******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. 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 Matter of ) AAD 96-95 Petition for Waivers Filed by ) ) Baltic Telecom Cooperative, Inc. East Plains ) Telecom, Inc. and U S WEST ) Communications, Inc. ) ) Concerning Sections 69.3(e)(11), 69.3(i)(4), ) 69.605(c) and the Definition of "Study Area" ) Contained in the Part 36 Appendix-Glossary ) of the Commission's Rules ) MEMORANDUM OPINION AND ORDER Adopted: February 27, 1997 Released: February 27, 1997 By the Chief, Accounting and Audits Division Common Carrier Bureau: I. INTRODUCTION 1. On September 11, 1996, Baltic Telecom Cooperative, Inc. ("Baltic"), East Plains Telecom, Inc. ("East Plains"), and U S WEST Communications, Inc. ("U S WEST") filed a petition for waiver of various Commission rules. The petitioners seek waivers of the definition of "Study Area" contained in the Part 36 Appendix-Glossary of the Commission's rules. The requested waivers would allow U S WEST to alter the boundaries of its South Dakota study area and allow East Plains to create a new study area to reflect the sale of the Alcester exchange from U S WEST to East Plains. East Plains also seeks a waiver of Section 69.605(c) of the Commission's rules to allow the Alcester exchange to be treated as an average schedule company. In addition, Baltic and East Plains also seek waiver of Sections 69.3(e) and 69.3(i)(4) of the Commission's rules, if necessary, so that they may be issuing carriers in the National Exchange Carrier Association ("NECA") common line tariffs. 2. On September 20, 1996, the Common Carrier Bureau ("Bureau") released a Public Notice soliciting comments on the petition. In this Order, we find that the public interest would be served by allowing U S WEST to alter its study area boundary and by permitting East Plains to have average schedule status. We also find that the public interest would not be served by allowing East Plains to establish a new study area. We therefore grant the petition, in part, as explained below. II. STUDY AREA WAIVERS A. Background 3. 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. 4. 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 the change. 5. 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 6. U S WEST currently serves approximately 250,000 access lines in South Dakota. Baltic currently serves approximately 1,400 access lines in South Dakota. U S WEST intends to sell the Alcester exchange, serving 792 access lines, to Baltic. Baltic has established East Plains, a wholly- owned subsidiary, to operate the Alcester exchange after the sale. U S WEST seeks waiver of the rule freezing study area boundaries to enable it to remove the Alcester exchange from its South Dakota study area. East Plains also seeks waiver of that rule to create a new study area for this exchange. 7. Petitioners state that the proposed changes would serve the public interest. They state that East Plains intends to maintain operating staff in Alcester; as a result, East Plains' customers will receive maintenance and other customer support services on a more localized basis. The petitioners also state that East Plains plans to install a digital switch which will support CLASS and other SS7- related services. In addition, the petitioners state that East Plains plans to upgrade outside plant by providing fiber in the loop to eliminate multi-party services. 8. Petitioners state that there will be no USF impact arising from its transaction. Specifically, petitioners state that neither U S WEST nor Baltic currently receives USF support for their South Dakota study areas and that neither U S WEST, Baltic, nor East Plains will receive USF support after the acquisition. Further, the petitioners state that, if Baltic and East Plains are required to combine into one study area, there will be no USF impact. C. Discussion 9. Request for waivers. We have reviewed the data the petitioners filed with NECA and the estimates filed in this proceeding and have determined that there will be no USF impact arising from this transaction. In addition, the South Dakota Public Utilities Commission states that it does not object to these requested waivers. The petitioners state that planned upgrades would enable East Plains to improve customer services in the Alcester exchange. We believe the petitioners have demonstrated that their customers will likely be well served by East Plains, 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 and that the study area waiver requests should be granted. 10. Request for separate study area. East Plains seeks permission to place the acquired exchange into a newly created study area that is separate from its affiliates' (i.e., Baltic) study area. East Plains asserts that this change would be consistent with Commission policy and precedent in freezing study area boundaries. Specifically, East Plains states that it will not gain any advantage under the USF support rules or the small carrier assistance rules. The petitioners also state that Baltic is a cooperative and East Plains is a for-profit corporation and due to their divergent ownership structures, they can be operated most reasonably, efficiently, and equitably as separate study areas. 11. Regarding East Plains' assertion that setting up a separate study area would be consistent with the Commission's policy and precedent in freezing study area boundaries, we disagree. It is the consolidation of study areas located within the same state for affiliated companies, not the disaggregation of such areas, that is the type of study area configuration that the Commission encourages as serving the public interest. While the USF impact is of genuine concern, it is not the only concern. It would not be consistent with Commission goals to create a new study area for East Plains' Alcester, South Dakota exchange since its affiliate, Baltic, has been operating in South Dakota for many years. 12. As explained above, the primary intent of the study area freeze rule is to prohibit ILECs from setting up exchanges within their service territories as separate study areas to maximize USF support. ILECs 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, an ILEC's USF payment will often be greater in the future if the ILEC can isolate exchanges in one or more separate study areas. Such action permits the ILEC to report average loop cost in the high-cost study areas further above the USF eligibility threshold than would be possible if the exchanges remained consolidated with lower-cost exchanges. 13. East Plains asserts that, if it is granted average schedule status, grant of a separate study area would not provide it an advantage under either the USF or the small carrier assistance programs. Under our rules, an average schedule carrier can convert to cost settlement status without requesting a waiver. As a result, even if East Plains and Baltic would not be able to maximize their interstate cost allocations as separate average schedule companies, they could do so as separate cost companies, should they choose such treatment. 14. East Plains states that due to its divergent ownership structures, infrastructure and investment needs, and accounting systems, the existing Baltic exchanges and new East Plains exchange can be operated most reasonably, efficiently and equitably as separate study areas. We do not oppose the plans that Baltic has to create a new, wholly-owned subsidiary for the acquired exchange. Nor do we oppose Baltic's plans to treat the acquisition as a company that is separate and apart from its current South Dakota operation. We do not agree, however, that these plans would necessitate separate study areas for the acquired exchange. 15. East Plains further claims that we are required to permit it to create a new study area because of Commission precedent. East Plains cites three of our decisions to allow ILECs to establish second study areas because their USF draws would increase by only a small amount, as support for East Plains creating a separate study area where there would be no USF assistance. We granted those waivers shortly before we became aware of the magnitude of the potential cumulative effect of other similar waivers. Numerous ILECs 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 ILECs 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 ILECs after they were granted study area waivers. 16. In conclusion, we find that in this case, where ILECs are operating in the same state, the rule is intended to prevent companies from creating additional study areas when transferring exchanges among themselves. We therefore deny East Plains' request for the creation of a new study area. III. COST SETTLEMENT WAIVERS A. Background 17. Section 69.605(c) of the Commission's rules states, in pertinent part, that "a telephone company that was participating in average 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. B. Pleadings 18. As a newly created company, East Plains seeks a waiver of this rule in order to permit it to have average schedule status for interstate settlement purposes. East Plains states that this structure is necessary to enable it to avoid performing cost studies that would be unnecessarily costly in view of its small size. C. Discussion 19. We are persuaded that a deviation from the general rule is warranted for East Plains because we have decided herein that it would share a study area with its parent, Baltic, an average schedule company. Because jurisdictional separations and USF calculations are performed at the study area level, all affiliates in a single study area must be under the same settlement method for performing interstate settlements. Hence, an application of Section 69.605(c) in this instance would have the unintended effect of requiring the parent company, which now operates over 1,400 access lines and has average schedule status, to convert to cost-based settlement in order to be able to acquire the subject exchange, which operates fewer than 800 access lines. That effect would be unnecessarily burdensome on East Plains and its parent. We therefore find that this requested waiver should be granted. 20. The waiver for East Plains is subject to three conditions. First, East Plains and its parent Baltic, shall report to NECA on a combined basis for interstate average schedule and USF purposes and receive distributions on that basis. This condition implies that, for interstate regulatory purposes, the two companies effectively are one company. Second, if one of the two affiliates in this study area converts from average schedule status to cost-based settlements, or elects Section 61.39 treatment, the other affiliate in this study area must convert to that settlement status. Third, the average schedule status of East Plains shall remain in effect only while it is under common control with its parent, Baltic. This condition implies that East Plains' average schedule status shall terminate when it is sold, transferred, or otherwise assigned. These conditions will ensure that the waiver will not result in unintended effects on the petitioners' interstate revenue requirements or result in an administrative burden on the Commission or NECA. IV. OTHER ISSUES 21. Baltic and East Plains seek waivers of Section 69.3(i)(4) to the extent necessary. That rule states that, if an ILEC elects to withdraw from participation in NECA tariffs and then becomes subject to price cap regulation, neither the ILEC nor any of its withdrawing affiliates shall be permitted to participate in any NECA tariffs. Neither Baltic nor East Plains is subject to price cap regulation. Thus, neither East Plains nor Baltic needs a waiver of Section 69.3(i)(4) to participate in NECA tariffs. 22. To the extent necessary, Baltic and East Plains seek waiver of Section 69.3(e)(11) of the Commission's rules. That rule requires that any changes in NECA common line tariff participation and long term support resulting from a merger or acquisition of telephone properties are to be made effective on the next annual access tariff filing effective date following the merger or acquisition. Baltic and East Plains are concerned that under a strict interpretation of this rule they, rather than NECA, would be required to file a tariff on the next annual access tariff filing date. Assuming East Plains' acquisition occurs this year, East Plains and Baltic represent that they plan to utilize NECA as their interstate tariff administrator; consequently, East Plains' and Baltic's carrier common line costs will be included in NECA's 1997 filing. We conclude that neither East Plains nor Baltic is required to make a separate annual access filing for their carrier common line costs, and therefore, a waiver of Section 69.3(e)(11) is not required. V. ORDERING CLAUSES 23. 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 Petition of Baltic Telecom Cooperative, Inc., East Plains Telecom, 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 IN PART. 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 Petition of East Plains 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 exchange. 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 the Petition of East Plains Telecom, Inc. for Waiver of Section 69.605(c) of the Commission's rules, 47 C.F.R.  69.605(c), IS GRANTED subject to the conditions stated in paragraph 20 of this Order. 26. 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 if and when East Plains Telecom, Inc. or any of its affiliates in South Dakota convert from average schedule status to cost-based settlements or are sold, assigned or otherwise conveyed, the affected companies and the National Exchange Carrier Association shall promptly notify this Division of the change. 27. 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