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                           Before the
               Federal Communications Commission
                     Washington, D.C. 20554



In the Matter of

Rye Telephone Company, Inc. and
U S WEST Communications, Inc.

Joint Petition for Waiver of
Definition of "Study Area" Contained in the
Part 36 Appendix-Glossary of the 
Commission's Rules

Rye Telephone Company, Inc.

Petition for Waiver of Section 61.41(c)(2) of the
Commission's Rules
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CC Docket No. 96-45


                  MEMORANDUM OPINION AND ORDER

   Adopted:  July 17, 2000              Released:  July 18, 2000

By the Deputy Chief, Accounting Policy Division:

                      I.Introduction
1.     In this Order, we grant requests from Rye Telephone Company, Inc. (Rye) 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 Colorado study area to remove 94 access lines in the Pueblo exchange.  This waiver
will also permit Rye to alter the boundaries of its existing Colorado study area to include the 94 access
lines it is acquiring from U S WEST.  We also grant Rye's request for waiver of section 61.41(c)(2) of
the Commission's rules to permit Rye to continue operating under rate-of-return regulation after
acquiring U S WEST access lines that are currently under price cap regulation. 
                   II.STUDY AREA WAIVER
                       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.  When a carrier acquires additional entire study areas in a
given state, however, the carrier may operate more than one study area in that 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.  Because the interstate access universal service
support mechanism is capped at $650 million, transactions involving the transfer of support will not
increase the mechanism's overall size.  If a non-price cap LEC acquires exchanges from a price-cap
LEC, per-line interstate access universal service support will not transfer. 
5.     The Petition for Waiver.  On October 15, 1999, Rye 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.  U S WEST, an incumbent LEC that currently serves approximately 2,633,542 access lines in
Colorado, seeks a waiver of the rule freezing study area boundaries to allow it sell to Rye 94 access lines
in its Pueblo, Colorado exchange.  Rye, an incumbent LEC that currently serves 1,931 access lines in
Colorado, seeks a waiver of the rule freezing study area boundaries to allow the addition of U S
WEST's 94 access lines to its existing study area.  On November 30, 1999, the Common Carrier
Bureau (Bureau) released a public notice soliciting comments on the petition.  No comments were filed.
     F.   Discussion
7.     We find that good cause exists to waive the definition of study area contained in the Part 36
Appendix-Glossary of the Commission's rules to permit U S WEST to remove the 94 access lines from
its Colorado study area, and to permit Rye to combine the acquired access lines with its Colorado study
area.
8.      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 Rye and U S WEST have satisfied these criteria and demonstrated that good cause exists
for a waiver of the Commission's study area freeze rule.
9.     First, we find that Rye and U S WEST have demonstrated that the proposed changes in the
study area boundaries will not adversely affect the universal service fund.  Because, under our rules,
carriers purchasing high-cost exchanges can only receive the same level of per-line support as 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.  Because U S WEST's Pueblo
exchange currently is not eligible to receive any form of high-cost support, Rye also will not be eligible
to receive support for the acquired access lines.  As a result of this transaction, access lines in Rye's
pre-acquisition study area boundary will be eligible for different amounts of high-cost support than the
94 access lines being acquired from U S WEST.  We, therefore, direct Rye to submit, as part of its
annual USF data submission to the fund administrator, a schedule showing its methodology for excluding
the costs associated with the 94 acquired access lines from the costs associated with its pre-acquisition
study area.  We also note that because Rye is not a price cap LEC, it will not be eligible to receive
interstate access universal service support for the acquired access lines. 
10.    Second, no state commission having regulatory authority over the transferred exchanges
opposes the transfer.  We note that an Administrative Law Judge of the Colorado Public Utilities
Commission issued a Recommended Decision indicating that the Colorado Public Utilities Commission
does not oppose grant of the requested study area waiver for U S WEST and Rye.
11.    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 access lines from its Colorado study area, and to permit Rye to
include the access lines with its Colorado study area.  Rye proposes to convert the transferred customers
to a digital architecture, which will improve transmission quality and provide other benefits to the
customers.  We note that the Colorado Public Utilities Commission has "found that the proposed
rearrangements of the exchange areas will promote the public interest and welfare and will not adversely
impact the public switched network of the local exchange provider or impact the provider's financial
integrity."  Based on these facts and the findings of the Colorado Public Utilities Commission, we
conclude that petitioners have demonstrated that grant of this waiver serves the public interest.
      XII.WAIVER OF THE COMMISSION'S PRICE CAP RULES
                     A.Background
13.    Section 61.41(c) of the Commission's rules provides that any price cap telephone company
subject to a merger, acquisition, or similar transaction shall continue to be subject to price cap regulation
notwithstanding such transaction.  In addition, when a non-price cap company acquires, merges with, or
otherwise becomes affiliated with a price cap company or any part thereof, the acquiring company
becomes subject to price cap regulation and must file price cap tariffs within a year.  Moreover, LECs
that become subject to price cap regulation are not permitted to withdraw from such regulation.  Under
these rules, Rye's acquisition of U S WEST's 94 access lines would obligate it to become subject to price
cap regulation for both its existing and acquired exchanges.
14.    In the LEC Price Cap Reconsideration Order, the Commission explained that section
61.41(c) is intended to address two concerns regarding mergers and acquisitions involving price cap
companies.  The first concern was that, in the absence of the rule, a LEC might attempt to shift costs
from its price cap affiliate to its non-price cap affiliate, allowing the non-price cap affiliate to charge
higher rates to recover its increased revenue requirement, while increasing the earnings of the price cap
affiliate.  The second concern was that, absent the rule, a LEC might attempt to game the system by
switching back and forth between rate-of-return regulation and price cap regulation.  For example,
without such a rule, a price cap company may attempt to "game" the system by opting out of price cap
regulation, building a large rate base under rate-of-return regulation so as to raise rates and then, after
returning to price caps, cutting costs back to an efficient level, thereby enabling it to realize greater
profits.  It would not serve the public interest, the Commission stated, to allow a carrier alternately to
"fatten up" under rate-of-return regulation and "slim down" under price cap regulation, because the rates
would not decrease in the manner intended under price cap regulation.  
15.    The Commission nonetheless recognized that narrow waivers of the price cap "all-or-
nothing" rule might be justified if efficiencies created by the purchase and sale of exchanges outweigh
the threat that the system might be subject to gaming.  Such waivers will not be granted
unconditionally, however.  Waivers of the all-or-nothing rule will be granted conditioned on the selling
price cap company's downward adjustment to its price cap indices to reflect the sale of exchanges. 
That adjustment is needed to remove the effects of transferred exchanges from rates that have been
based, in whole or in part, upon the inclusion of those exchanges in a carrier's price cap indices.   In
addition, waiver of the all-or-nothing rule has been granted subject to the condition that the acquiring
carrier obtain prior Commission approval of any attempt to return to price cap regulation.
16.    Rye is currently subject to rate-of-return regulation, while U S WEST is subject to price cap
regulation.  Rye seeks a waiver of section 61.41(c)(2) of the Commission's rules to permit it to continue
to be regulated under rate-of-return regulation after acquiring from U S WEST the 94 access lines that
are currently under price cap regulation.  Absent a waiver of the all-or-nothing price cap rules, all of
Rye's operations would become subject to price cap regulation no later than one year after acquiring the
price cap access lines from U S WEST.  
          A.   Discussion
17.    For the reasons discussed below, we find that good cause exists for us to waive section
61.41(c)(2) of our rules, and that it would be in the public interest to grant Rye's waiver request.  As
discussed previously, the courts have interpreted section 1.3 of the Commission's rules to require a
petitioner seeking a waiver of a Commission rules to demonstrate that special circumstances warrant a
deviation from the general rule, and such a deviation will serve the public interest.
18.    Because Rye is significantly smaller than any of the carriers subject to mandatory price caps,
we conclude that special circumstances support a waiver of section 61.41(c)(2) of our rules.  In
evaluating requests for waiver of section 61.41(c)(2) of our rules, the Bureau takes into account the
company's preferences and, in particular, the preferences of small carriers.  After the proposed
transaction, Rye will still be far smaller than any of the LECs subject to mandatory price caps, and also
will be significantly smaller than many other carriers that have been granted waivers of section
61.41(c)(2) of the Commission's rules.  Therefore, we believe that Rye presents special circumstances
to support its waiver request.
19.    We conclude that, in this case, waiver of section 61.41(c)(2) of the Commission's rules will
serve the public interest.  We agree with Rye that the circumstances surrounding Rye's acquisition of U
S WEST's exchanges fail to give rise to the dangers of cost-shifting and gaming of the system.  Rye is
not seeking to maintain separate affiliates under different systems of regulation, and, therefore, Rye will
have no opportunity to shift costs between price cap and rate-of-return affiliates.  Moreover, to
safeguard against possible gaming resulting from attempts to elect price cap regulation, we will require
Rye to request prior Commission approval if it seeks to elect price cap regulation.  At that time, the
Commission can make a determination if the transaction raises concerns that the Commission sought to
address in section 61.41 of its rules.  We believe that requiring Rye to seek Commission approval before
electing price cap regulation is sufficient to deter gaming in the future.
20.    Consistent with past precedent, we also require U S WEST to make a downward
adjustment to its price cap indices to reflect the removal of the 94 access lines from its Colorado study
area.
                    V.ORDERING CLAUSES

6.     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 Rye Telephone Company, Inc.
and U S WEST Communications, Inc., on October 15, 1999, IS GRANTED.
7.     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 for
waiver of section 61.41(c)(2) of the Commission's rules, filed by Rye Telephone Company, Inc. IS
GRANTED.
8.     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 Rye Telephone
Company, Inc. SHALL SUBMIT, as part of its annual USF data submission to the fund administrator, a
schedule showing its methodology for excluding the costs associated with the 94 acquired access lines
from the costs associated with its pre-acquisition study area.
9.     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