FINAL DRAFT
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
In the Matter of
Application by SBC Communications Inc.,
Pacific Bell, and Southwestern Bell
Communications Services, Inc. d/b/a
Pacific Bell Long Distance for Provision
of In-Region, InterLATA Services in California
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CC Docket No.___________
REPLY AFFIDAVIT OF ROBERT HENRICHS
STATE OF TEXAS
COUNTY OF DALLAS
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TABLE OF CONTENTS
ACCOUNTING SAFEGUARDS REPLY AFFIDAVIT
SUBJECT
INTRODUCTION
PURPOSE OF AFFIDAVIT
SUMMARY OF COMMENTERS’ CLAIMS AND
RECOMMENDATIONS
PACIFIC’S REPLY TO PAC-WEST/WORKING ASSETS
PACIFIC’S REPLY TO ORA
PARAGRAPH
1
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3
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INTRODUCTION
I, Robert Henrichs, of lawful age, being duly sworn, depose and state:
1. My name is Robert Henrichs. My business address is 308 South Ackard, Dallas, Texas. I am
Director-Regulatory Issues for Southwestern Bell Telephone Company (“SWBT”), a wholly
owned subsidiary of SBC Communications Inc. (“SBC”), and am the same Robert Henrichs
who submitted an affidavit in this proceeding on June 27, 2001 (“Opening Henrichs
Affidavit”).
PURPOSE OF REPLY AFFIDAVIT
2. The purpose of my affidavit is to address the joint response of Pac-West Telecomm, Inc. and
Working Assets Long Distance (“Pac-West/Working Assets”), regarding the affiliate
transactions between Pacific Bell Telephone Company (“Pacific”) and Southwestern Bell
Communication Services, Inc., doing business as Pacific Bell Long Distance (“SBCS”) and
regarding Pacific’s compliance with §709.2(c)(3) of the California Public Utility Code as
well as Sections 272(b)(1), 272(b)(3), 272(b)(5) and 254(k) of the federal
Telecommunications Act of 1996 (“the Act”). Also, I will address the Section 272-related
issues raised by the Office of Ratepayer Advocates (“ORA”).
SUMMARY OF COMMENTERS’ CLAIMS AND RECOMMENDATIONS
3. Pac-West/Working Assets claim that the nature of the financial relationship between Pacific
and SBCS violates §709.2(c)(3), which reflects the Commission’s “ratepayer indifference”
standard, as well as Sections 272(b)(1), 272(b)(3), 272(b)(5) and 254(k) of the Act.1 PacWest/Working Assets’ claims and recommendations are as follows:
1
Response of Pac-West/Working Assets, Declaration of Lee L. Selwyn (“Selwyn Declaration”), ¶¶ 82-101.
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Claims


The financial relationship between Pacific and SBCS is at odds with Commission
rulings D.86-01-026, D.87-12-067 and D.92-07-02.2
The value of affiliate transactions between Pacific and SBCS is generally
understated, particularly with regard to sales support activities and customer
acquisition costs.
Recommendations
 Imposition of a royalty payment from SBCS to Pacific for the use of the “Pacific
Bell” name.
 Payment of industry cost for customer acquisitions.
4. ORA claims that Pacific’s affidavits do not demonstrate compliance with Section 272
requirements.3 ORA’s claims and recommendations are as follows:
Claims


The evidentiary record is lacking regarding compliance with Section 272.
Approval of the 271 filing does not constitute approval of Pacific’s Operating
Practice 125 for affiliate transactions.
Recommendations
 Commencement of an audit within the first year following 271 approval and
imposition of penalties for any demonstrated non-compliance with Section 272
and the Commission’s affiliate transaction requirements.
 A determination that approval of the 271 filing should not be construed as
approval of Pacific’s Operating Practice 125.
PACIFIC’S REPLY TO PAC-WEST/WORKING ASSETS
5. As a preliminary matter, it should be noted that, in approving SBC Communications Inc.’s
(“SBC’s) prior 271 applications in Kansas, Oklahoma and Texas, the Federal
Communications Commission (“FCC”) has concluded that SBC will operate in accordance
2
In the Matter of the Application of Pacific Bell, a Corporation, for Authority to Increase Certain Intrastate Rates
and Charges Applicable to Telephone Services Furnished Within the State of California and Related Matters,
Decision No. 86-01-026, 20 CPUC 2d 237 (January 10, 1986).
In the Matter of the Application of Pacific Bell, a Corporation, for Authority to Increase Certain Intrastate Rates
and Charges Applicable to Telephone Services Furnished Within the State of California, Decision No. 87-12-067,
27 CPUC 2d 1 (December 22, 1987).
In the Matter of the Application of Pacific Bell (U 1001 C) for Authorization to Transfer Specified Personnel and
Assets, Decision No. 92-07-072, 45 CPUC 2d 109 (July 22, 1992).
3
ORA Brief, p.41
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with the accounting safeguards of Section 272 of the Act.4 Indeed, in the SBC
Kansas/Oklahoma Order, no commenter challenged SBC’s showing regarding compliance
with Section 272.5 Pacific maintains the same Section 272 accounting safeguards in
California as does Southwestern Bell Telephone Company (“SWBT”) in Kansas, Oklahoma
and Texas. Thus, the criticisms of Pac-West/Working Assets (in addition to those of ORA)
merit little if any attention by this Commission.6
6. Pac-West/Working Assets’ claim that Pacific and SBCS violate the “operating
independently” provisions of Section 272(b)(1), and the “separate officers, directors and
employees” provisions of Section 272(b)(3).7 This claim has to do with the structural
separation requirements of Section 272, not the accounting safeguards of Section 272, and is
thus addressed in the reply affidavit of Linda G. Yohe.
7. Section 272(b)(5) of the Act requires that SBCS “conduct all transactions with the Bell
operating company of which it is an affiliate on an arm’s length basis with any such
transactions reduced to writing and available for public inspection.” My opening affidavit
described in great detail Pacific’s compliance with Section 272(b)(5) and the FCC’s
Accounting Safeguards Order, which interpreted its provisions.8 As I noted there, the FCC
4
Joint Application by SBC Communications Inc., Southwestern Bell Telephone Company, and Southwestern Bell
Communications Services, Inc. d/b/a Southwestern Bell Long Distance for Provision of In-Region, InterLATA
Services in Kansas and Oklahoma, Memorandum Opinion and Order, 16 FCC Rcd 6237, ¶¶ 256-262 (2001) (“SBC
Kansas/Oklahoma Order”); Application by SBC Communications Inc., Southwestern Bell Telephone Company,
and Southwestern Bell Communications Services, Inc., d/b/a Southwestern Bell Long Distance Pursuant to Section
271 of the Telecommunications Act of 1996 To Provide In-Region InterLATA Services in Texas, Memorandum
Opinion and Order, 15 FCC Rcd 18354, ¶¶ 396-409 (2000). (“SBC Texas Order”).
5
SBC Kansas/Oklahoma Order, ¶ 257.
6
In its SBC Kansas/Oklahoma Order, the FCC noted its prior findings in the SBC Texas Order and that
“Significantly, SWBT states that it maintains the same structural separation and nondiscrimination safeguards in
Kansas and Oklahoma as it does in Texas.” SBC Kansas/Oklahoma Order, ¶ 257.
7
Response of Pac-West/Working Assets, Selwyn Declaration, ¶¶ 82-101.
8
Opening Henrichs Affidavit, ¶¶ 13-22; Implementation of the Telecommunications Act of 1996: Accounting
Safeguards Under the Telecommunications Act of 1996, Report and Order, 11 FCC Rcd 17539 (1996)
(“Accounting Safeguards Order”).
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concluded in the Accounting Safeguards Order that “our affiliate transaction rules, developed
in Computer III, and the Joint Cost Proceeding, with some of the changes proposed in the
Commission’s (FCC’s) Affiliate Transaction NPRM, will ensure compliance with the ‘arm’s
length’ requirement of section 272(b)(5).”9 The FCC also concluded that the rules adopted in
its Accounting Safeguards Order with respect to sections 260 and 271 through 276 of the Act
“are sufficient to implement section 254(k)’s requirement that the carriers not ‘use services
that are not competitive to subsidize services that are subject to competition.”10 PacWest/Working Assets provide no evidence that Pacific will fail to comply with these
applicable statutes and the FCC’s rules implementing them.
8. Pacific will also apply the supplemental rules adopted by this Commission in D.86-01-026,
D.87-12-067, and D.92-07-072 as referenced in Pacific’s response to Working Assets data
request 1-1e. As the Commission determined in D.92-07-072, “the preservation of ratepayer
indifference to a proposed utility-affiliate relationship requires the review and application of
the Commission’s affiliate transaction rules…set forth in D.86-01-026, D.87-12-067.” These
supplemental rules adopted a “fully distributed cost (“FDC”) plus 10%” requirement
applicable to services provided by Pacific to affiliates, a “25% employee transfer fee”
applicable where Pacific employees transfer to an affiliate, and a “13% referral fee” for sales
resulting from Pacific referrals of affiliate products. To the extent that any affiliate
transactions occur between Pacific and SBCS, Pacific will comply with each of these
requirements and any other applicable Commission rules. Application of these rules ensures
9
Opening Henrichs Affidavit, ¶¶ 13; Accounting Safeguards Order, ¶ 121.
Accounting Safeguards Order, ¶ 275.
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that the “ratepayer indifference” standard is met under §709.2(c)(3). The contrary claim of
Pac-West/Working Assets is unfounded.11
9. Pac-West/Working Assets also assert that Pacific will engage in improper crosssubsidization, implying that the services to be provided by Pacific to SBCS are “woefully
short” of capturing the value of the transactions.12 Pac-West/Working Assets criticizes the
compensation for $1.39 for each “PIC.” They conclude that it is inadequate, and thus
propose a role playing scenario to establish that more time would be required and that the
current level of compensation does not include time for unsuccessful sales.13 Their recitation
of the compensation fee is accurate, but their conclusion and resulting proposal are wide of
the mark. As a preliminary matter, neither party inquired of Pacific about the basis for the
study that arrived at the $1.39 figure, an inquiry which would have eliminated their misplaced
concern. In any case, the underlying study is based upon activity representing the time
consumed to address customer inquiries before interLATA authority is obtained, (i.e., to field
the customer’s inquiry and to then inform the customer that SBCS does not yet have the
authority to offer long distance). Once interLATA authorization is obtained, Pacific will
update the study to reflect the appropriate sales contact time, which will also assess time
spent on unsuccessful sales attempts.
10.
Pac-West/Working Assets’ notion that the acquisition costs to be paid by SBCS to Pacific
should meet the industry average and is an express violation of the Commission rules is
unfounded for several reasons.14 To the extent that Pacific on behalf of SBCS incurs
11
12
13
14
Response of Pac-West/Working Assets, Selwyn Declaration, ¶¶ 82, 85.
Response of Pac-West/Working Assets, Selwyn Declaration, ¶ 75.
Response of Pac-West/Working Assets, Selwyn Declaration, ¶ 88.
Response of Pac-West/Working Assets, Selwyn Declaration, ¶ 90.
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acquisition costs, they will be billed to SBCS in accordance with the Commission’s rules.
Thus, “FDC plus 10%” applies on all services wherein the FDC plus 10% sum would be
above the fair market value (“FMV”) of the service provided SBCS (i.e., the higher of FDC
plus 10% or FMV applies); the “13% referral fee” applies on successful sales referrals of
affiliated products; and the “25% transfer fee” applies if any employees are transferred from
Pacific to SBCS.
11.
This Commission’s (and the FCC’s own) rules are structured to prevent cross-subsidization
and have been in effect for over 15 years. Pacific’s sales support activities are clearly
documented, as evidenced in Attachment A of my opening affidavit, and are otherwise in
accordance with 272(b)(5). Not only will Pacific’s compliance with these rules ensure its
meeting the “ratepayer indifference” standard; it will also ensure that no cross-subsidization
of competitive activities occurs.
12.
Pac-West/Working Assets’ provide no evidence that acquisition costs are undervalued. For
one thing, acquisition costs incurred for advertising, special promotions, and direct mail will
be incurred by SBCS, not Pacific. Thus, there is no occasion for Pacific to value them for
purposes of billing SBCS. Furthermore, with respect to telemarketing and sales support
activities that will actually be provided by Pacific, SBCS will be charged the higher of FDC
plus 10% or FMV. The Commission should reject Pac-West/Working Assets’ attempt to
confuse the value of sales with the 13% referral fee, as well as their consequent claim that
Pacific is substantially understating the value of Pacific’s sales activities. The 13% referral
fee is in addition to the sales activity already valued at the higher of FDC plus 10% or FMV.
These charges accurately represent SBCS’ acquisition costs. Indeed, in my view, it may well
be that these charges to SBCS will be higher than the average costs incurred by carriers in the
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long distance industry. In sum, Pac-West/Working Assets mischaracterize both the affiliate
transaction rules and the actual division of labor between Pacific and SBCS. Thus, their
claim that Pacific is “substantially understating the value of the transferred service” should be
dismissed.
13.
Pac-West/Working Assets’ recommendation that a royalty payment is required ignores the
substantial record developed in D.87-12-067 and D.96-03-007 demonstrating that a royalty
payment would not be appropriate.15 In D.87-12-067, the Commission held that “evidence
does not support the adoption of the 5% royalty payment” and that “the standard of rate payer
indifference can be assured through other regulatory requirements.” These regulatory
requirements include the “FDC plus 10%” valuation methodology, the “25% employee
transfer payment” and the “13% referral fee.” Further, in D.96-03-007, the Commission
declined to require payment of a royalty by PB Com for its use of the Pacific name based
upon prior consideration of the issue in the PacTel Cellular spin-off, stating:
The name and reputation of a utility is not an asset to which
ratepayers have a claim. Indeed the utility has never
included good will in the rate base of a utility for
ratemaking purposes. It follows that ratepayers have never
had to pay through rates of return on the value of good will.
(Re Pacific Telesis Group (1992) 51 CPUC2d 728, 754,
citing D.88-01-063, 27 CPUC 2d 347, 369 (1988)).
Accordingly, Pac-West/Working Assets’ contention is without merit.
PACIFIC’S REPLY TO ORA
14.
ORA claims that there is not an evidentiary record of Pacific’s compliance with Section
272.16 However, Attachments A and B of my opening affidavit provide a substantial
15
16
Response of Pac-West/Working Assets, Selwyn Declaration, ¶¶ 84, 95.
ORA Brief, p. 48
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evidentiary record demonstrating Pacific’s compliance with the affiliate transaction
requirements of Section 272. In addition, the Commission should find significant the FCC’s
prior conclusions reached regarding SBC’s compliance with the accounting safeguards of
Section 272 of the Act, for the reasons noted earlier in my reply affidavit.
15.
ORA has asked for an audit within a year of 272 authorization with penalties for noncompliance with the Commission rules.17 In the PB Com case, this Commission directed the
ORA to consult with the FCC’s Common Carrier Bureau and perform an audit of California’s
existing affiliate transaction rules either as part of the joint FCC/state audit, or as a separate
audit in conjunction with the joint audit required under Section 272(d). To the extent that
any audit should result in a finding that corrective actions are appropriate, consideration of
such matters as “penalties” or other appropriate action, why they are appropriate, and how to
best ensure that they are implemented, will then become ripe based on all relevant facts.
16.
With regard to Operating Practice 125 (“OP 125”), ORA claims that Pacific unreasonably
limits the meaning of the terms “assets” or “property” to “physical or tangible” things.18
However, nowhere does ORA provide any alternative meaning for either of those terms, and
Section 11.1 of OP 125 provides the specific references to the law relied on by ORA. In
addition, ORA makes no mention of Section 12 of OP 125, which specifically covers the
Commission’s requirements regarding Intellectual Property and Proprietary Information set
forth in D.99-03-057. In any case, even ORA agrees that this 271 proceeding is not the
correct forum for airing disputes regarding interpretation of OP 125.19 Given that, the
Commission need not address whether Pacific’s interpretation of OP 125 should prevail over
17
ORA Brief, p. 43.
ORA Brief, p. 48.
19
ORA Brief, p. 48.
18
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that of ORA. The Commission needs only to conclude that its rules shall apply to the
affiliate transactions between Pacific and SBCS.
17.
This concludes my reply affidavit.
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