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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 96-26 Petitions for Waivers Filed by ) ) Golden Belt Telephone Association, Inc.,) S&T Communications of Dighton, Inc., ) S&T Telephone Cooperative Association, Inc.,) United Telephone Company of Southcentral) Kansas, and United Telephone Company of) Kansas ) ) Concerning Sections 61.41(c)(2), 69.3(e) and) the Definition of "Study Area" Contained in ) the Part 36 Appendix-Glossary of the ) Commission's Rules ) MEMORANDUM OPINION AND ORDER Adopted: August 30, 1996 Released: August 30, 1996 By the Chief, Accounting and Audits Division: I. INTRODUCTION 1. On January 19, 1996, Golden Belt Telephone Association, Inc. ("Golden Belt"), S&T Telephone Cooperative Association, Inc. ("S&T Cooperative"), S&T Communications of Dighton, Inc. ("S&T-Dighton"), United Telephone Company of Kansas ("United-Kansas"), and United Telephone Company of Southcentral Kansas ("United-Southcentral") filed a joint 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. The waivers would allow Golden Belt, S&T Cooperative, United-Kansas, and United-Southcentral to alter the boundaries of their existing Kansas study areas to reflect the sale of two exchanges. 2. In addition, Golden Belt, S&T Cooperative, and S&T-Dighton 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 Golden Belt, S&T Cooperative, and S&T-Dighton to operate under rate-of-return regulation after acquiring the exchanges, which are currently under price cap regulation. 3. On February 16, 1996, the Common Carrier Bureau ("Bureau") released a Public Notice soliciting comments on the joint petition. On March 18, 1996, the Bureau received comments supporting the joint petition from the National Exchange Carrier Association, Inc. ("NECA") and the National Telephone Cooperative Association ("NTCA"). In July 1996, S&T Cooperative provided additional information concerning the joint petition. 4. The information provided in the original waiver request and in the two subsequent letters indicates that, in fact, two separate transactions are contemplated. One transaction involves the sale of the Dighton exchange from United-Kansas to S&T-Dighton, and the other transaction involves the sale of the Ness exchange from United-Southcentral to Golden Belt. For that reason, we shall sever the joint petition to treat it as two separate waiver requests, and in this order, we consider only the sale of the Dighton exchange. We find that the public interest would be served by allowing United-Kansas and S&T Cooperative to alter their study area boundaries as requested and by allowing S&T Cooperative and S&T-Dighton to operate under rate-of-return regulation after acquiring the Dighton exchange. We therefore grant the United-Kansas/S&T portion of the joint petition, as conditioned and explained 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 USF program. B. Pleadings 8. United-Kansas currently serves 75,716 access lines and S&T Cooperative currently serves 1,603 access lines. United-Kansas proposes to sell the Dighton exchange which contains 1,139 access lines to S&T-Dighton. Petitioners seek waivers of the rule freezing study area boundaries to reflect the transfer of the Dighton exchange out of the United-Kansas study area and into the S&T Cooperative study area. 9. Petitioners state that the proposed changes would serve the public interest. S&T- Dighton states that it plans to replace the existing electro-mechanical switch with a digital satellite serving office and replace the major portion of the existing Dighton local loop plant. S&T-Dighton states that the upgrade will enable it to offer one-party service to all customers in the Dighton exchange. Further, S&T-Dighton states that the upgrade will enable it to enhance the quality of voice and data transmissions for Dighton residents and businesses, as well as make available for the first time, enhanced services such as call forwarding, SS7 capability, and CLASS features. S&T-Dighton estimates that its upgrades would require an investment outlay of $6.2 million. 10. Petitioners estimate that the transfer of the Dighton exchange from the United-Kansas study area to the S&T Cooperative study area would result in a net USF increase of $53,502. In addition, S&T Cooperative estimates that, after it facilities upgrade is complete, it would receive an additional $1,545,382 in USF support. Therefore, based on petitioners estimates, the total net impact on the USF, after upgrades, would be an increase of $1,598,884. 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 the combined increase in USF draws will not have a significant adverse impact on the USF total or on individual carrier draws. In addition, the Kansas Corporation Commission ("Kansas CC") states that it does not object to the requested waivers. S&T-Dighton states that its planned upgrades would enable it to improve customer services in the Dighton exchange. We believe the petitioners have demonstrated that their customers will likely be well served by S&T-Dighton, and therefore, the requested study area waivers are likely to serve the public interest. As a result, we find that the three-prong standard for granting a study area waiver has been met and that the waiver requests should be granted. 12. Need for imposed limits on USF draws. Although we find no reason to question petitioners' 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 S&T-Dighton. 13. 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 S&T Cooperative's study area shall not exceed the amount estimated in the joint 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 petitioners' 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 area. 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 14. 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. United-Kansas is a price cap LEC. Hence, under this rule, S&T Cooperative's acquisition of the Dighton exchange from United-Kansas obligates S&T Cooperative and S&T-Dighton to become subject to price cap regulation instead of rate-of-return regulation. 15. The Commission explained that the all-or-nothing rule is intended to address two concerns it has regarding mergers and acquisitions involving price cap LECs. 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 LEC 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, 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. 16. 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 LEC shall make a downward exogenous adjustment to its price cap index to reflect the change in its study area. That adjustment is needed to remove the effects of the transferred exchanges from price-capped 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 17. Petition. S&T Cooperative seeks a waiver of Section 61.41(c)(2) of the Commission s rules so that it may operate as a rate-of-return LEC, rather than price cap LEC, and may participate in the NECA tariffs after acquiring the Dighton exchange which currently is 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 18. We agree with petitioners that the Commission's first concern underlying the all-or- nothing rule is not applicable in this case. S&T Cooperative does not have an incentive to shift costs between price cap and rate-of-return affiliates, because it is not seeking to maintain separate affiliates under different systems of regulation. As to the Commission's second concern, we find it implausible that United-Kansas could game the system by moving the one exchange back and forth between price cap and rate-of-return regulation, because United-Kansas is selling this exchange and a reacquisition would require a second study area waiver. Moreover, United- Kansas cannot transfer the exchange without removing the rate effects of this exchange from the rates that have been based, in part, upon the inclusion of this exchange in its Kansas study area. 19. We therefore find there is good cause to grant S&T Cooperative waiver of the all-or- nothing rule to permit it to operate under rate-of-return regulation after acquiring the Dighton exchange which currently is under price cap regulation. As noted above, these waivers are subject to the condition that United-Kansas shall make exogenous adjustments to its price cap indices to reflect the removal of this exchange from its Kansas study area. For the present, we will regulate S&T Cooperative as a rate-of-return carrier, and because we are waiving Section 61.41(c)(2); S&T Cooperative may remain in the NECA pools. We note that, as is the case for any other rate-of-return carriers, S&T Cooperative may elect price cap regulation in the future if it decides to withdraw from the NECA pools. IV. OTHER ISSUES 20. To the extent necessary, S&T-Dighton seeks a waiver 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. S&T-Dighton is concerned that under a strict interpretation of this rule it, rather than NECA, would be required to file a tariff on the next annual access tariff filing date. Assuming its acquisition occurs this year, S&T-Dighton represents that it plans to utilize NECA as its interstate tariff administrator; consequently, S&T-Dighton's carrier common line costs will be included in NECA's 1997 filing. We conclude that S&T-Dighton is not required to make a separate annual access filing for its carrier common line costs, and therefore a waiver of Section 69.3(e)(11) is not required. V. ORDERING CLAUSES 21. 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 S&T Communications of Dighton, Inc., S&T Telephone Cooperative Association, Inc., and United Telephone Company of Kansas 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 condition stated in paragraph 13 and note 26 of this Order. 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, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, that the petition of S&T Communications of Dighton and S&T 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 19 of this Order. 23. 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, Inc. shall not distribute USF assistance exceeding the limit imposed in paragraph 13 and note 26 of this Order. 24. 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