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Before the
Federal Communications Commission
Washington, D.C. 20544
In the Matter of ) File No. EB-03-IH-
0245
)
Verizon Telephone Companies, Inc. ) NAL/Acct. No.
200332080014
)
Apparent Liability for Forfeiture ) FRN No.
0008988438
NOTICE OF APPARENT LIABILITY FOR FORFEITURE
Adopted: August 6, 2003 Released:
September 8, 2003
By the Commission: Commissioner Copps and Commissioner
Adelstein concurring and issuing a joint
statement.
I. INTRODUCTION
1. In this Notice of Apparent Liability for
Forfeiture, we find that the Verizon Telephone Companies
(``Verizon'')1 apparently violated section 32.27(c) of the
Commission's rules, which regulates accounting practices for
transactions between Verizon's New York Bell Operating
Company (``BOC'') and its affiliates established pursuant to
section 272(c) of the Communications Act of 1934, as amended
(``the Act''). This rule is important because it helps to
ensure that Verizon's affiliates do not receive better
treatment than Verizon's competitors. We find that Verizon
is apparently liable for forfeiture in the amount of
$283,800 under section 220(d) of the Act for its apparent
violations of section 32.27(c). We also admonish Verizon
for violating section 272(b)(5) of the Act and section
53.203(e) of the Commission's rules by failing to post on
the Internet accurate and timely descriptions of all
transactions between the BOC and its section 272 affiliates.
II. BACKGROUND
2. Section 271 of the Act prohibits BOCs from
providing in-region interLATA services without Commission
authorization.2 To receive such authorization, a BOC must,
on a state-by-state basis, show the Commission that it
satisfies the 14-point competitive checklist, that
authorization is in the public interest, convenience, and
necessity, and that it will carry out its long-distance
operations through a separate affiliate in accordance with
section 272.3 Section 272 establishes certain structural,
transactional, and nondiscrimination safeguards that govern
the relationship between a BOC and its section 272
affiliate. These statutory safeguards and the Commission's
rules thereunder are designed to prevent BOCs from giving
unfair, anti-competitive advantage to their own long
distance affiliates to the detriment of unaffiliated
carriers.4
3. In a series of orders, the Commission implemented
the section 272 separate affiliate safeguards by designing
rules to deter BOCs from unfairly favoring their in-region
interLATA operations by cross-subsidizing or otherwise
discriminating in favor of their long-distance operations to
the detriment of unaffiliated long-distance competitors.5
For example, the rules at issue in this case ensure that
BOCs do not provide services to their affiliates at rates
lower than those available to unaffiliated competitors, and
that all rates and other terms between a BOC and its
affiliate are available for public scrutiny. In short, the
rules prohibit a BOC from providing to its affiliate in the
long distance market an advantage that the BOC derived from
its dominant position in local markets. To help the
Commission determine if a BOC is complying with section 272
and the Commission's implementing rules after receiving
section 271 authority in a state, section 272(d) requires
the BOC to obtain a joint Federal/State audit conducted by
an independent auditor.6 In the Accounting Safeguards
Order, the Commission also adopted rules governing the joint
Federal/State audit of the BOCs' compliance with section
272. These rules address, inter alia, oversight of the
independent auditor and the filing of the audit report.7
4. The Commission authorized Verizon to provide in-
region interLATA service in New York on December 22, 1999,
effective January 3, 2000.8 At the time of the
authorization, Verizon stated that it had established three
New York section 272 affiliates.9 Pursuant to the
requirements of section 272(d), Verizon retained an
independent auditor to perform a section 272(d) biennial
audit for its first full year of in-region long-distance
operations, i.e., January 3, 2000 through January 2, 2001.10
Verizon's independent auditor submitted a publicly-available
audit report on February 6, 2002 that, among other things,
identified the apparent violations discussed here.11
Verizon responded, and, after a public notice,12 WorldCom
and AT&T filed comments proposing enforcement action, and
Verizon responded to those comments.
III. DISCUSSION
5. Under section 220, any carrier subject to the Act
that fails to keep its accounts, records, and memoranda on
the books in the manner prescribed by the Commission, or
fails to submit such accounts, records, memoranda,
documents, papers, and correspondence to the inspection of
the Commission or its authorized agents, is liable for
forfeiture.13 To impose such a forfeiture penalty, the
Commission must issue a notice of apparent liability and
send it to the person against whom the notice is issued.14
The Commission must then give the person against whom the
notice has been issued an opportunity to show, in writing,
why a forfeiture penalty should not be imposed.15 The
Commission will then issue a forfeiture if it finds that the
person has violated the Act or a Commission rule.16 As set
forth in more detail below, we conclude that Verizon is
apparently liable for a forfeiture under section 220(d) for
its apparent violations of section 32.27(c) of the
Commission's rules.
6. The fundamental issues in this case are whether
Verizon violated section 32.27(c) of the rules by failing to
estimate fair market value for certain transactions and
failing to record the correct value for certain other
transactions, and whether Verizon violated the Commission's
Internet posting rules, section 53.203(e), by failing to
post accurate and timely affiliate transactions
descriptions. Based on the record in this case, which
includes the February 6, 2002 report of Verizon's
independent auditor, as well as the comments of WorldCom and
AT&T and Verizon's reply, we find that Verizon apparently
failed to comply with the Commission's affiliate
transactions rules as set forth in section 32.27(c) of the
Commission's rules.17 Based on the record, we also find
that Verizon apparently failed to post on the Internet
accurate and timely descriptions of its affiliate
transactions between its BOC and section 272 affiliates
contrary to the requirements of section 272(b)(5) of the Act
and section 53.203(e) of the Commission's rules.18
A. Verizon's Apparent Violations
1. Section 32.27(c)
7. Section 32.27(c) of the Commission's rules
requires a BOC to record transactions with its section 272
affiliate at the tariffed rate, prevailing company price, or
the higher or lower of cost or fair market value, in that
mandatory order of preference (depending on the direction of
the transaction).19 If there is no tariffed rate or
prevailing company price, the BOC must make a good faith
estimate of fair market value.20 For transfers from the BOC
to its section 272 affiliate, the BOC must then record the
higher of cost or fair market value in its books of
account.21 For transfers from the section 272 affiliate to
the BOC, the BOC must record the lower of cost or fair
market value in its books of account.22 Based on the
independent auditor's report, we find that Verizon
apparently violated this affiliate transactions rule.
(a) Verizon Failed to Record the Correct Value
for Transactions
8. We find that Verizon apparently failed to book
nine transactions, approximately 13 percent out of a sample
of 70, at either tariffed rate, prevailing company price, or
the higher of cost or fair market value as section 32.27(c)
of our rules require it to do.23 The independent auditor's
report shows that Verizon recorded the costs of the
transactions at some different amount.24 Verizon's
arguments that it did not violate our rules are
unpersuasive. According to Verizon, it contracted with its
affiliates at appropriate rates, but then failed to bill
them at the contract rates ``due to administrative
error.''25 But the rule, which is designed to ensure that
carriers do not charge their affiliates less than market
value for services, thereby giving their affiliates a
competitive advantage over unaffiliated carriers, has
apparently been violated, regardless of whether the
violation may have been caused by ``administrative error.''
Strict enforcement will help ensure that the Commission can
detect any anticompetitive behavior. Thus, we find that
Verizon apparently violated section 32.27(c) of our rules.
(b) Verizon Failed to Make a Good-Faith Estimate
of Fair Market Value
9. Verizon booked 34 of 70 sampled transactions
(apart from the nine above) at cost, without engaging in the
mandated comparison of cost versus market. Verizon
apparently failed to make a good faith estimate of fair
market value for the 34 transactions in the independent
auditor's sample.26 As a result, Verizon failed to perform
the required comparison between fair market value and fully
distributed cost for the 34 transactions, which totaled
$15,177,531 when measured at cost.27 Instead, Verizon
simply booked the 34 transactions at cost.28 Thus, Verizon
apparently violated section 32.27(c), and is therefore
apparently liable for forfeiture under section 220(d). As a
result of Verizon's failure to follow the Act and rules when
booking the cost of these transactions, it may have charged
its section 272 affiliate less than market value for the
services, giving the affiliate a competitive advantage over
unaffiliated long-distance carriers.
10. Verizon argues that it nevertheless complied with
the Act and the Commission's rules. Verizon asserts that:
(1) it could not obtain fair market valuations from third
parties; (2) the services at issue are unique, precluding a
fair market value analysis; and, (3) the Act and the
Commission's affiliate transactions rules require Verizon
merely to make a good faith attempt at obtaining fair market
value but do not require Verizon to arrive at an estimate of
fair market value.29 We reject all of Verizon's
contentions. Although the Commission's rules do not
prescribe a specific method for determining fair market
value,30 they do require a BOC to make a good faith
estimate, not merely a good faith attempt at making an
estimate.31 As the Commission stated in the Accounting
Safeguards Order, carriers have a variety of ways to
estimate fair market value, e.g., appraisals, catalogs
listing similar items, competitive bids, replacement cost of
an asset, and net realizable value of an asset.32 The
Commission has also recognized that not all transactions can
be valued using such independent valuation methods. The
Commission has not exempted such transactions from the fair
market value requirement, but has said that ``[w]hen
situations arise involving transactions that are not easily
valued by independent means, we require carriers to maintain
records sufficient to support their value determination.''33
Therefore, even if a third-party consultant reports that it
cannot estimate fair market value for the BOC, the BOC may
not ignore its obligation to do so, and to keep supporting
records.34 Based on the record before us, we also disagree
that the services - most of which are some form of
telemarketing or call center operations - are sufficiently
unique to justify Verizon's departure from the Commission's
rules. In any event, while the unique nature of services
might serve as a basis for a waiver of the rule, Verizon did
not even ask for such a waiver, let alone receive one.
Finally, Verizon is incorrect that it can satisfy its
obligation by merely making a good faith attempt at
obtaining faith market value. Nothing in the rule or the
Accounting Safeguards Order so suggests. Rather, its
failure to provide the requisite estimate constitutes an
apparent violation of section 32.27(c) of the Commission's
rules.
2. Section 272(b)(5)
11. Section 272(b)(5) of the Act requires that all
transactions between a BOC and its section 272 affiliates be
``reduced to writing and available for public
inspection.''35 The Commission's rules implement this
requirement by directing BOCs to post all transactions with
their section 272 affiliates on the Internet within 10 days
of their occurrence.36 The postings must include a
``detailed written description of the asset or service
transferred and the terms and conditions of the
transaction.''37 The audit results show that Verizon failed
to comply with this requirement in numerous cases.
Specifically, of 839 postings reviewed, the independent
auditor identified the following errors: 129 web postings
that did not match the underlying agreements, including 44
with multiple errors; four missing postings; 51 late
postings; and 68 postings that did not contain all of the
required disclosures.38
12. Verizon states that: (1) these transactions are
``complex'';39 (2) the postings represent only one percent
of Verizon's total postings;40 and (3) the errors were
clerical in nature.41 Verizon's contentions are not
persuasive. It is not clear whether Verizon believes the
purported complexity of the transactions means that we
should not consider the audit findings violations of the
Commission's rules or that we should use discretion in not
pursuing the violations. To the extent Verizon argues that
complexity should compel us to not find a violation, we
disagree. The purported complexity of the transactions does
not excuse the large number of errors uncovered by the
audit. To the extent Verizon argues that we should use our
discretion, we address the proper enforcement action below.
Although the identified errors may represent a small
fraction of Verizon's total postings, they represent a large
percentage of the transactions sampled. And even if the
errors were ``clerical,'' they nevertheless constitute a
failure to comply with our rules. Therefore, we find that
Verizon violated section 272(b)(5) of the Act and section
53.203(e) of the Commission's rules.
B. Proposed Action
13. As we explained above, we find that Verizon
apparently violated section 32.27(c) of the Commission's
rules by failing properly to account for affiliate
transactions. In particular, Verizon failed to record a
total of 43 transactions according to the methods specified
in section 32.27(c). Based on this information, we find
that Verizon has apparently failed to justify its accounting
entries for approximately $16 million in services provided
to its section 272 affiliates in 2000. For the reasons
discussed below, these apparent violations justify a
forfeiture. In addition, because we are barred by the one-
year statute of limitations from imposing a forfeiture for
Verizon's Internet posting violations,42 we admonish the
company.
14. We acknowledge that, as of December 23, 2002,
Verizon is no longer obligated to comply with the section
272 safeguards in New York, other than section 272(e).43
Enforcement action is important nevertheless for several
reasons. First, and obviously, section 272 was effective in
New York at the time Verizon committed these apparent
violations. In addition, section 32.27 of the Commission's
rules remains in effect. Verizon must continue to comply
with the affiliate transactions rules when dealing with
nonregulated affiliates. Moreover, a large percentage of
the transactions sampled by the auditor indicate apparent
violations. Finally, Verizon operates the same section 272
affiliates in its other BOC states. Thus, Verizon and its
section 272 affiliates must continue to comply with section
272, and enforcement action here should help deter future
violations.
1. Forfeiture Amount
15. In light of Verizon's apparent repeated violations
of section 272(c)(2) of the Act, and associated Commission
rules, we find that a proposed forfeiture is warranted
pursuant to section 220(d).44
16. Section 220(d) provides that ``[i]n the case of
failure or refusal on the part of any such carrier to keep
such accounts, records, and memoranda on the books and in
the manner prescribed by the Commission, or to submit such
accounts, records, memoranda, documents, papers, and
correspondence as are kept to the inspection of the
Commission or any of its authorized agents, such carrier
shall forfeit to the United States the sum of [$6,600] for
each day of the continuance of each such offense.''45 The
affiliate transactions rule that Verizon has apparently
violated constitutes the ``manner prescribed by the
Commission'' for Verizon to keep its books. Accordingly,
Verizon is apparently liable for forfeiture under section
220(d) for violating section 32.27(c) of the Commission's
rules.
17. Based on our review of the facts and circumstances
of this case, we find that Verizon is apparently liable for
a forfeiture of $283,800. We find that all 43 apparent
accounting violations occurred within the five-year statute
of limitations because they occurred in calendar year 2000.
We note that Verizon allowed the apparent violations to go
uncorrected for eight to 28 months.46 Forty-three apparent
violations multiplied by the then-effective statutory amount
of $6,600 per violation produces $283,800. Our total
proposed forfeiture is therefore $283,800. We do not
propose that the forfeiture amount for each of the 43
violations also include the $6,600 per day amount because,
under the circumstances of this case, we believe the result
would be excessive.47 2. Admonishment
18. Based on our review of the facts and circumstances
in this case, we also admonish Verizon for failing to comply
with the Internet posting requirements of section 272(b)(5)
and section 53.203(e) of the Commission's rules. We
therefore expect that Verizon will take steps to ensure that
it complies with these requirements for the states in which
it remains subject to section 272. Although section
272(b)(5)'s requirements have sunset for Verizon in New
York,48 admonishment is nevertheless warranted in light of
the fact that the section 272(b)(5) Internet posting
requirements and other non-discrimination safeguards remain
in effect in Verizon's other BOC states for at least three
years from the date of section 271 approval.
IV. CONCLUSION
19. We find Verizon has apparently violated section
32.27(c) of the rules in transactions with its affiliates
and we propose a forfeiture of $283,800. We also admonish
Verizon for not accurately and timely posting affiliate
transactions on its Internet site in violation of section
272(b)(5) of the Act and section 53.203(e) of the rules.
IV. ORDERING CLAUSES
20. ACCORDINGLY, IT IS ORDERED THAT, pursuant to
section 220(d) of the Communications Act of 1934, as
amended, 47 U.S.C. § 220(d), and section 1.80 of the
Commission's rules, 47 C.F.R. § 1.80, that the Verizon
Telephone Companies are hereby NOTIFIED of its APPARENT
LIABILITY FOR A FORFEITURE in the amount of two hundred
eighty-three thousand, eight hundred dollars ($283,800) for
violating section 32.27(c) of the Commission's rules in
transactions with its affiliates.
21. IT IS FURTHER ORDERED THAT, pursuant to section
1.80 of the Commission's rules, 47 C.F.R. § 1.80, within
thirty days (30) of release of this NOTICE OF APPARENT
LIABILITY, the Verizon Telephone Companies SHALL PAY the
full amount of the proposed forfeiture currently outstanding
on that date or shall file a response showing why the
proposed forfeiture should not be imposed or should be
reduced.
22. Payment of the forfeiture may be made by check or
money order drawn to the order of the Federal Communications
Commission. Such remittance should be made to Forfeiture
Collection Section, Finance Branch, Federal Communications
Commission, P.O. Box 73482, Chicago, Illinois 60673-7482.
The payment should note the NAL/Acct. No. referenced above.
23. The response, if any, must be mailed to Maureen F.
Del Duca, Chief, Investigations and Hearings Division,
Enforcement Bureau, Federal Communications Commission, 445
12th Street, S.W., Room 3-B431, Washington DC 20554, and
must include the file number listed above.
24. IT IS FURTHER ORDERED that the Verizon Telephone
Companies ARE ADMONISHED for failing to make accurate and
timely Internet postings in violation of 47 U.S.C. §
272(b)(5) and 47 C.F.R. § 53.203(e).
25. IT IS FURTHER ORDERED that the Secretary shall
send, by certified mail/return receipt requested, a copy of
this Notice of Apparent Liability for Forfeiture to Susanne
A. Guyer, Senior Vice President - Federal Regulatory
Affairs, Verizon, 1300 I Street N.W., Room 400W, Washington,
D.C., 20005.
FEDERAL COMMUNICATIONS COMMISSION
Marlene H. Dortch
Secretary JOINT STATEMENT OF
COMMISSIONERS MICHAEL J. COPPS AND JONATHAN S. ADELSTEIN,
CONCURRING
Re: Verizon Telephone Companies, Inc. Apparent Liability for
Forfeiture
(File No. EB-03-IH-0245)
We support today's Notice of Apparent Liability because
it is an appropriate exercise of the Commission's
enforcement authority. Nonetheless, we only concur because
the timing of this decision sends the wrong signals
concerning our oversight of section 272 affiliates. This is
yet another illustration of how the Commission has fallen
short of its statutory duties under Section 272. We need to
do more to ensure that our oversight is of the kind and
character that Congress intended.
Through Section 272, Congress required Bell companies
to provide long distance and manufacturing services through
a separate affiliate. In implementing these requirements,
the Commission concluded that Congress adopted these
safeguards because it recognized that Bell companies might
still exercise market power at the time they enter long-
distance markets. As part of these safeguards, Congress
specifically required that Bell companies retain an
independent auditor to review separate affiliate operations
and produce a public report evaluating how they comply with
the statute and the Commission's rules. Congress also
provided that the long distance separate affiliate
requirements would continue for three years, but could be
extended by the Commission by rule or order.
On the three-year anniversary of its entry into the
long distance market, the Commission allowed the Section 272
separate affiliate requirement for Verizon in New York to
sunset. It did so without a crumb of analysis. We
addressed neither the New York Public Service Commission's
concerns that sunset was premature, nor the results of the
independent audit report. Instead, we review the results of
that audit in today's decision. This review takes place
more than seven months after the Commission allowed the
sunset of the New York Section 272 separate affiliate. This
is backwards.
Despite the appropriateness of today's enforcement
action, it highlights the shortcomings of our approach to
section 272. By failing to use the statutory audit tool as
part of a larger analysis before the decision to sunset is
made, the forfeiture and admonishment we impose in this
Notice of Apparent Liability are denied the context Congress
intended.
_________________________
1 ``Verizon'' means the Verizon Telephone Companies, which
include Verizon Delaware Inc., Verizon Maryland Inc.,
Verizon New England Inc., Verizon New Jersey Inc., Verizon
New York Inc., Verizon Pennsylvania Inc., Verizon Virginia
Inc., Verizon Washington, DC Inc., Verizon West Virginia
Inc., Bell Atlantic Communications, Inc. d/b/a Verizon Long
Distance, NYNEX Long Distance Company d/b/a Verizon
Enterprise Solutions, and Verizon Select Services Inc., and
their successors and assigns.
2 47 U.S.C. § 271.
3 47 U.S.C. §§ 271(d)(3).
4 See also Separation of Costs of Regulated Telephone
Service from Costs of Nonregulated Activities; Amendment of
Part 31, the Uniform System of Accounts for Class A and
Class B Companies To Provide Nonregulated Activities and To
Provide for Transactions Between Telephone Companies and
Their Affiliates, Report and Order, 2 FCC Rcd 1298 (1987)
(``Joint Cost Order''), modified on recon., 2 FCC Rcd 6283
(1987), modified on further recon., 3 FCC Rcd 6701 (1988),
aff'd sub nom. Southwestern Bell Corp. v. FCC, 896 F.2d 1378
(D.C. Cir. 1990).
5 See Accounting Safeguards under the Telecommunications Act
of 1996, CC Docket No. 96-150, Report and Order, 11 FCC Rcd
17539, 17546, ¶ 13 (1996) (``Accounting Safeguards Order''),
Second Order on Reconsideration, 15 FCC Rcd 1161 (2000);
Non-Accounting Safeguards Order, 11 FCC Rcd at 21914, ¶¶ 15-
16.
6 See 47 U.S.C. § 272(d).
7 See Accounting Safeguards Order, 11 FCC Rcd at 17628-32,
¶¶ 197-205; 47 C.F.R. §§ 53.209-213; Non-Accounting
Safeguards Order, 11 FCC Rcd at 22061, ¶ 323.
8 Application of Bell Atlantic New York for Authorization
under Section 271 of the Communications Act to Provide In-
Region, InterLATA Service in the State of New York, CC
Docket No. 99-295, Memorandum Opinion and Order, 15 FCC Rcd
3953, 4178, ¶ 458 (1999) (``Bell Atlantic New York Order''),
aff'd sub nom. AT&T Corp. v. FCC, 220 F.3d 607 (D.C. Cir.
2000).
9 These affiliates include Bell Atlantic Communications,
Inc. (``BACI''), NYNEX Long Distance (``NLD''), and Bell
Atlantic Global Networks, Inc. (``BAGNI''). See Bell
Atlantic New York Order, 15 FCC Rcd at 4153-54, ¶ 405.
According to Verizon, it planned to offer long distance
services to residential customers through BACI and business
customers through NLD. See id. Verizon stated that the
third affiliate, BAGNI, would ``build the telecommunications
network and serve BACI and NLD.'' Id. For simplicity, we
refer to these affiliates collectively as the ``section 272
affiliates'' or individually using the generic ``section 272
affiliate.''
10 See Report of Independent Accountants on Applying Agreed-
Upon Procedures, filed in CC Docket No. 96-150 (Feb. 6,
2002) (``Verizon Audit Report''). The audit was an agreed-
upon procedures engagement (``AUP''). An AUP requires the
auditor to perform specified procedures upon which the users
agree. See Statement on Standards for Attestation
Engagements No. 10 at § 2.03 (American Inst. of Certified
Pub. Accountants 1999). The independent auditor presents
the results and/or findings in its report without regard to
materiality. See id. at §§ 2.24, 2.25.
11 The audit report covered the Verizon section 272
affiliate operations in New York only. Therefore, this
Notice of Apparent Liability is limited to Verizon's
operations in that state.
12 See Accounting Safeguards Under the Telecommunications
Act of 1996, CC Docket No. 96-150, Order, 17 FCC Rcd. 2488
(Com. Car. Bur. 2002). On December 23, 2002, the
Commission issued a Public Notice stating that, pursuant to
section 272(f)(1), the section 272 provisions (except
section 272(e)) sunset for Verizon in New York, effective
that day. See Section 272 Sunsets for Verizon in New York
State by Operation of Law on December 23, 2002 Pursuant to
Section 272(f)(1), WC Docket No. 02-112, Public Notice, 17
FCC Rcd 26864 (2002). In an accompanying order, however,
the Commission warned that BOCs remain ``obligated to
cooperate fully in the completion of the section 272(d)
audits addressing section 272 compliance for all time
periods prior to the statutory sunset even though these
independent audits may be completed after the sunset date.''
Section 272(f)(1) Sunset of the BOC Separate Affiliate and
Related Requirements, WC Docket No. 02-112, Memorandum
Opinion and Order, 17 FCC Rcd 26884 (2002).
13 A carrier is subject to forfeiture under section 220(d)
if it fails to comply with the Commission's accounting
rules. Section 32.27 is such a rule; therefore, failure to
comply makes a carrier liable for section 220(d) penalties.
The statute of limitations for such offenses is five years.
47 C.F.R. § 1.80(c)(2).
Unlike section 503, section 220(d) does not require that
a violation be willful or repeated before the Commission can
impose a forfeiture. In any case, however, the apparent
violations here are clearly repeated and, in the case of the
34 transactions for which Verizon decided not to estimate
market value, willful.
14 See 47 C.F.R. § 1.80(f)(1), 1.80(f)(2).
15 See 47 C.F.R. § 1.80(f)(3).
16 See 47 C.F.R. § 1.80(f)(4).
17 In addition to the apparent violations of the affiliate
transactions rules, Verizon apparently failed to retain the
documentation required under our rules. Section 220(c) of
the Act places the burden of proof to justify questioned
accounting entries on carriers. 47 U.S.C. § 220(c). The
Accounting Safeguards Order further requires BOCs ``to
maintain records sufficient to support [its] value
determination'' for situations in which making a good faith
estimate of fair market value may be difficult. The
independent audit report states that Verizon failed to
retain documentation to support its valuations. Verizon
apparently violated these record retention requirements for
both groups of transactions described in sections
III.A.1.(a) and (b), infra. These apparent violations of
the record retention requirements are further indication of
Verizon's apparent failure to comply with the substantive
affiliate transactions requirements.
18 We note that both AT&T and WorldCom complain that
Verizon's section 272(e) performance measurements results
indicate that Verizon discriminated in favor of its
affiliates in the provision and maintenance of special
access lines and other services. See AT&T Comments at 16-
22; WorldCom Comments at 3-4. The independent auditor's
report, however, does not disaggregate the services to a
level sufficient to permit a service-by-service
discrimination analysis. See Verizon Audit Report at 34-40.
The joint federal-state section 272 audit team, including
the Enforcement Bureau audit staff, has worked with and
continues to work with the section 272 independent auditors
to ensure that such disaggregation takes place in future
audits.
19 47 C.F.R. § 32.27. In implementing section 272(c)(2),
the Commission relied on its existing affiliate transaction
rules. See Accounting Safeguards Order, 11 FCC Rcd at
17620, ¶ 176 (``[w]e therefore adopt our tentative
conclusion that we should apply our affiliate transactions
rules to transactions between each BOC and any interLATA
telecommunications affiliate it establishes under section
272(a), such as an affiliate providing in-region services,
and order that the BOCs treat such services like
nonregulated activities for accounting purposes.'') The
affiliate transactions rules, adopted pursuant to section
220 of the Act, are codified in section 32.27 of the
Commission's rules. 47 C.F.R. § 32.27.
20 See 47 C.F.R. §§ 32.27(c) (``For purposes of this
section, carriers are required to make a good faith
determination of fair market value for a service when the
total aggregate annual value of that service reaches or
exceeds $500,000.''); 53.203(e). The former Common Carrier
Bureau has stated that the good faith determination of fair
market value is neither difficult nor burdensome. See,
e.g., Puerto Rico Telephone, Petition for Waiver of Section
32.27 of the Commission's Rules, ASD File No. 98-93,
Memorandum Opinion and Order, 15 FCC Rcd 7044, 7047, ¶ 8,
n.19 (Com. Car. Bur. 1999). The affiliate transactions
requirements are sufficiently clear to allow Verizon ``to
identify, with ascertainable certainty, the standards with
which the [Commission] expects [it] to conform . . . .''
Trinity Broadcasting, 211 F.3d at 628. We note that the
rules governing the cost-market comparison for services
changed effective September 28, 2000. See 2000 WL 1450766
(FR) (Federal Register notice of Phase 1 Order's effective
date); Comprehensive Review of the Accounting Requirements
and ARMIS Reporting Requirements for Incumbent Local
Exchange Carriers: Phase 1, CC Docket No. 99-253, Report
and Order, 15 FCC Rcd 8690 (2002) (``Phase 1 Order''). In
the Phase 1 Order, the Commission relaxed the rule to
require BOCs to estimate fair market value only where the
annual value of the transactions for the relevant service is
greater than $500,000. See id., 15 FCC Rcd at 8700-01, ¶¶
18-20.
21 See 47 C.F.R. § 32.27(c).
22 See id. ``Cost'' varies depending on whether the
transaction involves assets or services. For affiliate
transactions involving assets, ``cost'' means ``net book
cost.'' For services, ``cost'' means ``fully distributed
cost.'' See id.
23 Verizon Audit Report at 23. The value of these
transactions was $991,509. See id.
24 See id.
25 Verizon June 11, 2001 Response at 5. Verizon also states
that it corrected the bookings in April, 2001, i.e., as much
as 13 months after Verizon booked the transactions. Id.
26 See Verizon Audit Report at 21; see also AT&T Comments at
34.
27 See id.
28 See Letter from Joseph DiBella, Regulatory Counsel,
Verizon, to Joseph Paretti, Accounting Safeguards Division,
Common Carrier Bureau, Federal Communications Commission, at
17 (June 11, 2001) (``Verizon June 11, 2001 Response'').
29 See Verizon Audit Report at 21; Verizon June 11, 2001
Response at 5; Letter from Gerald Asch, Director, Federal
Regulatory, Verizon, to Marlene Dortch, Secretary, Federal
Communications at 17 (June 11, 2002) (``Verizon June 11,
2002 Response'').
30 See Accounting Safeguards Order, 11 FCC Rcd at 17609-10,
¶ 153.
31 See 47 C.F.R. § 32.27(c); Accounting Safeguards Order, 11
FCC Rcd at 17610, ¶ 154.
32 See Accounting Safeguards Order, 11 FCC Rcd at 17610, ¶ 154.
33 Id.
34 See AT&T Comments at 34 (arguing that benchmark prices
should be available on an ``inter-industry basis'').
35 47 U.S.C. § 272(b)(5).
36 See 47 C.F.R. § 53.203(e); Accounting Safeguards Order,
11 FCC Rcd at 17593-94, ¶ 122.
37 Accounting Safeguards Order, 11 FCC Rcd at 17593-94, at ¶
122. The BOC must also make this information available for
public inspection at its principal place of business. See
id.
38 Verizon Audit Report at 16-18; see also Letter from Joan
Marsh, Director, Federal Government Affairs, AT&T, to
Marlene Dortch, Secretary, Federal Communications
Commission, at 2 (May 23, 2002); AT&T Comments at 32.
39 See Verizon June 11, 2001 Response at 2.
40 See id.
41 See Verizon June 11, 2002 Response at 15-16.
42 We note that the statute of limitations for forfeiture
action for these violations is one year, not five years as
with a section 220 forfeiture. 47 U.S.C. § 503(b)(6)(B).
Compare 47 C.F.R. § 1.80(c)(2).
43 See n.12 supra.
44 Although we find here that these apparent violations were
repeated and, in the case of the 34 transactions for which
Verizon made a decision not to estimate market value,
repeated, it is not clear that section 220(d) has a willful
or repeated requirement.
45 47 U.S.C. § 220(d); 47 C.F.R. § 1.80(b)(4) (2000).
Effective November 13, 2000, the Commission raised the
statutory per violation maximum from $6,600 to $7,600 to
account for inflation. Amendment of Section 1.80(b) of the
Commissions Rules, Adjustment of Forfeiture Maxima to
Reflect Inflation, Order, 15 FCC Rcd 18221, 18225 (2000); 65
FR 60868; In the Matter of the Commission's Forfeiture
Policy Statement and Amendment of Section 1.80 of the Rules
to Incorporate the Forfeiture Guidelines, CI Docket No. 95-
6, Report and Order, 12 FCC Rcd 17087, 17117 (noting that
maximum liability for each section 220(d) violation was
$6,600). Verizon's apparent continuing violations began
before the date the $7,600 maximum took effect. Although
some of Verizon's apparent violations occurred after the
effective date, we will use the $6,600 amount to calculate
Verizon's apparent liability here for simplicity.
46 The duration of the 43 apparent violations is based on
two factors. For the nine apparent violations for which
Verizon failed to book the transactions at either fully
distributed cost or fair market value, the end month is
April 2001, when Verizon states that it cured the violation.
See n.22 supra. For the 34 transactions for which Verizon
failed to perform a good faith estimate of fair market
value, the end month is June 2002, when Verizon last argued
that it had not violated the Commission's affiliate
transactions rules. June 2002 is the last month at which
it is clear Verizon had not cured these apparent violations.
47 See generally 47 C.F.R. § 1.80(b)(4); 47 U.S.C. § 504(b).
48 See n.12 supra.