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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of )AAD 96-93 Petition for Waivers Filed by ) ) TelAlaska, Inc. and TelHawaii, Inc. ) ) Concerning Sections 36.611, 36,612, 61.41(c)(2) ) and the Definition of "Study Area" ) Contained in the Part 36 Appendix-Glossary ) of the Commission's Rules ) MEMORANDUM OPINION AND ORDER Adopted: July 16, 1997Released: July 16, 1997 By the Chief, Accounting and Audits Division Common Carrier Bureau: I. INTRODUCTION AND BACKGROUND 1.On August 16, 1996, TelAlaska, Inc. ("TelAlaska") and TelHawaii, Inc. ("TelHawaii") filed a petition for waiver of three Commission rules. TelHawaii, a subsidiary of TelAlaska, seeks a waiver 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 waiver would allow TelHawaii to establish a new study area containing a rural telephone exchange serving approximately 2,447 access lines in the Ka'u area of Hawaii. In addition, TelHawaii seeks a waiver of Section 61.41(c) of the Commission's rules. Section 61.41(c) 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 TelHawaii and TelAlaska to operate under rate-of-return regulation after acquiring telephone facilities in the Ka'u area that currently are under price cap regulation. Finally, TelHawaii seeks a waiver of Sections 36.611 and 36.612. These waivers would provide TelHawaii with immediate universal service fund ("USF") support monies effective with the transfer of GTE Hawaiian Tel's ("GTE") assets to TelHawaii, and TelHawaii's commencement of service in the Ka'u area. Further, TelHawaii asks that we direct the National Exchange Carrier Association, Inc. ("NECA") to make these USF support payments to TelHawaii based on current cost data rather than historical cost data. TelHawaii states that it seeks the waivers so that it may comply with the Hawaii Public Utility Commission's ("Hawaii PUC") mandate that TelHawaii provide telecommunications services as the carrier of last resort to the Ka'u area of Hawaii because GTE has failed to provide adequate telephone service to the area. 2.On September 11, 1996, the Common Carrier Bureau ("Bureau") released a Public Notice soliciting comments on the petition. In this Order, we find that the public interest would be served by allowing TelHawaii to establish a new study area and by allowing TelHawaii to operate under rate-of-return regulation after acquiring the exchange. We deny, however, TelHawaii's request for a waiver enabling it to receive immediate USF support. II. STUDY AREA WAIVER A. Background 3.A study area is a geographic 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. 4.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 the change. 5.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 "one-percent" guideline be applied to all exchange transfers where either carrier has been a party as a purchaser or seller and where a study area waiver request was submitted and granted within the previous twelve months. 6.In addition, we note that the recently released Universal Service Order 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. In the Order, the Commission recognized that "[u]ntil support for all carriers is based on a forward-looking economic cost methodology,...potential universal service support payments may influence unduly a carrier's decision to purchase exchanges from other carriers." To discourage this reliance on potential support, the Commission concluded that a "carrier making a binding commitment on or after May 7, 1997 to purchase a high cost exchange should receive the same level of support...as the seller received prior to the sale. For example, if a rural carrier acquires an exchange from another rural carrier, the acquired lines will continue to receive per-line support of the selling company prior to the sale. Eventually, support for all carriers will be based on a forward-looking economic cost methodology allowing carriers to receive support for all high-cost exchanges, including exchanges acquired from other carriers. III. PETITION AND COMMENTS 7.Petition.TelHawaii, a subsidiary of TelAlaska, is a new company that plans to operate in Hawaii. TelHawaii seeks waiver of the rule freezing study area boundaries so that it can establish a new study area. TelHawaii proposes to acquire and operate a rural telephone exchange in Ka'u, Hawaii, approximately 2,447 access lines, presently owned and operated by GTE. TelHawaii states that this waiver request is precipitated by the Public Utilities Commission of the Hawaii PUC's recent decision selecting TelHawaii as the carrier of last resort in the Ka'u area of Hawaii. 8.TelHawaii states that grant of this waiver would be in the public interest because TelHawaii's network will bring state-of-the-art services to the Ka'u area by mid 1997. TelHawaii states that its intended modernization and upgrades will provide basic exchange single party service to all customers in the Ka'u area in 1997. Further, TelHawaii states that its modernization and upgrade plan for Ka'u includes: (1) the installation of a Lucent Technologies 5ESS-200 CDX digital switch; (2) basic single party service with CLASS features; and (3) the provision of basic service for $15 per month for residential access and $31 per month for business access. Finally, TelHawaii states that it will provide service to the area that is a significant improvement over the inadequate service currently provided by GTE. 9.TelHawaii states that the transfer of the Ka'u exchange would not adversely affect the USF in any material way. TelHawaii states that, if TelHawaii were to acquire GTE's facilities and establish a new study area for the Ka'u exchange, its 1997 USF support would be approximately $2,194,255, considering planned upgrades. TelHawaii states that the exchange transfer would have no effect on GTE's USF assistance because GTE currently receives no USF assistance and it would receive no USF assistance after the transfer. Further, TelHawaii states that this increase would represent the utilization of support funding in high cost rural communities consistent with the original purpose of the USF, "to promote or preserve universal service by supporting improved and affordable modern telecommunications service in high cost rural exchanges." 10.Comments.GVNW, NECA and the Division of Consumer Advocacy of the State of Hawaii support Tel Hawaii's requests for a study area waiver, to be regulated as a rate of return company and to receive immediate USF support, claiming that these requests comport with the public interest. 11.GTE opposes TelHawaii's Petition, claiming it is irreconcilable with the Commission's Universal Service Order in two main respects: First, GTE states that since TelHawaii did not have a "binding commitment" to purchase the Ka'u exchange prior to May 7, 1997, it would only be eligible to receive the same level of USF support that is currently available to GTE, i.e., no support, because GTE's does not receive USF support for its Hawaii operations. Second, GTE contends that even if there had been a "binding commitment" for purchase of the exchange prior to May 7, 1997, TelHawaii's request of $2,194,225 in USF is inaccurate under the terms of Section 54.305 of the Commission's rules. C. Discussion 12.Request for waiver. We have reviewed the data the petitioners filed with NECA and the estimates filed in this proceeding and have determined that the net increase in USF draws would not have a substantial adverse impact on the USF total or on individual ILEC draws. In addition, the Hawaii Public Utilities Commission does not object to these requested waivers. Moreover, the upgrades planned by TelHawaii should improve customer services in the Ka'u exchange. We believe the petitioners have demonstrated that their customers will likely be well served by TelHawaii, 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 request should be granted. 13.USF draw. We also reject GTE's claim that the USF amount TelHawaii has requested is not accurate under Section 54.305. According to our calculations, TelHawaii's request for $2,194,225 is an accurate representation of the "average cost of all of its lines, both newly acquired and those it had prior to [transfer]." In addition, TelHawaii's estimate is approximately the same as the amount GTE would receive if it were an eligible carrier. IV. ADVANCEMENT OF USF DRAW A. Background 14.Under the Commission's rules, NECA calculates USF support payments based on historical data consisting of certain expenses, investment costs, and loop counts for a twelve (12) month period. Because each LEC is required to report data for a full 12 months of the preceding calendar year, newly established LECs typically are not eligible to receive support under Sections 36.611 and 36.612 of the Commission's rules until its third year of operation. Thus, because TelHawaii is a new carrier in Hawaii, the Commission's rules would preclude TelHawaii from receiving USF support payments on its 1997 costs until 1999. B. Pleadings 15.TelHawaii requests a waiver of Sections 36.611 and 36.612 of the Commission's rules in order: (1) to permit TelHawaii to receive USF support from the date that a change in GTE's study area boundary becomes effective; (2) to direct NECA to pay USF support to TelHawaii based upon TelHawaii's current projections of costs, subject to quarterly adjustments to reflect actual costs incurred. TelHawaii argues that this waiver is necessary to provide the contemplated range of services at reasonable rates that the Hawaii PUC has already determined are in the public interest to safeguard life and property in a specific rural area of Hawaii. C. Discussion 16.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. Further, the waiver must be consistent with the principles underlying the rule for which the waiver is requested. A primary principle underlying Sections 36.611 and 36.612 is that the goal of the USF program is to promote the nationwide availability of telephone service at reasonable rates by assisting ILECs operating in high cost areas. 17.TelHawaii cites a previous Commission order to support its request for a waiver. In that order, we granted a waiver to allow Border to Border Communications, Inc. ("Border") to be eligible to start receiving USF support immediately so it would be able to commence service in a remote area of Texas. In that situation, however, Border was entering a territory previously without service. Moreover, because Border was the only interested service provider, and because Border demonstrated that it could not provide service without USF support, the area would have remained without basic telephone service unless immediate USF support was granted. TelHawaii cannot claim the same special circumstances in support of its waiver. For example, TelHawaii is not entering an area that was previously without service. In addition, GTE is equipped to provide service in the Ka'u area should TelHawaii be unable to serve the area. We therefore find that TelHawaii has not demonstrated the special circumstances required for a waiver of Commission rules. Consequently, we conclude that TelHawaii request for immediate USF support should be denied. 18.Binding Commitment. TelHawaii estimated its USF support using the rules in place prior to the release of the Universal Service Order, i.e., on the basis of its projected actual cost of providing service. GTE states that since TelHawaii had not made a binding commitment to purchase the Ka'u exchange prior to May 7, 1997, it is not eligible for USF support. We note that even if TelHawaii had made a binding commitment to purchase the Ka'u exchange before the established deadline it would not be eligible to receive USF support until 1999, by which time the new universal service rules will mandate that any carrier providing service in the Ka'u area will be eligible for USF support based upon a forward-looking cost model and not on the basis of the purchaser's or seller's actual costs. The issue of whether Telhawaii had a binding commitment has no import if the Ka'u exchange is, in 1999, part of a study area served by a non-rural carrier. It is premature, therefore, to decide the "binding commitment" issue at this time, before it is clear that the issue will affect determination of USF support for the Ka'u exchange in 1999. Accordingly, we shall not decide the "binding commitment" issue unless and unitl it becomes clear that the Ka'u exchange will no longer be part of a study area served by a non-rural carrier in 1999. V. PRICE CAPS WAIVER A. Background 19.Section 61.41 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. GTE is a price cap company and TelHawaii is a newly created company. Hence, TelHawaii's acquisition of a GTE exchange would obligate it to become subject to price cap regulation. 20.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. 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. 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. B. Pleadings 21.Petition. TelHawaii seeks waiver of Section 61.41(c) so it may operate as a rate-of- return ILEC, rather than a price cap ILEC, after acquiring the exchange which is currently under price cap regulation. The petitioners argue that TelHawaii is the type of small rural ILEC which the Commission has found to be an inappropriate candidate for price cap regulation. In addition, the petitioners state that in balancing the benefits to be gained under price cap regulation against the costs which would be incurred by TelHawaii, the public interest is better served by a grant of the requested waiver. The 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 22.We agree with the petitioners that the Commission's first concern underlying the all- or-nothing rule is not applicable in this case. TelHawaii cannot shift costs between price cap and cost 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 the petitioners could game the system by moving the exchange back and forth between price cap and other forms of regulation, because the petitioners would require a second study area waiver. 23.We therefore find there is good cause to grant TelHawaii and TelAlaska a waiver of the all-or-nothing rule to permit TelHawaii to operate under rate-of-return regulation after acquiring the exchange which is currently under price cap regulation. We note that, as with any other rate-of- return ILEC, TelHawaii may elect price cap regulation in the future if it decides to withdraw from the NECA pools. VI. OTHER ISSUES 24.To the extent necessary, TelHawaii seeks a waiver 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. TelHawaii 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, TelHawaii represents that it plans to utilize NECA as its interstate tariff administrator; consequently, TelHawaii's carrier common line costs will be included in NECA's 1997 filing. We conclude that, TelHawaii 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. VII. ORDERING CLAUSES 25.Accordingly, IT IS ORDERED, pursuant to Sections 1, 4(i), 5(c), 201 and 202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201 and 202, and Sections 0.91, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, and 1.3, that the Petition of TelHawaii, Inc. and TelAlaska, Inc. for Waiver of Part 36, Appendix-Glossary, of the Commission's rules, 47 C.F.R. Part 36 Appendix-Glossary IS GRANTED. 26.IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201 and 202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201 and 202, and Sections 0.91, 0.291, and 1.3 of the Commission's rules, 47 C.F.R.  0.91, 0.291, and 1.3, that the Petition of TelHawaii, Inc. and TelAlaska, Inc. for Waiver of Section 61.41(c)(2) of the Commission's rules, 47 C.F.R.  61.41(c)(2), IS GRANTED. 27.Accordingly, IT IS ORDERED, pursuant to Sections 4(i) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), and Sections 0.91 and 0.291 of the Commission's rules, 47 C.F.R.  0.91 and 0.291, that the Petition of TelHawaii, Inc. for Waiver of Sections 36.611 and 36.612 of the Commission's rules, 47 C.F.R.  36.611 and 36.612, IS DENIED 28.IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201 and 202 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201 and 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