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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 96-52 Petitions for Waivers Filed by ) ) San Carlos Apache Telecommunications) Utility, Inc., and U S WEST Communications,) Inc. ) ) 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: November 8, 1996Released: November 8, 1996 By the Chief, Accounting and Audits Division: I. INTRODUCTION 1. On April 19, 1996, San Carlos Apache Telecommunications Utility, Inc. ("San Carlos") and U S WEST Communications, Inc. ("U S WEST") filed a petition for waiver of three Commission rules. San Carlos and U S WEST 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 U S WEST to alter the boundaries of its existing Arizona study area, and allow San Carlos to create a new Arizona study area, when transferring one U S WEST telephone exchange to San Carlos. 2. In addition, San Carlos seeks a waiver of 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 waiver would permit San Carlos to operate under rate-of-return regulation after acquiring the exchange which currently is under price cap regulation. Finally, San Carlos has asked the Commission not to place caps on the amounts it can draw from the universal service fund ("USF"). 3. On May 3, 1996, the Common Carrier Bureau ("Bureau") released a Public Notice soliciting comments on the petition. On June 3, 1996, the Bureau received comments supporting the petition from the National Telephone Cooperative Association. San Carlos provided additional information concerning the petition. In this Order, we find that the public interest would be served by allowing petitioners to alter their study area boundaries and allowing San Carlos to operate under rate-of-return regulation after acquiring the exchange. We therefore grant the petition, in part, as conditioned and explained below. II. STUDY AREA WAIVERS A. Background 4. A study area is a geographical segment of an incumbent local exchange carrier's ("ILEC") telephone operations. Generally, a study area corresponds to an ILEC's entire service territory within a state. Thus, ILECs operating in more than one state typically have one study area for each state, and ILECs operating in a single state typically have a single study area. Study area boundaries are important primarily because ILECs 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 ILECs do not set up high-cost exchanges within their existing service territories as separate study areas to maximize interstate cost allocations. An ILEC must apply to the Commission for a waiver of the frozen study area rule if it 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 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. U S WEST seeks a waiver of the rule freezing study area boundaries to enable it to remove one exchange, serving approximately 686 access lines, from its Arizona study area. San Carlos also seeks a waiver of that rule to permit it to acquire this exchange and establish a new study area. San Carlos proposes that it be regulated as a cost company. 8. Petitioners state that the proposed changes would serve the public interest because San Carlos would improve telecommunications service without necessitating inordinate increases in basic service rates. San Carlos states that it plans to replace much of the existing analog equipment with modern digital equipment to provide the customers with the most technologically advanced telephone system possible. San Carlos also states that it plans to install modern toll recording, signalling, and equal access facilities. San Carlos states that, over the next five years, it plans to make plant investments totalling $11,226,000, of which $7,898,900 will be for loop related facilities. 9. Petitioners estimate that the transfer of the exchange out of U S WEST's study area and into San Carlos' proposed new study area would make San Carlos eligible to receive $435,283 in annual USF support. San Carlos estimates that, after all planned upgrades are completed, its USF draw would increase to $1,079,602. In addition, petitioners state that U S WEST currently receives no USF support in Arizona and, after the sale, will not be eligible to receive USF support. C. Discussion 10. Request for waivers. We have reviewed the data the petitioners filed with NECA and the estimates filed with 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 ILEC draws. In addition, the Arizona Corporation Commission ("Arizona CC") states that it does not object to these requested waivers. The modernization and upgrade proposals as stated by San Carlos, demonstrate that current and potential customers in the affected exchange will likely be better served by San Carlos. 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. Request for exemption from USF limits. Although we find no reason to question San Carlos' 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 new or revised study area shall not exceed the amount specified in the petition. In reference to that Bureau policy, San Carlos submits an argument against the imposition of limits on its USF draw. 12. San Carlos argues that it would be inappropriate for its future USF draw to be restricted to current estimates (i.e., $1,079,602) because that estimate was made in good faith and 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 ILECs have risen by unexpected amounts. These ILECs 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 San Carlos. However, San Carlos' failure to submit accurate USF estimates is not, as San Carlos suggests, 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 ILECs' USF draws following exchange transfers. 13. These limits would ensure that the study area waivers will not, due to errors or unforeseen circumstances, result in USF impacts which substantially exceed San Carlos' 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 San Carlos' representation of the USF impact may be inaccurate, it would be unreasonable for its USF draw to be limited by those representations. 14. In conclusion, we believe that we should continue our policy of imposing limits on the new or revised study area'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 San Carlos' proposed new study area shall not exceed the post-upgrade amount 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 San Carlos' new 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 15. 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 ILEC 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 ILEC but also to the acquisition of part of a study area. U S WEST is a price cap company. Hence, under this rule, San Carlos' acquisition of the U S WEST exchange would obligate San Carlos to become subject to price cap regulation instead of rate-of-return regulation. 16. 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, an ILEC 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, an ILEC 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 an ILEC 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. 17. 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 18. Petition. San Carlos seeks waiver of Section 61.41(c)(2) so it may operate as a rate-of- return ILEC, rather than a price cap ILEC, after acquiring the 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 19. We agree with petitioners that the Commission's first concern underlying the all-or- nothing rule is not applicable in this case. San Carlos has no incentive to shift costs between price cap and cost affiliates, because San Carlos is not seeking to maintain separate affiliates under different systems of regulation. As to the Commission's second concern, we find it implausible that U S WEST could game the system by moving the exchange back and forth between price caps and rate-of-return regulation, because U S WEST is selling the exchange and a reacquisition would require a second study area waiver. Moreover, U S WEST cannot transfer the exchange without removing the rate-increasing effects of the exchange from the price-capped rates that have been based, in part, upon the inclusion of the exchange in its Arizona study area. 20. We therefore find there is good cause to grant San Carlos a waiver of the all-or-nothing rule to permit it to remain under rate-of-return regulation after acquiring the exchange which currently is under price cap regulation. As noted above, these waivers are subject to the condition that U S WEST shall make a downward exogenous adjustment to its price cap indices to reflect the removal of this generally high-cost exchange from its Arizona study area. For the present, we will regulate San Carlos as a rate-of-return carrier. We note that, as with any other rate-of-return carrier, San Carlos may elect price cap regulation in the future if it decides to withdraw from the NECA pools. IV. OTHER ISSUES 21. To the extent necessary, San Carlos 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. San Carlos 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, San Carlos represents that it plans to utilize NECA as its interstate tariff administrator; consequently, San Carlos' carrier common line costs will be included in NECA's 1997 filing. We conclude that San Carlos 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 22. 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 San Carlos Apache Telecommunications Utility, Inc. and U S WEST Communications, 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 condition stated in paragraph 14 and note 28 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, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, that the petition of San Carlos Apache Telecommunications Utility, Inc. and U S WEST 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 20 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 the National Exchange Carrier Association shall not distribute USF assistance exceeding the limit imposed in paragraph 14 and note 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 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