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Telephone Company, Inc. andR) United Telephone Company of Eastern KansasR) R) Concerning Section 61.41(c)(2) and theR) Definition of "Study Area" Contained in theR) Part 36 AppendixGlossary of theR) Commission's RulesR)  X -|  MEMORANDUM OPINION AND ORDER TP  X-X` hp x (#%'0*,.8135@8:ԍx47 C.F.R. 36 app. (defining "study area"). See MTS and WATS Market Structure, Amendment of Part  {O[- x67 of the Commission's rules and Establishment of a Joint Board, Recommended Decision and Order, 49 Fed. Reg.  {O%- x48325 (December 12, 1984) ("1984 Joint Board Recommended Decision"); id., Decision and Order, 50 Fed. Reg.  {O- x939 (January 8, 1985) ("1985 Order Adopting Recommendation"); see also Amendment of Part 36 of the  {O- xCommission's rules and Establishment of a Joint Board, Notice of Proposed Rulemaking, 5 FCC Rcd 5974 (October  {O-10, 1990) ("Study Area Notice").] The Commission took that action primarily to ensure that local exchange  xcarriers ("LECs") do not set up highcost exchanges within their existing service territories as  X- x<separate study areas to maximize highcost payments.L {O-  =ԍxSee 1984 Joint Board Recommended Decision, supra note 3,  66; 1985 Order Adopting Recommendation,  {O-supra note 3,  1,5. The study area freeze also prevents LECs  xfrom transferring exchanges among existing study areas for the purpose of increasing interstate  xyrevenue requirements and compensation. A LEC must apply to the Commission for a waiver of  xkthe frozen study area rule if the LEC wishes to sell an exchange to another carrier and if that  X4-transaction would have the effect of changing the study area boundaries of either carrier.P4 L yO-ԍx47 C.F.R. 1.3, 36 app.P  X-  x5. Waiver of Commission rules is appropriate only if special circumstances warrant  X- xdeviation from the general rule and such a deviation will serve the public interest. L {O2#-   ԍxNortheast Cellular Tel. Co. v. FCC, 897 F.2d 1164, 1166 (D.C. Cir. 1990); see also WAIT Radio v. FCC, 418 F.2d 1153, 1159 (D.C. Cir. 1969); 47 C.F.R.  1.3. In evaluating  x[petitions seeking a waiver of the rule freezing study area boundaries, the Commission employs  xa threeprong standard: first, the change in study area boundaries does not adversely affect the",N(N(ZZ"  X- x\Universal Service Fund ("USF") support program;[h L {Oy-  \ԍxSee 1984 Joint Board Recommended Decision, supra note 3,  66. The Commission created the USF to  {OC- xpreserve and promote universal service. See Amendment of Part 67 of the Commission's rules and Establishment  {O - xof a Joint Board, Decision and Order, 96 F.2d 781 (1984). The USF allows LECs with high local loop plant costs  x-to allocate a portion of those costs to the interstate jurisdiction, thus enabling the states to establish lower local  xiexchange rates in study areas receiving such assistance. To determine which LEC study areas are eligible for USF  xsupport, the USF rules prescribe an eligibility threshold set at 115 percent of the national average unseparated loop  xcost per working loop. When loop cost in a particular study area exceeds that threshold, the study area is eligible  xfor support equal to a certain percentage of the loop cost in excess of that threshold. The study area becomes eligible  xfor higher levels of support as its loop cost rises above additional thresholds set farther above the national average  xLunseparated loop cost. Because USF assistance is targeted primarily at small study areas, the level of support  {OO - xprovided at each threshold generally is greater if the study area has 200,000 or fewer working loops. See 47 C.F.R.  36.631.[ second, the state commission(s) having  x[regulatory authority over the exchange(s) to be transferred does not object to the change; and  X-third, the public interest supports such a change.^ L {O{-  kԍxSee U S WEST Communications, Inc., and Eagle Telecommunications, Inc., Joint Petition for Waiver of  {OE- x,the Definition of "Study Area" Contained in Part 36, AppendixGlossary of the Commission's Rules, Memorandum  {O-Opinion and Order, 10 FCC Rcd 1771,  5 (1995) ("U S WESTEagle Study Area Order").  X-  x6. The Commission's concern about adverse USF impacts was mitigated, in the short term  X- xat least, by its adoption of the Joint Board's recommendation for an indexed cap on the USF. L yO\-  ԍxThe Joint Board recommended, and the Commission adopted, interim rules that limit the rate of growth of  {O$- xthe USF to the rate of growth in the total number of working loops nationwide. See generally Amendment of Part  {O- x36 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision, 9 FCC Rcd 334 (1993)  {O- x("1993 Joint Board Recommended Decision"); id., Report and Order, 9 FCC Rcd 303 ("Interim Cap Order"). The  xCommission extended these interim rules through July 1, 1996. Amendment of Part 36 of the Commission's Rules  {OJ- xwand Establishment of a Joint Board, Report and Order, 11 FCC Rcd 2538 (1995), summarized in 60 Fed. Reg. 65011  yO- x(1995). Recently, the Joint Board recommended, and the Commission adopted, an extension of the interim cap rules  xon the USF only until the final universal service rules become effective. FederalState Joint Board on Universal  {O- xYService, Recommended Decision, CC Docket No. 9645, released June 19, 1996 ("1996 Joint Board Recommended  {On-Decision"); id., Report and Order, FCC 96281, released June 26, 1996 ("Extension of Interim Cap Rules").  xKThe Commission nonetheless recognized that, even in the short term, the granting of a study area  xwaiver may adversely affect the fund's distribution, if not its size. Under the indexed USF cap  xrules, any study area reconfiguration that increases the USF draw of one USF recipient often  xreduces that of other USF recipients. Consequently, in evaluating whether a study area change  xwould have an adverse impact on the distribution or level of the USF, the Commission applies  X - xa "onepercent" guideline to study area waiver requests filed after January 5, 1995.y  L {Ov"-ԍxSee U S WESTEagle Study Area Order, supra note 8,  1417.y Under this  x[guideline, no study area waiver is granted if it would result in an annual aggregate shift in USF  xassistance in an amount equal to or greater than one percent of the total USF, unless the parties  xzcan demonstrate extraordinary public interest benefit. To prevent carriers from evading this  xlimitation by disaggregating a single large sale of exchanges into a series of smaller transactions  xthat in the aggregate have the same effect on the USF, the Commission further requires that the"T ,N(N(ZZ"  xguideline be applied to all study area waivers granted to either carrier, as a purchaser or seller,  X-pending completion of the current review of the USF program. \L {Ob-  kԍxId. In this context, the Commission defines the term "carrier" to include all affiliated carriers (i.e., those  xYcarriers that are in common control, as the term "control" is defined in Section 32.9000 of the Commission's Rules,  {O-47 C.F.R.  32.9000). Id.  14 note 34. ė  X- B. Pleadings  X-  x7.  Petition. United seeks a waiver of the rule freezing study area boundaries to enable  xMit to remove two exchanges, serving 354 access lines, from its Kansas study area. JBN also  xseeks a waiver of that rule to permit it to consolidate the acquired exchanges with its existing  x\Kansas study area, which is comprised of 13 exchanges serving approximately 2,315 access  X3-lines.? 3L yO -ԍxPetition at 2.?  X -  zx8. Petitioners state that the proposed changes would serve the public interest because JBN  xLwill comply with the modernization requirements previously imposed on United by the Kansas  xCorporation Commission ("KCC"). Those requirements include providing digital dialtone and  X - xmodern features by the end of 1997. |L {O-ԍxPetition at 6. See KCC Stipulation, dated October 27, 1995. Id. Exhibit B. Further, JBN states that these upgrades will give the new  xcustomers equal access to interstate and intrastate long distance carriers, as well as access to  xcustom local area signalling service features such as automatic callback, automatic recall,  X{- x>selective call forwarding and call rejection.E{L yO:-ԍxPetition at 7.E Finally, JBN states that it will provide the new customers with more localized management and maintenance.  X6-  x9. Based on 1994 cost data, petitioners state that the transfer of the two exchanges out  xof United's study area and into JBN's study area would initially decrease United's annual USF  x^draw by $149,625 (from $8,982,230 to $8,832,605) and decrease JBN's by $71,073 (from  X- x$312,983 to $241,910), for a net decrease of $220,698.PL yO@-ԍxPetition at Exhibits C and D. P JBN states that prior to the end of 1997  xit plans to complete substantial upgrades to the proposed new exchanges, as well as to its 13  xexisting exchanges. Therefore, JBN estimates, based on projected 1997 costs, that the proposed  X-new consolidated study area will receive an additional $871,197 (from $312,983 to $1,184,180).. L yO#-  ԍxPetition at Exhibits D and E. JBN states that $80,912 of the additional USF support is attributed to upgrading the two purchased exchanges and the other $790,285 is attributed to upgrading its 13 existing exchanges.  X~- "g ,N(N(ZZ1"Ԍ X-C. Discussion  X-  x 10. Request for waivers. We have reviewed the data the petitioners filed with NECAyL yOK-ԍxNECA USF 1995 Submission of 1994 Study Results filed September 29, 1995.y  xand the estimates filed with this proceeding and have determined that the combined increase in  xUSF draws will not have a substantial adverse impact on the USF total or on individual carrier  X- xdraws. In addition, the KCC states that it does not object to these requested waivers.XL {O-ԍxSee KCC Order and Certificate, Docket No. 193,316U 96JBNT113COC, dated December 13, 1995. JBN  xstates that it will upgrade existing equipment with digital dialtone and modern features. Finally,  xthe modernization and upgrade proposals as stated by the petitioners, demonstrate that current  xand potential customers in the affected exchanges will likely be better served by JBN than  X3- xMUnited.K3L {O -ԍxSee supra at  8.K The requested study area waivers thus are likely to serve the public interest. We  xtherefore find that the three criteria for granting a study area waiver have been met in this instance and that the waiver requests should be granted.  X -  mx 11.  Need for imposed limits on USF draws. Although we find no reason to question  xJBN's estimates of the USF impact, we nonetheless are concerned that those estimates may later  xprove inaccurate when the planned upgrades are completed. We have found that, even in a  X- xperiod of a few years, the USF payments for some LECs have risen by unexpected amounts.~|L {O-  ԍxSee, e.g., Delta Telephone Company, Inc., Waiver of the Definition of "StudyArea" contained in Part 36,  {O- xAppendixGlossary, of the Commission's Rules, Memorandum Opinion and Order, 5 FCC Rcd 7100 (1990), whose  yOU- xUSF payment grew from $82,500 in 1991 to approximately $445,700 in 1993; and U S WEST Communications and  xwGila River Telecommunications, Inc., Joint Petition for Waiver of the Definition of "Study Area" Contained in Part  {O- xK36, AppendixGlossary, of the Commission's Rules, Memorandum Opinion and Order, 7 FCC Rcd 2161 (1992),  x[whose projection of $169,155 for Gila River's 1992 USF payment was more than doubled by the actual 1992  yOw-payment of $390,993, which has been nearly doubled again by the 1995 payment of approximately $750,000.(#(#X  xjThese LECs generally had undertaken substantial upgrades or expansions of the local network  xin difficulttoserve, sparsely populated exchanges that are similar to the exchanges being acquired by JBN.  X!-  Ox 12. We therefore find that the waiver should be subject to the condition that, absent  xexplicit approval from the Bureau, the annual USF support provided to JBN's study area shall  x\not exceed the postupgrade USF amount estimated in the petition for the threeyear period  xzfollowing the transfer, which is $1,184,180. This limit ensures that the study area waiver will  xinot, due to errors or unforeseen circumstances, result in adverse USF impacts which substantially  xexceed JBN's forecast. We note that the Telecommunications Act of 1996, which became  X- xeffective on February 8, 1996,z L yO &-ԍxTelecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996).z requires the reform of many mechanisms the Commission uses"R ,N(N(ZZ3"  X- xyto support its universal service goals, including the USF, by May 8, 1997.^L {Oy-  zԍxId. 47 U.S.C. 254(a)(2). To develop new USF rules, the Commission has initiated a proceeding to address  {OC- xthis issue. See Federal-State Joint Board on Universal Service, Notice of Proposed Rulemaking and Order  {O -Establishing Joint Board, 61 Fed. Reg. 10499 (March 14, 1996). Id.  39. It is likely that any  xnew universal service rules will alter the method used to determine the distribution of USF  xsupport to highcost areas, thereby changing the projected level of support to the buyer's study  xyarea. This, in turn, may require us to revisit these issues, and the related waiver conditions that we have established herein.  Xv-x III. PRICE CAPS WAIVER  XH-A. Background  X -  |x 13. Section 61.41(c)(2) of the Commission's rules provides that, when a nonprice cap  xLEC acquires a price cap LEC, the acquiring company, and any LEC with which it is affiliated,  X - xshall become subject to price cap regulation within a year of the transaction.e L {O-  \ԍx47 C.F.R.  61.41(c). See Policy and Rules Concerning Rates for Dominant Carriers, Second Report and  {OU- xOrder, 5 FCC Rcd 6786, 6821 (1990), Erratum, 5 FCC Rcd 7664 (Com. Car. Bur. 1990) ("LEC Price Cap Order"),  {O- xmodified on recon., Order on Reconsideration, 6 FCC Rcd 2637 (1991) ("LEC Price Cap Reconsideration Order"),  {O- x-aff'd sub nom. National Rural Telecom Ass'n v. FCC, 988 F.2d 174 (D.C. Cir. 1993), petitions for further recon.  {O- xdismissed, 6 FCC Rcd 7482 (1991), further modification on recon., Amendments of Part 69 of the Commission's  xrules Relating to the Creation of Access Charge Subelements for Open Network Architecture, Policy and Rules  {OE- xConcerning Rates for Dominant Carriers, Report and Order and Order on Further Reconsideration and Supplemental  {O- xNotice of Proposed Rulemaking, 6 FCC Rcd 4524 (1991) ("ONA Part 69 Order"), further recon., Memorandum  {O-Opinion and Order on Second Further Reconsideration, 7 FCC Rcd 5235 (1992).e The Commission  xstated that this "allornothing" rule applies not only to the acquisition of an entire LEC but also  X - xto the acquisition of part of a study area.\ L {O=-  ԍxSee LEC Price Cap Reconsideration Order, supra note 23,  149 note 207. The Commission explained that,  xYif these two types of acquisitions were not treated the same under the allornothing rule, a LEC could avoid the rule  {O-by selling all but one of its exchanges. Id.Č Hence, under this rule, JBN's acquisition of United's  xtwo exchanges would obligate JBN to become subject to price cap regulation instead of rateofreturn regulation.  Xb-  ^x 14. The Commission explained that the allornothing rule is intended to address two  xconcerns regarding mergers and acquisitions involving price cap LECs. The first concern is that,  xzin the absence of the rule, a LEC might attempt to shift costs from its price cap affiliate to its  xMnonprice cap affiliate, allowing the nonprice cap affiliate to earn more, due to its increased  X- xrevenue requirement, without affecting the earnings of the price cap affiliate, i.e., without  xtriggering the sharing mechanism. The second concern is that, absent the rule, a LEC may  xattempt to "game the system" by switching back and forth between rateofreturn regulation and  xprice cap regulation. The Commission cited, as an example, the incentive a price cap LEC may  xhave to increase earnings by opting out of price cap regulation, building up a large rate base",N(N(ZZ4"  xunder rateofreturn regulation so as to raise rates and, then, after returning to price caps, cutting  xcosts back to an efficient level. It would disserve the public interest, the Commission stated, to  xallow a LEC to alternately "fatten up" under rateofreturn regulation and "slim down" under  xprice cap regulation, because rates would not fall in the manner intended under price cap  X-regulation.KL {O-ԍxId.  148.K  Xv-  x15. The Commission nonetheless recognized that a narrow waiver of the allornothing  x.rule might be justified if efficiencies created by the purchase and sale of a few exchanges were  XH- xto outweigh the threat that the system may be subject to gaming.NHZL {OS -ԍxId.  149 note 207.N Such a waiver would not be  xLgranted unconditionally, however. Rather, waivers of the allornothing rule would be granted  xsubject to the condition that the selling price cap LEC shall make a downward exogenous  X - x.adjustment to its price cap indices to reflect the change in its study area. L {O-  =ԍxSee Price Cap Performance Review for Local Exchange Carriers, First Report and Order, 10 FCC Rcd 8962,  {Oj- x 328, 330 (1995) ("LEC Price Cap Review Order"). Under that requirement, United must reduce the Price Cap  xIndices for its Kansas study area if the changes in study area boundaries reduce the cost bases for those indices. The  xPrice Cap Indices, which are the cost indices on which pricecapped rates are based, are calculated pursuant to a  {O-formula specified in the Commission's rules for price cap LECs. See 47 C.F.R.  61.45.xx That adjustment is  xZneeded to remove the effects of the transferred exchanges from pricecapped rates that have been  xLbased, in whole or in part, upon the inclusion of those exchanges in the study areas subject to  X -price cap regulation.| L {O-ԍxSee LEC Price Cap Review Order, supra note 27,  330. |  X- B. Pleadings  Xb<  x16.  Petition.  JBN seeks waiver of Section 61.41(c)(2) so it may operate as a rateof xreturn LEC, rather than a price cap LEC, after acquiring the two exchanges which currently are  xiunder price cap regulation. Petitioners argue that the rule's application in this instance is contrary  xto the public interest and does not serve the purposes for which the rule was adopted. Petitioners  x[further argue that the Commission's two concerns, the threat of cost shifting between affiliates  X-and gaming of the system, are not at issue in this case.4 L yO -  ԍxPetition at 1114. We note that, although United signed the petition, United does not seek a waiver of the allornothing rule.  X- C. Discussion  X-  !x17. We agree with petitioners that the Commission's first concern underlying the allor xnothing rule is not applicable in this case. JBN has no incentive to shift costs between price cap  xzand rateofreturn affiliates, because JBN is not seeking to maintain separate affiliates under"g ,N(N(ZZ""  xdifferent systems of regulation. As to the Commission's second concern, we find it implausible  xthat United could game the system by moving the two exchanges back and forth between price  xcaps and rateofreturn regulation, because United is selling these exchanges and a reacquisition  xwould require a second study area waiver. Moreover, United cannot transfer the exchanges  xwithout removing the rateincreasing effects of these exchanges from the pricecapped rates that  X-have been based, in part, upon the inclusion of these exchanges in its Kansas study area.`L {O-ԍxSee discussion supra  15.` x  X_-  x18. We therefore find there is good cause to grant JBN a waiver of the allornothing rule  xto permit it to remain under rateofreturn regulation after acquiring the two exchanges which  xcurrently are under price cap regulation. As noted above, these waivers are subject to the  x=condition that United shall make a downward exogenous adjustment to its price cap indices to  x[reflect the removal of these generally highcost exchanges from its Kansas study area. For the  xpresent, we will continue to regulate JBN as a rateofreturn carrier. Because we are waiving  xSection 61.41(c)(2), it need not withdraw from the NECA pools. We note that, as with any other  xLrateofreturn carriers, JBN may elect price cap regulation in the future if it decides to withdraw from the NECA pools.  Xy-x IV. ORDERING CLAUSES ă  XK-  }x19. Accordingly, IT IS ORDERED, pursuant to Sections 1, 4(i), 5(c), 201202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201202, and  x/Sections 0.91, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, that the  xpetition of J.B.N. Telephone Company, Inc. and United Telephone Company of Eastern Kansas,  xOfor waiver of Part 36, Appendix-Glossary, of the Commission's rules, 47 C.F.R. Part 36 AppendixGlossary, IS GRANTED subject to the condition stated in paragraph 12 of the Order.  X-  x20. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201202, and  x/Sections 0.91, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, that the  xpetition of J.B.N. Telephone Company, Inc. and United Telephone Company of Eastern Kansas,  xfor waiver of Section 61.41(c)(2) of the Commission's rules, 47 C.F.R.  61.41(c)(2), IS GRANTED subject to the condition stated in paragraph 18 of this Order.  X -  x21. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201202, and  x\Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R. 0.91, 0.291, that the National  xExchange Carrier Association shall not distribute USF assistance exceeding the limit imposed in paragraph 12 of this Order. "h$Z,N(N(ZZF#"Ԍ X-  x22. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201202, and  xzSections 0.91 and 0.291 of the Commission's rules, 47 C.F.R. 0.91, 0.291, that this Order IS EFFECTIVE IMMEDIATELY UPON RELEASE. x` `  hhFEDERAL COMMUNICATIONS COMMISSION  X - hhKenneth P. Moran x` `  hhChief, Accounting and Audits Division x` `  hhCommon Carrier Bureau