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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) GTE TELEPHONE ) AAD 98-26 OPERATING COMPANIES ) ) Release of Information ) Obtained During Joint Audit ) MEMORANDUM OPINION AND ORDER Adopted: March 11, 1998 Released: March 18, 1998 By the Commission: Commissioner Furchtgott-Roth issuing a statement. I. INTRODUCTION 1. Pursuant to Section 220(f) of the Communications Act of 1934, as amended, we authorize release to the public certain information obtained jointly by FCC and state regulatory commission auditors during a Federal/State joint audit of the property records (Joint CPR Audit) of GTE Telephone Operating Companies ("GTOCs"). Disclosure of this information does not mean that we adopt the joint audit report or endorse the analysis and conclusions contained in it. II. BACKGROUND 2. Since 1990, the Commission has participated in audits with auditors of state commissions in selected areas of mutual concern. In November 1994, the National Association of Regulatory Utility Commissioners ("NARUC") passed a resolution calling for Federal/State joint audits of the GTOCs. In January 1995, the FCC invited the 28 state regulatory commissions in whose jurisdictions the GTOCs operate to join the FCC in an audit of the GTOCs' property records. Auditors from the state regulatory commissions of Arkansas, Missouri, Nebraska, Ohio, and Pennsylvania participated in the joint audit. 3. The purpose of the joint audit was to determine whether the GTOCs maintain their property records in compliance with Part 32, our uniform system of accounts. Our rules require telephone companies to maintain property records consisting of: (1) the continuing property records ("CPR") that list in detail their units of operating equipment; and (2) supplemental records thereto, such as equipment invoices, engineering drawings, and construction work orders. The CPR of a telephone company is an inventory of all physical property actually used by the telephone company to provide both regulated and nonregulated telecommunications services. The CPR is intended to document the physical existence and cost of each item of equipment placed in service. The description of the equipment and property listed in the CPR should include sufficient information to locate and identify each unit. The cost recorded in the CPR for each unit is the original cost of the installed unit of property and includes the material, labor, and other costs required to place the unit in service. The CPR is an indispensable auxiliary record that substantiates the investment recorded in the plant accounts of the telephone company. The telephone company should be able to reconcile its CPR with the balances in its plant accounts and, thus, provide evidence that the amounts recorded in its plant accounts reflect its actual plant in service. 4. The audit had two objectives: (1) physical verification of the plant equipment listed in the CPR; and (2) evaluation of the accuracy of the 1994 plant additions, retirements and transfers. The audit covered the GTOC operations in eight states. At the audit's conclusion, the Federal/State joint audit team prepared a joint audit report that contains the following sections: (1) a forward; (2) a letter from GTE Corporation; (3) an executive summary; (4) the initial joint audit report; (5) GTE Corporation's comments on the initial joint audit report; and (6) the audit team's response. The letter of GTE Corporation states it will not request that any portion of the report be kept confidential by the Commission or other members of the joint audit team. The initial joint audit report and audit team's response to GTE Corporation's comments provide the audit team's final conclusions regarding the audit. III. DISCUSSION 5. Section 220(f) of the Communications Act prohibits Commission personnel from disclosing publicly facts and information obtained during an audit, absent a Commission or court order. The Commission does not routinely release to the public audit reports prepared by Commission staff. It has been the Commission's policy, however, to release audit reports when release is necessary to support Commission actions that are based on information contained in the report. Regarding joint audits, moreover, the Commission has released reports, even when it plans no action itself, if release is deemed necessary so that state commissions could use information in the reports to support state actions. GTE Corporation has stated that it will not request that any portion of the report be kept confidential by the Commission or other members of the joint audit team. Under the circumstances of this joint audit, we conclude that it is in the public interest to disclose to the public the joint audit report. 6. Accordingly, although we do not adopt the audit report in this order nor endorse its analysis or conclusions at this time, we authorize its public disclosure. This report provides important information about the accuracy of the plant accounts of the GTOCs. This is a matter of mutual federal-state concern that could become the subject of other investigations or actions by this Commission and its state counterparts. Accurate plant accounts play a vital role in monitoring financial results, calculating low-end earnings adjustments, determining productivity factors for price cap companies, defining and resolving stranded investment issues, determining the basis for jurisdictional separations, and deriving inputs for forward-looking cost models for universal service, interconnection agreements, and access prices. The results of the Joint CPR Audit could be used by the Commission or state regulators to initiate other investigations of or actions against the GTOCs. In addition, disclosure would allow other interested persons, including customers, to scrutinize GTOC property records to the benefit of ratepayers and the public. IV. ORDERING CLAUSE 7. Accordingly, IT IS ORDERED, pursuant to Section 220(f) of the Communications Act of 1934, as amended, 47 U.S.C.  220(f), that the report of the Federal/State joint audit of The GTE Telephone Operating Companies is HEREBY AUTHORIZED for public release. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary SEPARA TE STATEMENT OF COMMIS SIONER HAROLD FURCHTGOTT-ROTH Re: Release of Information Obtained During Joint Audit of GTE Telephone Operating Companies. I write today to take this opportunity to express my continued concern with the Commission's ongoing micromanagement of LEC accounting rules. Today's Commission Order releases the results of a Federal/State joint audit of the continuing property records (a CPR audit) of GTE Telephone Operating Companies. State utility commissions frequently require and private auditors are regularly hired to examine a LEC's financial records. With scores of state and private accountants performing audits, I fail to see the need for the Commission to continue with any comprehensive review of property records, especially since such audits are primarily necessary only to the extent that we have not eliminated all of the remnants of rate-of-return regulation. Moreover, as GTE points out in its response, this report is of even less value to the Commission as the sampling technique used was insufficient to allow inferences across GTE's entire basic property records. The Commission's Order states, for example, that accurate plant accounts play a vital role in monitoring financial results, defining stranded investment and calculating low-end earnings adjustments. These mechanisms, however, are mere relics of rate-of service regulation and are no longer necessary in today's increasingly competitive environment. This Commission must become more aggressive in eliminating its reliance on rate-of-return type backstops. We must develop a more forward-looking blueprint to guide the transition from price cap regulation to even more flexible, streamlined regulation as competition begins to take hold in a particular geographic or service market. Price cap regulation is designed, to the extent possible, to replicate a competitive marketplace. But any form of regulation is an imperfect surrogate for full-fledged competition. At a minimum, we should implement a system of pure price cap regulation for the largest carriers, under which there would be little need for the Commission to continue to perform general plant account audits or dictate, even through revised or streamlined procedures, low-end adjustments and depreciation rates. Some may argue that, even under pure price caps, some accounting rules would be necessary to determine expenses if a LEC filed a general rate case with the Commission. But only under those limited circumstances would the FCC have any need for a CPR audit. Moreover, I believe we should at least consider even further rate deregulation so that such cumbersome regulations are never necessary. Thus, I urge, and encourage all interested parties to request, that the Commission use this year's first biennial review to revise its rules and regulations regarding a uniform system of accounts to eliminate such vestiges of rate-of- return regulation.