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The Commission's concern about adverse USF impacts was mitigated, in the short term  X 4 xat least, by its adoption of the Joint Board's recommendation for an indexed cap on the USF.M  d yO!' "/ Ѝ#c P/P#The Joint Board recommended, and the Commission adopted, interim rules that limit the rate of growth of  {O"' x the USF to the rate of growth in the total number of working loops nationwide. See generally Amendment of Part  {O|#' xD 36 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision, 9 FCC Rcd 334 (1993)  {OF$' x ("1993 Joint Board Recommended Decision"); id., Report and Order, 9 FCC Rcd 303 ("Interim Cap Order"). The  xD Commission extended these interim rules through July 1, 1996. Amendment of Part 36 of the Commission's Rules"% 0*%%%"  {O' xk and Establishment of a Joint Board, Report and Order, 11 FCC Rcd 1077 (1995), summarized in 60 Fed. Reg. 65011  yOZ' x (1995). Recently, the Joint Board recommended, and the Commission adopted, an extension of the interim cap rules  x on the USF until the final universal service rules become effective. FederalState Joint Board on Universal Service,  {O' x Recommended Decision, CC Docket No. 9645, released June 19, 1996 ("1996 Joint Board Recommended Decision");  {O'id., Report and Order, FCC 96281, released June 26, 1996 ("Extension of Interim Cap Rules").#Xw PXP#M " ~ 0*%%ZZ "  xThe Commission nonetheless recognized that, even in the short term, the granting of a study area  xwaiver may adversely affect the fund's distribution, if not its size. Under the indexed USF cap  xrules, any study area reconfiguration that increases the USF draw of one USF recipient often  xVreduces that of other USF recipients. Consequently, in evaluating whether a study area change  xwould have an adverse impact on the distribution or level of the USF, the Commission applies  X4 x}a "onepercent" guideline to study area waiver requests filed after January 5, 1995. ~ {O 'Ѝ#c P/P#See U S WESTEagle Study Area Order, supra note 10,  1417.#x@bX@# Under this  xguideline, no study area waiver is granted if it would result in an annual aggregate shift in USF  xcassistance in an amount equal to or greater than one percent of the total USF, unless the parties  xcan demonstrate extraordinary public interest benefit. To prevent ILECs from evading this  xVlimitation by disaggregating a single large sale of exchanges into a series of smaller transactions  xthat in the aggregate have the same effect on the USF, the Commission further requires that the  xguideline be applied to all study area waivers granted to either ILEC, as a purchaser or seller,  X 4pending completion of the current review of the universal service program. \  {O' "y Ѝ#c P/P#Id. In this context, the Commission defines the term ILEC to include all affiliated ILECs (i.e., those that  x are in common control, as the term "control" is defined in Section 32.9000 of the Commission's rules, 47 C.F.R.   {O?'32.9000). Id.  14 note 34.#x@bX@#  X ' B. Pleadings  X4 "46. U S WEST serves approximately 393,000 access lines in Idaho. U S WEST plans to  xsell three Idaho exchanges, serving 3,126 access lines, to Columbine, which currently operates  Xb4 xonly in Colorado.b4  yOG'ԍColumbine is in the process of selling its Colorado exchanges and reestablishing itself in Idaho through the purchase discussed herein. Silver Star, an affiliate of Columbine,Eb  yO'ԍJoint Petition at 2.E serves approximately 500 access lines  xEin Idaho. U S WEST seeks waiver of the rule freezing study area boundaries to enable it to  X44 x3remove the three exchanges from its Idaho study area.4 {O"'ԍId. at 1. U S WEST states that approximately 196 access lines in these exchanges are located in Wyoming but are served by U S WEST from its Idaho study area. Columbine also seeks waiver of that rule to create a new study area separate from its affiliate, Silver Star. "v0*%%ZZf"Ԍ X4 "7. Petitioners state that, according to the Idaho Public Utilities Commission findings, the  xproposed changes would serve the public interest because service will improve with a small, local  xtelephone provider. The petitioners state that Columbine plans an extensive upgrade of telephone  xfacilities. The petitioners also state that Columbine has an obligation to replace the switches to  X4 x+provide CLASS features and access to the Internet. yO'ԍCustom Local Area Signaling Services, or CLASS, includes automatic callback, automatic recall, call  yO'waiting, call forwarding and other similar services.#x6X@`7bX@# Specifically, the petitioners state that  xuColumbine plans to replace all switches with digital technology operating in a hostremote  xconfiguration. In addition, the petitioners state that Columbine plans to modernize outside plant  xby installing digital loop carrier and new cable. Further, the petitioners state that Columbine  x"plans to replace and upgrade existing air core cable and aerial wire facilities and modernize the  xtransmission facilities. Finally, the petitioners state that Columbine plans to purchase new telephone facilities in order to meet the projected growth of the exchanges being purchased.  X 4 "8. Columbine states that it proposes to acquire the U S WEST assets as part of a tax free  X 4 xexchange of assets, pursuant to Section 1031 of the Internal Revenue Service ("IRS") Code.0X  yO'ԍJoint Petition at Attachment B, Response to Question 15. In essence, Columbine states that it will dispose of its Colorado telephone properties to a third party while simultaneously acquiring similar telephone assets located in Idaho from U S WEST.0  xNColumbine states that because the IRS imposes a number of restrictions on Section 1031  xtransactions, the most important of which, is that the purchasing company must maintain its  x<independent identity without commingling acquired assets and ongoing operations with affiliated corporations, it should be allowed to establish a separate study area.  XK4 "9. The petitioners state that, if Columbine were to establish a new study area for its  X44 xpurchased exchanges, its annual USF support would be $1,300,285.h4@ {O%'ԍSee Overhead Letter, supra note 3.qh Silver Star states that it  xcurrently receives $137,821 in annual USF support. The petitioners also state that, if Columbine's  xpurchased exchanges were to be combined with Silver Star's study area, the combined study area  X4 x_would receive $1,338,773 in USF support.I {Or'ԍId.` ` I The petitioners state that the exchange transfer  xwould have no effect on U S WEST's USF assistance because U S WEST does not and will not  X4qualify for USF assistance before or after the sale.d  yO!'#c PE37/P#эJoint Petition at Attachment B, Response to Question 15.  yO"'#c PE37/P# " 0*%%ZZ"  X' C. Discussion   X4 " 10.  Request for waivers. We have reviewed the data the petitioners filed with NECA {OK'Ѝ#c P/P#See NECA USF 1996 Submission of 1995 Study Results filed October 1, 1996.#x@bX@#  xand the estimates filed in this proceeding and have determined that the net increase in USF draws  X4 x8will not have a substantial adverse impact on the USF total or on individual ILEC draws. In  X4 xaddition, the Idaho Public Utilities Commission does not object to these requested waivers.Z {O'ЍSee Idaho Public Utilities Commission#c P/P#, Order, Case Nos. SILT941, USWS944, dated March 5, 1996. The  xupgrades planned by Columbine should improve customer service in the three exchanges. We  xbelieve the petitioners have demonstrated that their customers will likely be well served by  XL4 xColumbine,LL {O 'ԍSee supra  at  7.L and therefore, the requested study area waivers are likely to serve the public  xpinterest. As a result, we find that the threeprong standard for granting a study area waiver has been met and that the waiver requests should be granted.  X 4 "q 11. Request for separate study area. In order to comply with Commission policy, ~ {O'ԍSee generally U S WEST Comm., Inc., and Range Tel. Coop., Inc., Joint Petition for Waiver of the  {O'Definition of Study Area, Order on Reconsideration, 10 FCC Rcd 13264,  1521 (Com. Car. Bur., 1995) ("U S  {O'WESTRange Recon Order"; ALLTEL Serv. Corp., Petition for Waiver of the Definition of Study Area,  {O}'Memorandum Opinion and Order, 9 FCC Rcd 4450, 4451,  67 (Com. Car. Bur., 1994); ALLTEL Serv. Corp.,  {OG'Petition for Waiver of the Definition of Study Area, Memorandum Opinion and Order, 8 FCC Rcd 6411,  6  {O'(Acct. & Audits Div., Com. Car. Bur. 1993); Study Area Notice, supra note 5,  6, 17; 1984 Joint Board  {O'Recommendation, supra note 5,  66; 1985 Order Adopting Recommendation, supra note 5,  1.  xColumbine's and Silver Star's data must be combined as one study area. This does not mean that  xyColumbine and Silver Star cannot be operated as two separate companies. Rather, it merely  xRrequires that their cost data must be combined in determining costs for interstate ratemaking  X4purposes.#X  yO'ԍAlthough the tax implications of the proposed purchase are not at issue here, we see nothing on the record indicating that our requirement for a combined study area would adversely affect the carriers' plans for a tax free exchange of assets.#  Xh4 "0 12. As explained above, the primary intent of the study area freeze rule is to prohibit  xILECs from setting up exchanges within their service territories as separate study areas to  xmaximize USF support. ILECs would have no incentive to do this if USF assistance were  xpdistributed on an exchange basis. Yet, because it is distributed on a study area basis, an ILEC's  xUSF payment is often greater if it can isolate exchanges in one or more separate study areas.  xSuch action permits the ILEC to report average loop cost in the highcost study areas further  x above the USF eligibility threshold than would be possible if the exchanges remained"0*%%ZZ:"  xconsolidated with lowercost exchanges. Hence, the creation of a new study area would enable  xthese companies to gain an advantage under the USF support rules or the small carrier assistance  X4 xrules. {OK'ԍSee 47 C.F.R.  36.125(f). These rules are commonly referred to as the DEM rules (dial equipment minuteofuse rules). In conclusion, we find that in this case, where ILECs will be operating in the same state,  xthe creation of an additional study area is unwarranted. Therefore, the request of Columbine for a new study area is denied.  Xv4 " 13. Need for imposed limits on USF draws. Although we find no reason to question  x@Columbine's estimates of the USF impact, we nonetheless are concerned that those estimates may  x<later prove inaccurate when the planned upgrades are completed. We have found that, even in  X34 x a period of a few years, the USF payments for some ILECs have risen by unexpected amounts.*3" {O ' "c #C\  P6Q/P##X\  P6G;/P#э  See, e.g., Delta Tel. Co., Inc., Waiver of the Definition of "StudyArea," Memorandum Opinion and Order,  x 5 FCC Rcd 7100 (1990) (USF payments grew from $82,500 in 1991 to approximately $445,700 in 1993); U S WEST  x Comm. and Gila River Telecomm., Inc., Petition for Waiver of the Definition of "Study Area," Memorandum  x Opinion and Order, 7 FCC Rcd 2161,  7 (1992) (Gila River estimated 1992 highcost support to be $169,155, yet  yO('actual 1992 payment was $390,993, and the 1995 payment was approximately $750,000).#x@bX@#xxX*  X 4 xI These ILECs generally had undertaken substantial upgrades or expansions of the local network  xuin difficulttoserve, sparsely populated exchanges that are similar to the exchanges being acquired by Columbine.  X 4 "= 14. We therefore find that the waivers should be subject to the condition that, absent  xexplicit approval from the Bureau, the annual USF support provided to Columbine's and Silver  X4 xStar's combined study area shall not exceed $1,338,773.o {O'ԍSee Overhead Letter, supra note 3.q o We note that the Telecommunications  X{4 xAct of 1996, which became effective on February 8, 1996,{f  yO'Ѝ#c P/P#Telecommunications Act of 1996, Pub. L. No. 104104, 110 Stat. 56 (1996).#x@bX@# requires the reform by May 8, 1997,  xof many mechanisms the Commission uses to support its universal service goals, including the  XM4 xUSF.&M  {O' "" Ѝ#c P/P#Id. 47 U.S.C. 254(a)(2). To develop new USF rules, the Commission has initiated a proceeding to address  {O' x this issue. See FederalState Joint Board on Universal Service, Notice of Proposed Rulemaking and Order  {O' x Establishing Joint Board, 61 Fed. Reg. 10499 (Mar. 14, 1996). Id.  39. #C\  P6Q/P# The Joint Board released its Recommended  yOR 'Decision on November 8, 1996, 12 FCC Rcd 87.#Xx6X@DQbX@#ѡ It is likely that any new universal service rules will alter the method used to determine  xthe distribution of USF support to highcost areas, thereby changing the projected level of support  xto the petitioner's study area. This, in turn, may require us to revisit this issue, and the related waiver condition that we have established herein. "0*%%ZZ]"Ԍ X' III. PRICE CAPS WAIVER A. Background  X'    X4 " 15.  Section 61.41 of the Commission's rules provides that, when a cost company acquires  xa price cap company, the acquiring company, and any ILEC with which it is affiliated, shall  Xv4 xbecome subject to price cap regulation within a year of the transaction. v {O' " Ѝ#c P/P#47 C.F.R.  61.41(c). See Policy and Rules Concerning Rates for Dominant Carriers, Second Report and  {O' x Order, 5 FCC Rcd 6786, 6821 (1990), Erratum, 5 FCC Rcd 7664 (Com. Car. Bur. 1990) ("LEC Price Cap Order"),  {O ' x modified on recon., Order on Reconsideration, 6 FCC Rcd 2637 (1991) ("LEC Price Cap Reconsideration Order"),  {OM ' x aff'd sub nom. National Rural Telecom Ass'n v. FCC, 988 F.2d 174 (D.C. Cir. 1993), petitions for further recon.  {O ' x dismissed, 6 FCC Rcd 7482 (1991), further modification on recon., Amendments of Part 69 of the Commission's  x Rules Relating to the Creation of Access Charge Subelements for Open Network Architecture, Policy and Rules  {O ' x Concerning Rates for Dominant Carriers, Report and Order and Order on Further Reconsideration and Supplemental  {Os ' x Notice of Proposed Rulemaking, 6 FCC Rcd 4524 (1991) ("ONA Part 69 Order"), further recon., Memorandum  {O='Opinion and Order on Second Further Reconsideration, 7 FCC Rcd 5235 (1992).#x@bX@#ѽ The Commission stated  xthat this "allornothing" rule applies not only to the acquisition of an entire ILEC but also to the  XH4 xacquisition of part of a study area.!\H {O' " Ѝ#c P/P#See LEC Price Cap Reconsideration Order, supra note 32,  149 note 207. The Commission explained that,  x if these two types of acquisitions were not treated the same under the allornothing rule, an ILEC could avoid the  {O3'rule by selling all but one of its exchanges. Id.#x@bX@# U S WEST is a price cap companyP"XH  yO' "p ЍPrice cap companies are those ILECs that receive compensation for the use of their facilities in originating  xQ and terminating interstate telecommunication services on the basis of the Commission's price cap rules. 47 C.F.R.  61.4161.49.P and Columbine is a  X14 xIcost company. #1 yO' "p ЍCost companies are those ILECs that receive compensation for the use of their facilities in originating and terminating interstate telecommunications services on the basis of their actual costs.  Hence, Columbine's acquisition of a U S WEST exchange would obligate it to become subject to price cap regulation.  X 4 "16. The Commission explained that the allornothing rule is intended to address two  x8concerns it has regarding mergers and acquisitions involving price cap companies. The first  xconcern is that, in the absence of the rule, an ILEC might attempt to shift costs from its price cap  x<affiliate to its nonprice cap affiliate, allowing the nonprice cap affiliate to earn more, due to its  X4 x8increased revenue requirement, without affecting the earnings of the price cap affiliate, i.e.,  x}without triggering the sharing mechanism. The second concern is that, absent the rule, an ILEC  xmay attempt to "game the system" by switching back and forth between rateofreturn regulation  xand price cap regulation. The Commission noted, as an example, the incentive a price cap  xcompany may have to increase earnings by opting out of price cap regulation, building up a large  x&rate base under rateofreturn regulation so as to raise rates and, then, after returning to price cap,"D#0*%%ZZo"  xlcutting costs back to an efficient level. It would disserve the public interest, the Commission  xstated, to allow an ILEC to alternately "fatten up" under rateofreturn regulation and "slim down"  x/under price cap regulation, because rates would not fall in the manner intended under price cap  X4regulation.$ {O4'ЍSee LEC Price Cap Reconsideration Order#c P/P#, supra note 32,  148.#x@bX@#  X4 "17.PCI The Commission nonetheless recognized that a narrow waiver of the allornothing  xcrule might be justified if efficiencies created by the purchase and sale of a few exchanges were  X_4 xcto outweigh the threat that the system may be subject to gaming.~%_Z {Oj 'Ѝ#c P/P#Id.  149 note 207.~  Such a waiver would not be  xgranted unconditionally, however. Rather, waivers of the allornothing rule would be granted  xsubject to the condition that the selling price cap company shall make a downward adjustment  X 4 xyto its price cap indices to reflect the change in its study area.>&  {O' "p Ѝ#c P/P#See Price Cap Performance Review for Local Exchange Carriers, First Report and Order, 10 FCC Rcd 8962,  {O' x  328, 330 (1995) ("LEC Price Cap Review Order"). Under that requirement, U S WEST must reduce the price  x. cap indices for its Idaho study area if the changes in study area boundaries reduce the cost bases for those indices.  x The price cap indices, which are the cost indices on which pricecapped rates are based, are calculated pursuant to  {O'a formula specified in the Commission's rules for price cap carriers. See 47 C.F.R.  61.45.xxX#x@bX@#> That adjustment is needed to  xremove the effects of the transferred exchanges from rates that have been based, in whole or in  X 4part, upon the inclusion of those exchanges in the study areas subject to price cap regulation.'  {O?'Ѝ#c P/P#See LEC Price Cap Review Order, supra note 38,  330.    X '  X 'B. Pleadings  X4 "18.  Petition. Columbine seeks waiver of Section 61.41(c)(2) so it may operate as a rate xofreturn ILEC, rather than a price cap ILEC, after acquiring the exchanges which currently are  xunder price cap regulation. The petitioners argue that Columbine is the type of small rural ILEC  xwhich the Commission has found to be an inappropriate candidate for price cap regulation. In  xaddition, the petitioners state that in balancing the benefits to be gained under price cap  xregulation against the costs which would be incurred by Columbine, the public interest is better  xIserved by a grant of the requested waiver. The petitioners further argue that the Commission's  xItwo concerns, the threat of cost shifting between affiliates and gaming of the system, are not at  X4issue in this case.x(4  yO!'ЍJoint #c P/P#Petition at 56.x " (0*%%ZZ$"  X' C. Discussion  X4 "A 19.  We agree with the petitioners that the Commission's first concern underlying the all X4 xornothing rule is not applicable in this case. Columbine cannot shift costs between price cap  xand cost affiliates, because it is not seeking to maintain separate affiliates under different systems  X4 x}of regulation. As to the Commission's second concern, we find it implausible that the petitioners  xcould game the system by moving the exchanges back and forth between price cap and other  x&forms of regulation, because the petitioners would require a second study area waiver. Moreover,  xU S WEST cannot transfer the exchanges without removing the rateincreasing effects of the  xexchanges from the pricecapped rates that have been based, in part, upon the inclusion of these  X 4exchanges in its Idaho study area.d)  {O 'ЍSee discussion supra  17.d   X 4 "20. We therefore find there is good cause to grant Columbine waiver of the allornothing  xrule to permit it to remain under rateofreturn regulation after acquiring the exchanges which  xIcurrently are under price cap regulation. As noted above, this waiver is subject to the condition  xthat U S WEST shall make a downward adjustment to its price cap indices to reflect the removal  x"of the three exchanges from its Idaho study area. For the present, we will continue to regulate  xColumbine as a rateofreturn ILEC. Because we are waiving Section 61.41(c)(2), it need not  x&withdraw from the NECA pools. We note that, as with any other rateofreturn ILEC, Columbine may elect price cap regulation in the future if it decides to withdraw from the NECA pools.  X' ` ` hhCIV. OTHER ISSUES  X4 ` `  X4 "W21. To the extent necessary, Columbine seeks a waiver of Section 69.3(e)(11) of the  xCommission's rules. That rule requires that any changes in NECA carrier common line tariff  xparticipation and long term support resulting from a merger or acquisition of telephone properties  x&are to be made effective on the next annual access tariff filing effective date following the merger  xor acquisition. Columbine is concerned that under a strict interpretation of this rule it, rather than  xNECA, would be required to file a tariff on the next annual access tariff filing date. Assuming  xits acquisition occurs this year, Columbine represents that it plans to utilize NECA as its  xinterstate tariff administrator; consequently, Columbine's carrier common line costs will be  xincluded in NECA's 1997 filing. We conclude that Columbine is not required to make a separate  xannual access filing for its carrier common line costs, and therefore, a waiver of Section 69.3(e)(11) is not required.  X' 6%V. ORDERING CLAUSES ă  X!4 "h22. Accordingly, IT IS ORDERED, pursuant to Sections 1, 4(i), 5(c), 201 and 202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201 and 202, and"" Z)0*%%ZZ "  xSections 0.91, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, and 1.3, that  xpthe Joint Petition of Columbine Telephone Company, Inc., Silver Star Telephone Company, Inc.,  xand U S WEST Communications, Inc. for waiver of Part 36, Appendix-Glossary, of the  xCommission's rules, 47 C.F.R. Part 36 AppendixGlossary IS GRANTED subject to the condition stated in paragraph 14 of this Order.  Xv4 "23. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201 and 202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201 and 202, and  xSections 0.91, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, and 1.3, that  xthe Joint Petition of Columbine Telephone Company, Inc. for waiver of Part 36,  x&Appendix-Glossary, of the Commission's rules, 47 C.F.R. Part 36 AppendixGlossary IS DENIED as to the establishment of a new study area containing the acquired exchanges.  X 4 "24. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201 and 202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201 and 202, and  xSections 0.91, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, and 1.3, that  xthe Joint Petition of Columbine Telephone Company, Inc. for waiver of Section 61.41(c)(2) of the Commission's rules, 47 C.F.R.  61.41(c)(2), IS GRANTED.  "22. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201 and 202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201 and 202, and  xSections 0.91, 0.291, 1.3, and 61.43 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, and  x61.43, that U S WEST Communications, Inc. SHALL adjust its price cap indices as discussed  x<in paragraph 20 above, to reflect, in its 1997 annual price cap filing, cost changes resulting from this and other transactions involving the sale of exchanges.  "23. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201 and 202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201 and 202, and  xSections 0.91, 0.291, and of the Commission's rules, 47 C.F.R.  0.91, 0.291, and 1.3, that the  xNational Exchange Carrier Association shall not distribute USF assistance exceeding the limit imposed in paragraph 14 of this Order. "7 )0*%%ZZ"  "24. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201 and 202 of the  xCommunications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201 and 202, and  x/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. ` `  hhCFEDERAL COMMUNICATIONS COMMISSION ` `  hhCKenneth P. Moran ` `  hhCChief, Accounting and Audits Division  X 4` `  hhCCommon Carrier Bureau@@  *@xxX#Xw PXP#