Federal Communications Commission DA 96-1872 Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) AAD 96-52 Petitions for Waivers Filed by ) ) San Carlos Apache Telecommunications ) Utility, Inc., and U S WEST Communications,) Inc. ) ) Concerning Sections 61.41(c)(2), 69.3(e) and ) the Definition of "Study Area" Contained in ) the Part 36 Appendix-Glossary of the ) Commission's Rules ) MEMORANDUM OPINION AND ORDER Adopted: November 8, 1996 Released: November 8, 1996 By the Chief, Accounting and Audits Division: I. INTRODUCTION 1. On April 19, 1996, San Carlos Apache Telecommunications Utility, Inc. ("San Carlos") and U S WEST Communications, Inc. ("U S WEST') filed a petition for waiver of three Commission rules. San Carlos and U S WEST 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 U S WEST to alter the boundaries of its existing Arizona study area, and allow San Carlos to create a new Arizona study area, when transferring one U S WEST telephone exchange to San Carlos.1 2. In addition, San Carlos seeks a waiver of Section 61.41(c)(2) of the Commission's rules. That 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 waiver would permit San Carlos to operate under rate-of-retum 1 For ease of presentation, we refer to the transferred properties as "one exchange" although San Carlos actually proposes to acquire the San Carlos exchange and a portion of the adjacent service territories of the Pima and Globe exchanges, which serve customers on the San Carlos Apache Reservation. 14591 Federal Communications Commission DA 96-1872 regulation after acquiring the exchange which currently is under price cap regulation.2 Finally, San Carlos has asked the Commission not to place caps on the amounts it can draw from the universal service fund ("USF"). 3. On May 3, 1996, the Common Carrier Bureau ("Bureau") released a Public Notice soliciting comments on the petition.3 On June 3,1996, the Bureau received comments supporting the petition from the National Telephone Cooperative Association. San Carlos provided additional information concerning the petition.4 In this Order, we find that the public interest would be served by allowing petitioners to alter their study area boundaries and allowing San Carlos to operate under rate-of-return regulation after acquiring the exchange. We therefore grant the petition, in part, as conditioned and explained below. II. STUDY AREA WAIVERS A. Background 4. A study area is a geographical segment of an incumbent local exchange carrier's ("ILEC") telephone 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.5 For jurisdictional separations purposes, the Commission froze all study area boundaries effective November 15, 1984.6 The Commission took that action primarily to ensure that ILECs do not set up high-cost exchanges within their existing service territories as 2 San Carlos also seeks a waiver of Section 69.3(e) of the Commission's rules, if necessary, to become an issuing carrier in the National Exchange Carrier Association, Inc.'s ("NECA") tariffs, and therefore, die regulatory, tariffs, and pooling changes related to the proposed exchange acquisition would occur immediately upon the closing of the transaction. As shown in 1 21, infra., a waiver is not required. 3 Public Notice, San Carlos and U S WEST Filed Petition for Waiver of Sections 61.41(cXd), 69.3(eXl 1) and the Definition of "Study Area" Contained in the Appendix-Glossary of Part 36 of the Commission's Rules, AAD 96- 52, DA 96-694, released (May 3, 1996) (Common Carrier Bureau 1996). 4 Ex parte letter from Sylvia Lesse, Kraskin & Lesse, to Secretary, FCC (August 21, 1996) ("Investment Letter"). Letter from Sylvia Lesse, Kraskin & Lesse, to Secretary, FCC (November 6, 1996) ("USF Letter"). 5 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 C.F.R. §§ 36.1-36.741. 6 47 C.F.R. § 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) ("7985 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"). 14592 Federal Communications Commission DA 96-1872 separate study areas to maximize interstate cost allocations.7 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.8 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 interest.9 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 USF support program;10 second, the state commission(s) having regulatory authority over the exchange(s) to be transferred does not object to the change; and third, the public interest supports such a change.11 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.12 7 See 1984 Joint Board Recommended Decision, supra note 6, f 66; 1985 Order Adopting Recommendation, supra note 6, fj 1,5. 8 47 C.F.R. §§ 1.3, 36 app. 9 Northeast Cellular Tel. Co. v. FCC, 897 F.2d 1164, 1166 (D.C. Cir. 1990); see also WAIT Radio v. FCC, 418 F.2d 1153, 1159 (D.C. Cir. 1969); 47 C.F.R. § 1.3. 10 See 1984 Joint Board Recommended Decision, supra note 6,1 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 ILECs 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 ILEC 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 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 C.F.R. § 36.631. 11 See U S WEST Communications, Inc., and Eagle Telecommunications, Inc., Joint 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 1771,1 5 (1995) ("U S WEST-Eagle Study Area Order"). 12 The Joint Board recommended, and the Commission adopted, interim rules that limit the rate of growth of the 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) ("7995 Joint Board Recommended Decision"); id., Report and Order, 9 FCC Red 303 ("Interim Cap Order"). The Commission extended these interim rules through July 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. See Federal-State Joint Board on Universal 14593 Federal Communications Commission DA 96-1872 The Commission nonetheless recognized that, even in the short term, the granting of a study area 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, 1995.13 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 USF program.14 B. Pleadings 7. Petition. U S WEST seeks a waiver of the rule freezing study area boundaries to enable it to remove one exchange, serving approximately 686 access lines, from its Arizona study area. San Carlos also seeks a waiver of that rule to permit it to acquire this exchange and establish a new study area. San Carlos proposes that it be regulated as a cost company.15 8. Petitioners state that the proposed changes would serve the public interest because San Carlos would improve telecommunications service without necessitating inordinate increases in basic service rates.16 San Carlos states that it plans to replace much of the existing analog equipment with modern digital equipment to provide the customers with the most technologically advanced telephone system possible.17 San Carlos also states that it plans to install modern toll recording, signalling, and equal access facilities. San Carlos states that, over the next five years, it plans to make plant investments totalling $11,226,000, of which $7,898,900 will be for loop Service, Recommended Decision, 11 FCC Red 7928 (1996) ("1996 Joint Board Recommended Decision "); id., Report and Order, 11 FCC Red 7920 (1996) ("Extension of Interim Cap Rules"). 13 See U S WEST-Eagle Study Area Order, supra note 11, H 14-17. 14 Id. In this context, the Commission defines the term "carrier" to include all affiliated carriers (Le., those carriers 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). Id. 1 14 note 34. 13 Cost companies are those ILECs that receive compensation for the use of their facilities in originating and terminating interstate telecommunications services on the basis of their actual costs. 16 Petition at 12. 17 Petition at Attachment B, Response to Question 4. 14594 Federal Communications Commission DA 96-1872 related facilities.18 9. Petitioners estimate that the transfer of the exchange out of U S WESTs study area and into San Carlos' proposed new study area would make San Carlos eligible to receive $435,283 in annual USF support.19 San Carlos estimates that, after all planned upgrades are completed, its USF draw would increase to $1,079,602.20 In addition, petitioners state that U S WEST currently receives no USF support in Arizona and, after the sale, will not be eligible to receive USF support.21 C. Discussion 10. Request for waivers. We have reviewed the data the petitioners filed with NECA22 and the estimates filed with this proceeding and have determined that the combined increase in USF draws will not have a substantial adverse impact on the USF total or on individual ILEC draws. In addition, the Arizona Corporation Commission ("Arizona CC") states that it does not object to these requested waivers.23 The modernization and upgrade proposals as stated by San Carlos, demonstrate that current and potential customers in the affected exchange will likely be better served by San Carlos.24 The requested study area waivers thus are likely to 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 waiver requests should be granted. 11. Request for exemption from USF limits. Although we find no reason to question San Carlos' estimates of the USF impact, we nonetheless are concerned that those estimates may later prove inaccurate when the planned upgrades are completed. To address this concern, we have granted waivers of this type subject to the condition that, absent explicit approval from the Bureau, the annual USF support provided to the new or revised study area shall not exceed the amount specified in the petition. In reference to that Bureau policy, San Carlos submits an argument against the imposition of limits on its USF draw.25 18 Petition at Attachment B, Response to Question 4. See Investment Letter, supra note 4. 19 Petition at Attachment B, Appendix C. 20 See USF Letter, supra note 4. 21 Petition at Attachment B, Response to Question 4. 22 NECA USF 1995 Submission of 1994 Study Results filed September 29, 1995. 23 See Arizona CC Opinion and Order, Docket Nos. E-1051-95-143, U-2892-95-143, dated March 26, 1996. 24 See supra at f 8. 25 Petition at 13-14. 14595 Federal Communications Commission DA 96-1872 12. San Carlos argues that it would be inappropriate for its future USF draw to be restricted to current estimates (i.e., $1,079,602) because that estimate was made in good faith and may need to be adjusted once it begins day-to-day operations.26 We have found that, even in a period of a few years,-the USF estimates for some ILECs have risen by unexpected amounts.27 These ILECs generally had undertaken substantial upgrades or expansions of the local network in difficult-to-serve, sparsely populated exchanges that are similar to the exchange being acquired by San Carlos. However, San Carlos1 failure to submit accurate USF estimates is not, as San Carlos suggests, a valid reason for granting these waivers unconditionally. On the contrary, the potential for such failure has been our primary reason for imposing limits on ILECs' USF draws following exchange transfers. 13. These limits would ensure that the study area waivers will not, due to errors or unforeseen circumstances, result in USF impacts which substantially exceed San Carlos' forecasts. The limits also would ensure that the Commission's one percent guideline can be properly adhered to in future filings of this kind. Absent such limits, companies could file waiver requests that appear to fall within the guideline, only to later adjust their USF estimates to exceed the guideline free of any Bureau review. We therefore reject the claim that, because San Carlos' representation of the USF impact may be inaccurate, it would be unreasonable for its USF draw to be limited by those representations. 14. In conclusion, we believe that we should continue our policy of imposing limits on the new or revised study area's USF draw. We therefore find that the waivers should be subject to the condition that, absent explicit approval from the Bureau, the annual USF support provided to San Carlos' proposed new study area shall not exceed the post-upgrade amount specified by it in the petition.28 We note that the Telecommunications Act of 1996, which became effective on February 8, 1996,29 requires the reform of many mechanisms the Commission uses to support its universal service goals, including the USF, by May 8, 1997.30 It is likely that any new 26 Petition at 14. 27 See, e.g.. Delta Telephone Company, Inc., Waiver of the Definition of "Study-Area" contained in Part 36, Appendix-Glossary, of the Commission's Rules, Memorandum Opinion and Order, 5 FCC Red 7100 (1990), whose USF payment grew from $82,500 in 1991 to approximately $445,700 in 1993; and U S WEST Communications and Gila River Telecommunications, Inc., Joint Petition for Waiver of the Definition of "Study Area" Contained in Part 36, Appendix-Glossary, of the Commission's Rules, Memorandum Opinion and Order, 7 FCC Red 2161 (1992), whose projection of $169,155 for Gila River's 1992 USF payment 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. 28 San Carlos estimates that its post-transfer, post upgrade USF draw would be $1,079,602. See USF Letter, supra note 4. 29 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat 56 (1996). 30 Id. 47 U.S.C. 254(a)(2). 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 Rulemaking and Order Establishing Joint Board, 61 Fed. Reg. 10499 (March 14, 1996). Id. I 39. 14596 Federal Communications Commission DA 96-1872 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 San Carlos' new study area. This, in turn, may require us to revisit these issues, and the related waiver conditions that we have established herein. III. PRICE CAPS WAIVER A. Background 15. Section 61.41(c)(2) of the Commission's rules provides that, when a cost company31 acquires a price cap company,32 the acquiring company, and any ILEC with which it is affiliated, shall become subject to price cap regulation within a year of the transaction.33 The Commission stated that this "all-or-nothing" rule applies not only to the acquisition of an entire ILEC but also to the acquisition of part of a study area.34 U S WEST is a price cap company. Hence, under this rule, San Carlos' acquisition of the U S WEST exchange would obligate San Carlos to become subject to price cap regulation instead of rate-of-retura regulation. 16. The Commission explained that the all-or-nothing rule is intended to address two concerns regarding mergers and acquisitions involving price cap companies. The first concern is that, in the absence of the rule, an ILEC 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 increased revenue requirement, without affecting the earnings of the price cap affiliate, /.