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 ) ) NYNEX Telephone Companies ) AAD No. 93-149 ) ) 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 NYNEX Telephone Operating Companies ("NYNEX"). 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 NYNEX 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 NYNEX to adjust its price cap indexes; and (3) require NYNEX to improve its internal processes to bring them into compliance with Commission rules and orders. 4. On May 2, 1995, NYNEX responded to the Commission's Order to Show Cause and contested and denied each of the NECA audit report findings listed in the Commission's Order. By public notice dated June 20, 1995, the Common Carrier Bureau invited public comment on NYNEX's response. Only MCI Telecommunications Corporation filed comments, and NYNEX replied on September 11, 1995. 5. This Commission and NYNEX 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. Among other things, the Consent Decree requires NYNEX to make on a prospective basis an exogenous cost reduction of $1.7 million in its price cap indexes. Under Section 61.45(d) of our price cap rules, local exchange carriers may make exogenous cost changes only if permitted or required by Commission rule, waiver or declaratory ruling. On our own motion, we find it in the public interest to issue a waiver of Section 61.45(d) of our rules to permit NYNEX to adjust its price cap indexes to make the exogenous cost reduction specified in the Consent Decree. A waiver of Section 61.45(d) is appropriate because strict compliance with the rule would prevent or delay the adjustment required by the Consent Decree and, thus, would be inconsistent with the public interest. 7. We delegate authority to the Common Carrier Bureau to: (1) review the price cap recalculations of NYNEX; (2) review the updated independent audit that verifies that NYNEX's internal controls are working properly; and (3) take such other appropriate action as is needed. 8. 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 and its Attachment A, 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. 9. IT IS FURTHER ORDERED that NYNEX is permitted to adjust its price cap indexes to make the exogenous cost reduction as required by and specified in the Consent Decree. 10. IT IS FURTHER ORDERED that this Order is effective upon execution of the Consent Decree by all parties to the Agreement. 11. IT IS FURTHER ORDERED that proceedings under the March 3, 1995 Order to Show Cause, 10 FCC Rcd 5492, ARE HEREBY TERMINATED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of) ) NYNEX Telephone Companies)AAD No. 93-149 ) ) CONSENT DECREE 12. This is a Consent Decree entered into by the Federal Communications Commission ("Commission") and the NYNEX Telephone Companies ("NYNEX") (collectively referred to sometimes as the "Parties"). 13. 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 NYNEX, concerning apparent rule violations and misconduct. These findings generally involve failures to keep accounts, memoranda and records in the manner prescribed by the Commission. 14. On March 3, 1995, the Commission released an Order to Show Cause directing NYNEX to respond to certain of the findings in the Adjustments Report. On May 2, 1995, NYNEX 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 NYNEX's response. Only MCI Communications Corporation filed comments, and NYNEX replied on September 11, 1995. The positions of the parties to this consent decree are as follows: (a) The Commission found that NYNEX'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 NYNEX 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 apparent violations of its cash working capital requirements by NYNEX that included (1) using average bank balances instead of minimum bank balances, (2) using inadequate expense and revenue analysis in lead/lag studies, (3) using an inappropriate revenue lag factor for "Other Income" that contained billing and collection revenues, (4) using an inadequate income tax analysis, and (5) not reflecting the new Part 32 of the Commission's rules in its lead/lag studies; (ii) The Commission found apparent violations of its rules because NYNEX failed to calculate its allowance for funds used during construction (AFUDC) based on the prime rate, but instead used an overall cost of capital rate; (iii) The Commission found apparent violations in NYNEX's assignment of rent revenues to the intrastate jurisdiction, but separation of the associated expenses between the intrastate and interstate jurisdictions. (iv) The Commission found apparent violations because NYNEX used obsolete studies to determine trunk counts that apportion cable and wire facilities between exchange and interexchange categories under Section 36.152 of the Commission's rules; (v) The Commission found apparent violations because NYNEX performed a basic study that resulted in erroneous conversation- minutes and conversation-minute-mile data used to apportion interchange circuit equipment and cable and wire facilities between interstate and intrastate jurisdictions under Sections 36.126(e) and 36.156(b) of the Commission's rules; (vi) The Commission found apparent violations regarding revenue, cost, basic study, or tax adjustments that were made by NYNEX without supporting documentation; (vii) Finally, the Commission found apparent violations based on clerical and computer errors that caused NYNEX to violate certain Commission rules. (b) NYNEX contests the findings in the Adjustments Report and the Commission's Order to Show Cause on the following grounds: (i) The forfeitures should not be assessed because (1) NYNEX did not willfully and knowingly violate the Commission's rules and orders, (2) most of the items raised in the audit were inadvertent errors or one-time events that were corrected prior to the five-year statute of limitations on forfeitures and prior to the date that NYNEX established its initial price cap rates, and (3) other items were corrected as soon as NYNEX discovered them through its internal review processes or when they were raised by the auditors; (ii) Only two items concern accounting practices that NYNEX continues to follow, in the belief that they are consistent with the Commission's rules and orders (specifically, the use of average daily bank balances, and the inclusion of billing and collection revenues, in the calculation of cash working capital). If NYNEX had followed the Commission's interpretation of its rules and orders with regard to the items raised in the audit, NYNEX's revenue requirements, and its price cap rates, would have been higher; and (iii) Finally NYNEX states that it has improved its accounting practices and internal controls since the audit period, such that the errors that occurred in the past are not likely to occur in the future. 15. The Commission and NYNEX 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. 16. Accordingly, and in consideration of the agreement of the Commission and NYNEX to conclude action on the Order to Show Cause on the terms set forth in this Consent Decree, NYNEX agrees to act as specified in paragraph 5 of this Consent Decree: (a) NYNEX 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) NYNEX agrees to establish procedures to prevent the specific apparent deficiencies from recurring in the future. (c) NYNEX agrees to change its calculation of cash working capital for ratemaking purposes going forward from the date of this Consent Decree to exclude billing and collection revenues. (d) NYNEX agrees to make a permanent exogenous adjustment to its price cap indexes to reflect the removal of $1.7 million in costs. NYNEX shall make this prospective adjustment within 60 days after the effective date of this Consent Decree. (e) NYNEX agrees to have an independent audit of its internal accounting controls performed as specified in Attachment A of this Consent Decree. 17. In the event NYNEX 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 NYNEX. If NYNEX 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 paragraph 5 and Attachment A shall be regarded by the Commission as presumptively reasonable and lawful. The Commission, however, reserves its right under law to change accounting requirements prospectively and retroactively, as long as no penalty attaches to such retroactive application. Likewise, NYNEX 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. 18. In light of NYNEX'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 NYNEX 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 NYNEX shall have all opportunities afforded by law to contest that use and that information. 19. NYNEX admits the jurisdiction of the Commission to adopt this Consent Decree. 20. NYNEX 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. 21. 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. 22. It is understood that NYNEX's agreement to this Consent Decree does not constitute an adjudication of any factual or legal issues or an admission by NYNEX 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, NYNEX 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. 23. 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. 24. Adoption by the Commission of this Consent Decree shall conclude action in the proceeding commenced by the Order to Show Cause, 10 FCC Rcd 5492, and the Adjustments Report without a finding of wrongdoing, violations or liability on the part of NYNEX. 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 NYNEX with the terms of this Consent Decree. If this Consent Decree is not signed by NYNEX 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. 25. 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, NYNEX 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. 26. This agreement may be signed in counterparts. FEDERAL COMMUNICATIONS COMMISSION By:_____________________________________ Acting Secretary Signed this ______ day of October, 1996 NYNEX TELEPHONE COMPANIES By:_____________________________________ Its_____________________________________(Title) Signed this ______ day of October, 1996 Attachment A Independent Review of NYNEX Internal Controls NYNEX 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 cost allocation system. The scope of this independent review will focus on 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 have served to 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, NYNEX will submit to the Commission an implementation plan for each recommendation that 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.