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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 95-82 Petitions for Waivers Filed by ) ) Leaco Rural Telephone Cooperative, Inc.,) Roosevelt County Rural Telephone ) Cooperative, Inc., Tularosa Basin Telephone ) Company, Inc., and U S WEST ) Communications, Inc. ) ) Concerning Section 61.41(c)(2) and the ) Definition of "Study Area" Contained in the ) Part 36 Appendix-Glossary of the ) Commission's Rules ) MEMORANDUM OPINION AND ORDER Adopted: July 11, 1996 Released: July 11, 1996 By the Chief, Accounting and Audits Division: I. INTRODUCTION 1. On May 30, 1995, the above-listed petitioners filed a joint petition for waiver of two Commission rules. U S WEST Communications, Inc. ("U S WEST") and the three other petitioners (collectively, "buyers") 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 the petitioners to alter the boundaries of their existing New Mexico study areas to reflect the proposed sale of six U S WEST telephone exchanges to the buyers. 2. In addition, the buyers 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 the buyers to operate under rate-of-return regulation after acquiring the exchanges, which currently are under price cap regulation. Finally, the buyers ask the Commission not to place caps on the amounts they can draw from the Universal Service Fund ("USF"). 3. After receiving notification of state approval of the sale, the Common Carrier Bureau ("Bureau") released a Public Notice on November 24, 1995 that solicited comments on the joint petition. On January 11, 1996, the National Exchange Carrier Association, Inc. ("NECA") and the United States Telephone Association ("USTA") submitted comments supporting the joint petition and AT&T Corporation ("AT&T") submitted comments that, in part, opposed the joint petition. On February 6, 1996, the Bureau received reply comments from the petitioners. On April 9, 1996, the New Mexico State Commission ("New Mexico Commission") notified the Bureau that it has no objection to the requested waivers. 4. In this Order, we find that the public interest would be served by allowing petitioners to alter their study area boundaries and allowing the buyers to operate under rate-of-return regulation after acquiring the exchanges. We therefore grant the joint petition, in part, as explained more fully below. II. STUDY AREA WAIVERS 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 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 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 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, any 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 universal service program. B. Pleadings 8. Petition. U S WEST proposes to sell: two exchanges serving 1,137 access lines to Leaco Rural Telephone Cooperative ("Leaco"); one exchange serving 455 access lines to Roosevelt County Rural Telephone Cooperative, Inc. ("Roosevelt"); and three exchanges serving 3,854 access lines to the Tularosa Basin Telephone Company ("Tularosa"). Petitioners seek waivers of the rule freezing study area boundaries to enable U S WEST to remove the six exchanges from its New Mexico study area. The requested waivers also would allow Leaco and Roosevelt to add the acquired exchanges to their existing New Mexico study areas, and allow Tularosa to establish a new study area in New Mexico. 9. Petitioners state that the proposed changes would serve the public interest. They state that Leaco and Roosevelt have substantial experience in serving rural areas, and that the principal owners of Tularosa have considerable experience in operating rural exchanges. The buyers state that they will upgrade the facilities to assure quality service and meet customer demand. They state they will adhere to U S WEST's construction schedule for upgrading switches and for providing single-party service to the customers in the six exchanges. In addition, Roosevelt and Tularosa state they plan to install fiber optic cables. They state that these upgrades will significantly improve service and allow for remote monitoring of the switches. Petitioners estimate that the upgrades will require an investment outlay of approximately $4,669,000. 10. Petitioners assert that the transfer of the six exchanges will not adversely affect the USF in any material way. Petitioners estimate that, if the study area waivers were granted, the transfer of the six exchanges would result in an initial increase of $239,280 in combined 1997 USF draws. Petitioners further estimate that their proposals will ultimately increase their combined USF draws by another $126,880 due to the facilities' upgrades, for a total increase of $336,160. They state that the exchange transfers would have no effect on U S WEST's USF assistance because its New Mexico study area would not qualify for USF assistance before or after the transfer. 11. NECA and USTA support petitioners' requests. AT&T argues that individual caps on USF are still necessary in order to reduce the adverse effects on the fund s distribution caused by unidentified errors contained in the estimates. C. Discussion 12. 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 individual carrier draws. In addition, the New Mexico Commission states that it does not object to these requested waivers. Finally, petitioners' proposals for significant facility upgrades demonstrate that current and potential customers in the affected exchanges will likely be better served by the buyers than U S WEST. The requested study area waivers thus are likely to serve the public interest. We therefore find that the three-prong standard for granting a study area waiver has been met and that the study area waiver requests should be granted. 13. Request for exemption from USF limits. Although we find no reason to question the buyers' estimates of the USF impact, we nonetheless are concerned that those estimates may later prove inaccurate when the planned upgrades are completed. To address this concern, we have granted waivers of this type subject to the condition that, absent explicit approval from the Bureau, the annual USF support provided to the buyers' study areas shall not exceed the amounts specified in their joint petition. In reference to that Bureau policy, petitioners submit several arguments against the imposition of limits on buyers' USF draws. 14. First, petitioners argue that it would be inappropriate for the buyers' future USF draws to be restricted to current estimates because the buyers have made good faith estimates of USF draws that may need to be adjusted once they begin day-to-day operations. We have found that, even in a period of a few years, the USF estimates for some LECs have risen by unexpected amounts. These 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 the buyers. However, the buyers' failure to submit accurate USF estimates is not, as petitioners suggest, a valid reason for granting these waivers unconditionally. On the contrary, the potential for such failure has been our primary reason for imposing limits on carriers USF draws following exchange transfers. 15. These limits would ensure that the study area waivers will not, due to errors or unforeseen circumstances, result in USF impacts which substantially exceed the buyers' forecasts. The limits also would 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. We therefore reject the claim that, because the buyers' representations of the USF impacts may be inaccurate, it would be unreasonable for the buyers' USF draws to be limited by those representations. 16. Second, petitioners argue that imposition of limits would not serve the public interest, that it would be unfair to impose a cap when ongoing operations and operational characteristics are unknown, and that imposition of individual caps is unnecessary. Third, they argue that imposing a future waiver requirement to raise a capped USF amount is contrary to the Commission s policies, that it would place an additional burden on small LECs, would discourage strategic investment in the further development of rural telephony, and would produce additional regulatory burdens and requirements on companies. We do not agree with petitioners' arguments regarding the public interest, fairness, necessity, the Commission s policies, impact on investment and regulatory burden. In particular, petitioners fail to show that the limits established pursuant to their own representations would preclude their opportunity to make investments. Such limits will permit the buyers to receive annual USF draws totaling $1,621,883. Petitioners also fail to show that it would be burdensome for the buyers to seek an increase in imposed limits that are based on the buyers' representations of their post-transfer USF draws. The waiver condition would permit the buyers' USF draws to exceed the limits if, based on the buyers' submission of revised data, the Bureau later determined that such an increase is warranted. 17. In conclusion, we agree with AT&T that, in study area waivers of this type, we should continue our policy of imposing limits on the buyers' USF draws. 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 buyers' study areas shall not exceed the post- upgrade amounts specified by the buyers in the U S WEST Letter. We note that the Telecommunications Act of 1996, which became effective on February 8, 1996, requires the reform of many mechanisms the Commission uses to support its universal service goals, including the USF, by May 8, 1997. It is likely that any new universal service 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. III. PRICE CAPS WAIVER A. Background 18. Section 61.41(c)(2) of the Commission's rules provides that, when a non-price cap LEC acquires a price cap LEC, the acquiring company, and any 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 LEC but also to the acquisition of part of a study area. Hence, under this rule, the buyers' acquisition of U S WEST's six exchanges would obligate the buyers to become subject to price cap regulation instead of rate-of-return regulation. 19. 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 LEC 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, a 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 a 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. 20. 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 21. Petition. The buyers 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 six 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 22. We agree with petitioners that the Commission's first concern underlying the all-or- nothing rule is not applicable in this case. None of the buyers has 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 U S WEST could game the system by moving the six exchanges back and forth between price cap and rate-of-return regulation, because U S WEST is selling these exchanges and a reacquisition would require a second study area waiver. Moreover, U S WEST cannot transfer the exchanges without removing the rate-increasing effects of these exchanges from the price-capped rates that have been based, in part, upon the inclusion of these exchanges in its New Mexico study areas. 23. We therefore find there is good cause to grant the buyers waivers of the all-or- nothing rule to permit them to remain under rate-of-return regulation after acquiring the six exchanges which currently are under price cap regulation. As noted above, these waivers are subject to the condition that U S WEST shall make a downward exogenous adjustment to its price cap indices to reflect the removal of these generally high-cost exchanges from its New Mexico study area. For the present, we will continue to regulate the buyers 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, the buyers may elect price cap regulation in the future if they decide to withdraw from the NECA pools. IV. 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, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, that the joint petition of Leaco Rural Telephone Cooperative, Inc.; Roosevelt County Rural Telephone Cooperative, Inc.; Tularosa Basin Telephone Company, Inc.; and U S WEST Communications, Inc. 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 17 and note 32 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, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, that the joint petition of Leaco Rural Telephone Cooperative, Inc.; Roosevelt County Rural Telephone Cooperative, Inc.; Tularosa Basin Telephone Company, Inc.; and U S WEST 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 23 of this Order. 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 17 and note 32 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