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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 ) ) Arctic Slope Telephone Association ) Cooperative, Inc. ) ASD File No. 98-66 ) Petition for Expedited Waiver of ) Section 36.621(a)(4) of the Commission's ) Rules (Corporate Operations Expense Cap) ) ORDER Adopted: December 22, 1998 Released: December 22, 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 include in the 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 formula allowed a greater amount of corporate operations expense per line for smaller study areas than larger ones because our statistical analysis of carrier data showed that study areas with fewer lines experience more corporate operations expense per line. In the Order on Reconsideration and the Fourth Order on Reconsideration, the Commission made further refinements to the formula specifically to recognize problems of the smaller companies. 3. On May 7, 1998, Arctic Slope Telephone Association Cooperative, Inc., ("ASTAC") filed a Petition for Expedited Waiver ("Petition") of Section 36.621(a)(4) of the Commission's rules, which limits the amount of corporate operations expenses inclusive in federal universal service support as modified by the Fourth Order on Reconsideration. On June 24, 1998, the Commission released a Public Notice seeking comment on the Petition. Three parties filed comments, all in support of the Petition. This Order grants ASTAC a limited one-year waiver of the corporate operations expense limit of section 36.621(a)(4) of the Commission's rules. II. BACKGROUND A. Standard for Granting a Waiver 4. 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." 5. 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 and that carriers 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 expenses are typically within a company's complete discretion, they are more likely to be susceptible to abuse than other types of expenditures such as plant maintenance expenditures. B. ASTAC Petition 6. ASTAC is a telephone cooperative that provides local exchange service in the rural North Slope of Alaska through eight discrete exchanges (Anaktuvuk Pass, Atqasuk, Deadhorse/Pruhdoe Bay, Kaktovik, Nuiqsut, Point Hope, Point Lay, and Wainwright) with a total of 2,200 access lines. Its corporate headquarters are located in Anchorage. 7. In its Petition, ASTAC 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. ASTAC states that it serves the North Slope Borough, which is located above the Arctic Circle in the northernmost section of Alaska. It states that it has exchanges in seven separate, isolated, native Alaskan villages and that its high corporate operations expense is a direct result of its operating environment. The Coastal Region of the North Slope, ASTAC states, has the coldest climate in Alaska. According to the Petition, the North Slope Borough is larger than the state of Minnesota and has a population of about 6,500. 8. ASTAC contends that its high corporate operations expenses are attributable to high travel costs, greatly increased construction costs, and the high cost of living in Alaska. It states that travel costs are high because the North Slope communities are only accessible by air and that seven of its exchanges are only accessible by small aircraft with a limited schedule of flights or chartered plane. It states that the cost to haul heavy equipment without roads causes greatly increased construction costs. To demonstrate the formidable cost of living in Alaska, it notes that cost of living in the North Slope is 178 percent higher than the lower 48 states. Moreover, it points out that, although its corporate headquarters are located in Anchorage, labor costs in Anchorage are still 40 percent higher than the lower 48 states. C. Initial Commission Review and ASTAC Response 9. In a letter dated September 14, 1998, we requested further information from ASTAC including: (1) a summary of ASTAC's corporate operations expenses by cost category; (2) an explanation of how the exceptional circumstances identified in the Petition specifically impact ASTAC's corporate operations expenses; and (3) a description of the nature and frequency of ASTAC's corporate operations travel. We requested this additional information because our initial review of ASTAC's waiver request revealed that, although ASTAC made assertions about the extreme conditions existing in its service territories, it did not provide sufficient information to demonstrate that its high level of corporate operations expenses was due to exceptional circumstances that would justify a grant of a waiver. We were particularly concerned that, although the circumstances described in ASTAC's petition may have implications for costs associated with its customer operations and plant specific operations, no explanation was provided as to how and to what degree these circumstances affected its corporate operations. 10. In response, by letter dated October 5, 1998, ASTAC provided a summary of its corporate operations expenses for 1996 grouped by labor, benefits, travel, and other costs. In the letter, ASTAC identifies transportation costs and the cost of living as the major exceptional circumstances that affect its corporate operations expenses. ASTAC submits that its higher than average corporate operations expenses result from administrative necessities inherent in managing its remote exchanges from its corporate offices in Anchorage. For example, ASTAC states that administrative personnel travel to each of the separate exchange areas to negotiate contracts with the governmental bodies and school districts of the North Slope. The nature of these contracts varies from interconnection, to space and power, to planning for and developing wide area networks. ASTAC also explains that, to manage the complexities of its remote exchanges, it holds two organizational meetings per year in Deadhorse, where the majority of its technical staff is located, when only one such meeting is normally required. 11. ASTAC also provides a description of the different types of corporate travel necessary for it to conduct business in its remote exchanges. ASTAC specifically describes corporate travel associated with quarterly Board of Directors meetings in Anchorage, annual membership meetings in each exchange, meetings needed to address technical or FCC-mandated changes, and meetings with governmental entities. ASTAC also argues that travel associated with participation in trade associations and training for administrative staff is important in light of the rapidly changing rural telephone industry resulting from the passage of the 1996 Act. III. DISCUSSION 12. Despite the information provided by ASTAC, we are still concerned about its high corporate operations expense. For example, although ASTAC appears to adequately justify its high corporate travel costs, these costs represent only 12 percent of ASTAC's total corporate operations expenses; so travel alone does not explain the overall high cost for corporate operations. We note that over 53 percent of the costs attributed to corporate operations expenses relates to the cost of ASTAC's labor and benefits. This does not include the labor and benefits costs that make up a significant amount of the costs of the other corporate services ASTAC purchases such as regulatory consulting and accounting and audit services. The majority of these combined labor and benefits costs is presumably incurred in Anchorage, where ASTAC's corporate activities are centrally located and which has a cost of living that is approximately 40 percent higher than in the lower 48 states. We determined that ASTAC's reported corporate operations expenses are approximately 108 percent higher than those of similarly sized carriers nationwide. We are unable to reconcile the high level of ASTAC's corporate operations expenses for which its largest cost component (i.e., labor and benefits) is 40 percent higher than that of carriers operating in the lower 48 states, yet its total corporate operations expenses are 108 percent higher than similarly sized carriers nationwide. ASTAC does not provide an explanation that adequately reconciles this difference. 13. In addition, we are concerned about the level of ASTAC's corporate operations expenses relative to the corporate operations expenses incurred by other Alaskan local exchange carriers. For example, according to data submitted in association with a similar petition filed by TelAlaska, Inc., the monthly corporate operations expense per Universal Service Fund (USF) subscriber loop was approximately $54 for ASTAC compared to $32 for all Alaskan local exchange carriers identified. More specifically, several similarly sized Alaskan local exchange carriers reported much lower monthly corporate operations expenses per USF subscriber loop than ASTAC. Our review of this data, thus, reveals that there is a notable disparity between the level of ASTAC's corporate operations expenses and that of other Alaskan local exchange carriers. 14. We are also concerned that ASTAC's high corporate operations expenses may be due to the misclassification of costs that should be recorded as customer services or plant operations. We note that many of the conditions that ASTAC attributes its high costs to relate to operations other than corporate. These include the costs associated with meetings with technical staff and time and travel to negotiate contracts for network-related issues. We believe some of the costs recorded as corporate may be mixed costs allocable between corporate and other cost categories. Therefore, ASTAC should review its costs recorded as corporate operations expenses to determine whether any of those costs should be reclassified. 15. Noting these concerns, we nevertheless find that ASTAC faces special circumstances that support the grant of a limited waiver. We realize that the costs incurred to provide local telephone service 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 geographic nature of the area served and weather patterns in different parts of the state, that can cause differences in the costs the carriers incur. In addition, we note that the expenses at issue were incurred in 1996, before the current corporate operations expense limitation formula went into effect. For these reasons, we believe that a grant of a limited waiver is justified and will serve the public interest of maintaining affordable rates in ASTAC's service area. Thus, we will grant ASTAC a limited one-year waiver of section 36.621(a)(4) of the Commission's rules. 16. Due to the concerns we express herein, we believe ASTAC should make all reasonable efforts to reduce its corporate operations expenses and will require that in future waiver requests, ASTAC show what measures it has taken to reduce its corporate operations expenses. Further, we request that in any future waiver request, ASTAC obtain and submit to us a nonbinding statement from the Alaska Public Utility Commission that, based on its knowledge of the operations of ASTAC and the Alaskan market, the corporate operations expenses of ASTAC are reasonable and that it supports approval of a request for waiver by ASTAC. IV. ORDERING CLAUSE 17. 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 Arctic Slope Telephone Association Cooperative, Inc. for Expedited Waiver of Section 36.21(a)(4) of the Commission's Rules IS GRANTED to the extent noted in this Order. FEDERAL COMMUNICATIONS COMMISSION Yog R. Varma Deputy Chief, Common Carrier Bureau