NEWSReport No. CC 95-16         COMMON CARRIER ACTION       February 27, 1995

ORDERS TO SHOW CAUSE ADOPTED FOR BELL OPERATING COMPANIE   S

     The Commission has adopted Orders requiring the Bell Operating Companies (BOCs)
to show cause why the Commission should not issue Notices of Apparent Liability for
Forfeiture and order other remedies, including price cap index adjustments, for possible
accounting-related violations associated with BOC-reported adjustments to the non-traffic
sensitive common line pool administered by the National Exchange Carrier Association
(NECA). These Orders stem from an audit of such adjustments conducted by Ernst and
Young for the period from January 1, 1988 through March 31, 1989. Commission analysis
of the audit findings indicates that the some of the apparent violations continued beyond the
audit period and may continue to the date of these Orders to Show Cause.

     The Commission's rules require local exchange carriers, on a monthly basis, to report
to NECA their revenue, expense and investment data.  NECA uses these data to compute
each carrier's monthly traffic sensitive and non-traffic sensitive pool shares.  Because carriers
do not have complete data available when they first report to NECA, they initially report
estimated data.  In the following months, the carriers are required to reconcile their estimates
with actual results.  To ensure the accuracy of the reconciliation process, NECA procedures
allow the carriers 24 months to reconcile and correct previously submitted data.  Thus, in
each monthly "settlement cycle," carriers report estimated data for the current month as well
as adjusted data for the preceding 24 months.

     In the December 1988 settlement cycle, certain carriers reported unusually large
adjustments.  Commission staff audited the larger of these adjustments and found that they
appeared to have been encouraged by NECA Board members representing the BOCs and
further found the adjustments apparently inconsistent with the Commission's rules.  As a
result, the Commission in 1990 issued initial Notices of Apparent Liability for Forfeiture and
Orders to Show Cause against the BOCs that filed these adjustments. (The Commission
subsequently entered into consent decrees with these BOCs, thus resolving the initial actions
without determinations of liability.) The Commission at that time also issued a letter of
reprimand to the NECA Board of Directors requiring that NECA hire an independent auditor
to perform a comprehensive audit of significant adjustments the BOCs reported to the
common line pool for 1988 and 1989. NECA hired Ernst & Young whose audit report the
Commission has now reviewed. 



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     The Ernst & Young report includes numerous audit findings against the BOCs.  Since
NECA distributes access tariff revenues based on reported data, this conduct has apparently
had a substantial impact on BOCs' interstate telecommunications services customers. 
Moreover, since the reported adjustments involve misstatements or miscalculations of
interstate costs and revenues historically used to develop the BOCs' access charges, and,
after 1988, their price cap indexes, interstate access customers, as well as end users, are
potentially affected.  

     The Commission finds that the BOCs' conduct appears to be inconsistent with their
obligation under Section 220 of the Communications Act to maintain their accounts, records,
and memoranda as prescribed by the Commission.  Carriers must accumulate, process, and
report their financial and operating data in accordance with very specific Commission
requirements because the Commission relies on those data to help ensure that interstate
telephone rates are just and reasonable.  Moreover, the Commission cannot evaluate how
well its accounting rules work if carriers disregard or misinterpret these rules.  Therefore,
where, as appears to be the case with the BOCs, carriers either intentionally violate
Commission rules or fail to maintain the internal systems necessary to ensure compliance
with those rules, the Commission believes forfeitures may be appropriate under Section
220(d) of the Act.  

     Section 220(d) of the Act directs the Commission to impose forfeitures of up to $6000
per carrier per day for accounting-related violations.  Any violations that continued
throughout the audit period and to the present could trigger substantial sums.  The Orders to
Show Cause direct the BOCs to state when the conduct detailed in the Orders ceased, if ever,
and otherwise show cause why notices of apparent liability pursuant to Section 1.80 of the
Commission's rules should not be issued.

     Action by the Commission February 24, 1995, by Orders to Show Cause (FCC 95-
72, -73, -74, -75, -76, -77, -78).  Chairman Hundt, Commissioners Quello, Barrett, Ness
and Chong.

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