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 Federal  Communications  Commission  DA  00-  1686 
 Before  the 
 Federal  Communications  Commission 
 Washington,  D.  C.  20554 


 In  the  Matter  of 
 Southwestern  Bell  Telephone 
 Companys  Permanent  Cost  Allocation 
 Manual  for  the  Separation  of 
 Regulated  and  Nonregulated  Costs 


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 ASD  99-  25 


 ORDER 
 Adopted:  July  27,  2000  Released:  July  28,  2000 
 By  the  Chief,  Accounting  Safeguards  Division: 


 I.  INTRODUCTION  AND  BACKGROUND 
 1.  On  March  29,  1999,  SBC  Communications,  Inc.  (  SBC)  filed  revisions  to  Southwestern 
 Bell  Telephone  Companys  (  SWBTs)  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  SWBTs  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  carriers  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  carriers  costs  are  recorded  in  the 
 proper  accounts  and  cost  pools  and,  therefore,  are  allocated  properly  between  a  carriers  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 


 1  SBC  is  the  holding  company  for  SWBT.  In  this  order,  we  refer  to  SBCs  filings  on  behalf  of  SWBT  as 
 SWBTs  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),  affd  sub  nom.  Southwestern  Corp.  v.  FCC,  896  F.  2d  1378  (D.  C.  Cir.  1990). 
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 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. 


 II.  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  SWBTs  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 


 3  See  SWBTs  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  SWBTs  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  SWBTs  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  SWBTs  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  SWBTs  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. 
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 6.  Therefore,  we  approve  SWBTs  proposed  CAM  revisions  and  permit  SWBT  to  implement 
 its  TASS  process  effective  August  1,  2000,  subject  to  these  conditions.  Our  approval  of  SWBTs  CAM 
 revision  is  limited  to  the  use  of  the  statistical  sampling  method  described  in  SWBTs  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  commissions  rules,  11  we  require 
 SWBT  to  direct  its  independent  auditor  to  conduct  additional  procedures  to  test  and  review  the  TASS 
 process. 


 III.  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  Commissions  rules,  47  C.  F.  R.    0.91  and  0.291,  that  Southwestern  Bell  Telephone 
 Companys  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 


 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. 
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