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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matters of ) AAD 96-70 Petitions for Waivers Filed by ) ) Bryant Pond Telephone Company, Lincolnville ) Telephone Company, Maine Telephone ) Company, Mid-Maine Telecom, Inc., Northland ) Telephone Company of Maine, Inc., Oxford ) West Telephone Company, Sidney Telephone ) Company, Standish Telephone Company, and ) Tidewater Telecom, Inc. ) ) Concerning Section 69.605(c) and the Definition ) of "Study Area" Contained in Part 36 ) Appendix-Glossary of the Commission's Rules ) MEMORANDUM OPINION AND ORDER Adopted: January 31, 1997 Released: February 3, 1997 By the Chief, Accounting and Audits Division Common Carrier Bureau: I. INTRODUCTION AND BACKGROUND 1. On June 18, 1996, Bryant Pond Telephone Company ("Bryant Pond"), Lincolnville Telephone Company ("Lincolnville"), Maine Telephone Company ("Maine Telephone"), Mid-Maine Telecom, Inc. ("Mid-Maine"), Northland Telephone Company of Maine, Inc. ("Northland"), Oxford West Telephone Company ("Oxford West"), Sidney Telephone Company ("Sidney"), Standish Telephone Company ("Standish"), and Tidewater Telecom, Inc. ("Tidewater") 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, effective November 15, 1984. The requested waivers would allow the GTE-Maine study area to be divided among Maine Telephone, Mid-Maine, Northland, Oxford West, Sidney, and Tidewater. The requested waivers would also allow three expansions of existing study areas and two new Maine study areas for companies unaffiliated with existing Maine telephone companies. In addition, Oxford West seeks a waiver of Section 69.605 of the Commission's rules. That rule defines an average schedule company as being a telephone company that was participating in average schedule settlements on December 1, 1982. The requested waiver would permit Oxford West to have average schedule status. 2. Petitioners state that these waivers are needed to complete a process that began with the sale of 46 telephone exchanges serving 45,686 access lines by GTE-Maine in July 1994, to the Maine Telecommunications Group, Inc. ("MTG"). MTG was created by several existing Maine local exchange carriers and other interested participants. The petitioners state that, after the sale in July 1994, the GTE-Maine properties were divided among six operating companies which have since operated the exchanges independently, but within the parameters of the existing MTG study area (formerly GTE-Maine). 3. On July 10, 1996, the Common Carrier Bureau ("Bureau") released a Public Notice soliciting comments on the joint petition. In addition the petitioners submitted additional information concerning the joint petition. 4. In this Order, we find that the public interest would be served by allowing the former GTE-Maine study area to be divided among the petitioners. We also find that the public interest would be served by permitting Oxford West to have average schedule status for one year. We therefore grant the joint petition as conditioned below. II. STUDY AREA WAIVER A. Background 5. A study area is a geographic segment of an incumbent local exchange carrier's ("ILEC") telephone operations. Generally, a study area corresponds to an ILEC's entire service territory within a state. Thus, ILECs operating in more than one state typically have one study area for each state, and ILECs operating in a single state typically have a single study area. Study area boundaries are important primarily because ILECs 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 ILECs do not set up high-cost exchanges within their existing service territories as separate study areas to maximize interstate cost allocations. An ILEC must apply to the Commission for a waiver of the frozen study area rule if it wishes to sell or purchase an exchange. 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, that the change in study area boundaries does not adversely affect the Universal Service Fund ("USF") support program; second, that the state commission(s) having regulatory authority over the exchange(s) to be transferred does not object to the change; and third, that the public interest supports the 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 ILECs 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 ILEC, as a purchaser or seller, pending completion of the current review of the USF program. B. Pleadings 8. Background. The petitioners state that on July 31, 1994, GTE-Maine sold all of its stock to MTG. As a result, GTE-Maine was dissolved and all of its assets and liabilities were distributed to MTG. Six of the petitioners, Maine Telephone; Mid-Maine; Northland; Oxford West; Sidney; and Tidewater make up the MTG study area. Three of the petitioners, Bryant Pond; Lincolnville; and Standish have pre-existing study areas which serve 639; 1,624; and 6,801 access lines, respectively. These petitioners are affiliated with three of the ILECs that are a part of the MTG study area. Maine Telephone; Mid-Maine; Northland; Oxford West; Sidney; and Tidewater redeemed their stock in MTG in exchange for the assets and liabilities associated with their respective service areas and have since operated the exchanges independently. Maine Telephone acquired four exchanges serving 8,845 access lines; Mid-Maine acquired four exchanges serving 4,703 access lines; Northland acquired 23 exchanges serving 18,600 access lines; Oxford West acquired eight exchanges serving 4,747 access lines; Sidney acquired one exchange serving 324 access lines; and Tidewater acquired six exchanges serving 8,467 access lines. 9. Joint Petition. The petitioners seek waivers of the rule freezing study area boundaries to allow Maine Telephone and Tidewater to add their purchased exchanges to existing cost company study areas owned by their affiliates. The petitioners also seek waiver of the rule freezing study area boundaries to allow Oxford West to add its purchased exchanges to an existing average schedule company study area owned by its affiliate. In addition, petitioners seek waivers of the same rule to allow Mid-Maine, Northland and Sidney to place their purchased exchanges into two newly created cost based study areas. 10. Petitioners state that the proposed changes would serve the public interest because the realignment would result in interstate rates that more accurately reflect the cost of providing service. The petitioners state that it would be more efficient, both economically and administratively, for each of the petitioners to operate the exchanges within study areas corresponding to each individual operating entity. In addition, Northland states that it plans to install seven new concentrators or subscriber carrier systems by the end of 1996. Northland also states that it plans to install new subscriber cable facilities to connect these new concentrator locations. Further, Mid-Maine states that by 1998 it plans to upgrade the switch software in its central offices and replace all existing switch hardware with digital remote hardware, which will allow the provision of ISDN and CLASS features. Tidewater and Lincoln state that they plan to replace 13 remote line concentrators by the year 2000 and to add capacity to their network by adding cable and wire facilities to serve additional customers. Oxford West states that over the next five years, it plans to add switching and subscriber circuit equipment to its facilities, to make generic software upgrades and to add cable and wire facilities to add capacity to its network. Maine Telephone states that over the next five years it plans to add 2 to 3 new concentrators per year and to add capacity to its network by adding cable and wire facilities to serve additional customers. The petitioners state that, over the next five years, they plan to make plant investments totalling $17,591,769, of which $9,533,350 will be for loop related facilities. 11. Petitioners state that the impact on the USF if the requested waivers are granted would be minimal. They estimate that the combined USF draws after the transfer and including the planned upgrades would result in a net increase of $640,636 as shown below. Company Name USF Before the transfer USF After the transfer and upgrades Difference Existing Maine Study Areas MTG $2,697,924 N/A ($2,697,924) Bryant Pond/ Oxford West $0 $0 $0 Lincolnville/Tidewater $0 $549,442 $549,442 Standish/Maine Telephone $669,046 $1,222,475 $553,429 New Study Areas Mid-Maine N/A $543,639 $543,639 Northland/Sidney N/A $1,692,050 $1,692,050 TOTAL $3,366,970 $4,007,606 $640,636 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 substantial adverse impact on the USF total or on individual ILEC draws. In addition, the Maine Public Utilities Commission ("Maine PUC") states that it does not object to these requested waivers. Furthermore, the modernization and upgrades planned by the petitioners demonstrate that customers will likely be well served, and therefore, the requested study area waivers are likely to serve the public interest. As a result, we find that the three-prong standard for granting a study area waiver has been met in this instance and that the waiver requests should be granted. 13. Request for exemption from USF limits. 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. 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 new or revised study area shall not exceed the amounts specified in the joint petition. In reference to that Bureau policy, petitioners submitted two arguments against the imposition of limits on their USF draws. 14. First, the petitioners argue that it would be inappropriate for their future USF draws to be restricted to current estimates because those estimates were made in good faith. We have found that, even in a period of a few years, the USF estimates for some ILECs have risen by unexpected amounts. These ILECs 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 petitioners. However, the petitioners' failure to submit accurate USF estimates is not, as the 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 ILEC 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 petitioners' 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 petitioners' representations of the USF impact may be inaccurate, it would be unreasonable for their USF draws to be limited by those representations. 16. Second, the petitioners argue that the imposition of a cap subjects them individually to an unjust discriminatory application of the Commission's rules. Petitioners state, for example, in the case of Bryant Pond, Lincolnville, and Standish, these pre-existing ILECs would not be subject to a USF cap but for the acquisition decision of their affiliates. Yet, unlike the petitioners and other similarly situated ILECs, the other USF recipients have not been involved in transactions that remove exchanges from large study areas and spin them off into smaller study areas, where the exchanges may qualify for a higher level of USF. If the petitioners are cost settlement companies, for example, the transfer of high-cost exchanges to smaller study areas would permit the exchanges to have a greater effect on average loop cost. Because the USF assistance depends on study area average loop cost, such transactions cause any upgrading of loop plant in the transferred exchanges to be supported by a higher level of USF assistance than would occur if the upgrading had been performed instead by the seller. As a result, those transactions tend to cause upgrading costs to have a greater negative effect on the support available to other USF recipients. 17. In conclusion, we believe that, for cost companies, we should continue our policy of imposing limits on each new or revised study area's USF draw. We therefore find that, for these cost companies, the waivers should be subject to the condition that, absent explicit approval from the Bureau, the annual USF support provided to the petitioners' study areas shall not exceed the post- upgrade amounts specified by them in the joint petition. We do not establish USF support limits for average schedule companies, however, because their USF draws are not directly related to their costs. 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 petitioners' study areas. This, in turn, may require us to revisit these issues, and the related waiver conditions that we have established herein. III. COST SETTLEMENT WAIVERS 18. Background. Section 69.605(c) of the Commission's rules states, in pertinent part, that "a telephone company that was participating in average schedule settlements on December 1, 1982, shall be deemed to be an average schedule company." Average schedule status has certain advantages for small ILECs and for interstate ratepayers. Average schedule companies are able to avoid certain administrative burdens and interstate ratepayers are not required to pay the expenses that cost settlement ILECs incur in the performance of interstate cost studies. The Commission has concluded, however, that an unrestricted opportunity for cost companies to convert to average schedule status is likely to operate to the detriment of interstate ratepayers because the conversion may result in inflated interstate revenue requirements. Hence ILECs may go from an average schedule company to a cost company, but not from a cost company to an average schedule company without first obtaining a waiver. An ILEC must apply to the Commission for a waiver of the average schedule rule if it wishes to elect average schedule settlement status. 19. Pleadings. Oxford West, a company already operating within the MTG study area as a cost company, seeks a waiver of this rule in order to permit it to have average schedule status for interstate settlement purposes. Oxford West states that it proposes to combine its operations with those of its affiliate, Bryant Pond, an average schedule company. In addition, Oxford West states that it and Bryant Pond plan to file with NECA on a combined basis for interstate average schedule and USF purposes. Therefore, the interstate revenue impact is the same as if Oxford West had rolled these properties into Bryant Pond's existing operations. As a result, Oxford West states that this structuring of their individual operations cannot be seen as an effort to "game" the system. Further, Oxford West states that if it is not granted average schedule status, Bryant Pond would have to convert to cost settlement status and because of both companies' small size, such a conversion may result in increased interstate revenue requirements due to additional costs caused by the necessary cost studies. 20. Discussion. A petition for waiver of the Commission's rules may be granted for good cause. The Commission may exercise its discretion to waive a rule where particular facts would make strict compliance inconsistent with the public interest. Oxford West claims that average schedule status is needed because its affiliate has average schedule status and if the waiver request is denied Bryant Pond would have to convert to cost settlement status and such a conversion may result in increased interstate revenue requirements due to additional costs caused by the necessary cost studies. Oxford West is currently operating as a cost company and the majority of the consolidated study area would consist of cost based access lines. 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. Neither Bryant Pond nor Oxford West has demonstrated a need for a waiver to permit Oxford West to have average schedule status. We will not permit mergers and acquisitions to become a method of avoiding the intent of our average schedule rule on which ILECs may settle with NECA on the basis of average schedules. 21. We therefore will require the consolidated Bryant Pond/Oxford West study area to use cost settlements with the NECA pools. We recognize, however, that converting the Bryant Pond/Oxford West study area from average schedule to cost settlement status will require performance of cost studies and other changes to its accounting systems. Therefore, we will permit the new, combined study area to use average schedule settlements until such time as it performs the necessary cost studies to convert to cost settlements. This limited waiver of Section 69.605(c) will expire on July 1, 1998 or when the new combined study area completes the necessary actions to enable cost settlements, which ever occurs first. IV. ORDERING CLAUSES 22. Accordingly, IT IS ORDERED, pursuant to Sections 1, 4(i), 5(c), 201 and 202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201 and 202, and Sections 0.91, 0.291, and 1.3 of the Commission's Rules, 47 C.F.R.  0.91, 0.291, and 1.3 that the joint petition of Bryant Pond Telephone Company, Lincolnville Telephone Company, Maine Telephone Company, Mid-Maine Telecom, Inc., Northland Telephone Company of Maine, Inc., Oxford West Telephone Company, Sidney Telephone Company, Standish Telephone Company, and Tidewater Telecom, 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 of this Order. 23. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201 and 202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201 and 202, and Sections 0.91, 0.291, and 1.3 of the Commission's Rules, 47 C.F.R.  0.91, 0.291, and 1.3 that the National Exchange Carrier Association, Inc., shall not distribute USF assistance exceeding the limits imposed in paragraph 17 of this Order. 24. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201 and 202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201 and 202, and Sections 0.91, 0.291, and 1.3 of the Commission's Rules, 47 C.F.R.  0.91, 0.291, and 1.3 that the Joint Petition of Oxford West Telephone Company for waiver of Section 69.605(c) of the Commission's Rules, 47 C.F.R.  69.605(c), IS GRANTED, subject to the condition stated in paragraph 21. 25. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201 and 202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201 and 202, and Sections 0.91, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, and 1.3 that this Order IS EFFECTIVE IMMEDIATELY UPON RELEASE. FEDERAL COMMUNICATIONS COMMISSION Kenneth P. Moran Chief, Accounting and Audits Division Common Carrier Bureau