NOTICE ************************************************************************* NOTICE ************************************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file pnmc5021. File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) U S West Communications, Inc ) AAD No. 93-152 ) ) CONSENT DECREE ORDER Adopted: October 15, 1996 Released: November 1, 1996 By the Commission: 1. At the direction of the Commission, the National Exchange Carrier Association, Inc. ("NECA") hired Ernst and Young to conduct an independent audit of carrier- reported adjustments to the common line revenue pool for 1988 and the first quarter of 1989. On December 9, 1991, NECA submitted to the Commission Ernst and Young's report ("Adjustments Report"). 2. The independent auditor reported numerous apparent violations of the Commission's rules committed by the Bell Operating Companies, including the U S West Communications, Inc. ("U S West") affiliated operating companies. These apparent violations generally involve failures to keep accounts, memoranda and records in the manner prescribed by the Commission. 3. On March 3, 1995, the Commission released an Order to Show Cause directing U S West to show cause why the Commission should not: (1) issue a Notice of Apparent Liability for Forfeiture for apparent violation of Section 220(d) of the Communications Act of 1934, as amended; (2) require U S West to adjust its price cap indexes; and (3) require U S West to improve its internal processes to bring them into compliance with Commission rules and orders. 4. On May 2, 1995, U S West responded to the Commission's Order to Show Cause and contested and denied each of the Adjustment Report findings listed in the Commission's Order. By public notice dated June 20, 1995, the Common Carrier Bureau invited public comment on U S West's response. Only MCI Telecommunications Corporation filed comments, and U S West replied on September 11, 1995. 5. This Commission and U S West have reached an agreement with respect to these audit findings. The terms and conditions of this agreement are contained in the attached Consent Decree. 6. We have reviewed the terms of the Consent Decree and evaluated the circumstances of the case. We believe the public interest would be served by approving the Consent Decree, the terms of which are incorporated herein by reference. 7. Accordingly, IT IS ORDERED, pursuant to Sections 4(i) and 4(j) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i) and (j), that the Consent Decree, incorporated by reference herein and attached to this Order, IS HEREBY ADOPTED, and the Secretary shall sign such Consent Decree on behalf of the Commission. 8. IT IS FURTHER ORDERED that this Order is effective upon execution of the Consent Decree by all parties to the Agreement. 9. IT IS FURTHER ORDERED that proceedings under the March 3, 1995 Order to Show Cause, 10 FCC Rcd 5523, ARE HEREBY TERMINATED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of) ) U S West Communications, Inc)AAD No. 93-152 ) ) CONSENT DECREE 10. This is a Consent Decree entered into by the Federal Communications Commission ("Commission") and U S West Communications, Inc. ("U S West") (collectively referred to herein as the "Parties"). 11. The common line revenue pool is administered by the National Exchange Carrier Association, Inc. ("NECA") and allows incumbent local exchange carriers ("LECs") to participate in a tariff filed by NECA that establishes uniform access rates on a nation-wide basis for all participants. Monthly distributions from the pool are computed using monthly revenue, expense and investment figures reported by the participating LECs. Initially the figures are only estimates, but in later months the incumbent LECs adjust them to actual monthly figures. At the direction of the Commission, NECA hired Ernst and Young to conduct an independent audit of carrier-reported adjustments to the common line revenue pool for 1988 and the first quarter of 1989. The Ernst and Young audit report ("Adjustments Report") included numerous audit findings against the Bell Operating Companies, including U S West, concerning apparent rule violations and conduct. These findings generally involve failures to keep accounts, memoranda and records in the manner prescribed by the Commission. 12. On March 3, 1995, the Commission released an Order to Show Cause directing U S West to respond to certain of the findings in the Adjustments Report. On May 2, 1995, U S West responded to the Commission's Order to Show Cause and contested and denied each of the Adjustments Report findings listed in the Commission's Order. By public notice dated June 20, 1995, the Common Carrier Bureau invited public comment on U S West's response. Only MCI Telecommunications Corporation filed comments, and U S West replied on September 11, 1995. The positions of the parties to this consent decree are as follows: (a) The Commission found that U S West's actions appear to be inconsistent with its statutory obligation to maintain its accounts, records, and memoranda as prescribed by the Commission. Generally, the Commission found that U S West had apparently misstated or miscalculated interstate costs and revenues from January 1988 through March 1989. The Commission's specific findings included: (i) The Commission found twelve instances of apparent violations of cash working capital requirements in U S West's calculations that included failure to make certain adjustments in a consistent manner, improperly excluding certain cash expenses and use of average daily cash balances instead of required minimum bank balances. (ii) The Commission found apparent violations of Part 65 of its rules because, in making its retroactive adjustment, U S West failed to treat certain account balances in a manner consistent with Part 65. (iii) The Commission found that U S West had apparently failed to apportion correctly certain information origination/termination equipment costs; (iv) The Commission found a number of other apparent rule violations, including violation of Section 32.4999(d) (improper shifting of revenues between accounting periods), violation of Section 69.406 (improper calculation of end user carrier access line charge), and the incorrect reporting of end user revenue. (b) U S West responded to the Order to Show Cause on May 2, 1995, contesting liability on all counts, and asserting that no price cap index adjustment was appropriate or lawful. U S West argued that any discrepancies documented in the Adjustments Report were the result of good faith disagreements between the auditors and U S West or clerical errors. U S West also contended that the overall result of the accounting issues described in the Adjustments Report, taking the conclusions in the Adjustments Report at face value, was that U S West's rates were such that U S West earned approximately $2.6 million less than it would have had the recommendations of the Adjustments Report been followed in all instances. (c) As part of its response to the Order to Show Cause, U S West submitted an independent audit report prepared by the accounting firm of Coopers and Lybrand ("Coopers' Audit Report"). It addressed specific corrective action relevant to the 27 apparent violations identified in the Adjustments Report and the Order to Show Cause. The Coopers' Audit Report concluded that U S West's assertion that "US West Communications maintained an effective internal control structure as of March 31, 1995 is fairly stated, in all material respects." 13. The Commission and U S West agree that the expeditious resolution of issues raised by the Adjustments Report and the Commission's Order to Show Cause in accordance with the terms of this Consent Decree is in the public interest. 14. Accordingly, and in consideration of the agreement of the Commission and U S West to conclude action on the Order to Show Cause on the terms set forth in this Consent Decree, U S West agrees to act as specified in this paragraph: (a) U S West agrees to correct any past accounting and recordkeeping deficiencies that might have caused the apparent violations set forth in the Order to Show Cause; (b) U S West agrees to establish procedures to prevent the specific apparent deficiencies from recurring in the future; and (c) U S West agrees to conduct an independent audit of its internal accounting controls as specified in Attachment A of this Consent Decree. To the extent otherwise consistent with Attachment A, the independent audit conducted by Coopers and Lybrand referenced in paragraph 3(c) of this Consent Decree shall fulfill US West's obligations to conduct an independent audit pursuant to this paragraph of this Consent Decree. US West's implementation plan submitted in accordance with Attachment A may, to the extent appropriate, include actions taken prior to or in accordance with the independent audit referenced in paragraph 3(c). 15. In the event U S West fails to comply with the requirements set forth in paragraph 5 and Attachment A of this Consent Decree, the Commission reserves the right to pursue legal action against U S West. If U S West complies with the terms set forth in paragraph 5 and Attachment A of this Consent Decree, then the accounting treatments, procedures and documentation adopted in compliance with the requirements of Paragraph 5 and Attachment A shall be regarded by the Commission as presumptively reasonable and lawful. The Commission, however, reserves its rights under law to change accounting requirements prospectively and retroactively as long as no penalty attaches to such retroactive application. Likewise, U S West shall be authorized to make changes to its accounting treatments, procedures and documentation to implement or reflect changes in the law or rules or waivers of the Commission's rules and shall not thereby be in violation of any part of this Consent Decree. 16. In light of U S West's covenants and representations contained in paragraph 5 and Attachment A of this Consent Decree, and in express reliance thereon, the Commission has issued a final order formally authorizing the Secretary to execute this Consent Decree ("Consent Decree Order") without change, addition or modification and without a finding of wrongdoing, violations or liability by U S West and further agrees not to begin, on the motion of the Commission or its staff, any proceeding formal or informal, concerning matters that were the subject of the Adjustments Report. Nothing herein, however, shall preclude the Commission from using the information underlying the findings and observations in the Adjustments Report for other lawful regulatory purposes provided that U S West shall have all opportunities afforded by law to contest that use and that information. 17. U S West admits the jurisdiction of the Commission to adopt this Consent Decree. 18. U S West waives any rights it may have to judicial review, appeal or rights otherwise to challenge or contest the validity of the Consent Decree Order, provided the Commission adopts this Consent Decree without change, addition or modification. 19. The Parties agree not to engage in conduct inconsistent with the terms of this Consent Decree. The Parties may comment publicly, however, on the nature of the Consent Decree, and the merits of their respective positions, after it has been adopted by the Commission. 20. It is understood that U S West's agreement to this Consent Decree does not constitute an adjudication of any factual or legal issues or an admission by U S West of wrongdoing, violations or of any inconsistency between its position, on the one hand, and, on the other hand, (i) the Communications Act of 1934, as amended, and (ii) the rules and policies of the Commission. As a result, U S West shall not be precluded or estopped from litigating de novo any and all of the issues subject to this Consent Decree in any forum, except as provided herein. 21. The Parties agree that this Consent Decree and the Consent Decree Order may not be used in any fashion by either of the Parties to this Consent Decree in any legal proceeding except as set forth in this Consent Decree. 22. Adoption by the Commission of this Consent Decree shall conclude action in the proceeding commenced by the Order to Show Cause, 10 FCC Rcd 5523, and the Adjustments Report without a finding of wrongdoing, violations or liability on the part of U S West. The Parties agree that the effectiveness of this Consent Decree is expressly contingent upon issuance of the Consent Decree Order described herein, and compliance by U S West with the terms of this Consent Decree. If this Consent Decree is not signed by U S West and the Commission, or is otherwise rendered invalid by any court of competent jurisdiction, it shall become null and void and may not become part of the record in this proceeding. 23. If the Commission brings an action in any court of competent jurisdiction to enforce the terms of the Consent Decree Order or the Consent Decree, U S West agrees that it will not contest the validity of either the Consent Decree Order or the Consent Decree, will waive any statutory right to contest the validity of the Consent Decree Order or this Consent Decree through a trial de novo, and will consent to a judgment incorporating the terms of this Consent Decree without change, addition or modification provided, however, that the Commission has complied with all of its obligations under the Consent Decree. 24. This agreement may be signed in counterparts. FEDERAL COMMUNICATIONS COMMISSION By:_____________________________________ Acting Secretary Signed this ______ day of October, 1996 U S WEST COMMUNICATIONS, INC. By:_____________________________________ Its_____________________________________(Title) Signed this ______ day of October, 1996 Attachment A Independent Review of U S West Internal Controls U S West will engage an independent auditing firm to review the adequacy of internal controls associated with the automated and manual input processes related to the company's Part 36 separations system. The scope of this independent review will be the following three areas: 1. Review of existing internal processes that enable detection and correction of accounting errors on a timely basis; 2. Review of automated systems that eliminate or reduce the potential for clerical errors and that provide an appropriate trail for data verification; and 3. Review of controls and processes for appropriate implementation of the Commission's rules and related interpretations. The independent review will be completed within one year of the release of the Commission's Consent Decree order. Upon completion of the review, U S West will submit to the Commission an implementation plan for each recommendation which the independent auditing firm determines has the potential for material impact on the results of the company's cost allocations. All aspects of the implementation plan will be instituted 180 days after the independent review is completed.