******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect or Word 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 Citizens Telecommunications Company of North Dakota and U S WEST Communications, Inc. Joint Petition for Waiver of the Definition of "Study Area" Contained in the Part 36 Appendix-Glossary of the Commission's Rules ) ) ) ) ) ) ) ) ) ) ) ) ) CC Docket No. 96-45 MEMORANDUM OPINION AND ORDER Adopted: July 11, 2000 Released: July 12, 2000 By the Deputy Chief, Accounting Policy Division: I. Introduction 1. In this Order, we grant a request from Citizens Telecommunications Company of North Dakota (Citizens) and U S WEST Communications, Inc. (U S WEST) for a waiver of the definition of "study area" contained in the Part 36 Appendix-Glossary of the Commission's rules. This waiver will permit U S WEST to alter the boundaries of its existing North Dakota study area to remove eight telephone exchanges it is transferring to Citizens. This waiver will also allow Citizens to establish a new study area in North Dakota for the exchanges it is acquiring from U S WEST. II. DISCUSSION A.Background 2. Study Area Boundaries. A study area is a geographic segment of an incumbent local exchange carrier's (LEC's) telephone operations. Generally, a study area corresponds to an incumbent LEC's entire service territory within a state. Thus, incumbent LECs operating in more than one state typically have one study area for each state. The Commission froze all study area boundaries effective November 15, 1984, and an incumbent LEC must apply to the Commission for a waiver of the study area boundary freeze if it wishes to sell or purchase additional exchanges. 3. Transfer of Universal Service Support. Section 54.305 of the Commission's rules provides that a carrier acquiring exchanges from an unaffiliated carrier shall receive the same per-line levels of high-cost universal service support for which the acquired exchanges were eligible prior to their transfer. For example, if a rural carrier purchases an exchange from a non-rural carrier that receives support based on the Commission's new universal service support mechanism for non-rural carriers, the loops of the acquired exchange shall receive the same per-line support as calculated under the new non- rural mechanism, regardless of the support the rural carrier purchasing the exchange may receive for any other exchanges. Section 54.305 is meant to discourage carriers from transferring exchanges merely to increase their share of high-cost universal service support, especially during the Commission's transition to universal service support mechanisms that provide support to carriers based on the forward-looking economic cost of operating a given exchange. High-cost support mechanisms currently include non- rural carrier forward-looking high-cost support, interim hold-harmless support for non-rural carriers, rural carrier high-cost loop support, local switching support, and Long Term Support (LTS). To the extent that a carrier acquires exchanges receiving any of these forms of support, the acquiring carrier will receive the same per-line levels of support for which the acquired exchanges were eligible prior to their transfer. 4. As described in the Commission's recent order adopting an integrated interstate access reform and universal service proposal put forth by the members of the Coalition for Affordable Local and Long Distance Service (CALLS), beginning July 1, 2000, if a price cap LEC acquires exchanges from another price cap LEC the acquiring carrier will become eligible to receive interstate access universal service support for the acquired exchanges. In accordance with section 54.801 of the Commission's rules, the acquiring price cap LEC will receive interstate access universal service support at the same level as the selling price cap LEC formerly received, and both carriers will adjust their line counts accordingly beginning with the next quarterly report to the fund Administrator. Carriers also are required to report their adjusted average common line, marketing, and transport interconnection charge (CMT) revenue per line per month for the affected study areas in accordance with the Commission's rules. Per-line amounts of interstate access universal service support for the acquired exchanges may change as a result of the revised CMT revenue filings. Because the interstate access universal service support mechanism is capped at $650 million, individual transactions will not increase its overall size. 5. The Petition for Waiver. U S WEST, an incumbent LEC currently serving approximately 250,000 access lines in North Dakota, entered into an agreement with Citizens, a LEC that currently does not provide service in North Dakota, to sell eight of U S WEST's North Dakota exchanges, which serve approximately 17,000 access lines. The proposed transaction also includes the sale of approximately 122 access lines physically located in Minnesota, but served by the North Dakota Fairmount and Pembina telephone exchanges. 6. On February 16, 2000, Citizens and U S WEST filed a joint petition for waiver of the definition of "study area" contained in the Part 36 Appendix-Glossary of the Commission's rules. The requested waiver would permit U S WEST to remove the eight exchanges from its North Dakota study area, and permit Citizens to create a North Dakota study area for the acquired exchanges. On February 25, 2000, the Common Carrier Bureau (Bureau) released a public notice seeking comment on the petition. No comments were received. G. Discussion 8. We find that good cause exists to waive the definition of study area contained in Part 36 Appendix-Glossary of the Commission's rules to permit U S WEST to remove the eight exchanges from its North Dakota study area, and permit Citizens to create a North Dakota study area for the acquired exchanges. 9. Generally, the Commission's rules may be waived for good cause shown. As noted by the Court of Appeals for the D.C. Circuit, however, agency rules are presumed valid. The Commission may exercise its discretion to waive a rule where the particular facts make strict compliance inconsistent with the public interest. In addition, the Commission may take into account considerations of hardship, equity, or more effective implementation of overall policy on an individual basis. Waiver of the Commission's rules is therefore appropriate only if special circumstances warrant a 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 traditionally has applied a three-prong standard: first, the change in study area boundaries must not adversely affect the universal service funds; second, no state commission having regulatory authority over the transferred exchanges may oppose the transfer; and third, the transfer must be in the public interest. For the reasons discussed below, we conclude that petitioners have satisfied these criteria and demonstrated that good cause exists for a waiver of the Commission's study area freeze rule. 10. First, we conclude that the proposed change in U S WEST's study area boundary and the creation of a new North Dakota study area will not adversely affect any of the universal service mechanisms. Because, under our rules, carriers purchasing high-cost exchanges can only receive the same level of per-line support that the selling company was receiving for those exchanges prior to the sale, there can, by definition, be no adverse impact on the universal service fund resulting from this transaction. In addition, even though per-line amounts of interstate access universal service support directed to the acquired exchanges may increase as a result of the proposed transaction, the overall size of the interstate access universal service mechanism will not exceed $650 million. Therefore, we conclude that this transaction will not adversely affect universal service funds. 11. Second, no state commission with regulatory authority over the transferred exchanges opposes the transfer. The petitioners have included with their joint petition letters from the North Dakota Public Service Commission and the Minnesota Public Utilities Commission indicating that neither commission objects to the grant of the study area waiver. 12. Finally, we conclude that the public interest is served by a waiver of the study area freeze rule to permit U S WEST to remove the eight North Dakota exchanges from its study area and Citizens to create a North Dakota study area for the transferred exchanges. In its petition, Citizens states its intent to invest approximately $10 million in the North Dakota exchanges it is purchasing during the first three years of ownership, using some of the capital investment to upgrade the network to provide enhanced services. According to Citizens, it also will provide broadband/digital subscriber line services when there is sufficient demand to make it possible to provide these services at an affordable rate. We also note that, in its order approving the transfer of U S WEST's Certificates of Public Convenience and Necessity to Citizens, the North Dakota Commission found that: (1) Citizens will provide all exchange services currently being offered by U S WEST; and (2) there will be no rate change resulting from the acquisition. Based on these facts and the findings of the affected state commissions, we conclude that Citizens has demonstrated that grant of this waiver request serves the public interest. 13. In accordance with section 61.45 of the Commission's rules, we also require U S WEST to adjust its price cap indices to reflect the removal of the transferred access lines from its North Dakota study area. Section 61.45 of the Commission's rules grants the Commission discretion to require price cap carriers to make adjustments to their price cap indices to reflect cost changes resulting from rule waivers. The Commission has required carriers to make adjustments to their price cap indices in past study area waivers involving the sale of exchanges operated by carriers subject to price cap regulation. We, therefore, require U S WEST to make such an adjustment. III.ORDERING CLAUSES 4. 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 for waiver of Part 36, Appendix-Glossary, of the Commission's rules, filed by Citizens Telecommunications Company of North Dakota and U S WEST Communications, Inc. on February 16, 2000, IS GRANTED. 5. 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, 1.3, and 61.43 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, and 61.43, that U S WEST Communications, Inc. SHALL ADJUST its price cap indices in its annual price cap filing to reflect cost changes resulting from this transaction, consistent with this Order. FEDERAL COMMUNICATIONS COMMISSION Katherine L. Schroder Deputy Chief, Accounting Policy Division