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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federa l Communications Commission Wash ington, D.C. 20554 In the Matter of) ) Fremont Telcom Company) AAD 97-56 ) Petition For Waiver of Sections 36.611 and ) 36.612 of the Commission's Rules ) ORDER Adopted: January 23, 1998 Released: January 23, 1998 By the Chief, Accounting and Audits Division: I. INTRODUCTION 1. On April 28, 1997, Fremont Telcom Co. ("Fremont") filed a petition ("Petition") requesting a waiver of Sections 36.611 and 36.612 of the Commission's rules to enable it to receive high cost loop support retroactively from January 1, 1997. On April 29, 1997, the Accounting and Audits Division ("Division") released a public notice soliciting comment on the petition for waiver. Four parties filed comments. Fremont filed reply comments. In this Order, we deny Fremont's Petition. II. BACKGROUND 2. In 1984, the Commission established high cost support mechanisms to promote the nationwide availability of telephone service at reasonable rates. Specifically, high cost loop support allows incumbent local exchange carriers with high local loop costs to allocate an additional portion of those costs to the interstate jurisdiction, enabling the state jurisdictions to establish lower local exchange rates in study areas receiving such assistance. Under these rules, a company's high cost loop support is based on the relationship of its historical loop cost to the national average historical loop cost. 3. In the Universal Service Order released on May 8, 1997, the Commission established new federal universal service support mechanisms consistent with the Communications Act of 1934, as amended (the "Act"). Under the new federal universal support mechanisms, support for high cost areas will be based upon forward-looking economic cost mechanisms. Thus, a carrier's support will be based on the forward-looking economic cost of providing the supported services to a service area. Non-rural incumbent local exchange carriers ("incumbent LECs") will receive support based on forward-looking economic costs beginning January 1, 1999; rural incumbent LECs will begin to receive support based on forward-looking economic costs no earlier than January 1, 2001. Until an incumbent LEC's high cost loop support is based on forward-looking economic cost, its support will continue to be based on historical cost data. 4. In accordance with Sections 36.611 and 36.612 of the Commission's rules, on July 31 of each year, incumbent LECs submit to the National Exchange Carrier Association ("NECA") loop cost data for the prior year. NECA compiles and analyzes these data to determine the average cost per loop for each incumbent LEC as well as the nationwide average cost per loop. Each incumbent LEC's high cost loop support amount for the following year is based upon the relationship between the incumbent LEC's average cost per loop and the nationwide average cost per loop. Because the cost data is not submitted by carriers until seven months after the end of a calendar year and because NECA requires time to compile and analyze data, support is not provided generally to carriers until two years after costs are incurred. This period can be less than two years if quarterly updates are filed. III. PETITION AND COMMENTS 5. Petition. On August 29, 1996, the Division granted Fremont a study area waiver associated with Fremont's purchase of three rural Idaho exchanges from US West Communications, Inc. ("US West"). The study area waiver was granted based on Fremont's assertion that its planned upgrades would improve customer service and that the estimated increase in high cost loop support draw would not have a substantial adverse impact on the total universal service fund. Fremont states that, as a new incumbent LEC, it lacks the historical cost data upon which to base high cost loop support distributions and, therefore, requests a waiver of Sections 36.611 and 36.612 to permit it to receive immediate high cost loop support. In the absence of the requested relief, Fremont will not receive any high cost loop support revenues for up to two years as a result of the application of the high cost loop support distribution rules. As actual costs become known, Fremont proposes to provide documentation to NECA and to true up the payments it receives on a quarterly basis. 6. Fremont argues that application of the Commission's rules in this instance would be contrary to the public interest because improvements to service quality and availability in its high cost rural service area cannot be achieved without immediate revenue recovery from the high cost loop support mechanism. Fremont states that it must replace or upgrade its switching equipment and that the plant it acquired from US West is antiquated and of insufficient capacity to provide service to existing customers requesting additional service or to any new customers. 7. Comments. NTCA, the Idaho Commission, ITA, and ITC support Fremont's Petition. NTCA states that because Fremont plans to make needed improvements to service quality and availability via new digital switching equipment and replacement of antiquated outside plant in its existing service area, its requested waiver for immediate high cost loop support would further the Commission's goal of providing universal service. The Idaho Commission states that it is in the public interest to grant Fremont's request so that it might provide upgraded telecommunications services to its rural customers. ITA also supports the waiver as being in the public interest, adding that the subject territory encompasses rugged terrain and suffers under extreme weather conditions that cause Idaho carriers to experience high costs in providing supported services. Finally, ITC states that, should the Commission deny the requested waiver, the only parties injured would be the customers, a result that would be contrary to the goals of universal service. 8. In reply, Fremont contends that because it is serving an isolated, high cost area that is not currently included in existing high cost loop support mechanisms, it should, in accordance with the procedures set forth in the Commission's Universal Service Order, receive support based on an estimate of annual amounts of its embedded costs, as it requested. IV. DISCUSSION 9. Fremont began operations on November 15, 1996, providing local exchange service in three rural Idaho exchanges previously served by US West. Fremont, as a new company, has no historical cost data. Because the Commission's rules require calculation of high cost loop support disbursements to be based on historical cost data, Fremont would be precluded from receiving high cost loop support for up to two years. 10. Under Section 1.3 of our rules, we are required to grant waivers "if good cause therefor is shown." As interpreted by the courts, this requires that a petitioner demonstrate that "special circumstances warrant a deviation from the general rule and such a deviation will serve the public interest." 11. It has been long standing policy not to waive sections 36.611 and 36.612 of the Commission's rules. In fact, we have granted waivers of these sections only when a requesting carrier proposes to serve or is serving previously unserved areas. Fremont does not assert any special circumstances affecting it that were not faced by any of the numerous rural telephone companies that have received study area waiver requests to obtain exchanges. As a result, Fremont fails to demonstrate the special circumstances that would support the grant of a waiver of sections 36.611 and 36.612. 12. We note that the Commission's high cost loop support distribution rules related to the sale and acquisition of exchanges have been in place for many years. In negotiating the purchase price of an exchange, therefore, it is incumbent upon the purchaser and the seller to take into consideration the necessary investments and future cash flows related to the sale. In fact, in its initial study area waiver petition, Fremont provided a description of its upgrades and extensions of service, but failed to provide detailed costs of the planned upgrades or proposed timetables for the upgrades. Furthermore, Fremont made no claim that its planned upgrades would be burdened by the application of sections 36.611 and 36.612. Thus, Fremont could have, but failed, to request a waiver for immediate high cost loop support at its first opportunity to do so. Because high cost loop support receipts represent an important source of funds for the operation of an exchange with high loop costs, the acquiring company would undoubtedly negotiate a lower price for the exchange if the high cost loop support payments were delayed than it would be willing to pay if there were no delay. Because the selling company and the buying company negotiate the transfer of an exchange with full knowledge of the Commission's rules that apply to the transaction, we see no reason to waive the rules to compensate the buying company further. In the case at hand, allowing Fremont to receive immediate high cost loop support would result in support for US West and for Fremont for the same exchanges. Consequently, we conclude that Fremont's request for immediate high cost loop support must be denied. 13. We also reject Fremont's assertion that the Commission's new universal service rules set forth procedures that would allow Fremont to receive high cost loop support immediately. In the paragraph of the Universal Service Order that Fremont uses to support this contention, the Commission stated that any carrier serving an insular area that is not currently included in the existing universal service mechanism, shall receive support based on an estimate of annual embedded amount of their embedded costs. Fremont may be located in landlocked Idaho, but Idaho is clearly not considered an "insular area." We thus find the cited Universal Service Order paragraph completely inapplicable to Fremont. V. ORDERING CLAUSE 14. Accordingly, IT IS ORDERED, pursuant to Sections 1, 4(i), 5(c), 201, 202, 218-220, and 254 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201, 202, 218-220, 205, and 254, and Sections 1.3, 0.91, and 0.291 of the Commission's rules, 47 C.F.R.  1.3, 0.91, and 0.291 that the Petition of Fremont Telcom Co., for Waiver of Sections 36.611 and 36.612 of the Commission's rules, 47 C.F.R.  36.611 and 36.612, IS DENIED. FEDERAL COMMUNICATIONS COMMISSION Kenneth P. Moran Chief, Accounting and Audits Division