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File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ************************************************************************* Before the Federal Communications Commission Washington, D.C. 20554 In the Matters of ) AAD 95-30 Petitions for Waivers Filed by ) ) Champlain Valley Telecom, Inc., ) Northland Telephone Company of Vermont,) and Vermont Telephone Company, Inc. ) ) Concerning the Definition of "Study Area") in the Part 36 Appendix-Glossary ) of the Commission's Rules ) MEMORANDUM OPINION AND ORDER Adopted: June 14, 1996 Released: June 14, 1996 By the Chief, Accounting and Audits Division: I. INTRODUCTION AND BACKGROUND 1. On February 14, 1995, Champlain Valley Telecom, Inc. ("Champlain"), Northland Telephone Company of Vermont ("Northland"), and Vermont Telephone Company, Inc. ("Vermont Telephone") filed a joint petition for waiver of the definition of "Study Area" contained in the Part 36 Appendix-Glossary of the Commission's rules. That definition constitutes a rule freezing all study area boundaries. The requested waivers would allow the Contel of Vermont study area to be divided among Champlain, Northland, and Vermont Telephone. The requested waivers would also allow Champlain, Northland, and Vermont Telephone to establish new study areas for their newly acquired exchanges. Champlain requests that its newly created study area be separate from the existing Vermont study area of its affiliate Waitsfield-Fayston Telephone Company, Inc. ("Waitsfield"). 2. Petitioners state that these waivers are needed to complete a process that began with the sale of 30 telephone exchanges by Contel of Vermont, Inc. in July 1994, to WFT Acquisition Company ("WFTAC"). WFTAC was owned by three shareholders: Nordcom, Vermont Telephone, and Northland. The petitioners state that, after the sale in July 1994, the Contel of Vermont properties were divided among Champlain, Northland, and Vermont Telephone, which are now operating independently as LECs. 3. On April 4, 1995, the Common Carrier Bureau ("Bureau") released a Public Notice soliciting comments on the joint petition. On May 15, 1995, the National Exchange Carrier Association, Inc. ("NECA"), the National Telephone Cooperative Association ("NTCA"), and the United States Telephone Association ("USTA") submitted comments supporting the joint petition and AT&T Corporation ("AT&T") submitted comments that, in part, oppose the joint petition. On May 30, 1995, the Bureau received reply comments from the petitioners. On December 12, 1995, the Bureau received the Vermont Public Service Board Order which addressed the study area waivers. 4. In this Order, we find that the public interest would be served by allowing the former Contel of Vermont study area to be divided among Champlain, Northland, and Vermont. We find that the public interest would not be served, however, by allowing Champlain to create a new study area, separate from the existing Waitsfield study area. We therefore grant the joint petition, in part, as explained more fully below. II. STUDY AREA WAIVER A. Background 5. A study area is a geographical segment of a carrier's telephone operations. Generally, a study area corresponds to a carrier's entire service territory within a state. Thus, carriers operating in more than one state typically have one study area for each state, and carriers operating in a single state typically have a single study area. Study area boundaries are important primarily because carriers perform jurisdictional separations at the study area level. For jurisdictional separations purposes, the Commission froze all study area boundaries effective November 15, 1984. The Commission took that action primarily to ensure that LECs do not set up high-cost exchanges within their existing service territories as separate study areas to maximize high-cost payments. The study area freeze also prevents LECs from transferring exchanges among existing study areas for the purpose of increasing interstate revenue requirements and compensation. A LEC must apply to the Commission for a waiver of the frozen study area rule if the LEC wishes to sell an exchange to another carrier and if that transaction would have the effect of changing the study area boundaries of either carrier. 6. Waiver of Commission rules is appropriate only if special circumstances warrant deviation from the general rule and such a deviation will serve the public interest. In evaluating petitions seeking a waiver of the rule freezing study area boundaries, the Commission employs a three-prong standard: first, the change in study area boundaries does not adversely affect the Universal Service Fund ("USF") support program; second, the state commission(s) having regulatory authority over the exchange(s) to be transferred does not object to the change; and third, the public interest supports such a change. 7. The Commission's concern about adverse USF impacts was mitigated, in the short term at least, by its adoption of the Joint Board's recommendation for an indexed cap on the USF. The Commission nonetheless recognized that, even in the short term, the granting of a study area waiver may adversely affect the fund's distribution, if not its size. Under the indexed USF cap rules, a study area reconfiguration that increases the USF draw of one USF recipient often reduces that of other USF recipients. Consequently, in evaluating whether a study area change would have an adverse impact on the distribution or level of the USF, the Commission applies a "one-percent" guideline to study area waiver requests filed after January 5, 1995. Under this guideline, no study area waiver is granted if it would result in an annual aggregate shift in USF assistance in an amount equal to or greater than one percent of the total USF, unless the parties can demonstrate extraordinary public interest benefit. To prevent carriers from evading this limitation by disaggregating a single large sale of exchanges into a series of smaller transactions that in the aggregate have the same effect on the USF, the Commission further requires that the guideline be applied to all study area waivers granted to either carrier, as a purchaser or seller, pending completion of the current review of the USF program. B. Pleadings 8. Joint Petition. The petitioners seek waiver of the rule freezing study area boundaries to allow them to create new study areas for their newly acquired exchanges. They state that on July 31, 1994, Contel Corporation sold all of the stock of Contel of Vermont to WFTAC. Contel of Vermont was dissolved and all of its assets and liabilities were distributed to WFTAC. Vermont Telephone and Northland redeemed their stock in WFTAC in exchange for the assets and liabilities associated with their respective service areas. Vermont Telephone received assets and liabilities corresponding to the southern region, which contained 14 exchanges serving 17,699 access lines. Northland received assets and liabilities corresponding to the northern region, which contains eight exchanges serving 4,906 access lines. WFTAC retained the remaining assets and liabilities corresponding to the central region, which contained eight exchanges serving 12,568 access lines. The central region is the Champlain operation. 9. Petitioners state that the transaction has produced, and will continue to produce, numerous and significant public interest benefits for present and future customers. Petitioners state that these benefits flow from two sources: elimination of administrative burdens, and improvements in the network. In addition, the petitioners state that grant of these waivers will allow the companies to provide customer services and other support functions on a localized basis, allowing responses to customers' needs in a more timely manner. Finally, petitioners plan to improve customer services by phasing out multi-party telephone service and expanding fiber deployment in certain service areas. 10. Petitioners estimate that, if the study area waivers were granted, the transfer of the exchanges would result in a net increase of $19,632 in the combined USF, assuming that a separate study area is created as requested by Champlain. Further, petitioners state that, if Champlain is combined with Waitsfield, the net increase in the USF draw would be even greater. 11. Comments. NECA, NTCA, and USTA supports petitioners' requests. AT&T, however, opposes the joint petition, in part. AT&T states that the joint petition should be denied to the extent that Champlain seeks to establish a new study area for the purchased exchanges, rather than consolidating those exchanges with the existing Waitsfield study area. AT&T raises a number of arguments against the proposed creation of a separate study area for Champlain: (1) such action would be contrary to the Commission's well-established policy against subdividing study areas to prevent carriers from using this procedure to gain an advantage under the USF and jurisdictional separations rules; (2) the joint petition fails to provide any showing why the fact that Champlain and Waitsfield are separate companies with separate debt structures justifies a waiver; and (3) the petitioners fail to explain how combining the operations of the two companies, with the anticipated efficiencies, would result in an increased USF. C. Discussion 12. Request for waivers. Petitioners plan many plant upgrades and service improvements and have thereby demonstrated that current and potential customers in the affected exchanges will likely be well served. The requested study area waivers are thus likely to serve the public interest. In addition, the Vermont PSB states that it does not object to the requested study area waivers. Further, we have determined that, if Champlain and Waitsfield are combined into one study area, grant of the study area waivers would not have a significant adverse effect on the USF. 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, to the extent indicated herein. 13. Request for separate study areas. Champlain seeks permission to place its acquired exchanges into a newly created study area although its affiliate, Waitsfield, has an existing study area in Vermont. Champlain claims that it should be allowed to set up a new study area in Vermont because: the existing companies currently are operating as separate telephone companies, with separate employees, tariffs, debt structures; and combining the study areas would lead to increased USF draws. We disagree. 14. We reject the argument that separate study areas are necessary because the two companies are operating separately. We do not object to the maintenance of two separate legal entities, but we do not believe that this necessitates separate study areas for jurisdictional separations purposes. 15. Champlain is incorrect in its assertion that combining Champlain and Waitsfield into one study area would reduce the total USF draw. We have reviewed the data the petitioners filed in this proceeding and in the NECA USF proceeding, and it is clear that combining the two areas will result in a reduction in the USF draw. Therefore, we find that allowing Champlain to create a separate study area rather than adding the acquired exchanges to its affiliate's existing study area would increase its USF assistance unnecessarily. 16. Champlain further asserts that its proposal to create a new study area would be consistent with the Commission's policy on granting study area waivers. On the contrary, it is the consolidation of study areas located within the same state, not the disaggregation of such areas, that is the type of study area reconfiguration that the Commission encourages as serving the public interest. While the USF impact is of genuine concern as explained above, it is not the only concern. It would not be consistent with Commission goals to create a new study area for Champlain separate from its affiliate's study area in the same state. 17. As explained above, the primary intent of the study area freeze rule is to prohibit LECs from setting up high-cost exchanges within their service territories as separate study areas to maximize USF support. LECs would have no incentive to do this if USF assistance were distributed on an exchange basis. Yet, because it is distributed on a study area basis, a LEC's USF payment will tend to be greater over time if the LEC can isolate high-cost exchanges in one or more separate study areas. Such action permits the LEC to report average loop cost in the high-cost study areas further above the USF eligibility threshold than would be possible if the high-cost exchanges remained consolidated with lower-cost exchanges. 18. The risk that LECs will act on this incentive to create new study areas is no less serious when LECs are deciding whether to consolidate newly acquired exchanges with existing study areas located in the same state. As noted above, a LEC's USF draw will tend to be greater if it can isolate high-cost exchanges in a separate study area. In the instant case, the creation of a new study area would enable Waitsfield to avoid a reduction in its annual USF draws that would occur if the higher-cost acquired exchanges were consolidated with its lower-cost study area, and as a result, enable Waitsfield to gain advantage under the USF and jurisdictional separations rules. 19. Champlain and Waitsfield may also gain an advantage under the small carrier assistance rules. Those rules allow small LECs to assign an increased share of local switching equipment costs to the interstate jurisdiction. The Bureau therefore has considered impacts on that assistance program in deciding whether to grant requests for separate study areas. Moreover, if separate study areas were created as requested, Champlain and Waitsfield may also gain a long-term advantage under those rules, a risk which is one focus of the Bureau's concern. The Bureau has noted that, even where an acquiring LEC does not "realize an immediate gain" with the creation of a new study area, the additional study area would provide an advantage should demand increase the size of the LEC's total operations above 10,000 access lines. Champlain and Waitsfield's discussions of their projections with respect to the number of access lines do not meet these concerns. We thus reject Champlain's claim that its request for separate study areas would be consistent with the Commission's goals in freezing study area boundaries. 20. Champlain further claims that we are obligated to permit it to create a new study area because of Commission precedent. Champlain cites our decision to allow a Utah LEC to establish a second study area because the USF would increase by only $3,000, as support for Champlain creating a separate study area where the USF assistance actually decreases. We reject this argument as stated above, because the USF does not decrease and because the USF is not the only concern. Further, we note that we granted the Utah waiver in December 1993, shortly before we became aware of the magnitude of the potential cumulative effect of other similar waivers. Numerous LECs had announced their intent to file study area waiver requests affecting hundreds of exchanges. This heightened activity increased our concern that such transactions, in the aggregate, may have a substantial impact on the USF program. It also increased our concern that permitting LECs to create new study areas in states where they have existing operations raises regulatory costs. Moreover, we have had a growing concern that USF payments have been increasing at an unexpected rate for some LECs granted study area waivers. 21. In view of these potential risks and the Commission's primary objective in adopting the study area freeze rule, we find that in this case, where LECs are operating in the same state, the rule is intended to prevent companies from creating any additional study areas when transferring exchanges among themselves. We therefore deny Champlain's request for the creation of a new study area. 22. Need for imposed limits on USF draws. Although we find no reason to question petitioners' estimates of the USF impact, we nonetheless are concerned that those estimates may later prove inaccurate. For example, we have found that, even in a period of a few years, the USF payments for some LECs filing study area waivers have risen by unexpected amounts. These LECs generally operated in hard-to-serve areas similar to those under consideration here. 23. We therefore find that the waivers should be subject to the condition that, absent explicit approval from the Bureau, the annual USF support provided to petitioners' study areas shall not exceed the USF amounts estimated in the joint petition except for Champlain. The annual USF support provided to the Champlain/Waitsfield combined study area shall not exceed $1,819,419, the amount calculated based on corrected data. These limits ensure that the study area waivers will not, due to errors or unforeseen circumstances, result in adverse USF impacts which substantially exceed petitioners' forecasts. The limits also ensure that the Commission's one-percent guideline can be properly adhered to in future filings of this kind. Absent such limits, companies could file waiver requests that appear to fall within the guideline, only to later adjust their USF estimates to exceed the guideline free of any Bureau review. Moreover, it would be administratively difficult for us to enforce the guideline if we were to impose limits only after monitoring the month-to-month USF draws of the petitioners, and of numerous other similarly situated companies, to determine which individual companies had exceeded the guideline. We note that the implementation of the Telecommunications Act of 1996, requires the overhaul of various Commission support programs, including USF. It is likely that any new USF rules will alter the method used to determine the distribution of USF support to high-cost areas, thereby changing the projected level of support to the buyers study areas. This, in turn, may require us to revisit these issues, and the related waiver conditions that we have established herein following implementation of the 1996 Act. III. ORDERING CLAUSES 24. Accordingly, IT IS ORDERED, pursuant to Sections 1, 4(i), 5(c), 201-202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201-202, and Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, that the joint petition of Champlain Valley Telecom, Inc., Northland Telephone Company of Vermont, and Vermont Telephone Company, Inc. for waiver of Part 36, Appendix-Glossary, of the Commission's rules, 47 C.F.R. Part 36 Appendix-Glossary, IS GRANTED IN PART, subject to the condition stated in paragraph 23 and note 37 of this Order. 25. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201-202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201-202, and Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, that the joint petition of Champlain Valley Telecom, Inc. for waiver of Part 36, Appendix-Glossary, of the Commission's rules, 47 C.F.R. Part 36, Appendix-Glossary, IS DENIED as to the establishment of a separate study area containing the acquired exchanges. 26. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201-202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201-202, and Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R.  0.91, 0.291, that the National Exchange Carrier Association, Inc., shall not distribute USF assistance exceeding the limits imposed in paragraph 23 and note 37 of this Order. 27. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201-202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201-202, and 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. FEDERAL COMMUNICATIONS COMMISSION Kenneth P. Moran Chief, Accounting and Audits Division Common Carrier Bureau