NEWSReport No. CC 95-15          COMMON CARRIER ACTION    February 27, 1995

      SOUTHWESTERN BELL ORDERED TO SHOW CAUSE WHY IT SHOULD NOT BE
         SUBJECT TO SANCTIONS FOR TRANSACTIONS WITH AFFILIATES 
                                    
     The Commission has ordered Southwestern Bell Telephone (SWBT) to show cause
why the Commission should not find that certain SWBT and affiliate accounting practices,
associated with the allocation of costs and recorded charges for affiliate transactions, violate
Commission rules.   The Commission also ordered SWBT to show cause why the
Commission should not, as a result of these findings, take appropriate enforcement action,
including issuing a Notice of Apparent Liability for Forfeiture, and ordering SWBT to bring
its accounting practices into conformity with Commission policies and rules governing
affiliate transactions and associated cost accounting. 

     This action comes as a result of a federal-state joint audit report, released May 19,
1994, that examined various transactions between SWBT and various SWBT nonregulated
affiliates, including its parent, Southwestern Bell Corporation (SBC), and Southwestern Bell
Asset Management, Inc. (AMI).  The audit report found various apparent violations of the
rules in the accounting methodologies and practices employed by SWBT to book charges for
services provided by affiliates to SWBT. 

     The four apparent violations that are the subject of the Order to Show Cause concern
transactions between SWBT and SBC and between SWBT and AMI.  First, the joint auditors
determined that adequate time records do not exist to properly audit the charges SBC billed
SWBT for management services.  Since most of SBC's costs are driven by the time reporting
of SBC employees, this failure to keep adequate time records could be viewed as a critical
mistake.  The Order to Show Cause rejects  arguments that, by requiring SWBT to produce
SBC records, the Commission is imposing accounting requirements on a nonregulated
affiliate.  Rather, the point is that adequate SBC records are required in any audit of
transactions between SBC and SWBT, the regulated company.
 
     The second and third apparent violations involve modifications to Commission-
prescribed marketing and general allocators used to assign certain residual costs. The
Commission in the Order to Show Cause finds that SWBT has developed a marketing
allocator that differs from that prescribed by the Commission, but one that may be found to
be consistent with the rules.  The Commission directs SWBT to come forward with
additional information to justify its use of this marketing allocator. In the case of the general
allocator, the Commission finds that SBC apparently has kept certain costs out of its
calculation of the allocator in violation of the rules.

                                  (over)
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     The fourth issue is related to AMI and concerns a contract whereby SWBT solely
pays for reserved, unused hotel space  in a property owned by Majestic Associates, in which
AMI has an ownership interest.  The hotel space is used by SWBT and other affiliates.  The
Commission orders SWBT to show why the contract costs should be booked solely by
SWBT, and to demonstrate that the contract rate reflects fully distributed costs.

     Action by the Commission January 26, 1995, by Order to Show Cause (FCC 95-31). 
Chairman Hundt, Commissioners Quello, Barrett, Ness and Chong. 

  -FCC-


     News Media contact: Susan Lewis Sallet at (202) 418-1500.
     Common Carrier Bureau contact: Thomas J. Beers at (202) 418-0872.