Click here for Adobe Acrobat version
Click here for Microsoft Word version
********************************************************
NOTICE
********************************************************
This document was converted from Microsoft Word.
Content from the original version of the document such as
headers, footers, footnotes, endnotes, graphics, and page numbers
will not show up in this text version.
All text attributes such as bold, italic, underlining, etc. from the
original document will not show up in this text version.
Features of the original document layout such as
columns, tables, line and letter spacing, pagination, and margins
will not be preserved in the text version.
If you need the complete document, download the
Microsoft Word or Adobe Acrobat version.
*****************************************************************
Before the
Federal Communications Commission
Washington, D.C. 20554
In re Application of )
)
GTE CORPORATION, )
Transferor, ) CC Docket No. 98-184
)
AND )
)
BELL ATLANTIC CORPORATION, )
Transferee, )
)
For Consent to Transfer Control )
of Domestic and International )
Sections 214 and 310 )
Authorizations and Application )
to Transfer Control of a
Submarine Cable Landing License
ORDER
Adopted: September 8, 2003 Released: September 11,
2003
By the Commission:
INTRODUCTION
1. In this order, we approve $175.1 million in out-of-
region expenditures, including $73.8 million in facilities
expenditures, as counting toward Verizon Communications, Inc.'s
(``Verizon's'') compliance with the out-of-region expenditure
requirements of the Bell Atlantic/GTE Merger Order.1 That order
required Verizon to spend $500 million toward services that
compete with incumbent local exchange carriers (LECs) outside
Verizon's region, including at least $250 million on facilities-
based competitive service in out-of-region markets.2 Adding the
expenditures approved here to those approved in prior orders, we
have approved a total of $567.9 million in expenditures toward
the out-of-region expenditure requirements, including $251.4
million on facilities, which would fulfill the out-of-region
investment requirements of the Bell Atlantic/GTE Merger Order.3
BACKGROUND
2. The Bell Atlantic/GTE Merger Order requires Verizon to
spend $500 million to provide ``Competitive Local Service''
outside its territory within three years of the closing of the
merger (i.e., by June 30, 2003).4 The Bell Atlantic/GTE Merger
Order defines Competitive Local Service as ``traditional local
telecommunications services that compete with like services
offered by incumbent LECs, provision of advanced services to the
mass market, and resale.''5 To encourage the growth of
facilities-based competition, the Merger Conditions require
Verizon to spend at least half of the total requisite amount
(i.e., $250 million) ``to construct, acquire, lease, use,
obtain, or provide facilities, operating support systems, or
equipment that are used to serve customers in Out-of-Region
Markets (`Facilities Expenditure').''6 Verizon may use the
other half of its out-of-region expenditures to ``acquire
customers for Competitive Local Service in those Out-of-Region
Markets (`Customer Acquisition Expenditure').'' 7 If Verizon
does not establish that it has met these requirements during the
three-year period ending June 30, 2003, it must pay the U.S.
Treasury 150 percent of the difference between what it spent and
what it was required to spend.8
3. This order is one in a series of decisions reviewing
whether Verizon's expenditures satisfy the out-of-region
expenditure requirements of the Bell Atlantic/GTE Merger Order.
On November 20, 2001, the former Common Carrier Bureau held that
Verizon satisfied $297.4 million of the out-of-region
expenditure requirements, including $113.4 million towards the
Facilities Expenditure requirement, with its purchase of
OnePoint Communications Corp. (``OnePoint'').9 On June 24,
2002, the Commission approved Verizon's request to count $90.5
million of its investment in NorthPoint Communications Group,
Inc. (``NorthPoint'') toward the out-of-region requirements,
including $50.2 million towards the Facilities Expenditure
requirement.10 Most recently, on March 13, 2003, the Commission
approved $13.95 million of Verizon's synchronous optical network
(``SONET'') and switched voice expenditure
toward the Facilities Expenditure requirement.11 Thus, prior to
Verizon's current requests, we had determined that Verizon spent
a total of $401.85 million, including $177.55 million for
facilities, towards the $500 million out-of-region expenditure
requirements.12
4. In this order, we rule on Verizon's requests to count
the following investments toward the Merger Order requirements:
$142.8 million in expenditures, including $ 42.0 million in
facilities expenditures, by Verizon Avenue (formerly
``OnePoint'');13
classification of $13 million of investment in NorthPoint's
computers and software, originally approved as customer
acquisition expenditures, to further qualify as facilities
expenditures;14
$32.3 million in expenditures, including $31.8 million in
facilities expenditures, for SONET investments.15
In addition, we rule on Verizon's request to reduce the $90.5
million NorthPoint expenditures that were previously approved to
$81.4 million, to reflect the fact that some of the NorthPoint
investment that had been approved was actually attributable to
NorthPoint's international investments.16
DISCUSSION
5. To qualify as an out-of-region expenditure, Verizon's
spending must have been ``to provide services, including resale,
that compete with traditional local telecommunications services
offered by incumbent local exchange carriers or Advanced
Services to the mass market.''17 In addition, those
expenditures must have been made to provide such services
outside the former Bell Atlantic and GTE Service Areas.18 We
approve all of Verizon's requests as described at paragraph 4,
except that we reject Verizon's request to further classify $13
million in NorthPoint-related expenditures as facilities
expenditures because Verizon has not sufficiently established
that the NorthPoint spending related to facilities investment.
Verizon Avenue
6. We approve Verizon's request to qualify an additional
$142.8 million in out-of-region expenditures, including $42
million in facilities expenditures, by Verizon Avenue. As noted
above, Verizon acquired OnePoint on December 15, 2000, and
renamed the entity ``Verizon Avenue.'' Verizon Avenue provides
high-speed Internet and voice services, including local voice
service, to apartment buildings, condominiums, and cooperative
properties, both in and out-of-region.19 Verizon Avenue also
provides advanced services through its high-speed Internet
service and local service that compete with traditional local
telecommunications services.20
7. Verizon contends that between January 1, 2001 and March
31, 2003, Verizon Avenue spent $142.8 million to provide
Competitive Local Service in out-of-region markets.21 Verizon
Avenue's total out-of-region spending included state-specific
fixed assets, centralized software fixed assets, state-specific
expenses, centralized operating expenses, and pre-paid marketing
payments.22 These five categories are discussed below.
8. State-specific fixed assets. According to Verizon,
between January 1, 2001 and March 31, 2003, Verizon Avenue spent
$11.2 million on fixed assets in out-of-region markets, of which
$10.3 million qualifies as facilities expenditures.23 Verizon
lists the following types of spending in this category: Digital
Service Line Access Modules (``DSLAMs'') and related network
equipment installed in customer multiple dwelling units
(``MDUs''); network equipment and facilities used at Verizon
Avenue Data Points of Presence (``DPOPs''); outside plant and
capitalized labor to survey, install, and maintain DSLAM and
DPOP network equipment; and capitalized ``gateway'' operations
support systems (OSS) software used by Verizon Avenue to
interface with various incumbent LECs in order to provide
competitive local service.24
9. Verizon has provided a summary of these fixed-asset
expenditures between January 1, 2001 and March 31, 2003, broken
down by state and region.25 Verizon has also provided detailed
spreadsheets for each state, itemizing each expenditure by its
exact date, amount, vendor, and whether it qualifies as a
facilities expenditure.26 Based on our review of these detailed
documents itemizing Verizon's expenditures, we agree that the
expenditures qualify as out-of-region expenditures and that
Verizon Avenue spent $11.2 million on fixed assets in out-of-
region markets, and that $10.3 million of this amount counts
towards the Facilities Expenditure requirement.
10. Centralized software fixed assets. Verizon contends
that between January 1, 2001 and March 31, 2003, Verizon Avenue
purchased $4.9 million in software to run network operations.27
The software assets include: Primus Knowledge Systems OSS
software, used for provisioning process flows and
troubleshooting problems with network systems; Micromuse Netcool
OSS software, which provides network surveillance for the
Network Operations Center; Bridgewater Widespan DSLAM and
Ethernet switch provisioning software and high speed Internet
provisioning software; Nightfire ``gateway'' software for
interconnection with various incumbent LECs; Network Tech
Dispatch software used for provisioning and repair functions;
and lab network software used for testing to ensure data packets
flow through the network properly.28
11. Verizon must allocate these expenditures between in-
region and out-of-region states because the expenditures were
for centralized assets. To do so, Verizon uses a ``passings''
allocator, under which the number of customer units ``passed''
by Verizon Avenue represents the potential customer base for
Verizon's services.29 For example, when Verizon equips all of
the units in a building for its services, all of the units in
that building are considered passed.30 According to Verizon,
Verizon Avenue uses passings as a cost allocator for centralized
assets and expenses because it accurately reflects the cost of
providing service in each area. 31
12. We have evaluated the passings allocator by comparing
it against two other allocation methods. We have compared it
with (1) allocating on the basis of the number of customers
served within the state and (2) allocating based on the fixed
assets in each state. Based on our review, we find that the
total costs allocated through the passings allocator are similar
to the total costs allocated using the number of customers or
the state-specific fixed assets. Therefore, for purposes of
this proceeding, we conclude that the passings allocator
provides a reasonable approach to allocating Verizon Avenue's
centralized costs to out-of-region markets.
13. Using the passings allocator, Verizon attributes $2.6
million of Verizon Avenue's centralized software assets to
serving out-of-region markets because the software in question
relates to OSS used to serve customers in such markets and was
spent in conjunction with the provision of competitive local
service.32 Verizon further contends that $1.5 million of these
software assets also qualifies as facilities expenditures.33
Verizon has provided a detailed spreadsheet, listing and
describing
each piece of software, its date of purchase, its asset
identification number, and its acquisition price.34 Based on
our review of this detailed documentation provided by Verizon,
we agree that these expenditures qualify as out-of-region
expenditures and we approve Verizon's request to count both the
$2.6 million out-of-region expenditures and the $1.5 million
facilities expenditures toward satisfaction of the out-of-region
expenditure requirements.
14. State-specific expenses. Verizon contends that between
January 1, 2001 and March 31, 2003, it had $46.2 million in
expenses in out-of-region states.35 These expenses, which
include cost of goods sold, employee salaries and benefits,
taxes and fees, marketing and promotional expenses, payments for
resale of local voice service, and building rent and leases,
were booked on each state's expense ledger.36 In support of its
claim, Verizon has provided a summary and a state-specific
accounting for each expense, including amounts, dates,
descriptions, accounting codes, and eligibility as a facilities
expenditure.37
15. According to Verizon, $5.5 million of these expenses
qualifies as facilities expenditures because they were incurred
to ``lease,'' ``use,'' or ``provide'' Verizon Avenue's
facilities and network equipment.38 Verizon lists the following
as facilities expenditures: leasing costs for network
facilities to transport Internet traffic; leasing costs for
space and power at Verizon Avenue's DPOPs; DPOP expenses as well
as payments to outside companies to monitor DPOP sites;
technician costs to connect a subscriber to Verizon Avenue
DSLAMs and troubleshoot subscriber connection problems; and
expenses by field technicians who maintain and operate Verizon
Avenue's facilities and equipment.39 Based on our review of
this comprehensive submission, we find that these expenditures
qualify as out-of-region expenditures. We approve the proposed
$46.2 million as out-of-region expenditures, including $5.5
million in facilities expenditures.
16. Centralized operating expenses. Verizon contends that
it incurred $79.8 million in centralized expenses, including
$24.7 million in facilities expenditures, allocable to out-of-
region markets between January 1, 2001 and March 31, 2003.
According to Verizon, these expenses were incurred by four of
Verizon Avenue's centralized departments: Network Services,
Provisioning, Customer Care, and Central Dispatch.40 Verizon
has provided a detailed description of the duties of each of
these departments. Verizon also has accounted for each
department's expenses, breaking down the spending by in-region
and out-of-region states, as well as whether a given expenditure
qualifies as a facilities expenditure. As with the centralized
software fixed asset category, Verizon has used a ``passings''
allocator to determine the portion of spending attributable to
serving out-of-region markets.41 Based on our review of
Verizon's detailed descriptions, we agree that these
expenditures qualify as out-of-region expenditures. We approve
the proposed $79.8 million as out-of-region expenditures,
including $24.7 million as facilities expenditures.
17. Pre-paid marketing payments. Between January 1, 2001
and March 31, 2003, Verizon Avenue paid $3.0 million in fees or
commissions to building developers and owners in exchange for
marketing agreements.42 Verizon contends that these
expenditures are out-of-region expenditures because they were
made in the course of providing Competitive Local Service in
out-of-region markets.43 In support of its claim, Verizon has
provided a state-by-state accounting of these payments, listing
the relevant period of time, account name, accounting code, and
balance.44 Based on our review of Verizon's state-by-state
accounting, we agree that these expenditures qualify as out-of-
region expenditures.
NorthPoint
18. NorthPoint was a competitive LEC that provided
wholesale symmetric digital subscriber line (``DSL'') services
to Internet service providers.45 Under the terms of the
Verizon/NorthPoint merger agreement, Verizon was to provide $800
million in cash and assets to NorthPoint in exchange for a 55
percent interest in NorthPoint.46 Verizon's initial payment
under the agreement was $150 million. Verizon subsequently
terminated the agreement with NorthPoint, and NorthPoint entered
Chapter 11 bankruptcy proceedings.47
19. In the NorthPoint Order, the Commission approved
Verizon's request to count $90.5 million, including $50.2
million for facilities, of its NorthPoint investment as an out-
of-region expenditure.48 We concluded that Verizon's
expenditure was a ``contribution to, or investment in, [a]
venture'' that provides Advanced Services to the mass market.49
We also found that Verizon's method of allocating the total
NorthPoint expenditure into out-of-region and facilities
categories was consistent with the method the Common Carrier
Bureau approved in its OnePoint decision.50 We concluded that
Verizon's expenditure constituted an investment in NorthPoint,
and that Verizon itself was not required to provide the
Competitive Local Service for the investment to count as an out-
of-region expenditure.51
20. Proposed reduction in qualifying amount of NorthPoint
investment. Following questions from Enforcement Bureau staff,
Verizon proposed a $9.1 million reduction of the previously
approved NorthPoint out-of-region expenditures to account for
NorthPoint investments in international joint ventures, which do
not qualify as out-of-region expenditures under the Merger
Order.52 Verizon derived the $9.1 million figure, in part, by
applying to its NorthPoint investment an international joint
venture allocator53 in addition to its previously approved out-
of-region allocator.54 Verizon applied these allocators to two
categories of investment related to the joint ventures: Long-
Term Investments and Computers and Software.55 The shares of
international investment for each category were $5.8 million,56
and $1 million,57 respectively. The $9.1 million proposed
reduction also includes a $2.3 million reduction in OSS services
provided to NorthPoint's international joint ventures, which was
recorded in Amounts Due from Affiliated Companies.58 These
amounts owed to NorthPoint from international joint ventures do
not qualify as spending to provide services within the United
States. Based on our review of these calculations, we find
Verizon's proposed adjustment to be reasonable. We, therefore,
accept Verizon's adjustment, thereby reducing the total
NorthPoint-related approved out-of-region expenditures from
$90.5 million to $81.4 million.59
21. Proposed classification to facilities expenditures.
Verizon contends that we should further classify $13 million of
the out-of-region expenditure that it spent for NorthPoint's
computers and software assets as facilities expenditures.60
Subsequently, Verizon proposed an allocator to allocate a
portion of the computer and software assets to NorthPoint's
international ventures.61 As described below, we find that
Verizon has not adequately established that these expenditures
were facilities-related. This disallowance does not, however,
affect our conclusion that Verizon has fulfilled the out-of-
region requirements of the Bell Atlantic/GTE Merger Order.
22. In support of its request to consider NorthPoint
spending against the Facilities Expenditure requirement, Verizon
relies entirely on an undated, unattributed spreadsheet obtained
``[d]uring NorthPoint's bankruptcy proceedings'' that Verizon
``revised to include descriptions of the particular
software.''62 Verizon contends that this spreadsheet lists more
than 5,000 line items for software and software development
work.63 According to Verizon, the company reviewed each line
item on the spreadsheet to determine the nature and type of each
asset. Based on this review, Verizon asserts that NorthPoint
used $67.5 million of the software or software development work
for OSS, network maintenance, network monitoring, provisioning
network management, mapping tools for deployment, or interface
software that enabled NorthPoint's ISP customers to process
orders. 64
23. Verizon's assertions are based solely on the above-
described revised version of the NorthPoint software asset
account, with no additional evidence to support its claim. As
an initial matter, Verizon has not shown, through a declaration
or otherwise, who created this spreadsheet and when it was
created, information that is critical in evaluating its
reliability. Nor has Verizon offered any independent support
for its claim, or described the method by which it determined
that a given software expense was a facilities-based
expenditure.65
24. On a related point, even if we assume that the
spreadsheet accurately reflects NorthPoint's software asset
account, Verizon has not identified which of the 5000-plus
entries qualifies as facilities expenditures. For example, the
entries for ``Consulting Services'' and ``Management Consulting
Services'' may be for software development work for OSS, as
Verizon contends, or they may be for something entirely
unrelated to facilities. We cannot accept Verizon's conjecture
that all the consulting services listed were for OSS. We
therefore conclude that Verizon has not demonstrated at this
time that $67.5 million of the software or software development
work listed in Exhibit 11 is a facilities expenditure.
25. Verizon also asks to further classify certain computer
assets as facilities expenditures on the basis of an undated,
unattributed list of ``NorthPoint Communications Fixed Assets by
Location As of December 31, 2000''66 and declaration of Celia
Engman, Executive Director, Implementation and Support, Verizon
Online/Broadband,67 These documents, however, do not
demonstrate that all of the listed NorthPoint computers were
facilities expenditures. Ms. Engman was Verizon's lead
representative on the NorthPoint merger transition team.68 As
such, her responsibilities included evaluating NorthPoint's DSL
operations, particularly NorthPoint's Information Technology
Systems.69 Ms. Engman states that NorthPoint maintained a
state-of-the-art facility in Emeryville, California, that such
facility was the nucleus for NorthPoint's DSL network, that
Verizon has a document that states that $30.7 million of
NorthPoint assets are computers located in the Bay Area, and
that, in her opinion, the computers would likely have been used
to operate NorthPoint's DSL network, run its OSS, and support
other facilities or network-related purposes.
26. But Ms. Engman's declaration has several conspicuous
omissions. Ms. Engman, who does not appear to have even
reviewed the fixed asset spreadsheet,70 does not state that
NorthPoint actually had $30.7 million of computers. Nor does
Ms. Engman allege that the computers listed in the spreadsheet
actually ran NorthPoint's OSS, or even that those computers were
the same computers she saw on her visits to the NorthPoint
facility. Ms. Engman does not provide the dates of her visits
to the NorthPoint data center; her visits may have been long
before December 31, 2000. Moreover, even if we assume that
Verizon has provided us an accurate list of NorthPoint fixed
assets on December 31, 2000, we cannot conclude, based on
Verizon's submission, that all of the computers listed in
Exhibit 12 were facilities expenditures.
27. For the above reasons, we find that Verizon has not
demonstrated that $13 million of the NorthPoint investment,
approved in the NorthPoint Order as an out-of-region
expenditure, should qualify as facilities expenditures. We need
more than Verizon's conjecture to determine whether these
NorthPoint assets were facilities expenditures.
SONET
28. In the SONET Order, the Commission found that Verizon's
SONET investment provided a ``service[], including resale, that
compete[s] with traditional local telecommunications services
offered by incumbent local exchange carriers.''71 The
Commission also found that although all of the SONET
expenditures addressed in that order were for facilities, only a
portion was physically located out-of region.72 We stated that
in the absence of any customer use data, physical location is a
reasonable basis for allocating investment. Accordingly, we
approved the portion of the investments that was physically
located out-of-region, and denied Verizon's request to count the
in-region portion toward satisfaction of the merger condition.73
29. Verizon now asserts that additional portions of its
expenditures in the Dallas, Los Angeles, and Seattle areas were
for SONET facilities that are physically located out-of-region.
Verizon has asked to count these additional amounts toward its
out-of-region expenditure requirements.74 In support of its
request, Verizon has provided summary information, as well as
detailed charts, demonstrating that the capital expenditures and
associated expenses from November 2001 through March 2003 were
for SONET investments physically located out-of-region.75 Based
on Verizon's detailed charts, we agree that these expenditures
qualify as out-of-region expenditures. We approve Verizon's
request to count an additional $32.3 million in out-of-region
expenditures, including $31.8 million in facilities,76 toward
satisfaction of its out-of-region commitments.
ORDERING CLAUSES
30. Accordingly, IT IS ORDERED, pursuant to sections 1-4,
201-205, 214, 251, 303(r), and 309 of the Communications Act of
1934, as amended, 47 U.S.C. §§ 151-154, 201-205, 214, 251,
303(r), and 309, that Verizon Communications, Inc.'s requests to
count its NorthPoint, SONET, and Verizon Avenue expenditures
toward satisfaction of Condition XVI of the Bell Atlantic/GTE
Merger Conditions ARE GRANTED IN PART as described herein.
31. IT IS FURTHER ORDERED, pursuant to sections 1-4, 201-
205, 214, 251, 303(r), and 309 of the Communications Act of
1934, as amended, 47 U.S.C. §§ 151-154, 201-205, 214, 251,
303(r), and 309, that Verizon's Contingent Petition for
Extension of Time, filed on June 12, 2003, IS DISMISSED AS MOOT.
FEDERAL COMMUNICATIONS COMMISSION
Marlene H. Dortch
Secretary
_________________________
1 GTE Corporation, Transferor, and Bell Atlantic Corporation,
Transferee, for Consent to Transfer Control of Domestic and
International Sections 214 and 310 Authorizations and Application
to Transfer Control of a Submarine Cable Landing License,
Memorandum Opinion and Order, 15 FCC Rcd 14032 (2000) (Bell
Atlantic/GTE Merger Order, Bell Atlantic/GTE Merger Conditions,
or Merger Conditions). The merger conditions are in Appendix D
of the Merger Order.
2 Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14182, ¶ 319
(Appendix D, 15 FCC Rcd at 14319, ¶¶ 44-45).
3 We note that in this order, as in previous orders approving
expenditures, our findings are based on Verizon's representations
as to the character of the investments and the amounts actually
spent. Verizon's compliance with the out-of-region expenditure
requirements of the Merger Conditions is subject to examination
in an annual independent audit. See Bell Atlantic/GTE Merger
Order, 15 FCC Rcd 14190-93, ¶¶ 336-341 (Appendix D, 15 FCC Rcd at
14327-28, ¶ 56). Should it be determined in such an audit, or
otherwise, that Verizon did not actually make the expenditures
described here, or that the expenditures were not as described by
Verizon in the record here, nothing in this order precludes a
finding that Verizon has not satisfied the Merger Conditions.
4 See Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14182, ¶ 319
(Appendix D, 15 FCC Rcd at 14318-19, ¶ 43).
5 Id.
6 Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14182, ¶ 319
(Appendix D, 15 FCC Rcd at 14319, ¶¶ 44-45). The amounts
included in the facilities expenditure must be spent in
conjunction with: (1) the provision of Competitive Local
Service; (2) the provision of other telecommunications services;
or (3) investments in, or contributions to, ventures that provide
Competitive Local Service activity in Out-of-Region Markets by
those ventures. Id.
7 Id.
8 See id., 15 FCC Rcd at 14182-83, ¶ 320 (Appendix D,15 FCC Rcd
at 14319, ¶ 46).
9 See Letter from Carol Mattey, Deputy Chief, Common Carrier
Bureau, Federal Communications Commission to Jeffrey Ward, Senior
Vice President - Regulatory Compliance, Verizon, 16 FCC Rcd 20315
(2001). OnePoint provided bundled voice, data, and video
services to residents of apartment buildings and condominiums.
See Letter from Patricia E. Koch, Assistant Vice President,
Federal Regulatory, Verizon to Dorothy Attwood, Chief, Common
Carrier Bureau, Federal Communications Commission at 1 (May 17,
2001).
10 See GTE Corporation, Transferor, and Bell Atlantic
Corporation, Transferee, for Consent to Transfer Control of
Domestic and International Sections 214 and 310 Authorizations
and Application to Transfer Control of a Submarine Cable Landing
License, Order, 17 FCC Rcd 12271 (2002) (``NorthPoint Order'').
11 See GTE Corporation, Transferor, and Bell Atlantic
Corporation, Transferee, for Consent to Transfer Control of
Domestic and International Sections 214 and 310 Authorizations
and Application to Transfer Control of a Submarine Cable Landing
License, Order, 18 FCC Rcd 4813 (2003) (``SONET Order'').
12 SONET Order, 18 FCC Rcd at 4813, ¶ 1.
13 See Letter from Marie Breslin, Director, Federal Regulatory,
Verizon to Maureen Del Duca, Chief, Investigations and Hearings
Division, Enforcement Bureau, Federal Communications Commission
(Apr. 11, 2003) (``Verizon April 11, 2003 Letter''); Letter from
Marie Breslin, Director, Federal Regulatory, Verizon, to Diana
Lee, Investigations and Hearings Division, Enforcement Bureau,
Federal Communications Commission (May 9, 2003) (correcting its
figures for state-specific fixed asset expenditures submitted in
the April 11, 2003 filing) (``Verizon May 9, 2003 Letter'');
Letter from Marie Breslin, Director, Federal Regulatory, Verizon,
to Maureen Del Duca, Chief, Investigations and Hearings Division,
Enforcement Bureau, Federal Communications Commission (May 27,
2003) (``Verizon May 27, 2003 Letter'').
14 Verizon April 11, 2003 Letter at 2. Initially, Verizon
specifically excluded a request for a facilities credit for the
NorthPoint computer and software assets and stated that it might
provide additional details in a future filing requesting
facilities treatment. See Letter from Dee May, Verizon to
Dorothy Attwood, Chief, Common Carrier Bureau, Federal
Communications Commission, at 9-10 & note 12. (Feb. 7, 2002)
(``Verizon February 7, 2002 Letter'').
15 Letter from Marie Breslin, Director, Federal Regulatory,
Verizon, to Maureen Del Duca, Chief, Investigations and Hearings
Division, Enforcement Bureau, Federal Communications Commission
(Apr. 30, 2003) (``Verizon April 30, 2003 Letter''); Letter from
Marie Breslin, Director, Federal Regulatory, Verizon, to Maureen
Del Duca, Chief, Investigations and Hearings Division,
Enforcement Bureau, Federal Communications Commission (May 15,
2003) (``Verizon May 15, 2003 Letter''). See Verizon April 30,
2003 Letter at 1.
16 See Letter from Marie Breslin, Director, Federal Regulatory,
Verizon to Maureen Del Duca, Chief, Investigations and Hearings
Division, Enforcement Bureau, Federal Communications Commission
(Jun. 9, 2003) (``Verizon June 9, 2003 Letter'').
17 See Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14182, ¶
319 (Appendix D, 15 FCC Rcd at 14318-19, ¶ 43).
18 Id. The Merger Conditions define the Bell Atlantic and GTE
``Service Areas'' as the states and service areas in which the
various former Bell Atlantic and GTE affiliates had incumbent
local exchange operations as of January 27, 2000. Id., 15 FCC
Rcd at 14263.
19 See Verizon April 11, 2003 Letter at 3.
20 See Verizon April 11, 2003 Letter at 3-4.
21 The April 11 submission covered spending between January 1,
2001 and June 30, 2002, and the May 27 filing covered spending
between July 1, 2002 and March 31, 2003. Verizon has stated that
it reserves the right to detail additional spending and
investments in later filings. Verizon May 27, 2003 Letter at 1,
note 2.
22 See Verizon April 11, 2003 Letter, Exhibit 1; Verizon May
27, 2003 Letter, Exhibit 1.
23 Verizon April 11, 2003 Letter at 5-6; Verizon May 27, 2003
Letter at 2.
24 Verizon April 11, 2003 Letter at 5-6; Verizon May 27, 2003
Letter at 2.
25 Verizon April 11, 2003 Letter, Exhibit 2, Verizon May 27,
2003 Letter, Exhibit 2.
26 Verizon April 11, 2003 Letter, Exhibit 3; Verizon May 27,
2003 Letter, Exhibit 3
27 See Verizon April 11, 2003 Letter at 6; Verizon May 27, 2003
Letter, Exhibit 3.
28 See Verizon April 11, 2003 Letter at 6; Verizon May 27, 2003
Letter at 3.
29 Id.
30 See Verizon April 11, 2003 Letter at 4-5.
31 See Verizon April 11, 2003 Letter, Exhibit 4; Verizon May
27, 2003 Letter, Exhibit 4.
32 See Verizon April 11, 2003 Letter at 6; Verizon May 27, 2003
Letter at 3.
33 See Verizon April 11, 2003 Letter at 6; Verizon May 27, 2003
Letter at 3.
34 Verizon April 11, 2003 Letter, Exhibit 5; Verizon May 27,
2003 Letter, Exhibit 5.
35 See Verizon April 11, 2003 Letter at 7; Verizon May 27, 2003
Letter at 3.
36 Verizon April 11, 2003 Letter at 7; Verizon May 27, 2003
Letter at 3.
37 Verizon April 11, 2003 Letter, Exhibits 6-7; Verizon May 27,
2003 Letter, Exhibits 6-7.
38 See Verizon April 11, 2003 Letter at 7; Verizon May 27, 2003
Letter at 3. The Bell Atlantic/GTE Merger Order defines
``Facilities Expenditure'' as money used not only to
``construct,'' ``acquire,'' and ``obtain'' facilities and
equipment, but also money spent to ``lease,'' ``use,'' or
``provide'' them. Merger Conditions, 15 FCC Rcd at 14319, ¶ 44.
39 Verizon April 11, 2003 Letter at 7; Verizon May 27, 2003
Letter at 3.
40 See Verizon April 11, 2003 Letter, Exhibits 8-9. Exhibits 8
and 9 are Verizon's summaries of Verizon Avenue's 2001 and first-
half of 2002 out-of-region allocations for these centralized
expenses, organized by functional department and by state, based
on Verizon Avenue's expense records. These two exhibits also
include the monthly passings percentages used by Verizon Avenue
to allocate these expenses to each individual state. Id. See
also Verizon May 27, 2003 Letter, Exhibits 8-9 (Verizon summaries
of Verizon Avenue's second-half of 2002 and first-quarter of 2003
out-of region allocations for these expenses.)
41 See Verizon April 11, 2003 Letter at 8-9; id. at Exhibits 8-
9. See also Verizon May 27, 2003 Letter at 4; id. at Exhibits 8-
9.
42 See Verizon April 11, 2003 Letter at 9; Verizon May 27, 2003
Letter at 4.
43 See Verizon April 11, 2003 Letter, Exhibit 10; Verizon May
27, 2003 Letter, Exhibit 10. Exhibit 10 is a summary of these
pre-paid marketing payments, by state, based on Verizon Avenue's
asset ledgers.
44 Verizon April 11, 2003 Letter, Exhibit 10; Verizon May 27,
2003 Letter, Exhibit 10.
45 According to the NorthPoint Communications Group, Inc. Form
10-Q filed for the quarterly period ending September 30, 2000, at
p. 4: ``NorthPoint Communications, Inc. was formed in May 1997 to
provide high speed network and data transport services, allowing
network service providers, including Internet service providers,
broadband data service providers and long distance and local
phone companies (collectively, network service providers or NSPs)
to meet the rapidly increasing information needs of small and
medium-sized businesses, people who work in home offices and
telecommuters.''
46 See Verizon February 7, 2002 Letter at 7-8.
47 See id. at 8.
48 See NorthPoint Order, 17 FCC Rcd at 12273, ¶ 5.
49 Id.
50 Id.
51 See id., 17 FCC Rcd at 12273, ¶ 6.
52 Verizon June 9, 2003 Letter at 1-3; Bell Atlantic/GTE Merger
Conditions, Appendix D, 15 FCC Rcd at 14318-19, ¶ 43.
53 See Verizon June 9, 2003 Letter at 1-2. Verizon reviewed
NorthPoint's public filings (Year 2000 Form 10-Q Reports) and
determined that NorthPoint invested $37.7 million in two joint
ventures that NorthPoint established in Canada and Europe. See
id. at 2; id., revised Exhibit 14. Verizon concluded that ``it
appears from the public filings that the $37.7 million in
investments was included in the $51 million line item for `Long-
Term Investments' on NorthPoint's third-quarter 2000 balance
sheet, which Verizon used to allocate its NorthPoint
investment.'' See id. at 1. Verizon proposes that we use an
international joint venture allocator of 6.4% to reduce the
previously approved $90.5 million NorthPoint-related out-of-
region investment. See id. at 2. The 6.4% international joint
venture allocator is the ratio of the $37.7 million joint venture
investment to NorthPoint's total assets of $588.2 million. See
id. at 2.
54 The Commission previously approved the out-of-region
allocator of 60.25% in the NorthPoint Order. See NorthPoint
Order, 17 FCC Rcd at 12272-73, ¶ 4 (describing the out-of-region
allocator as ``about 60%'').
55 See Verizon June 9, 2003 Letter at 2.
56 See id. at 2. Verizon derived the $5.8 million by applying
the international joint venture allocator of 6.4% and the out-of-
region allocator of 60.25% to Verizon's previously approved $150
million investment in NorthPoint (6.4% x 60.25% x $150 million).
See id., revised Exhibit 14.
57 The ratio of the Computers and Software balance of $112.9
million to NorthPoint's total assets of $588.2 million is 19.2%.
See id., revised Exhibit 14. Verizon applied this 19.2% and the
international joint venture allocator of 6.4% to the $150 million
NorthPoint investment (19.2% x 6.4% x $150 million), resulting in
$1.8 million. See id. Verizon then subtracted from the $1.8
million the associated adjustment to Accumulated Depreciation and
Amortization ($.25 million) for the Computers and Software line
item attributed to the international investment, resulting in
$1.6 million. See id. Finally, Verizon applied the out-of-
region allocator of 60.25% to the $1.6 million, resulting in $1
million. See id.
58 See id. at 2. The Amounts Due from Affiliated Companies
balance in NorthPoint's third-quarter 2002 balance sheet was
$15.1 million. See id., revised Exhibit 14. The ratio of the
$15.1 million to NorthPoint's total assets $588.2 million is
2.5%. Id. at 2; id., revised Exhibit 14. Verizon applied this
2.5% and the 60.25% out-of-region allocator to the $150 million
(2.5% x 60.25% x $150 million), resulting in $2.3 million.
59 The reductions of $5.8 million in the Long-Term Investments,
$1 million in the Computer and Software, and $2.3 million in the
Amounts Due from Affiliated Companies line items total to $9.1
million. We note that the NorthPoint facilities-related spending
(for network equipment and collocation) that we previously
approved is not affected, since it is unrelated to these
international joint ventures.
60 Verizon derived the $13 million figure by first comparing
its asserted amount of facilities-related computer and software
spending by NorthPoint ($98.2 million) with the total amount of
NorthPoint computers and software spending, as described in the
NorthPoint Order ($113 million). Verizon then applied this
percentage (87%) to the amount of its $150 million investment in
NorthPoint related to computers and software ($28.8 million) to
determine how much of its overall investment went to facilities-
related computers and software investment ($25 million). Verizon
then subtracted accumulated depreciation ($3.4 million), and
multiplied the resulting figure ($21.6 million) by the out-of-
region allocator approved by the Commission in the NorthPoint
Order (60.25%), thereby determining the out-of-region amount of
the facilities-related computer and software. That figure is $13
million.
61 In its June 9, 2003 letter, Verizon proposed an allocator of
6.4% (the percentage of the $33.7 million international
investment over the total assets on NorthPoint's third-quarter
2000 balance sheet) that would allocate approximately $0.8
million of the $13 million figure for operations support systems
and related services to international joint ventures. See
Verizon June 9, 2003 Letter at 2-3.
62 See Verizon April 11, 2003 Letter at 11-12.
63 See id. at 11.
64 See id.
65 To substantiate the claims for out-of-region expenditures
for the Verizon Avenue and SONET expenses, Verizon submitted
detailed spreadsheets listing all such expenses. Verizon's
claims for the Verizon Avenue and SONET out-of-region
expenditures can be audited as part of Verizon's annual merger
conditions compliance audit. The spreadsheet containing a list
of NorthPoint's software asset account, on the other hand, does
not provide sufficient detail to determine whether the software
listed would qualify as a facilities expense. Verizon cannot
demonstrate whether such software assets were for facilities or
non-facilities. Without the necessary detail, supporting
documentation, or access to verify such assets, this information
cannot be audited.
66 Verizon April 11, 2003 Letter, Exhibit 12.
67 Verizon April 11, 2003 Letter, Exhibit 13 (``Engman
Declaration'').
68 Engman Declaration at ¶ 2.
69 Id.
70 Ms. Engman states ``I am informed that Verizon has obtained
a document that lists NorthPoint's fixed assets by location as of
December 31, 2000, including its computer inventory. I am also
informed that $30.7 million of the computers identified on this
list are shown as located in the San Francisco Bay Area.''
Engman Declaration at ¶ 5.
71 SONET Order, 18 FCC Rcd at 4815, ¶ 7.
72 Id. Verizon states that it uses the SONET facilities to
provide special access and transport services that compete with
local incumbents' special access and transport services. Id.
``The SONET facilities are comprised of fiber rings and
associated equipment located in Los Angeles, Seattle, and Dallas.
Verizon is an incumbent LEC in each city, and the fiber rings
straddle the line between the Verizon incumbent territories and
those of other incumbent LECs.'' Id., 18 FCC Rcd at 4814-15, ¶
4. The Commission found that the condition's language and
purpose require exclusion of the in-region portion, ``given that
in-region customers [also] use the facilities, e.g., to
communicate with other in-region customers.'' See id., 18 FCC
Rcd at 4816, ¶ 10.
73 Id. The Commission approved capital expenditures during
July 1, 2000 and October 31, 2001, for the SONET investments
physically located out-of-region.
74 See Verizon April 30, 2003 Letter at 1 (for spending between
November 2001 and December 2002); Verizon May 27, 2003 Letter at
1 (for spending between January 2003 and March 2003). Exhibit 1,
as attached to the Verizon April 30, 2003 Letter and the Verizon
May 27, 2003 Letter, is a general summary of Verizon's
expenditures in all three cities, divided into capital
expenditures and expenses. Verizon derived the capital
expenditures from work orders from Verizon's Capital Program
Management System (``CPMS'') which detail capital costs, tracked
by location; Verizon derived the expenses from its accounts
payable and internal tracking systems. Verizon April 30, 2003
Letter at 2-3.
75 Exhibit 2, attached to the Verizon April 30, 2003 Letter and
the Verizon May 27, 2003 Letter, is a summary of Verizon's Dallas
area capital spending, organized by physical location and work
order; Exhibit 3 contains detail for the Dallas operating
expenses, which include collocation and rental fees, lease
payments, and operating expenses by employees who manage the
Dallas network; Exhibit 4 is a summary of the Los Angeles area
capital spending, organized by physical location and work order;
Exhibit 5 contains detail for the Los Angeles operating expenses,
which include collocation and rental fees, lease payments, and
operating expenses by employees who manage the Los Angeles
network; Exhibit 6 is a summary of the Seattle area capital
spending, organized by physical location and work order (includes
spending for one work order from February 2001 that was not
included in the previous filing); and Exhibit 7 contains detail
for the Seattle operating expenses, which include collocation and
rental fees, lease payments, and operating expenses by employees
who manage the Seattle network.
76 Exhibit 8, as attached to the Verizon April 30, 2003 Letter
and the Verizon May 27, 2003 Letter, is a summary of the
expenditures to modify the OSS in order to accommodate the out-
of-region customers in Dallas, Los Angeles, and Seattle.