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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 96-25 Petitions for Waivers Filed by ) ) Contel of Texas d/b/a/ GTE Southwest, Inc.,) Crawford Telephone Company, ) GTE Southwest, Inc., and NRPT ) Communications, Inc. ) ) Concerning Section 61.41(c)(2) and the) Definition of "Study Area" Contained in) the Part 36 Appendix-Glossary ) MEMORANDUM OPINION AND ORDER Adopted: August 15, 1996 Released: August 15, 1996 By the Chief, Accounting and Audits Division: I. INTRODUCTION 1. On January 23, 1996, Crawford Telephone Company ("Crawford"), NRPT Communications, Inc. ("NRPT"), GTE Southwest Inc., and Contel of Texas d/b/a GTE Southwest, Inc. (collectively "GTE") filed a petition for waiver of two 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 GTE to alter the boundaries of its Texas study area when transferring four telephone exchanges to NRPT and Crawford, two newly formed corporations. NRPT and Crawford, each propose to create a new study area after acquiring these exchanges. 2. In addition, Crawford and NRPT seek waivers of the price cap rule contained in Section 61.41(c)(2) of the Commission's rules. That 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 Crawford and NRPT to operate under rate-of-return regulation after acquiring the exchanges, which are currently under price cap regulation. 3. On March 1, 1996, the Common Carrier Bureau ("Bureau") released a Public Notice soliciting comments on the petition. On April 1, 1996, the Bureau received comments supporting the petition from the National Exchange Carrier Association, Inc ("NECA"). In this Order, we find that the public interest would be served by allowing petitioners to alter their study area boundaries and allowing Crawford and NRPT to operate under rate-of-return regulation after acquiring the exchanges. We therefore grant the petition, as conditioned and explained below. II. STUDY AREA WAIVERS A. Background 4. 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. The study area freeze also prevents LECs from transferring exchanges among existing study areas for the purpose of increasing interstate revenue requirements and compensation. 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. 5. 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. 6. 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 USF program. B. Pleadings 7. Petition. GTE proposes to sell four of its Texas exchanges, which serve a total of 1,226 access lines. NRPT would operate three of these exchanges (710 access lines), and Crawford would operate one (516 access lines). GTE seeks a waiver of the rule freezing study area boundaries to enable it to remove the four exchanges from its Texas study area. Crawford and NRPT seek waivers of the same rule to establish new study areas. 8. Crawford and NRPT state that they plan to make major improvements to the facilities in the four exchanges. They plan to construct four new digital central offices, add fiber for both toll and subscriber use, add new buried or aerial facilities to replace aging open wire, upgrade multi- party lines to single party service and provide standby power for exchanges currently without back- up. Further, Crawford and NRPT state that they will comply with modernization requirements that the Texas Public Service Commission ("Texas PUC") has prescribed: one-party service will be made to all subscribers by January 1, 1997; all open-wire transmission media shall be replaced with more reliable and better quality transmission media by the end of 1998; and all switched voice circuits shall be adequately designed and maintained to allow transmission of at least 2,400 bits of data per second when connected through an industry standard modem or facsimile machine by the end of 1998. Crawford and NRPT state that each possesses the expertise required to operate and maintain these facilities. They estimate that the upgrades would require an investment outlay of approximately $2,267,000. 9. Petitioners state that grant of the requested waivers will not have a substantial impact on the USF. Petitioners state that the transfer of the four exchanges out of GTE's Texas study area and into Crawford and NRPT's proposed new study areas would increase the annual USF draw for these four exchanges by $190,320 before planned upgrades and by $449,196 after completion of the upgrades. C. Discussion 10. Request for waivers. We have reviewed the data the petitioners filed with NECA and the estimates filed in this proceeding and have determined that the combined increase in USF draws will not have a substantial adverse impact on the USF total or on individual carrier draws. In addition, the Texas PUC states that it does not object to these requested waivers. Furthermore, the modernization and upgrades planned by the petitioners demonstrate that customers in the affected exchanges will likely be better served by Crawford and NRPT than GTE. The requested study area waivers thus 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 waiver requests should be granted. 11. Need for imposed limits on USF draws. Although we find no reason to question Crawford and NRPT's estimates of the USF impact, we nonetheless are concerned that those estimates may later prove inaccurate when the planned upgrades are completed. We have found that, even in a period of a few years, the USF payments 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 exchanges being acquired by Crawford and NRPT. 12. We therefore find that the waiver should be subject to the condition that, absent explicit approval from the Bureau, the annual USF support provided to Crawford and NRPT's proposed new study areas shall not exceed the post-upgrade USF amount estimated in the petition. This limit ensures that the study area waivers will not, due to errors or unforeseen circumstances, result in adverse USF impacts which substantially exceed Crawford and NRPT's forecasts. 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 13. Section 61.41(c)(2) of the Commission's rules provides that, when a cost company acquires a price cap company, the acquiring LEC, and any LEC 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. GTE is a price cap company. Hence, under this rule, Crawford and NRPT's acquisition of GTE's four exchanges obligates Crawford and NRPT to become subject to price cap regulation instead of rate-of-return regulation. 14. The Commission explained that the all-or-nothing rule is intended to address two concerns it has 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 cap regulation, 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. 15. 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 16. Petition. Crawford and NRPT request waivers of Section 61.41(c)(2) of the Commission s rules so that they may operate as rate-of-return LECs, rather than price cap LECs, and may participate in the NECA tariffs after acquiring the four exchanges which currently are under price cap regulation. 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 17. We agree with Crawford and NRPT that the Commission's first concern underlying the all-or-nothing rule is not applicable in this case. Neither, Crawford nor NRPT have an incentive to shift costs between price cap and cost affiliates, because they are not seeking to maintain separate affiliates under different systems of regulation. As to the Commission's second concern, we do not find it likely that GTE could game the system by moving the four exchanges back and forth between price cap and rate-of-return regulation, because GTE is selling these exchanges and a reacquisition would require a second study area waiver. Moreover, GTE cannot transfer the exchanges without removing the rate-increasing effects of these exchanges from the price-capped rates that have been based, in part, upon the inclusion of these exchanges in its Texas study area. 18. We therefore find there is good cause to grant Crawford and NRPT waivers of the all- or-nothing rule to permit them to operate under rate-of-return regulation after acquiring the four exchanges which currently are under price cap regulation. As noted above, these waivers are subject to the condition that GTE shall make downward exogenous adjustments to its price cap indices to reflect the removal of these generally high-cost exchanges from its Texas study area. For the present, we will regulate Crawford and NRPT as rate-of-return carriers. Because we are waiving Section 61.41(c)(2), Crawford and NRPT may join the NECA pools. We note that, as with other rate-of-return carriers, Crawford and NRPT may elect price cap regulation in the future if either decides to withdraw from the NECA pools. IV. ORDERING CLAUSES 19. 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 Crawford Telephone Company, NRPT Communications, Inc., GTE Southwest, Inc., and Contel of Texas, Inc. d/b/a/ GTE Southwest, Inc. 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 12 and note 23 of this Order. 20. 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 Crawford Telephone Company and NRPT Communications, 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 18 of the Order. 21. 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 the National Exchange Carrier Association shall not distribute USF assistance exceeding the limits imposed in paragraph 12 and note 23. 22. 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