$// Order; Rochester Tel. Petition for Waiver; DA 95-239 //$ $/ Section 0.291 Delegated Authority /$ TRANSMITTED FOR FCC RECORD ONLY Before the FEDERAL COMMUNICATIONS COMMISSION Washington D.C. 20544 DA 95-239 In the Matter of ) ) Rochester Telephone Corporation, ) Mid-South Telecommunications Company, Inc., ) Ontonagon County Telephone Company and ) Midway Telephone Company ) ) Petition for Waiver of Sections 61.41(c), ) 61.41(d), 69.3(e)(11) and 69.3(i)(4) of the ) Commission's Rules ) ORDER Adopted: February 14, 1995; Released: February 15, 1995 By the Chief, Common Carrier Bureau: 1. On October 3, 1994, Rochester Telephone Corporation (Rochester), Mid-South Telecommunications Company, Inc. (Mid-South), Ontonagon County Telephone Company (Ontonagon) and Midway Telephone Company (Midway) (collectively, Petitioners) filed a joint petition for waiver of Sections 61.41(c), 61.41(d), 69.3(e)(11) and 69.3(i)(4) of the Commission's rules in conjunction with the proposed sale of Ontonagon and Midway by Rochester to Mid-South. The rule waiver would allow Ontonagon and Midway to withdraw from price cap regulation and become subject to cost-of-service regulation, and place Ontonagon and Midway in the National Exchange Carrier Association (NECA) pools effective on the date of their acquisition by Mid-South. 2. Petitioners state that Rochester is a New York corporation that provides local exchange service to approximately 500,000 access lines in western central New York, and additionally owns 35 local exchange carriers that serve approximately 480,000 access lines in thirteen states. Rochester is a Tier 1 local exchange carrier, subject to price cap regulation since July 1, 1991. Ontonagon and Midway are two of Rochester's local exchange carrier subsidiaries. Ontonagon, which serves approximately 4,000 access lines, is wholly owned by Rochester. Midway, which serves approximately 900 access lines, is 99.65 percent owned by Ontonagon. Both Ontonagon and Midway were in the NECA traffic sensitive and common line pools prior to their acquisition by Rochester on April 10, 1989. When Rochester elected price cap regulation, pursuant to Section 61.41 of the Commission's rules, its subsidiaries were included under price cap regulation as well. On September 19, 1994, Rochester and Mid-South (a Tier 2 company) entered into an agreement whereby Mid-South would acquire all of the outstanding shares of Ontonagon from Rochester, and would then operate Ontonagon, Midway and S & A Telephone Company, Inc. (S & A). 3. The Commission's rules provide that when a rate of return company and a price cap company merge, or when one company acquires the other, the resulting company must comply with price cap regulation within a year of the transaction. In the absence of this "all-or-nothing" rule, a local exchange carrier might attempt to shift costs from its price cap affiliate to its rate of return affiliate, allowing the rate of return affiliate to retain higher rates, and thus generate greater earnings for the price cap affiliate without triggering the sharing mechanism. Also, a local exchange carrier could "game the system" by opting out of price cap regulation, increasing its costs inefficiently under rate of return regulation, then opting for price caps again and reducing its costs to an efficient level. The carrier would realize higher earnings as a result of its cost reductions. The carrier would thus be rewarded for efficiency gains without reducing the rates. The Commission has stated, however, that "in some cases, the efficiencies created by the purchase and sale of one or two exchanges may outweigh the threat of gaming the system. Such cases might justify [a] narrow waiver of the all-or-nothing rule." 4. Petitioners contend that the grant of the waiver is in the public interest because Mid-South would be under an administrative and financial burden if it had to operate three small local exchange carriers, serving approximately 6,000 access lines, subject to price caps. Mid-South contends that the granting of waivers will allow it to be more efficient in managing its business and providing customer service. Petitioners also contend that granting the waiver would be consistent with prior waivers granted by this Bureau, the Commission's price cap policies, and its regulation of small telephone companies. 5. On December 14, 1994, NECA filed comments in support of the joint petition for waivers. NECA argues that in this case there would be no cost shifting between affiliates, and that the Commission has consistently granted similar waiver requests for other small exchange carriers. 6. We conclude that there is good cause to grant Petitioners waivers of Sections 61.41(c) and (d) of the Commission's rules to permit Mid-South to avoid price cap regulation after acquiring ownership of Ontonagon and Midway. The first concern identified by the Commission in adopting these rules, cost shifting between affiliates, is not at issue here. Neither Rochester nor Mid-South are seeking to maintain Ontonagon and Midway as affiliates under different systems of regulation. The second concern underlying the rule, "gaming the system," also is not raised in this case. Rochester will remain regulated under price caps and retain no ownership interest in Ontonagon or Midway. Additionally, Mid- South has stated that it will not elect price caps and will be under rate of return regulation. Moreover, Rochester has agreed to reduce its interstate revenues to reflect the sale of the two exchanges to Mid-South, and adjust its price cap indices accordingly. Grant of the waiver is conditioned on Rochester's compliance with this representation. 7. Further, the Commission has always been sensitive to the administrative burdens imposed on small and mid-size local exchange carriers by the application of Commission rules. In the LEC Price Cap Order, the Commission recognized that small telephone companies should not be forced into a regulatory regime that was designed largely on the basis of the historical performance by the largest local exchange carriers. The Commission, therefore, made price cap regulation optional for smaller carriers. Given the Commission's reservations about mandatory application of the price cap plan to carriers other than GTE and the Regional Bell Operating Companies, our application of the all-or-nothing rule must take into account the Commission's concerns about applying the price cap system to small carriers. 8. For the foregoing reasons, we grant a waiver of the all-or-nothing rule for Mid-South, subject to Rochester's fulfillment of its commitment to adjust its price cap indices as described above. Our waiver of Sections 61.41(c) and (d) allows Mid-South, with the acquisition of Ontonagon and Midway, to be the subject of rate of return regulation. Because Mid-South does not serve more than 50,000 access lines, it does not require a waiver of Section 69.3 to re-enter the NECA pools. 9. Accordingly, IT IS ORDERED, pursuant to Section 4(i) of the Communications Act of 1934, as amended, 47 U.S.C.  4(i), and Sections 0.91 and 0.291 of the Commission's Rules, 47 C.F.R.  0.91, 0.291, that the joint petition of Rochester Telephone Corporation, Mid-South Telecommunications Company, Inc., Ontonagon County Telephone Company and Midway Telephone Company for waivers of Sections 61.41(c) and (d) of the Commission's Rules, 47 C.F.R.  61.41(c) and (d), IS GRANTED, subject to the condition in paragraph six of this Order. 10. IT IS FURTHER ORDERED that the joint petition of Rochester Telephone Corporation, Mid-South Telecommunications Company, Inc., Ontonagon County Telephone Company and Midway Telephone Company for waivers of Sections 69.3 (e)(11) and 69.3(i)(4) of the Commission's Rules, 47 C.F.R.  69.3(e)(11) and (i)(4), IS DISMISSED. FEDERAL COMMUNICATIONS COMMISSION Kathleen M.H. Wallman Chief, Common Carrier Bureau