*Pages 1--3 from Microsoft Word - 2667.doc* Federal Communications Commission DA 00- 1686 Before the Federal Communications Commission Washington, D. C. 20554 In the Matter of Southwestern Bell Telephone Company’s Permanent Cost Allocation Manual for the Separation of Regulated and Nonregulated Costs ) ) ) ) ) ) ASD 99- 25 ORDER Adopted: July 27, 2000 Released: July 28, 2000 By the Chief, Accounting Safeguards Division: I. INTRODUCTION AND BACKGROUND 1. On March 29, 1999, SBC Communications, Inc. (“ SBC”) filed revisions to Southwestern Bell Telephone Company’s (“ SWBT’s”) cost allocation manual (“ CAM”) to reflect proposed changes in its time reporting procedures for installation and maintenance technicians. 1 On July 10, 2000, SWBT filed additional modifications to its revised CAM. We hereby approve SWBT’s proposed CAM revisions, subject to certain conditions as described below. 2. In the Joint Cost Order 2 the Commission established a mechanism for separating the costs of regulated telephone services from the costs of nonregulated services. The purpose of the Joint Cost Order was to ensure that a carrier’s regulated operations do not improperly subsidize its nonregulated activities. The Commission established two separate but complementary sets of rules, one which governs how carriers allocate their costs between regulated and nonregulated activities and the other which governs transactions between carriers and their affiliates. The Commission required that carriers file CAMs setting out in detail the manner in which they propose to implement both the cost allocation and affiliate transaction rules. 3. For carrier activities that are labor intensive, such as the installation and maintenance activities, an accurate time reporting system is essential to ensure that a carrier’s costs are recorded in the proper accounts and cost pools and, therefore, are allocated properly between a carrier’s regulated and nonregulated activities. Most carrier employees prepare activity reports for all of their work. In recent years, however, carriers have developed procedures in which only a sample of their installation and maintenance technicians prepare activity reports. These carriers have proposed such procedures primarily 1 SBC is the holding company for SWBT. In this order, we refer to SBC’s filings on behalf of SWBT as SWBT’s filings. 2 See Separation of Costs of Regulated Telephone Service from Costs of Nonregulated Activities, CC Docket No. 86- 111, Report and Order, 2 FCC Rcd 1298, recon., 2 FCC Rcd 6283 (1987), further recon., 3 FCC Rcd 6701 (1988), aff’d sub nom. Southwestern Corp. v. FCC, 896 F. 2d 1378 (D. C. Cir. 1990). 1 Federal Communications Commission DA 00- 1686 2 to reduce their administrative costs. Generally, we have approved the use of such streamlined procedures when a carrier has demonstrated that they provide adequate accuracy for accounts and cost pools. II. DISCUSSION 4. On March 29, 1999, SWBT submitted CAM revisions 3 in which it proposed sample- based time reporting procedures for its installation and maintenance technicians. 4 These procedures, which SWBT refers to as its technician activity statistical sampling (“ TASS”) process, relied on both regression analysis and statistical sampling techniques to determine account and cost pool amounts. Both Commission staff and an independent auditor 5 reviewed this proposal. The independent auditor and the Commission staff made various recommendations for improvements to the TASS process. 6 5. On July 10, 2000, SWBT filed additional CAM revisions. 7 In this filing SWBT proposed to implement most of the recommendations of the independent auditor and Commission staff. Our review finds that SWBT’s July 10, 2000 CAM revisions are appropriate; however, in order to ensure that its CAM will provide reliable accounting results, we will require that SWBT make two additional revisions to both its TASS process and CAM. First, SWBT must select at least 1,000 valid sample jobs per state per month on which to base its statistical testing. 8 Second, as recommended by Deloitte and Touche, SWBT must improve its controls regarding TASS software changes and must amend its System Administration Binder accordingly. 9 3 See SWBT’s March 29, 1999, CAM revision, at VII- 1, 1A and 6. 4 In addition, on July 12, 2000, SWBT submitted updates to its System Administration Binder and System Design Binder that support and detail the technical requirements for carrying out procedures described in its CAM. 5 The Accounting Safeguards Division directed SBC to engage an independent auditor to perform an agreed upon procedures audit relating to implementation and operation of SWBT’s TASS process. SBC engaged Deloitte and Touche to perform this audit. 6 See Deloitte and Touche Audit Report, dated May 31, 2000; and Letter from Mr. Kenneth P. Moran, Chief Accounting Safeguards Division to Ms. B. Jeannie Fry, Director of Federal Regulatory, SBC Telecommunications, Inc., dated June 20, 2000. 7 See SWBT’s July 10, 2000, CAM Revision at VII- 1, 3, 3A and 9. 8 In updates to its binders to support its proposed CAM revisions, SWBT states that it will select a sample size of approximately 1,000 valid jobs per state per month for its TASS process. In a subsequent filing illustrating how the TASS process would be employed, however, the data suggested that SWBT was not using a sample size of 1,000. We have reviewed the statistical aspects of SWBT’s proposal, and we are convinced that SWBT should draw a sample of at least 1,000 valid jobs per state per month. Thus, SWBT should revise its procedures and documentation to reflect this requirement. 9 See Deloitte and Touche Audit Report, dated May 31, 2000 at 27. Deloitte and Touche observed that under SWBT’s current procedures, unauthorized personnel could make changes to certain TASS programs without the knowledge of management. To correct this problem, Deloitte and Touche recommended that SWBT generate automated internal reports within the system that list program changes, and that these reports be provided to management for review. We note that SWBT has agreed to generate these reports. 2 Federal Communications Commission DA 00- 1686 3 6. Therefore, we approve SWBT’s proposed CAM revisions and permit SWBT to implement its TASS process effective August 1, 2000, subject to these conditions. Our approval of SWBT’s CAM revision is limited to the use of the statistical sampling method described in SWBT’s submissions and SWBT must not make any changes to its TASS process without prior written approval. 10 Furthermore, as part of its CAM audit or attestation review under Part 64.904 of the commission’s rules, 11 we require SWBT to direct its independent auditor to conduct additional procedures to test and review the TASS process. III. ORDERING CLAUSE 7. Accordingly, IT IS ORDERED, pursuant to Sections 4( i), 4( j), 201, 202, and 220 of the Communications Act of 1934, as amended, 47 U. S. C. §§ 154( i), 154( j), 201, 202, and 220, and Sections 0.91 and 0.291 of the Commission’s rules, 47 C. F. R. §§ 0.91 and 0.291, that Southwestern Bell Telephone Company’s July 10, 2000, cost allocation manual revisions pertaining to Section VII, Time Reporting ARE APPROVED and effective August 1, 2000, subject to the conditions in paragraphs 5 and 6 above. FEDERAL COMMUNICATIONS COMMISSION Kenneth P. Moran Chief, Accounting Safeguards Division 10 For example, if SWBT were to propose any substantial change in its TASS process, we would have to re- evaluate the statistical parameters (e. g. sample size) in order to ensure that SWBT would continue to maintain an adequate degree of accuracy. 11 See 47 C. F. R. § 64.904. 3