[Federal Register Volume 60, Number 75 (Wednesday, April 19, 1995)]
[Notices]
[Pages 19591-19593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-9574]



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FEDERAL COMMUNICATIONS COMMISSION

Accounting and Reporting Requirements for Video Dialtone Service

    In Reply Refer To: RAO Letter 25, DA 95-703.

    Adopted: March 31, 1995.
    Released: April 3, 1995.
Responsible Accounting Officer:
Re: Accounting and Reporting Requirements for Video Dialtone Service

I. Introduction

    This letter provides guidance on video dialtone accounting to local 
exchange carriers (``LECs'') that receive Section 214 authorizations to 
provide video dialtone service.\1\ It sets forth specific guidance on 
the requirements for accounting classifications, subsidiary records, 
and amendments to cost allocation manuals (``CAMs'') for LECs that 
provide video dialtone service.\2\

    \1\This includes video dialtone trials and commercial 
applications.
    \2\LECs with annual operating revenues of $100 million or more 
are required to file a CAM with the Commission. CAMs contain 
information regarding the carriers' allocation of costs between 
regulated and nonregulated activities. See 47 C.F.R. Sec. 64.903.
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II. Background

    In 1991 and 1992, the Commission adopted policies and rules to 
permit LECs to assume an expanded role in the provision of video 
services in their telephone service areas.\3\ In its 1991 and 1992 
Orders, the Commission established a regulatory framework for telephone 
companies to provide video service on a common carrier basis and 
provide various related nonregulated services consistent with the 
cross-ownership restrictions imposed by the Cable Communications Policy 
Act of 1984 (``1984 Cable Act'').\4\ This regulatory framework is 
called ``video dialtone.''

    \3\See Telephone Company-Cable Television Cross-Ownership Rules, 
Section 63.54-63.58, Further Notice of Proposed Rulemaking, First 
Report and Order and Second Further Notice of Inquiry, 56 FR 65464 
(Dec. 17, 1991) (First Report and Order), recon., 7 FCC Rcd 5069 
(1992), aff'd, National Cable Television Association v FCC, No. 91-
1649 (D.C. Cir. Aug. 26, 1994) (NCTA v. FCC); Telephone Company-
Cable Television Cross-Ownership Rules, Sections 63.54-63.58, Second 
Report and Order, Recommendation to Congress, and Second Further 
Notice of Proposed Rulemaking, 57 FR 41106 (Sep. 9, 1992) (Second 
Report and Order), aff'd, Memorandum Opinion and Order on 
Reconsideration and Third Further Notice of Proposed Rulemaking, 59 
FR 63909 (Dec. 12, 1994) (``VDT Recon Order''), appeal pending sub 
nom. Mankato Citizens Telephone Company v. FCC, No. 92-1404 (D.C. 
Cir. filed September 9, 1992).
    \4\Cable Communications Policy Act of 1984, Pub. L. No. 98-549, 
Sec. 613(b), 98 Stat. 2779 (codified at 47 U.S.C. Sec. 533(b)).
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    On November 7, 1994, the Commission issued the Video Dialtone 
Reconsideration Order (``VDT Recon Order''). In that Order, the 
Commission reaffirmed its basic video dialtone framework adopted in the 
Second Report and Order, and, among other things, set forth accounting 
and reporting requirements for LECs that offer video dialtone service. 
The Commission required carriers offering video dialtone to establish 
two sets of subsidiary accounting records: one to capture the 
investment, expense and revenue wholly dedicated to video dialtone; the 
other to capture the investment, expense and revenue shared between 
video dialtone and other services. \5\ Wholly dedicated refers to 
investment, expense and revenue related exclusively to providing video 
dialtone service. Shared refers to investment, expense and revenue 
related to providing video dialtone and other services on a joint or 
common basis.\6\

    \5\VDT Recon Order at para. 173.
    \6\By ``other services'' we mean telephone and other services 
provided by LECs.
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    The VDT Recon Order requires LECs to file a summary of these 
subsidiary accounting records with the Commission on a quarterly basis. 
The Commission delegated authority to the Common Carrier Bureau to 
define the content and format of both the subsidiary accounting records 
and the quarterly reports, and to provide accounting guidance where 
necessary for uniform classification of video dialtone investment, 
expense and revenue.\7\ Finally, the VDT Recon Order required LECs to 
file revisions to their CAMs to reflect the provision of video dialtone 
service.

    \7\In this Responsible Accounting Officer (``RAO'') Letter, we 
only address the accounting classifications, format and content 
requirements for LEC subsidiary records and CAM filing requirements. 
We plan to address the format and content for LEC video dialtone 
quarterly reports in a separate notice and comment proceeding.
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III. Accounting Classification

    The Commission did not change its Part 32, Uniform System of 
Accounts for Telecommunications Companies (``USOA'') in the VDT Recon 
Order, but it did require carriers to establish subsidiary accounting 
records, consistent with that system, in order to isolate video 
dialtone costs and revenues from other LEC costs and revenues.\8\ We 
therefore require LECs to maintain in subsidiary records, by USOA 
accounts, all wholly dedicated and shared investment, expense, and 
revenue related to providing video dialtone service. Finally, 
consistent with Part 32 of the Commission's rules, Class A companies 
shall use Class A detail level accounts and Class B companies shall use 
Class B detail level accounts in recording video dialtone investment, 
expense and revenue in subsidiary records.\9\

    \8\VDT Recon Order at para. 173.
    \9\47 C.F.R. Sec. 32.11
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A. Investment Classifications

    For accounting classification purposes, video dialtone investment 
shall include all plant wholly dedicated to video dialtone or shared 
between video dialtone and other services. Wholly dedicated investment 
is defined [[Page 19592]] as investment that is used exclusively for 
the provision of video dialtone service. Shared investment is defined 
as investment that is common to, or used jointly to provide video 
dialtone and other services. Under the VDT Recon Order, LECs must 
separately track both wholly dedicated and shared video dialtone 
investment. This requirement covers both new investment purchased for 
the provision of video dialtone and existing plant converted to video 
dialtone use. To track net investment, subsidiary records must 
identify, for each plant account, all accumulated depreciation, 
amortization and deferred income taxes associated with wholly dedicated 
and shared video dialtone investment.
    In addition, the Commission conditioned LEC authorizations to 
provide video dialtone service on a requirement that LECs keep 
subsidiary records to identify, by Part 32 plant account, the cost of 
plant that is replaced or retired due to either the deployment of video 
dialtone plant or the deployment of fiber optic network upgrades as 
mandated under state authority in study areas where VDT deployment 
occurs.\10\

    \10\See, e.g., Application of New Jersey Bell Telephone Company 
for Authority pursuant to Section 214 of the Communications Act of 
1934, 9 FCC Rcd 3677, 3690 at para. 72 (1994).
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B. Expense Classification

    Video dialtone expense shall include all expenses identified with 
the exclusive or shared provision of video dialtone service. In 
addition to ongoing expenses incurred in the provision of video 
dialtone service, these expenses shall include all expenses incurred 
during the initial development and deployment stages of video dialtone, 
such as research and development expense and legal services expense.
    In order to implement the Commission's requirement that the Common 
Carrier Bureau ensure that LEC proposed expense allocations and 
overhead loadings associated with video dialtone tariff filing are 
reasonable, we will require separate subsidiary records for dedicated 
and shared video dialtone expenses.\11\ Carriers must also separately 
identify depreciation and amortization expense associated with wholly 
dedicated and shared video dialtone investment by each Part 32 plant 
account.

    \11\VDT Recon Order at para. 221.
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    We recognize that some of the expenses that fall into the shared 
category may be the type of expenses that are tracked by function codes 
and some may be the type that are not tracked by function codes. 
Expenses not tracked by function codes are support functions, such as 
network support, general support, corporate operations and general 
administrative. Expenses tracked by function codes shall be identified 
as video dialtone expense using the tracking mechanism.\12\ Expenses 
not tracked by function codes shall be so identified and shall be 
classified as shared video dialtone expenses. These expenses will be 
subject to overhead allocation for the video dialtone tariff filing.

    \12\All employees that incur video dialtone costs must employ 
existing time reporting procedures using some type of function 
codes. For example, carriers that currently utilize time reporting 
tracking mechanisms in order to identify regulated and nonregulated 
activities of support functions, such as legal services, must 
continue to use similar accounting tracking mechanisms for 
identifying video dialtone expenses. In addition, expenses incurred 
or services provided by LEC affiliates for LEC provision of video 
dialtone service must be identified with unique function codes that 
indicate video dialtone expense.
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IV. Subsidiary Accounting Records

    As required by the VDT Recon Order, LECs shall create subsidiary 
accounting records that identify investment and expense wholly 
dedicated to video dialtone, or shared between video dialtone and other 
services.\13\ Carriers shall ensure that subsidiary accounting record 
entries are readily identifiable by account title, account number, 
subaccount identification, and study area. These records shall also 
include all initial and ongoing transactions that directly impact 
investment, expense and revenue accounts. In order to enhance our 
ability to verify LEC compliance with the Commission's established 
video dialtone accounting and reporting requirements, carriers shall be 
required to have internal accounting controls and a complete audit 
trail for each subsidiary account record. Subsidiary accounting records 
must be reconcilable with total amounts reported in the Part 32 
accounts. In addition, LECs shall maintain these records until such 
time as the Commission decides otherwise. These requirements do not 
preclude carriers from creating subaccounts, if necessary, to capture 
data necessary to provide subsidiary record information.

    \13\In the VDT Recon Order, the Commission determined that it 
was not necessary to make permanent changes to the Commission's USOA 
for LEC provision of video dialtone. The Commission, however, 
required that LECs offering video dialtone service create subsidiary 
records to capture wholly dedicated and shared video dialtone costs. 
See VDT Recon Order at para 173. Under the Commission's rules, 
subsidiary records categories are defined as ``* * * segregations of 
certain regulated costs, expenses and revenues which must be 
maintained and are subject to specific reporting requirements of 
this Commission.'' See 47 C.F.R. Sec. 32.9000.
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    Consistent with the Commission's requirements on accounting 
classifications and reporting, carriers shall capture all costs 
incurred for the provision of video dialtone, including the preliminary 
planning, and research and development expenses incurred prior to the 
Commission's approval of Section 214 application. Upon receiving 
Section 214 authorization from the Commission, carriers must establish 
subsidiary accounting records and report the results of these records 
to the Commission on a quarterly basis.
    Subsidiary accounting records for investment accounts must include, 
but shall not be limited to, all telephone plant in service accounts, 
associated accumulated depreciation, deferred taxes and any associated 
land and support assets which contain costs related to the provision of 
video dialtone service. Subsidiary accounting records for video 
dialtone investment accounts must also identify the investment's 
location and whether that investment is wholly dedicated to video 
dialtone or shared between video dialtone and other services. LECs 
shall maintain subsidiary accounting records so that the content of 
these records can be traced from the continuing property records 
(``CPRs'') through the accounting system to the general ledger and to 
the equipment's physical location.
    Carriers shall use tracking codes that allow video dialtone expense 
to be extracted and summarized from the Part 32 USOA expense accounts. 
Carriers may create tracking codes that are compatible with their 
existing internal accounting systems. Carriers may use either field 
reporting codes, job function codes, location codes, or any other 
identification codes that permits such expenses to be audited.
    Subsidiary accounting records for expense shall include all plant-
specific operations expense, plant-nonspecific operations expense, 
customer operations expense, and corporate operations expense accounts 
that contain any costs related to the provision of video dialtone 
service. Subsidiary accounting records for video dialtone should 
separately identify revenues from intrastate and interstate 
tariffs.\14\ Carriers shall identify by subsidiary record category any 
nonregulated video dialtone revenues.

    \14\Carriers shall record revenues in Part 32 accounts 
consistent with the category of video dialtone service set forth in 
a carrier's tariff provisions. See 47 C.F.R. Sec. 32.4999.
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V. Cost Allocation Manual Filing Requirements

    LECs offering video dialtone service must amend their CAMs to 
reflect both [[Page 19593]] their regulated and nonregulated video 
dialtone service as follows:
    LECs are required, pursuant to the VDT Recon Order, to amend their 
CAMs prior to providing nonregulated products or services related to 
video dialtone.\15\ We require carriers that receive Section 214 
authorizations to provide video dialtone service to implement these 
requirements by revising Section II (Nonregulated Activities) of their 
CAMs to include a detailed description of proposed nonregulated video 
dialtone services that they seek to provide.

    \15\VDT Recon Order at 330, para. 181.
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    CAM revisions must include a statement indicating whether 
nonregulated video dialtone service is provided through a stand-alone 
video dialtone system, or a system shared with telephony. Carriers must 
also establish a new subsection in Section II of their CAMs that 
identifies all costs incurred in the planning and development of 
nonregulated activities provided in conjunction with video dialtone 
service. LECs that currently include enhanced services planning in 
their CAMs as a nonregulated activity associated with their provision 
of telephone service, shall be required to amend their CAMs to 
specifically identify any planning associated with the provision of 
nonregulated video dialtone service. In addition, LECs shall amend 
their existing ``Nonregulated Services Matrix''--which shows 
nonregulated products/services and the USOA accounts associated with 
these nonregulated products/services--to list each individual USOA 
account affected by the provision of any nonregulated video dialtone 
activity.
    LECs must also amend Section VI (Cost Apportionment Tables) of 
their CAMs, so that existing cost allocation tables include 
apportionment procedures for investment and expense used in the 
provision of regulated and nonregulated video dialtone service. We 
require LECs to justify and/or amend, if necessary, their existing cost 
apportionment methodology and allocators for their provision of video 
dialtone service. LECs that choose not to modify their cost 
apportionment methodology or allocators for video dialtone, must also 
explain why their existing methodology or allocation factors are still 
valid for their regulated, nonregulated and common cost pools. In 
addition, because the allocation for nonregulated usage of common 
network plant is determined by a three-year forecast of investment 
usage, LECs shall revise their forecast usage allocator to reflect 
accurately the provision of any nonregulated video dialtone service 
offered on common network plant. Moreover, carriers that currently do 
not provide nonregulated services that use common network plant, but 
``reasonably anticipate'' offering such services during the plant's 
three-year forecast usage period, shall include revised apportionment 
procedures for the nonregulated usage of network plant in the Section 
VI, Cost Apportionment Tables.\16\

    \16\See American Telephone & Telegraph Company's Permanent Cost 
Allocation Manual for the Separation of Regulated and Nonregulated 
Costs, 4 FCC Rcd 6930 at para. 6-7 (1989).
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    Finally, we require LECs to amend their CAMs to identify any 
affiliate transactions related to their provision of video dialtone 
service. LECs must amend Section V (Affiliate Transactions) of their 
CAMs by listing all transactions with affiliates that involve video 
dialtone service. This listing must contain a brief description of the 
nature, terms and frequency of each transaction. LECs that currently 
list transactions involving affiliates providing video related services 
in existing CAMs, must amend such CAMs to indicate which, if any, 
specific transactions relate to the provision of video dialtone 
service.
    As required by the VDT Recon Order, LECs shall file CAM revisions 
within thirty days after the effective date of their Section 214 
authorization and at least sixty days prior to providing nonregulated 
products or services related to video dialtone.

VI. Accounting Consistency/Uniformity Issues

    In reviewing various LEC Section 214 applications for video 
dialtone service, we have found certain inconsistencies in the 
accounting classification of asynchronous transfer mode (``ATM'') 
equipment. LECs have described ATM equipment as providing the basic 
connection between the various video servers and various destinations. 
Some LECs have provisionally classified ATM equipment in Account 2212, 
Digital electronic switching; other LECs have classified the same type 
of equipment in Account 2232, Circuit equipment. Based on our analysis 
of video dialtone ATM equipment and LEC descriptions of the functional 
purpose of such equipment, we find that, although certain carriers have 
classified ATM equipment as switches, the equipment does not perform 
the functions performed by traditional network switches.\17\ We find 
based on the data before us, that ATM video dialtone equipment does 
not, at this stage of LEC video dialtone deployment, meet established 
criteria for classification as a switch. Therefore, carriers shall 
classify ATM equipment as circuit equipment and record it in Account 
2232, Circuit equipment. Our decision regarding the accounting 
classification for video dialtone ATM equipment does not in any way 
preclude LECs from demonstrating at a future date any functional change 
that should alter this classification.

    \17\The criteria for switch classification are met if equipment 
performs some, but not necessarily all, of the following basic 
switching functions: (1) Attending--monitors for off-hook signals; 
(2) Control--determines call destination and assigns call to 
available line or trunk; (3) Busy testing--determines whether the 
called line/trunk is busy; (4) Information receiving--receives 
control and busy test results; (5) Information transmitting--
transmits control and busy test results to tell the alerting and 
interconnection functions whether to complete the call; (6) 
Interconnection--connects subscriber line to subscriber line or 
subscriber line to trunk; (7) Alerting--rings the called 
subscriber's line or other signalling means if the call is destined 
for another exchange; (8) Supervising--monitors for call termination 
so the line can be released. See Responsible Accounting Officer 
Letter 21, 7 FCC Rcd 6075 (1992).
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    Finally, we intend to amend RAO Letter No. 6 shortly to incorporate 
video dialtone plant investment within our existing itemized list of 
telecommunications plant in service.\18\

    \18\See Revised Responsible Accounting Officer Letter 6, 4 FCC 
Rcd 1965 (1989).
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    This letter is issued pursuant to authority delegated under 
Sec. 0.291 of the Commission's Rules, 47 C.F.R. Sec. 0.291. 
Applications for review under Section 1.115 of the Commission's Rules, 
47 C.F.R. Sec. 1.115, must be filed within 30 days of the date of this 
letter. See 47 C.F.R. Sec. 1.4(b)(2).
    If you have any questions, please contact Kenneth Ackerman or 
Daniel Gonzalez at (202) 418-0810.
Kenneth P. Moran,
Chief, Accounting and Audits Division, Common Carrier Bureau.
[FR Doc. 95-9574 Filed 4-17-95; 8:45 am]
BILLING CODE 6712-01-M