Before the

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | * | ASD 99-25                    |
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| Southwestern Bell Telephone      | ) |                              |
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| Company's Permanent Cost         | * |                              |
| Allocation                       |   |                              |
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| Manual for the Separation of     | * |                              |
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| Regulated and Nonregulated Costs | * |                              |
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**ORDER**

**Adopted:** July 27, 2000 **Released:** July 28, 2000

By the Chief, Accounting Safeguards Division:

# INTRODUCTION AND BACKGROUND

1.  On March 29, 1999, SBC Communications, Inc. ("SBC") filed revisions
    to Southwestern Bell Telephone Company's ("SWBT's") cost allocation
    manual ("CAM") to reflect proposed changes in its time reporting
    procedures for installation and maintenance technicians.[^1] On July
    10, 2000, SWBT filed additional modifications to its revised CAM. We
    hereby approve SWBT's proposed CAM revisions, subject to certain
    conditions as described below.

2.  In the *Joint Cost Order*[^2] the Commission established a mechanism
    for separating the costs of regulated telephone services from the
    costs of nonregulated services. The purpose of the *Joint Cost
    Order* was to ensure that a carrier's regulated operations do not
    improperly subsidize its nonregulated activities. The Commission
    established two separate but complementary sets of rules, one which
    governs how carriers allocate their costs between regulated and
    nonregulated activities and the other which governs transactions
    between carriers and their affiliates. The Commission required that
    carriers file CAMs setting out in detail the manner in which they
    propose to implement both the cost allocation and affiliate
    transaction rules.

3.  For carrier activities that are labor intensive, such as the
    installation and maintenance activities, an accurate time reporting
    system is essential to ensure that a carrier's costs are recorded in
    the proper accounts and cost pools and, therefore, are allocated
    properly between a carrier's regulated and nonregulated activities.
    Most carrier employees prepare activity reports for all of their
    work. In recent years, however, carriers have developed procedures
    in which only a sample of their installation and maintenance
    technicians prepare activity reports. These carriers have proposed
    such procedures primarily

to reduce their administrative costs. Generally, we have approved the
use of such streamlined procedures when a carrier has demonstrated that
they provide adequate accuracy for accounts and cost pools.

# DISCUSSION

4.  On March 29, 1999, SWBT submitted CAM revisions[^3] in which it
    proposed sample-based time reporting procedures for its installation
    and maintenance technicians.[^4] These procedures, which SWBT refers
    to as its technician activity statistical sampling ("TASS") process,
    relied on both regression analysis and statistical sampling
    techniques to determine account and cost pool amounts. Both
    Commission staff and an independent auditor[^5] reviewed this
    proposal. The independent auditor and the Commission staff made
    various recommendations for improvements to the TASS process.[^6]

5.  On July 10, 2000, SWBT filed additional CAM revisions.[^7] In this
    filing SWBT proposed to implement most of the recommendations of the
    independent auditor and Commission staff. Our review finds that
    SWBT's July 10, 2000 CAM revisions are appropriate; however, in
    order to ensure that its CAM will provide reliable accounting
    results, we will require that SWBT make two additional revisions to
    both its TASS process and CAM. First, SWBT must select at least
    1,000 valid sample jobs per state per month on which to base its
    statistical testing.[^8] Second, as recommended by Deloitte and
    Touche, SWBT must improve its controls regarding TASS software
    changes and must amend its System Administration Binder
    accordingly.[^9]

6.  Therefore, we approve SWBT's proposed CAM revisions and permit SWBT
    to implement its TASS process effective August 1, 2000, subject to
    these conditions. Our approval of SWBT's CAM revision is limited to
    the use of the statistical sampling method described in SWBT's
    submissions and SWBT must not make any changes to its TASS process
    without prior written approval.[^10] Furthermore, as part of its CAM
    audit or attestation review under Part 64.904 of the commission's
    rules,[^11] we require SWBT to direct its independent auditor to
    conduct additional procedures to test and review the TASS process.

#  ORDERING CLAUSE

7.  Accordingly, **IT IS ORDERED**, pursuant to Sections 4(i), 4(j),
    201, 202, and 220 of the Communications Act of 1934, as amended, 47
    U.S.C. §§ 154(i), 154(j), 201, 202, and 220, and Sections 0.91 and
    0.291 of the Commission's rules, 47 C.F.R. §§ 0.91 and 0.291, that
    Southwestern Bell Telephone Company's July 10, 2000, cost allocation
    manual revisions pertaining to Section VII, Time Reporting **ARE
    APPROVED** and effective August 1, 2000, subject to the conditions
    in paragraphs 5 and 6 above.

> FEDERAL COMMUNICATIONS COMMISSION
>
> Kenneth P. Moran
>
> Chief, Accounting Safeguards Division

[^1]: ^?^ SBC is the holding company for SWBT. In this order, we refer
    to SBC's filings on behalf of SWBT as SWBT's filings.

[^2]: ^?^ *See* Separation of Costs of Regulated Telephone Service from
    Costs of Nonregulated Activities, CC Docket No. 86-111, *Report and
    Order,* 2 FCC Rcd 1298, *recon.,* 2 FCC Rcd 6283 (1987)*, further
    recon.,* 3 FCC Rcd 6701 (1988)*, aff'd sub nom*. *Southwestern Corp.
    v. FCC*, 896 F. 2d 1378 (D.C. Cir. 1990).

[^3]: ^?^ *See* SWBT's March 29, 1999, CAM revision, at VII-1, 1A and 6.

[^4]: ^?^ In addition, on July 12, 2000, SWBT submitted updates to its
    System Administration Binder and System Design Binder that support
    and detail the technical requirements for carrying out procedures
    described in its CAM.

[^5]: ^?^ The Accounting Safeguards Division directed SBC to engage an
    independent auditor to perform an agreed upon procedures audit
    relating to implementation and operation of SWBT's TASS process. SBC
    engaged Deloitte and Touche to perform this audit.

[^6]: ^?^ *See* Deloitte and Touche Audit Report, dated May 31, 2000;
    and Letter from Mr. Kenneth P. Moran, Chief Accounting Safeguards
    Division to Ms. B. Jeannie Fry, Director of Federal Regulatory, SBC
    Telecommunications, Inc., dated June 20, 2000.

[^7]: ^?^ *See* SWBT's July 10, 2000, CAM Revision at VII-1, 3, 3A and
    9.

[^8]: ^?^ In updates to its binders to support its proposed CAM
    revisions, SWBT states that it will select a sample size of
    approximately 1,000 valid jobs per state per month for its TASS
    process. In a subsequent filing illustrating how the TASS process
    would be employed, however, the data suggested that SWBT was not
    using a sample size of 1,000. We have reviewed the statistical
    aspects of SWBT's proposal, and we are convinced that SWBT should
    draw a sample of at least 1,000 valid jobs per state per month.
    Thus, SWBT should revise its procedures and documentation to reflect
    this requirement.

[^9]: ^?^ *See* Deloitte and Touche Audit Report, dated May 31, 2000 at
    27. Deloitte and Touche observed that under SWBT's current
    procedures, unauthorized personnel could make changes to certain
    TASS programs without the knowledge of management. To correct this
    problem, Deloitte and Touche recommended that SWBT generate
    automated internal reports within the system that list program
    changes, and that these reports be provided to management for
    review. We note that SWBT has agreed to generate these reports.

[^10]: ^?^ For example, if SWBT were to propose any substantial change
    in its TASS process, we would have to re-evaluate the statistical
    parameters (*e.g.* sample size) in order to ensure that SWBT would
    continue to maintain an adequate degree of accuracy.

[^11]: ^?^ *See* 47 C.F.R. § 64.904.