Before the
FEDERAL COMMUNICATIONS COMMISSION 
Washington, D.C. 20554
In the Matter of ) 
Petitions for Waivers Filed by )
 )Alenco Communications, Inc.; Cap Rock Telephone )
Cooperative, Inc.; Central Texas Telephone )
Cooperative, Inc.; Conlel of Texas, Inc.; Ganado ) DA 96489
Telephone Co., Inc.; GTE Southwest Incorporated; )
Guadalupe Valley Telephone Cooperative, Inc.; ) AAD 95-139
Mid-Plains Rural Telephone Cooperative, Inc.; and )
Peoples Telephone Cooperative, Inc. )
)Concerning Section 61.41(c)(2) and the ) 
Definition of "Study Area" Contained in the Part 36 ) 
Appendix-Glossary of the Commission's Rules )
MEMORANDUM OPINION AND ORDER
Adopted: April 1, 1996 Released: April 2, 1996 
By the Chief, Accounting and Audits Division:
I. INTRODUCTION
1. On September 20, 1995, the above-listed petitioners (collectively, "Petitioners") 
filed a joint petition for waiver ("Joint Petition") of two Commission rules. Contel of Texas, 
Inc. ("Contel") and GTE Southwest Incorporated ("GTE") (collectively, "Sellers") and the seven 
other petitioners (collectively, "Buyers") seek a waiver of the definition of "Study Area" 
contained hi the Part 36 Appendix-Glossary of the Commission's rules. That definition 
constitutes a rule freezing all study area boundaries. The requested waivers would allow 
Petitioners to alter the boundaries of their existing Texas study areas when transferring seven 
Contel telephone exchanges and nine GTE telephone exchanges to Buyers. In addition, Buyers 
seek waivers of the price cap rule contained hi 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 waivers would permit Buyers to remain under rate-of-return 
regulation after acquiring the exchanges which currently are under price cap regulation.
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2. On November 29,1995, the Common Carrier Bureau ("Bureau") released a public 
notice soliciting comments on the Joint Petition.1 On December 11, 1995, the Bureau received 
comments supporting the Joint Petition from the National Exchange Carrier Association, Inc. 
("NECA") and the National Telephone Cooperative Association ("NTCA"). The Bureau also 
received comments from AT&T Corp. ("AT&T"), which opposes the Joint Petition in part. On 
January 11, 1996, Buyers filed a reply to the AT&T comments. Petitioners also provided 
additional information and cost data concerning 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 Buyers to continue operating under rate-of-return regulation after acquiring the 
exchanges. We therefore grant the Joint Petition, as explained more fully below.
n. STUDY AREA WAIVERS
3. Background. 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 level.3 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 high-cost payments.5 The study area 
freeze also prevents LECs from transferring exchanges among existing study areas for the 
purpose of increasing interstate revenue requirements and compensation. A LEG must apply to 
the Commission for a waiver of the frozen study area rule if the LEC wishes to sell an exchange
1 Public Notice, 10 FCC Red 13058 (Com. Car. Bur. 1995).
2 Letter from Whitney Hatch, GTE Service Corporation, to William Caton, Acting Secretary, FCC (Sept 20, 
1995) (GTE Letter); letter from Margaret Nyland, Kraskin & Lesse, to William Caton, Acting Secretary, FCC (Nov. 
2, 1995) (Nyland Letter).
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 CfJEL §§ 36.1-36.741.
4 47 CJFJL § 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 (1984) (1984 Joint Board Recommended Decision); id., Decision and Order*, 50 Fed. Reg. 939 (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 RulemaJang, 5 FCC Red 5974 (1990) (Study Area Notice).
5 See 1985 Order Adopting Recommendation, supra note 4, at 940; see also 1984 Joint Board Recommended 
Decision, supra note 4, at 48337.
11478
to another carrier and if that transaction would have the effect changing the study area 
boundaries of either carrier.6
4. 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.7 In evaluating 
petitions seeking a waiver of the rule freezing study area boundaries, the Commission employs- 
a three-prong standard:8 first, that the change in study area boundaries does not adversely affect 
the Universal Service Fund ("USF" support program;9, second, that the state commission(s) 
having regulatory authority over the :hange(s) to be transferred does not object to the change; 
and third, that the public interest su xts such a change.
5. The Commission's concern about adverse USF impacts was mitigated, hi 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 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
4 47 CJJL §§ 13, 36 app.
7 Northeast Cellular TeL Co. v. FCC, 897 R2d 1164,1166 (D.C. Cir. 1990); WATT Radio v. FCC, 418 F.2d 
1153, 1159 (D.C. Cir. 1969); 47 CJJL § 13.
* See US West Communications, Inc, and Eagle Telecommunications, Inc., Joint Petition for Waiver of Hie 
Definition of "Study Area" Contained in Part 36, Appendix-Glossary of the Commission's Rules, Memorandum 
Opinion and Order, 10 FCC Red 1771,15 (1995) (US West-Eagle Study Area Order).
9 See 1984 Joint Board Recommended Decision, supra note 4,48337. 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 LEG 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 mat threshold, the study area is eligible 
for support equal to a certain percentage of the loop cost in excess of mat threshold The study area becomes eligible 
for higher levels of support as its loop cost rises above additional thresholds set farmer 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 JF JL 
§ 36.631.
10 The Joint Board recommended, and the Commission adopted, interim rules mat 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) 
(1993 Joint Board Recommended Decision)', ieL, Report and Order, 9 FCC Red 303 (Interim Cap Order). The 
Commission recently extended these interim rules -rough Jury 1,1996. Amendment of Part 36 of the Commission's 
Rules and Establishment of a Joint Board, Report,. id Order, CCVkL No. 80-286, FCC 95-494 (reLDec. 12,1995), 
summarized in 60 Fed. Reg. 65011 (1995).
11479
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. u 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. 12
6. We note, however, the likelihood that any conditions imposed pursuant to this 
analysis may be superseded by new USF rules before those conditions have any effect. The 
Telecommunications Act of 1996 became effective on February 8, 1996.a The 1996 Act 
requires the overhaul of various Commission support programs, including the USF, by May 8, 
1997. M The new USF rules are likely to alter the method used to determine the distribution of 
USF support to high-cost areas, thereby changing the projected level of support to Buyers' Texas 
study areas. This rulemaking must be completed before-the initial stage of upgrades planned by 
Buyers would cause increased USF payments to their study areas.15 For the interim, however, 
it is important to apply the standards that we have developed consistently until such time as the 
rules are changed.
7. Pleadings. Petitioners seek waivers of the rale freezing study area boundaries to 
enable Contel to remove seven exchanges, serving approximately 1,164 access lines, from its 
Texas study area and to permit GTE to remove nine exchanges, serving approximately 5,205 
access lines, from its Texas study area. The requested waivers also would allow Buyers to 
consolidate the acquired exchanges with their existing Texas study areas, which are comprised 
of 63 exchanges serving approximately 38,300 access lines.16
11 See US West-Eagle Study Area Order, supra note 8, ff 14-17.
12 Id. In this context, the Commission defines the term "carrier" to include all affiliated carriers (i.e., those 
carriers mat are in common control, as the term "control" is defined in Section 32.9000 of the Commission's rules, 
47 C.FJL § 32.9000). Id. nJ4.
13 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat 56 (1996).
14 Id sec. 101(a), § 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 Rulemaking and Order 
Establishing Joint Board, 61 Fed. Reg. 10,499 (1996). That proceeding includes the record of a prior proceeding 
on the same issue. Id. J 39.
15 A lag of up to two years exists between the time that a LEG incurs additional loop costs and the time that 
its study area receives additional USF assistance reflecting those higher costs. See 47 CJML §§ 36.611-36.612.
16 Joint Petition, at 2-3; GTE Letter, supra note 2, at 5.
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8. Petitioners state that the proposed changes would serve the public interest because 
Buyers would improve customer service in the newly acquired exchanges by constructing new 
digital central offices and by upgrading multi-party lines to single-party service. Petitioners 
estimate that these upgrades would require Buyers to make a combined investment outlay of 
$9,617,275 over a five-year period.17
9. Petitioners assert that these requests are consistent with the original purpose of 
the USF and that the resulting impact on the USF would be marginal. Petitioners estimate that, 
if the study area waivers were granted and all planned upgrades were completed, the transfer 
of the 16 exchanges would increase the combined annual USF draw of Buyers by $923,804 and 
decrease that of Sellers by $249,966. Hence, according to Petitioners, the net increase in the 
combined annual USF draw of buyers and sellers would be $673,838 (i.e., $923,804 minus 
$249,966 equals $673,838).18
10. . AT&T contends that Buyers' USF draws should be limited to Buyers' current 
estimates. Without such limits, AT&T argues, exchange buyers would have no incentive to 
reflect accurately hi their waiver requests the USF. assistance they anticipate having after the 
purchase of exchanges. AT&T thus submits that it is in the public interest to require Buyers to 
justify actions that may have a significant, adverse impact on the distribution of USF support. 19 
Petitioners raise several objections against such limits. Petitioners state that, to the extent the 
Bureau considers any limits appropriate, the limits should be confined to increases hi USF 
assistance due to the acquisitions themsr s.20
11. Discussion. Petitioners proposals demonstrate that current and potential 
customers in the affected exchanges will likely be better served by Buyers than Sellers. Buyers 
state that they will construct a new digital central office hi each of the subject exchanges and will 
upgrade multi-party lines to single-party service. The requested study area waivers thus are 
likely to serve the public interest. In addition, the Public Utility Commission of Texas states 
that it does not object to these requested waivers.21 Further, we have determined that the 
projected net increase of $673,838 hi Petitioners' combined annual USF draw22 would not have 
a significant adverse effect on the USF. We therefore find that the three existing criteria for 
granting a study area waiver have been met hi this instance and that the study area waiver 
requests should be granted.
17 GTE Letter, supra note 2, Attachment 3.
11 Joint Petition, at 13-14.
19 AT&T Comments, at 3-5.
20 Joint Petition, at 13-15.
21 Nyland Letter, supra note 2, Attachment.
22 See supra note 18 and accompanying text
11481
12. We nonetheless are concerned that Buyers' estimates of the USF impact may 
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 buyers' study areas shall not exceed the 
amounts specified in their waiver petitions. Apparently referring to that Bureau policy, 
Petitioners submit a number of arguments against the imposition of limits on Buyers' USF draws.23
13. First, Petitioners argue that it would be inappropriate for Buyers' future USF 
draws to be restricted to current estimates because Buyers cannot reasonably be expected to 
anticipate all future upgrades that may be required in the transferred exchanges.24 We recognize 
that Buyers' estimates may be inaccurate. We have found that, even in a period of a few years, 
the USF payments for some LECs have risen by unexpected amounts. 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 Buyers in this 
case.25 However, Buyers' failure to submit accurate USF impact estimates is not, as Petitioners 
suggest, 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 buyers' USF draws 
following exchange transfers.
14. These limits would ensure that the study area waivers will not, due to errors or 
unforeseen circumstances, result in USF impacts which substantially exceed Buyers' 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. This guideline could not be enforced if, as 
Petitioners suggest, we were to confine the limits to the increases in Buyers' USF draws that, 
in Buyers' judgment, are attributable solely to the acquisitions.26 We therefore reject the claim 
that, because Buyers' representations of the USF impacts may be inaccurate, it would be 
unreasonable for Buyers' USF draws to be limited by those representations.
23 Joint Petition, at 13-15.
24 Id
25 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 US West Communications and 
Gila River Telecommunications, Ino, 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 scheduled payment of approximately 
$750,000.
26 Joint Petition, at 15.
11482
15. Second, Petitioners argue that imposed limits would mistakenly continue Sellers' 
association with the transferred exchanges long after the exchanges have been transferred and 
become operationally distinct.27 It is not true, however, that the limits would connect Sellers 
to the exchanges after the transfer. Rather, the limits would connect Buyers' future USF draws 
to their own representations of those draws, ensuring that the study area waivers will not result 
in adverse effects exceeding Buyers' forecasts.
16. Third, Petitioners argue that imposed limits would be contrary to the public 
interest because they would threaten the economic viability of Buyers' proposals and thus would 
disadvantage rural America. Petitioners state that the consummation of these transactions cannot 
be justified if Buyers have no opportunity to recover current costs.28 Petitioners fail to show, 
however, that the limits established pursuant to their own representations would preclude such 
an opportunity. As discussed above, the limits permit Buyers to receive an increase of $923,804 
in their combined annual USF draws. That increase in USF support would be available for 
upgrades even though Petitioners concede that "Buyers are not heavily dependent upon existing 
USF support levels for future planning purposes."29 Petitioners also fail to show that it would 
be burdensome for Buyers to seek an increase in.imposed limits that are based on Buyers' 
representations of their post-transfer USF draws. The waiver condition would permit Buyers' 
USF draws to exceed the limits if, based on Buyers' submission of revised data, the Bureau later 
determined that such an increase is warranted.
17. Fourth, Petitioners argue that it would be arbitrary to require the size of a 
carrier's USF draw to depend, in part, on whether that carrier has been involved in an 
acquisition requiring a study area waiver.30 Similarly, Buyers claim that imposed limits on 
Buyers' USF draws would constitute unfair discrimination against high-cost LECs based on 
changes in ownership. Buyers assert that, because an increase in the support to any USF 
recipient reduces the support available to other recipients, the upgrade plan of any USF 
recipient would have that same result regardless of whether it has been involved in an exchange 
transfer.31 We are not persuaded by that argument.
18. Unlike Petitioners and other similarly situated LECs, the other USF recipients 
have not been involved in transactions that remove high-cost exchanges from large study areas 
and spin them off into smaller study areas, where the exchanges have a greater effect on average 
loop cost. Because USF assistance depends on study area average loop cost, such transactions 
cause any upgrading of outside plant in the transferred exchanges to be supported by a higher
27 Id
» Id.
29 Id at 13.
10 Joint Petition, at 15.
31 Buyers Reply Comments, at 3-4.
11483
level of USF assistance than would occur if the upgrading had been performed instead by the 
sellers.32 As a result, those transactions tend to cause upgrading costs to have a greater negative 
effect on the support available to other USF recipients. Because Buyers are distinguishable in 
this way from LECs that have not been involved in such transactions, we reject the claim that 
limits on Buyers' USF draws would be arbitrary or unfairly discriminatory.
19. Consequently, we agree with AT&T that, in study area waivers of this type, we 
should continue our policy of imposing limits on buyers' USF draws.33 We disagree, however, 
with AT&T's suggestion that the limits in this case should be based on Buyers' estimates of the 
initial post-transfer USF draws, i.e., the projected level of assistance for the first year following 
the transfer.34 We regard the five-year post-upgrade estimates as a more reasonable basis for 
the limits. AT&T correctly observes that we employed the initial post-transfer basis when 
granting a previous waiver request.35 Yet, unlike the instant waiver request which projects 
upgrades over a five-year period, that earlier waiver request projected upgrades over an eight- 
year period. We consider the USF impact estimates more reliable when the forecast period is 
no longer than five years. Moreover, unlike the instant waiver request, that earlier request had 
been filed before January 5, 1995 and thus was not subject to the Commission's one-percent 
guideline. As discussed above, the level of Petitioners' estimated USF impact, even after five 
years of planned upgrades, lies within that guideline.
20. In conclusion, we find that the waivers should be subject to the condition that, 
absent explicit approval from the Bureau, the annual USF support provided to Buyers' study 
areas shall not exceed the post-upgrade amounts estimated in the GTE Letter for the five-year 
period following the transfers.36 We note that new USF rules, implementing new statutory
32 An exchange transfer could result in increased USF draws even when average loop cost data do not show 
the exchanges to be high-cost areas when transferred. Because the outside plant and switching facilities in difficult- 
to-serve rural exchanges may consist largely of antiquated facilities serving multi-party lines, the high-cost nature 
of some exchanges may not be evident until upgrades are completed. Hence, if such exchanges were transferred from 
large study areas to small study areas absent any USF limits, the small study areas might exhibit reductions in USF 
assistance initially, to be followed by large increases when upgrades are completed.
33 AT&T Comments, at 2-6.
34 Mats.
35 Id The precedent referred to by AT&T is in an order adopted last year. See US West Communications, 
Inc., Copper Valley Telephone, Inc., Midvale Telephone Exchange, and Table Top Telephone Company, Joint 
Petition for Waiver of the Definition of "Study Area" Contained in Part 3, Appendix-Glossary of the Commission's 
Rules, Memorandum Opinion and Oder, 10 FCC Red 3373, f 16 & nJ3 (Com. Car. Bur. Accounting & Audits Div. 
1995).
36 Buyers estimate mat their post-sale, post-upgrade USF draws will be $880,041 for Alenco Communications, 
Inc.; $480,112 for Cap Rock Telephone Cooperative, Inc.; $2,044,066 for Central Texas Telephone Cooperative, Inc.; 
$632,666 for Ganado Telephone Co., Inc.; $2,219,416 for Guadalupe Valley Telephone Cooperative, Inc.; $689,559 
for Mid-Plains Rural Telephone Cooperative, Inc.; and $1,031,005 for Peoples Telephone Cooperative, Inc. GTE
11484
mandates, are likely to alter the distribution of USF support to high-cost areas and require us 
to revisit these issues following implementation of the 1996 Act.37
PRICE CAPS WAIVER
21. Background. Section 61.41(c)(2) of the Commission's rules provides that, when 
a non-price cap company acquires a price cap company, the acquiring company-and any LEG 
with which it is affiliated-shall become subject to price cap regulation within a year of the 
transaction.38 The Commission stated that this "all-or-nothing" rule applies not only to the 
acquisition of an entire LEC but also to the acquisition of part of a study area.39 Hence, under 
this rule, Buyers' acquisition of Sellers' 16 exchanges obligates Buyers to become subject to 
price cap regulation instead of rate-of-return regulation.
'-2. The Commission explained mat the all-or-nothing rule is intended to address two 
concerns it has regarding mergers and acquisitions involving price cap LECs. The first concern 
is that, in the absence of the HL . a company 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, i.e.. 
without triggering the sharing mechanism. The second concern is that, absent the rule, a LEC 
may attempt to "game the system" by switching back and form between rate-of-return regulation 
and price cap regulation. The Commission cited, as an example, the incentive a price cap LEC
Letter, supra note 2, Attachment 4. We note that these study ana waivers also are subject to die condition that, if 
die selling LEC is a price cap carrier selling a high-cost portion of its operations, it shall make a downward 
exogenous adjustment to its Price Cap Index to reflect the change in its study area boundaries. See Price Cap 
Performance Review for Local Exchange Carriers, First Report and Order, 10 FCC Red 8962, ft 328,330 (1995) 
(LEC Price Cap Review Order). Under that requirement, Contel and GTE must reduce the Price Cap Indices for 
their Texas study areas if die changes in study area boundaries reduce die cost bases for those indices. The Price Cap 
Indices, which are die cost indices on which price-capped rates are based, are calculated pursuant to a formula 
specified in die Commission's rules for price cap LECs. See 47 CJFJL § 61.45.
17 See discussion supra paragraph 6.
" 47 CJJL § 61.41(c). See Policy and Rules Concerning Rates for Dominant C jiers, 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), 
affdsub nom. National Rural Telecom Ass'n v. FCC, 988 FJd 174 (D.C. Cir. 1993), petitions for further recon. 
dismissed, 6 FCC Red 7482 (1991), farther modification on recon., Amendments of Part 69 of the Commission's 
Rules Relating to me 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 Rulemaking, 6 FCC Red 4524 (1991) (ONA Part 69 Order), farther recon., Memorandum 
Opinion and Order on Second Further Reconsideration, 7 FCC Red 5235 (1992).
19 The Commission explained diat, if diese two types of acquisitions were not treated die same under the all-or- 
nothing rule, a LEC could avoid me rule by selling all but one of its exchanges. See LEC Price Cap Reconsideration 
Order, supra note 38, at 2706.
11485
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 caps, 
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 caps regulation, because rates would not fall in the manner intended under price cap 
regulation.40
23. 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 41 Such a waiver would not 
be granted unconditionally, however. Rather, similar to certain study area waivers,42 waivers 
of the all-or-nothing rule would be granted subject to the condition that the selling price cap LEG 
shall make a downward exogenous adjustment to its Price Cap Index to reflect the change in its 
study area. That adjustment is needed to remove the effects of the transferred exchanges from 
price-capped rates that have been based, in whole or in part, upon the inclusion .of those 
exchanges in the study areas subject to price cap regulation.43
  24. Petition. Buyers seek waivers of Section 61.41(c)(2) so they may operate as rate- 
of-retum LECs, rather than price cap LECs, after acquiring the 16 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 
affiliates and gaming of the system, are not at issue in this case.44
25. Discussion. We agree with Petitioners that the Commission's first concern 
underlying the all-or-nothing rule is not applicable in mis case. None of the buyers has an 
incentive to shift costs between price cap and rate-of-return affiliates, because none of these 
companies is seeking to maintain separate affiliates under different systems of regulation. As 
to the Commission's second concern, we find it implausible that Contel and GTE could game 
the system by moving the 16 exchanges back and forth between price caps and rate-of-return 
regulation, because Contel and GTE are selling these exchanges and a reacquisition would 
require a second study area waiver. Moreover, they cannot transfer the exchanges without
40 u.
41 Id
42 See supra note 36.
43 See LEG Price Cap Review Order, supra note 36,1 330.
Joint Petition, at 5-11.
11486
removing the rate-'ncreasing effects of these exchanges from the price-capped rates that have 
been based, in part, upon the inclusion of these exchanges in their Texas study areas.45
26. We therefore find there is good cause to grant Buyers a waiver of the all-or- 
nothing rule to permit them to remain under rate-of-return regulation after acquiring the 16 
exchanges which currently are under price cap regulation. As noted above, these waivers are 
subject tc the condition that Contel and GTE shall make a downward exogenous adjustment to 
then: Price Cap Indices to reflect the removal of these generally high-cost exchanges from their 
Texas study areas. For the present, we will continue to regulate Buyers as rate-of-return 
carriers. Because we are waiving Section 61.41(c)(2), they need not withdraw from the NECA 
pools. We note that, as with any other rate-of-return carriers, Buyers may elect price cap 
regulation in the future if they decide to withdraw from the NECA pools.
IV. ORDERING CLAUSES
27. 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 Alenco Communications, Inc.; Cap Rock Telephone Cooperative, Inc.; 
Central Texas Telephone Cooperative, Inc.; Contel of Texas, Inc.; Ganado Telephone Co., Inc.; 
GTE Southwest Incorporated; Guadalupe Valley Telephone Cooperative, Inc.; Mid-Plains Rural 
Telephone Cooperative, Inc.; and Peoples Telephone Cooperative, Inc., 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 conditions stated in paragraph 20 of mis Order.
28. IT IS FURTHER ORDERED that the Joint Petition of Alenco Communications, 
Inc.; Cap Rock Telephone Cooperative, Inc.; Central Texas Telephone Cooperative, Inc.; 
Ganado Telephone Co., Inc.; Guadalupe Valley Telephone Cooperative, Inc.; Mid-Plains Rural 
Telephone Cooperative, Inc.; and Peoples Telephone Cooperative, Inc., 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 26 of this Order.
29. IT IS FURTHER ORDERED that the National Exchange Carrier Association, Inc. 
shall not distribute USF assistance exceeding the limits imposed in paragraph 20 of this Order.
45 See discussion supra paragraph 23.
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30. IT IS FURTHER ORDERED that this Order is effective immediately upon 
release.
COMMUNICATIONS COMMISSION
Kenneth P. Moran
Chief, Accounting and Audits Division 
Common Carrier Bureau
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