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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 ) ) TelAlaska, Inc. ) ASD File No. 98-51 ) Petition for Expedited Waiver of ) Section 36.621(a)(4) of the Commission's ) Rules (Corporate Operations Expense Cap ) MEMORANDUM OPINION AND ORDER Adopted: November 18, 1998 Released: November 19, 1998 By the Deputy Chief, Common Carrier Bureau: I. INTRODUCTION 1. In the Telecommunications Act of 1996, Congress amended the Communications Act of 1934 by, among other things, adding new section 254 to the Act. In section 254, Congress directed the Commission and the states to devise methods to ensure that "[c]onsumers in all regions of the Nation, including low-income consumers and those in rural, insular, and high cost areas [h]ave access to telecommunications and information services [a]t rates that are reasonably comparable to rates charged for similar services in urban areas." On May 8, 1997, the Commission released the Universal Service Order, implementing section 254 of the Act and establishing a universal service support system that became effective on January 1, 1998. 2. In the Universal Service Order, the Commission adopted a formula that limited the amount of corporate operations expense that a carrier could recover through existing high cost loop support mechanisms. The formula was developed to "ensure that carriers use universal service support only to offer better service to their customers through prudent facility investment and maintenance consistent with their obligations under section 254(k)." The Commission decided to "limit universal service support for corporate operations expense to a reasonable per-line amount, recognizing that small study areas, based on the number of lines, may experience greater amounts of corporate operations expense per line than larger study areas." 3. The Commission adjusted the maximum allowable corporate operations expense formula in the Fourth Order on Reconsideration by adopting a new minimum recoverable expense cap of $300,000 per year out of an abundance of caution for the smallest carriers. By raising the floor for corporate operations expense, the Commission reasoned that it reduced the need for the smallest carriers to seek a waiver of the cap. The Commission recognized, however, that certain carriers, such as those serving rural Alaskan territories, may have unusually high corporate operations expense, and invited carriers to file for waiver of the cap "to demonstrate the necessity of these expenses for the provision of the supported services." 4. On March 20, 1998, TelAlaska, Inc. ("TelAlaska") filed a Petition for Expedited Waiver ("Petition") of section 36.621(a)(4) of the Commission's rules, which limits the corporate operating expense recoverable through federal universal service support as modified by the Fourth Reconsideration Order. TelAlaska argues that, "[b]ecause of the uniqueness of its rural local exchange service territories and the Alaskan-specific costs necessary to serve these territories, good cause exists for the Commission to waive the newly imposed cap and to allow TelAlaska to recover its corporate operating expenses through the high-cost loop fund using the Commission's prior recovery mechanism." On April 7, 1998, the Commission released a Public Notice seeking comment on the Petition. Six parties filed comments, all in support of the Petition. This Order grants TelAlaska a limited one-year waiver of the corporate operations expense limitation requirements of section 36.621(a)(4) of the Commission's rules. II. BACKGROUND A. The Standard for Granting a Waiver 5. Under section 1.3 of the Commission's rules, a waiver may be granted "if good cause therefor is shown." As interpreted by the courts, this requires that a petitioner demonstrate that "special circumstances warrant a deviation from the general rule and such a deviation will serve the public interest." 6. In the Universal Service Order, the Commission adopted a high standard for granting a waiver for corporate operations expense recovery. Specifically, the Commission requires that "exceptional circumstances" be shown to receive a grant of a waiver to provide additional support for such expenses. The Commission, in the Fourth Order on Reconsideration, affirmed its conclusion that the need for waivers should be limited to exceptional circumstances, reasoning that, because corporate operations expense is typically within a company's complete discretion, it is more likely to be susceptible to abuse than other types of expenditures, such as plant maintenance expenditures. B. TelAlaska Petition 7. In its Petition, TelAlaska contends that it faces exceptional circumstances sufficient to meet the high standard for a waiver of the Commission's limit on corporate operations expense recovery. TelAlaska argues that "[a] waiver is warranted because of the uniqueness of [its] rural local exchange service territories and the Alaska-specific costs necessary to serve these territories." TelAlaska states that servicing its territories "is extremely difficult" as a result of "the remoteness of the service territories and the lack of resources the communities have to obtain telecommunications services." Many of TelAlaska's exchanges cannot be reached by road, requiring costly air transportation. For example, TelAlaska states that travel to Mukluk's Little Diomede exchange costs approximately $3,000 per trip from Nome (a distance of only 150 miles), because the only reliable way to reach the island community is by helicopter. 8. TelAlaska contends that its waiver request is justified because rural local exchange carriers operating in Alaska are faced with higher expenses to provide the same telecommunications services that rural local exchange carriers ("LECs") in the lower 48 states provide due mainly to Alaska's "substantially higher wage levels and general cost of living." In support of this contention, TelAlaska presents data that show that Alaskan labor costs are approximately 40 percent higher than comparable labor costs in the lower 48 states, and that its labor costs are comparable to those paid by other rural Alaska LECs. 9. TelAlaska asserts that residential local rates would have to be increased by 20.2 percent for its customers served by Interior, and by 38.9 percent for the customers served by Mukluk, in order to recover the lost support related to the limitation on corporate operations expense in the calculation of federal support. Moreover, TelAlaska argues that such a significant rate increase for residential services would be in direct contravention of the 1996 Act's universal service goal that services be made available at affordable rates. C. Initial Commission Review and TelAlaska Response 10. In support of its waiver request, TelAlaska provided data pertaining to its corporate operations expense intended to demonstrate the exceptional circumstances it encounters in providing service in its operating territories. The Bureau's initial review and analysis of the data, however, did not convince us that the circumstances faced by TelAlaska were necessarily exceptional. Instead, the data raised new concerns. For instance, the Bureau found that (1) TelAlaska's reported corporate operations expense is approximately 88 percent higher than that incurred by firms of comparable size--not the 40 percent figure claimed by TelAlaska; (2) its high travel expenses were attributed in large part to its high corporate operations expense; and (3) TelAlaska's total corporate operations expense in 1996 was substantially higher than in 1995 and 1997. These findings raised concern that TelAlaska's corporate operations expense was in part discretionary. Thus, the Bureau sought further information from TelAlaska, and in a letter dated June 24, 1998, asked TelAlaska to (1) explain what other cost factors contribute to TelAlaska's high corporate operations expense; (2) provide a breakdown of the expenses that comprise its travel costs, including information concerning the type and purpose of travel; and (3) explain why its total corporate operations expense in 1996 were substantially higher than in 1995 and 1997. 11. In a letter dated July 31, 1998, TelAlaska replied that its corporate operations expense was 88 percent higher than that predicted by the Commission's cost model due to the extreme weather patterns in its serving areas and distances between its exchanges. As an example, TelAlaska states that its subsidiary, Interior, has a local area network that spans distances in excess of 1,000 miles, requiring additional labor and travel. Moreover, TelAlaska states that it incurs costs for travel that would either be avoided completely or significantly reduced by a carrier in the lower 48 states. Among these travel costs are the costs incurred for training personnel. According to TelAlaska, "[s]pecialized training is often essential for the success of the organization, yet telecommunications training opportunities within Alaska are limited." Accordingly, TelAlaska often sends its employees to the continental United States for training. Also, TelAlaska claims that it experiences extraordinary costs for outside directors to attend board meetings, because "Alaska's insular nature makes it difficult to find Alaskan directors with telecommunications expertise who have no conflicts of interest . . . [a]s a result, in 1996 three out of five of TelAlaska's Directors were from [the] Lower-48 [states] and had to travel to Alaska four times in that year to attend Board meetings." TelAlaska states that another component of its travel expense is the cost for corporate operations personnel to travel to the rural exchanges to manage and communicate with both field personnel and subscribers. Among other things, TelAlaska asserts that this type of travel provides a basis for strategic planning, budgeting, and carrier relations. Finally, TelAlaska states that travel by administrative personnel is also necessary for payroll, scheduling, provisioning, and other administrative functions. 12. TelAlaska submits that its corporate operations expense was substantially higher in 1996 than in either 1995 or 1997, due to a combination of factors, including the passage of the 1996 Telecommunications Act, and the emergence of a competitor in its market. These factors resulted in increased costs as TelAlaska was forced to address many new legal and competitive issues, such as interconnection. III. DISCUSSION 13. The Bureau's review of TelAlaska's operations shows that TelAlaska provides local exchange service over an extremely large and remote geographical area, even by Alaska standards, and, as a result, it faces much higher than average expenses. Although we have concerns regarding the level of corporate operations expense reported by TelAlaska, we believe the data provided by TelAlaska sufficiently show that it encounters exceptional circumstances that increase its expenses above those incurred by other carriers. We are concerned, however, about the level of TelAlaska's corporate operations expense, particularly in light of our review of the corporate operations expenses reported by other Alaskan local exchange carriers. For example, TelAlaska's actual monthly corporate operations expense is approximately $41 per subscriber loop. According to Attachment II of its July 31 letter, however, TelAlaska provides data that show that the average monthly corporate operations expense per subscriber loop was $32.14 for all listed Alaskan local exchange carriers, and $29.26 for all Alaskan local exchange carriers operating between 1,000 and 6,000 loops. More specifically, three similarly- sized and similarly-situated Alaskan local exchange carriers, United Utilities, Inc. ("United"), Bristol Bay Telephone Cooperative ("Bristol"), and OTZ Telephone Cooperative ("OTZ"), report much lower corporate operations expenses than TelAlaska. The average monthly corporate operations expense of United, operating 5,231 loops, is $21.37; for Bristol, operating 1,862 loops, the monthly corporate operations expense is $33.41; for OTZ, operating 2,878 loops, the monthly corporate operations expense is $24.29. Our review of the data, thus, reveals that there is a notable disparity between TelAlaska's corporate operations expense and other Alaskan local exchange carriers. 14. We are also concerned that TelAlaska's significant corporate operations expense may be due to the misclassification of costs that properly belong in customer services expense or another expense category. During our review of the data submitted by TelAlaska, we identified costs associated with customer operations expense, plant specific operations expense, and plant non-specific operations expense that were erroneously recorded as part of TelAlaska's corporate operations expense. An example of this misclassification was discovered in TelAlaska's telecommunications expense. TelAlaska estimates that its corporate operations telecommunications costs may be as much as 500 percent higher than those of comparable rural LECs due in part to special access circuits for its own exchanges, outgoing toll charges to its own exchanges, and toll-free service costs between exchanges for remote switch programming. Some of these costs, however, are incorrectly classified as corporate operations expense. For example, TelAlaska provides customers with a toll-free number to contact its corporate offices, but classifies the total cost of the toll-free number as corporate operations expense because the toll-free number is also used by field personnel to contact the corporate offices. We do not believe that the difficulty involved in separating mixed-use costs justifies classifying the entire cost as corporate operations expense. Therefore, where appropriate, we require TelAlaska to allocate its mixed-use costs appropriately between corporate operations expense, customer operations expense, plant specific expense, and plant non-specific costs in a manner that will more accurately reflect the amount of its corporate operations expense. 15. Despite these concerns, we find that TelAlaska has established the special circumstances necessary to support the grant of a limited waiver. We realize that the operating costs to administer a telecommunications network are generally higher in Alaska than the lower 48 states. We also recognize that comparisons with other Alaskan local exchange carriers are difficult because of a variety of factors, such as the nature of the area served or weather patterns in different parts of the state, that cause differences in the costs the carriers incur. In addition, we take note of the fact that the expenses at issue here were incurred in 1996, before the current corporate operations expense limitation formula went into effect. We also believe that a grant of a limited waiver will be in the public interest of maintaining affordable rates in TelAlaska's service area. We thus grant TelAlaska a limited one-year waiver of section 36.621(a)(4) of the Commission's rules, subject to the conditions indicated below. Once these conditions have been met, this waiver will be granted retroactive to January 1, 1998. We also urge TelAlaska to make all reasonable efforts to reduce its corporate operations expenses. 16. To receive this waiver, within sixty (60) days after the release date of this Order, we require that TelAlaska review its corporate operations expense and reclassify certain expenses that properly should be recorded as other types of expenses, such as customer service expense. In addition, we require that TelAlaska provide the Accounting Safeguards Division with workpapers evidencing its analysis and detailing its reclassified expenses within sixty (60) days after the release date of this Order. 17. Due to the concerns we express herein, we believe TelAlaska should take measures to reduce its corporate operations expenses. We will require that in future waiver requests, TelAlaska show what measures it has taken to reduce its corporate operations expenses. Finally, we believe the Alaska Public Utility Commission, because of its knowledge of the Alaskan market and its oversight of TelAlaska, could provide credible assurance as to the merits of TelAlaska's classification of costs as corporate operations expense. We would therefore urge TelAlaska, in future filings, to obtain and submit to us a nonbinding statement from the Alaska Public Utility Commission that, based on its knowledge of the operations of TelAlaska and the Alaskan market, the corporate operations expenses of TelAlaska are reasonable and that it would support approval of a grant of TelAlaska's waiver request. IV. ORDERING CLAUSE 18. Accordingly, IT IS ORDERED, pursuant to sections 1, 4(i), 5(c), 201-205, and 254 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154(i), 155(c), 201-205, 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 of TelAlaska, Inc. for Expedited Waiver of Section 36.621(a)(4) of the Commission's Rules IS GRANTED to the extent discussed in this Order. FEDERAL COMMUNICATIONS COMMISSION Yog R. Varma Deputy Chief, Common Carrier Bureau