Before the Federal Communications Commission Washington, D.C. 20554 ) In the Matter of ) ) Fremont Telecom Company ) ) AAD 97-56 Petition for Waiver of Sections ) 36.611 and 36.612 of the Commission's) Rules ) ) ORDER ON RECONSIDERATION Adopted: November 23, 1998 Released: November 23, 1998 By the Deputy Chief, Common Carrier Bureau: I. INTRODUCTION 1. On February 23, 1998, Fremont Telecom Company ("Fremont") filed a petition for reconsideration of a January 23, 1998 Accounting and Audits Division ("Division") Order denying its request for waiver of sections 36.611 and 36.612 of the Commission's rules. Waiver of these rule sections would allow Fremont to receive high cost loop support retroactively from January 1, 1997. For reasons explained herein, in this Order on Reconsideration we deny Fremont's requested waiver of sections 36.611 and 36.612 of the Commission's rules. II. BACKGROUND 2. In 1984, the Commission established high cost support mechanisms to promote the nationwide availability of telephone service at reasonable rates. High cost loop support allows incumbent local exchange carriers (LECs) with high local loop costs to shift an additional portion of these costs to the interstate jurisdiction, beyond the 25 percent permitted in the Commission's jurisdictional separations rules. This enables the state jurisdictions to establish lower local exchange rates in study areas receiving such assistance. Under these rules, a company's high cost loop support is based on the relationship of its embedded loop cost to the national average embedded loop cost. 3. In its Universal Service Order released on May 8, 1997, the Commission established new federal universal service support mechanisms consistent with the Communications Act of 1934, as amended ("the Act"). Pursuant to the Universal Service Order, support for providing service in a high cost area will be based upon the forward-looking economic costs of providing supported service to that service area. Non-rural incumbent LECs will begin receiving high cost support based on forward-looking costs on July 1, 1999. Rural incumbent LECs will begin to receive support based on forward-looking costs no earlier than January 1, 2001. Until an incumbent LEC receives high cost support based upon forward-looking costs, that incumbent LEC's support will continue to be based upon historical cost data. 4. Under current high cost support mechanisms, in accordance with sections 36.611 and 36.612 of the Commission's rules, on July 31 of each year incumbent LECs submit loop cost data for the prior year to the National Exchange Carrier Association (NECA). NECA compiles and analyzes these data to determine the average cost per loop for each incumbent LEC as well as the nationwide average cost per loop, adjusted by the indexed cap on the high cost fund. Each incumbent LEC's high cost loop support amount for the following year is based on the relationship between the incumbent LEC's average cost per loop and the nationwide average cost per loop, as limited by the indexed cap. Thus, NECA cannot determine high cost support for any individual carrier until it has cost data for all carriers. Section 36.611 of the rules, therefore, ensures that the basis for distribution of high cost support is updated at least annually. 5. Because the cost data are not submitted by carriers until seven months after the end of a calendar year, and because NECA requires time to analyze the data and make the necessary nationwide calculations of support by determining the nationwide average loop cost adjusted by the indexed cap, carriers generally do not receive high cost support based on these data until the beginning of the second calendar year after costs are incurred. 6. Carriers whose loop costs or lines increase significantly can, however, update their data, and thus their support levels, on a quarterly basis under section 36.612 of the rules. That section allows carriers to update, on a quarterly basis, the calendar year cost data that they submit to NECA on July 31. If a carrier files a quarterly update, by September 30, for instance, NECA recalculates high cost support for all carriers based in part on that carrier's updated data (e.g., cost data covering the last nine months of the previous calendar year and the first three months of the current calendar year, as well as its number of lines), rather than the calendar year data submitted on July 31. Thus, the quarterly update provision allows carriers to receive support based on updated cost and line information much earlier than the beginning of the second calendar year after costs are incurred. 7. On August 29, 1997, the Division granted Fremont's petition for a study area waiver associated with Fremont's purchase of three telephone exchanges in rural Idaho from US West Communications, Inc. ("US West"). This study area waiver was based, inter alia, on Fremont's assertion that its planned upgrades would improve customer service and that the estimated increase in the high cost loop support draw would not have a substantial adverse impact on the total universal service fund. 8. In a separate petition (Waiver Petition), Fremont requested a waiver of sections 36.611 and 36.612 of the Commission's rules in order to permit Fremont to receive immediate high cost loop support, retroactively from January 1, 1997. Fremont stated that, as a new incumbent LEC, it lacked the historical cost data upon which to base high cost loop support. Fremont proposed that as actual costs became known, it would provide documentation to NECA to "true- up" the payments it received on a quarterly basis. Fremont argued that application of the Commission's rules in its situation would be contrary to the public interest because improvements in service quality and availability in its high cost rural service area could not be achieved without immediate revenue recovery from the high cost support mechanism. Fremont stated that it must replace or upgrade its switching equipment, and that the plant it acquired from US West was antiquated and of insufficient capacity to provide service to existing customers requesting additional service, or to new customers. Fremont also noted in its Waiver Petition that "the number of unserved customers is significant" in the exchanges it obtained from US West. 9. In its January 23, 1998 Order, the Division denied Fremont's requested waiver of the Commission's rules on the grounds that Fremont had failed to demonstrate any special circumstances that are not faced by any of the numerous rural telephone companies that have received study area waivers to obtain exchanges, and thus Fremont had not met the conditions for a waiver. The Division also noted that Fremont had the opportunity to negotiate a lower price for the exchange to account for the delay in high cost support payments set out in the Commission's rules, and thus there was no reason for the Commission to compensate Fremont further. III. PETITION FOR RECONSIDERATION 10. On February 23, 1998, Fremont filed a petition for reconsideration ("Reconsideration Petition") of the Division's denial of its waiver request. In its Reconsideration Petition, Fremont argues that the Division's denial should be reversed because Fremont had satisfied the legal requirements for grant of a rule waiver, and because strict application of the Commission's rules would impede "the fulfillment of the Commission's universal service policies." Fremont reiterates that, after acquisition of the exchanges from US West, Fremont found that the newly acquired exchanges "lacked the facilities to meet demand for the most basic level of service, including the ability to serve new customers and unserved areas." Fremont asserts that its current exchange facilities, which are operating at maximum capacity, "do not afford subscribers the minimum acceptable level of service available to other subscribers in the state, and they cannot accommodate growth." 11. Fremont also argues in its Reconsideration Petition that the Division overlooked "special circumstances" that warranted a waiver, namely the existence of "unserved areas and unserved customers," and "failing air core lead cable." Fremont is "concerned that the Division may not have fully recognized that the grant of the waiver request is necessary to foster the provision of service to previously unserved areas and citizens of Idaho." Fremont asserts that granting it immediate high cost support for expenses it incurred in 1997 and 1998 in serving its existing customers will allow it to commence service to households in unserved areas. Fremont also argues that the passage of time has not rendered its waiver request moot and that the "special circumstances" it faces are substantially similar to those faced by the parties in the Border to Border case, where the Commission granted a petition for waiver of sections 36.611 and 36.612 of its rules. Finally, Fremont asserts that it is "unaware of any other similar situation where a company acquiring an existing exchange has identified a significant number of potential customers that are unable to obtain telephone service because facilities simply do not exist to provide that service." One party, the United States Telecommunications Association (USTA), filed comments in support of Fremont's reconsideration petition. IV. DISCUSSION 12. The Commission may waive any provision of its rules on its own motion, or on petition, if good cause therefor is shown. A petitioner applying for a waiver must demonstrate that special circumstances warrant a deviation from the general rule, and that such a deviation will serve the public interest. 13. It has been long-standing Commission policy not to grant waivers of sections 36.611 and 36.612 of its rules. The Bureau has granted waivers of these rule sections only in limited circumstances, namely to cover costs incurred by a carrier serving previously unserved areas. In Border to Border, the petitioners had been granted a certificate of public convenience and necessity (CPCN) from the Texas Public Utility Commission and began providing local exchange service to"largely unsettled" areas previously without telephone service. In a similar decision, South Park Telephone Company, the petitioners had received a CPCN from the Colorado Public Utility Commission to begin service to previously unserved areas of Park County, Colorado. 14. We conclude, first, that the existence of unserved customers within the exchanges purchased from US West does not provide a basis for the requested waiver. The Commission's high cost support distribution rules related to the sale and acquisition of exchanges have been in place for many years. As a purchaser of existing exchanges, Fremont had the opportunity to evaluate, before purchasing these exchanges from US West, the cost of providing service to all customers in these exchanges. While Fremont contends that it had no ability to identify unserved areas based upon the information provided by US West at the time of the sale, we note that the record shows that Fremont was aware that its assumption of the US West exchanges would require significant investment and upgrades, and that business negotiations regarding the acquisition of assets often include access to confidential information before any agreement is finalized. Specifically, in its study area waiver petition, Fremont provided a description of planned upgrades and extensions of service. The need for upgrades, along with the long- established procedures for obtaining high cost support based on these costs on an annual or quarterly basis, are factors that Fremont could have taken into consideration when it negotiated the transfer of exchanges from US West. Furthermore, because high cost loop support is an important source of funds for the operation of an exchange with high loop costs, and because the Commission has only waived sections 36.611 and 36.612 of its rules in very limited circumstances, Fremont could not reasonably have relied upon obtaining a waiver when it purchased the exchanges from US West. The Commission has never granted a waiver of these rules based on the existence of unserved households within exchanges previously served by another carrier. 15. We conclude, second, that Fremont's desire to serve a number of "previously unserved areas of Idaho that are adjacent to the exchanges Fremont acquired" does not fit within the circumstances in which we have granted waivers of sections 36.611 and 36.612 of our rules. Unlike the carriers in Border to Border and South Park, Fremont is not seeking a waiver of these rules for costs that it has incurred, or will incur, in providing service in a previously unserved area. Rather, Fremont is seeking a waiver to minimize delay in its receipt of high cost support for its existing customers, which "will, in turn, allow Fremont to commence service" to other customers, including those in unserved areas adjacent to the exchanges Fremont acquired from US West. In addition, there is no assurance in the record that these funds will be used to provide service in the unserved areas. Although Fremont asserts that it has "agreed to incorporated [sic] the areas outside of the former US West exchanges into its certificated service area," Fremont has not provided documentation demonstrating such an agreement or commitment to extend service. Furthermore, Fremont has not indicated that it has taken any steps to initiate service to these adjacent unserved areas, nor has it filed any projections regarding the specific costs of expanding into the unserved areas or the extent of demand for telephone service in these areas. 16. We note that the quarterly update provisions of section 36.612 of our rules enhance Fremont's ability to extend service to areas outside of the exchanges that are the subject of this proceeding. By filing quarterly updates, Fremont is able to obtain high cost support more quickly, in order to recover the cost of serving its existing customers or the cost of expanding into unserved areas. Indeed, Fremont has filed quarterly updates with NECA and is projected to receive several hundred thousand dollars of high cost loop support in 1998. In summary, Fremont has not sufficiently demonstrated special circumstances that are not faced by the many other LECs that have received study area waivers to acquire exchanges. Thus, we see no reason to deviate from our long-standing general policy not to waive section 36.611 and 36.612 of our rules. V. ORDERING CLAUSES 17. Accordingly, IT IS ORDERED, pursuant to Sections 1, 4(i), 5(c), 201, 202, 218-220, and 254 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201, 202, 218-220, 205, and 254, and sections 1.3, 0.91, and 0.291 of the Commission's rules, 47 C.F.R.  1.3, 0.91, and 0.291, that the Petition for Reconsideration of Fremont Telecom Co., 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. FEDERAL COMMUNICATIONS COMMISSION James D. Schlichting Deputy Chief, Common Carrier Bureau