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Federal Communications Commission
Washington, D.C. 20554
In the Matter of )
AMERITECH CORP., )
AND ) CC Docket No. 98-141
SBC COMMUNICATIONS, INC., ) EB File No. EB-04-IH-0216
For Consent to Transfer of )
Control of Corporations Holding )
Commission Licenses and Lines )
Pursuant to Sections 214 and )
310 (d) of the Communications )
Act and Parts 5, 22, 24, 25,
63, 90, 95, and 101 of the
Adopted: January 5, 2005 Released: January 7, 2005
By the Commission:
1. In this Order, we deny SBC Communications Inc.'s
(``SBC's'') request that we discontinue the independent auditor
condition in Merger Condition XXVII of the SBC/Ameritech Merger
Order for periods beginning on or after January 1, 2004.1
Specifically, we find that SBC has not demonstrated that
discontinuing this audit condition for the period in question
would serve the public interest.
2. In the SBC/Ameritech Merger Order, the Commission
adopted the Merger Conditions to mitigate any potential public
interest harms of the merger of Ameritech Corporation
(``Ameritech'') and SBC.2 These Merger Conditions, to which SBC
agreed, included Condition XXVII, the independent auditor
condition.3 This condition requires SBC to engage an independent
auditor to conduct audits on an annual basis regarding SBC's
compliance with the Merger Conditions and the sufficiency of
SBC's internal controls.4 The Merger Order specifically
contemplates that the independent auditor condition will permit
oversight of SBC's compliance with all the merger conditions.
For instance, Commission staff approves the independent auditor
and reviews the scope and quality of the independent auditor's
work, the independent auditor's final audit report must be
publicly filed with the Commission, and the Commission staff has
access to the independent auditor's working papers and supporting
materials for two years following the submission of the final
audit report.5 As SBC agreed when the Commission released the
Merger Order, the independent auditor condition expires when the
last of the remaining Merger Conditions subject to this
3. On June 9, 2004, SBC requested that the Commission
discontinue the independent auditor condition for all periods
beginning on or after January 1, 2004.7 SBC filed a supplemental
letter on July 7, 2004 providing additional information.8 On
July 13, 2004, the Enforcement Bureau issued a public notice
seeking comment on SBC's request.9 AT&T Corporation and Premiere
Network Services, Inc. filed comments, and various other
competitive local exchange carriers (``LECs'') filed joint reply
comments.10 These commenters universally oppose SBC's request.
SBC also filed reply comments on August 10, 2004.11
4. In evaluating SBC's request, we consider whether
discontinuing the independent auditor condition would serve the
public interest.12 The purpose of imposing the independent
auditor requirement was to provide a cost-effective yet
``thorough and systematic evaluation of SBC's compliance with the
conditions and the sufficiency of SBC's internal controls'' to
supplement the Commission's usual investigative authority in
ensuring compliance and enforcement of the Merger Conditions.13
As discussed below, we find no reason to revisit our decision to
impose the independent auditor condition as originally
contemplated by the Merger Order.
5. In support of its request, SBC makes the general
argument that there is no productive reason for the Commission
and SBC to conduct further audits for the period under
consideration. In particular, SBC contends that most of the
conditions have sunset as of June 1, 2004, and the amount of
information provided to the Commission through the audit report
will be substantially less than in prior years.14 We disagree
with SBC's argument and find no reason to depart from the
Commission's previous determinations that the audit condition is
in the public interest. The Commission concluded that the
SBC/Ameritech merger was in the public interest because the
``approval is subject to significant and enforceable
conditions.''15 Moreover, the Commission found that ``[o]nly a
strong corporate compliance program, in conjunction with the
independent audit and other enforcement mechanisms, will enable
consumers to realize the full benefits of the conditions.''16
The Commission recognized from the outset the importance of the
independent auditor condition as an integral component of a
successful program to monitor SBC's compliance with the operative
Merger Conditions as well as a disincentive to discrimination and
other potential misbehavior.17
6. SBC also contends an audit is not necessary for two of
the remaining operative conditions because they merely require
SBC to maintain specific discounts for competitive local exchange
carriers on previously ordered eligible services for the
remainder of the effective period but do not require SBC to take
additional action.18 SBC contends that in the event that it does
not maintain these discounts, competitive carriers could file a
complaint with the Commission.19 The Merger Condition, however,
placed the burden on SBC, and not the competitive carriers, to
take active steps to ensure compliance, including hiring an
independent auditor to conduct audits.20 Several commenters
observed that relying on the complaint process without an
independent evaluation would be unnecessarily burdensome to the
harmed party.21 They also argue that the Commission is less
likely to discover violations through complaints than through the
audit process because a harmed party may not have the incentive
or resources to file a complaint.22 We agree with these
commenters. We see no reason to second-guess our earlier
decision that, as a condition for approval of SBC's and
Ameritech's merger, SBC should bear the burden of complying with
the independent auditor condition for the entire period
envisioned in our original order.
7. SBC also claims that, in the absence of audits, other
compliance and enforcement mechanisms established in the Merger
Order would provide adequate assurance of SBC's compliance with
the Merger Conditions. In particular, SBC contends that a third
operative condition, the nondiscriminatory rollout of digital
subscriber line (``xDSL'') services condition, is self-policing
because SBC continues to file quarterly reports on its compliance
with the xDSL deployment.23 In addition, SBC contends that it
will continue to file compliance reports that would ``describe
SBC's compliance with all open merger conditions that will allow
the Commission and others to confirm SBC's compliance with merger
8. We reject SBC's claim that its remaining compliance
obligations obviate the need for the independent auditor
condition. As previously stated, the Commission found that the
compliance program protected the public interest, but only in
conjunction with the independent auditor condition.25 Quarterly
reports and compliance reports are not a substitute for an
independent audit. SBC's obligations to file unaudited quarterly
and compliance reports do not provide an independent review of
SBC's performance. During the audit process, the Commission
staff and independent auditor have access to the working papers,
supporting materials, and interpretations underlying SBC's
compliance assertions that may not be disclosed in the
performance reports or available to third parties.26 Finally,
when contemplating the merger, the Commission considered the
independent auditor condition a useful tool to supplement its
usual investigative authority27 and found that the ``findings in
the auditor's report, or review of the auditor's working papers,
could form the basis of enforcement actions.''28 In view of the
foregoing, we find no reason to alter our prior conclusion that
the compliance mechanisms discussed in SBC's request are not
substitutes for the independent auditor condition.
9. Lastly, SBC contends that we should discontinue the
audit requirement because ``the cost of the audits for the years
2004 and beyond would cost at least one million dollars,'' and
``the burdens of continued audits clearly outweigh any possible
benefits.''29 We find this contention unpersuasive. The
Commission specifically found that ``the audit requirement
establishes an efficient and cost-effective mechanism for
providing reasonable assurance of SBC/Ameritech's compliance with
the conditions.''30 SBC has not provided substantial evidence to
contradict this finding. We conclude that, therefore, SBC has
not demonstrated that discontinuing the independent auditor
condition would serve the public interest.
IV. ORDERING CLAUSE
10. Accordingly, IT IS ORDERED, pursuant to sections 1-4,
201-205, 214, 251, 303(r), 309, and 416(b) of the Communications
Act of 1934, as amended, 47 U.S.C. §§ 151-154, 201-205, 214, 251,
303(r), 309, and 416(b) that SBC Communications Inc.'s request
that the Commission discontinue requiring audits under Condition
XXVII of the SBC/Ameritech Merger Order is DENIED.
FEDERAL COMMUNICATIONS COMMISSION
Marlene H. Dortch
1 Applications of Ameritech, Transferor, and SBC Communications
Inc., For Consent to Transfer Control of Corporations Holding
Commission Licenses and Lines Pursuant to Sections 214 and 310(d)
of the Communications Act and Parts 5, 22, 24, 25,63, 90, 95, 101
of the Commission's Rules, Memorandum Opinion and Order, 14 FCC
Rcd 14712, 15034-35, Appendix C, ¶ 66 (1999) (``SBC/Ameritech
Merger Order'' or ``Merger Order''), vacated in part sub nom.,
Ass'n of Communications Entrs. v. FCC, 235 F.3d 662 (D.C. Cir.
2001); see Letter from Jim Lamoureux, Senior Counsel, SBC
Telecommunications Inc., to William Davenport, Chief,
Investigations and Hearings Division, Enforcement Bureau, Federal
Communications Commission, dated June 9, 2004 (``SBC Request'').
2 See SBC/Ameritech Merger Order, 14 FCC Rcd at 14716, 14881, ¶¶
2, 410; id., 14 FCC Rcd at 14964-15039, Appendix C). We refer to
the market-opening conditions in Appendix C as the Merger
3 See SBC/Ameritech Merger Order, 14 FCC Rcd at 14881-84, ¶¶ 406-
4 SBC/Ameritech Merger Order, 14 FCC Rcd at 15034-35, Appendix C,
¶ 66 (requiring an annual examination engagement).
5 See id.; see also Delegation of Additional Authority to the
Enforcement Bureau, Order, 17 FCC Rcd 4795 (2002).
6 See SBC/Ameritech Merger Order, 14 FCC Rcd at 15034-35,
Appendix C, ¶ 66; Applications of Ameritech Corp., Transferor,
and SBC Communications Inc., Transferee, For Consent to Transfer
Control of Corporations Holding Commission Licenses and Lines
Pursuant to Sections 214 and 310(d) of the Communications Act and
Parts 5, 22, 24, 25, 63, 90, 95, and 101 of the Commission's
Rules, Memorandum Opinion and Order, 17 FCC Rcd 19595, 19597, ¶
3, n.7 (noting that the independent audit condition does not
follow the general sunset date, i.e., 36 months after the merger
closing date, because it specifically establishes its own period
7 See SBC Request.
8 See Letter from David Cartwright, Director, Federal Regulatory,
SBC Telecommunications Inc., to Diana Lee, Investigations and
Hearings Division, Enforcement Bureau, Federal Communications
Commission, dated July 7, 2004.
9 See Public Notice, ``Enforcement Bureau Seeks Comment on SBC's
Request to Discontinue Audit of SBC's Compliance with Merger
Conditions,'' DA 04-2092 (rel. July 13, 2004).
10 See Comments of AT&T Corporation, filed July 27, 2004 (``AT&T
Comments''); Letter from Leo A. Wrobel, President, Premiere
Network Services Inc., to Marlene H. Dortch, Secretary, Federal
Communications Commission, filed on July 16, 2004; Reply Comments
of ACN Communications Services, Inc., Adelphia Business Solutions
Operations, Inc. d/b/a TelCove, ATX Communications, Inc., Capital
Telecommunications, Inc., CTC Communications Corp., CTSI, LLC,
DSLnet Communications, LLC, El Paso Networks, LLC, Focal
Communications Corp., Gillette Global Network, Inc., d/b/a Eureka
Networks, ICG Telecom Group, Inc., Integra Telecom, Inc.,
Lightship Telecom, LLC, LightWave Communications, LLC, McLeodUSA
Telecommunications Services, Inc., Mpower Communications Corp.,
NTELOS Network Inc., PAETEC Communications, Inc., Pac-West
Telecomm, Inc., RCN Telecom Services, Inc., TDS Metrocom, LLC,
and Vycera Communications, Inc., filed August 10, 2004 (``Joint
11 See Reply Comments of SBC Communications Inc., filed August
10, 2004 (``SBC Reply'').
12 See 47 U.S.C. § 416(b); SBC/Ameritech Merger Order, 14 FCC Rcd
at 14885, ¶ 415 & n.781 (providing that the Commission may modify
the Merger Conditions); see also, e.g., Application of GTE
Corporation, Transferor, and Bell Atlantic Corporation,
Transferee, For Consent to Transfer Control of Domestic and
International Section 214 and 310 Authorization and Application
to Transfer Control of a Submarine Cable Landing License, Order,
17 FCC Rcd 6982, 6984, ¶ 7 & n.14 (2002) (finding that a
temporary suspension of the Bell Atlantic/GTE Merger Conditions
would serve the public interest); Applications of Ameritech
Corp., Transferor, and SBC Communications Inc., Transferee, For
Consent to Transfer Control of Corporations Holding Commission
Licenses and Lines Pursuant to Sections 214 and 310(d) of the
Communications Act and Parts 5, 22, 24, 25, 63, 90, 95, and 101
of the Commission's Rules, Second Memorandum Opinion and Order,
15 FCC Rcd 17521, 17532, ¶ 21 (2000) (finding that SBC's request
to modify its Merger Condition is in the public interest).
13 SBC/Ameritech Merger Order, 14 FCC Rcd at 14884, 14918, ¶¶
14 SBC Request at 1. SBC states that, with the Enforcement
Bureau staff's approval, SBC included two Merger Conditions with
a 2004 sunset in the scope of the 2003 independent audit. Id.
15 See SBC/Ameritech Merger Order, 14 FCC Rcd at 14716, ¶ 2.
16 See SBC/Ameritech Merger Order, 14 FCC Rcd at 14882, ¶ 409;
AT&T Comments at 12.
17 See SBC/Ameritech Merger Order, 14 FCC Rcd at 14821-22, 14881-
84, ¶¶ 246-47, 406-12.
18 SBC Request at 1. The discount conditions are Condition XIV,
carrier-to-carrier promotions: unbundled loop discount, and
Condition XV, carrier-to-carrier-promotions: resale discount.
SBC/Ameritech Merger Order, 14 FCC Rcd at 15015-15019, Appendix
C, ¶¶ 45-47.
19 SBC Request at 1; SBC Reply at 7-8.
20 SBC/Ameritech Merger Order, 14 FCC Rcd at 14881, ¶ 406
(stating that the Merger Conditions place responsibility of
taking active steps to ensure compliance on SBC by: (1)
establishing a compliance program; (2) requiring an independent
compliance audit; and (3) setting voluntary payment obligations).
The voluntary payment provisions sunset in 2004.
21 See AT&T Comments at 13-14; Joint Reply at 20-22.
22 See AT&T Comments at 13-14 (stating that the difference
between the small discount amount available compared to the high
cost of pursuing a complaint and the time expended in such
complaints serves as a deterrent to filing any formal complaint);
Joint Reply at 22.
23 Id.; SBC/Ameritech Merger Order, 14 FCC Rcd at 14999, Appendix
C, ¶ 22.
24 SBC Request at 1; SBC Reply at 8.
25 SBC/Ameritech Merger Order, 14 FCC Rcd at 14881, ¶ 406.
26 See AT&T Comments at 14-16; Joint Reply at 20-21.
27 See SBC/Ameritech Merger Order, 14 FCC Rcd at 14918, ¶ 503.
See also AT&T Comments at 17; Joint Reply at 21-23.
28 See SBC/Ameritech Merger Order, 14 FCC Rcd at 14882-83, ¶ 410;
AT&T Comments at 12.
29 SBC Request at 2; SBC Reply at 7.
30 See SBC/Ameritech Merger Order, 14 FCC Rcd at 14882, 14884, ¶¶
409, 412; AT&T Comments at 4, 17; Joint Reply at 20.