XIV. Monitoring, Auditing, and Reporting Requirements

ILECs must maintain two sets of regulated books. The first set is required by the FCC pursuant to Part 32 Uniform System of Accounts. The second set is designated for California specifically. The Commission requires books reflecting state accounting rules, which differ in many ways from the FCC rules.

Overall, the parties are in agreement that California should streamline its monitoring and auditing requirements.⁷⁹⁵ There are clear distinctions between certain positions, however, in terms of the extent of the refinement and the timing. This section describes and assesses these various positions.

A. Position of Parties

AT&T recommends that the Commission eliminate California-specific accounting rules. According to AT&T, the California accounting requirements "are for the most part legacy requirements, and they only made sense in the context of cost-of-service regulation or a regulatory regime that otherwise regulates earnings. There is no longer a justification for maintaining these outdated regulatory accounting requirements."⁷⁹⁶ AT&T adds that currently "regulatory audits are not performed uniformly across all carriers."⁷⁹⁷ The ILEC complains that its most recent audit "cost millions of dollars and resulted in protracted litigation" and "did not result in any tangible benefit to customers."⁷⁹⁸

Instead, AT&T recommends that the Commission defer to the FCC accounting requirements. Specifically, AT&T asks that the Commission take the following steps in this decision regarding the monitoring program:⁷⁹⁹

· Adopt a policy that it will no longer conduct lengthy and burdensome regulatory audits, and that requirements for regulatory audits be met in a uniform manner across all regulated telephone companies.

· Eliminate all existing company-specific monitoring program requirements. For AT&T, this means elimination of the NRF monitoring program.

· Adopt a policy that requires proposals for monitoring reports to be accompanied by a showing that the report is necessary and that the benefit of the report outweighs its cost.

· Adopt a policy that all monitoring requirements be applied uniformly to all telecommunications providers in Phase II.

· Adopt a policy that all monitoring requirements have sunset provisions to ensure that such requirements are not maintained beyond their usefulness.⁸⁰⁰

AT&T argues that adoption of its proposals would "further uniformity in industry accounting requirements while reducing the cost of regulation."⁸⁰¹ It suggests that, in Phase II, the Commission then can determine the best approach through which it can fulfill its statutory audit obligations, and implement the monitoring policies adopted in this decision.⁸⁰² As a part of its request to end company-specific auditing requirements, AT&T urges the Commission to end company-specific affiliate transaction rules, and instead base affiliate transaction requirements on FCC rules.⁸⁰³

Verizon agrees that the Commission should eliminate the detailed monitoring reports that have grown up in the NRF regulatory program. Specifically, Verizon recommends that "[e]xisting NRF monitoring reports would be replaced by FCC ARMIS reports and supplemented with limited URF-specific reports, to be determined in Phase 2."⁸⁰⁴ In particular, Verizon asks that the Commission explicitly end California-specific affiliate transaction rules, and instead base our rules on those adopted by the FCC.⁸⁰⁵ Verizon envisions Phase II of this proceeding as the appropriate venue "to identify any URF-specific monitoring reports that are needed in addition to FCC ARMIS reports to replace the existing NRF monitoring regime."⁸⁰⁶ Concerning financial reports, Verizon states that monitoring and auditing of ILEC earnings are warranted by the need for "ratemaking" adjustments, and it recommends that the Commission adopt the approach it instituted for AT&T in D.93-02-010, where periodic staff review of the accuracy of monitoring reports was found to satisfy any auditing requirements under the Public Utilities Code.⁸⁰⁷

Likewise, Frontier and SureWest recommend that the Commission eliminate or reduce the monitoring reporting requirements and eliminate earnings audits.⁸⁰⁸ They too ask that the Commission conform its accounting rules to ARMIS financial reporting requirements.⁸⁰⁹

DRA argues that monitoring, reporting, and audits of the ILECs are necessary during the transition to a fully competitive market. It declares that "in a new competitive world, monitoring will continue to play an essential part of any comprehensive oversight program. Absent monitoring, the CPUC will not be able to determine if any new framework is meeting or defeating the CPUC's stated goals."⁸¹⁰ DRA specifically references the OIR and Public Utilities Code §§ 709(f) and (h) when setting out the Commission's goals, and it voices concerns that the ILECs' proposals do not adequately reflect statutory goals of "promot[ing] low prices" and "fair treatment of consumers" that are established in §§ 709(f) and (h), respectively.⁸¹¹

DRA contends that if the Commission is serious about ensuring that these goals are met, then it must adopt an effective monitoring program. DRA suggests that the Commission needs better information about competition in California, and can obtain such data, in the future, through monitoring.⁸¹² It also asserts that different levels of market power warrant differing degrees of reporting and auditing requirements.⁸¹³

Finally, DRA supports the ILECs' position that the specifics of these issues can be best addressed in Phase II.⁸¹⁴ DRA notes that a workshop would be the more efficient method to address the details of the monitoring programs applicable to the ILECs.⁸¹⁵

DisabRA asks the Commission to acknowledge in Phase I of this proceeding that specific monitoring and auditing requirements are necessary in order to ensure that Californians with disabilities receive reasonably high quality service.⁸¹⁶ DisabRA also agrees that the details of such requirements can be established in Phase II.⁸¹⁷

B. Discussion: Accounting and Reporting Should Follow National Standards; Audits Should Follow Approach Adopted in D.93-02-010; NRF-Specific Monitoring Reports Are Suspended; URF Monitoring Reports Are Considered in Phase II

An apt starting point for our discussion is Public Utilities Code § 314.5. This section is the statutory basis of our auditing requirements:

The commission shall inspect and audit the books and records for regulatory and tax purposes (a) at least once in every three years in the case of every . . . telephone . . . corporation serving over 1,000 customers, and (b) at least once in every five years in the case of every . . . telephone . . . corporation serving 1,000 or fewer customers. . . .⁸¹⁸

The statute uniformly requires an audit every three years for all telephone companies with over one thousand customers.⁸¹⁹

Despite the uniform applicability of the statute, the Commission has not conducted uniform audits across the carriers. Moreover, as noted by AT&T, the most recent audits have been extensive, have led to minor adjustments, and have produced no tangible benefits for ratepayers. Indeed, the design of the previous NRF sought to reduce the need for the extensive audits that characterized ROR regulation, and it is a measure of the success of this program that extensive audits have led to no changes for ratepayers.

DRA cites Public Utilities Code §§ 709(f) and (h) in support of its request for continued auditing and monitoring, but DRA has failed to provide a logical nexus between the code section and its request. That is, DRA has not shown that an extensive audit is necessary to "promote low prices" or "fair treatment of consumers." We further note that Section 709(g), a piece of Section 709 not cited by DRA, states that California policy is to promote "fair product and price competition in a way that encourages greater efficiency, lower prices, and more consumer choice."⁸²⁰ Conducting extensive audits for one or two carriers that produce no tangible results is inconsistent with this statutory policy.

To comply with the statutes encouraging uniform treatment of carriers and efficient regulation, we adopt the policy that we instituted for AT&T in D.93-02-010, where periodic staff review of the accuracy of monitoring reports was found to satisfy any auditing requirements under the Public Utilities Code.

Concerning accounting standards, there is no reason to continue to require a set of regulatory accounts with California jurisdictional adjustments. Since the regulatory adjustments no longer serve a ratemaking purpose, the only result of the requirement is to create a confusing proliferation of regulatory accounts that make utility operations less transparent. For these reasons, therefore, we adopt the FCC standard accounting practices for California carriers. We clarify that this modification of our accounting practices extends to our affiliate-transaction rules. We hereby end all California-specific affiliate transaction rules that apply to carriers, and instead we elect to rely on FCC rules.

With respect to monitoring reports, we eliminate all NRF-specific monitoring reports and choose to rely on the FCC ARMIS data. Our experience over the last several years indicates that these NRF-specific detailed reports are of little use. We expect that companies in a competitive marketplace will respond to market abuse by filing complaints with the Commission or a court.

Yet the points raised by DisabRA and TURN - i.e., better information on competition and on the effects Californians with disabilities can be useful to the Commission - are well taken. Thus, we clarify that Phase II should determine what information and what reports can best meet the Commission needs in the new competitive environment. In Phase II of this proceeding, parties may propose monitoring reports concerning any particular issue or concern. The Commission then will consider whether the benefits of the proposed monitoring reports exceed their costs.

In determining specific new reporting requirements, we concur with AT&T that those proposing reporting requirements should be accompanied by a report showing that the projected benefits outweigh the costs of providing the report. We also agree with DRA that workshops provide the appropriate venue for initiating an investigation into Commission needs, public benefits, and reporting costs. We, therefore, will schedule workshops to launch this inquiry. It is our intention to ensure that the Commission has all the information it needs to fulfill its statutory obligations, while avoiding the collection of data that imposes asymmetric or unnecessary costs on only certain market competitors.

⁷⁹⁵ See Comparison of URF Proposals.

⁷⁹⁶ Pacific Bell Opening Brief at 64.

⁷⁹⁷ Id. at 64.

⁷⁹⁸ Id. at 65.

⁷⁹⁹ Id. at 63-69.

⁸⁰⁰ Id.

⁸⁰¹ Id. at 64.

⁸⁰² Id. at 65.

⁸⁰³ Opening Comments of Pacific Bell on Proposed Decision at 12 (Aug. 15, 2006).

⁸⁰⁴ Verizon Opening Brief at 4.

⁸⁰⁵ Opening Comments of Verizon on Proposed Decision at 12 (Aug. 15, 2006).

⁸⁰⁶ Id. at 4-5.

⁸⁰⁷ Id. at 28-31.

⁸⁰⁸ Citizens Opening Brief at 27-28; SureWest Opening Brief at 31-32.

⁸⁰⁹ Citizens Opening Brief at 27-28; SureWest Opening Brief at 31-32.

⁸¹⁰ DRA Reply Brief at 15.

⁸¹¹ DRA Reply Brief at 13-14.

⁸¹² Id. at 15.

⁸¹³ Id. at 17.

⁸¹⁴ Id. at 15-16.

⁸¹⁵ Id. at 15-16.

⁸¹⁶ DisabRA Opening Brief at 23.

⁸¹⁷ Id. at 23-27.

⁸¹⁸ Cal. Pub. Util. Code § 314.5.

⁸¹⁹ In California, that would be over 1,300 carriers.

⁸²⁰ Cal. Pub. Util. Code § 709(f).