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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.  {OS- x48325 (December 12, 1984) 1984 JOINT BOARD("1984 Joint Board Recommended Decision"); id., Decision and Order, 50 Fed. Reg.  {O- x939 (January 8, 1985) 1985 ORDER ADOPTING("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 ("Study Area Notice").Ğ The Commission took that action primarily to ensure that incumbent local exchange  xcarriers ("LECs") do not set up highcost exchanges within their existing service territories as  Xb- xkseparate study areas to maximize highcost payments.b  {O-  [ԍxSee 1984 Joint Board Recommended Decision, supra note 3, 66; 1985 Order Adopting Recommendation,  {O-supra note 3, 1, 5. The study area freeze also prevents  xkincumbent LECs from transferring exchanges among existing study areas for the purpose of  xincreasing interstate revenue requirements and compensation. An incumbent LEC must apply to  xthe 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. \^  yO#-ԍx47 C.F.R. 1.3, 36 app.\ ",N(N(ZZp"Ԍ X-  x5. Waiver of Commission rules is appropriate only if special circumstances warrant  X- xdeviation from the general rule and such a deviation will serve the public interest. {Ob-   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  xa threeprong standard: first, the change in study area boundaries does not adversely affect the  X- x\Universal Service Fund ("USF") support program; h " {Ow-  \ԍUSF PROCEDURE USF RULE xSee 1984 Joint Board Recommended Decision, supra note 3,  66. The Commission created the USF to  {OA - 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 incumbent LECs with high local  xloop plant costs to allocate a portion of those costs to the interstate jurisdiction, thus enabling the states to establish  x,lower local exchange rates in study areas receiving such assistance. To determine which incumbent LEC study areas  xare eligible for USF support, the USF rules prescribe an eligibility threshold set at 115 percent of the national average  xYunseparated loop cost per working loop. When loop cost in a particular study area exceeds that threshold, the study  x;area is eligible for support equal to a certain percentage of the loop cost in excess of that threshold. The study area  xbecomes eligible for higher levels of support as its loop cost rises above additional thresholds set farther above the  xnational average unseparated loop cost. Because USF assistance is targeted primarily at small study areas, the level  {OM- xJof support provided at each threshold generally is greater if the study area has 200,000 or fewer working loops. See 47 C.F.R. 36.631. second, the state commission(s) having  X- x[regulatory authority over the exchange(s) to be transferred does not object to the change; and  Xv-third, the public interest supports such a change.^vR  {Oy-  kԍxSee U S WEST Communications, Inc., and Eagle Telecommunications, Inc., Joint Petition for Waiver of  {OC- xthe Definition of "Study Area" Contained in Part 36, AppendixGlossary of the Commission's rules, Memorandum  {O -Opinion and Order, 10 FCC Rcd 1771,  5 (1995) US WEST-EAGLE STUDY("U S WESTEagle Study Area Order").  XH-  x6.ONE PERCENT The Commission's concern about adverse USF impacts was mitigated, in the short term  X1- xat least, by its adoption of the Joint Board's recommendation for an indexed cap on the USF. 1x yOZ-  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  {O- x36 of the Commission's rules and Establishment of a Joint Board, Recommended Decision, 9 FCC Rcd 334 (Joint  {O- xBd. 1993) ("1993 Joint Board Recommended Decision"); id., Report and Order, 9 FCC Rcd 303 (1993) ("Interim  {O- xCap Order"). The Commission extended these interim rules through July 1, 1996. Amendment of Part 36 of the  {OJ- xCommission's rules and Establishment of a Joint Board, Report and Order, 11 FCC Rcd 1077 (1995), summarized in 60 Fed. Reg. 65011 (1995).   xKThe Commission nonetheless recognized that, even in the short term, the granting of a study area  xwaiver may adversely affect the fund's distribution, if not its size. Under the indexed USF cap  xrules, a study area reconfiguration that increases the USF draw of one USF recipient often  xreduces that of other USF recipients. Consequently, in evaluating whether a study area change  X - xwould have an adverse impact on the distribution or level of the USF, the Commission applies  X - xa "onepercent" guideline to study area waiver requests filed after January 5, 1995.  {O&-ԍxSee U S WESTEagle Study Area Order, supra note 8,  1417. Under this  x[guideline, no study area waiver is granted if it would result in an annual aggregate shift in USF"T ,N(N(ZZ"  xassistance in an amount equal to or greater than one percent of the total USF, unless the parties  xzcan demonstrate extraordinary public interest benefit. To prevent carriers from evading this  xlimitation by disaggregating a single large sale of exchanges into a series of smaller transactions  xthat in the aggregate have the same effect on the USF, the Commission further requires that the  xguideline be applied to all study area waivers granted to either carrier, as a purchaser or seller,  X-pending completion of the current review of the USF program.C \" {O-  k" 1. 1. 1.(1)(a)(i) 1) a) I. A. 1. a.(1)(a) i) a)ЍxId. In this context, the Commission defines the term "carrier" to include all affiliated carriers (i.e., those  x,carriers that are in common control, as the term "control" is defined in Section 32.9000 of the Commission's rules,  {O-47 C.F.R.  32.9000). Id.  14 note 34. C  X_- B. Pleadings  X1<   x    7.  Petition.  Petitioners seek waivers of the rule freezing study area boundaries to enable  xUnited to remove three exchanges, serving approximately 1,021 access lines, from its Kansas  x=study area. The requested waivers also would allow MJD to add these three exchanges to the  xLKansas study area of Sunflower, a whollyowned subsidiary of MJD, which currently consists  xof seven exchanges serving approximately 1,400 access lines. MJD states that the newly  X -acquired exchanges would be operated by Bluestem, also a whollyowned subsidiary of MJD.?  yO]-ԍxPetition at 3.?  X-  x8. Petitioners state that the proposed changes would serve the public interest because  xBluestem plans to improve customer service in the newly acquired exchanges by installing state Xd- xKoftheart digital switching facilities.? d| yO-ԍxPetition at 8.? Bluestem states that the upgrades will enable the residents  xserved by these exchanges to have new customer calling features, equal access to interLATA long  X6- xKdistance carriers, improved facsimile and data transmission, and signalling system 7 capabilities.?6  yO-ԍxPetition at 9.?  x-Further, Bluestem states that it plans to construct the AmericusSaffordville link of an interoffice  xfiber optic ring connecting these two exchanges and several other Eastern Kansas exchanges  xioperated by surrounding incumbent LECs. Bluestem estimates that these upgrades would require  X-an investment outlay of $1,165,000.G yO' -ԍxPetition at 89.G  X-    X-  x9. Petitioners assert that these requests are consistent with the original purpose of the  xLUSF and that the resulting impact on the USF program would be marginal. Based on 1994 cost  xdata, petitioners state that the transfer of the three exchanges out of United's study area and into  xythe new Sunflower/Bluestem study area would decrease United's annual USF draw by $369,959  x(from $9,091,684 to $8,721,725) and would increase the new Sunflower/Bluestem's annual USF"P, ,N(N(ZZ"  X-draw by $473,748 (From $812,644 to $1,286,392), for a net increase of $103,789.N yOy-ԍxPetition at Exhibits A and B.N  X- C. Discussion  X-  x 10.    Request for waivers. We have reviewed the data the petitioners filed with NECAtX yO-ԍxNECA USF Submission of 1994 Study Results filed September 29, 1995.t  xKand the estimates filed in this proceeding and have determined that the combined increase in USF  xdraws will not have a significant adverse impact on the USF total or on individual carrier draws.  xIn addition, the Kansas Corporation Commission states that it does not object to the requested  XJ- xwaivers.J {O -  ԍxKansas Corporation Commission Order and Certificate, Docket No. 192,325U 95EKAT434COC, dated December 13, 1995. Bluestem states that it will improve customer service in the newly acquired exchanges  xby installing stateoftheart digital switching facilities. Finally, petitioners' proposals demonstrate  xthat current and potential customers in the affected exchanges will likely be better served by  X - xBluestem than United.V B {O-ԍxSee discussion supra at  8.V The requested study area waivers thus are likely to serve the public  xinterest. We therefore find that the three criteria for granting a study area waiver have been met and that the waiver requests should be granted.  X -  x 11. Need for imposed limits on USF draws. Although we find no reason to question the  xpetitioners' estimates of the USF impact, we nonetheless are concerned that those estimates may  xlater prove inaccurate when the planned upgrades are completed. We have found that, even in  xja period of a few years, the USF payments for some incumbent LECs have risen by unexpected  XO- xZamounts.~O {O-  ԍxSee, e.g., Delta Telephone Company, Inc., Waiver of the Definition of "StudyArea" contained in Part 36,  {O- xAppendixGlossary, of the Commission's Rules, Memorandum Opinion and Order, 5 FCC Rcd 7100 (1990), whose  yOh- xUSF payment grew from $82,500 in 1991 to approximately $445,700 in 1993; and U S WEST Communications and  xwGila River Telecommunications, Inc., Joint Petition for Waiver of the Definition of "Study Area" Contained in Part  {O- xK36, AppendixGlossary, of the Commission's Rules, Memorandum Opinion and Order, 7 FCC Rcd 2161 (1992),  x[whose projection of $169,155 for Gila River's 1992 USF payment was more than doubled by the actual 1992  yO-payment of $390,993, which has been nearly doubled again by the 1995 payment of approximately $750,000.(#(#X These incumbent LECs generally had undertaken substantial upgrades or expansions  xof the local network in difficulttoserve, sparsely populated exchanges that are similar to the exchanges being acquired by Bluestem.  X-  x 12. LIMITS   We therefore find that the waivers should be subject to the condition that, absent  xyexplicit approval from the Bureau, the annual USF support provided to the Sunflower/Bluestem  xystudy area shall not exceed the amount estimated in the petition, which is $1,286,392. This limit  xensures that the study area waiver will not, due to errors or unforeseen circumstances, result in  xadverse USF impacts which substantially exceed Sunflower/Bluestem's forecasts. We note that",N(N(ZZQ"  X- xthe implementation of the Telecommunications Act of 1996,z yOy-ԍxTelecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996).z requires the overhaul of various  X- xCommission support programs, including USF.&X {O-  zԍxId. 47 U.S.C. 254(a)(2). To develop new USF rules, the Commission has initiated a proceeding to address  {O- xthis issue. See Federal-State Joint Board on Universal Service, Notice of Proposed Rulemaking and Order  {O- xEstablishing Joint Board, 61 Fed. Reg. 10499 (March 14, 1996). That proceeding includes portions of the record of a prior proceeding.  It is likely that any new USF rules will alter  xthe method used to determine the distribution of USF support to highcost areas, thereby  xjchanging the projected level of support to the buyers' study areas. This, in turn, will require us  xto revisit these issues, and the related waiver conditions that we have established herein following implementation of the 1996 Act.  X_-/ III. PRICE CAP WAIVER A. Background  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 incumbent LEC with  x1which it is affiliated, shall become subject to price cap regulation within a year of the  X - xktransaction.e F {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"),  {OI- x,modified on recon., Order on Reconsideration, 6 FCC Rcd 2637 (1991) ("LEC Price Cap Reconsideration Order"),  {O- 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 modification on recon., Amendments of Part 69 of the Commission's  xrules Relating to the Creation of Access Charge Subelements for Open Network Architecture, Policy and Rules  {Oo- xConcerning Rates for Dominant Carriers, Report and Order and Order on Further Reconsideration and Supplemental  {O9- x<Notice of Proposed Rulemaking, 6 FCC Rcd 4524 (1991) ("ONA Part 69 Order"), further recon., Memorandum  {O-Opinion and Order on Second Further Reconsideration, 7 FCC Rcd 5235 (1992).e The Commission stated that this "allornothing" rule applies not only to the  X - x/acquisition of an entire incumbent LEC but also to the acquisition of part of a study area.\ & {O~-  ԍxSee LEC Price Cap Reconsideration Order, supra note 23,  149 note 207. The Commission explained that,  xif these two types of acquisitions were not treated the same under the allornothing rule, an incumbent LEC could  {O-avoid the rule by selling all but one of its exchanges. Id.ģ  x Hence, under this rule, Bluestem and MJD's acquisition of United's three exchanges would  xobligate Bluestem, MJD, and their affiliates to become subject to price cap regulation instead of rateofreturn regulation.  X4-  ^x 14. The Commission explained that the allornothing rule is intended to address two  xconcerns regarding mergers and acquisitions involving price cap LECs. The first concern is that,  xin the absence of the rule, a company might attempt to shift costs from its price cap affiliate to  x=its nonprice cap affiliate, allowing the nonprice cap affiliate to earn more, due to its increased  X- xrevenue requirement, without affecting the earnings of the price cap affiliate, i.e., without"J,N(N(ZZ"  xtriggering the sharing mechanism. The second concern is that, absent the rule, an incumbent  x>LEC may attempt to "game the system" by switching back and forth between rateofreturn  xregulation and price cap regulation. The Commission cited, as an example, the incentive a price  xcap LEC may have to increase earnings by opting out of price cap regulation, building up a large  xrate base under rateofreturn regulation so as to raise rates and, then, after returning to price  xcaps, cutting costs back to an efficient level. It would disserve the public interest, the  xCommission stated, to allow an incumbent LEC to alternately "fatten up" under rateofreturn  xZregulation and "slim down" under price cap regulation, because rates would not fall in the manner  XH-intended under price cap regulation.JH {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  X - xto outweigh the threat that the system may be subject to gaming.M Z {O-ԍxId.  149 note 207.M 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 - x.adjustment to its price cap indices to reflect the change in its study area.  {OD-  =ԍxSee Price Cap Performance Review for Local Exchange Carriers, First Report and Order, 10 FCC Rcd 8962,  {O- x 328, 330 (1995) ("LEC Price Cap Review Order"). Under that requirement, United must reduce the Price Cap  xIndices for its Kansas study area if the changes in study area boundaries reduce the cost bases for those indices. The  xPrice Cap Indices, which are the cost indices on which pricecapped rates are based, are calculated pursuant to a  {Oh-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  Xb-price cap regulation.b {O-ԍxSee LEC Price Cap Review Order, supra note 27,  330.ć    X4- B. Pleadings  X<  x16.  Petition.  Bluestem and MJD seek waivers of Section 61.41(c)(2) so they may operate  xas rateofreturn LECs, rather than price cap LECs, after acquiring the three exchanges which  x/currently are under price cap regulation. Petitioners argue that the rule's application in this  x<instance is contrary to the public interest and does not serve the purposes for which the rule was  xZadopted. Petitioners further argue that the Commission's two concerns, the threat of cost shifting  X-between affiliates and gaming of the system, are not at issue in this case.4  yOz$-  ԍxPetition at 16. We note that, although United signed the petition, United does not seek a waiver of the allornothing rule.  Xg- "g ,N(N(ZZ""Ԍ X-C. Discussion  X-  ! x17.  We agree with petitioners that the Commission's first concern underlying the allor X- xnothing rule is not applicable in this case. Neither Bluestem nor MJD have an incentive to shift  xcosts between price cap and rateofreturn affiliates, because none of these companies are seeking  xto maintain separate affiliates under different systems of regulation. As to the Commission's  Xv- x[second concern, we find it implausible that United could game the system by moving the three  xexchanges back and forth between price caps and rateofreturn regulation, because United is  xiselling these exchanges and a reacquisition would require a second study area waiver. Moreover,  xMUnited cannot transfer the exchanges without removing the rateincreasing effects of these  xexchanges from the pricecap rates that have been based, in part, upon the inclusion of these  X -exchanges in its Kansas study area.`  {O| -ԍxSee discussion supra  15.` x  X -  !x18. We therefore find there is good cause to grant Bluestem, MJD, and their incumbent  xzLEC affiliates waivers of the allornothing rule to permit them to remain under rateofreturn  xregulation after acquiring the three exchanges which currently are under price cap regulation.  xyAs noted above, these waivers are subject to the condition that United shall make a downward  xexogenous adjustment to its price cap indices to reflect the removal of these generally highcost  xexchanges from its Kansas study area. For the present, we will continue to regulate Bluestem  xand MJD as rateofreturn carriers. Because we are waiving Section 61.41(c)(2), they need not  xwithdraw from the NECA pools. We note that, as with any other rateofreturn carriers,  x.Bluestem and MJD may elect price cap regulation in the future if they decide to withdraw from the NECA pools.  X-? IV. OTHER ISSUES ă  X-  x19. To the extent necessary, Bluestem also seeks waiver of Section 69.3(e) of the  X- xCommission's rules.EZ yO-ԍxPetition at 3.E That rule instructs NECA as to the effective filing date for the common  xline tariff in the event there are changes in the common line tariff participation and long term  Xe- xKsupport resulting from a merger or acquisition of telephone properties. "e {O -  \ЍxSee 47 C.F.R. 69.3(e)(11). Section 69.3(e)(11) states that "[a]ny changes in Association common line  x tariff participation and [l]ong [t]erm and [t]ransitional [s]upport resulting from the merger or acquisition of telephone  x,properties are to be made effective on the next annual access tariff filing effective date following consummation of the merger or acquisition." Bluestem does not need  xa waiver of that rule because its requirements pertain only to NECA's effective filing date for the common line tariff. "  ,N(N(ZZz"Ԍ X-x5 V. ORDERING CLAUSES ă  X-  }x20. 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  xpetition of Bluestem Telephone Company, MJD Communications, Inc., and United Telephone  xkCompany of Eastern Kansas, for waiver of Part 36, Appendix-Glossary, of the Commission's  xrules, 47 C.F.R. Part 36 AppendixGlossary IS GRANTED subject to the condition stated in paragraph 12 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, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, that the  xpetition of Bluestem Telephone Company and MJD Communications, Inc., for waiver of Section  x61.41(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.  Xy-  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  x0Sections 0.91, 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 of the Order.  X-   x23. 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  xNSections 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. x` `  hhFEDERAL COMMUNICATIONS COMMISSION x` `  hhKenneth P. Moran x` `  hhChief, Accounting and Audits Division x` `  hhCommon Carrier Bureau@@  @xx