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Before the
Federal Communications Commission
Washington, D.C. 20554
In the Matter of )
) File No. EB-03-IH-0616
) NAL Account No. 200432080025
BellSouth Telecommunications, Inc. ) EB Docket No. 03-197
)
Apparent Liability for Forfeiture ) FRN No. 0001-
8579-52
NOTICE OF APPARENT LIABILITY
FOR FORFEITURE
Adopted: March 24, 2004 Released: March 25,
2004
By the Chief, Enforcement Bureau:
I. INTRODUCTION
1. In this Notice of Apparent Liability for Forfeiture
(``NAL''), we find that BellSouth Telecommunications, Inc.
(``BellSouth''),1 apparently violated section 53.203(a)(3) of the
Commission's rules2 during the period May 24, 2002 through at
least March 17, 2004 by allowing a BellSouth affiliate, BellSouth
Carrier Professional Service (``BCPS''), to perform operations,
installation, and maintenance (``OI&M'') functions for
BellSouth's section 272 affiliate, BellSouth Long Distance, Inc.
(``BSLD'').3 Based on our review of the facts and circumstances
of this case, and for the reasons discussed below, we find that
BellSouth is apparently liable for a monetary forfeiture in the
amount of $75,000.
II. BACKGROUND
2. Section 271 of the Communications Act of 1934, as
amended (``the Act''), prohibits Bell Operating Companies
(``BOCs'') from providing in-region interLATA services without
Commission authorization. To receive such authorization, a BOC
must demonstrate to the Commission that it satisfies the
conditions of a fourteen-point competitive checklist; that
authorization is in the public interest, convenience, and
necessity; and that the BOC will carry out its in-region
interLATA operations through a separate affiliate in accordance
with section 272.4 Section 272 establishes certain structural,
transactional, and nondiscrimination safeguards that govern the
relationship between the BOC and its section 272 affiliate.5
These statutory safeguards were designed to prevent BOCs from
giving an anti-competitive advantage to their own long distance
affiliates to the detriment of unaffiliated carriers.6 One such
safeguard requires that the section 272 affiliate ``operate
independently'' from the BOC.7 To help the Commission determine
if a BOC is complying with section 272 and the Commission's
implementing rules after the BOC receives section 271 authority,
the Act requires the BOC to obtain a biennial joint federal/state
audit conducted by an independent auditor.8
3. In a series of orders, the Commission implemented the
section 272 separate affiliate safeguards, designing rules to
deter BOCs from unfairly favoring their in-region interLATA
operations by discriminating in favor of their long distance
operations against unaffiliated competitors.9 In support of the
``operate independently'' requirement, the Commission articulated
a clear rule prohibiting the section 272 affiliate from receiving
OI&M services from the BOC or any BOC affiliate other than the
section 272 affiliate itself.10 In the Non-Accounting Safeguards
Order, the Commission explained that section 272(b)(1) ``bar[s] a
section 272 affiliate from contracting with a BOC or another
entity affiliated with the BOC to obtain operating, installation,
and maintenance functions associated with the section 272
affiliate's facilities.''11 In its Second Report and Order in
that docket, the Commission reiterated that ``operational
independence . . . bars a BOC or any BOC affiliate, other than
the section 272 affiliate itself, from performing operating,
installation, or maintenance functions associated with the
facilities that the section 272 affiliate owns or leases from a
provider other than the BOC with which it is affiliated.''12
4. After the Second Report and Order, BellSouth petitioned
the Commission to reconsider its position with respect to OI&M.13
BellSouth contended that ``the Commission improperly determined
that section 272(b)(1) prohibits a BOC affiliate, other than the
section 272 affiliate, from providing installation and
maintenance services to both the BOC and its section 272
affiliate.''14 The Commission specifically considered and
rejected BellSouth's position, concluding that ``allowing a third
affiliate to provide such installation and maintenance services
would, in essence, create a loophole around the separate
affiliate requirement.''15
5. During 2002, the Commission authorized BellSouth to
provide in-region interLATA service through a section 272
separate affiliate in Alabama, Florida, Georgia, Kentucky,
Louisiana, Mississippi, North Carolina, South Carolina, and
Tennessee. 16 The planning stage of the first section 272
biennial audit began in 2002 to ascertain BellSouth's compliance
with section 272 and Commission rules during the period May 24,
2002 through May 23, 2003. At that time, BellSouth requested
inclusion of audit procedures involving BCPS. 17 BellSouth
argued that procedures for this affiliate should be included
because BCPS was ``272 compliant'' although it was not in fact
the section 272 affiliate company. In order to obtain more
information about BCPS, the federal/state joint oversight team
agreed to include selected audit procedures for BCPS.18
6. BellSouth's first biennial audit was performed by
independent auditor PricewaterhouseCoopers, LLP (``PWC'') and
filed with the Commission by PWC on December 23, 2003.19 The
Audit Report disclosed that during the audit period BCPS
performed approximately $44 million in services for BSLD,
including both services that qualified as OI&M and other
management and vendor supervision tasks.20 The Audit Report
noted that BellSouth management confirmed that BCPS ``perform[s]
OI&M functions on BSLD network facilities.''21 The Audit Report
noted that the services provided by BCPS to BSLD were encompassed
by section 53.203(a)(2)-(3) of the Commission's rules,22 and that
Commission orders ``prohibit a BOC or BOC affiliate from
performing OI&M functions on facilities either owned by the
section 272 Affiliate, or leased from a third party by the
Section 272 Affiliate.''23
7. BellSouth's response was included in the Audit Report.
24 BellSouth disclosed that BCPS was established by BellSouth
because BSLD management ``determined that the type of
professional services provided by the engineering group . . . was
a potentially profitable line of business to be offered to third
parties'' and that ``BellSouth determined that corporate
governance would be better served by establishing and placing
these operations in a new corporate entity.'' BellSouth asserted
that BCPS was ``compliant with Section 272 rules'' because it
``remained completely separate from'' the BOC. BellSouth
emphasized that BCPS was never intended to and never did provide
any services to the BOC. Further, BellSouth claimed that BCPS
never provided services to any non-affiliated company.25 As
such, BellSouth argued that ``BCPS's provision of OI&M services
to BSLD is the equivalent of one Section 272 Affiliate providing
OI&M services to another Section 272 Affiliate.''26
8. Upon request, BellSouth provided the Enforcement Bureau
with additional information concerning BCPS.27 According to
BellSouth, BCPS was incorporated on July 15, 1999. Despite the
purpose for the affiliate's formation, the company has not
provided services to any entity outside of BellSouth.28
BellSouth reported that approximately $4.4 million of the total
value of services provided by BCPS to BSLD during the audit
period was attributable to OI&M functions. BellSouth concedes
that since the close of the audit period, there has been no
alteration in the way BCPS and BSLD interact.
9. After a public notice,29 on March 9, 2004, AT&T filed
comments on the Audit Report, recommending enforcement action
for, inter alia, BellSouth's violation of the ``operate
independently'' requirements.30
10. On November 4, 2003, the Commission issued a Notice of
Proposed Rulemaking to re-examine its rules implementing the
``operate independently'' requirements of section 272(b)(1) of
the Act.31 On March 17, 2004, the Commission released an order
eliminating on a prospective basis the prohibition against
sharing of OI&M functions by BOCs and their section 272
affiliates, finding that the prohibition is not a necessary
component of the statutory requirement to ``operate
independently'' and that the prohibition is no longer necessary
to prevent cost misallocation or discrimination by BOCs against
unaffiliated rivals.32 The Operate Independently Order made
clear that prior to its release the Commission's rules were
unambiguous and there was an absolute prohibition against a BOC
affiliate provisioning OI&M services to a 272 affiliate,
``includ[ing] the prohibition against a non-section 272 affiliate
providing OI&M services to a section 272 affiliate.''33 The
Operate Independently Order in no way excused any BOC for
violations of the Commission's OI&M prohibitions prior to release
of the order. In fact, the order acknowledged potential
enforcement action relating to certain OI&M violations.34
III. DISCUSSION
11. Under section 503(b)(1) of the Act, any person who is
determined by the Commission to have willfully or repeatedly
failed to comply with any provision of the Act or any rule,
regulation, or order issued by the Commission shall be liable to
the United States for a monetary forfeiture penalty.35 In order
to impose such a forfeiture penalty, the Commission must issue a
notice of apparent liability, the notice must be received, and
the person against whom the notice has been issued must have an
opportunity to show, in writing, why no such forfeiture penalty
should be imposed.36 The Commission will then issue a forfeiture
if it finds by a preponderance of the evidence that the person
has willfully or repeatedly violated the Act or a Commission
rule.37
12. The fundamental issue in this case is whether BellSouth
violated the ``operate independently'' provisions of section
53.203(a)(3)38 of the Commission's rules, as they existed during
the period May 24, 2002 to the effective date of their
elimination, when BCPS, a BellSouth affiliate, provided OI&M
services to BSLD, the section 272 affiliate. As discussed below,
we answer this question affirmatively. Based on a preponderance
of the evidence, we therefore conclude that BellSouth is
apparently liable for a forfeiture of $75,000 for apparently
willfully and repeatedly violating section 53.203(a)(3) of the
Commission's rules.
A. BellSouth Apparently Willfully and Repeatedly Violated the
``Operate Independently'' Requirement
13. According to the Audit Report, ``BSLD Management''
confirmed that BCPS ``employees performed OI&M functions on BSLD
network facilities and also managed and supervised vendors that
performed OI&M functions for BSLD network facilities.''39 The
Audit Report also observed that ``[T]he amount that BCPS bills
BSLD each month is the total cost incurred by BCPS, plus a rate
of return calculated on BCPS's total salaries and wages for the
month, less the cost of providing services to other BellSouth
companies.''40 BellSouth concedes that BCPS is a BOC affiliate
and not the 272 affiliate.41 During the audit period, BellSouth
admits that BCPS provided approximately $4.4 million worth of
OI&M services to BSLD. BellSouth admits that BCPS did not alter
its operations after the close of the audit period.42 The record
indicates that BellSouth created BCPS in 1999, after determining
that certain activities, including the provision of certain OI&M
functions, could provide a profitable line of business.43 In
that same year the Commission rejected BellSouth's petition for
reconsideration of its OI&M prohibition.44
14. We disagree with BellSouth's position45 that the
provision of OI&M by BCPS to BSLD is not a violation of
Commission rules because BellSouth satisfied the ``spirit'' of
the ``operate independently'' requirement by maintaining BCPS as
wholly separate from the BOC. The Commission's rules and its
statements in repeated orders demonstrate that during the
relevant period there was a clear rule prohibiting a BOC's
section 272 affiliate, such as BSLD, from receiving OI&M from
another BOC affiliate, such as BCPS. Although language in the
Third Reconsideration Order demonstrates that the Commission's
principal concern in creating this rule was to prevent the
integration of essential functions between the BOC and its 272
affiliate, the rule patently does not, as BellSouth suggests,
contemplate an exception permitting a 272 affiliate to receive
OI&M from a BOC affiliate if that affiliate does not also serve
the BOC. Indeed, the Commission specifically noted in denying
BellSouth's petition for reconsideration of the OI&M rule that a
clear prohibition was established for the purpose of avoiding the
burdensome regulatory involvement that would result from the
Commission's need to police subtle distinctions and procedures in
the absence of a clear rule.46 With full knowledge of the
Commission's clear pronouncements concerning OI&M and the
Commission's denial of BellSouth's petition for reconsideration,
BellSouth established the corporate structure of BCPS for the
purpose of providing OI&M to the section 272 affiliate and
allowed BCPS to continue to provide OI&M services to BSLD
throughout the audit period and thereafter.
15. Based on the information in the audit report, and
BellSouth's admissions, we conclude that during the period May
24, 2002 through at least March 17, 2004, BellSouth authorized an
affiliate other than the section 272 affiliate itself to provide
OI&M services to the 272 affiliate.47 Accordingly, we conclude
that BellSouth apparently willfully and repeatedly violated
section 53.203(a)(3) of the Commission's rules.
B. Proposed Forfeiture Amount
16. Section 503(b)(2)(B) of the Act authorizes the
Commission to assess a forfeiture of up to $120,000 for each
violation or each day of a continuing violation, up to a
statutory maximum of $1,200,000 for a single act or failure to
act.48 In determining the appropriate forfeiture amount, we
consider the factors enumerated in section 503(b)(2)(D) of the
Act, including ``the nature, circumstances, extent and gravity of
the violation, and, with respect to the violator, the degree of
culpability, any history of prior offenses, ability to pay, and
such other matters as justice may require.''
17. The record is undisputed that BellSouth provided OI&M
to BSLD through BCPS, another BellSouth affiliate. Based on the
facts described above, it appears that BellSouth deliberately
chose to implement a corporate structure that violated Commission
rules despite the Commission's clear rejection of this proposed
structure in its petition for reconsideration. Due to
BellSouth's apparently willful and repeated violation of section
53.203(a) of the Commission's rules, we find that a proposed
forfeiture is warranted. The Commission has not established a
base forfeiture amount for a violation of the section 272(b)(1)
``operate independently'' requirement or the section 53.203(a)(3)
OI&M prohibition. We note, however, that section 503(b)(2)(D)49
of the Act and the Forfeiture Policy Statement50 allow the
Commission considerable flexibility in determining the
appropriate forfeiture.51 In determining the appropriate amount
of the proposed forfeiture, we take into account the fact that
the Commission recently eliminated the OI&M prohibitions in
section 53.203(a) of the Commission's rules, finding that the
prohibition was an overbroad means of preventing cost
misallocation or discrimination by BOCs against unaffiliated
rivals.52 While we do not believe the Commission's prospective
rulemaking insulates BellSouth from the imposition of a proposed
forfeiture for its apparent violation of a clear rule during the
relevant period, we will consider the Commission's holding in
assessing an appropriate penalty.53 Balancing the clear rule
violation against the prospective elimination of the rule yields
a proposed forfeiture of $75,000.
18. For the reasons discussed above, we find that BellSouth
is in apparent willful and repeated violation of section
53.203(a)(3) of the Commission's rules. These violations pertain
to the nondiscrimination safeguards established by the Act and
the Commission's rules to promote efficient competition. Based
on our review of the facts and circumstances of this case, we
find that a forfeiture of $75,000 is appropriate, pursuant to
section 503(b) of the Act and section 1.80 of the Commission's
rules.
V. ORDERING CLAUSES
19. ACCORDINGLY, IT IS ORDERED THAT, pursuant to section
503(b) of the Communications Act of 1934, as amended, 47 U.S.C. §
503(b), and sections 0.111, 0.311, and 1.80 of the Commission's
rules, 47 C.F.R. §§ 0.111, 0.311, and 1.80, BellSouth
Telecommunications, Inc. is hereby NOTIFIED of its APPARENT
LIABILITY FOR FORFEITURE in the amount of seventy-five thousand
dollars ($75,000) for willfully and repeatedly violating section
53.203(a)(3) of the Commission's rules.
20. IT IS FURTHER ORDERED THAT, pursuant to section 1.80 of
the Commission's rules, 47 C.F.R. § 1.80, within thirty days of
the release date of this NOTICE OF APPARENT LIABILITY FOR
FORFEITURE, BellSouth Telecommunications, Inc. SHALL PAY the full
amount of the proposed forfeiture currently outstanding on that
date or SHALL FILE a written statement seeking reduction or
cancellation of the proposed forfeiture.
21. Payment of the forfeiture may be made by check or
similar instrument, payable 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 must include the NAL/Acct. No. and FRN
No. referenced above.
22. The response, if any, to this NOTICE OF APPARENT
LIABILITY FOR FORFEITURE must be mailed to William H. Davenport,
Chief, Investigations and Hearings Division, Enforcement Bureau,
Federal Communications Commission, 445 12th Street, S.W., Room 3-
B443, Washington, D.C. 20554 and must include the NAL/Acct. No.
referenced above.
23. The Commission will not consider reducing or canceling
a forfeiture in response to a claim of inability to pay unless
the petitioner submits: (1) federal tax returns for the most
recent three-year period; (2) financial statements prepared
according to generally accepted accounting practices (``GAAP'');
or (3) some other reliable and objective documentation that
accurately reflects the petitioner's current financial status.
Any claim of inability to pay must specifically identify the
basis for the claim by reference to the financial documentation
submitted.
24. Requests for payment of the full amount of this NOTICE
OF APPARENT LIABILITY FOR FORFEITURE under an installment plan
should be sent to Chief, Revenue and Receivables Operations
Group, 445 12th Street, S.W., Washington, D.C. 20554.54
25. Under the Small Business Paperwork Relief Act of 2002,
Pub.L.No. 107-198, 116 Stat. 729 (June 28, 2002), the Commission
is engaged in a two-year tracking process regarding the size of
entities involved in forfeitures. If you qualify as a small
entity and if you wish to be treated as a small entity for
tracking purposes, please so certify to us within 30 days of this
NAL, either in your response to the NAL or in a separate filing
to be sent to the Investigations and Hearings Division,
Enforcement Bureau, 445 12th Street, S.W., Washington, D.C.
20054. Your certification should indicate whether you, including
your parent entity and its subsidiaries, meet one of the
definitions set forth in the list in Attachment A of this NAL.
This information will be used for tracking purposes only. Your
response or failure to respond to this question will have no
effect on your rights and responsibilities pursuant to section
503(b) of the Communications Act. If you have any questions
regarding any of the information contained in Attachment A,
please contact the Commission's Office of Communications Business
Opportunities at (202) 418-0990.
26. 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 Stephen L. Earnest,
Regulatory Counsel, BellSouth Corporation Legal Department, 675
West Peachtree Street, Suite 4300, Atlanta, GA 30375-0001.
FEDERAL COMMUNICATIONS COMMISSION
David H. Solomon
Chief, Enforcement Bureau ATTACHMENT A
FCC List of Small Entities
As described below, a ``small entity'' may be a small
organization,
a small governmental jurisdiction, or a small business.
(1) Small Organization
Any not-for-profit enterprise that is independently owned
and operated and
is not dominant in its field.
(2) Small Governmental Jurisdiction
Governments of cities, counties, towns, townships, villages,
school districts, or
special districts, with a population of less than fifty
thousand.
(3) Small Business
Any business concern that is independently owned and
operated and
is not dominant in its field, and meets the pertinent size
criterion described below.
Industry Type Description of Small Business
Size Standards
Cable Services or Systems
Special Size Standard -
Cable Systems Small Cable Company has 400,000
Subscribers Nationwide or Fewer
Cable and Other Program
Distribution $12.5 Million in Annual
Receipts or Less
Open Video Systems
Common Carrier Services and Related Entities
Wireline Carriers and
Service providers
1,500 Employees or Fewer
Local Exchange Carriers,
Competitive Access
Providers, Interexchange
Carriers, Operator Service
Providers, Payphone
Providers, and Resellers
Note: With the exception of Cable Systems, all size
standards are expressed in either millions of dollars or
number of employees and are generally the average annual
receipts or the average employment of a firm. Directions
for calculating average annual receipts and average
employment of a firm can be found in
13 CFR 121.104 and 13 CFR 121.106, respectively.
International Services
International Broadcast
Stations
$12.5 Million in Annual
Receipts or Less
International Public Fixed
Radio (Public and Control
Stations)
Fixed Satellite
Transmit/Receive Earth
Stations
Fixed Satellite Very Small
Aperture Terminal Systems
Mobile Satellite Earth
Stations
Radio Determination
Satellite Earth Stations
Geostationary Space Stations
Non-Geostationary Space
Stations
Direct Broadcast Satellites
Home Satellite Dish Service
Mass Media Services
Television Services
$12 Million in Annual Receipts
or Less
Low Power Television
Services and Television
Translator Stations
TV Auxiliary, Special
Broadcast and Other Program
Distribution Services
Radio Services
$6 Million in Annual Receipts
or Less
Radio Auxiliary, Special
Broadcast and Other Program
Distribution Services
Multipoint Distribution Auction Special Size Standard -
Service Small Business is less than
$40M in annual gross revenues
for three preceding years
Wireless and Commercial Mobile Services
Cellular Licensees
1,500 Employees or Fewer
220 MHz Radio Service -
Phase I Licensees
220 MHz Radio Service - Auction special size standard -
Phase II Licensees Small Business is average gross
revenues of $15M or less for
the preceding three years
(includes affiliates and
controlling principals)
Very Small Business is average
gross revenues of $3M or less
for the preceding three years
(includes affiliates and
controlling principals)
700 MHZ Guard Band Licensees
Private and Common Carrier
Paging
Broadband Personal
Communications Services 1,500 Employees or Fewer
(Blocks A, B, D, and E)
Broadband Personal Auction special size standard -
Communications Services Small Business is $40M or less
(Block C) in annual gross revenues for
three previous calendar years
Very Small Business is average
gross revenues of $15M or less
for the preceding three
calendar years (includes
affiliates and persons or
entities that hold interest in
such entity and their
affiliates)
Broadband Personal
Communications Services
(Block F)
Narrowband Personal
Communications Services
Rural Radiotelephone Service 1,500 Employees or Fewer
Air-Ground Radiotelephone
Service
800 MHz Specialized Mobile Auction special size standard -
Radio Small Business is $15M or less
average annual gross revenues
for three preceding calendar
years
900 MHz Specialized Mobile
Radio
Private Land Mobile Radio 1,500 Employees or Fewer
Amateur Radio Service N/A
Aviation and Marine Radio
Service 1,500 Employees or Fewer
Fixed Microwave Services
Small Business is 1,500
Public Safety Radio Services employees or less
Small Government Entities has
population of less than 50,000
persons
Wireless Telephony and
Paging and Messaging 1,500 Employees or Fewer
Personal Radio Services N/A
Offshore Radiotelephone 1,500 Employees or Fewer
Service
Wireless Communications Small Business is $40M or less
Services average annual gross revenues
for three preceding years
Very Small Business is average
gross revenues of $15M or less
for the preceding three years
39 GHz Service
Auction special size standard
(1996) -
Multipoint Distribution Small Business is $40M or less
Service average annual gross revenues
for three preceding calendar
years
Prior to Auction -
Small Business has annual
revenue of $12.5M or less
Multichannel Multipoint
Distribution Service $12.5 Million in Annual
Receipts or Less
Instructional Television
Fixed Service
Auction special size standard
(1998) -
Local Multipoint Small Business is $40M or less
Distribution Service average annual gross revenues
for three preceding years
Very Small Business is average
gross revenues of $15M or less
for the preceding three years
First Auction special size
standard (1994) -
Small Business is an entity
that, together with its
affiliates, has no more than a
218-219 MHZ Service $6M net worth and, after
federal income taxes (excluding
carryover losses) has no more
than $2M in annual profits each
year for the previous two years
New Standard -
Small Business is average gross
revenues of $15M or less for
the preceding three years
(includes affiliates and
persons or entities that hold
interest in such entity and
their affiliates)
Very Small Business is average
gross revenues of $3M or less
for the preceding three years
(includes affiliates and
persons or entities that hold
interest in such entity and
their affiliates)
Satellite Master Antenna
Television Systems $12.5 Million in Annual
Receipts or Less
24 GHz - Incumbent Licensees 1,500 Employees or Fewer
24 GHz - Future Licensees Small Business is average gross
revenues of $15M or less for
the preceding three years
(includes affiliates and
persons or entities that hold
interest in such entity and
their affiliates)
Very Small Business is average
gross revenues of $3M or less
for the preceding three years
(includes affiliates and
persons or entities that hold
interest in such entity and
their affiliates)
Miscellaneous
On-Line Information Services $18 Million in Annual Receipts
or Less
Radio and Television
Broadcasting and Wireless
Communications Equipment 750 Employees or Fewer
Manufacturers
Audio and Video Equipment
Manufacturers
Telephone Apparatus
Manufacturers (Except 1,000 Employees or Fewer
Cellular)
Medical Implant Device 500 Employees or Fewer
Manufacturers
Hospitals $29 Million in Annual Receipts
or Less
Nursing Homes $11.5 Million in Annual
Receipts or Less
Hotels and Motels $6 Million in Annual Receipts
or Less
Tower Owners (See Lessee's Type of Business)
_________________________
1 BellSouth Telecommunications, Inc., the Bell Operating Company
of BellSouth Corporation, provides local exchange service in
Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi,
North Carolina, South Carolina, and Tennessee.
2 47 C.F.R. § 53.203(a)(3).
3 BellSouth and BSLD are direct and wholly-owned subsidiaries of
BellSouth Corporation.
4 47 U.S.C. § 271.
5 47 U.S.C. § 272.
6 See 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), 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).
7 47 U.S.C. § 272(b)(1) (``The separate affiliate . . . shall
operate independently from the Bell operating company.'')
8 47 U.S.C. § 272(d). The Commission adopted requirements
governing the section 272(d) biennial audit. See Accounting
Safeguards under the Telecommunications Act of 1996, Report and
Order, 11 FCC Rcd 17539, 17628-632, ¶¶ 197-205 (1996)
(``Accounting Safeguards Order''), Second Order on
Reconsideration, 15 FCC Rcd 1161 (2000); 47 C.F.R. §§ 53.209-
53.213.
9 See Accounting Safeguards Order; Implementation of the Non-
Accounting Safeguards of Sections 271 and 272 of the
Communications Act of 1934, as Amended, First Report and Order
and Further Notice of Proposed Rulemaking, 11 FCC Rcd 21905
(1996) (``Non-Accounting Safeguards Order''), First Order on
Reconsideration, 12 FCC Rcd 2297 (1997), Second Order on
Reconsideration, 12 FCC Rcd 8653 (1997), aff'd sub nom. Bell
Atlantic Telephone Companies v. FCC, 131 F.3d 1044 (D.C.Cir.
1997), Third Order on Reconsideration, 14 FCC Rcd 16299 (1999)
(``Third Reconsideration Order''); see also 47 C.F.R. §§ 32.27,
53.1-53.213, 64.901-64.904.
10 47 C.F.R. § 53.203(a)(3) provides that a ``BOC or BOC
affiliate, other than the section 272 affiliate itself, shall not
perform any operating, installation, or maintenance functions
associated with the facilities that the BOC's section 272
affiliate owns or leases from a provider other than the BOC.''
11 See Non-Accounting Safeguards Order, 11 FCC Rcd at 21984, ¶
163.
12 See Regulatory Treatment of LEC Provision of Interexchange
Services Originating in the LEC's Local Exchange Area, Second
Report and Order in CC Docket No. 96-149 and Third Report and
Order in CC Docket No. 96-61, 12 FCC Rcd 15756, 15816, ¶ 104
(1997) (``Second Report and Order'').
13 BellSouth Corporation, Petition for Reconsideration, CC
Docket No. 96-149 (filed Feb. 20, 1997).
14 Third Reconsideration Order, 14 FCC Rcd at 16314-15, ¶ 20.
15 Id.
16See Application by BellSouth Corporation, BellSouth
Telecommunications, Inc., and BellSouth Long Distance, Inc. for
Authorization to Provide In-Region, InterLATA Services in Florida
and Tennessee, Memorandum Opinion and Order, 17 FCC Rcd 25828
(2002); Joint Application by BellSouth Corporation, BellSouth
Telecommunications, Inc., and BellSouth Long Distance, Inc. for
Authorization to Provide In-Region, InterLATA Services in
Alabama, Kentucky, Mississippi, North Carolina, and South
Carolina, Memorandum Opinion and Order, 17 FCC Rcd 17595 (2002);
Joint Application by BellSouth Corporation, BellSouth
Telecommunications, Inc., and BellSouth Long Distance, Inc. for
Authorization to Provide In-Region, InterLATA Services in Georgia
and Louisiana, Memorandum Opinion and Order, 17 FCC Rcd 9018
(2002). The section 272 requirements, other than section 272(e),
expire three years after section 271 authorization, unless the
Commission extends the three-year period. 47 U.S.C. § 272(f)(1).
Sunset of these requirements is on a state-by-state basis. See
Section 272(f)(1) Sunset of the BOC Separate Affiliate and
Related Requirements, Memorandum Opinion and Order, 17 FCC Rcd
26869 (2002). BellSouth agreed in a consent decree with the
Commission that it will comply with the separate affiliate
requirements set forth in 47 U.S.C. § 271, including section
272(d), until such time as each of the nine states in BellSouth's
region is relieved of the requirements. BellSouth Corporation,
Order and Consent Decree, 18 FCC Rcd 15135, 15143, ¶ 11(a)(i).
17 See Letter from Stephen L. Earnest, Regulatory Counsel,
BellSouth Corporation to Maureen F. Del Duca, Division Chief,
Investigations and Hearings Division, Enforcement Bureau, FCC
(Feb. 27, 2003).
18 See Letter from Maureen F. Del Duca, Division Chief,
Investigations and Hearings Division, Enforcement Bureau, FCC to
Stephen L. Earnest, Regulatory Counsel, BellSouth Corporation
(Feb. 28, 2003) (granting BellSouth's request to expand the scope
of the section 272(d) audit to include another BellSouth
affiliate and reminding BellSouth that expansion of the audit did
not constitute a waiver or modification of any Commission rule,
order, or requirement that applied to BellSouth or its
affiliates).
19 BellSouth initially requested confidential treatment for
portions of the audit report and a redacted version of the
document was filed by PWC with the Commission. See Letter from
Stephen L. Earnest, BellSouth Corporation to Terry Bowling,
Partner, PWC, EB Docket No. 03-197 (Nov. 7, 2003); BellSouth
Telecommunications, Inc., Section 272 Biennial Agreed-Upon
Procedures Engagement, Public Version - Redacted, EB Docket No.
03-197 (Nov. 10, 2003). That request was later withdrawn and a
complete copy of the audit report was then filed with the
Commission by PWC. BellSouth Telecommunications, Inc., Section
272 Biennial Agreed-Upon Procedures Engagement, EB Docket No. 03-
197 (Dec. 23, 2003) (``Audit Report'')
20 Audit Report, Appendix A at 13, Appendix B at 64-79,
Attachment C at 1-2. No break down was provided detailing the
dollar value of services attributable to OI&M functions.
21 Audit Report, Attachment C at 1.
22 47 C.F.R. § 53.203(a)(2)-(3).
23 Id.
24 Audit Report, Attachment C at 1-2.
25 During the audit period, BCPS provided some services to two
non-BOC BellSouth affiliates, BellSouth.net and BellSouth
Technology Group. See Letter from Mary L. Henze, BellSouth
Corporation, to Hillary DeNigro, Enforcement Bureau (Jan. 16,
2004) at 3 (``BellSouth Jan. 16 Letter'').
26 Id.
27 See id. at 3-4. On Jan. 9, 2004, BellSouth met with staff
from the Investigations and Hearing Division of the Enforcement
Bureau to provide information concerning certain items in the
Audit Report. At the Bureau's request, the additional
information contained in the BellSouth Jan. 16 Letter was
thereafter provided to the Bureau.
28 See BellSouth Jan. 16 Letter at n.25.
29 ``Enforcement Bureau Seeks Comment on BellSouth
Telecommunications, Inc. Section 272 Biennial Audit Report in EB
Docket No. 03-197,'' Public Notice, DA 04-33 (rel. Jan. 9, 2004).
30 See Section 272(d) Biennial Audit of BellSouth
Telecommunications, Inc., EB Docket No. 03-197, Comments of AT&T
Corp. on BellSouth's Section 272 Compliance Biennial Audit Report
(``AT&T Comments'').
31 See Section 272(b)(1)'s ``Operate Independently''
Requirement for Section 272 Affiliates, Notice of Proposed
Rulemaking, 18 FCC Rcd 23538 (2003). Comments were filed on
December 10, 2003.
32 Section 272(b)(1)'s ``Operate Independently'' Requirement
for Section 272 Affiliates, Report and Order in WC Docket No. 03-
228 Memorandum Opinion and Order in CC Docket Nos. 96-149, 98-
141, 01-337, FCC 04-54 (rel. Mar. 17, 2004) (``Operate
Independently Order''). The elimination of the rule becomes
effective upon publication of the Operate Independently Order in
the Federal Register.
33 Operate Independently Order at n.51.
34 See id at n.68.
3547 U.S.C. § 503(b)(1)(B); 47 C.F.R. § 1.80(a)(1); see also 47
U.S.C. § 503(b)(1)(D) (forfeitures for violation of 14 U.S.C. §
1464). Section 312(f)(1) of the Act defines willful as ``the
conscious and deliberate commission or omission of [any] act,
irrespective of any intent to violate'' the law. 47 U.S.C. §
312(f)(1). The legislative history to section 312(f)(1) of the
Act indicates that this definition of willful applies to both
sections 312 and 503(b) of the Act, H.R. Rep. No. 97-765, 97th
Cong. 2d Sess. 51 (1982), and the Commission has so interpreted
the term in the section 503(b) context. See, e.g., Application
for Review of Southern California Broadcasting Co., Memorandum
Opinion and Order, 6 FCC Rcd 4387, 4388 (1991) (``Southern
California Broadcasting''). The Commission may also assess a
forfeiture for violations that are merely repeated, and not
willful. See, e.g., Callais Cablevision, Inc., Grand Isle,
Louisiana, Notice of Apparent Liability for Monetary Forfeiture,
16 FCC Rcd 1359 (2001) (``Callais Cablevision'') (issuing a
Notice of Apparent Liability for, inter alia, a cable television
operator's repeated signal leakage). ``Repeated'' means that the
act was committed or omitted more than once, or lasts more than
one day. Southern California Broadcasting, 6 FCC Rcd at 4388, ¶
5; Callais Cablevision., 16 FCC Rcd at 1362, ¶ 9.
3647 U.S.C. § 503(b); 47 C.F.R. § 1.80(f).
37See, e.g., SBC Communications, Inc., Apparent Liability for
Forfeiture, Forfeiture Order, 17 FCC Rcd 7589, 7591, ¶ 4 (2002).
38 47 C.F.R. § 53.203(a)(3).
39 Audit Report, Objective I, Appendix A at 1.
40 Audit Report, Objective I, Appendix A at 2 (emphasis added).
We agree with AT&T's argument that under such a billing
arrangement (which is not on a per service basis), there could be
an undisclosed indirect subsidy from the BOC to BSLD. See AT&T
Comments at 9-10.
41 Audit Report, Attachment C at 1.
42 Audit Report, Objective I, Appendix A at 1-3. According to
the audit report, BCPS performs the following OI&M functions on
BSLD network facilities: network planning, engineering,
installation, operations, maintenance, fraud management,
provisioning, service assurance, and customer care. Id. at 2.
43 See Audit Report, Attachment C at 1. BCPS never provided
such services to BellSouth or to a non-affiliated company. BCPS
provided some services, however, to two non-BOC BellSouth
affiliates, BellSouth.net and BellSouth Technology Group.
44 Third Reconsideration Order, 14 FCC Rcd at 16314-15, ¶ 20.
45 Audit Report, Attachment C at 1-2.
46 Third Reconsideration Order, 14 FCC Rcd at 16314-15, ¶ 20.
47 47 C.F.R. §53.203(a)(3).
4847 U.S.C. § 503(b)(2)(B); see also 47 C.F.R. § 1.80(b)(2); see
also Amendment of Section 1.80(b) of the Commission's Rules,
Adjustment of Forfeiture Maxima to Reflect Inflation, Order, 15
FCC Rcd 18221 (2000).
49 47 U.S.C. § 503(b)(2)(D).
50 The Commission's Forfeiture Policy Statement and Amendment
of Section 1.80 of the Rules to Incorporate the Forfeiture
Guidelines, 12 FCC Rcd 17087 (1997), recon. denied, 15 FCC Rcd
303 (1999).
51 47 U.S.C. § 503(b)(2)(D); see also Forfeiture Policy
Statement, 12 FCC Rcd at 17100-01, ¶ 27; 47 C.F.R. § 1.80(b)(4).
52 Operate Independently Order at ¶ 1.
53 The Commission has previously proposed to penalize a company
for intentionally violating a rule even while the Commission
amended the rule prospectively and authorized a prospective
waiver for the conduct at issue. See Ameritech Corporation,
Notice of Apparent Liability for Forfeiture and Order to Show
Cause, 10 FCC Rcd 10559 (1995) (finding Ameritech apparently
liable for a $200,000 forfeiture for violation of section 214 of
the Communications Act and the Commission's implementing rule, 47
C.F.R. § 63.01, for constructing cable facilities without first
obtaining authorization from the Commission and delegating
authority to grant a prospective temporary waiver to the Chief,
Common Carrier Bureau, issued contemporaneously with a Commission
order amending the authorization process required by 47 C.F.R. §
63.01); Telephone Company-Cable Television Cross-Ownership Rules,
Fourth Report and Order, 11 FCC Rcd 818 (1995) (streamlining the
section 214 authorization process and implementing 47 C.F.R. §
63.16 for authorization disclosures in lieu of 47 C.F.R. §
63.01); Application of Ameritech New Media Enterprises, Inc.,
Order and Authorization, 10 FCC Rcd 10873 (1995) (granting
temporary authority to construct cable facilities).
54See 47 C.F.R. § 1.1914.