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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 ) ) US West Communications, Inc. ) and ) Eagle Telecommunications, Inc. ) ) Joint Petition for Waiver of the ) Definition of "Study Area" Contained ) in Part 36, Appendix-Glossary ) AAD 94-27 of the Commission's Rules ) ) and ) ) Eagle Telecommunications, Inc. ) ) Petition for Waiver of Section 61.41(c) ) of the Commission's Rules ) ) ) Petition for Reconsideration ) MCI Telecommunications Corporation ) ) Petition for Partial Reconsideration ) and/or Clarification ) National Telephone Cooperative Association ) and ) United States Telephone Association ) ) Petition for Partial Reconsideration ) Pacific Bell ) MEMORANDUM OPINION AND ORDER ON RECONSIDERATION Adopted: April 14, 1997 Released: April 18, 1997 By the Commission: I. INTRODUCTION 1. On February 2, 1994, US West Communications, Inc. ("US West") and Eagle Telecommunications, Inc.,/Colorado, d/b/a PTI Communications, Inc. ("PTI/EAGLE") filed a joint petition for waiver of the definition of "Study Area" contained in Part 36, Subpart H, Appendix- Glossary, of the Commission's Rules ("PTI/Eagle Order" or "Order"). On January 5, 1995, the Commission released an Order granting a study area waiver that allowed US West to transfer 43 exchanges from its Colorado study area to PTI/Eagle's Colorado study area. In the same Order, the Commission expressed a concern that the actual effects of previously granted waivers on the Universal Service Fund's ("USF") support program had substantially exceeded the projected effects detailed in the requests for those study area waivers. The US West and PTI/Eagle petitions presented the Commission with its first opportunity to interpret guidelines used to review waiver requests for transfers that would cause a shift in USF assistance greater than one percent of the total USF. We clarified in the PTI/Eagle Order that for waiver requests filed after the Order, the proposed transfer and any other exchange transfers of either carrier for which a waiver was granted should not cause an aggregate shift in USF assistance in an amount equal to or greater than one percent of the annual total USF for the year in which the request was filed, unless the parties can demonstrate an extraordinary public interest benefit (hereinafter referred to as the "One Percent Guideline" or "Guideline"). 2. One month after issuing the PTI/Eagle Order, the Commission received three petitions for reconsideration of the Commission's One Percent Guideline filed by MCI Telecommunications Corporation ("MCI"), Pacific Bell, and The National Telephone Cooperative Association ("NTCA") and the United States Telephone Association ("USTA"). In this Order, we confirm our decision with respect to the One Percent Guideline and thus deny the petitions for reconsideration. In addition, we clarify certain issues with respect to implementation of the One Percent Guideline. II. BACKGROUND 3. A study area is a geographic segment of an incumbent local exchange carrier's ("ILEC") 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. We initially adopted a "minimal effect on USF" standard by which to gauge petitions seeking a waiver of the rule freezing study area boundaries. Gradually, we developed a three- pronged analysis for applying this standard: first, whether the proposed change in study area boundaries affects adversely the USF support program; second, whether the state commission having regulatory authority objects to the change; and finally, whether the public interest supports grant of the waiver. The total USF fund is currently subject to an indexed cap until new universal service rules become effective. A transfer of exchanges may increase a particular carrier's draw on the USF, however if the total USF reaches the indexed cap, the increase in one carrier's draw on the USF must be proportionately absorbed by the other carriers receiving USF assistance. In the PTI/Eagle Order, we stated that consideration of adverse effect on the USF support program would be analyzed according to the following guideline: the requested transfer, and all the transfers of the purchaser and seller for which waivers were granted, should not cause an annual aggregate shift in USF assistance in an amount equal to or greater than one percent of the USF, unless the parties can demonstrate that the transfer would result in an extraordinary public interest benefit. We stated that this One Percent Guideline would only be applied prospectively, and therefore would not be applicable to the Petitions of US West and PTI/Eagle or to waiver requests pending before the Commission as of the release date of the PTI/Eagle Order. III. THE PETITIONS FOR RECONSIDERATION 5. On February 6, 1995, MCI Telecommunications Corporation ("MCI") filed a Petition for Reconsideration pursuant to Sections 1.106(b)(2)(i) and 1.106(c)(2) of the Commission's Rules ("MCI Petition"). In its petition, MCI requests that the Commission reconsider its One Percent Guideline and entertain alternatives to the guideline. MCI asserts that a more appropriate limitation on the USF effect of a study area waiver request would be 0.05%, rather than 1.0%, because a lower cap would provide more protection to the USF and lessen the need to increase the size of the USF. MCI also argues that if a transfer results in a greater draw on the USF, only price cap ILECs should bear the decrease in USF assistance because only price cap ILECs benefit from such transfers. 6. On February 6, 1995, The National Telephone Cooperative Association ("NTCA") and the United States Telephone Association ("USTA") jointly filed a Petition for Partial Reconsideration and/or Clarification pursuant to Section 1.429 of the Commission's rules ("Joint Petition"). The Joint Petition of the NTCA and USTA asserts that: the One Percent Guideline constitutes a "rule" as defined by the Administrative Procedure Act ("APA"); the rule is a substantive rule for which no exception to the notice and comment requirements of Section 553 of the APA is applicable; as a consequence, the Commission improperly adopted a rule without meeting the notice and comment requirements of Section 553 of the APA. In addition, the Joint Petition claims that the One Percent Guideline affects jurisdictional separations and, according to 47 U.S.C.  410(c), requires the approval of the Federal/State Joint Board. The Joint Petition also requests clarification on certain aspects of the implementation of the One Percent Guideline. Finally, NTCA and USTA state that all of the issues raised in the petition would be resolved by removal of the indexed cap on the USF. 7. On February 6, 1995, Pacific Bell filed a Petition for Partial Reconsideration ("Pacific Bell Petition"). Pacific Bell claims that the One Percent Guideline is a new substantive guideline for which no public notice was given. Pacific Bell further argues that the PTI/Eagle Order was procedurally and substantively discriminatory in that it granted the joint petition of US West and PTI/Eagle while future petitions filed under identical conditions will be denied. IV. DISCUSSION 8. While we find that the Joint Petition of NTCA and USTA, the MCI Petition, and the Pacific Bell Petition can be denied on procedural grounds, we nevertheless consider the merits of petitioners' arguments. We affirm our decision in the PTI/Eagle Order and the guidance provided therein in the form of the One Percent Guideline. We also provide further clarification on implementation of the Guideline. A. Procedural Issues 9. Petition for Reconsideration under Section 1.106: The Joint Petition of NTCA and USTA, the MCI Petition, and the Pacific Bell Petition are considered by the Commission to be petitions for reconsideration under Section 1.106(b)(1) of the Commission's rules. Section 1.106(b)(1) allows persons whose interests are adversely affected by a final action taken by the Commission to file a petition for reconsideration of such action. The Joint Petition of NTCA and USTA was filed as a petition for reconsideration pursuant to Section 1.429, which applies only to actions involving notice and comment rulemaking proceedings under 5 U.S.C.  553. Section 1.429 is inapplicable because the One Percent Guideline does not fall within the parameters of a notice and comment proceeding, as discussed in paragraphs 16-20 of this order. MCI filed its petition for reconsideration pursuant to Section 1.106(b)(2), which allows for reconsideration where the Commission denies an application for review. In the PTI/Eagle Order, the Commission did not deny an application for review, but granted a study area waiver. Pacific Bell failed to state the authority under which it filed its Petition for Partial Reconsideration. 10. Standing: Petitioners seeking reconsideration of the PTI/Eagle Order (NTCA, USTA, MCI, and Pacific Bell) are not parties to the study area waiver request that was the subject of the PTI/Eagle Order and have failed to state with particularity the manner in which their interests are adversely affected by the PTI/Eagle Order, as required by Section 1.106(b)(1) of the Commission's rules. NTCA, USTA, MCI, and Pacific Bell therefore have not properly demonstrated that they have standing to petition the Commission for reconsideration of the Order. Nonetheless, even assuming that petitioners had met the requirements of Section 1.106(b)(1) of our rules, we would deny their petitions for reconsideration on the merits. B. One Percent Guideline 11. Joint Board Consideration: NTCA and USTA argue that the One Percent Guideline is a substantive rule that affects jurisdictional separations, and to comply with 47 U.S.C.  410(c), should have been referred to the Federal-State Joint Board. According to 47 U.S.C.  410(c): "The Commission shall refer any proceeding regarding the jurisdictional separation of common carrier property and expenses between interstate and intrastate operations, which it institutes pursuant to a notice of proposed rulemaking, and, . . . may refer any other matters relating to common carrier communications of a joint Federal-State concern, to a Federal-State Joint Board . . . ." [emphasis added] 12. The issue of whether the One Percent Guideline constitutes "a proceeding regarding jurisdictional separations" is irrelevant. Assuming arguendo that the Guideline affects jurisdictional separations,  410(c) does not require the Guideline's submission to a Federal-State Joint Board because adoption of the Guideline did not arise in, and does not require, a rulemaking proceeding. 13. One Percent Guideline is not Discriminatory: Pacific Bell asserts that the One Percent Guideline clarified in the PTI/Eagle Order is procedurally and substantively discriminatory in that the Commission granted the joint petition of US West and PTI/Eagle but will deny future petitions filed under identical conditions. Prior to the waiver request submitted by US West and PTI/Eagle, the Commission did not have occasion to consider a study area change that, based on the record before it, would clearly result in a USF impact greater than one percent of the total USF. The One Percent Guideline was a clarification of Commission policy that such waiver requests would require proof of an extraordinary public benefit. We find that our decision to apply the Guideline prospectively was not discriminatory; on the contrary, fairness dictated that those carriers unaware of the Guideline, such as petitioners of the PTI/Eagle Order and other pending petitions, not be subject to the Guideline. 14. One Percent Guideline is not a Rule, but Part of a Method of Analysis: As its name suggests, the One Percent Guideline is merely intended to provide guidance. The Guideline is not a rule, but is part of a method of analysis that the Commission uses in the process of evaluating requests for study area waivers. We announced the Guideline to provide carriers considering whether to request a study area waiver with more insight into our analytical process. 15. The unique characteristics of each study area waiver request require that we not apply a standardized checklist in determining whether to grant or deny that request. The One Percent Guideline does not impose a strict cap that ends our analysis of a request. The Guideline instead provides a specific trigger that signals the need for heightened scrutiny. Thus it may be that the effect on the USF may exceed one percent, but the benefits to subscribers within the affected exchanges of improved service and expanded phone subscribership are so extraordinary that we would grant the waiver request. In other instances, the effect on the USF may be less than one percent, but public interest factors support denial of the request. A waiver request would be against the public interest, for example, if there is a likelihood that the request is an attempted abuse of the USF program. 16. One Percent Guideline is Excepted from Notice and Comment Requirements: Assuming arguendo that it is deemed to be a rule, we conclude for the reasons set forth below that the One Percent Guideline falls within an exception to the notice and comment requirements of the APA. Consequently, the Commission's adoption of this "rule" would violate no provision of the APA. 17. The APA broadly defines a "rule" as "the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency . . . . " Section 553 of the APA requires that a general notice of proposed rulemaking be published in the Federal Register, and that interested persons be given the opportunity to participate in the rulemaking process by the submission of written data, views, or arguments with or without an opportunity for oral presentation (hereinafter referred to as "APA notice and comment requirements"). 18. While the notice and comment requirements of Section 553 apply generally to all agency rulemakings, the provision provides for certain exceptions that allow government agencies to operate effectively while preserving the public's right to participate in the rulemaking process. Section 553 excepts from the notice and comment requirements interpretative rules, general statements of policy, and rules of agency organization, procedure, or practice, and when the agency for good cause finds that notice and public procedure are impracticable, unnecessary, or contrary to the public interest. Interpretative rules are agency statements of general effect in which the agency announces an interpretation of a statute or of another rule. Interpretative rules thus serve an advisory function by explaining the meaning given to a particular word or phrase in a statute or rule that an agency administers. In a somewhat similar manner, general statements of policy educate the public about a prospective guideline for some agency activity. Policy statements are not binding rules that determine present rights or obligations, but instead are given prospective effect and leave an agency free to exercise its discretion. 19. The One Percent Guideline is not a substantive rule that imposes legally binding obligations, but is at most an interpretive rule or a general statement of policy. In either case, it is excepted from the notice and comment requirements. In the PTI/Eagle Order, we provided our interpretation of one of the previously enunciated criteria used to evaluate study area waiver requests. We intended that the One Percent Guideline apprise the public of the level of USF impact that would, absent extraordinary circumstances, be likely to pose an undue adverse effect on the USF. 20. The Joint Petition of NTCA and USTA cites the recent case of U.S. Telephone Association v. FCC, which held that a "policy statement" used to calculate monetary forfeitures was a substantive rule requiring notice and comment. The "policy statements" excepted from that requirement turned on "an agency's intention to bind itself to a particular legal policy position." While the PTI/Eagle Order at various points uses mandatory language, such as the One Percent Guideline "must apply" or that "we shall apply," the Commission clearly indicated as follows: "[W]e believe that no waiver should cause an 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." [emphasis added] The Commission further stated: "Study area waiver requests filed after the release date of this order shall be subject to the condition that the transfer at issue and any other transfers involving either carrier, as purchaser or seller, may not cause a shift in USF assistance in an amount equal to or greater than one percent of the total USF for the year in which the waiver request is submitted, unless the parties can demonstrate extraordinary public interest considerations that would warrant the removal of this condition." [emphasis added] We believe strongly that application of the One Percent Guideline will in many cases serve the public interest; nonetheless, we clearly stated that whether or not a waiver request, and previous waivers granted to parties to the request, cause a shift in USF assistance greater than one percent will not be dispositive in every case. We do not intend that the Guideline specify a strict cap on the allowable shift in USF assistance, but that it enunciate the circumstances under which the Commission will engage in heightened scrutiny of a waiver request. The Guideline was announced so that the public would better understand how the Commission, in its discretion, would interpret its adverse effect criterion for assessing waiver requests. We also were very clear that as a statement of Commission policy, the Guideline would be applied only prospectively to waiver requests filed after its adoption. Because the One Percent Guideline falls within the exception for interpretative rules or general statements of policy, no notice and comment procedure was required. 21. MCI's Proposal of a 0.05% Guideline: MCI asserts that the One Percent Guideline is too broad and that a more appropriate guideline by which to determine whether study area waiver requests would have an adverse effect on the USF would be a 0.05% aggregate shift in USF assistance. In our discussion of the One Percent Guideline in the PTI/Eagle Order, we stated the following: We recognize that we might have chosen another criterion, including a different percentage, for evaluating whether the proposed transaction would adversely affect the USF, contrary to the public interest. The criterion we have selected will ensure that, during our ongoing review of the USF program, transfers of exchanges do not cumulatively lead to substantial, unexpected changes in the USF support needed to maintain local rates at reasonable levels. We believe that this approach strikes a reasonable balance between the need to maintain adequate USF assistance to carriers serving high cost areas and our desire to avoid interfering with private business transactions. Our "adverse impact" standard, as clarified herein, also preserves the opportunity for parties to a transaction to show that the specific circumstances of the proposed transfer justify unconditional grant of the requested waiver. We find that the PTI/Eagle Order clearly stated our rationale for adopting a one percent limit instead of another percentage such as 0.05%. MCI has offered no compelling rationale to alter that decision. C. Clarification of Issues Raised by NTCA and USTA 22. In their Joint Petition, NTCA and USTA raise a number of questions regarding implementation of the One Percent Guideline. We provide clarification of these issues in the following paragraphs. 23. NTCA and USTA first ask whether, in applying the One Percent Guideline, impact on the USF is compared against the amount of the total USF fund for the calendar year in which the study area waiver request is filed. While we recognize, as NTCA and USTA observe, that a transfer generally will not cause a USF shift in the calendar year in which the waiver is requested, we confirm that it is the appropriate year against which to compare the estimated impact of the proposed transfer, added to the impact of transfers within the past twelve months to which either carrier has been a party. We find that this approach is reasonable and practical because as a result of the indexed cap on the USF, the amount of the USF fund for the current year will be a close approximation of the amount of the USF fund for the succeeding years that the indexed cap remains in effect. 24. The Joint Petition raises a number of questions regarding how the annual USF impact of an individual transfer should be calculated. NTCA and USTA inquire whether, in estimating the annual impact of a transfer, ILECs should calculate the impact for the first year, the average impact over some period, or the highest impact over some period. The Joint Petition also asks what assumptions ILECs should apply in determining the estimated impact. We decline to specify a detailed methodology for producing the required estimate because such details, including the time period used to calculate the annual impact of a transfer, may need to vary in order to reflect the unique circumstances of each transfer. Moreover, it is in the interests of petitioners for study area waivers to assess realistically the USF impact of a proposed transfer, taking into account any firm plans for future investment, because we often grant waivers on the condition that the annual USF draw not exceed the estimated impact claimed in the petition. For these reasons, we decline to provide the specifications sought by the Joint Petitioners. 25. NTCA and USTA also ask if "the shift impact limit caused by the study area change that involves at least two different [I]LECs [will] be evaluated on the net of what happens with the acquiring company and what happens with the selling company." In a petition for a study area waiver, petitioners estimate how the proposed transaction would change the draw of the seller and purchaser(s) on the USF. The One Percent Guideline specifies that the net effect of the transfer, added to the net effect of other waivers granted to petitioners within the past year, should not increase, by one percent or more of the total USF, the combined annual USF draw of the petitioners, absent an extraordinary public interest. Each carrier is individually subject to the Guideline; the one percent limitation applies to the aggregate impact of the proposed transfer and of all transfers to which a carrier has been a party, either as a purchaser or a seller, for which a study area waiver request was submitted within the twelve months preceding the filing date of the waiver request at issue, and for which a waiver was granted. 26. Finally, NTCA and USTA ask if the One Percent Guideline applies to acquisition transactions that were "signed" before the release date of the PTI/Eagle Order, but for which study area waiver requests had not been filed as of the Order's release date. As stated in the Order, the One Percent Guideline does not apply to study area waiver requests that were pending before the Commission on the Order's release date, regardless of when the acquisition transaction was completed. D. Other Issues 27. MCI proposes that the burden of any increased USF assistance that results from the sales of exchanges be borne only by price cap ILECs. Under MCI's proposal, an exchange transfer would reduce the USF assistance of price cap ILECs, while the funds available to other carriers would be maintained. We do not address this proposal because it is beyond the scope of this proceeding. 28. NTCA and USTA urge the Commission to remove the indexed cap on the USF. We do not address this issue here because it is beyond the scope of this proceeding. V. ORDERING CLAUSES 29. Accordingly, pursuant to Sections 4(i) and 4(j) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i) and 154(j), Sections 553(b) and 553(c) of the Administrative Procedure Act, 5 U.S.C.  553(b) and 553(c), and Section 1.106 of our rules, 47 C.F.R.  1.106, IT IS ORDERED that the Petition for Reconsideration filed by MCI Telecommunications Corporation and the Petition for Partial Reconsideration filed by Pacific Bell ARE DENIED. 30. IT IS FURTHER ORDERED that, pursuant to Sections 4(i) and 4(j) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i) and 154(j), Sections 553(b) and 553(c) of the Administrative Procedure Act, 5 U.S.C.  553(b) and 553(c), and Section 1.106 of our rules, 47 C.F.R.  1.106, the Petition for Partial Reconsideration and/or Clarification filed by the National Telephone Cooperative Association and the United States Telephone Association IS GRANTED in part and IS OTHERWISE DENIED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary