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Transactions With Affiliates  This letter revises the guidelines carriers must follow in preparing the affiliate transactions   section of their cost allocation manuals (CAMs). Through this letter, we accomplish three   >objectives. First, we address discrepancies in the CAM filing format that Commission staff   juncovered during our recent review of the CAMs. Second, we revise the CAM filing format to   ensure that carriers understand and comply with the changes to the Commission's affiliate  X-  itransactions rules adopted in the Accounting Safeguards Order. {O-ԍAccounting Safeguards Under the Telecommunications Act of 1996, CC Docket No. 96150, Report  {O`-and Order, 11 FCC Rcd 17539 (1996) ("Accounting Safeguards Order"). Finally, we streamline the CAM   filing format by eliminating approximately 40% of the required pages in order to reduce the reporting burden on carriers.  X- In the Accounting Safeguards Order, the Commission amended the Part 32 affiliate  X-  transactions rules.R$ {O-ԍSee 47 C.F.R.  32.27. R In particular, four of these amendments may require carriers to change their   .CAMs. These amendments include: (1) establishing uniform valuation methodologies for the  X-  provision of services and the transfer of assets between regulated and nonregulated affiliates; zP-ԍ#b&_ x$&7<X#See #c P7P#Appendix A. (2)   establishing an exception to the valuation rules for nonregulated service affiliates providing  XR-  <services to a regulated affiliate;[RH zOK#-ԍ#b&_ x$&7<X#Id.[ (3) allowing prices appearing in certain publiclyfiled agreements  X;-  in the place of tariffed rates when tariffed rates are not available;; zP%-ԍ#b&_ x$&7<X#Id#c P7P#. and (4) applying the authorized  X$-rate of return on interstate services, currently 11.25%, when determining fully distributed cost.$k  zP@(-ԍ#b&_ x$&7<X#See #c P7P#Appendices A and B. "  0*0*0*"Ԍ We address the necessary changes to the CAM filing format in the appendices to this   letter. Appendix A provides the list of terms as set forth in Section 32.27 of the Commission's   Krules that carriers should use in their CAMs when describing transactions between regulated and   jnonregulated affiliates. Appendix B presents the format for the affiliate transactions section of  X-  0the CAM and details the information that carriers must provide in this section. yO-ԍCarriers provide information about their affiliate transactions in Section V of their CAMs. Finally, Appendix C contains an example of the revised affiliate transactions matrix format.  The guidance in this RAO letter supersedes the CAM uniformity requirements for affiliate  XH-  transactions set forth in Section A.4 of the Appendix to RAO Letter 19,K\HX {OQ -ԍSee Responsible Accounting Officer Letter No. 19, 6 FCC Rcd 7536 (1991) ("RAO Letter 19"). In  {O -RAO Letter 19, the Accounting and Audits Division established a uniform filing format for the CAMs and a standard procedure for filing CAM revisions.K released December 23,  X3-  1991, but it does not supersede any other aspect of RAO Letter 19. Carriers that are required to   file CAMs must use the format established in this RAO letter no later than December 31, 1998,  X -although such carriers are permitted to revise their CAMs accordingly before that date. $ | yO4-ԍBecause the modifications to the affiliate transactions rules were effective on August 12, 1997, carriers must reflect these modifications in their CAMs after that date. The deadline for the format specified in this  {O-RAO letter should not be construed to represent a modification to the effective date of the Accounting  {O-Safeguards Order.   oThis letter is issued pursuant to authority delegated under Section 0.291 of the   Commission's Rules, 47 C.F.R.  0.291. Applications for review under Section 1.115 of the   MCommission's Rules, 47 C.F.R.  1.115, must be filed within 30 days of the date of this letter. See 47 C.F.R.  1.4(b)(2). If you have any questions, please contact Jos)Luis Rodr1guez at (202) 4180810.  ` `  hh,FEDERAL COMMUNICATIONS COMMISSION ` `  hh,Kenneth P. Moran, Chief ` `  hh,Accounting Safeguards Division"h 0*((r"  X- f Appendix A, Page 1 of 3(#Uf(#UThe affiliate transactions rules specify the valuation methodologies that carriers must use   xin accounting for transactions between regulated and nonregulated affiliates. In the course of our cost allocation manual (CAM) review experience, we have noted that the descriptions that   many carriers use in their CAMs lack the necessary detail to determine whether the carrier fully  Y-  ;understands and complies with the Commission's accounting rules. For example, carriers have   xused the word "cost" to describe the method used to value certain affiliate transactions. The   word "cost," by itself, lacks precision and may be interpreted in a number of ways. In order   to prevent confusion arising from multiple definitions of similar terms, and also to ensure   uniformity for CAM reporting purposes, we require carriers to use the definitions listed in   Section A below when describing affiliate transactions. In Sections B and C below, we describe terms used in valuing asset and service transactions.  Y -A.XGeneral Definitions:(#  Y -  X(1)X` ` "tariffed rates" rates provided pursuant to documents filed with state or federal regulatory authorities.(#`  Yy-  _X(2)X` ` "publiclyfiled agreements/statements of generally available terms" charges   mappearing in publiclyfiled agreements submitted to a State commission pursuant   to section 252(e) or statements of generally available terms pursuant to section  Y4-252(f) in place of tariffed rates when tariffed rates are not available. 4 zP-ԍ#X\  P6G;P#See Accounting Safeguards Order, 11 FCC Rcd at 1761213 para. 158.#x6X@`7wX@#(#`  Y-  X(3)X` ` "prevailing price" the price at which a company offers an asset or service to   1the general public. In order to qualify for prevailing price valuation, 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 an assetbyasset and servicebyservice basis,  Y-rather than on a product line or service line basis. Z zP-ԍ#b&_ x$&7X#Id#c P7P#. at 17600601 #c P7P#paras. 135136.#x6X@8;wX@#(#`  Ye-  @X(4)X` ` "fair market value" the price at which property would change hands between   ^a willing buyer and a willing seller, neither being under any compulsion to buy  Y7-or to sell and both having reasonable knowledge of relevant facts. 7 zP!-ԍSee Accounting Safeguards Under the Telecommunications Act of 1996, CC Docket No. 96150,  zP"-#b&_ x$&7X#Notice of Proposed Rulemaking#c P7P#, #c P7P#11 FCC Rcd 9054, fn. 167.#x6X@8;wX@#х(#`  Y -  f \Appendix A, Page 2 of 3(#UfX(5)X` ` "net book cost" the original cost of an asset adjusted by the associated valuation reserves (e.g., accumulated depreciation, deferred taxes, etc.).(#` "H 0*''JJ "Ԍ Y-  PX(6)X` ` "fully distributed cost" - cost determined in a manner that complies with the   standards and procedures for the apportionment of special, joint, and common  Y-  costs between the regulated and nonregulated operations of the carrier.J  xPK-ԍ47 C.F.R.  64.901(b).J A fully   |distributed costing methodology apportions the total costs of a group of services   or products--including the authorized interstate rate of return--among the   individual services or products in that group. In general, this process directly   assigns some of the costs to individual services or products. The remaining costs   are allocated among individual services or products based on relative use   _measurements or estimates of relative use. The resulting cost apportionments  Y1-determine the share of total cost that is attributed to each service or product.1X zP: -ԍSee Accounting Safeguards Order, #c P7P#fn. 139.#x6X@8;wX@#Ѻ  $I (#`  $I   Y -B.XValuation Methods for the Sale or Transfer of Assets:(#  Y -  X(1)X` ` "tariffed rate" is to be used when assets are sold or transferred between a   @carrier and its affiliates pursuant to existing tariffs, including a tariff filed with a state commission.(#`  Yy-  X(2)X` ` "prevailing price" is to be used when nontariffed assets are sold or transferred   "between a carrier and its affiliates that qualify for prevailing price. To qualify   for prevailing price, the sale of a particular asset must encompass greater than   50% of the total quantity of such product sold by an entity. Carriers shall apply   @this 50 percent threshold on an assetbyasset basis rather than on a productline   nbasis. In the case of transactions for assets subject to 47 U.S.C.  272, a Bell   operating company may record such transactions at prevailing price regardless of whether the 50 percent threshold has been satisfied.(#`  Y-  X(3)X` ` "higher of fair market value and net book cost" is to be used for all other  Y-  assets sold by or transferred from the carrier to its affiliates. For each asset   Plisted under this classification, the carrier must include the specific valuation   2method in effect at the date of the CAM filing by inserting either FMV (fair market value) or NBC (net book cost) next to each asset listed. (#`  Y!-  X(4)X` ` "lower of fair market value and net book cost" is to be used for all other assets   purchased by or transferred to the carrier from its affiliates. For each asset listed   under this classification, the carrier must include the specific valuation method   1f\1Appendix A, Page 3 of 3(#Ufin effect at the date of the CAM filing by inserting either FMV or NBC next to each asset listed.(#`  Y"-(#U""0*''JJ#"  Y-C.XValuation Methods for the Provision of Services:(#  Y-  (1)` ` "tariffed rate" is to be used when services are sold or transferred between a   @carrier and its affiliates pursuant to existing tariffs, including a tariff filed with a state commission.(#`  Yv-  X(2)X` ` "rate pursuant to a publiclyfiled agreement" rate is to be used when non  Qtariffed services are sold or transferred between a carrier and its affiliates   |pursuant to publicly filed agreements submitted to state commissions pursuant to   #section 252(e) of the Communications Act of 1934, as amended, (the Act) or statements of generally available terms pursuant to section 252(f).(#`  Y -  X(3)X` ` "prevailing price" is to be used when nontariffed services are sold or   transferred between a carrier and its affiliates that qualify for prevailing price.   To qualify for prevailing price, the sale of a particular service must encompass   greater than 50% of the total quantity of such service sold by an entity. Carriers   ^shall apply this 50 percent threshold on a servicebyservice basis rather than on   Oa serviceline basis. In the case of transactions for services subject to 47 U.S.C.    272, a Bell operating company may record such transactions at prevailing price regardless of whether the 50 percent threshold has been satisfied.(#`  Y-  nX(4)X` ` "higher of fair market value and fully distributed cost" is to be used for all   other services sold by or transferred from the carrier to its affiliates. For each   service listed under this classification, the carrier must include the specific   valuation method in effect at the date of the CAM filing by inserting either FMV or fully distributed cost (FDC) next to each service listed.(#`  Y-  AX(5)X` ` "lower of fair market value and fully distributed cost" is to be used for all   other services purchased by or transferred to the carrier from its affiliates (except  Ye-  that services received by a carrier from its affiliates that exist solely to provide   mservices to members of the corporate family shall be recorded at FDC, as shown   below in item (6)). For each service listed under this classification, the carrier   must include the specific valuation method in effect at the date of the CAM filing by inserting either FMV or FDC next to each service listed.(#`  Y-  X(6)X` ` "fully distributed cost" is to be used only when a carrier purchases services  Y -  from an affiliate that exists solely to provide services to members of the carrier's   |corporate family. In order to qualify for this classification, the services affiliate  Y"-must not have any sales with outside parties.(#` "#0*''JJ$"  Y- f1): Appendix B, Page 1 of 3(#UfSection V of the CAM should be organized in the following manner and include the following topics:  Y- A.XIntroduction In this section, carriers should include a description of our affiliate  {transactions rules and how they apply them. Inclusion of this information provides  assurance that the carrier is aware of, and is appropriately applying, the affiliate  transactions rules. When describing the "terms" of the affiliate transactions, carriers  must use the definition of terms as  $B specified  $B in Appendix A. In this section, carriers  must also include a statement that fully distributed cost includes a return component  Y1- >calculated using the authorized interstate rate of return.1 zP -ԍ#b&_ x$&7X#See #c P7P#Represcribing the Authorized Rate of Return for Interstate Services of Local Exchange Carriers,  zPt -CC Docket No. 89624, #b&_ x$&7X#Order#c P7P#, 5 FCC Rcd 7507, 7509 para. 13 (1990). This statement must specify  Lthe interstate rate of return in use. (Note: the current prescribed interstate rate of return  Y -is 11.25 percent).@ $ zP-ԍ#X\  P6G;P#See #b&_ x$&7X#Accounting Safeguards Order, #c P7P#11 FCC Rcd at 1761617 paras. 1656.#c P7P# #b&_ x$&7X#@(#  Y -B.XList of Affiliates This section must include the following information:(#  Y -  X(1)X` ` A listing of affiliates with which the carrier engages in, or will engage in,   ?affiliate transactions. For each affiliate listed, provide a brief narrative describing the nature of its business. (#`  YK-  `X(2)X` ` When listing the affiliates, any separate affiliate(s) established to meet the   requirements of Section 272 of the Act, must be so identified (i.e., XYZ Long Distance Co., (Section 272 affiliate)).(#`  Y-  X(3)X` ` When listing the affiliates, any affiliate that exists solely to provide services to   Qmembers of the carrier's corporate family must be so identified (i.e., ABC Company. For transactions with this affiliate, the FDC exception applies).(#`  Y- zC.XList of Assets and Services Provided As discussed in Appendix C, we streamline the  .matrix for reporting transactions between the carrier and its affiliates. As shown in that  matrix, we allow carriers to list assets and services by category. In this section, carriers  YP- must list and describe $Bof each of those asset and service categories, as presented on that  matrix. The description can be a narrative explaining these assets or services, or it can  contain a list of activities that are provided under each service. To conform to the matrix  format, this list must be separated into two sections: assets and services provided by the  carrier to its affiliates; and assets and services received by the carrier from its affiliates.  For CAM presentation f)2 Appendix B, Page 2 of 3(#Ufpurposes, a carrier may combine various types of assets or  .services into homogeneous groups. These groups must separate regulated activities from  >nonregulated activities. For assets or services that, under different circumstances, are"!0*''JJ""  {provided at a combination of more than one of the following: prevailing price, fair  0market value, and/or fully distributed cost, an explanation must be provided in the  =description to explain these circumstances. Below, we provide several examples of asset  or service categories that may appear on the matrix and describe how  $B they should be  $B presented in this section.(#  Yv-  (#UX(1)X` ` Examples of Assets or Services Provided by the Telephone Company to its  Y_-Affiliates:(#`  Y1-  `XX` ` (a)X Marketing Services includes market research, strategic planning, market surveys, consulting services.(#  Y -  7XX` ` (b)X Real Estate Services includes lease arrangements and tenant  improvement management. Leasing arrangements can be offered in some  poffice buildings at prevailing price, and in other office buildings at the  rhigher of fully distributed cost or fair market value. (Provide an explanation of why this occurs.)(#  Yb-  XX` ` (c)X Public Relations (1) support: includes communication consultation,   writing services, production management for media, and presentation  %design and development and (2) television services: includes scripting production, editing, duplication, and live broadcasting.(#  Y-  XX` ` (d)X Telecommunications Services includes basic exchange and intraLATA toll services.(#  Y- $XX` ` (e)X Voice Messaging allows subscribers to leave, direct, and retrieve voice messages.(#  Ye-  } X (2)X` ` Examples of Assets or Services Received by the Telephone Company from its  YN-Affiliates:(#`  Y -  bXX` ` (a)X Marketing Services marketing of telecommunications services and products.(#  Y-XX` ` (b)X Directory Advertising advertising in both white and yellow pages.(#  Y!- XX` ` (c)X Legal Services includes legal representation in areas of commercial  Y"-litigation, labor law, and corporate transactions.  (#  Yh$- f2: Appendix B, Page 3 of 3(#UfD.XMatrix This section must contain a matrix showing each type of asset or service   (#(#Q%(#(#involved in the affiliate transaction, and the terms and the frequency of each type of   transaction. The matrix must be grouped into two categories: transactions from the":&0*''JJ`'"   zcarrier to its affiliates and transactions from the affiliates to the carrier. In the matrix,   carriers must identify the affiliate transactions they engage in, or will engage in, by using  ]Xa code denoting the frequency with which they engage in, or will engage in, those  ktransactions. The following codes must be used when describing the frequency of the transactions:(#  Yv-XX` ` D =Daily(#`  Y_-XX` ` W =Weekly(#`  YH-XX` ` M =Monthly(#`  Y1-XX` ` Q =Quarterly(#`  Y -XX` ` A =Annually(#`  Y -XX` ` O =Occasionally(#`  .XThe matrix must include a legend of the codes used. In the event that these codes do not  ?fit a particular circumstance, contact the Accounting Safeguards Division for prior  yapproval before adding a code. If approval is authorized, the new code must be included in the legend. See Appendix C for an example of the matrix.(# "b0*''JJ"  f:>Appendix C, Page 1 of 3(#UfThe matrix must be designed as shown in this Appendix. As noted in Appendix B, the   matrix must contain each type of asset or service, the affiliate involved, and the terms and the   frequency of each type of transaction. The matrix must be grouped into two categories:   transactions from the carrier to its affiliates and transactions from the affiliates to the carrier. In preparing the matrix, please keep the following in mind:  Yv- A.XThe matrix must be organized using the "terms" of affiliate transactions as major  \headings in column 1. Carriers must use the "terms" as defined in Appendix A. Each  [type of affiliate transaction (assets and services provided or received) is then entered into the matrix according to the terms with which it is provided or received.(#  Y - jB.XWhen listing assets or services under the category "Higher of Fair Market Value and Net  Book Cost", "Higher of Fair Market Value and Fully Distributed Cost", "Lower of Fair  ^Market Value and Net Book Cost", and "Lower of Fair Market Value and Fully  Distributed Cost", designate the specific valuation method used to value the transaction  by inserting either FMV (fair market value), NBC (net book cost), or FDC (fully  distributed cost), in parenthesis, next to each service listed. The valuation method identified must be the method in effect at the date of the CAM filing.(#  YK- lC.XServices listed under the category "Fully Distributed Cost" must include only those  Y4- >services received by a carrier from its affiliates that exist solely to provide services to  kmembers of the carrier's corporate family. Other services offered or provided at FDC  which must meet the "higher or lower" test, as discussed above, are included in that section of the matrix, and so identified.(# #Xw PE37[hXP#