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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 Matter of ) AAD 95-66 Petitions for Waivers Filed by ) ) Bluestem Telephone Company, ) MJD Communications, Inc., and ) United Telephone Company of Eastern Kansas) ) Concerning Sections 61.41(c)(2), 69.3(e) and ) the Definition of "Study Area" Contained 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 1. On April 28, 1995, Bluestem Telephone Company ("Bluestem"), MJD Communications, Inc. ("MJD"), and United Telephone Company of Eastern Kansas ("United") (collectively, "petitioners") filed a petition for waiver of three Commission rules. MJD and United seek waivers 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 United and MJD to alter the boundaries of their Kansas study areas when transferring three telephone exchanges from United to MJD. After the transfer, the three exchanges would be added to the Kansas study area of Sunflower Telephone Company, Inc. ("Sunflower") and operated by Bluestem, both wholly-owned subsidiaries of MJD. 2. In addition, Bluestem and MJD seek waivers of the price cap rule contained in Section 61.41(c)(2) of the Commission's rules. That rule requires non-price cap companies, and the telephone companies with which they are affiliated, to become subject to price cap regulation after acquiring a price cap company or any part thereof. The requested waivers would permit Bluestem and MJD to operate under rate-of-return regulation after acquiring the exchanges, which currently are under price cap regulation. Finally, Bluestem seeks a waiver of Section 69.3(e) of the Commission's rules, if necessary, so that it may become an Issuing Carrier in the National Exchange Carrier Association, Inc.'s ("NECA's") tariffs, and so that the regulatory, tariff and pooling changes related to the proposed exchange acquisition can occur immediately upon the closing of the transaction. 3. On November 28, 1995, the Common Carrier Bureau ("Bureau") released a Public Notice soliciting comments on the petition. No comments were filed. In this Order, we find that the public interest would be served by allowing United and MJD to alter their study area boundaries and allowing Bluestem and MJD to continue operating under rate-of-return regulation after acquiring the exchanges. We therefore grant the petition, as explained more fully below. II. STUDY AREA WAIVERS A. Background 4. A study area is a geographical segment of a carrier's telephone operations. Generally, a study area corresponds to a carrier's 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 incumbent local exchange carriers ("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 incumbent LECs from transferring exchanges among existing study areas for the purpose of increasing interstate revenue requirements and compensation. An incumbent LEC must apply to the Commission for a waiver of the frozen study area rule if the incumbent 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. 5. 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. 6. 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 7. Petition. Petitioners seek waivers of the rule freezing study area boundaries to enable United to remove three exchanges, serving approximately 1,021 access lines, from its Kansas study area. The requested waivers also would allow MJD to add these three exchanges to the Kansas study area of Sunflower, a wholly-owned subsidiary of MJD, which currently consists of seven exchanges serving approximately 1,400 access lines. MJD states that the newly acquired exchanges would be operated by Bluestem, also a wholly-owned subsidiary of MJD. 8. Petitioners state that the proposed changes would serve the public interest because Bluestem plans to improve customer service in the newly acquired exchanges by installing state- of-the-art digital switching facilities. Bluestem states that the upgrades will enable the residents served by these exchanges to have new customer calling features, equal access to interLATA long distance carriers, improved facsimile and data transmission, and signalling system 7 capabilities. Further, Bluestem states that it plans to construct the Americus-Saffordville link of an inter-office fiber optic ring connecting these two exchanges and several other Eastern Kansas exchanges operated by surrounding incumbent LECs. Bluestem estimates that these upgrades would require an investment outlay of $1,165,000. 9. Petitioners assert that these requests are consistent with the original purpose of the USF and that the resulting impact on the USF program would be marginal. Based on 1994 cost data, petitioners state that the transfer of the three exchanges out of United's study area and into the new Sunflower/Bluestem study area would decrease United's annual USF draw by $369,959 (from $9,091,684 to $8,721,725) and would increase the new Sunflower/Bluestem's annual USF draw by $473,748 (From $812,644 to $1,286,392), for a net increase of $103,789. C. Discussion 10. Request for waivers. We have reviewed the data the petitioners filed with NECA and the estimates filed in this proceeding and have determined that the combined increase in USF draws will not have a significant adverse impact on the USF total or on individual carrier draws. In addition, the Kansas Corporation Commission states that it does not object to the requested waivers. Bluestem states that it will improve customer service in the newly acquired exchanges by installing state-of-the-art digital switching facilities. Finally, petitioners' proposals demonstrate that current and potential customers in the affected exchanges will likely be better served by Bluestem than United. The requested study area waivers thus are likely to serve the public interest. We therefore find that the three criteria for granting a study area waiver have been met and that the waiver requests should be granted. 11. Need for imposed limits on USF draws. Although we find no reason to question the petitioners' estimates of the USF impact, we nonetheless are concerned that those estimates may later prove inaccurate when the planned upgrades are completed. We have found that, even in a period of a few years, the USF payments for some incumbent LECs have risen by unexpected amounts. These incumbent LECs generally had undertaken substantial upgrades or expansions of the local network in difficult-to-serve, sparsely populated exchanges that are similar to the exchanges being acquired by Bluestem. 12. 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 the Sunflower/Bluestem study area shall not exceed the amount estimated in the petition, which is $1,286,392. This limit ensures that the study area waiver will not, due to errors or unforeseen circumstances, result in adverse USF impacts which substantially exceed Sunflower/Bluestem's forecasts. 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, will require us to revisit these issues, and the related waiver conditions that we have established herein following implementation of the 1996 Act. III. PRICE CAP WAIVER A. Background 13. Section 61.41(c)(2) of the Commission's rules provides that, when a non-price cap company acquires a price cap company, the acquiring company, and any incumbent LEC with which it is affiliated, shall become subject to price cap regulation within a year of the transaction. The Commission stated that this "all-or-nothing" rule applies not only to the acquisition of an entire incumbent LEC but also to the acquisition of part of a study area. Hence, under this rule, Bluestem and MJD's acquisition of United's three exchanges would obligate Bluestem, MJD, and their affiliates to become subject to price cap regulation instead of rate-of-return regulation. 14. The Commission explained that the all-or-nothing rule is intended to address two concerns regarding mergers and acquisitions involving price cap LECs. The first concern is that, in the absence of the rule, a company might attempt to shift costs from its price cap affiliate to its non-price cap affiliate, allowing the non-price cap affiliate to earn more, due to its increased revenue requirement, without affecting the earnings of the price cap affiliate, i.e., without triggering the sharing mechanism. The second concern is that, absent the rule, an incumbent LEC may attempt to "game the system" by switching back and forth between rate-of-return regulation and price cap regulation. The Commission cited, as an example, the incentive a price cap LEC may have to increase earnings by opting out of price cap regulation, building up a large rate base under rate-of-return regulation so as to raise rates and, then, after returning to price caps, cutting costs back to an efficient level. It would disserve the public interest, the Commission stated, to allow an incumbent LEC to alternately "fatten up" under rate-of-return regulation and "slim down" under price cap regulation, because rates would not fall in the manner intended under price cap regulation. 15. The Commission nonetheless recognized that a narrow waiver of the all-or-nothing rule might be justified if efficiencies created by the purchase and sale of a few exchanges were to outweigh the threat that the system may be subject to gaming. Such a waiver would not be granted unconditionally, however. Rather, waivers of the all-or-nothing rule would be granted subject to the condition that the selling price cap LEC shall make a downward exogenous adjustment to its price cap indices to reflect the change in its study area. That adjustment is needed to remove the effects of the transferred exchanges from price-capped rates that have been based, in whole or in part, upon the inclusion of those exchanges in the study areas subject to price cap regulation. B. Pleadings 16. Petition. Bluestem and MJD seek waivers of Section 61.41(c)(2) so they may operate as rate-of-return LECs, rather than price cap LECs, after acquiring the three exchanges which currently are under price cap regulation. Petitioners argue that the rule's application in this instance is contrary to the public interest and does not serve the purposes for which the rule was adopted. Petitioners further argue that the Commission's two concerns, the threat of cost shifting between affiliates and gaming of the system, are not at issue in this case. C. Discussion 17. We agree with petitioners that the Commission's first concern underlying the all-or- nothing rule is not applicable in this case. Neither Bluestem nor MJD have an incentive to shift costs between price cap and rate-of-return affiliates, because none of these companies are seeking to maintain separate affiliates under different systems of regulation. As to the Commission's second concern, we find it implausible that United could game the system by moving the three exchanges back and forth between price caps and rate-of-return regulation, because United is selling these exchanges and a reacquisition would require a second study area waiver. Moreover, United cannot transfer the exchanges without removing the rate-increasing effects of these exchanges from the price-cap rates that have been based, in part, upon the inclusion of these exchanges in its Kansas study area. 18. We therefore find there is good cause to grant Bluestem, MJD, and their incumbent LEC affiliates waivers of the all-or-nothing rule to permit them to remain under rate-of-return regulation after acquiring the three exchanges which currently are under price cap regulation. As noted above, these waivers are subject to the condition that United shall make a downward exogenous adjustment to its price cap indices to reflect the removal of these generally high-cost exchanges from its Kansas study area. For the present, we will continue to regulate Bluestem and MJD as rate-of-return carriers. Because we are waiving Section 61.41(c)(2), they need not withdraw from the NECA pools. We note that, as with any other rate-of-return carriers, Bluestem and MJD may elect price cap regulation in the future if they decide to withdraw from the NECA pools. IV. OTHER ISSUES 19. To the extent necessary, Bluestem also seeks waiver of Section 69.3(e) of the Commission's rules. That rule instructs NECA as to the effective filing date for the common line tariff in the event there are changes in the common line tariff participation and long term support resulting from a merger or acquisition of telephone properties. Bluestem does not need a waiver of that rule because its requirements pertain only to NECA's effective filing date for the common line tariff. V. ORDERING CLAUSES 20. 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, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, that the petition of Bluestem Telephone Company, MJD Communications, Inc., and United Telephone Company of Eastern Kansas, for waiver of Part 36, Appendix-Glossary, of the Commission's rules, 47 C.F.R. Part 36 Appendix-Glossary IS GRANTED subject to the condition stated in paragraph 12 of this Order. 21. 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, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, that the petition of Bluestem Telephone Company and MJD Communications, Inc., for waiver of 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. 22. 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, 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 limit imposed in paragraph 12 of the Order. 23. 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, 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