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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 96-59 Petition for Waivers Filed by ) ) Arapahoe Telephone Company, Great Plains ) Communications, Inc., Nebraska Central ) Telephone Company, Northeast Nebraska ) Telephone Company, 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's Rules ) MEMORANDUM OPINION AND ORDER Adopted: November 15, 1996 Released: November 15, 1996 By the Deputy Chief, Accounting and Audits Division Common Carrier Bureau: I. INTRODUCTION 1. On June 27, 1996, Arapahoe Telephone Company ("Arapahoe"), Great Plains Communications, Inc. ("Great Plains"), Nebraska Central Telephone Company ("Nebraska Central"), Northeast Nebraska Telephone Company ("Northeast Nebraska"), and U S WEST Communications, Inc. ("U S WEST") filed a joint petition for waiver of various Commission rules. The petitioners seek waivers of the definition of "Study Area" contained in the Part 36 Appendix-Glossary of the Commission's rules. The requested waivers would allow Arapahoe, Great Plains, Nebraska Central, Northeast Nebraska, and U S WEST to alter the boundaries of their existing Nebraska study areas as a result of U S WEST's sale of 32 exchanges. 2. In addition, the buyers 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 that currently are under price cap regulation. 3. On July 17, 1996, the Common Carrier Bureau ("Bureau") released a Public Notice soliciting comments on the joint petition. On October 4, 1996, the petitioners provided additional information concerning the joint petition. In this Order, we find that the public interest would be served by allowing the 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, as explained more fully 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 current 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 ILECs 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 ILEC, as a purchaser or seller, pending completion of the current review of the universal service program. B. Pleadings 7. Arapahoe, Great Plains, and Nebraska Central are cost companies which currently serve 1,060, 26,000, and 6,106 access lines, respectively. Northeast Nebraska is an average schedule company which currently serves 3,940 access lines; and U S WEST is a price cap company which currently serves 509,786 access lines in Nebraska. U S WEST proposes to sell 32 exchanges serving 12,497 access lines: four exchanges serving 1,424 access lines to Arapahoe; 11 exchanges serving 5,536 access lines to Great Plains; eight exchanges serving 2,558 access lines to Nebraska Central; and nine exchanges serving 2,979 access lines to Northeast Nebraska. U S WEST seeks waiver of the rule freezing study area boundaries to enable U S WEST to remove these 32 exchanges from its Nebraska study area. The requested waivers would allow the buyers to consolidate the acquired exchanges with their existing Nebraska study areas. 8. Petitioners state that the proposed changes would serve the public interest because the buyers are small local telephone companies that are in the best position to determine and serve the unique needs of the rural customers in the acquired exchanges. The petitioners also state that the proposed changes will result in service that is more closely tailored to address customer needs and serve community interests. Further, the buyers state that initial review of the exchanges indicates there is no need for any major upgrades of loop-related plant and therefore the planned upgrades will not affect the USF draws, as shown in the chart below. In addition, the buyers state that all central office switches will have to be replaced since they are remote offices from U S WEST host offices. The petitioners estimate that the switch replacement costs will be approximately $2,247,000. The petitioners estimate that, if the study area waivers were granted, the transfer of the 32 exchanges, including upgrades, would increase the combined annual USF draw of the buyers by $517,858. ANNUAL USF DRAWS Company Before Purchase (A) After Purchase (B) After Upgrades (C) Difference (D)=(C-A) Arapahoe $128,712 $155,517 $155,517 $26,805 Great Plains $837,732 $1,230,848 $1,230,848 $393,116 Nebraska Central $150,696 $206,064 $206,064 $55,368 Northeast Nebraska $153,516 $196,085 $196,085 $42,569 U S WEST $0 $0 $0 $0 TOTAL $1,270,656 $1,788,514 $1,788,514 $517,858 C. Discussion 9. 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 ILEC draws. In addition, the Nebraska Public Service Commission and the South Dakota Public Utilities Commission state that they do not object to these requested waivers. The buyers plan to replace all existing switches in the acquired exchanges with digital equipment that is compatible with existing equipment utilized by them. Further, based upon the buyers' statement that grant of the requested waivers would result in service that is more closely tailored to address customer needs and serve community interests, we believe that the requested study area waivers will likely 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. 10. Need for imposed limits on USF draws. Although we find no reason to question the buyers' 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 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. Even though the buyers state that they will not make substantial upgrades in loop plant, we are still concerned that their USF estimates may later prove inaccurate because the exchanges to be acquired are located in sparsely populated areas and when some upgrading is done their costs may rise. 11. 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 the cost companies' (i.e., Arapahoe, Great Plains, and Nebraska Central) study areas shall not exceed the post-upgrade amounts estimated in the joint petition. This limit ensures that the study area waivers will not, due to error or unforeseen circumstances, result in adverse USF impacts which substantially exceed the buyers' forecasts. We do not establish a limit for average schedule companies, such as Northeast Nebraska, because their USF draws are not directly related to their costs. 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 12. 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; Arapahoe, Great Plains, and Nebraska Central are cost companies; and Northeast Nebraska is an average schedule company. Hence, Arapahoe, Great Plains, and Nebraska Central's acquisition of a U S WEST exchange would obligate them to become subject to price cap regulation, but Northeast Nebraska's acquisition of a U S WEST exchange would not obligate it to become subject to price cap regulation. 13. 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, 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 noted, 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, 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. 14. 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 15. Petition. Arapahoe, Great Plains, and Nebraska Central seek waivers of Section 61.41(c)(2) so they may operate as rate-of-return ILECs, rather than price cap ILECs, after acquiring the 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 16. We agree with petitioners that the Commission's first concern underlying the all-or- nothing rule is not applicable in this case. None of the petitioners has an incentive to shift costs between price cap and cost affiliates, because none of these companies are seeking to maintain separate affiliates under different systems of regulation. As to the Commission's second concern, we find it implausible that the petitioners could game the system by moving the exchanges back and forth between price cap and other forms of regulation, because the petitioners would require a second study area waiver. Moreover, U S WEST 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 Nebraska study area. 17. We therefore find there is good cause to grant the petitioners waivers of the all-or- nothing rule to permit them to remain under rate-of-return regulation after acquiring the exchanges which currently are 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 these generally high-cost exchanges from its Nebraska study area. For the present, we will continue to regulate the petitioners as rate-of-return ILECs. Because we are waiving Section 61.41(c)(2), they need not withdraw from the NECA pools. We note that, as with any other rate-of-return ILECs, the petitioners may elect price cap regulation in the future if they decide to withdraw from the NECA pools. IV. OTHER ISSUES 18. To the extent necessary, three of the buyers, Arapahoe, Nebraska Central and Northeast Nebraska seek waivers of Section 69.3(e)(11) of the Commission's rules. That rule requires that any changes in NECA carrier 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 its acquisition occurs this year, each buyer represents that it plans to utilize NECA as its interstate tariff administrator; consequently, the buyers' carrier common line costs will be included in NECA's 1997 filing. We conclude that, Arapahoe, Nebraska Central, and Northeast Nebraska are not required to make a separate annual access filing for their carrier common line costs, and therefore, a waiver of Section 69.3(e)(11) is not required. V. 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 joint petition of Arapahoe Telephone Company, Great Plains Communication, Inc., Nebraska Central Telephone Company, Northeast Nebraska Telephone Company, 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 11 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 joint petition of Arapahoe Telephone Company, Great Plains Communications, Inc., and Nebraska Central Telephone Company 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 17 of this 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, 0.291, and 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 11 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 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 John S. Morabito Deputy Chief, Accounting and Audits Division Common Carrier Bureau