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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 No. 95-67 BPS Telephone Co. ) Petition for Waiver of ) Section 69.605(c) ) of the Commission's Rules ) MEMORANDUM OPINION AND ORDER ON RECONSIDERATION Adopted: September 9, 1997 Released: September 10, 1997 By the Chief, Accounting and Audits Division I. INTRODUCTION 1. On April 30, 1997, we issued an Order denying a petition for waiver filed by BPS Telephone Company Inc. (BPS). In the Order, we denied BPS's request to waive section 69.605(c) of the Commission's rules to permit it to convert from cost study settlements to average schedule settlements. On May 30, 1997, BPS sought reconsideration of that ruling arguing that the Order was contrary to both Commission precedent and the Commission's average schedule policy. In this Order, we affirm our previous order for reasons explained below. II. BACKGROUND 2. In 1982, the Commission adopted a comprehensive system of tariffed charges, generally known as the access charge plan, for the recovery of incumbent local exchange carriers' (ILECs) costs associated with the origination and termination of interstate calls. The Commission's access charge rules also required the establishment of an association of exchange carriers to file tariffs and administer revenue pools on behalf of ILECs. To fulfill this requirement, the ILECs formed the National Exchange Carrier Association (NECA). Each company that participates in a NECA access tariff charges rates appearing in that tariff. In the settlement process, each pool participant receives revenues from the pool to cover its cost of providing service plus a pro rata share of the pool's earnings. A NECA pool participant's costs are determined either on the basis of cost studies conducted by that ILEC or average schedule formulas. By settling on an average schedule, exchange carriers are permitted to avoid the expense of performing a detailed cost study by using estimated costs that are based on "the costs of a hypothetical exchange company." 3. Section 69.605(c) of the Commission's rules states, in pertinent part, that "a telephone company that was participating in average schedule settlements on December 1, 1982, shall be deemed to be an average schedule company." The Commission sanctioned the average schedule status of these ILECs based on the assumption that these small carriers lacked sufficient financial resources or expertise to justify a requirement that they perform jurisdictionally separated cost studies for determining their compensation for originating and terminating interstate telecommunications services. While the Commission allowed small carriers to maintain their average schedule status, they were not required to do so. The Commission stated that, "any exchange carrier that believes the average schedules do not provide appropriate compensation . . . is entitled to be compensated on a cost basis." 4. Average schedule settlement companies may convert to cost settlement status at any time. The Commission concluded, however, that an unrestricted opportunity for cost companies to convert to average schedule status would likely operate to the detriment of interstate ratepayers because the conversion may result in inflated interstate revenue requirements. By buying or selling regulated assets, "exchange carriers can manipulate, and increase, compensation that is received under the Commission's rules without any corresponding benefit to the carrier's customers." 5. For this reason, an ILEC under cost-settlement status must apply to the Commission for a waiver of the average schedule rule if it seeks to obtain average schedule settlement status. Waivers of this rule have only been granted in very limited instances when ILECs have been able to show special circumstances such as individualized hardship or inequity. BPS, a corporation formed to buy three exchanges from GTE in 1994, requires a waiver of section 69.605(c) because it was not "participating in average schedule settlements on December 1, 1982." III. PETITION 6. In its Petition for Reconsideration, BPS states that our requirement that it show individual hardship or inequity in order to be granted a waiver is contrary to precedent. In support of this assertion, BPS cites the Commission's grant of a waiver of section 69.605(c) to the New Castle Telephone Company, an ILEC of 1,550 access lines. BPS argues that its situation is analogous to that in New Castle because BPS similarly lacks the information and records necessary to produce a cost study and wishes to avoid the burdens and costs of settling on a cost basis. BPS also states that it meets the four factors that were considered in granting the waiver in New Castle: (1) it is a small, newly-created telephone company; (2) the transaction does not appear to be designed to increase interstate revenue requirements materially or to have that effect; (3) the effect on interstate revenue requirements is de minimis; and (4) it would not increase Universal Service Fund (USF) revenue requirements. 7. BPS, further claiming that the Order is inconsistent with the Commission's "average schedule policy," argues that the waiver should be granted because the "Commission has always acted to protect small and rural carriers from burdensome administrative requirements." BPS indicates that it "understands and appreciates the Commission's concern that 'reclassification of assets from cost study basis to average schedule settlement status can inflate interstate revenue requirements' and that carriers may 'receive a windfall . . . if . . . permitted to elect to depreciate plant to the 'cross over' point [under cost settlements] and then receive average schedule treatment,'" but insists that neither of those circumstances are present in its case. BPS states that it will not receive a windfall because, as a newly formed ILEC, it will not be able to depreciate its assets prior to electing average schedule status. IV. DISCUSSION A. Commission Precedent 8. We reject BPS's contention that our precedent dictates that its petition for waiver be granted. We are not persuaded by BPS's argument that the waiver in New Castle was granted under circumstances that are closely analogous. Furthermore, we do not consider the factors relied upon in the New Castle Order to be the establishment of a four part test that can be applied generically in any section 69.605(c) waiver situation. At the time we granted the New Castle waiver, we were persuaded that New Castle Telephone faced "uniquely limited circumstances." BPS has failed to show that a waiver of section 69.605(c) is warranted for its situation. 9. A petition for waiver of the Commission's rules may be granted for good cause shown. The Commission may exercise its discretion to waive a rule where particular facts would make strict compliance inconsistent with the public interest. The Court of Appeals for the D.C. Circuit has stated that a waiver may permit a more rigorous adherence to an effective regulation by allowing the agency to take into account considerations of hardship, equity, or more effective implementation of overall policy on an individualized basis, while also emphasizing that "[a]n applicant for waiver faces a high hurdle even at the starting gate." In WAIT Radio, the court explained that "[t]he very essence of a waiver is the assumed validity of the general rule. . . ." Given the validity of the rule, the test identified in WAIT Radio requires the party seeking the waiver to demonstrate that the rule is unjust as applied to the party given the unique circumstances of the situation. Waiver is thus only appropriate if special circumstances warrant a deviation from the general rule and such deviation will better serve the public interest than adherence to the general rule. Therefore, the test for whether BPS may be granted a waiver is whether it has shown special circumstances as individualized hardship or inequity that warrants deviation from our general rule that cost companies may not change from cost-based settlements to average schedule settlements. 10. The special circumstances used to justify past waivers of section 69.605(c) fall into three broad categories. First, we have granted limited opportunities for exchange carriers serving 5,000 or fewer access lines to convert from cost-based to average schedule settlements. Granting these limited opportunities was a necessary approach to deal with industry-wide changed circumstances. Second, we have granted waivers to certain small exchange carriers that clearly lacked the resources to operate on a cost-study basis. Papago Tribal Utility Authority, serving fewer than 400 lines in a 700 square mile area and lacking the operational expertise of a parent company, falls into this category. The situation in National Utilities, Inc. and Bettles Telephone Co., Inc., can also be seen as an accommodation for very small exchange carriers in light of significant changes in their state regulatory environment. 11. Finally, to ensure a smooth settlement process, we have granted section 69.605(c) waivers to average schedule companies that have acquired another company, and we allowed the combined companies to merge into one average schedule study area. "Because jurisdictional separations and USF calculations are performed at the study area level, all affiliates in a single study area must be under the same settlement method." In these special cases, we have attached three conditions to minimize the impact of the conversion and reduce the incentive to manipulate Commission rules. We required waiver recipients to: (1) report to NECA on a combined basis for interstate average schedule and USF purposes, and receive distributions on that basis as a consolidated company, (2) convert to cost-based settlement status if an average schedule affiliate in that study area converts to cost-based settlements, or elects section 61.39 treatment, and (3) maintain common control over average schedule affiliates, so that average schedule status terminates when any of the affiliates are sold, transferred, or otherwise assigned. We have always intended for these conditions to "ensure that the waivers will not result in unintended effects on the petitioners' interstate revenue requirements or result in an administrative burden on the Commission or NECA." 12. Based on this review of our precedent, we now properly see New Castle as an aberration that cannot be relied upon to support a waiver request. At the time we granted New Castle's petition, we believed the necessary unique circumstances were present. This belief was predicated in part on the de minimis impact on interstate revenue requirements and in part on the lack of any indication that the waiver recipient "contemplate[d] further exchanges of assets (below the study area level), or further requests for waiver of . . . average schedule status . . . ." In retrospect, we mistakenly attached greater weight to the de minimis impact on New Castle's interstate revenue requirements than to the danger of "giving the 'green light' to exchange carrier asset transfers that increase interstate revenue requirements." 13. This is not an appropriate opportunity, however, to revisit the status of New Castle Telephone Company. Removing New Castle's average schedule status would arguably be a retroactive application of this decision. New Castle has operated in reliance on its waiver since 1992 and may continue to do so without being seen as a "green light" for cost-study exchange carriers to convert to average schedule status. 14. Even assuming that the situation in New Castle can still be seen as sufficiently unique to justify a waiver, BPS has not adequately demonstrated that its own situation is closely analogous to that of New Castle. We did not set out a four-part test for section 69.605(c) waivers; these were simply factors that demonstrated, at that time, that New Castle presented a special situation. Again, we found New Castle's situation unique because: (1) New Castle is a small telephone company (two exchanges, 1,550 access lines); (2) [the] transaction [did] not appear to be a part of a pattern of asset transfers . . . designed to materially increase interstate revenue requirements . . . ; (3) the effect upon interstate revenue requirements [was likely] to be de minimis; and (4) New Castle . . . stated that USF revenue requirements [would] not increase. Although these four factors do not comprise a four-part test, they do provide a guide for comparing the respective circumstances of BPS and New Castle. BPS, serving 3,373 access lines, is larger than New Castle. BPS is also larger than other small exchange carriers that presented similar, size-based arguments. NUI, for example, served 2,350 lines when we granted its waiver; Papago served 400 access lines over a 700 square mile area; Bettles served only 50 access lines. Nor does BPS share the significant changes in its regulatory environment like those experienced by NUI and Bettles, or the extremely rugged area of operations like Papago. 15. Although BPS indicated that the impact on its interstate revenue requirements would be de minimis, and thus its interstate revenue requirements would not increase, the potential exists for starting an industry-wide pattern. We have long recognized the incentives to "game" the system to the detriment of interstate ratepayers, and we have consistently stated that the purpose behind section 69.605(c) was to prevent this sort of opportunistic behavior. We reiterate that "[e]ach waiver request is reviewed to ascertain whether it, or it in combination with prior waiver requests, will have a material effect on interstate revenue requirements." Isolated incidents of exchange carriers selecting average schedule settlements may not have a significant impact on interstate revenue requirements; the cumulative effect of many carriers switching from cost-based to average schedule status will almost certainly have a sizeable impact. Stretching the comparisons between BPS and New Castle will only serve to create more opportunities and greater incentives to game the system at the expense of the ratepayers when similarly situated companies also demand the option to receive average schedule settlements. B. Average Schedule Policy 16. The Commission has consistently acted to protect small and rural exchange carriers from burdensome administrative requirements. BPS, arguing that a denial would be "against public policy," points to our actions in National Utilities, Inc. and Bettles Telephone Co., Inc. to support its wish for less expensive administrative burdens. Our decision in National Utilities, Inc. and Bettles Telephone Co., Inc. relied heavily on the specific showing of significant savings to interstate ratepayers. BPS makes no such demonstration. Moreover, several hundred exchange carriers serving fewer lines than BPS successfully operate on cost-based status despite the additional administrative burdens. A policy in favor of reducing administrative burdens simply does not outweigh the Commission's public interest obligation to protect interstate ratepayers or eliminate the requirement for unique circumstances to justify a waiver. C. Conclusion 17. Based on the information provided in its Petition for Waiver and its Petition for Reconsideration, BPS has failed to show that a waiver of Commission Rule 69.605(c) is warranted. BPS presents no special circumstances that justify a waiver nor does it show that a denial of its petition compromises the Commission's average schedule policy. Accordingly, we deny BPS's Petition for Reconsideration. V. ORDERING CLAUSE 18. Accordingly IT IS ORDERED, pursuant to the authority that is contained in 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 BPS's Petition for Reconsideration is DENIED. FEDERAL COMMUNICATIONS COMMISSION Kenneth P. Moran Chief, Accounting and Audits Division Common Carrier Bureau