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See MTS and WATS Market Structure, Amendment of Part  {O!- x67 of the Commission's rules and Establishment of a Joint Board, Recommended Decision and Order, 49 Fed. Reg.  {O`"- x48325 (December 12, 1984) ("1984 Joint Board Recommended Decision"); id., Decision and Order, 50 Fed. Reg.  {O*#- x939 (January 8, 1985) ("1985 Order Adopting Recommendation"); see also Amendment of Part 36 of the  {O#- xCommission's rules and Establishment of a Joint Board, Notice of Proposed Rulemaking, 5 FCC Rcd 5974 (October  {O$-10, 1990) ("Study Area Notice").7 The Commission took that action primarily to ensure that incumbent local  xexchange carriers ("LECs") do not set up highcost exchanges within their existing service",N(N(ZZ"  X- xyterritories as separate study areas to maximize highcost payments.m {Oy-  zԍxSee 1984 Joint Board Recommended Decision, supra n.6,  66; 1985 Order Adopting Recommendation,  {OC-supra n.6,  1,5.  The study area freeze also  xprevents incumbent LECs from transferring exchanges among existing study areas for the purpose  xof increasing interstate revenue requirements and compensation. An incumbent LEC must apply  xto the Commission for a waiver of the frozen study area rule if the incumbent LEC wishes to sell  xian exchange to another carrier and if that transaction would have the effect of changing the study  X-area boundaries of either carrier. \$m yOb -ԍx47 C.F.R. 1.3, 36 app.\  X_-  x6. Waiver of Commission rules is appropriate only if special circumstances warrant  XH- xdeviation from the general rule and such a deviation will serve the public interest. Hm {O -  >ԍxNortheast Cellular Tel. Co. v. FCC, 897 F.2d 1164, 1166 (D.C. Cir. 1990); See also WAIT Radio v. FCC, 418 F.2d 1153, 1159 (D.C. Cir. 1969); 47 C.F.R. 1.3. In evaluating  x[petitions seeking a waiver of the rule freezing study area boundaries, the Commission employs  X - xZa threeprong standard: ^ m {O-  kԍxSee U S WEST Communications, Inc., and Eagle Telecommunications, Inc., Joint Petition for Waiver of  {O- x,the Definition of "Study Area" Contained in Part 36, AppendixGlossary of the Commission's Rules, Memorandum  {Om-Opinion and Order, 10 FCC Rcd 1771,  5 (1995) US WEST-EAGLE STUDY("U S WESTEagle Study Area Order"). first, the change in study area boundaries does not adversely affect the  X - xUSF support program; m h  4 m {O-  {ԍxSee 1984 Joint Board Recommended Decision, supra n.6,  66. The Commission created the USF to  {O- xpreserve and promote universal service. See Amendment of Part 67 of the Commission's rules and Establishment  {O|- xof a Joint Board, Decision and Order, 96 FCC 2d 781 (1984). The USF allows LECs with high local loop plant  xcosts to allocate a portion of those costs to the interstate jurisdiction, thus enabling the states to establish lower local  xiexchange rates in study areas receiving such assistance. To determine which LEC study areas are eligible for USF  xsupport, the USF rules prescribe an eligibility threshold set at 115 percent of the national average unseparated loop  xcost per working loop. When loop cost in a particular study area exceeds that threshold, the study area is eligible  xfor support equal to a certain percentage of the loop cost in excess of that threshold. The study area becomes eligible  xfor higher levels of support as its loop cost rises above additional thresholds set farther above the national average  xLunseparated loop cost. Because USF assistance is targeted primarily at small study areas, the level of support  {O- xprovided at each threshold generally is greater if the study area has 200,000 or fewer working loops. See 47 C.F.R.  yO- 36.631.m second, the state commission(s) having regulatory authority over the  X - xexchange(s) to be transferred does not object to the change; and third, the public interest supports  xsuch a change. We note that the Commission's concern about adverse USF impacts was  x[mitigated, in the short term at least, by its adoption of the Joint Board's recommendation for an  X -indexed cap on the USF.  dm yO#-  ԍxThe Joint Board recommended, and the Commission adopted, interim rules that limit the rate of growth of  {O$- xthe USF to the rate of growth in the total number of working loops nationwide. See generally Amendment of Part  {ON%- x36 of the Commission's rules and Establishment of a Joint Board, Recommended Decision, 9 FCC Rcd 334 (1993)  {O&- x("1993 Joint Board Recommended Decision"); id., Report and Order, 9 FCC Rcd 303 ("Interim Cap Order"). The  xCommission recently extended these interim rules through July 1, 1996. Amendment of Part 36 of the Commission's"& ,N(N('"  {O- xRules and Establishment of a Joint Board, Report and Order, 11 FCC Rcd 1077 (1995), summarized in 60 Fed. Reg. 65011 (1995).  " " ,N(N(ZZ "Ԍ X- B. Pleadings  X-   x 7.   Petition. Petitioners seek waivers of the rule freezing study area boundaries to enable  xU S WEST to remove eight exchanges, serving approximately 5,000 access lines, from its Utah  X- xstudy area. "m yOy-  {ԍxThe Kanab, Utah exchange being transferred to South Central serves approximately 500 customers in  {OA -Fredonia, Arizona. See U S WEST Letter, supra n.2. The requested waivers also would allow buyers to consolidate the acquired  xexchanges with their existing Utah study areas, which are comprised of 17 exchanges serving approximately 6,000 access lines.  XJ-  x8. Petitioners state that the proposed changes would serve the public interest because  x/buyers have agreed to upgrade the central offices to digital switches within 12 months and  X - x.upgrade the outside plant facilities to single party service within a reasonable period of time.E |m yOI-ԍxJoint Petition at 5.E  xThe petitioners further state that the demonstrated expertise of the buyers' management in  xoperating rural telephone exchanges will ultimately provide a substantial and direct benefit to the  X -subscribers within the eight exchanges.@ m {O-ԍxId.@ x  X -  x9. Petitioners state that the requested waivers will not adversely affect the USF in any  xmaterial way. They estimate that, if the study area waivers are granted and all planned upgrades  x[are completed, the transfer of exchanges would increase the annual USF draw of South Central  Xd- xby $292,438 (from $74,613 to $367,051),Zdm {O-ԍxGVNW Letter, Attachment, supra n.2.Z but it would not affect the USF draw of either U S  XM-WEST or Skyline.EM0 m yO.-ԍxJoint Petition at 5.E  X- C. Discussion  X-  x 10.  Request for waivers. We have reviewed the data the petitioners filed with NECA m {Ob"-ԍxSee NECA USF 1995 Submission of 1994 Study Results filed September 29, 1995.  xKand the estimates filed in this proceeding and have determined that the combined increase in USF  xdraws will not have a substantial adverse impact on the USF total or on individual carrier draws.  X- x=In addition, the Utah Public Utilities CommissionWR m {O&-ԍxUtah Letter, supra n.3.W and the Arizona Corporation Commissionim {O-ԍxU S WEST Letter, Attachment, supra n.2.@i"Z,N(N(ZZ"  x!state that they do not object to these requested waivers. Finally, petitioners' proposals  xjdemonstrate that current and potential customers in the affected exchanges will likely be better  X- xserved by the buyers than by U S WEST.bZm {O-ԍxSee discussion supra  8.b The requested study area waivers thus are likely to  x<serve the public interest. We therefore find that the three criteria for granting a study area waiver have been met in this instance and that the study area waiver requests should be granted.  Xv-  mx 11. Need for imposed limits on USF draws. Although we find no reason to question  xZbuyers' estimates of the USF impact, we nonetheless are concerned that those estimates may later  xprove inaccurate when the planned upgrades are completed. We have found that, even in a  X3- xperiod of a few years, the USF payments for some LECs have risen by unexpected amounts.i3m {O -  LԍxSee, e.g., Delta Tel. Co., Inc., Waiver of the Definition of "Study Area," Memorandum Opinion and Order,  {O- xY5 FCC Rcd 7100 (1990). The USF payment grew from $82,500 in 1991 to approximately $445,700 in 1993. See,  {Od- xhe.g., U S WEST Comm. & Gila River Telecomm., Inc., Joint Petition for Waiver of the Definition of "Study Area,"  {O.- xMemorandum Opinion and Order, 7 FCC Rcd 2161,  7 (1992) (stating that Gila River estimates 1992 highcost  xZsupport to be $169,155). Gila River's 1992 USF estimate was more than doubled by the actual 1992 payment of $390,993, which has been nearly doubled again by the 1995 payment of approximately $750,000.i  xjThese LECs generally had undertaken substantial upgrades or expansions of the local network  xin difficulttoserve, sparsely populated exchanges that are similar to the exchanges being acquired by buyers.  X -  x 12. LIMITS   We therefore find that the waivers should be subject to the condition that, absent  xLexplicit approval from the Bureau, the annual USF support provided to the buyers' study areas  X- xshall not exceed the postupgrade amounts estimated in the GVNW Letter.l m yO-  >ԍxBuyers estimate that their posttransfer, post upgrade USF draws will be $0 for Skyline and $367,051 for  {Ow-South Central. Joint Petition at 5; GVNW Letter, Attachment, supra n.2. This limit ensures  xthat the study area waivers will not, due to errors or unforeseen circumstances, result in adverse  xUSF impacts which substantially exceed buyers' forecasts. We note that the implementation of  XM- xthe Telecommunications Act of 1996,zM m yO-ԍxTelecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996).z requires the overhaul of various Commission support  X6- xprograms, including USF.0(6V m {O=!-  ԍxId. Sec. 101(a) (to be codified at 47 U.S.C. 254(a)(2)). To develop new USF rules, the Commission has  {O"- xinitiated a proceeding to address this issue. See Federal-State Joint Board on Universal Service, Notice of Proposed  {O"- xRulemaking and Order Establishing Joint Board, 61 Fed. Reg. 10499 (March 14, 1996). That proceeding includes  {O#-portions of the record of a prior proceeding. Id.  39. 0 It is likely that any new USF rules will alter the method used to  xdetermine the distribution of USF support to highcost areas, thereby changing the projected level  xof support to the buyers' study areas. This, in turn, may require us to revisit these issues and the  xyrelated waiver conditions that we have established herein following implementation of the 1996 Act."F,N(N(ZZ"Ԍ X-ԙ III. PRICE CAPS WAIVERS ă  X- A. Background  X-  X-  |x 13. Section 61.41(c)(2) of the Commission's rules provides that, when a nonprice cap  xcompany acquires a price cap company, the acquiring company, and any LEC with which it is  Xv- xaffiliated, shall become subject to price cap regulation within a year of the transaction.avm {O-  \ԍx47 C.F.R.  61.41(c). See Policy and Rules Concerning Rates for Dominant Carriers, Second Report and  {O- xOrder, 5 FCC Rcd 6786, 6821 (1990), Erratum, 5 FCC Rcd 7664 (Com. Car. Bur. 1990) ("LEC Price Cap Order"),  {O - xmodified on recon., Order on Reconsideration, 6 FCC Rcd 2637 (1991) ("LEC Price Cap Reconsideration Order"),  {OM - x-aff'd sub nom. National Rural Telecom Ass'n v. FCC, 988 F.2d 174 (D.C. Cir. 1993), petitions for further recon.  {O - xdismissed, 6 FCC Rcd 7482 (1991), further modified on recon., Amendments of Part 69 of the Commission's Rules  xRelating to the Creation of Access Charge Subelements for Open Network Architecture, Policy and Rules Concerning  {O - x;Rates for Dominant Carriers, Report and Order and Order on Further Reconsideration and Supplemental Notice of  {Os - x;Proposed Rulemaking, 6 FCC Rcd 4524 (1991) ("ONA Part 69 Order"), further recon., Memorandum Opinion and  {O=-Order on Second Further Reconsideration, 7 FCC Rcd 5235 (1992).a The  xCommission stated that this "allornothing" rule applies not only to the acquisition of an entire  XH- x\LEC but also to the acquisition of part of a study area.\Hm {O-  \ԍxSee LEC Price Cap Reconsideration Order, supra n.26,  149 n.207. The Commission explained that, if  xthese two types of acquisitions were not treated the same under the allornothing rule, a LEC could avoid the rule  {O3-by selling all but one of its exchanges. Id. Hence, under this rule, the buyers'  xacquisition of U S WEST's eight exchanges obligates them to become subject to price cap regulation instead of rateofreturn regulation.  X -  ^x 14. The Commission explained that the allornothing rule is intended to address two  xconcerns it has regarding mergers and acquisitions involving price cap LECs. The first concern  x is that, in the absence of the rule, a company might attempt to shift costs from its price cap  x[affiliate to its nonprice cap affiliate, allowing the nonprice cap affiliate to earn more, due to its  x increased revenue requirement, without affecting the earnings of the price cap affiliate, i.e.,  xwithout triggering the sharing mechanism. The second concern is that, absent the rule, a LEC  xmay attempt to "game the system" by switching back and forth between rateofreturn regulation  xand price cap regulation. The Commission cited, as an example, the incentive a price cap LEC  x-may have to increase earnings by opting out of price cap regulation, building up a large rate base  xunder rateofreturn regulation so as to raise rates and, then, after returning to price caps, cutting  xcosts back to an efficient level. It would disserve the public interest, the Commission stated, to  xallow a LEC to alternately "fatten up" under rateofreturn regulation and "slim down" under  xprice cap regulation, because rates would not fall in the manner intended under price cap  X-regulation.J m {O>$-ԍxId.  148.J  X-  x15.PCI The Commission nonetheless recognized that a narrow waiver of the allornothing  x.rule might be justified if efficiencies created by the purchase and sale of a few exchanges were"|^ ,N(N(ZZ"  X- xto outweigh the threat that the system may be subject to gaming.Jm {Oy-ԍxId.  149 n.207.J Such a waiver would not be  xLgranted unconditionally, however. Rather, waivers of the allornothing rule would be granted  xsubject to the condition that the selling price cap LEC shall make a downward exogenous  X- xadjustment to its Price Cap Index to reflect the change in its study area.Zm {O-  =ԍxSee Price Cap Performance Review for Local Exchange Carriers, First Report and Order, 10 FCC Rcd 8962,  {O- xx 328, 330 (1995) ("LEC Price Cap Review Order"). Under that requirement, U S WEST must reduce the Price  xZCap Indices for its Utah study area if the changes in study area boundaries reduce the cost bases for those indices.  xThe Price Cap Indices, which are the cost indices on which pricecapped rates are based, are calculated pursuant to  {O -a formula specified in the Commission's rules for price cap LECs. See 47 C.F.R.  61.45.xx That adjustment is  xZneeded to remove the effects of the transferred exchanges from pricecapped rates that have been  xLbased, in whole or in part, upon the inclusion of those exchanges in the study areas subject to  Xv-price cap regulation.svm {O7-ԍxSee LEC Price Cap Review Order, supra  n.30,  330.s  XH- B. Pleadings  X -  lx16. Petition.  Buyers seek waivers of Section 61.41(c)(2) so they may operate as rateof xreturn LECs, rather than price cap LECs, after acquiring the eight exchanges which currently are  xiunder price cap regulation. Petitioners argue that the rule's application in this instance is contrary  xto the public interest and does not serve the purposes for which the rule was adopted. Petitioners  x[further argue that the Commission's two concerns, the threat of cost shifting between affiliates  X -and gaming of the system, are not at issue in this case.E m yO-ԍxJoint Petition at 8.E  X{- C. Discussion  XM-  !x17. We agree with petitioners that the Commission's first concern underlying the allor xnothing rule is not applicable in this case. None of the buyers has an incentive to shift costs  xbetween price cap and rateofreturn affiliates, because none of these companies is seeking to  xZmaintain separate affiliates under different systems of regulation. As to the Commission's second  xconcern, we find it very unlikely that U S WEST could game the system by moving the eight  x=exchanges back and forth between price cap and rateofreturn regulation, because U S WEST  x{is selling these exchanges and a reacquisition would require a second study area waiver.  xKMoreover, U S WEST cannot transfer the exchanges without removing the rateincreasing effects  xof these exchanges from the pricecapped rates that have been based, in part, upon the inclusion  X~-of these exchanges in its Utah study areas.Z!~2 m {Oa%-ԍxSee discussion supra  15.Z x "P !,N(N(ZZ"Ԍ X-  x18. We therefore find there is good cause to grant the buyers waivers of the allor xnothing rule to permit them to remain under rateofreturn regulation after acquiring the eight  xexchanges which currently are under price cap regulation. As noted above, these waivers are  xsubject to the condition that U S WEST shall make a downward exogenous adjustment to its  xPrice Cap Indices to reflect the removal of these generally highcost exchanges from its Utah  xstudy area. For the present, we will continue to regulate the buyers as rateofreturn carriers.  xBecause we are waiving Section 61.41(c)(2), they need not withdraw from the NECA pools. We  x=note that, as with any other rateofreturn carriers, buyers may elect price cap regulation in the future if they decide to withdraw from the NECA pools.  X - IV. ORDERING CLAUSES ă  X -  }x19. Accordingly, IT IS ORDERED, pursuant to Sections 1, 4(i), 5(c), 201202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201202, and  x/Sections 0.91, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, that the  x\joint petition of Skyline Telecom; South Central Utah Telephone Association, Inc.; and U S  xWEST Communications, Inc., for waiver of Part 36, Appendix-Glossary, of the Commission's  xkrules, 47 C.F.R. Part 36 AppendixGlossary IS GRANTED subject to the conditions stated in paragraph 12 and note 23 of this Order.  X4-  x20. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201202, and  x/Sections 0.91, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, that the  xjoint petition of Skyline Telecom and South Central Utah Telephone Association, Inc., for waiver  xof Section 61.41(c)(2) of the Commission's rules, 47 C.F.R.  61.41(c)(2), IS GRANTED subject to the condition stated in paragraph 18 of this Order.  X-  x21. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201202, and  x\Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R. 0.91, 0.291, that the National  xExchange Carrier Association, Inc., shall not distribute USF assistance exceeding the limit imposed in paragraph 12 and note 23 of this Order.  X -  x22. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201202, and  x\Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R. 0.91, 0.291, that this Order is effective immediately upon release.  x` `  hhFEDERAL COMMUNICATIONS COMMISSION  XQ%- hhKenneth P. Moran x` `  hhChief, Accounting and Audits Division x` `  hhCommon Carrier Bureau@@