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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before theFEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Florida Public Service Commission ) Request for Interpretation of the ) AAD 95-77 Applicability of the Limit on Change in ) Interstate Allocation, Section 36.154(f) ) of the Commission's Rules ) ORDER Adopted: March 11, 1997 Released: March 12, 1997 By the Commission: I. INTRODUCTION 1. In a March 22, 1996 Order, the Accounting and Audits Division clarified the application of the subscriber plant factor (SPF) transition rules set forth in section 36.154 of the Commission's rules. These rules govern the allocation of loop costs between the state and interstate jurisdictions. The transition was designed to change a carrier's loop allocation from the traffic sensitive subscriber plant factor (SPF) to a flat rate 25 percent interstate allocation factor. 2. The Order's interpretation rejected the guidance provided and enforced by the National Exchange Carrier Association (NECA) for reporting of pool settlement data. In response to the Order, NECA issued two letters stating that, to comply with the Order's interpretation, certain carriers must adjust monthly settlement data for the period from April 1994 to the present. On April 22, 1996, GVNW Inc./Management (GVNW), on behalf of itself and its clients, filed a Motion for Partial Stay of the retroactive application of the Order. That Motion was granted on May 22, 1996. 3. On April 22, 1996, the Commission also received the following submissions in response to the Order: Applications for Review from GVNW, the National Telephone Cooperative Association (NTCA), and Tri-County Telephone Association, Inc., (TCTA) jointly with TCT West, Inc. (TCTW); a Request for Clarification from the Organization for the Promotion and Advancement of Small Telecommunications Companies (OPASTCO); Requests for Clarification or Reconsideration from NECA and John Staurulakis Inc., (JSI); and a Petition for Reconsideration from TCA Inc., (TCA). 4. On May 2, 1996, MCI Communications Corporation (MCI) submitted an Opposition to the above pleadings. Also on May 2, the Sprint Local Telephone Companies (SPRINT) submitted an Opposition in part to NTCA's application. On May 6, 1996, the Commission issued a Public Notice soliciting comments from interested parties. We received comments from 39 parties and reply comments from 7 parties. 5. The petitions and comments raise three issues: whether the Order's interpretation of the five percent limit is correct; whether the Order must be applied retroactively; and how study area changes affect the operation of the SPF transition rules. II. LIMIT ON CHANGE IN INTERSTATE ALLOCATION A. Background 6. The procedures for allocating loop costs between the state and interstate jurisdictions are set forth in sections 36.154(a) through (f) of our rules. Prior to 1982, these costs were allocated using a traffic sensitive interstate allocation factor known as the subscriber plant factor (SPF). By the early 1980's, increases in relative interstate usage caused carriers' SPFs to escalate rapidly, reaching 85 percent for some carriers. As a result, the Commission decided to re-evaluate its allocation procedures. 7. In a series of proceedings, the Commission instituted a flat-rate 25 percent interstate allocation factor that would be phased in during an eight-year period, 1986 to 1993, subject to the limitation that a carrier's transitional interstate allocation factor would not decrease more than five percent each year (SPF transition). Concurrent with the institution of the SPF transition, the Commission established the universal service fund (USF) that allows incumbent local exchange carriers (ILECs) with high local loop costs to allocate a portion of those costs to the interstate jurisdiction. The USF was phased in during the same eight-year transition period as the SPF transition. The SPF transition's five percent limit on the change in interstate allocation measured the combined impact of both the SPF transition and USF transition. Carriers with very high SPFs were directed to extend their transition, subject to the five percent limitation, until the 25 percent allocation was reached. 8. In a letter dated May 12, 1995, the Florida PSC requested an interpretation of the applicability of the five percent limit on the change in interstate allocations after 1993 and after a study area's interstate allocation factor has reached a level of 25 percent pursuant to the SPF transition. The Florida PSC stated that, in its view, the purpose of section 36.154(f) was to mitigate potentially large intrastate cost shifts and thereby to help stabilize a carrier's earnings and rates. According to the Florida PSC, that purpose remained valid after 1993. 9. Essentially, the Florida PSC sought to confirm that the interpretation set forth by NECA, in its February 1991 Cost Issue 5.3, was correct. NECA there stated that the five percent limit found in section 36.154(f) was to be applied on a year-to-year basis until the rule was eliminated. Based on NECA's interpretation, carriers that had completed the transition to a 25 percent allocation nevertheless increased their interstate allocations to offset the impact of study area changes and reductions in USF payments. The Order, however, clarified that the overriding purpose of the transition was to establish a 25 percent interstate allocation factor and that, once a carrier had reached a 25 percent allocation, nothing in the rules would permit it to change. B. Positions of Parties 10. GVNW, NTCA and TCTA/TCTW contend that the Order's interpretation of section 36.154(f) conflicts with the language of the rule, the policy behind it, and previous reliable interpretations. They state that the overall purpose of reaching a 25 percent interstate allocation factor cannot be discerned from the language of section 36.154(f). Instead, they argue that the rule is intended to smooth ongoing fluctuations in interstate allocations resulting from reductions in USF support. 11. NECA, JSI and others maintain that NECA's former interpretation was reasonably supported by the rule language and prior Commission decisions. In fact, the Florida PSC observes that the Order does not cite any provision prohibiting the applicability of the five percent limit after 1993 and after a study area has reached the 25 percent interstate allocation factor. It claims the test may still be used to limit fluctuations in interstate allocations. Other commenters assert that NECA's interpretation better reflects the purposes of the rule -- to promote and develop a more competitive market and foster universal service goals. Many of GVNW's clients individually submitted financial impact data to support GVNW's application. These small ILECs warn that they may "review future construction plans to avoid significant revenue shortfalls which will occur" as a result of the Order's interpretation and the "inherent lag" in USF support. 12. Sprint, MCI, ALLTEL and AT&T support the Order's interpretation. They base their support on the language of the rule and observe that the method for determining whether the interstate allocation has decreased is based on the transitional allocations set forth in section 36.154(d). They note that, because the transitional allocations expired in 1992, it is impossible to calculate the five percent limit using the method required by section 36.154(f). In addition, AT&T and ALLTEL argue that previous Commission decisions support the Order's interpretation. C. Discussion 13. Section 36.154 sets forth the apportionment procedures for Exchange Line Cable and Wire Facilities - Category One. Sections 36.154(c) through (f) pertain to Subcategory 1.3: "subscriber or common lines that are jointly used for local exchange service and exchange access for state and interstate interexchange services." Section 36.154(c) provides that "except as provided in  36.154(d) through (f), effective January 1, 1986, 25 percent of the costs assigned to subcategory 1.3 shall be allocated to the interstate jurisdiction." Subsection (e) describes how to calculate the SPF and subsection (d) supplies the mathematical formula to apply during the transition from the SPF to the 25 percent interstate allocation factor. 14. Section 36.154(f) is the source of petitioners' dispute. Captioned "Limit on Change in Interstate Allocation," subsection (f)(1) provides that: No study area's percentage interstate allocation for Subcategory 1.3 Exchange Line C&WF and COE, Exchange Line Circuit Equipment Excluding Wideband - Category 4.13 investment as well as associated maintenance and depreciation shall decrease by a total of more than five percentage points from one calendar year to the next as a result of the combined operations of  36.154(d) and 36.641(a) and (b). The Order explains that section 36.154(f) was adopted for the limited purpose of mitigating the year- to-year impact of the transition from SPF to the 25 percent interstate allocation factor. The Order states that "no provision in the Commission's rules. . . would allow a carrier's interstate allocation factor to change, once it has reached 25 percent." 15. Opposition to the Order's interpretation stems in large part from dissatisfaction with the operation of the USF mechanism. NECA's interpretation directed carriers to use the five percent limitation to moderate the impact on intrastate rates resulting from reductions in USF payments. Petitioners contend that the reference to section 36.641(a), which provides that the USF expense adjustment "for 1993 and subsequent years shall be the amount computed in accordance with section 36.631," means that section 36.154(f) remains in effect until a rule change is enacted. They cite the general caption of the subsection, "Limit on Change in Interstate Allocation" to support their view of the rule's purpose. 16. We disagree. Petitioners' interpretation of section 36.154(f) is contrary to both the language of the rule and the intent of the Commission. Section 36.154(f) is a transitional provision created only to mitigate the impact of the SPF transition while the USF support mechanism was being phased-in. Significantly, the application of section 36.154(f) is not conditioned on the ongoing interstate allocation factor and USF expense adjustment provisions, sections 36.154(c) and 36.631 respectively. Instead, section 36.154(f) refers to the transitional SPF and USF provisions, sections 36.154(d) and 36.641(a) and (b) respectively, which reinforces our conclusion that the limitation was not intended to apply beyond the period of the SPF transition. 17. Unlike the SPF transition, in which carriers generally reduced their interstate allocations, under the USF transition, carriers could allocate an increasing portion of their costs to the interstate jurisdiction. At the time the SPF and USF transition rules were drafted, it was not contemplated that USF support would decline, but rather that the phase-in of the USF would offset the reduction of the interstate allocation stemming from the replacement of SPF with the 25 percent interstate allocation factor. The five percent limitation found in section 36.154(f) provided additional protection by limiting the change in interstate allocations in those situations where, taking into account the USF expense adjustment, the overall decrease in a carrier's interstate allocation factor would nevertheless be greater than five percent from the previous year. Therefore, section 36.154(f) provides that a carrier's allocation shall not decrease more than five percentage points as a result of the "combined operations" of the SPF transition and the USF transition. 18. Further support for this interpretation can be found in a Memorandum Opinion and Order released April 4, 1991. In that matter, USTA had claimed that the current procedures created significant unanticipated hardships for certain small carriers and proposed eliminating the USF offset to alleviate the problem. The Commission denied USTA's petition, stating that: When the Commission adopted the current rules, it believed that an annual limitation of five percentage points for the decrease in interstate [non-traffic sensitive] costs, taking into consideration the USF adjustment, would provide for an orderly transition to the 25 percent allocator without placing an undue burden on the local rates of any company. 19. Nothing in the administrative history of the SPF transition rules supports the view that section 36.154(f) was intended to mitigate year-to-year fluctuations in interstate allocations resulting from changes in USF support alone. In fact, because reductions in USF payments signify that carriers' local loop costs declined relative to the national average, mitigating their impact would undermine the operation of the USF support mechanism. Accordingly, we conclude that the Order's interpretation is supported by the language, context, and history of the SPF transition rules and therefore we affirm the Order's interpretation. Once a carrier's transition to a 25 percent interstate allocation factor has been achieved, the limitation on the change in interstate allocation found in section 36.154(f) is no longer operative. III. CORRECTIVE ACTION A. Background 20. Our rules require ILECS, on a monthly basis, to report to NECA their revenue, expense and investment data. NECA uses these data to compute each ILEC's monthly pool shares. Because ILECs do not have complete data available when they first report to NECA, the ILECs initially report estimated data. In the following months, the ILECs are required to reconcile their estimates with actual results. To ensure the accuracy of the reconciliation process, NECA's procedures allow the ILECs twenty-four months from the date their data are first reported to the pools to reconcile and correct previously submitted data. Because the Order represents an interpretation of an existing rule, NECA informed certain carriers that they would be required to adjust all settlement data filed within the 24-month period to comply with the Order's interpretation. 21. Our rules also require NECA and those ILECs not subject to price cap regulation to file one-page rate-of-return reports that show total revenues, total expenses and taxes, operating income, rate base and rate of return for each tariff pool and study area. These reports enable the Commission to monitor the pool's and carriers' actual performance on an access element-by-element basis and to determine whether maximum rates of return were exceeded. Under section 208 of the Act, any person injured by unlawful rates may file a complaint for damages with the Commission. B. Positions of Parties 22. All seven petitioners urge the Commission not to apply the Order retroactively. They argue that the Order represents an abrupt departure from NECA's interpretation that was reasonable and upon which they relied. Retroactive application of the Order's interpretation would result in millions of dollars of revenues being taken back from small, rural ILECs. GVNW estimates the total impact to its client companies as $11 million. JSI estimates that the collective impact on its clients would be $4.7 million. Because their states do not allow retroactive ratemaking, petitioners contend, these losses could not be recovered. The petitioners assert that these losses are likely to impact network improvements, new technologies and service enhancements. 23. The overwhelming majority of commenters support the petitioners' arguments. GVNW's clients argue against retroactive application because "[c]ost recovery must be predictable, so that auditors, lenders and ILECs can have confidence in NECA's interpretation and implementation of the Commission's rules." JSI's clients similarly cite the magnitude of losses that will occur as a result of the retroactive application of the Order. MTA estimates losses of approximately $3 million for its members. 24. AT&T, ALLTEL and MCI dismiss petitioners' and commenters' arguments for applying the Order only prospectively. AT&T states that it is "inappropriate. . . for these carriers to insist that the Commission interpret a rule in a manner it did not intend." AT&T and ALLTEL point out that mandating prospective application means carriers who complied with the rule would be forced to file a waiver to continue to do so. C. Discussion 25. As a general rule, declaratory rulings that interpret, but do not change, obligations under existing Commission rules have the effective date of the rule. Petitioners' arguments against retroactivity are rooted in the perception that the Order represents a new policy. We disagree. The Order corrects a misinterpretation put forth by NECA but does not change the purpose or operation of the underlying rules. Similarly, petitioners' claims that the Order's interpretation was unexpected are unpersuasive. This proceeding does not involve an unforeseen application of a rule, but rather the exact fact situation the rules were designed to address: the implementation of a flat 25 percent interstate allocation factor for loop costs for all carriers through a gradual transition. Petitioners ask us to substitute NECA's rule for our own because they relied on it. Their reliance was misplaced. Although parties such as TCA may have presumed that NECA had "informal communication with the FCC" prior to issuing Cost Issue 5.3, nothing in the record supports that claim. Because it interprets but does not change section 36.154 of our rules, the Order has the effective date of the rules. 26. NECA's interpretation of section 36.154(f) is so entirely in conflict with the literal meaning and clear intent of our rules that it gives us cause for concern that NECA may not be fulfilling its responsibilities to the Commission. NECA was established at the direction of the Commission to administer important Commission programs, including the common line and traffic sensitive pools, the universal service fund, the lifeline assistance program and the long term support program. We remind NECA that it must administer these pools in accordance with our requirements and has no authority to implement its own policy. As with any other parties, NECA may file a request that the Commission resolve any uncertainty about the operation of a rule. When NECA provides its own guidance in the absence of a Commission directive, it does so at the risk that its interpretation is incorrect and is subject to appropriate enforcement actions. 27. To the extent that its pool members overallocated costs to the interstate jurisdiction, NECA's quarterly and annual rate-of-return reports -- Form 492 -- contained incorrect data. Without corrected data, neither the Commission nor affected interexchange carriers can determine whether the Carrier Common Line pool exceeded the maximum allowable rate of return. In order to assess possible violations of our rate-of-return prescription, we require that NECA file in this docket corrected Form 492s for each of the years in which NECA required pooling companies to be in conformance with its misinterpretation of section 36.154(f), thereby causing incorrect settlement data for the Carrier Common Line pool to be reported. 28. Even if the incorrect interstate allocations did not give rise to violations of our rate-of- return prescription, the overassignment means that some members of the NECA pool received greater interstate returns than the rules would allow at the expense of many members who suffered somewhat lower interstate rates of return. We decline to address whether intrapool adjustments should be required because no NECA pool members have sought redress for the damage. IV. EFFECT OF STUDY AREA CHANGES A. Background 29. The SPF transition rules incorporate the definition of study area contained in Part 36 Appendix-Glossary of the Commission's rules which state that boundaries of a study area shall be frozen as they were on November 15, 1984. When the Commission decided to freeze study area boundaries, it sought to discourage carriers from establishing their high cost exchanges as separate study areas in order to maximize high cost support and at the same time to remove the disincentive for purchasing high cost carriers or expanding into high cost areas. 30. Under the approach adopted by the Commission, a holding company may either treat a newly purchased or newly created service territory separately or fold it into one of its existing study areas. The Commission expected that carriers would merge study areas "when the benefits of consolidated operations exceed the reduction in high cost support." To form a new study area or change existing study area boundaries, carriers are required to seek a waiver of that provision freezing study area boundaries. The March 22, 1996 Order acknowledges that "because the transition rules were designed for use for the study areas in existence during the transition, it is not clear that the transition rules would apply to study areas that have undergone significant changes." B. Positions of Parties 31. NECA and JSI seek clarification of the effect of study area changes on the application of the SPF transition rules. JSI argues that the uncertainty "violates the 'predictable' and 'sufficient' mandate of the 1996 Telecommunications Act. USTA agrees that the Order is not clear and "urges the Commission to release clarifying language." C. Discussion 32. The SPF transition rules were designed to mitigate the impact of the change to a 25 percent interstate allocation factor for existing carriers that had high frozen SPFs when the transition began. Newly established and newly purchased service territories that were separately incorporated were not eligible for the transition rules but instead were subject to the 25 percent interstate allocation factor set forth in section 36.154(c). 33. In the past, the Commission granted carriers' petitions to recalculate their transitional SPFs in conjunction with study area waivers in order to prevent study area changes from disrupting the gradual transition contemplated by the rules. At this point, the benefit of a gradual transition has been achieved. Most carriers completed the transition to a 25 percent interstate allocation by 1993. Because no study area had a frozen SPF higher than 85 percent when the transition began, most remaining carriers will reach 25 percent by 1997. We conclude that the rationale supporting the transition no longer applies to carriers whose existing study areas undergo changes because the potential for disruption no longer exists. As a result, these carriers will be subject to the 25 percent interstate allocation factor set forth in section 36.154(c). V. ORDERING CLAUSES 34. Accordingly, IT IS ORDERED, pursuant to sections 4(i), 5(c)(5), 218 and 220 of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 155(c)(5), 218 and 220, and section 1.115 of the Commission's Rules, 47 C.F.R.  1.115, that the Applications for Review filed April 22, 1996 by GVNW Inc./Management, the National Telephone Cooperative Association, and Tri- County Telephone Association Inc. and TCT West, Inc.; the Request for Clarification filed April 22, 1996 by the Organization for the Promotion and Advancement of Small Telecommunications Companies, and the Petition for Reconsideration filed April 22, 1996 by TCA Inc., ARE DENIED. 35. IT IS FURTHER ORDERED, pursuant to sections 4(i), 218 and 220 of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 218 and 220, and section 1.429 of the Commission's Rules, 47 C.F.R.  1.429, that the Requests for Clarification or Reconsideration filed by the National Exchange Carrier Association and John Staurulakis Inc., are GRANTED IN PART, as discussed in paragraphs 28 through 32, and otherwise DENIED. 36. IT IS FURTHER ORDERED, pursuant to sections 4(i), 218 and 220 of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 218 and 220, and section 1.429 of the Commission's Rules, 47 C.F.R.  1.429, that NECA file corrected Form 492s in accordance with paragraph 26 of this Order. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX A Ayrshire Farmers Mutual Telephone Co. Clear Lake Independent Telephone Company Dell Telephone Cooperative, Inc. Dubois Telephone Exchange, Inc. Ketchikan Public Utilities Midvale Telephone Exchange, Inc. Midway Telephone Company Montana Independent Telecommunications Systems Nehalem Telephone & Telegraph Company New Florence Telephone Company, Inc. Ontonagon County Telephone Company OTZ Telephone Cooperative Pine Telephone System, Inc. Roosevelt County Rural Telephone Cooperative Table Top Telephone Company, Inc. Yukon Telephone Company, Inc. APPENDIX B BEK Communications Cooperative Carr Telephone Company Central Texas Telephone Cooperative, Inc. Coastal Utilities Inc. Germantown Telephone Company Hargray Telephone Company, Inc. Hill Country Telephone Cooperative, Inc. Middleburgh Telephone Company Nicholville Telephone Company, Inc. Ogden Telephone Company APPENDIX C Blackfoot Telephone Cooperative Bristol Bay Telephone Cooperative, Inc. Canby Telephone Association Cascade Utilities Central Montana Communications, Inc. Clark Fork Telecommunications, Inc. Clear Creek Mutual Telephone Company Colton Telephone Company Cordova Telephone Cooperative Cowiche Telephone Company Crossville Telephone Company Custer Telephone Coop., Inc. Egyptian Telephone Cooperative Association Ellensburg Telephone Company Farmers Telephone Company, Inc. Gervais Telephone Company Kalona Cooperative Telephone Company Leaf River Telephone Company Lincoln Telephone Company Manti Telephone Company Mark Twain Rural Telephone Company Matanuska Telephone Association, Inc. Moultrie Independent Telephone Company North-State Telephone Company Oregon Farmers Mutual Telephone Company Oregon Telephone Corporation Pioneer Telephone Cooperative Price County Telephone Company Range Telephone Cooperative, Inc. Rib Lake Telephone Company Rico Telephone Company RT Communications S & A Telephone Company Southern Montana Telephone Company Trans-Cascades Telephone Company Triangle Telephone Cooperative Association, Inc. Wabash Telephone Cooperative, Inc. Yelm Telephone Company