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Before the
Federal Communications Commission
Washington, D.C. 20554
In the Matter of )
)
GTE CORPORATION, )
Transferor, )
)
and ) CC Docket 98-184
)
BELL ATLANTIC CORPORATION, )
Transferee, ) EB File No. EB-04-IH-0143
)
For Consent to Transfer of )
Control of Domestic and )
International Sections 214 and )
310 Authorizations and )
Application to Transfer Control )
of a Submarine Cable Landing
License
ORDER
Adopted: January 5, 2005 Released: January 7, 2005
By the Commission:
I. INTRODUCTION
1. In this Order, we deny Verizon Communications, Inc.'s
(``Verizon's'') request that we discontinue the independent
auditor condition in Merger Condition XXII of the Bell
Atlantic/GTE Merger Order for all periods beginning on or after
January 1, 2005.1
II. BACKGROUND
2. In the Bell Atlantic/GTE Merger Order, the Commission
adopted the Merger Conditions to mitigate any potential public
interest harms of the merger of Bell Atlantic Corporation (``Bell
Atlantic'') and GTE Corporation (``GTE'') to form Verizon.2
These Merger Conditions, to which Verizon agreed, included
Condition XXII, the independent auditor condition.3 This
condition requires Verizon to engage an independent auditor to
conduct audits on an annual basis regarding Verizon's compliance
with the Merger Conditions and the sufficiency of Verizon's
internal controls.4 The Merger Order specifically contemplates
that the independent auditor condition will permit oversight of
Verizon's compliance with all 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 Verizon agreed when the Commission released the Merger Order,
the independent auditor condition expires when the last of the
remaining Merger Conditions subject to this requirement sunsets.6
3. On April 28, 2004, Verizon requested that the
Commission discontinue the independent auditor condition for all
periods beginning on or after January 1, 2005.7 Verizon filed a
supplemental letter on June 22, 2004 providing additional
information.8 On July 13, 2004, the Enforcement Bureau issued a
public notice seeking comment on Verizon's request.9 AT&T
Corporation filed comments, the Pennsylvania Public Utility
Commission and Bridgecom International, Inc. filed reply
comments, and various other competitive local exchange carriers
(``LECs'') filed joint reply comments.10 These commenters
universally oppose Verizon's request. Verizon also filed reply
comments on August 10, 2004.11
III. DISCUSSION
4. In evaluating Verizon'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 Verizon's compliance with
the conditions and the sufficiency of Verizon'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, Verizon makes the general
argument that there is no reason for the Commission or Verizon to
continue these audits for the period under consideration. In
particular, Verizon contends that we should discontinue the
independent auditor condition because ``most of the conditions
have sunset as of January 1, 2005'' and ``there is no reason to
believe that additional audits will disclose any failure by
Verizon to satisfy these merger conditions while they remain in
effect,'' in light of the content of prior audit reports.14 We
disagree with Verizon's argument and find no reason to depart
from the Commission's previous determinations that the audit
condition is in the public interest. The results of previous
independent audit reports are not dispositive of our decision
here.15 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 Thus, the Commission
recognized from the outset the importance of the independent
auditor condition not only as an integral component of a
successful program to monitor Verizon's compliance with the
operative conditions but also as a disincentive to engage in
discrimination and other potential misbehavior.17
6. Verizon also claims that, in the absence of audits,
other compliance and enforcement mechanisms established in the
Merger Order would provide adequate assurance of its compliance
with the Merger Conditions. Verizon contends that most of the
remaining operative conditions are ``effectively self-
policing.''18 Specifically, Verizon states that most of the
remaining operative conditions require specific discounts or
pricing terms for competitive LECs who could be expected to bring
to the Commission's attention any failure by Verizon to continue
complying with those requirements.19 The Merger Conditions,
however, placed the burden on Verizon, 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 is 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 Bell Atlantic's and
GTE's merger, Verizon should bear the burden of complying with
the independent auditor condition for the entire period
envisioned in the Commission's original order.
7. Verizon also contends that another operative condition,
the nondiscriminatory rollout of digital subscriber line
(``xDSL'') services condition, is self-policing because Verizon
continues to file quarterly reports on its compliance with the
xDSL deployment.23 In addition, Verizon contends that it will
continue to file annual compliance reports ``prepared in a format
substantially similar to the independent auditor's section of the
audit report that will allow the Commission and others to confirm
Verizon's compliance'' with the Merger Conditions.24 We reject
Verizon's claim that these compliance requirements 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 A quarterly report or
compliance report is not a substitute for an independent audit.
Verizon's obligations to file unaudited quarterly and compliance
reports do not provide an independent review of Verizon's
performance. During the audit process, the Commission staff,
state commissions, and independent auditor have access to the
working papers, supporting materials, and interpretations
underlying Verizon'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 authority.27 In view
of the foregoing, we find no reason to alter our prior conclusion
that the compliance mechanisms discussed in Verizon's request are
not substitutes for the independent auditor condition.
8. Lastly, Verizon contends that we should discontinue the
audit requirement because ``the audits for the years 2005 and
beyond would cost at least one million dollars,'' and ``the
burdens of continued audits clearly outweigh any possible
benefits.''28 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 Bell Atlantic/GTE's compliance
with the conditions.''29 Verizon has not provided substantial
evidence to contradict this finding. We conclude that,
therefore, Verizon has not demonstrated that discontinuing the
independent auditor condition would serve the public interest.
IV. ORDERING CLAUSE
9. 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 Verizon Communications, Inc.'s
request that the Commission discontinue requiring audits under
Condition XXII of the Bell Atlantic/GTE Merger Order is DENIED.
FEDERAL COMMUNICATIONS COMMISSION
Marlene H. Dortch
Secretary
_________________________
1 Application of 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, 14190-
92, ¶¶ 336-38, 341 (2000) (``Bell Atlantic/GTE 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); id.,
15 FCC Rcd at 14327-28, Appendix D, ¶ 56; see Letter from Jeffrey
W. Ward, Senior Vice President, Regulatory Compliance, Verizon,
to William H. Davenport, Chief, Investigations and Hearings
Division, Enforcement Bureau, Federal Communications Commission,
dated April 28, 2004 (``Verizon Request'').
2 Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14036, 14190, ¶¶
4, 336; id., 15 FCC Rcd at 14258-331, Appendix D. We refer to
the market-opening conditions in Appendix D as the Merger
Conditions.
3 Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14190-93, ¶¶ 336-
42.
4 Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14327-28,
Appendix D, ¶ 56 (requiring an annual examination engagement).
5 Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14327-28,
Appendix D, ¶ 56; Delegation of Additional Authority to the
Enforcement Bureau, Order, 17 FCC Rcd 4795 (2002).
6 See Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14327-28,
Appendix D, ¶ 56.
7 See Verizon Request.
8 See Letter from Sara Cole, Associate Director, Federal
Regulatory Advocacy, Verizon, to William H. Davenport,
Investigations and Hearings Division, Enforcement Bureau, Federal
Communications Commission, dated June 22, 2004.
9 See Public Notice, ``Enforcement Bureau Seeks Comment on
Verizon's Request to Discontinue Audit of Verizon's Compliance
with Merger Conditions,'' DA 04-2093 (rel. July 13, 2004).
10 See Comments of AT&T Corporation, filed on July 27, 2004
(``AT&T Comments''); Reply Comments of the Pennsylvania Public
Utilities Commission, filed on August 10, 2004 (``PA PUC
Reply''); Reply Comments of BridgeCom International, Inc., filed
on August 10, 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
Reply'').
11 See Reply Comments of Verizon, filed August 10, 2004
(``Verizon Reply'').
12 See 47 U.S.C. § 416(b); Bell Atlantic/GTE Merger Order, 15 FCC
Rcd at 14194, ¶ 345 & n.807 (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 grant of SBC's
request to modify its Merger Condition is in the public
interest).
13 Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14190, ¶ 336.
14 Verizon Request at 2.
15 We note that there is a dispute in the record as to the
implications of certain disclosures by Verizon in connection with
previous independent audit reports. See AT&T Comments at 14
(arguing that the past two audits found violations with
Conditions XI and XII relating to unbundled loop and resale
discounts); but see Verizon Reply at 3 (noting that these were
not findings in the report but statements in its management
assertions attached to the audit report that identified errors,
which the independent auditor did not consider to be material
violations); see also, e.g., Deloitte and Touche, Independent
Account Report (on Conditions IV, VI, VII, IX-XII, XVII, XVIII,
XXI-XXV) (March 17, 2004), Report of Management on Compliance
with Merger Conditions, p. 6-7; Deloitte and Touche, Independent
Accountant Report (May 1, 2003), Report of Management on
Compliance with Merger Conditions, p. 8.
16 Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14189, ¶ 335;
AT&T Comments at 12; Joint Reply at 19.
17 See Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14188-93, ¶¶
332-342.
18 Verizon Request at 2.
19 Verizon Request at 2; Verizon Reply at 5 (arguing that, in
addition to filing a formal complaint, the harmed party may also
file informal complaints or requests for accelerated docket
treatment, or they could simply file a letter with the
Enforcement Bureau asking for an investigation).
20 Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14187, ¶ 332
(stating that the Merger Conditions place responsibility of
taking active steps to ensure compliance on Verizon 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 14-15; Joint Reply at 20-22.
22 See AT&T Comments at 14-15 (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 a formal complaint);
Joint Reply at 22.
23 See Verizon Request at 2; Bell Atlantic/GTE Merger Order, 15
FCC Rcd at 14292-93, Appendix D, ¶ 15.
24 See Verizon Request at 2; Verizon Reply at 3-5; Bell
Atlantic/GTE Merger Order, 15 FCC Rcd at 14188-89, ¶¶ 333-35
(Appendix D, 15 FCC Rcd at 14326, ¶ 55) (Condition XXI).¶
25 Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14188, ¶ 332.
26 See AT&T Comments at 12-3; Joint Reply at 20; PA PUC Reply at
1-2, 4-5.
27 Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14190, ¶ 336.
28 Verizon Request at 2; Verizon Reply at 7.
29 See Bell Atlantic/GTE Merger Order, 15 FCC Rcd at 14192, ¶
341; AT&T Comments at 19; Joint Reply at 20.