.203(e) of the Commission's rules. 

     B.   Proposed Action 

     13.  As  we  explained  above,  we  find  that  Verizon 
apparently  violated section  32.27(c)  of the  Commission's 
rules  by   failing  properly   to  account   for  affiliate 
transactions.   In particular,  Verizon failed  to record  a 
total of 43 transactions  according to the methods specified 
in  section 32.27(c).   Based on  this information,  we find 
that Verizon has apparently failed to justify its accounting 
entries for  approximately $16 million in  services provided 
to  its section  272 affiliates  in 2000.   For the  reasons 
discussed  below,   these  apparent  violations   justify  a 
forfeiture.  In addition, because we  are barred by the one-
year statute  of limitations from imposing  a forfeiture for 
Verizon's  Internet posting  violations,42  we admonish  the 
company.  

     14.  We  acknowledge that,  as  of  December 23,  2002, 
Verizon is  no longer obligated  to comply with  the section 
272  safeguards in  New York,  other than  section 272(e).43  
Enforcement  action is  important  nevertheless for  several 
reasons.  First, and obviously, section 272 was effective in 
New  York  at  the  time Verizon  committed  these  apparent 
violations.  In addition, section  32.27 of the Commission's 
rules remains  in effect.   Verizon must continue  to comply 
with  the affiliate  transactions  rules  when dealing  with 
nonregulated  affiliates.  Moreover,  a large  percentage of 
the transactions  sampled by  the auditor  indicate apparent 
violations.  Finally, Verizon operates  the same section 272 
affiliates in its  other BOC states.  Thus,  Verizon and its 
section 272 affiliates must  continue to comply with section 
272, and  enforcement action  here should help  deter future 
violations.  

          1.   Forfeiture Amount

     15.  In light of Verizon's apparent repeated violations 
of section  272(c)(2) of the Act,  and associated Commission 
rules,  we  find that  a  proposed  forfeiture is  warranted 
pursuant to section 220(d).44  

     16.  Section 220(d)  provides that  ``[i]n the  case of 
failure or refusal  on the part of any such  carrier to keep 
such accounts,  records, and memoranda  on the books  and in 
the manner prescribed  by the Commission, or  to submit such 
accounts,   records,  memoranda,   documents,  papers,   and 
correspondence  as  are  kept   to  the  inspection  of  the 
Commission  or any  of its  authorized agents,  such carrier 
shall forfeit to  the United States the sum  of [$6,600] for 
each day of  the continuance of each  such offense.''45  The 
affiliate  transactions  rule  that Verizon  has  apparently 
violated   constitutes  the   ``manner  prescribed   by  the 
Commission'' for  Verizon to  keep its  books.  Accordingly, 
Verizon is  apparently liable  for forfeiture  under section 
220(d) for  violating section  32.27(c) of  the Commission's 
rules.  

     17.  Based on our review of the facts and circumstances 
of this case, we find  that Verizon is apparently liable for 
a  forfeiture of  $283,800.  We  find that  all 43  apparent 
accounting violations occurred  within the five-year statute 
of limitations because they  occurred in calendar year 2000.  
We note that  Verizon allowed the apparent  violations to go 
uncorrected for eight to  28 months.46  Forty-three apparent 
violations multiplied by the then-effective statutory amount 
of  $6,600  per  violation  produces  $283,800.   Our  total 
proposed  forfeiture  is  therefore  $283,800.   We  do  not 
propose  that  the forfeiture  amount  for  each of  the  43 
violations also  include the $6,600 per  day amount because, 
under the circumstances of this  case, we believe the result 
would be excessive.47          2.   Admonishment

     18.  Based on our review of the facts and circumstances 
in this case, we also admonish Verizon for failing to comply 
with the Internet posting  requirements of section 272(b)(5) 
and  section  53.203(e)  of   the  Commission's  rules.   We 
therefore expect that Verizon will take steps to ensure that 
it complies with these requirements  for the states in which 
it  remains  subject  to   section  272.   Although  section 
272(b)(5)'s  requirements have  sunset  for  Verizon in  New 
York,48 admonishment  is nevertheless warranted in  light of 
the  fact  that  the   section  272(b)(5)  Internet  posting 
requirements and other  non-discrimination safeguards remain 
in effect in  Verizon's other BOC states for  at least three 
years from the date of section 271 approval.  
  
                       IV.  CONCLUSION

     19.  We  find Verizon  has apparently  violated section 
32.27(c) of  the rules  in transactions with  its affiliates 
and we propose  a forfeiture of $283,800.   We also admonish 
Verizon  for not  accurately  and  timely posting  affiliate 
transactions on  its Internet  site in violation  of section 
272(b)(5) of the Act and section 53.203(e) of the rules.  

                    IV.  ORDERING CLAUSES

     20.  ACCORDINGLY,  IT  IS  ORDERED  THAT,  pursuant  to 
section  220(d)  of  the  Communications  Act  of  1934,  as 
amended,  47  U.S.C.    220(d), and  section  1.80  of  the 
Commission's  rules,  47 C.F.R.    1.80,  that the  Verizon 
Telephone  Companies are  hereby  NOTIFIED  of its  APPARENT 
LIABILITY  FOR A  FORFEITURE in  the amount  of two  hundred 
eighty-three thousand, eight  hundred dollars ($283,800) for 
violating  section 32.27(c)  of  the  Commission's rules  in 
transactions with its affiliates. 

     21.  IT IS  FURTHER ORDERED  THAT, pursuant  to section 
1.80 of  the Commission's  rules, 47  C.F.R.   1.80, within 
thirty  days (30)  of  release of  this  NOTICE OF  APPARENT 
LIABILITY,  the Verizon  Telephone Companies  SHALL PAY  the 
full amount of the proposed forfeiture currently outstanding 
on  that date  or  shall  file a  response  showing why  the 
proposed  forfeiture  should not  be  imposed  or should  be 
reduced.

     22.  Payment of the forfeiture may  be made by check or 
money order drawn to the order of the Federal Communications 
Commission.  Such  remittance should  be made  to Forfeiture 
Collection Section,  Finance Branch,  Federal Communications 
Commission,  P.O. Box  73482, Chicago,  Illinois 60673-7482.  
The payment should note the NAL/Acct. No. referenced above.

     23.  The response, if any, must be mailed to Maureen F. 
Del  Duca,  Chief,  Investigations  and  Hearings  Division, 
Enforcement Bureau,  Federal Communications  Commission, 445 
12th  Street, S.W.,  Room 3-B431,  Washington DC  20554, and 
must include the file number listed above.

     24.  IT IS  FURTHER ORDERED that the  Verizon Telephone 
Companies ARE  ADMONISHED for  failing to make  accurate and 
timely  Internet  postings  in  violation  of  47  U.S.C.   
272(b)(5) and 47 C.F.R.  53.203(e).
     25.  IT  IS FURTHER  ORDERED that  the Secretary  shall 
send, by certified mail/return  receipt requested, a copy of 
this Notice of Apparent  Liability for Forfeiture to Susanne 
A.  Guyer,  Senior  Vice   President  -  Federal  Regulatory 
Affairs, Verizon, 1300 I Street N.W., Room 400W, Washington, 
D.C., 20005.

                         FEDERAL COMMUNICATIONS COMMISSION


                         Marlene H. Dortch
                         Secretary                        JOINT STATEMENT OF
    COMMISSIONERS MICHAEL J. COPPS AND JONATHAN S. ADELSTEIN,
                            CONCURRING

Re:  Verizon Telephone Companies, Inc. Apparent Liability for 
Forfeiture
     (File No. EB-03-IH-0245)

     We support today's Notice of Apparent Liability because 
it   is  an   appropriate  exercise   of  the   Commission's 
enforcement authority.  Nonetheless,  we only concur because 
the  timing  of  this   decision  sends  the  wrong  signals 
concerning our oversight of section 272 affiliates.  This is 
yet another  illustration of  how the Commission  has fallen 
short of its statutory duties under Section 272.  We need to 
do  more to ensure  that our  oversight is  of the  kind and 
character that Congress intended.  

     Through Section  272, Congress required  Bell companies 
to provide long distance  and manufacturing services through 
a separate  affiliate.  In implementing  these requirements, 
the  Commission   concluded  that  Congress   adopted  these 
safeguards because  it recognized that Bell  companies might 
still exercise  market power  at the  time they  enter long-
distance  markets.  As  part of  these safeguards,  Congress 
specifically   required  that   Bell  companies   retain  an 
independent auditor to  review separate affiliate operations 
and produce a public report  evaluating how they comply with 
the  statute  and  the Commission's  rules.   Congress  also 
provided   that  the   long   distance  separate   affiliate 
requirements would  continue for  three years, but  could be 
extended by the Commission by rule or order.

     On  the three-year  anniversary of  its entry  into the 
long distance market, the Commission allowed the Section 272 
separate affiliate  requirement for  Verizon in New  York to 
sunset.   It  did  so  without  a  crumb  of  analysis.   We 
addressed neither  the New York Public  Service Commission's 
concerns that sunset  was premature, nor the  results of the 
independent audit report.  Instead, we review the results of 
that  audit in  today's decision.   This review  takes place 
more  than seven  months  after the  Commission allowed  the 
sunset of the New York Section 272 separate affiliate.  This 
is backwards.  
     
     Despite  the  appropriateness  of  today's  enforcement 
action, it  highlights the  shortcomings of our  approach to 
section 272.  By failing to  use the statutory audit tool as 
part of a  larger analysis before the decision  to sunset is 
made,  the forfeiture  and  admonishment we  impose in  this 
Notice of Apparent Liability are denied the context Congress 
intended.  


_________________________

1 ``Verizon''  means the Verizon Telephone  Companies, which 
include  Verizon  Delaware   Inc.,  Verizon  Maryland  Inc., 
Verizon New  England Inc., Verizon New  Jersey Inc., Verizon 
New York  Inc., Verizon Pennsylvania Inc.,  Verizon Virginia 
Inc.,  Verizon Washington,  DC Inc.,  Verizon West  Virginia 
Inc., Bell Atlantic Communications,  Inc. d/b/a Verizon Long 
Distance,   NYNEX  Long   Distance  Company   d/b/a  Verizon 
Enterprise Solutions, and Verizon  Select Services Inc., and 
their successors and assigns.
2 47 U.S.C.  271.
3 47 U.S.C.  271(d)(3).
4  See  also  Separation  of Costs  of  Regulated  Telephone 
Service from Costs of  Nonregulated Activities; Amendment of 
Part  31, the  Uniform System  of Accounts  for Class  A and 
Class B Companies To  Provide Nonregulated Activities and To 
Provide  for Transactions  Between  Telephone Companies  and 
Their Affiliates,  Report and Order,  2 FCC Rcd  1298 (1987) 
(``Joint Cost Order''),  modified on recon., 2  FCC Rcd 6283 
(1987), modified on  further recon., 3 FCC  Rcd 6701 (1988), 
aff'd sub nom. Southwestern Bell Corp. v. FCC, 896 F.2d 1378 
(D.C. Cir. 1990).
5 See Accounting Safeguards under the Telecommunications Act 
of 1996, CC Docket No. 96-150,  Report and Order, 11 FCC Rcd 
17539, 17546,  13 (1996) (``Accounting Safeguards Order''), 
Second  Order on  Reconsideration, 15  FCC Rcd  1161 (2000); 
Non-Accounting Safeguards Order, 11 FCC Rcd at 21914,  15-
16. 
6 See 47 U.S.C.  272(d).
7 See Accounting  Safeguards Order, 11 FCC  Rcd at 17628-32, 
   197-205;  47   C.F.R.     53.209-213;  Non-Accounting 
Safeguards Order, 11 FCC Rcd at 22061,  323. 
8 Application  of Bell  Atlantic New York  for Authorization 
under Section 271  of the Communications Act  to Provide In-
Region,  InterLATA Service  in  the State  of  New York,  CC 
Docket No. 99-295, Memorandum Opinion  and Order, 15 FCC Rcd 
3953, 4178,  458 (1999) (``Bell Atlantic New York Order''), 
aff'd sub  nom. AT&T Corp. v.  FCC, 220 F.3d 607  (D.C. Cir. 
2000). 
9  These affiliates  include  Bell Atlantic  Communications, 
Inc.  (``BACI''), NYNEX  Long Distance  (``NLD''), and  Bell 
Atlantic  Global  Networks,   Inc.  (``BAGNI'').   See  Bell 
Atlantic  New York  Order, 15  FCC  Rcd at  4153-54,   405.  
According  to Verizon,  it  planned to  offer long  distance 
services to residential customers  through BACI and business 
customers  through NLD.   See id.   Verizon stated  that the 
third affiliate, BAGNI, would ``build the telecommunications 
network and serve  BACI and NLD.''  Id.   For simplicity, we 
refer to these affiliates  collectively as the ``section 272 
affiliates'' or individually using the generic ``section 272 
affiliate.''
10 See Report of Independent Accountants on Applying Agreed-
Upon  Procedures, filed  in CC  Docket No.  96-150 (Feb.  6, 
2002) (``Verizon Audit Report'').   The audit was an agreed-
upon procedures  engagement (``AUP'').  An AUP  requires the 
auditor to perform specified procedures upon which the users 
agree.    See  Statement   on   Standards  for   Attestation 
Engagements No.  10 at   2.03 (American Inst.  of Certified 
Pub.  Accountants 1999).   The independent  auditor presents 
the results and/or findings in  its report without regard to 
materiality.  See id. at  2.24, 2.25.  
11  The  audit  report   covered  the  Verizon  section  272 
affiliate  operations in  New  York  only.  Therefore,  this 
Notice  of  Apparent  Liability   is  limited  to  Verizon's 
operations in that state. 
12  See Accounting  Safeguards Under  the Telecommunications 
Act of 1996,  CC Docket No. 96-150, Order, 17  FCC Rcd. 2488 
(Com.  Car.   Bur.   2002).   On  December   23,  2002,  the 
Commission issued a Public  Notice stating that, pursuant to 
section  272(f)(1),  the   section  272  provisions  (except 
section 272(e))  sunset for  Verizon in New  York, effective 
that day.  See  Section 272 Sunsets for Verizon  in New York 
State by Operation  of Law on December 23,  2002 Pursuant to 
Section 272(f)(1),  WC Docket No. 02-112,  Public Notice, 17 
FCC Rcd  26864 (2002).   In an accompanying  order, however, 
the  Commission  warned  that  BOCs  remain  ``obligated  to 
cooperate  fully in  the  completion of  the section  272(d) 
audits  addressing  section  272  compliance  for  all  time 
periods  prior to  the  statutory sunset  even though  these 
independent audits may be completed after the sunset date.''  
Section 272(f)(1)  Sunset of the BOC  Separate Affiliate and 
Related  Requirements,  WC  Docket  No.  02-112,  Memorandum 
Opinion and Order, 17 FCC Rcd 26884 (2002).
13 A carrier  is subject to forfeiture  under section 220(d) 
if  it  fails to  comply  with  the Commission's  accounting 
rules.  Section 32.27 is such  a rule; therefore, failure to 
comply makes a carrier  liable for section 220(d) penalties.  
The statute of limitations for  such offenses is five years.  
47 C.F.R.  1.80(c)(2).
   Unlike section 503, section 220(d) does  not require that 
a violation be willful or repeated before the Commission can 
impose  a forfeiture.   In any  case, however,  the apparent 
violations here are clearly repeated and, in the case of the 
34 transactions  for which  Verizon decided not  to estimate 
market value, willful.  
14 See 47 C.F.R.  1.80(f)(1), 1.80(f)(2).
15 See 47 C.F.R.  1.80(f)(3).
16   See 47 C.F.R.  1.80(f)(4).
17 In addition  to the apparent violations  of the affiliate 
transactions rules, Verizon apparently  failed to retain the 
documentation required  under our rules.  Section  220(c) of 
the Act  places the  burden of  proof to  justify questioned 
accounting entries  on carriers.   47 U.S.C.   220(c).  The 
Accounting  Safeguards  Order  further  requires  BOCs  ``to 
maintain   records  sufficient   to   support  [its]   value 
determination'' for situations in  which making a good faith 
estimate  of  fair  market  value  may  be  difficult.   The 
independent  audit  report  states that  Verizon  failed  to 
retain  documentation to  support  its valuations.   Verizon 
apparently violated these  record retention requirements for 
both   groups   of   transactions  described   in   sections 
III.A.1.(a) and  (b), infra.   These apparent  violations of 
the record retention requirements  are further indication of 
Verizon's apparent  failure to  comply with  the substantive 
affiliate transactions requirements.
18  We  note  that  both AT&T  and  WorldCom  complain  that 
Verizon's  section 272(e)  performance measurements  results 
indicate  that   Verizon  discriminated  in  favor   of  its 
affiliates  in  the  provision and  maintenance  of  special 
access lines and  other services.  See AT&T  Comments at 16-
22;  WorldCom Comments  at 3-4.   The independent  auditor's 
report,  however, does  not disaggregate  the services  to a 
level    sufficient   to    permit   a    service-by-service 
discrimination analysis.  See Verizon Audit Report at 34-40.  
The joint  federal-state section  272 audit  team, including 
the  Enforcement Bureau  audit  staff, has  worked with  and 
continues to work with  the section 272 independent auditors 
to  ensure that  such disaggregation  takes place  in future 
audits.  
19 47  C.F.R.   32.27.  In implementing  section 272(c)(2), 
the Commission relied on  its existing affiliate transaction 
rules.   See  Accounting Safeguards  Order,  11  FCC Rcd  at 
17620,     176  (``[w]e   therefore  adopt   our  tentative 
conclusion that  we should apply our  affiliate transactions 
rules  to transactions  between each  BOC and  any interLATA 
telecommunications  affiliate it  establishes under  section 
272(a), such  as an affiliate providing  in-region services, 
and   order  that   the  BOCs   treat  such   services  like 
nonregulated  activities  for accounting  purposes.'')   The 
affiliate  transactions rules,  adopted pursuant  to section 
220  of  the Act,  are  codified  in  section 32.27  of  the 
Commission's rules.  47 C.F.R.  32.27.  
20  See  47  C.F.R.   32.27(c)  (``For  purposes  of  this 
section,  carriers  are  required   to  make  a  good  faith 
determination of  fair market value  for a service  when the 
total  aggregate annual  value  of that  service reaches  or 
exceeds $500,000.''); 53.203(e).   The former Common Carrier 
Bureau has stated that the  good faith determination of fair 
market  value is  neither  difficult  nor burdensome.   See, 
e.g., Puerto Rico Telephone,  Petition for Waiver of Section 
32.27  of  the  Commission's  Rules,  ASD  File  No.  98-93, 
Memorandum Opinion  and Order, 15  FCC Rcd 7044, 7047,   8, 
n.19  (Com. Car.  Bur.  1999).   The affiliate  transactions 
requirements are  sufficiently clear  to allow  Verizon ``to 
identify, with  ascertainable certainty, the  standards with 
which the  [Commission] expects  [it] to conform  . .  . .'' 
Trinity Broadcasting,  211 F.3d  at 628.   We note  that the 
rules  governing  the  cost-market comparison  for  services 
changed effective  September 28, 2000.  See  2000 WL 1450766 
(FR) (Federal  Register notice of Phase  1 Order's effective 
date); Comprehensive  Review of the  Accounting Requirements 
and  ARMIS   Reporting  Requirements  for   Incumbent  Local 
Exchange Carriers:   Phase 1,  CC Docket No.  99-253, Report 
and Order, 15  FCC Rcd 8690 (2002) (``Phase  1 Order'').  In 
the  Phase  1 Order,  the  Commission  relaxed the  rule  to 
require BOCs  to estimate fair  market value only  where the 
annual value of the transactions for the relevant service is 
greater than $500,000.   See id., 15 FCC Rcd  at 8700-01,  
18-20.  
21 See 47 C.F.R.  32.27(c).
22  See  id.   ``Cost''  varies  depending  on  whether  the 
transaction  involves  assets  or services.   For  affiliate 
transactions  involving assets,  ``cost''  means ``net  book 
cost.''   For services,  ``cost'' means  ``fully distributed 
cost.''  See id.
23  Verizon  Audit  Report  at   23.   The  value  of  these 
transactions was $991,509.  See id.
24 See id.  
25 Verizon June 11, 2001 Response at 5.  Verizon also states 
that it corrected the bookings in April, 2001, i.e., as much 
as 13 months after Verizon booked the transactions.  Id.
26 See Verizon Audit Report at 21; see also AT&T Comments at 
34.
27 See id.
28  See  Letter  from Joseph  DiBella,  Regulatory  Counsel, 
Verizon, to Joseph  Paretti, Accounting Safeguards Division, 
Common Carrier Bureau, Federal Communications Commission, at 
17 (June 11, 2001) (``Verizon June 11, 2001 Response'').  
29 See  Verizon Audit  Report at 21;  Verizon June  11, 2001 
Response at  5; Letter  from Gerald Asch,  Director, Federal 
Regulatory, Verizon,  to Marlene Dortch,  Secretary, Federal 
Communications  at 17  (June 11,  2002) (``Verizon  June 11, 
2002 Response'').
30 See Accounting Safeguards Order,  11 FCC Rcd at 17609-10, 
 153.
31 See 47 C.F.R.  32.27(c); Accounting Safeguards Order, 11 
FCC Rcd at 17610,  154.
32 See Accounting Safeguards Order, 11 FCC Rcd at 17610,  154.
33 Id.
34 See  AT&T Comments at  34 (arguing that  benchmark prices 
should be available on an ``inter-industry basis'').
35 47 U.S.C.  272(b)(5).
36 See  47 C.F.R.  53.203(e);  Accounting Safeguards Order, 
11 FCC Rcd at 17593-94,  122.  
37 Accounting Safeguards Order, 11 FCC Rcd at 17593-94, at  
122.  The BOC must also  make this information available for 
public inspection  at its principal place  of business.  See 
id.
38 Verizon Audit Report at  16-18; see also Letter from Joan 
Marsh,  Director,  Federal   Government  Affairs,  AT&T,  to 
Marlene    Dortch,    Secretary,   Federal    Communications 
Commission, at 2 (May 23, 2002); AT&T Comments at 32.
39 See Verizon June 11, 2001 Response at 2.
40 See id.
41 See Verizon June 11, 2002 Response at 15-16.
42 We  note that the  statute of limitations  for forfeiture 
action for these  violations is one year, not  five years as 
with a  section 220  forfeiture.  47 U.S.C.   503(b)(6)(B).  
Compare 47 C.F.R.  1.80(c)(2).
43 See n.12 supra.
44 Although we find here that these apparent violations were 
repeated and, in the case of the 34 transactions for which 
Verizon made a decision not to estimate market value, 
repeated, it is not clear that section 220(d) has a willful 
or repeated requirement.
45  47  U.S.C.   220(d);  47  C.F.R.   1.80(b)(4)  (2000).  
Effective  November  13,  2000, the  Commission  raised  the 
statutory  per violation  maximum from  $6,600 to  $7,600 to 
account for inflation.  Amendment  of Section 1.80(b) of the 
Commissions  Rules,  Adjustment   of  Forfeiture  Maxima  to 
Reflect Inflation, Order, 15 FCC Rcd 18221, 18225 (2000); 65 
FR  60868;  In the  Matter  of  the Commission's  Forfeiture 
Policy Statement and Amendment of  Section 1.80 of the Rules 
to Incorporate the Forfeiture  Guidelines, CI Docket No. 95-
6, Report  and Order, 12  FCC Rcd 17087, 17117  (noting that 
maximum  liability for  each  section  220(d) violation  was 
$6,600).   Verizon's  apparent continuing  violations  began 
before the  date the  $7,600 maximum took  effect.  Although 
some  of Verizon's  apparent violations  occurred after  the 
effective date, we  will use the $6,600  amount to calculate 
Verizon's apparent liability here for simplicity.
46 The  duration of the  43 apparent violations is  based on 
two  factors.  For  the nine  apparent violations  for which 
Verizon  failed to  book  the transactions  at either  fully 
distributed  cost or  fair market  value, the  end month  is 
April 2001, when Verizon states that it cured the violation.  
See n.22 supra.   For the 34 transactions  for which Verizon 
failed  to perform  a  good faith  estimate  of fair  market 
value, the end month is  June 2002, when Verizon last argued 
that  it   had  not  violated  the   Commission's  affiliate 
transactions rules.   June  2002 is the last  month at which 
it is clear Verizon had not cured these apparent violations.  
47 See generally 47 C.F.R.  1.80(b)(4); 47 U.S.C.  504(b).
48 See n.12 supra.