******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. 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 97-37 Petition for Waivers Filed by ) ) Northland Telephone Company d/b/a ) PTI Communications, Inc. and ) U S WEST Communications, Inc. ) ) Concerning Sections 61.41(c)(2), 69.3(e)(6) ) and the Definition of "Study Area" Contained ) in the Part 36 Appendix-Glossary of the ) Commission's Rules ) MEMORANDUM OPINION AND ORDER Adopted: August 27, 1997 Released: August 27, 1997 By the Chief, Accounting and Audits Division Common Carrier Bureau: I. INTRODUCTION 1. On February 26, 1997, Northland Telephone Company d/b/a PTI Communications, Inc. ("Northland") and U S WEST Communications, Inc. ("U S WEST") filed a petition for waiver of the definition of "Study Area" contained in the Part 36 Appendix-Glossary of the Commission's rules. The requested waivers would allow U S WEST and Northland to alter the boundaries of their existing Minnesota study areas to reflect the sale of 32 exchanges from U S WEST to Northland. Northland also seeks a waiver of 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 waiver would permit Northland to be regulated under rate-of-return regulation after acquiring the exchanges that are currently under price cap regulation. In addition, Northland seeks waiver of Section 69.3(e)(6) of the Commission's rules, so that it may withdraw from the National Exchange Carrier Association, Inc. ("NECA") traffic sensitive pool and participate in the Telephone Utilities Exchange Carriers Association ("TUECA") traffic sensitive pool. 2. On March 13, 1997, the Common Carrier Bureau ("Bureau") released a public notice soliciting comments on the petition. The petitioners also provided additional information. In this Order, we find that the public interest would be served by allowing the petitioners to alter their study area boundaries and by allowing Northland to be regulated under rate-of-return regulation after acquiring exchanges from U S WEST. We therefore grant the petition as explained more fully below. II. STUDY AREA WAIVERS 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 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 the change. 5. In recent years the Commission has taken a number of steps to mitigate potential adverse effects on the USF. Beginning in 1993 it adopted a series of orders that established indexed caps on the growth of the total USF. In addition, earlier this year the Commission adopted an order implementing the universal service provisions of the Telecommunications Act of 1996. In that order, the Commission decided that, eventually, all high cost area support would be provided based upon a forward-looking cost methodology. The Commission also determined that an indexed cap on the universal service support will remain in effect until all carriers, rural and non-rural, receive support for high cost areas based upon forward-looking economic cost mechanisms. The Commission also adopted a "one-percent guideline" under which no study area waiver would be granted if it would result in an annual shift in USF assistance in an amount equal to or greater than one percent of the total USF, unless the parties demonstrate an extraordinary public interest benefit. B. Pleadings 6. U S WEST, a price cap company, currently serves approximately 1,832,200 access lines in Minnesota. Northland, an average schedule company, currently serves 775 access lines in Minnesota. U S WEST proposes to sell 32 exchanges, serving 27,743 access lines, to Northland. U S WEST seeks waiver of the rule freezing study area boundaries to allow it to remove these 32 exchanges from its study area. Northland seeks waiver of this rule to allow it to add these 32 exchanges to its existing study area. Northland proposes to convert to a cost company and add the acquired exchanges on a cost-settlement basis. 7. Petitioners state that the proposed sale would serve the public interest because Northland will bring service personnel closer to the customers in the purchased exchanges and will assure that service keeps pace with changing technology and customer expectations. The petitioners also state that the Minnesota Public Utilities Commission ("Minnesota PUC") Order and Stipulation requires that Northland expend $21.4 million in the first five years of operation towards modernization and expansion of service. Further, the petitioners state that Northland has committed to accomplish the following within three years of close of the transaction: (1) achieve 100% digital interoffice toll connections; (2) replace all analog subscriber carrier systems; (3) deploy SS7 in all 32 exchanges; and (4) deploy CLASS features in all 32 exchanges. The petitioners state that the grant of the requested waiver will allow customers in the transferred exchanges to be served by a company that is very focused upon telecommunications needs of rural communities. 8. The petitioners state that the USF impact arising from this transaction is $3,287,476. The petitioners state that Northland currently receives no USF support. The petitioners estimate that, after the transfer and upgrading of the 32 exchanges, Northland will be eligible to receive $3,287,476. The petitioners also state that the exchange transfers would have no effect on U S WEST's USF assistance because U S WEST does not and will not qualify for USF assistance before or after the sale. In addition, the petitioners state that the USF amount arising from this transaction is entirely consistent with the purpose for which the USF program was established, "to promote and preserve affordable modern telecommunications services in high cost rural areas." Further, the petitioners state that the Telecommunications Act of 1996 established universal service principles that specifically provide that customers in all regions of the nation, including those in rural and high cost areas should have access to telecommunications and information services, including advanced telecommunications and information services, that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas. 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 grant of the requested waivers would not have a substantial adverse impact on the USF total or on individual ILEC draws. In addition, the Minnesota PUC states that it does not object to these requested waivers. Furthermore, Northland's planned upgrades will enable it to improve customer service in the acquired exchanges. Thus, the petitioners have demonstrated that their customers will likely be well served by Northland, and that 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 in this instance and that the waiver requests should be granted. III. PRICE CAPS WAIVER A. Background 10. 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. U S WEST is a price cap company; hence, absent a waiver, Northland's acquisition of U S WEST exchanges would obligate it to become subject to price cap regulation. 11. The Commission explained that the rules under Section 61.41(c)(2) are intended to address a concern regarding mergers and acquisitions involving price cap companies. Absent these rules, 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 caps, cutting costs back to an efficient level. It would not serve the public interest, the Commission stated, to allow a carrier 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. 12. The Commission nonetheless recognized that a narrow waiver of Section 61.41(c)(2) 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 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 13. Petition. Northland seeks waiver of Section 61.41(c)(2) so it may continue to operate as a rate-of-return ILEC, rather than a price cap ILEC, after acquiring exchanges which currently are under price cap regulation. The petitioners argue that Northland is the type of mid-size 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 Northland, the public interest is better served by a grant of the requested waiver. The petitioners further argue that the Commission's concern of gaming of the system is not at issue in this case. C. Discussion 14. As to the Commission's concern of gaming of the system, we find it unlikely 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 Minnesota study area. 15. We therefore find there is good cause to grant Northland a waiver of the all-or-nothing rule to permit it to remain under rate-of-return regulation after acquiring exchanges which currently are under price cap regulation. As noted above, this waiver is subject to the condition that U S WEST shall make a downward adjustment to its price cap indices to reflect the removal of all 32 exchanges from its Minnesota study area. Because we are waiving Section 61.41(c)(2), it need not withdraw from the NECA pools. We note that, as with other rate-of-return ILECs, Northland may elect price cap regulation in the future if it decides to withdraw from the NECA pools. IV. OTHER ISSUES 16. Northland also seeks waiver of Section 69.3(e)(6) of the Commission's rules. That rule requires that any company electing to participate in a non-NECA tariff must notify NECA of such election no later than December 31 of the year preceding such action. Northland proposes to withdraw from the NECA traffic sensitive pools and to participate in the TUECA traffic sensitive pools coincident with its acquisition of the 32 exchanges and its conversion to a cost basis. The petitioners state that granting the waiver will produce administrative efficiencies for Northland and will not adversely impact the NECA traffic sensitive pool. In addition, Northland states that it has contacted NECA regarding its intention to withdraw from the NECA traffic sensitive pool coincident with its acquisition of the 32 exchanges. Northland states that NECA expressed no objection to Northland's withdrawing from the NECA traffic sensitive tariff. We conclude that a waiver of Section 69.3(e)(6) is warranted because NECA has no objection to Northland withdrawing from its traffic sensitive pool and because NECA's traffic sensitive pool will not be adversely affected. 17. Northland is currently an average schedule company but proposes to convert to a cost settlement basis when it acquires the 32 exchanges. It is Commission policy to allow an average schedule company to convert to a cost basis. Therefore, Northland's proposal is consistent with Commission policy. V. ORDERING CLAUSES 18. 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 Northland Telephone Company d/b/a PTI Communications 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. 19. 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 Northland Telephone Company d/b/a PTI 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. 20. 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 Northland Telephone Company d/b/a PTI Communications, Inc. for waiver of Section 69.3(e)(6) of the Commission's rules, 47 C.F.R.  69.3(e)(6) IS GRANTED. 21. 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, 1.3, and 61.43 of the Commission's rules, 47 C.F.R.  0.91, 0.291, 1.3, and 61.43, that U S WEST Communications, Inc. SHALL ADJUST its price cap indices as discussed in paragraph 15 above, to reflect in its annual price cap filing, cost changes resulting from this transaction. 22. 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 this Order IS EFFECTIVE IMMEDIATELY UPON RELEASE. FEDERAL COMMUNICATIONS COMMISSION Kenneth P. Moran Chief, Accounting and Audits Division Common Carrier Bureau