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File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ***************************************************************** ******** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) AAD 96-6 Petitions for Waivers Filed by ) ) Farmers Mutual Telephone Company ) Project Mutual Telephone Cooperative ) Association, Inc., and ) U S WEST Communications, Inc. ) ) Concerning Section 61.41(c)(2) and 69.3) (e)(11) and the Definition of "Study Area") Contained in the Part 36 Appendix- ) Glossary of the Commission Rules ) MEMORANDUM OPINION AND ORDER Adopted: August 12, 1996 Released: August 12, 1996 By the Chief, Accounting and Audits Division: I. INTRODUCTION 1. On January 16, 1996, Farmers Mutual Telephone Company ("Farmers Mutual"), Project Mutual Cooperative Association, Inc. ("Project Mutual"), and U S WEST Communications, Inc. ("U S WEST") filed a petition for waiver of three Commission rules. The petitioners seek waivers of the definition of "Study Area" contained in the Part 36 Appendix-Glossary of the Commission's rules. That definition constitutes a rule freezing all study area boundaries, effective November 15, 1984. The requested waivers would allow petitioners to alter the boundaries of their existing study areas as a result of U S WEST's sale of one exchange to Farmers Mutual and one exchange to Project Mutual. 2. In addition, Farmers Mutual and Project Mutual seek waivers of the price cap rule contained in Section 61.41(c)(2) of the Commission's rules. This rule requires non-price cap companies, and the telephone companies with which they are affiliated, to become subject to price cap regulation after acquiring a price cap company or any part thereof. The requested waivers would permit the buyers to remain under rate-of-return regulation after acquiring the exchanges which currently are under price cap regulation. The buyers seek waivers of Section 69.3(e) of the Commission's rules, if necessary, so that they may become Issuing Carriers in the National Exchange Carrier Association, Inc.'s ("NECA") tariffs, and so that the regulatory, tariff and pooling changes related to the proposed exchange acquisitions can occur immediately upon the closing of the transaction. Finally, Project Mutual has asked the Commission not to place caps on the amounts it can draw from the Universal Service Fund ("USF"). 3. On March 29, 1996, the Common Carrier Bureau ("Bureau") released a Public Notice soliciting comments on the petition. On April 29, 1996, the Bureau received comments supporting the petition from NECA and the National Telephone Cooperative Association. On March 15, 1996, the Bureau received a letter from the Idaho Public Utilities Commission ("Idaho PUC"), which states that it has no objection to the requested waivers. 4. In this Order, we find that the public interest would be served by allowing petitioners to alter their study area boundaries and allowing the buyers to continue operating under rate-of-return regulation after acquiring the exchanges. We therefore grant the petition, in part, as explained more fully below. II. STUDY AREA WAIVERS A. Background 5. A study area is a geographical segment of a carrier's telephone operations. Generally, a study area corresponds to a carrier's entire service territory within a state. Thus, carriers operating in more than one state typically have one study area for each state, and carriers operating in a single state typically have a single study area. Study area boundaries are important primarily because carriers perform jurisdictional separations at the study area level. For jurisdictional separations purposes, the Commission froze all study area boundaries effective November 15, 1984. The Commission took that action primarily to ensure that local exchange carriers ("LECs") do not set up high-cost exchanges within their existing service territories as separate study areas to maximize interstate cost allocations. A LEC must apply to the Commission for a waiver of the frozen study area rule if the LEC wishes to sell or purchase an exchange. 6. Waiver of Commission rules is appropriate only if special circumstances warrant 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 employs a three-prong standard: first, the change in study area boundaries does not adversely affect the Universal Service Fund ("USF") support program; second, the state commission(s) having regulatory authority over the exchange(s) to be transferred does not object to the change; and third, the public interest supports such a change. 7. The Commission's concern about adverse USF impacts was mitigated, in the short term at least, by its adoption of the Joint Board's recommendation for an indexed cap on the USF. The Commission nonetheless recognized that, even in the short term, the granting of a study area waiver may adversely affect the fund's distribution, if not its size. Under the indexed USF cap rules, any study area reconfiguration that increases the USF draw of one USF recipient often reduces that of other USF recipients. Consequently, in evaluating whether a study area change would have an adverse impact on the distribution or level of the USF, the Commission applies a "one-percent" guideline to study area waiver requests filed after January 5, 1995. Under this guideline, no study area waiver is granted if it would result in an annual aggregate shift in USF assistance in an amount equal to or greater than one percent of the total USF, unless the parties can demonstrate extraordinary public interest benefit. To prevent carriers from evading this limitation by disaggregating a single large sale of exchanges into a series of smaller transactions that in the aggregate have the same effect on the USF, the Commission further requires that the guideline be applied to all study area waivers granted to either carrier, as a purchaser or seller, pending completion of the current review of the universal service program. B. Pleadings 8. Farmers Mutual is an average schedule company which currently serves 2,500 access lines; Project Mutual is a cost company which currently serves 7,400 access lines; and U S WEST is a price cap company which currently serves 392,591 access lines in Idaho. U S WEST proposes to sell two Idaho exchanges: one exchange, which serves 176 access lines, to Farmers Mutual and one exchange, which serves 479 access lines, to Project Mutual. U S WEST seeks waiver of the rule freezing study area boundaries to enable it to remove the two exchanges from its Idaho study area. The requested waivers would allow Farmers Mutual and Project Mutual to consolidate the acquired exchanges with their existing Idaho study areas. 9. Petitioners state that the proposed changes would serve the public interest because the buyers plan to improve the telephone plant in these exchanges by installing fiber optic trunks and digital switches. Petitioners state that these upgrades will enable them to provide new, enhanced CLASS services in these exchanges. They estimate that these upgrades would require a total investment of $620,000. 10. Petitioners state that the requested waivers will not adversely affect the USF. They state that currently they do not receive USF and their estimates show that, if the study area waivers are granted and all planned upgrades are completed, they would not receive any USF. Nevertheless, Project Mutual requests that we not cap its USF (i.e., at $0). C. Discussion 11. Request for waivers. We have reviewed the data the petitioners filed with NECA and the estimates filed in this proceeding and have determined that grant of the waiver will likely have no impact on the USF. In addition, the Idaho PUC states that it does not object to these requested waivers. Based upon a review of the petitioners' plans for facilities improvements, we believe the requested study area waivers are likely to serve the public interest. We therefore find that the three-prong standard for granting a study area waiver has been met in this instance and that the study area waiver requests should be granted. 12. Request for exemption from USF limits. Although we find no reason to question Project Mutual's estimates of the USF impact, we nonetheless are concerned that those estimates may later prove inaccurate when the planned upgrades are completed. To address this concern, we have granted waivers of this type subject to the condition that, absent explicit approval from the Bureau, the annual USF support provided to the buyers' study area shall not exceed the amount specified in its petition. In reference to that Bureau policy, Project Mutual submitted several arguments against the imposition of limits on its USF draw. 13. First, Project Mutual argues that it would be inappropriate for its future USF draw to be restricted to its current estimate (i.e., $0) because that estimate was made in good faith anda)may need to be adjusted once it begins day-to-day operations. We have found that, even in a period of a few years, the USF estimates for some LECs have risen by unexpected amounts. These LECs generally had undertaken substantial upgrades or expansions of the local network in difficult-to-serve, sparsely populated exchanges that are similar to the exchange being acquired by Project Mutual. However, Project Mutual's failure to submit accurate USF estimates is not, as petitioners suggest, a valid reason for granting these waivers unconditionally. On the contrary, the potential for such failure has been our primary reason for imposing limits on carrier USF draws following exchange transfers. 14. These limits would ensure that the study area waivers will not, due to errors or unforeseen circumstances, result in USF impacts which substantially exceed Project Mutual's forecasts. The limits also would ensure that the Commission's one percent guideline can be properly adhered to in future filings of this kind. Absent such limits, companies could file waiver requests that appear to fall within the guideline, only to later adjust their USF estimates to exceed the guideline free of any Bureau review. We therefore reject the claim that, because Project Mutual's representations of the USF impact may be inaccurate, it would be unreasonable for its USF draw to be limited by those representations. 15. Second, Project Mutual argues that imposition of limits would not serve the public interest, that it would be unfair to impose a cap when ongoing operations and operational characteristics are unknown, and that imposition of individual caps is unnecessary. Third, they argue that imposing a future waiver requirement to raise a capped USF amount is contrary to the Commission s policies, that it would place an additional burden on small LECs, would discourage strategic investment in the further development of rural telephony, and would produce additional regulatory burdens and requirements on companies. We do not agree with Project Mutual's arguments regarding the public interest, fairness, necessity, the Commission s policies, impact on investment or regulatory burden. In particular, petitioners fail to show that the limits established pursuant to their own representations would preclude their opportunity to make investments. Project Mutual also fails to show that it would be burdensome for it to seek an increase in imposed limits that are based on its representations of its post-transfer USF draw. The waiver condition would permit Project Mutual's USF draw to exceed the limits if, based on its submission of revised data, the Bureau later determined that such an increase is warranted. 16. In conclusion, we believe that we should continue our policy of imposing limits on Project Mutual's USF draw. We therefore find that the waivers should be subject to the condition that, absent explicit approval from the Bureau, the annual USF support provided to Project Mutual's study area shall not exceed the post-upgrade amounts specified by it in the petition. We note that the Telecommunications Act of 1996, which became effective on February 8, 1996, requires the reform of many mechanisms the Commission uses to support its universal service goals, including the USF, by May 8, 1997. It is likely that any new universal service rules will alter the method used to determine the distribution of USF support to high-cost areas, thereby changing the projected level of support to the buyers' study areas. This, in turn, may require us to revisit these issues, and the related waiver conditions that we have established herein. III. PRICE CAPS WAIVER A. Background 17. Section 61.41(c)(2) of the Commission's rules provides that, when a cost company acquires a price cap company, the acquiring company, and any companies with which it is affiliated, shall become subject to price cap regulation within a year of the transaction. The Commission stated that this "all-or-nothing" rule applies not only to the acquisition of an entire LEC but also to the acquisition of part of a study area. Section 61.41(c)(3) of the rules allows an average schedule company that acquires part or all of a price cap study area to retain its average schedule status. U S WEST is a price cap company; Project Mutual is a cost company; and Farmers Mutual is an average schedule company. Hence, Project Mutual's acquisition of a U S WEST exchange would obligate it to become subject to price cap regulation, but Farmer Mutual's acquisition of a U S WEST exchange would not obligate it to become subject to price cap regulation. 18. The Commission explained that the all-or-nothing rule is intended to address two concerns regarding mergers and acquisitions involving price cap companies. The first concern is 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 earn more, due to its increased revenue requirement, without affecting the earnings of the price cap affiliate, i.e., without triggering the sharing mechanism. The second concern is that, absent the rule, a LEC may attempt to "game the system" by switching back and forth between rate-of- return regulation and price cap regulation. The Commission cited, as an example, the incentive a price cap company may have to increase earnings by opting out of price cap regulation, building up 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. It would disserve the public interest, the Commission stated, to allow a LEC to alternately "fatten up" under rate-of-return regulation and "slim down" under price cap regulation, because rates would not fall in the manner intended under price cap regulation. 19. The Commission nonetheless recognized that a narrow waiver of the all-or-nothing rule might be justified if efficiencies created by the purchase and sale of a few exchanges were to outweigh the threat that the system may be subject to gaming. Such a waiver would not be granted unconditionally, however. Rather, waivers of the all-or-nothing rule would be granted subject to the condition that the selling price cap company shall make a downward exogenous adjustment to its price cap indices to reflect the change in its study area. That adjustment is needed to remove the effects of the transferred exchanges from rates that have been based, in whole or in part, upon the inclusion of those exchanges in the study areas subject to price cap regulation. B. Pleadings 20. U S WEST is a price cap company. Project Mutual seeks a waiver of Section 61.41(c)(2) so it may continue to operate as a cost company, rather than a price cap company, after acquiring an exchange from U S WEST. Farmers Mutual is currently an average schedule company and wishes to remain an average schedule company after acquiring an exchange from U S WEST. Petitioners argue that the rule's application in this instance is contrary to the public interest and does not serve the purposes for which the rule was adopted. Petitioners further argue that the Commission's two concerns, the threat of cost shifting between affiliates and gaming of the system, are not at issue in this case. C. Discussion 21. We agree with petitioners that the Commission's first concern underlying the all-or-nothing rule is not applicable in this case. Project Mutual has no incentive to shift costs between price cap and cost affiliates, because Project Mutual is not seeking to maintain separate affiliates under different systems of regulation. As to the Commission's second concern, we find it very unlikely that U S WEST could game the system by moving exchanges back and forth between price cap and other forms of regulation, because U S WEST is selling these exchanges and a reacquisition would require a second study area waiver. Moreover, it cannot transfer the exchanges without removing the rate-increasing effects of the exchanges from the price-capped rates that have been based, in part, upon the inclusion of these exchanges in its Idaho study area. 22. We therefore find there is good cause to grant Project Mutual a waiver of the all-or-nothing rule to permit it to remain under rate-of- return regulation after acquiring an exchange which currently is under price cap regulation. As noted above, this waiver is subject to the condition that U S WEST shall make a downward exogenous adjustment to its price cap indices to reflect the removal of the exchanges it is selling to Project Mutual and Farmers Mutual from its Idaho study area. For the present, we will continue to regulate Project Mutual as a cost company. Because we are waiving Section 61.41(c)(2), Project Mutual needs not withdraw from the NECA pools. We note that, as with any other cost company carrier, Project Mutual may elect price cap regulation in the future if it decides to withdraw from the NECA pools. IV. OTHER ISSUES 23. To the extent necessary, the buyers also seek waivers of Section 69.3(e)(11) of the Commission's rules. That rule requires that any changes in NECA common line tariff participation and long term support resulting from a merger or acquisition of telephone properties are to be made effective on the next annual access tariff filing effective date following the merger or acquisition. The buyers are concerned that under a strict interpretation of this rule they, rather than NECA, would be required to file a tariff on the next annual access tariff filing date. Assuming the proposed acquisitions occur this year, each buyer represents that it will participate in NECA's common line pool; consequently, the buyers' carrier common line costs should be included in NECA's 1996 filing. Therefore, none of the buyers are required to make an annual access filing for their carrier common line costs, and a waiver of Section 69.3(e)(11) is not required. V. ORDERING CLAUSES 24. Accordingly, IT IS ORDERED, pursuant to Sections 1, 4(i), 5(c), 201-202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201-202, and 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 petition of Farmers Mutual Telephone Company, Project Mutual Telephone Cooperative Association, Inc., and U S WEST, for waiver of Part 36, Appendix-Glossary, of the Commission's rules, 47 C.F.R. Part 36 Appendix- Glossary IS GRANTED subject to the conditions stated in paragraph 16 and footnote 28 of this Order. 25. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201-202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201-202, and 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 petition of Project Mutual Telephone Cooperative Association, Inc., for 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 22 of this Order. 26. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201-202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201-202, and Sections 0.91, 0.291, and of the Commission's rules, 47 C.F.R.  0.91, 0.291, that the National Exchange Carrier Association, Inc. shall not distribute USF assistance exceeding the limit imposed in paragraph 16 and footnote 28 of this Order. 27. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201-202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201-202, and Sections 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. FEDERAL COMMUNICATIONS COMMISSION Kenneth P. Moran Chief, Accounting and Audits Division Common Carrier Bureau