[Federal Register Volume 62, Number 13 (Tuesday, January 21, 1997)]
[Rules and Regulations]
[Pages 2918-2927]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1388]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 32 and 53

[CC Docket No. 96-150; FCC 96-490]


Accounting Safeguards Under the Telecommunications Act of 1996

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: On December 23, 1996, the Commission adopted a Report and 
Order (``Order'') establishing accounting safeguards necessary to 
satisfy the requirements of Sections 260 and 271 through 276 of the 
Communications Act of 1934, as amended by the Telecommunications Act of 
1996 (``1996 Act''). This Order prescribes the way incumbent local 
exchange carriers, including the Bell Operating Companies (``BOCs''), 
must account for transactions with affiliates involving, and allocate 
costs incurred in the provision of, both regulated telecommunications 
services and nonregulated services, including telemessaging, interLATA 
telecommunications, information, manufacturing, electronic publishing, 
alarm monitoring and payphone services, to ensure compliance with the 
1996 Act.

EFFECTIVE DATE: The requirements and regulations established in this 
Order shall become effective upon approval by OMB of the new 
information collection requirements adopted herein, but no sooner than 
February 20, 1997. The Commission will publish a document at a later 
date establishing the effective date.

FOR FURTHER INFORMATION CONTACT: Mark Ehrlich, Attorney/Advisor, 
Accounting and Audits Division, Common Carrier Bureau, (202) 418-0385. 
For additional information concerning the information collections 
contained in this Report and Order contact Dorothy Conway at 202-418-
0217, or via the Internet at [email protected].

SUPPLEMENTARY INFORMATION: This Report and Order contains new or 
modified information collections subject to the Paperwork Reduction Act 
of 1995 (PRA). It has been submitted to the Office of Management and 
Budget

[[Page 2919]]

(OMB) for review under the PRA. OMB, the general public, and other 
federal agencies are invited to comment on the proposed or modified 
information collections contained in this proceeding. This is a summary 
of the Commission's Report and Order adopted December 23, 1996, and 
released December 24, 1996. The full text of this Commission decision 
is available for inspection and copying during normal business hours in 
the FCC Public Reference Room (Room 239), 1919 M St., N.W., Washington, 
D.C. The complete text of this decision may also be purchased from the 
Commission's copy contractor, International Transcript Service (202) 
857-3800 1919 M Street, N.W., Suite 246, Washington, D.C. 20554.

Paperwork Reduction Analysis

    This Report and Order contains either a new or modified information 
collection. The Commission, as part of its continuing effort to reduce 
paperwork burdens, invites the general public and the Office of 
Management and Budget (OMB) to comment on the information collections 
contained in this Order, as required by the Paperwork Reduction At of 
1995, Public Law No. 104-12. Written comments by the public on the 
information collections are due 30 days after date of publication in 
the Federal Register. OMB notification of action is due March 24, 1997. 
Comments should address: (1) Whether the new or modified collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information shall practical 
utility; (b) the accuracy of the Commission's burden estimates; (c) 
ways to enhance the quality, utility, and clarity of the information 
collected; and (d) ways to minimize the burden of the collection of 
information on the respondents including the use of automated 
collection techniques or other forms of information technology.
    OMB Approval Number: 3060-0734
    Title: Implementation of the Telecommunications Act of 1996: 
Accounting Safeguards Under the Telecommunications Act of 1996.
    Form No.: N/A.
    Type of Review: Revision.
    Respondents: Businesses or other for profit.

------------------------------------------------------------------------
                                                Est. time   Total annual
        Section/title             No. of      per Response     burden   
                                respondents      (hrs.)        (hrs.)   
------------------------------------------------------------------------
Affiliate Company, Books,                                               
 Records & Accounts, Section                                            
 272........................              20      6,056.25    121,125   
Affiliate Company, Books,                                               
 Records & Accounts, Section                                            
 274........................               7      6,056.25     42,383.75
Est. Fair Market, Value--                                               
 Recordkeeping..............              20         24           480   
Arms' Length Requirement....               7         72           504   
Biennial Federal/State Audit/                                           
 Audit Planning/ Audit                                                  
 Analysis & Evaluation......               7        250         1,750   
Filing Written Contract.....               7          1             7   
Compliance Audit............               7        250         1,750   
Report of Exceptions........               7         80           560   
10-K Requirement............               7      1,711        11,977   
------------------------------------------------------------------------

    Total Annual Burden: 180,536.75 Hours.
    Estimated Costs Per Respondents: $632,500.
    Needs and Uses: The information that subject carriers are required 
to submit under the Order will enable the Commission to ensure that the 
subscribers to regulated telecommunications services do not bear the 
costs of these new nonregulated services and that transactions between 
affiliates and carriers will be at prices that do not ultimately result 
in unfair rates being charged to ratepayers. If the information 
collections in this submission are not conducted, or conducted less 
frequently, the Commission would not be able to prevent cross-
subsidization between these new nonregulated activities and the local 
exchange carriers' regulated operations and the Commission would not be 
in compliance with the 1996 Act. The Commission concludes that the 
burden on the BOCs and incumbent local exchange carriers to comply with 
these rules will be minimal.

Regulatory Flexibility Analysis

    We have determined that Section 605(b) of the Regulatory 
Flexibility Act of 1980, 5 U.S.C. Sec. 605(b), does not apply to these 
rules because they will not have a significant economic impact on a 
substantial number of small entities. Under the Small Business Act, a 
``small business concern'' is one that: (1) Is independently owned and 
operated; (2) is not dominant in its field of operation; and (3) meets 
any additional criteria established by the Small Business 
Administration. Entities directly subject to these rule changes are 
engaged in the provision of local exchange and exchange access 
telecommunications services. These entities are generally large 
corporations that are dominant in their fields of operations and thus, 
are not ``small entities'' as defined by the Act. While these companies 
may have fewer than 1,500 employees and thus fall within the SBA's 
definition of small telecommunications entity, we do not believe that 
such entities should be considered small entities within the meaning of 
the Regulatory Flexibility Act. Because the small incumbent local 
exchange carriers subject to these rules are either dominant in their 
field of operations or are not independently owned and operated, they 
should be excluded from the definition of ``small entity'' and ``small 
business concerns.'' Moreover, to the extent that small telephone 
companies will be affected by these rules, we hereby certify that these 
rules will not have a significant economic effect on a substantial 
number of ``small entities.'' Although we do not find that the 
Regulatory Flexibility Act is applicable to this proceeding, this 
Commission has an ongoing concern with the effect of its rules and 
regulation on small business and the customers of the regulated 
carriers as is evidenced by this proceeding.

Summary of Report and Order

I. Safeguards for Integrated Operations

    The Order establishes accounting safeguards for telemessaging, 
certain interLATA telecommunications and information, alarm monitoring, 
and payphone services that the BOCs and other incumbent local exchange 
carriers may provide on an integrated basis in accordance with sections 
260, 271, 275 and 276 of the 1996 Act. It concludes that our existing 
cost allocation rules satisfy the requirements of these sections that 
certain competitive telecommunications and information services not be 
subsidized by subscribers to regulated

[[Page 2920]]

telecommunications services. In general, our current cost allocation 
rules help ensure that interstate ratepayers do not bear the costs and 
risks of the telephone companies' nonregulated activities by 
prescribing how telecommunications carriers must separate the costs of 
certain regulated activities from the costs of nonregulated activities. 
Under these rules, incumbent local exchange carriers may not apportion 
the costs of nonregulated activities to regulated products and 
services. We discuss below the application of our cost allocation rules 
to services permitted under sections 260, 271, 275, and 276.

Section 260--Telemessaging Service

    Section 260(a)(1) provides that each incumbent local exchange 
carrier providing telemessaging service ``shall not subsidize its 
telemessaging service directly or indirectly from its telephone 
exchange service or its exchange access.'' ``Telemessaging service'' 
includes voice mail and voice storage and retrieval services, and any 
live operator services used to record, transcribe, or relay messages. 
The Order concludes that our existing accounting safeguards will 
effectively prevent cross-subsidization of telemessaging services in 
accordance with section 260(a)(1). Our existing Part 64 cost allocation 
rules are designed to prevent cross-subsidization of nonregulated 
activities such as telemarketing by establishing a methodology for 
allocating joint and common costs between regulated and nonregulated 
activities. Under our cost allocation rules, carriers must assign costs 
directly, wherever possible, to regulated or nonregulated activities. 
If costs cannot be directly assigned, they are considered ``common 
costs'' and must be placed in homogenous cost pools. The carrier must 
then divide the costs in each pool between regulated and nonregulated 
activities using formulas or factors known as ``allocators.'' Whenever 
possible, common costs must be directly attributed based upon a direct 
analysis of the origins of those costs. Common costs that cannot be 
directly attributed must be indirectly attributed based on an indirect, 
but cost-causative, linkage to another cost pool or pools for which a 
direct assignment or attribution is possible. Only if direct or 
indirect attribution factors are not available may the carrier allocate 
a pool of common costs using what is known as a ``general allocator.''

Section 271--InterLATA Telecommunications Services

    Section 254(k) prohibits telecommunications carriers from using 
``services that are not competitive to subsidize services that are 
subject to competition.'' The Order concludes that section 254(k) bars 
all incumbent local exchange carriers, including BOCs, from subsidizing 
competitive interLATA telecommunications services, such as out-of-
region services and certain types of incidental interLATA services, 
with revenues from exchange services and exchange access that are not 
subject to competition. Moreover, it concludes that our cost allocation 
rules, as outlined above, should apply to interLATA telecommunications 
services, including out-of-region services and certain types of 
incidental services, that may be provided by incumbent local exchange 
carriers on an integrated basis. However, in order to protect against 
improper cost allocations from one regulated activity to another 
regulated activity, we will now treat both out-of-region and certain 
types of incidental interLATA services that may be provided by 
incumbent local exchange carriers on an integrated basis like 
nonregulated activities.

Section 272(e)(3)--Imputation of Charges

    Section 272(e)(3) requires that ``[a] Bell operating company * * * 
impute to itself (if using [exchange] access for its provision of its 
own services), an amount for access that is no less than the amount 
charged to any unaffiliated interexchange carriers for such service.'' 
The Order concludes that to record imputed exchange access charges 
required under section 272(e)(3), BOCs should debit the nonregulated 
operating revenue account by the amount of the imputed exchange access 
charges and credit the regulated revenue account by the amount of the 
imputed exchange access charges. By requiring BOCs to account for 
imputed exchange access charges in this manner, the accounting for this 
imputed revenue will be consistent with our current accounting rules 
for imputing revenues derived from services provided to nonregulated 
affiliates. Where a BOC charges different rates to different 
unaffiliated carriers for access to its telephone exchange service, the 
BOC must impute to its integrated operations the highest rate paid for 
such access by unaffiliated carriers. In determining the highest rate 
paid by unaffiliated carriers, the BOC may consider the comparability 
of the service provided. If, for example, rates charged unaffiliated 
carriers vary based on the volume purchased, the BOC may consider 
comparable volume in determining the highest rate to impute to its 
integrated operations. Accordingly, a BOC may take advantage of the 
same volume discount purchases offered to its interLATA affiliate and 
other unaffiliated carriers.

Section 275--Alarm Monitoring Services

    Section 275(e) defines ``alarm monitoring service'' as ``a service 
that uses a device located at a residence, place of business, or other 
fixed premises (1) to receive signals from other devices located at or 
about such premises regarding a possible threat at such premises to 
life, safety, or property, from burglary, fire, vandalism, bodily 
injury, or other emergency, and (2) to transmit a signal regarding such 
threat by means of transmission facilities of a local exchange carrier 
or one of its affiliates to a remote monitoring center to alert a 
person'' about the emergency. Section 275(b)(2) specifies that an 
incumbent local exchange carrier engaged in the provision of alarm 
monitoring services ``not subsidize its alarm monitoring services 
either directly or indirectly from telephone exchange service 
operations.'' As with the prohibition against subsidizing telemessaging 
services, the Order concludes that our present Part 64 cost allocation 
rules will adequately safeguard against the subsidies prohibited by 
section 275(b)(2).

Section 276--Payphone Services

    Section 276(a)(1) states that ``any Bell operating company that 
provides payphone service shall not subsidize its payphone service 
directly or indirectly from its telephone exchange service operations 
or its exchange access operations.'' To implement the prohibition, 
section 276(b)(1)(C) directs the Commission to prescribe nonstructural 
safeguards for BOC payphone service that, ``at a minimum, include the 
nonstructural safeguards equal to those adopted in the Computer 
Inquiry-III (CC Docket No. 90-623) proceeding.'' In Computer III, we 
examined our regulatory regime for the provision of enhanced services 
and replaced our previous requirements with a series of nonstructural 
safeguards. These safeguards included the Part 64 cost allocation rules 
and the affiliate transactions rules. Our experience with accounting 
safeguards in Computer III has demonstrated that these safeguards can 
effectively guard against the subsidization of competitive activities 
by regulated ratepayers, which section 276 prohibits. Accordingly, the 
Order concludes that we should apply accounting safeguards identical to 
those adopted in Computer III to BOCs and incumbent local exchange 
carriers

[[Page 2921]]

providing payphone service on an integrated basis.

II. Safeguards for Separated Operations

    Previously, we adopted rules to govern how carriers record costs 
when conducting business with nonregulated affiliates. These affiliate 
transactions rules were designed to protect ratepayers from subsidizing 
the competitive ventures of incumbent local exchange carriers' 
affiliates. The affiliate transactions rules do not require carriers or 
their affiliates to charge any particular price for assets transferred 
or services provided; rather, the rules require carriers to use certain 
specified valuation methods in determining the amounts to record in 
their Part 32 accounts, regardless of the prices charged. The Order 
concludes that, except where the 1996 Act imposes specific additional 
requirements, our current affiliate transactions rules generally 
satisfy the statute's requirement of safeguards to ensure that these 
services are not subsidized by subscribers to regulated 
telecommunications services. However, the Order adopts several 
modifications to our current affiliate transactions rules, as discussed 
more fully below. These modifications apply to all transactions between 
incumbent local exchange carriers currently subject to these rules and 
their affiliates, not just to transactions between BOCs and their 
affiliates required under the Act.

Section 272--Manufacturing and InterLATA Services

    Section 272(b)(5) of the 1996 Act requires that transactions 
between a BOC and its affiliates engaged in the manufacturing 
activities, origination of interLATA telecommunications services, and 
offering of interLATA information services described in section 
272(a)(2) be conducted on ``an arm's length basis.'' The Order 
concludes that our affiliate transactions rules will ensure compliance 
with the ``arm's length'' requirement of section 272(b)(5). 
Furthermore, in order to satisfy section 272(b)(5)'s requirement that 
transactions between section 272 affiliates and the BOC of which they 
are an affiliate be ``reduced to writing and available for public 
inspection,'' the Order requires the separate affiliate, at a minimum, 
to provide a detailed written description of the asset or service 
transferred and the terms and conditions of the transaction on the 
Internet within 10 days of the transaction through the company's home 
page. The description of the asset or service and the terms and 
conditions of the transaction should be sufficiently detailed to allow 
us to evaluate compliance with our accounting rules. This information 
must also be made available for public inspection at the principal 
place of business of the BOC, along with a certification statement 
described in the Order. While section 272(b)(5) requires BOCs to reduce 
their transactions to writing and make them ``available for public 
inspection,'' we will protect the confidential information of BOCs, as 
well as other incumbent local exchange carriers.

Changes to the Affiliate Transactions Rules

Prevailing Price
    Under our current affiliate transactions rules, BOCs may use, under 
certain circumstances, the ``prevailing price'' method as a valuation 
method for recording affiliate transactions between themselves and 
their affiliates engaged in activities described in section 272(a)(2). 
The prevailing price describes the price at which a company offers an 
asset or service to the general public. Prevailing price currently 
represents just one component in the hierarchy of methods for valuing 
transactions between a carrier and its affiliate. A carrier subject to 
our current affiliate transactions rules currently uses one of the 
following methods to value asset transfers for regulated accounts: (1) 
Tariffed rates, (2) prevailing company prices, (3) net book cost, or 
(4) estimated fair market value. In comparison, carriers must record 
transactions involving services in their Part 32 accounts according to 
one of three valuation methods: (1) Tariffed rates, (2) prevailing 
company prices, or (3) fully distributed cost.
    One of the difficulties we have identified with respect to 
prevailing price valuation has been determining when carriers should 
apply the prevailing price method to transfers of particular assets or 
services. The mere offering of an asset or service to unaffiliated 
entities is not sufficient to establish a prevailing price. A 
substantial quantity of business must be conducted with unaffiliated 
third parties in order to establish a true prevailing price. 
Specifically, if the percentage of third-party business is small, there 
can be no assurance that the price agreed upon by the carrier and its 
affiliate represents the true market price, thus raising legitimate 
questions as to whether the parties actually negotiated ``on an arm's 
length basis.'' In such situations, the use of prevailing prices to 
value transactions could permit an affiliate to charge inflated prices 
to its affiliated regulated carrier, possibly leading to higher prices 
for customers purchasing the regulated services. The Order solves these 
difficulties by modifying and clarifying the prevailing price valuation 
method.
    Our previous rules did not clarify the meaning of a ``substantial'' 
amount of third-party business for the purpose of establishing a true 
prevailing price. The Order concludes that annual sales, as measured by 
quantity, of greater than 50 percent of a particular product or service 
to third parties must occur to satisfy the requirement that there be a 
``substantial'' amount of outside business in order to produce a true 
prevailing price for that particular product or service. The Order also 
concludes that this 50 percent threshold must be applied on a product-
by-product and service-by-service basis, rather than on a product-line 
or service-line basis, because applying the 50 percent threshold on a 
product-line or service-line basis would give carriers the incentive to 
define product lines and service lines as broadly as possible in order 
to be able to value as many transactions as possible at prevailing 
price. However, products and services subject to section 272 need not 
meet the 50 percent threshold in order for a BOC to record the 
transaction involving such products and services at prevailing price.
Valuation Methods for Assets and Services
    Our Part 64 cost allocation rules direct subject carriers to use 
different methods to value transfers of assets and transfers of 
services. The Order directs carriers to now apply the valuation method 
currently prescribed for asset transfers to service transfers as well. 
We believe that requiring carriers to use the same valuation methods 
for both services and asset transfers will reduce the incentive for a 
carrier to record an affiliate transaction as a service transfer, 
rather than an asset transfer. Requiring a carrier to value transfers 
of services using the same valuation methods currently used for asset 
transfers will reduce the carrier's ability to value a transfer so that 
a carrier can pass on to their affiliates any financial advantages 
flowing from how they choose to characterize the transaction. We 
continue, however, to define the cost of asset transfers in terms of 
net book cost and the cost of service transfers in terms of fully 
distributed costs because the net book cost of an asset is comparable 
to the fully distributed cost of a service.
    However, transactions where a carrier purchases from its affiliate 
services that are neither tariffed nor subject to prevailing company 
prices and such

[[Page 2922]]

affiliate exists solely to provide services to members of the carrier's 
corporate family will continue to be valued at fully distributed cost. 
This allows ratepayers to enjoy the benefits of economies of scale and 
scope that are created by an affiliate established to provide services 
solely to the carrier's corporate family. Requiring carriers to perform 
fair market valuations for such transactions would increase the cost to 
ratepayers while providing limited benefit.
Fair Market Value
    The Order concludes that the procedures carriers use in estimating 
fair market value should vary with the circumstances of each 
transaction. For this reason, the Order does not specify the 
methodologies that carriers must follow to estimate fair market value 
where such a valuation method is required under the affiliate 
transactions rules. Allowing carriers to make good faith determinations 
of fair market value, rather than prescribing specific methodologies, 
will provide them with the flexibility to use a methodology appropriate 
for the circumstances of the transaction. This good faith requirement 
will help ensure that transactions involving a BOC and its section 272 
affiliate satisfy the ``arm's length'' requirement of section 272. 
Furthermore, this good faith requirement is now imposed on all 
affiliate transactions between an incumbent local exchange carrier 
currently subject to our affiliate transactions rules and any of its 
affiliates, not just to affiliate transactions involving the activities 
described in section 272(a). When estimating the market value of 
transactions using independent valuation methods, carriers may use 
appraisals, catalogs listing similar items, competitive bids, 
replacement cost of an asset, and net realizable value of an asset. If 
sales to third parties of a product at a particular price generate 
large revenues then the sale price is strong evidence of a good faith 
estimate of fair market value. When situations arise involving 
transactions that are not easily valued by independent means, the Order 
requires carriers to maintain records sufficient to support their value 
determination. Specifically, the valuation method chosen by the carrier 
must succeed in capturing the available supporting information 
regarding the transaction and must utilize generally accepted 
techniques and principles regarding the particular type of transaction 
at issue.
Tariffed-Based Valuation
    Under section 252, incumbent local exchange carriers may submit 
agreements adopted by negotiations or arbitration to State commissions 
for approval or rejection without filing a tariff. Alternatively, they 
may file statements of generally available terms pursuant to section 
252(f) that state terms on which these incumbent local exchange 
carriers would provide services to all customers who desire them. The 
Order amends our affiliate transactions rules to allow incumbent local 
exchange carriers to use charges appearing in publicly-filed agreements 
submitted to a State commission pursuant to section 252(e) or 
statements of generally available terms pursuant to section 252(f) in 
the place of tariffed rates when tariffed rates are not available.
Return Component for Allowable Costs
    Previously, the Commission determined that fully distributed costs 
should include a return on investment, but no ``profit'' in excess of 
the return then prescribed for the carrier's interstate regulated 
activities. Consequently, carriers that utilize fully distributed cost 
to value affiliate transactions include in their cost computations a 
component for rate of return. The Commission has prescribed a unitary, 
overall rate of return of 11.25 percent for those incumbent local 
exchange carriers still subject to rate-of-return regulation to use in 
computing interstate revenue requirements, unless a carrier can show 
that such use would be confiscatory. The Order concludes that incumbent 
local exchange carriers should use the rate of return on interstate 
services, as amended periodically by the Commission, to determine the 
fully distributed costs associated with affiliate transactions. The 
prescribed interstate rate of return is consistent with the return on 
investment that an incumbent local exchange carrier could anticipate if 
it were to use its investment to provide services to third parties. The 
Order also concludes that for all affiliate transactions, incumbent 
local exchange carriers bear the burden of demonstrating with 
specificity that the business risks that they face in providing 
services to their affiliates would justify a risk-based adjustment to 
the cost of capital that would result in a rate of return different 
than 11.25%.

Accounting Requirements of Sections 272(b)(2) and (c)(2)

    Section 272(b)(2) requires the separate affiliates prescribed under 
section 272(a)(2) to ``maintain books, records, and accounts in the 
manner prescribed by the Commission which shall be separate from the 
books, records, and accounts maintained by the [BOC] of which it is an 
affiliate.'' The Order concludes that separate affiliates prescribed 
under section 272(a)(2) must maintain their books, records, and 
accounts in accordance with GAAP, which will result in a uniform audit 
trail at minimal cost. Moreover, a requirement of GAAP for separate 
affiliates required under section 272(a)(2) imposes some degree of 
uniformity upon these affiliates. We find no reason to impose the 
additional burden of requiring separate affiliates required under 
Section 272(a)(2) to maintain their books, records, and accounts in 
accordance with the Part 32 Uniform System of Accounts.

Application to InterLATA Telecommunications Affiliates

    Section 272(b)(5) requires BOC affiliates established under section 
272(a), such as an affiliate providing in-region services, to ``conduct 
all transactions with the Bell operating company of which it is an 
affiliate on an arm's length basis.'' The Order concludes that the 
current affiliate transactions rules satisfy section 272(b)(5)'s 
``arm's length'' requirement by treating interLATA telecommunications 
services like a nonregulated activity strictly for accounting purposes, 
and applying 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. However, when a BOC affiliate provides both regulated Title 
II services permitted under sections 271 and 272, such as interLATA 
telecommunications services, and nonregulated activities, such as 
interLATA information services, the Order concludes that we need not 
apply our cost allocation rules to prevent subsidization of 
nonregulated activities by subscribers to these interLATA 
telecommunications services because market forces leave BOC affiliates 
with little ability to subsidize nonregulated activities by interLATA 
telecommunications services.

Application to Sharing of Services

    BOCs are permitted to share in-house services other than operating, 
installation, and maintenance services with their section 272 
affiliates if the agreement to share in-house services complies with 
the requirements of section 272, including section 272(b)(1)'s 
``operate independently''

[[Page 2923]]

requirement, section 272(b)(3)'s ``separate officers, directors, and 
employees'' requirement, section 272(b)(5)'s ``arm's length'' 
requirement, and section 272(c)(1)'s nondiscrimination requirements. 
Earlier in this Order, we determined that our affiliate transactions 
rules should apply to transactions between BOCs and their section 272 
affiliates in order to satisfy section 272(b)(5)'s ``arm's length'' 
requirement. The Order concludes, therefore, that our affiliate 
transactions rules apply to transactions between BOCs and their section 
272 affiliates for the sharing of in-house services, including joint 
marketing services. Moreover, the sharing of in-house services by a BOC 
and its section 272 affiliate constitutes a ``transaction'' under 
section 272(b)(5) that must be ``reduced to writing and available for 
public inspection.''

Audit Requirements

    Section 272(d) requires that a company required to operate a 
separate subsidiary under section 272 ``shall obtain and pay for a 
joint federal/State audit every two years conducted by an independent 
auditor to determine whether such company has complied with this 
section and the regulations promulgated under this section, and 
particularly whether such company has complied with the separate 
accounting requirements under [section 272(b)].'' The purpose of the 
required audits is to determine whether the BOCs and their separate 
subsidiaries are complying with the accounting and structural 
safeguards required by section 272 and to report the audit results to 
the Commission and the state regulatory agencies. Because of the 
critical nature of accounting safeguards in promoting competition in 
the telecommunication marketplace and the critical role the biennial 
audit will play in ensuring that the safeguards are working, the Order 
concludes that the Commission and the States need to oversee the scope, 
terms and conditions of the biennial audit.
    Under the rules adopted in the Order, the Chief, Common Carrier 
Bureau has the authority to form a federal/State joint audit team with 
the States having jurisdiction over a BOC's local exchange service. 
This joint audit team will review the conduct of the audit and direct 
the independent auditor to take such action as the team finds necessary 
to ensure compliance with the audit requirements. The structural and 
transactional requirements and the nondiscrimination safeguards set 
forth in sections 272(b) 272(c) and 272(e) will be subject to audits. 
The BOCs cannot hire independent auditors who have participated during 
the two years preceding the biennial audit in designing any of the 
systems under review in the audit.
    The rules adopted in the Order set an orderly schedule for 
conducting the audit and for submitting the audit report to the 
Commission and the States as well as to interested parties for comment. 
The rules call for participation and agreement by the BOC and by the 
federal/State joint audit team in defining the scope and purpose of the 
audit prior to its commencement. The federal/State joint audit team may 
review and, if necessary, direct modifications to the design of the 
independent auditor's audit program.
    The final audit report must include: (1) The findings and 
conclusions of the independent auditor; (2) exceptions of the federal/
State joint audit team to the auditor's findings and conclusions; (3) 
response of the BOC to the auditor's findings and conclusions, and (4) 
reply of the independent auditor to both the exceptions of the federal/
State joint audit team and the response of the BOC. The independent 
auditor's section of the audit report must include a discussion of: (1) 
The scope of the work conducted, with a description of how the 
affiliate's or joint venture's books were examined and the extent of 
the examination; (2) the auditor's findings and conclusions on whether 
examination of the books, records and operations has revealed 
compliance or non-compliance with section 272 and with the affiliate 
transactions rules and any applicable nondiscrimination requirements; 
and (3) a description of any limitations imposed on the auditor in the 
course of its review by the affiliate or joint venture or other 
circumstances that might affect the auditor's opinion. However, the 
Order does not require a statement by the auditor that the carrier's 
cost allocation methodologies conform to the Act. The first audit will 
begin at the close of the first full year of operations. The next audit 
will begin two years later and will cover the operations of the 
previous two years. Each BOC must obtain one audit that covers all 
affiliates engaged in services specified in section 272(a)(2), 
including resale, rather than requiring individual audits for each of 
these services.
    Workpapers related to the biennial audits, including material 
obtained from the examined entities, will receive confidential 
treatment consistent with section 220(f) and the Commission's policy 
for Part 64 audits. Any State commission having access to the audit 
workpapers should have provisions in place to ensure the protection of 
proprietary information as required by section 272(d)(3)(C). Without 
such provisions in place, a State commission could neither be 
represented on the federal/State joint audit team nor participate in 
the biennial audit. To the extent the biennial audit and the cost 
allocation manual audit under Part 64 overlap, we will permit the 
biennial audit to meet the requirement of the section 64.904 annual 
audit. For a biennial audit to satisfy any part of a cost allocation 
manual audit, we will require a statement by the auditor that the 
carrier's cost allocation methodologies conform to the Act. We also 
note that, unlike the biennial audits, the cost allocation manual 
audits under Part 64 do not involve State participation. Thus, by 
relying on the biennial audit, we will allow State participation in the 
overlapping areas of the audits. In their cost allocation manual audit 
workpapers, the independent auditors should include copies of the audit 
work performed under the biennial audit.

Section 273--Manufacturing by Certifying Entities

    Section 273(d) requires entities that certify telecommunications or 
customer premises equipment to maintain separate affiliates in order to 
engage in certain types of manufacturing activities. Under section 
273(d)(3), when such an entity certifies telecommunications equipment 
or customer premises equipment manufactured by an unaffiliated entity, 
the certifying entity ``shall only manufacture a particular class of 
telecommunications equipment or customer premises equipment for which 
it is undertaking or has undertaken, during the previous eighteen 
months, certification activity * * * through a separate affiliate.'' 
``[N]otwithstanding [section 273(d)(3)],'' section 273(d)(1)(B) 
prohibits ``Bell Communications Research, Inc., or any successor entity 
or affiliate'' from ``engag[ing] in manufacturing telecommunications 
equipment or customer premises equipment as long as it is an affiliate 
of more than 1 otherwise unaffiliated [BOC] or successor or assign of 
any such company.'' Section 273(d)(3)(B) requires the separate 
affiliate to ``maintain books, records, and accounts separate from 
those of the entity that certifies such equipment, consistent with 
generally acceptable accounting principles[,]'' and to ``have 
segregated facilities and separate employees'' from the certifying 
entity. Section 273(g) permits ``[t]he Commission [to] prescribe such 
additional rules and regulations as the Commission determines necessary 
to carry out the provisions of this section,

[[Page 2924]]

and otherwise to prevent discrimination and cross-subsidization in a 
[BOC's] dealings with its affiliates and with third parties.''
    The Order concludes that our affiliate transactions rules, as 
modified here, satisfy section 273(g)'s requirement that we ``prescribe 
such additional rules and regulations as [we] determine are necessary 
to * * * prevent * * * cross-subsidization in a [BOC's] dealings with 
its affiliate.'' Elsewhere in this Order, we concluded that BOCs are 
subject to the modified affiliate transactions rules in their dealings 
with their affiliates engaged in activities permitted under section 
272(a), including manufacturing affiliates, in order to assure 
compliance with the ``arm's length'' requirement of section 272(b)(5). 
Accordingly, BOCs that perform certification activities are already 
subject to the affiliate transactions rules in dealings with their 
manufacturing affiliates under section 272(b)(5) and current conditions 
do not warrant additional rules to satisfy section 273(g). In addition, 
as long as a certifying entity, such as Bellcore, remains affiliated 
with a regulated BOC, our affiliate transactions rules apply to any 
transactions between that certifying entity and its section 273 
separated, nonregulated manufacturing affiliate that ultimately result 
in an asset or service being provided to the BOC.

Section 274--Electronic Publishing

    Section 274 prescribes the terms under which a BOC may offer 
electronic publishing. Section 274(a) permits a BOC or its affiliate to 
provide electronic publishing over its own or its affiliate's basic 
telephone service only through a ``separated affiliate'' or an 
``electronic publishing joint venture.'' The Order concludes that in 
order to satisfy sections 274(b) and 254(k), we must apply our 
affiliate transactions rules, as modified in this Order, to 
transactions between BOCs and their ``separated'' electronic publishing 
affiliates or joint ventures. This will serve as a safeguard against 
the misallocation of costs from a BOC's nonregulated services, such as 
electronic publishing services, to regulated telecommunication 
services. Our affiliate transactions rules, as modified in this Order, 
prevent the BOCs' ratepayers from bearing the costs of competitive 
services provided by BOC affiliates and are, therefore, sufficient to 
implement section 254(k)'s requirement that carriers not ``use services 
that are not competitive to subsidize services that are subject to 
competition.''
    Section 274(b)(8) requires that a BOC and its electronic publishing 
``separated'' affiliate or joint venture each perform an annual 
compliance review conducted by ``an independent entity'' to determine 
compliance with section 274. The Order concludes that we need not adopt 
any rules regarding the compliance review beyond the plain language of 
section 274(b)(8)(A). Because of the differences between a compliance 
review under section 274 and an audit, it further concludes that a 
carrier may not use the electronic publishing compliance review to 
satisfy any portion of the annual cost allocation manual audit required 
by section 64.904 of the Commission's rules.
    Section 274(b)(9) requires the BOC and its electronic publishing 
``separated'' affiliate or joint venture to file a report with the 
Commission of any exceptions and corrective action resulting from the 
compliance review. Section 274(b)(9) further requires the Commission to 
``allow any person to inspect and copy such report subject to 
reasonable safeguards to protect any proprietary information contained 
in such report from being used for purposes other than to enforce or 
pursue remedies under [section 274].'' The Order found that these 
requirements of section 274(b)(9) are self-effectuating and, therefore, 
we need not adopt any rules regarding this requirement beyond the plain 
language of section 274(b)(9). The same treatment will be given to 
confidential information in such reports as is applied to confidential 
information contained in other Commission filings.

Section 274(f)'s Reporting Requirement

    Section 274(f) requires any ``separated'' affiliate under section 
274 to file annual reports with the Commission ``in a form 
substantially equivalent to the Form 10-K required by regulations of 
the Securities and Exchange Commission.'' To minimize burdens on the 
filing companies, the Order concludes that when an electronic 
publishing ``separated'' affiliate already files a Form 10-K with the 
SEC, the ``separated'' affiliate may file the same Form 10-K with the 
Common Carrier Bureau within 90 days after the end of the ``separated'' 
affiliate's fiscal year in satisfaction of section 274(f)'s 
requirements. For each ``separated'' affiliate not subject to the SEC's 
Form 10-K requirement, however, the Order concludes that the 
``separated'' affiliate need not file an actual SEC Form 10-K with the 
Commission. Instead, such affiliates must file with the Commission a 
report containing the same information as is required in the SEC's Form 
10-K. In accordance with section 274(f), the report must be organized 
``in a form substantially equivalent to the Form 10-K required by 
regulations of the [SEC].''

Section 274 Transactional Requirements

    Section 274(b)(1) requires the ``separated'' affiliate or joint 
venture and the BOC with which it is affiliated to ``maintain separate 
books, records, and accounts and prepare separate financial 
statements.'' Section 274(b) requires the ``separated'' affiliate or 
joint venture to ``be operated independently from the [BOC].'' Pursuant 
to section 274(b)(3), the ``separated'' affiliate or joint venture and 
the BOC with which it is affiliated must ``carry out transactions (A) 
in a manner consistent with such independence, (B) pursuant to written 
contracts or tariffs that are filed with the Commission and made 
publicly available, and (C) in a manner that is auditable in accordance 
with generally accepted auditing standards.'' Section 274(b)(4) 
requires the ``separated'' affiliate or joint venture to ``value any 
assets that are transferred directly or indirectly from the [BOC] to a 
separated affiliate or joint venture, and record any transactions by 
which such assets are transferred, in accordance with such regulations 
as may be prescribed by the Commission or a State commission to prevent 
improper cross subsidies.'' The Order concludes that section 
274(b)(1)'s requirement of separate books, records, accounts, and 
financial statements is self-effectuating and, therefore, does not 
adopt any rules regarding this requirement beyond the plain language of 
section 274(b)(1). Furthermore, section 274(b)(3)(A)'s requirement that 
transactions be carried out ``in a manner consistent with such 
independence'' requires that transactions between a ``separated'' 
electronic publishing affiliate or joint venture and its affiliated BOC 
occur on an arm's length basis, as the transaction would occur between 
unrelated parties. The phrase ``such independence'' in section 
274(b)(3)(A) refers to section 274(b)'s requirement that a 
``separated'' electronic publishing affiliate or joint venture ``be 
operated independently from the [BOC].''
    However, we find the language of section 274(b)(3)(B) to be 
ambiguous. Pursuant to this section, a BOC and its separated affiliate 
shall carry out transactions ``pursuant to written contracts or tariffs 
that are filed with the Commission and made publicly available.'' From 
this language it is unclear whether written contracts must be filed 
with the Commission or whether only tariffs are required to be filed 
with the Commission. It is also unclear whether written contracts must 
be made publicly available or whether only tariffs are required to be 
made

[[Page 2925]]

publicly available. We therefore intend to seek further comment on the 
meaning of section 274(b)(3)(B) in CC Docket No. 96-152.
    Section 274 ``separated'' electronic publishing affiliates or joint 
ventures must maintain their books, records, and accounts in accordance 
with GAAP in order to satisfy section 274(b)(3)(C)'s requirement that 
transactions be ``auditable in accordance with generally accepted 
auditing standards.''
    Moreover, the Order concludes that we should conform our valuation 
methods governing the provision of services between an electronic 
publishing ``separated'' affiliate or joint venture and the BOC with 
which it is affiliated to those governing asset transfers. We therefore 
will require all non-tariffed affiliate transactions to be recorded at 
prevailing price if such price exists, and otherwise at the higher of 
cost and estimated fair market value when the carrier is the seller or 
transferor, and at the lower of cost and estimated fair market value 
when the carrier is the buyer or transferee. We will continue to define 
the applicable cost benchmarks as net book cost for asset transfers and 
fully distributed costs for service transfers. Although section 
274(b)(4) only refers to asset transfers, we read section 274's 
requirement that the ``separated'' affiliate or joint venture and the 
BOC with which it is affiliated ``carry out transactions * * * in a 
manner consistent with such independence'' to prohibit the 
``separated'' affiliate or joint venture and the BOC with which it is 
affiliated from subsidizing electronic publishing services from 
regulated telecommunications services. We designed our affiliate 
transactions rules to prevent such cross-subsidization. We therefore 
conclude that the affiliate transactions rules, as we modify them in 
this Order, should apply to all transactions--both asset transfers and 
the provision of services--between a BOC and its ``separated'' 
affiliate or joint venture engaged in electronic publishing activities 
permitted under section 274.
    Finally, our modified affiliate transactions rules apply whenever a 
BOC under common ownership or control with an electronic publishing 
``separated'' affiliate or joint venture provides network access and 
interconnections for basic telephone service to such ``separated'' 
affiliates or joint venture.

Separated Operations Under Sections 260 and 271 Through 276

    Even when sections 260 and 271 through 276 do not require BOCs or 
other incumbent local exchange carriers to offer services through a 
separate affiliate, an incumbent LEC might choose to perform these 
activities through an affiliate. Under such circumstances, the Order 
concludes that our affiliate transactions rules should apply to 
transactions between an incumbent local exchange carrier and any of its 
affiliates engaged in activities of the types permitted by these 
sections 260 and 271 through 276, regardless of whether the Act 
requires those activities to be conducted through a separate affiliate. 
In order to protect against the subsidies prohibited by these sections, 
we conclude that we must apply our affiliate transactions rules to all 
transactions between non-BOC incumbent local exchange carriers and 
their affiliates engaged in telemessaging activities, incidental 
interLATA services, alarm monitoring activities, and payphone services. 
We also conclude we must apply our affiliate transactions rules to all 
transactions between incumbent local exchange carriers and their 
affiliates providing any of the competitive services of the types 
permitted under sections 260 and 271 through 276.

Ordering Clauses

    Accordingly, it is ordered that, pursuant to sections 4(i), 4(j), 
201-205, 218, 220, 260, 271-76, 303(r), 403 of the Communications Act 
of 1934, as amended by the 1996 Act, 47 U.S.C. Secs. 154(i), 154(j), 
201-205, 218, 220, 260, 271-176, 303(r), 403, the rules, requirements 
and policies discussed in this order are adopted and sections 32.27, 
53.209, 53.211, and 53.213 of the Commission's rules, 47 CFR 
Secs. 32.27, 53.209, 53.211, and 53.213 are amended as set forth below.
    It is further ordered that the requirements and regulations 
established in this decision shall become effective upon approval by 
OMB of the new information collection requirements adopted herein, but 
no sooner than February 20, 1997.

List of Subjects

47 CFR Part 32

    Communications common carriers, Reporting and recordkeeping 
requirements, Separate affiliate safeguards, Telephone, Uniform System 
of Accounts.

47 CFR Part 53

    Bell Operating Companies, Communications common carriers, InterLATA 
services, Separate affiliate safeguards, Telephone.

Federal Communications Commission.
William F. Caton,
Acting Secretary.

Rule Changes

    Parts 32 and 53 of Title 47 of the Code of Federal Regulations are 
amended as follows:

PART 32--UNIFORM SYSTEM OF ACCOUNTS FOR TELECOMMUNICATIONS 
COMPANIES

    1. The authority citation for Part 32 continues to read as follows:

    Authority: Secs. 4(i), 4(j) and 220 as amended; 47 U.S.C. 
154(i), 154(j) and 220; Telecommunications Act of 1996, Public Law 
No. 104-104, sec. 402(c), 110 Stat 56 (1996) unless otherwise noted.

    2. Section 32.27 is amended by revising paragraphs (b), (c) and (d) 
to read as follows:


Sec. 32.27  Transactions with affiliates.

* * * * *
    (b) Assets sold or transferred between a carrier and its affiliate 
pursuant to a tariff, including a tariff filed with a state commission, 
shall be recorded in the appropriate revenue accounts at the tariffed 
rate. Non-tariffed assets sold or transferred between a carrier and its 
affiliate that qualify for prevailing price valuation, as defined in 
paragraph (d) of this section, shall be recorded at the prevailing 
price. For all other assets sold by or transferred from a carrier to 
its affiliate, the assets shall be recorded at the higher of fair 
market value and net book cost. For all other assets purchased by or 
transferred to a carrier from its affiliate, the assets shall be 
recorded at the lower of fair market value and net book cost. For 
purposes of this section carriers are required to make a good faith 
determination of fair market value.
    (c) Services provided between a carrier and its affiliate pursuant 
to a tariff, including a tariff filed with a state commission, shall be 
recorded in the appropriate revenue accounts at the tariffed rate. Non-
tariffed services provided between a carrier and its affiliate pursuant 
to publicly-filed agreements submitted to a state commission pursuant 
to section 252(e) of the Communications Act of 1934 or statements of 
generally available terms pursuant to section 252(f) shall be recorded 
using the charges appearing in such publicly-filed agreements or 
statements. Non-tariffed services provided between a carrier and its 
affiliate that qualify for prevailing price valuation, as defined in 
paragraph (d) of this section, shall be recorded at the prevailing 
price. For all other services provided by a carrier to its affiliate, 
the

[[Page 2926]]

services shall be recorded at the higher of fair market value and fully 
distributed cost. For all other services received by a carrier from its 
affiliate, the service shall be recorded at the lower of fair market 
value and fully distributed cost, except that services received by a 
carrier from its affiliate that exists solely to provide services to 
members of the carrier's corporate family shall be recorded at fully 
distributed cost. For purposes of this section carriers are required to 
make a good faith determination of fair market value.
    (d) In order to qualify for prevailing price valuation in 
paragraphs (b) and (c) of this section, sales of a particular asset or 
service to third parties must encompass greater than 50 percent of the 
total quantity of such product or service sold by an entity. Carriers 
shall apply this 50 percent threshold on a asset-by-asset and service-
by-service basis, rather than on a product line or service line basis. 
In the case of transactions for assets and services subject to section 
272, a BOC may record such transactions at prevailing price regardless 
of whether the 50 percent threshold has been satisfied.
* * * * *

PART 53--SPECIAL PROVISIONS CONCERNING BELL OPERATING COMPANIES

    1. The authority citation for Part 53 continues to read as follows:

    Authority: Sections 1-5, 7, 201-05, 218, 251, 253, 271-75, 48 
Stat. 1070, as amended, 1077; 47 U.S.C. 151-55, 157, 201-05, 218, 
251, 253, 271-75, unless otherwise noted.

    2. Section 53.209 is added to subpart C to read as follows:


Sec. 53.209  Biennial audit.

    (a) A Bell operating company required to operate a separate 
affiliate under section 272 of the Act shall obtain and pay for a 
Federal/State joint audit every two years conducted by an independent 
auditor to determine whether the Bell operating company has complied 
with the rules promulgated under section 272 and particularly the audit 
requirements listed in paragraph (b) of this section.
    (b) The independent audit shall determine:
    (1) Whether the separate affiliate required under section 272 of 
the Act has:
    (i) Operated independently of the Bell operating company;
    (ii) Maintained books, records, and accounts in the manner 
prescribed by the Commission that are separate from the books, records 
and accounts maintained by the Bell operating company;
    (iii) Officers, directors and employees that are separate from 
those of the Bell operating company;
    (iv) Not obtained credit under any arrangement that would permit a 
creditor, upon default, to have recourse to the assets of the Bell 
operating company; and
    (v) Conducted all transactions with the Bell operating company on 
an arm's length basis with the transactions reduced to writing and 
available for public inspection.
    (2) Whether or not the Bell operating company has:
    (i) Discriminated between the separate affiliate and any other 
entity in the provision or procurement of goods, services, facilities, 
and information, or the establishment of standards;
    (ii) Accounted for all transactions with the separate affiliate in 
accordance with the accounting principles and rules approved by the 
Commission.
    (3) Whether or not the Bell operating company and an affiliate 
subject to section 251(c) of the Act:
    (i) Have fulfilled requests from unaffiliated entities for 
telephone exchange service and exchange access within a period no 
longer than the period in which it provides such telephone exchange 
service and exchange access to itself or its affiliates;
    (ii) Have made available facilities, services, or information 
concerning its provision of exchange access to other providers of 
interLATA services on the same terms and conditions as it has to its 
affiliate required under section 272 that operates in the same market;
    (iii) Have charged its separate affiliate under section 272, or 
imputed to itself (if using the access for its provision of its own 
services), an amount for access to its telephone exchange service and 
exchange access that is no less than the amount charged to any 
unaffiliated interexchange carriers for such service; and
    (iv) Have provided any interLATA or intraLATA facilities or 
services to its interLATA affiliate and made available such services or 
facilities to all carriers at the same rates and on the same terms and 
conditions, and allocated the associated costs appropriately.
    (c) An independent audit shall be performed on the first full year 
of operations of the separate affiliate required under section 272 of 
the Act, and biennially thereafter.
    (d) The Chief, Common Carrier Bureau, shall work with the 
regulatory agencies in the states having jurisdiction over the Bell 
operating company's local telephone services, to attempt to form a 
Federal/State joint audit team with the responsibility for overseeing 
the planning of the audit as specified in Sec. 53.211 and the analysis 
and evaluation of the audit as specified in Sec. 53.213. The Federal/
State joint audit team may direct the independent auditor to take any 
actions necessary to ensure compliance with the audit requirements 
listed in paragraph (b) of this section. If the state regulatory 
agencies having jurisdiction choose not to participate in the Federal/
State joint audit team, the Chief, Common Carrier Bureau, shall 
establish an FCC audit team to oversee and direct the independent 
auditor to take any actions necessary to ensure compliance with the 
audit requirements in paragraph (b) of this section.
    3. Section 53.211 is added to subpart (C) to read as follows:


Sec. 53.211  Audit planning.

    (a) Before selecting a independent auditor, the Bell operating 
company shall submit preliminary audit requirements, including the 
proposed scope of the audit and the extent of compliance and 
substantive testing, to the Federal/State joint audit team organized 
pursuant to Sec. 53.209(d);
    (b) The Federal/State joint audit team shall review the preliminary 
audit requirements to determine whether it is adequate to meet the 
audit requirements in Sec. 53.209 (b). The Federal/State joint audit 
shall have 30 days to review the audit requirements and determine any 
modifications that shall be incorporated into the final audit 
requirements.
    (c) After the audit requirements have been approved by the Federal/
State joint audit team, the Bell operating company shall engage within 
30 days an independent auditor to conduct the biennial audit. In making 
its selection, the Bell operating company shall not engage any 
independent auditor who has been instrumental during the past two years 
in designing any of the accounting or reporting systems under review in 
the biennial audit.
    (d) The independent auditor selected by the Bell operating company 
to conduct the audit shall develop a detailed audit program based on 
the final audit requirements and submit it to the Federal/State joint 
audit team. The Federal/State joint audit team shall have 30 days to 
review the audit program and determine any modifications that shall be 
incorporated into the final audit program.
    (e) During the course of the biennial audit, the independent 
auditor, among other things, shall:
    (1) Inform the Federal/State joint audit team of any revisions to 
the final

[[Page 2927]]

audit program or to the scope of the audit.
    (2) Notify the Federal/State joint audit team of any meetings with 
the Bell operating company or its separate affiliate in which audit 
findings are discussed.
    (3) Submit to the Chief, Common Carrier Bureau, any accounting or 
rule interpretations necessary to complete the audit.
    4. Section 53.213 is added to subpart (C) to read as follows:


Sec. 53.213  Audit analysis and evaluation.

    (a) Within 60 dates after the end of the audit period, but prior to 
discussing the audit findings with the Bell operating company or the 
separate affiliate, the independent auditor shall submit a draft of the 
audit report to the Federal/State joint audit team.
    (1) The Federal/State joint audit team shall have 45 days to review 
the audit findings and audit workpapers, and offer its recommendations 
concerning the conduct of the audit or the audit findings to the 
independent auditor. Exceptions of the Federal/State joint audit team 
to the finding and conclusions of the independent auditor that remain 
unresolved shall be included in the final audit report.
    (2) Within 15 days after receiving the Federal/State joint audit 
team's recommendations and making appropriate revisions to the audit 
report, the independent auditor shall submit the audit report to the 
Bell operating company for its response to the audit findings and send 
a copy to the Federal/State joint audit team. The independent auditor 
may request additional time to perform additional audit work as 
recommended by the Federal/State joint audit team.
    (b) Within 30 days after receiving the audit report, the Bell 
operating company will respond to the audit findings and send a copy of 
its response to the Federal/State joint audit team. The Bell operating 
company's response shall be included as part of the final audit report 
along with any reply that the independent auditor wishes to make to the 
response.
    (c) Within 10 days after receiving the response of the Bell 
operating company, the independent auditor shall make available for 
public inspection the final audit report by filing it with the 
Commission and the state regulatory agencies participating on the joint 
audit team.
    (d) Interested parties may file comments with the Commission within 
60 days after the audit report is made available for public inspection.

[FR Doc. 97-1388 Filed 1-17-97; 8:45 am]
BILLING CODE 6712-01-P