01-3117. 1998 Biennial Regulatory Review-Review of Depreciation Requirements for Incumbent Local Exchange Carriers, Ameritech Corporation Telephone Operating Companies' Continuing Property Records Audit, et al., GTE Telephone Operating Companies ...

AGENCY:

Federal Communications Commission.

ACTION:

Proposed rule.

SUMMARY:

In this document, the Commission declines to adopt the alternative proposal set forth in a Further Notice of Proposed Rulemaking issued on April 3, 2000 concerning conditions for price cap incumbent local exchange carriers (ILECs) to obtain relief from the Commission's depreciation requirements. In addition, the Commission declines to pursue further investigation into the continuing property record (CPR) audits of certain ILECs that are currently before the Commission.

ADDRESSES:

Federal Communications Commission, 445 12th Street, SW, TW-A325, Washington, DC. 20554.

FOR FURTHER INFORMATION CONTACT:

JoAnn Lucanik at [phone].

SUPPLEMENTARY INFORMATION:

This is a summary of the Commission's Second Report and Order in CC Docket 99-137 and Order in CC Docket No. 99-117 and AAD File No. 98-26. The full text of this Commission decision is available for inspection and copying during normal business hours in the FCC Reference Center (Room CY-A257), 445 12th Street, SW, Washington, DC 20554. The complete text may also be purchased from the Commission's copy contractor, International Transcription Service, Inc., 1231 20th Street, Washington, DC 20036, telephone [phone].

Summary of the Order

The alternative proposal set forth in the April 2000 FNPRM, 65 FR 19725 (April 12, 2000), as an option for price cap ILECs to obtain freedom from the Commission's depreciation requirements, generated a great deal of controversy among the parties. In particular, significant concerns were raised by state regulatory commissions, consumer groups, and industry participants about the effect that the proposed above-the-line accounting treatment would have on local and interstate rates, unbundled network element (UNE) and interconnection rates, and universal service support. Many parties commenting on this issue generally disagreed with an accounting treatment that would permit above-the-line amortization of the regulatory-to-financial book differential over a five-year period. They also argued that the proposed non-recovery commitment included as part of the proposed alternative did not provide adequate assurance that a significant amount of costs would be excluded from recovery in customers' rates and did not protect against carriers' potential understatement of earnings and rates of return. In addition, many parties raised issues about the potential impact of the proposed above-the-line accounting treatment on state cost issues and argued that the non-recovery commitment proposed by the ILECs was not sufficient to assure that the amortized costs, particularly the intrastate portion, would be excluded from cost recovery.

Our review of the record finds that the parties have raised sufficient concerns that warrant our taking a cautious approach in this matter. We are concerned about assertions that the proposed accounting alternative set forth in the April 2000 FNPRM, along with the ILECs' non-recovery commitment, lacks the inherent protections that are provided for in the waiver process we approved in the December 1999 Order (which was not published in Federal Register). In light of the concerns expressed by various parties, particularly our state colleagues, we decline to adopt the proposed alternative set forth in the April 2000 FNPRM and instead maintain the status quo.

In making a decision here we weigh the concerns expressed by the states heavily in the balance. We are reluctant to take action that could unfairly burden state proceedings, particularly when our December 1999 Order provides a waiver process whereby carriers may seek additional relief from our depreciation prescription rules in the future without raising such concerns. In 1997, the Common Carrier Bureau's auditors began an audit of the CPRs of the largest ILECs, the RBOCs, to determine if their records were being maintained in compliance with the Commission's rules and to verify that property recorded in their accounts represented equipment used and useful for the provision of telecommunications services.

We note that the audits of the carriers' CPRs were initiated more than three years ago. The telecommunications landscape has changed significantly since that time. Among other things, in a recent decision issued on May 31, 2000, we adopted reforms intended to accelerate competition in the local and long distance telecommunications markets and set the appropriate level of interstate access charges for the next five years (“May 2000 Access Reform Order”) (which was not published in the Federal Register). Specifically, we provided for an immediate reduction in access charges paid by long distance companies and removed implicit subsidies found in interstate access charges by converting them into explicit, portable, universal service support. In earlier actions to implement the 1996 Act, we took steps to move the price of long distance companies' access to local telephone networks towards levels that reflect costs. These actions have brought about significant reductions in access charges and major changes in the interstate rate structure that resolve historically complex issues (some dating back nearly two decades), in a manner that benefits consumers.

In light of these recent reform measures, which in large part are only beginning to get underway, and the fact that the CPR audits were conducted prior to our implementation of these various reforms, we now decide not to pursue further investigation into the CPR audits and close the proceeding with regard to whether the CPRs reflected assets that were not purchased or used by the RBOCs in accordance with our rules. Further, we note that although we have made no decision concerning the findings stated in the CPR audits, we recognize that further investigation into the CPR audit matter will require a great deal of time and effort, and could prove to be a lengthy and costly proceeding for all participants. We wish to make clear, however, that our decision in this order does not preclude the states from investigating relevant state issues raised by the CPR audits.

Finally, while we decline here to further pursue investigation into the CPR audits with regard to whether the CPRs reflected assets that were not purchased or used by the RBOCs in accordance with our rules, we remain concerned about the poor record keeping that these audits revealed. The Commission's auditors found, and the RBOCs did not seriously challenge, that the CPRs were not well maintained. Thus, we find that the RBOCs' CPRs were not maintained in accordance with our rules. Accordingly, we direct the Common Carrier Bureau to work with the RBOCs to evaluate and improve the accuracy of their property records and accounts to ensure compliance with our requirements going forward.

Conclusion

The alternative proposal set forth in the April 2000 FNPRM has generated substantial controversy over whether it provides the same protections as provided in the December 1999 Order given the expressed concerns of our state colleagues, we decline to adopt it. Carriers remain free to seek relief under the waiver approach adopted in the December 1999 Order to obtain freedom from the Commission's depreciation requirements. Moreover, we have determined not to pursue further investigation into whether the RBOCs' CPRs reflected assets that were not purchased or used by the RBOCs in accordance with our rules and hereby close the CPR audit proceedings in this respect.

Federal Communications Commission.

Magalie Roman Salas,

Secretary.