Federal Communications Commission DA 96-1462
Before the
Federal Communications Commission 
Washington, D.C 20554
In the Matter of ) AAD 96-49 
Petition for Waivers Filed by )
) Albion Telephone Co. )
Cambridge Telephone Co., Inc. )
Fremont Telcom Co. )
Mdvale Telephone Exchange, Inc. )
Rockland Telephone Co., Inc., and )
U S WEST Communications, Inc. )
)Concerning Section 61.4KcX2) and 69.3 ) 
(eXl 1), and the Definition of "Study Area" ) 
Contained in the Part 36 Appendix-Glossary ) 
of the Commission's Rules )
MEMORANDUM OPINION AND ORDER 
Adopted: August 29,1996 Released: August 29,1996
By the Chie£ Accounting and Audits Division:
L INTRODUCTION
1. On April 11,1996, Albion Telephone Co. ("Albion"), Cambridge Telephone Co. Inc. 
("Cambridge"), Fremont Telcom Co. ('Tremont"), Mdvale Telephone Exchange, Inc. 
("Mdvale"), Rockland Telephone Co., Inc. C'Rockland"), and U S WEST (^mmunications, Inc. 
("U S WEST1) filed a joint petition for waiver of various Commission rules. The petitioners 
seek waivers of the definition of "Study Area" contained in the Part 36 Appendix-Glossary of 
the Commission's rules. That definition constitutes a rule freezing all study area boundaries, 
effective November 15,1984. The requested waivers would allow Albion, Cambridge, Mdvale, 
Rockland, and U S WEST to alter the boundaries of their existing study areas as a result of U 
S WESTs sale of nine exchanges. Fremont is a newly formed Idaho corporation and seeks 
permission to establish a new study area.
2. In addition, the buyers seek waivers of the price cap rule contained in Section 
61.41(cX2) of the Commission's rules. This rule requires non-price cap companies, and the 
telephone companies with which they are affiliated, to become subject to price cap regulation 
after acquiring a price cap company or any part thereof. The requested waivers would permit the buyers to 
remain under rate-of-retum regulation after acquiring Ihe exchanges which currently
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Federal Communications Commission DA 96-1462
are under price cap regulation.1
3. On April 19,1996, the Common Carrier Bureau ("Bureau") released a Public Notice 
soliciting comments on the joint petition.2 In this Order, we find that the public interest would 
be served by allowing petitioners to alter their study area boundaries and allowing the buyers to 
continue operating under rate-of-retum regulation after acquiring the exchanges. We therefore 
grant the petition, as explained more fully below.
IL STUDY AREA WAIVERS 
A. Background
4. A study area is a geographical segment of a carrier's telephone operations. Generally, 
a study area corresponds to a carrier's entire service territory within a state. Thus, carriers 
operating in more than one state typically have one study area for each state, and carriers 
operating in a single state typically have a single study area Study area boundaries are important 
primarily because carriers perform jurisdictional separations at the study area level3 For 
jurisdictional separations purposes, the Commission froze all study area boundaries effective 
November 15,1984.4 The Commission took that action primarily to ensure that local exchange 
carriers ("LECs") do not set up high-cost exchanges within their existing service territories as 
separate study areas to maximize interstate cost allocations.3 A LEG must apply to the 
Commission for a waiver of the frozen study area rule if the LEG wishes to sell or purchase an
1 The buyers also seek waivers of Section 693(e) of the Commission's rules, if necessary, to become 
Issuing Carriers in the National Exchange Carrier Association ("NECA") tariffs. As shown in para. 18, infra, a 
waiver is not required.
2 Public Notice, Albion Telephone Co., Inc., Cambridge Telephone Co, Fremont Telcom Co., Midvale 
Telephone Exchange, Inc., Rockland Telephone Co., and U S WEST Communications, Inc. filed a Petition for 
Waiver Sections 61.41(c) (2), 693(eXl 1) and the Definition of "Study Area" Contained in Appendix-Glossary of 
Part 36 of the Commission's Rules, AAD 9649, DA 96-610, released (April 11,1996) (Common Carrier Bureau 
1996). Comments were filed by the National Telephone Cooperative Association on May 20,1996.
3 The phrase "jurisdictional separations," or "separations," refers to the process of dividing costs and 
revenues between a carrier's state and interstate operations. See generally 47 GF.R. §§ 36.1-36.741.
4 47 CFJR. § 36 app. (defining "study area"). See MTS and WATS Market Structure, Amendment of 
Part 67 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision and Order, 49 
Fed. Reg. 48325 (December 12, 1984) ("1984 Joint Board Recommended Decision"); id\, Decision and Order, 50 
Fed. Reg. 939 (January 8, 1985) ("1985 Order Adopting Recommendation"); see also Amendment of Part 36 of 
the Commission's Rules and Establishment of a Joint Board, Notice of Proposed Rulemaking, 5 FCC Red 5974 
(October 10, 1990) ("Study Area Notice").
5 See 1984 Joint Board Recommendation Decision, supra note 4 ^ 66; 1985 Order Adopting 
Recommendation, supra note 4, ^HI U 5.
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Federal Communications Commission DA 96-1462
exchange.6
5. Waiver of Commission rules is appropriate only if special circumstances warrant 
deviation from the general rule and such a deviation will serve the public interest7 In evaluating 
petitions seeking a waiver of the rule freezing study area boundaries, the Commission employs 
a three-prong standard: first, the change in study area boundaries does not adversely affect the 
Universal Service Fund ("USF") support program;8 second, the state commission(s) having 
regulatory authority over the exchanges) to be transferred does not object to the change; and 
third, the public interest supports such a change.9
6. The Commission's concern about adverse USF impacts was mitigated, in the short term 
at least, by its adoption of the Joint Board's recommendation for an indexed cap on the USF.10 
The Commission nonetheless recognized that, even in the short term, the granting of-a study area
6 47 C.F.R. §§ 13, 36 app.
7 Northeast Cellular Tel Co. v. FCC, 897 R2d 1164, 1166 (D.C. Or. 1990); see also WAIT Radio v. 
FCC, 418 R2d 1153, 1159 (D.C. Or. 1969); 47 C.F.R. § 13.
8 See 1984 Joint Board Recommended Decision, supra note 4, f 66. The Commission created the USF to 
preserve and promote universal service. See Amendment of Part 67 of the Commission's Rules and 
Establishment of a Joint Board, Decision and Order, 96 FCC 2d 781 (1984). The USF allows LECs with high 
local loop plant costs to allocate a portion of those costs to the interstate jurisdiction, thus enabling the states to 
establish lower local exchange rates in study areas receiving such assistance. To determine which LEC study 
areas are eligible for USF support, the USF rules prescribe an eligibility threshold set at 115 percent of the 
national average unseparated loop cost per working loop. When the loop cost in a particular study area exceeds 
that threshold, the study area is eligible for support equal to a certain percentage of the loop cost in excess of 
that threshold. The study area becomes eligible for higher levels of support as its loop cost rises above 
additional thresholds set farther above the national average unseparated loop cost Because USF assistance is 
targeted primarily at small study areas, the level of support provided at each threshold generally is greater if the 
study area has 200,000 or fewer working loops: See 47 CPU. § 36.631.
9 See U S WEST Communications, Inc., and Eagle Telecommunications, Inc., Petition for Waiver of the 
Definition of "Study Area" Contained in Part 36, Appendix-Glossary of the Commission's Rules, Memorandum 
Opinion and Order, 10 FCC Red 1771, J 5 (1995) ("US WEST-Eagle Study Area Order").
10 The Joint Board recommended, and the Commission adopted, interim rules u^tonft the rate of growm 
of die USF to the rate of growth in the total number of working loops nationwide. See generally Amendment of 
Part 36 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision, 9 FCC Red 334 
(1993) ("1993 Joint Board Recommended Decision"); id., Report and Order, 9 FCC Red 303 ^Interim Cap 
Order"). The Commission extended these interim rules through Jury 1,1996. Amendment of Part 36 of the 
Commission's Rules and Establishment of a Joint Board, Report and Order, 11 FCC Red 1077 (1995), 
summarized in 60 Fed. Reg. 65011 (1995). Recently, the Joint Board recommended, and the Commission 
adopted, an extension of the interim cap rules on the USF until the final universal service rules become effective. 
Federal-State Joint Board on Universal Service, Recommended Decision, CC Docket No. 96-45, released June 19, 
1996 ("1996 Joint Board Recommended Decision"); id., Report and Order, FCC 96-281, released June 26, 19% 
("Extension of Interim Cap Rides").
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Federal Communications Commission DA 96-1462
waiver may adversely affect the fund's distribution, if not its size. Under the indexed USF cap 
rules, any study area reconfiguration that increases the USF draw of one USF recipient often 
reduces that of other USF recipients. Consequently, in evaluating whether a study area change 
would have an adverse impact on the distribution or level of the USF, the Commission applies 
a "one-percent" guideline to study area waiver requests filed after January 5,1995." Under this 
guideline, no study area waiver is granted if it would result in an annual 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. To prevent carriers from evading this 
limitation by disaggregating a single large sale of exchanges into a series of smaller transactions 
that in the aggregate have the same effect on the USF, the Commission further requires that the 
guideline be applied to all study area waivers granted to either carrier, as a purchaser or seller, 
pending completion of the current review of the universal service program.12
B. Pleadings
7. Albion currently serves 995 access lines; Cambridge serves 936 access lines; Mdvale 
serves 367 access lines; Rockland serves 325 access lines; and U S WEST serves 393,000 access 
lines in Idaho. U S WEST proposes to sell nine exchanges: three exchanges serving 3,391 access 
lines to Albion; one exchange serving 932 access lines to Cambridge; three exchanges serving 
5,439 access lines to Fremont;.one exchange serving 457 access lines to Mdvale; and one 
exchange serving 822 access lines to Rockland U S WEST seeks waiver of the rule freezing 
study area boundaries to enable U S WEST to remove these nine exchanges from its Idaho study 
area,13 The requested waivers also would allow the buyers to consolidate the acquired exchanges 
with their existing Idaho study areas. Fremont seeks a waiver to establish a new study area.
8. Petitioners state mat the proposed changes would serve the public interest because the 
buyers would install new facilities, such as fiber optic cables, and offer additional customer 
services, such as CLASS,14 and access to me internet Petitioners estimate that, if the study area 
waivers were granted and all planned upgrades were completed, the transfer of the nine 
exchanges would increase the combined annual USF draw of the buyers by $1,787,360.15
11 See USWEST-Eagle Study Area Order, szpranote 9, UH 14-17.
12 Id. In this context, the Commission defines the term "carrier" to include all affiliated carriers (Le^ those 
earners that are in common control, as the term "control" is defined in Section 32.9000 of the Commission's 
rules, 47 C.F.R. § 32.9000). LL U 14 note 34.
13 Joint petition at 2.
14 Custom Local Area Signaling Services, or CLASS, includes automatic callback, automatic recall, call 
waiting,, call forwarded and other similar services.
15 12*12.
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Federal Communications Commission DA 96-1462
C Discussion
9. Request for weavers. We have reviewed the data the petitioners filed with NECA16 
and the estimates filed in this proceeding and have detemiined that the combined increase in USF 
draws will not have a substantial adverse impact on the USF total or on individual carrier draws. 
In addition, the Idaho Public Utilities Commission states that it does not object to these requested 
waivers.17 Based upon the petitioners' statement that customer service would improve in the 
newly acquired exchanges, we believe that the requested study area waivers will likely serve the 
public interest We therefore find that the three-prong standard for granting a study area waiver 
has been met in this instance and that the study area waiver requests should be granted.
10. Need for imposed limits on USF draws. Although we find no reason to question the 
buyers' estimates of the USF impact, we nonetheless are concerned that those estimates may later 
prove inaccurate when the planned upgrades are completed. We have found mat, even in a 
period of a few years, the USF payments for some LECs have risen by unexpected amounts.18 
These LECs generally had undertaken substantial upgrades or expansions of the local network 
in difficult-to-serve, sparsely populated exchanges that are similar to the exchanges being 
acquired by the buyers.
11. We therefore find mat the waivers should be subject to the condition mat, absent 
explicit approval from the Bureau, the annual USF support provided to the buyers' study areas 
shall not exceed the post-upgrade amounts estimated in the joint petition.19 This limit ensures 
that the study area waivers will not, due to error or unforeseen circumstances, result in adverse 
USF impacts which substantially exceed the buyers' forecasts. We note that the 
Telecornmunications Act of 1996, which became effective on February 8, 1996,20 requires the 
reform of many mechanisms the Commission uses to support its universal service goals, including
16 See NECA USF 1995 Submission of 1994 Study Results filed September 29,1995.
17 Idaho Public Utilities Commission, Case No. ALB-T-94, Case No. CAM-T-94-1, Mto-T-94-1, FRE-T- 
94-1, SIL-T-94-1, and ROK-T-94-1, dated March 5, 1996.
18 See, e.g., Deha TeL Co, Inc., Waiver of the Definition of "Study-Area," Memorandum Opinion and 
Order, 5 FCC Red 7100 (1990). The USF payment grew from $82^00 in 1991 to approximately $445,700 in 
1993. See, e.g, U S WEST Comm, and Gila River Teleconm, Inc., Petition far Waiver of the Definition of 
"Study Area," Memorandum Opiman and Oraer, 1 FCC Red 2161, i 7 (1992) (stating that Gila River estimates 
1992 high-cost support to be $169,155). Gila River's 1992 USF estimate was more than doubled by the actual 
1992 payment of $390,993, which has been nearly doubled again by the 1995 payment of approximately 
$750,000.
19 Buyers estimate that their post-sale, post upgrade USF draws will be $713,951 for Albion; $310,748 for 
Cambridge; $1,268,662 for Fremont; $350,367 for Midvale; and $454,213 for Rockland.
20 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 StaL 56 (1996).
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Federal Communications Commission DA 96-1462
the USF, by May 8,1997.21 It is likely that any new universal service rules will alter the method 
used to determine the distribution of USF support to high-cost areas, thereby changing the 
projected level of support to the buyers' study areas. This, in turn, may require us to revisit these 
issues, and the related waiver conditions that we have established herein.
PRICE CAPS WAIVER 
A. Background
12. Section 61.41(cX2) of the Commission's rules provides that, when a cost company 
acquires a price cap company,22 the acquiring company, and any LEG with which it is affiliated, 
shall become subject to price cap regulation within a year of the transactioa23 The Commission 
stated that mis "all-or-nothing" rule applies not only to the acquisition of an entire LEG but also 
to the acquisition of part of a study area.24 U S WEST is a price cap company, and hence, under 
this rule, the buyers' acquisition of U S WESTs nine exchanges obligates them to become subject 
to price cap regulation instead of rate-of-retum regulation.
13. The Commission explained that the all-or-nothing rule is intended to address two 
concerns it has regarding mergers and acquisitions involving price cap companies. The first 
concern is that, in the absence of the rule, a LEG might attempt to shift costs from its price cap 
affiliate to its non-price cap affiliate, allowing the non-price cap affiliate to earn more, due to its
21 Id. 47 U.S.C. 254(aX2). To develop new USF rules, the Commission has initiated a proceeding to 
address this issue. See Federal-State Joint Board on Universal Service, Notice of Proposed Ridemaking and 
Order Establishing Joint Board, 61 Fed. Reg. 10499 (March 14, 1996). Id. H 39.
22 Price cap companies are those LECs that receive compensation for the use of their facilities in 
originating and terminating interstate telecommunication services on the basis of the Commission's price cap 
rules. 47 C.F.R. §§ 61.41-61.49. Cost companies are those LECs that receive compensation for the use of their 
facilities in originating and terminating interstate telecommunications services on the basis of their actual costs.
23 47 GF.R. § 61.41(c). See Policy and Rules Concerning Rates for Dominant Carriers, Second Report 
and Order, 5 FCC Red 6786, 6821 (1990), Erratum, 5 FCC Red 7664 (Com. Car. Bur. 1990) ("LEC Price Cap 
Order*), modified on recon, Order on Reconsideration, 6 FCC Red 2637 (1991) ("LEC Price Cap 
Reconsideration Order"), offd sub nom. National Rural Telecom Ass'n v. FCC, 988 F.2d 174 (D.C. Cir. 1993), 
petitions for farther recon. dismissed, 6 FCC Red 7482 (1991), farther modification on recon^ Amendments of 
Part 69 of the Commission's Rules Relating to the Creation of Access Charge Subelements for Open Network 
Architecture, Policy and Rules Concerning Rates for Dominant Carriers, Report and Order and Order on Further 
Reconsideration and Supplemental Notice of Proposed Ridemaking, 6 FCC Red 4524 (1991) ("ONA Part 69 
Order*), farther recon., Memorandum Opinion and Order on Second Further Reconsideration, 7 FCC Red 5235 
(1992).
24 See LEC Price Cap Reconsideration Order, supra note 23,1149 note 207. The Commission explained 
that, if these two types of acquisitions were not treated the same under the all-or-nothing rule, a LEC could avoid 
the rule by selling all but one of its exchanges. Id.
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Federal Communications Commission DA 96-1462
increased revenue requirement, without affecting the earnings of the price cap affiliate, i.e., 
without triggering the sharing mechanism. The second concern is that, absent die rule, a LEG 
may attempt to "game the system" by switching back and forth between rate-of-return regulation 
and price cap regulation. The Commission cited, as an example, the incentive a price cap 
company may have to increase earnings by opting out of price cap regulation, building up a large 
rate base under rate-of-retum regulation so as to raise rates and, then, after returning to price cap, 
cutting costs back to an efficient level. It would disserve the public interest, the Commission 
stated, to allow a LEG to alternately "fatten up" under rate-of-retum regulation and "slim down" 
under price cap regulation, because rates would not fell in the manner intended under price cap 
regulation.25
14. The Commission nonetheless recognized that a narrow waiver of the all-or-nothing 
rule might be justified if efficiencies created by the purchase and sale of a few exchanges were 
to outweigh the threat that the system may be subject to gaming.26 Such a waiver would not be 
granted unconditionally, however. Rather, waivers of the all-or-nothing rule would be granted 
subject to the condition that the selling price cap company shall make a downward exogenous 
adjustment to its price cap indices to reflect the change in its study area.27 That adjustment is 
needed to remove the effects of the transferred exchanges from rates mat have been based, in 
whole or in part, upon the inclusion of those exchanges in the study areas subject to price cap 
regulation.28
R Pleadings
15. Petition The buyers seek waivers of Section 61.41(cX2) so they may operate as rate- 
of-retum LECs, rather than price cap LECs, after acquiring the nine exchanges which currently 
are under price cap regulation. Petitioners argue that the rule's application in this instance is 
contrary to the public interest and does not serve the purposes for which the rule was adopted 
Petitioners further argue that the Commission's two concerns, the threat of cost shifting between
25 Id.
26 Id.\ 149 note 207.
27 See Price Gip Performance Review forLocal Exchange CanieK, First Report caid Oder, 
8962, UK 328, 330 (1995) ("LEG Price Cap Review Oder"). Under that requirement, U S WEST must reduce 
the (nice cap indices for its Idaho study area if the changes in study area boundaries reduce the cost bases for 
those indices. The price cap indices, which are the cost indices on which price-capped rates are based, are 
calculated pursuant to a formula specified in the Commission's rules for price cap LECs. See 47 CRR § 
61.45.
28 See LEC Price Gap Review Oder, supra *«ote 27, \ 330.
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______________Federal Communications Commission_______ DA 96-1462
affiliates and gaining of the system, are not at issue in this case.29 
C Discussion
16. We agree with petitioners that the Commission's first concern underlying the all-or- 
nothing rule is not applicable in this case. None of the buyers has an incentive to shift costs 
between price cap and cost affiliates, because none of these companies are seeking to maintain 
separate affiliates under different systems of regulation. As to the Commission's second concern, 
we find it implausible that U S WEST could game the system by moving the nine exchanges 
back and forth between price cap and other forms of regulation, because U S WEST is selling 
these exchanges and a reacquisilion would require a second study area waiver. Moreover, it 
cannot transfer the exchanges without removing the rate-increasing effects of the exchanges from 
the price-capped rates that have been based, in part, upon the inclusion of these exchanges in its 
Idaho study area.
17. We therefore find there is good cause to grant the buyers waivers of the all-or- 
nothing rule to permit them to remain under rate-of-retum regulation after acquiring the nine 
exchanges which currently are under price cap regulation. As noted above, these waivers are 
subject to the condition mat U S WEST shall make a downward exogenous adjustment to its 
price cap indices to reflect the removal of these generally high-cost exchanges from its Idaho 
study area. For the present, we will continue to regulate buyers as rate-of-retum carriers. 
Because we are waiving Section 61.41(cX2), they need not withdraw from the NECA pools. We 
note that, as with any other rate-of-return carriers, the buyers may elect price cap regulation in 
the future if they decide to withdraw from the NECA pools.
IV. OTHERISSUES
18. To the extent necessary, the buyers seek waivers of Section 69.3(e(ll) of the 
Commission's rules. That rule requires that any changes in NECA common line tariff 
participation and long term support resulting from a merger or acquisition of telephone properties 
are to be made effective on the next annual access tariff filing effective date following the merger 
or acquisition. Buyers are concerned mat under a strict interpretation of this rule they, rather 
than NECA, would be required to file a tariff on the next annual access tariff filing date. 
Assuming its acquisition occurs mis year, each buyer represents that it plans to utilize NECA as 
its interstate tariff administrator, consequently, the buyers' carrier common line costs will be 
included in NECA's 1997 filing. We conclude that, none of the buyers are required to make a 
separate annual access filing for their carrier common line costs, and therefore, a waiver of 
Section 69.3(eXl 1) is not required
29 Joint petition at 6. We note that, although U S WEST signed the joint petition, U S WEST does not 
seek a waiver of the all-or-nothing rule.
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Federal Communications Commission DA 96-1462
V. ORDERING CLAUSES
19. Accordingly, IT IS ORDERED, pursuant to Sections 1, 4(i), 5(c), 201-202 of the 
Communications Act of 1934, as amended, 47 U.S.C. §§ 151, 154(i), 155(c), 201-202, and 
Sections 0.91, 0.291, and 1.3 of the Commission's rules, 47 C.F.R. §§ 0.91, 0.291, 1.3, that 
the joint petition of Albion Telephone Co., Inc., Cambridge Telephone Co., Fremont Telcom 
Co., Midvale Telephone Exchange, Rockland Telephone Co., Inc., and U S WEST, for waiver 
of Part 36, Appendix-Glossary, of the Commission's rules, 47 C.F.R. Part 36 Appendix- 
Glossary IS GRANTED subject to the condition stated in paragraph 11 and footnote 19 of this 
Order.
20. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201-202 of the 
Communications Act of 1934, as amended, 47 U.S.C. §§ 151, 154(i), 155(c), 201-202, and 
Sections 0.91, 0.291, and 1.3 of the Commission's rules, 47 C.F.R. §§ 0.91, 0.291, 1.3, that 
the joint petition of Albion Telephone Co., Inc., Cambridge Telephone Co., Fremont Telcom 
Co., Midvale Telephone Exchange, Rockland Telephone Co., Inc., and U S WEST for waiver 
of Section 61.41(c)(2) of the Commission's rules, 47 C.F.R. § 61.41(c)(2), IS GRANTED 
subject to the condition stated in paragraph 17 of this Order.
21. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201-202 of the 
Communications Act of 1934, as amended, 47 U.S.C. §§ 151, 154(i), 155(c), 201-202, and 
Sections 0.91, 0.291, and of the Commission's rules, 47 C.F.R. §§ 0.91, 0.291, that the 
National Exchange Carrier Association shall not distribute USF assistance exceeding the limit 
imposed in paragraph 11 and footnote 19 of this Order.
22. IT IS FURTHER ORDERED, pursuant to Sections 1, 4(i), 5(c), 201-202 of the 
Communications Act of 1934, as amended, 47 U.S.C. §§ 151, 154(i), 155(c), 201-202, and 
Sections 0.91 and 0.291 of the Commission's rules, 47.C.F.R. §§ 0.91, 0.291, that this Order 
IS EFFECTIVE IMMEDIATELY UPON RELEASE.
FEDERAL COMMUNICATIONS COMMISSION
Kenneth P. Moran
Chief, Accounting and Audits Division
Common Carrier Bureau
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