[Federal Register Volume 70, Number 40 (Wednesday, March 2, 2005)]
[Rules and Regulations]
[Pages 10057-10061]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-4018]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 54

[CC Docket No. 96-45; FCC 05-1]


Federal-State Joint Board on Universal Service, National 
Telephone Cooperative Association

AGENCY: Federal Communications Commission.

ACTION: Final rule; petition for reconsideration.

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SUMMARY: In this document, the Commission amends its rules so that 
certain sections do not apply to transfers of telephone exchanges 
between non-rural carriers following the phase-down of interim hold-
harmless support, and the Commission addresses the request to 
reconsider portions of the Commission's order modifying the 
Commission's rules for providing high-cost universal service support 
based on the proposals made by the Rural Task Force by amending its 
rules to provide that rural carriers may receive ``safety valve'' 
support for investment made in the first year of operating acquired 
exchanges.

DATES: Effective April 1, 2005.

FOR FURTHER INFORMATION CONTACT: Katie King, Special Counsel, Wireline 
Competition Bureau, Telecommunications Access Policy Division, (202) 
418-7400, TTY (202) 418-0484.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Order 
and Order on Reconsideration, in CC Docket No. 96-45, FCC 05-1, 
released January 10, 2005. The full text of this document is available 
for public inspection during regular business hours in the FCC 
Reference Center, Room CY-A257, 445 12th Street, SW., Washington, DC 
20554.

I. Introduction

    1. In this Order and Order on Reconsideration, we amend Sec.  
54.305 of the Commission's rules so that it does not apply to transfers 
of exchanges between non-rural carriers after the phase-down of interim 
hold-harmless support, as proposed in the Further Notice of Proposed 
Rulemaking, 65 FR 79047, December 18, 2000. In addition, we address the 
request by the National Telephone Cooperative Association (NTCA) to 
reconsider portions of the Commission's rules adopted in the Rural Task 
Force Order, 66 FR 30080, June 5, 2001. Specifically, we amend our 
rules to provide that rural carriers may receive ``safety valve'' 
support for investment made in the first year of operating acquired 
exchanges. Based on the record before us, these actions better satisfy 
our policy goals of ensuring that acquiring carriers receive sufficient 
high-cost support and preserving the purpose of section 54.305 of 
discouraging carriers from transferring exchanges merely to increase 
their share of high-cost universal service support.

[[Page 10058]]

II. Discussion

    2. We amend Sec.  54.305 of the Commission's rules so that it does 
not apply to transfers of exchanges between non-rural carriers after 
the phase-down of interim hold-harmless support. The Commission adopted 
Sec.  54.305 ``as a stopgap measure to prevent carriers receiving 
support based on the size of their study areas and embedded costs from 
`placing unreasonable reliance upon potential universal service support 
in deciding whether to purchase exchanges[.]' '' The Commission 
anticipated that the rule would no longer be necessary once all 
carriers receive support based on forward-looking economic costs. When 
all non-rural carriers receive support based on forward-looking 
economic costs once the phase-down of interim hold-harmless support is 
complete, we find that the need for Sec.  54.305 will no longer exist 
with regard to transfers between non-rural carriers. Accordingly, after 
the complete phase-down of interim hold-harmless support, Sec.  54.305 
will not be applicable to the sale or transfer of exchanges between 
non-rural carriers.
    3. We agree with NTCA that we should amend Sec.  54.305 of our 
rules to provide that rural carriers that acquire high-cost exchanges 
may receive safety valve support for the investment made in the first 
year of operating the acquired exchanges. We conclude that this 
modification to the existing safety valve mechanism is necessary to 
provide appropriate incentives for rural carriers operating recently 
acquired exchanges to invest in rural infrastructure. Accordingly, we 
amend Sec.  54.305 to provide that the index year expense adjustment 
for purposes of determining safety valve support for the first year of 
operation shall be defined as the seller's expense adjustment for the 
twelve-month period prior to the transfer of the exchanges.
    4. While we continue to believe that Sec.  54.305 serves the 
important purpose of discouraging carriers from transferring exchanges 
merely to increase their share of high-cost support, we are persuaded 
that the current safety valve rules may have the unintended effect of 
discouraging investment in newly acquired exchanges during the first 
year of operation. The current rules not only prevent carriers from 
receiving safety valve support for any investments made in their first 
year of operation, but also may encourage carriers to keep first year 
investment as low as possible in order to maximize safety valve support 
in subsequent years. Because safety valve support is calculated by 
taking fifty percent of the difference between the expense adjustment 
in the index year and the expense adjustment in subsequent years, a 
lower index year expense adjustment would result in more safety valve 
support than a higher index year expense adjustment.
    5. We are persuaded that the current safety valve formula may 
prevent rural carriers that make substantial investment in acquired 
exchanges from receiving the full benefits intended under the safety 
valve mechanism. One commenter notes that state commissions may require 
companies to make needed investments and upgrade facilities as a 
condition of approval of the transfer. If a state commission requires 
investment in the first year, the acquiring carrier may make 
substantial investments to enhance the network infrastructure, but 
would be unable to receive any additional support for that first-year 
investment.
    6. We conclude that making safety valve support available for 
investment made in the first year of operation is more consistent with 
the purpose of the safety valve mechanism to provide additional support 
to rural carriers that acquire high-cost exchanges and make post-
transaction investments to enhance network infrastructure than the 
current rule. Providing safety valve support for first year investment 
will provide the proper incentives, and carriers will not delay 
investment solely because our rules would provide more safety valve 
support in subsequent years. Carriers that make investments in the 
first year of operation will receive safety valve support for the 
investments they make in the acquired exchanges.
    7. We find that NTCA's proposal to use the selling carrier's 
expense adjustment for the index year expense adjustment is a 
reasonable way to calculate safety valve support for the first year. 
Although the Commission previously said that it would be inappropriate 
to rely on the cost data of selling carriers in establishing the index 
year expense adjustment, upon reconsideration, we find that the 
benefits of providing safety valve support for first year investment 
outweigh any risks of using the seller's expense adjustment in this 
limited manner. We agree with NTCA that concerns regarding reliance on 
the seller's cost data are mitigated because the selling carrier's 
expense adjustment would be used only for the first year. We also note 
that the Commission based its concerns on the fact that ``rural 
carriers most often acquire high-cost exchanges from non-rural carriers 
operating in large study areas with lower average costs.'' Because non-
rural support is targeted to high-cost wire centers, however, the 
selling carrier's expense adjustment for transferred high-cost 
exchanges will be higher than the average support per line in the non-
rural study area.
    8. We disagree with commenters that claim that this limited use of 
the seller's expense adjustment to provide safety valve support for 
investment in the first year of operating an acquired exchange would 
create a ``substantial risk that the acquiring carrier would receive 
more support than necessary,'' and would ``drive up the price of the 
exchange.'' Section 54.305 will continue to limit the acquiring 
carrier's support to the per line amount the selling carrier received 
and the additional safety valve support for post-acquisition 
investment, which is limited to fifty percent of the difference between 
the index year and subsequent year expense adjustments. Such limitation 
effectively prevents the acquiring carrier from receiving more support 
than necessary. Moreover, the total amount of safety valve support 
available to all eligible study areas is limited to no more than five 
percent of rural incumbent local exchange carrier support available 
from the annual high-cost loop fund. We do not believe that the 
additional safety valve support provided in the first year will 
encourage carriers to transfer exchanges merely to increase their share 
of high-cost support.
    9. Moreover, we find that NTCA's proposal to use the selling 
carrier's expense adjustment for the index year expense adjustment is 
an administratively efficient way to calculate safety valve support for 
the first year and preferable to other proposed alternatives. Using the 
selling carrier's expense adjustment prior to the sale will not impose 
any additional filing requirements on carriers and should be readily 
available from the Universal Service Administrative Company (USAC).
    10. In response to AT&T's argument that it is not appropriate to 
use the seller's expense data because non-rural carriers report their 
expenses at the study area level, NTCA proposed an alternative method 
of calculating safety valve support. Specifically, NTCA suggests that 
the methodologies used to adjust the rate bases of regulated rate of 
return companies after a sale could be used to determine the rate base 
of the plant sold, and this amount could be used to determine safety 
valve support. We find that this alternative would impose considerable 
administrative burdens on the Commission. Rural carriers most often 
acquire high-cost exchanges from price-cap regulated non-rural carriers 
that are not likely to be

[[Page 10059]]

regulated as rate-of-return carriers by the state commission. Many 
states do not regulate the rates of small rural carriers. If the 
Commission had to determine the rate base of the sold exchanges, it 
would have to engage in a lengthy process of verifying the 
reasonableness of the companies' cost allocations, unless it simply 
accepted the data the companies provided at face value. It also is not 
clear that using the seller's embedded costs to estimate the index year 
expense adjustment would be preferable to using the seller's actual 
expense adjustment, even if the information were readily available and 
verifiable. The expense adjustment for most non-rural carriers is based 
on forward-looking economic cost as estimated by the Commission's 
universal service model. Although some non-rural carriers received 
hold-harmless support based on embedded costs, the support was targeted 
to high-cost wire centers based on the model's cost estimates. Safety 
valve support is designed to provide support in addition to that 
``transferred'' from the seller pursuant to Sec.  54.305; it is more 
appropriate to use the seller's actual expense adjustment to determine 
safety valve support for the first year than to use an estimate of the 
what the seller's embedded cost support may have been under rules that 
are no longer applicable to non-rural carriers.
    11. Our action does not modify the existing safety valve mechanism 
as set forth in the Rural Task Force Order, 66 FR 30080, June 5, 2001, 
for support beginning in an acquiring carrier's second year of 
operation. For the second year of operation, the acquiring carrier will 
use its first-year costs to determine a new index year expense 
adjustment, and from its second year onwards will receive 50 percent of 
the differential between its new index year expense adjustment and 
subsequent year expense adjustments, as per the current safety valve 
mechanism. In addition, the total amount of safety valve support 
available to all eligible study areas will continue be limited to no 
more than five percent of rural incumbent local exchange carrier 
support available from the annual high-cost loop fund. To the extent 
that rural carriers receive less than the indexed cap on the high-cost 
loop fund, the five percent cap on the safety valve mechanism shall 
continue to be based on the lesser amount. In effect, we conclude that 
the existing safety valve mechanism for acquiring carriers should be 
preserved and shall function as before, with the sole modification 
being that rural acquiring carriers can receive safety valve support in 
their first year of operation, as set forth in this order.

III. Procedural Matters

A. Paperwork Reduction Act

    12. This Order does not contain new or modified information 
collection requirements subject to the Paperwork Reduction Act of 1995 
(PRA), Public Law 104-13. In addition, therefore, it does not contain 
any new or modified ``information collection burden for small 
businesses with fewer than 25 employees,'' pursuant to the Small 
Business Paperwork Relief Act of 2002, Pub. L. 107-198, see 44 U.S.C. 
3506(c)(4).

B. Supplemental Final Regulatory Flexibility Analysis

    13. In compliance with the Regulatory Flexibility Act (RFA), this 
Supplemental Final Regulatory Flexibility Analysis (Supplemental FRFA) 
supplements the Final Regulatory Flexibility Analysis (FRFA) included 
in the Rural Task Force Order, to the extent that changes to that Order 
adopted here on reconsideration require changes in the conclusions 
reached in the FRFA. As required by the RFA, that previous FRFA was 
preceded by an Initial Regulatory Flexibility Analysis (IRFA) 
incorporated in the Further Notice of Proposed Rulemaking, which sought 
public comment on the proposals in the Further Notice.
1. Need for, and Objective of, the Order
    14. Section 254 of the Communications Act of 1934, as amended by 
the 1996 Act, requires the Commission to promulgate rules to preserve 
and advance universal service support. In the Rural Task Force Order, 
the Commission modified Sec.  54.305 of the Commission's rules to 
provide safety valve support to rural carriers that make substantial 
investment after acquiring exchanges. For purposes of determining a 
rural carrier's safety valve support, the index year expense adjustment 
was defined as the high-cost loop support expense adjustment for the 
acquired exchanges calculated at the end of the company's first year of 
operating the exchanges. In this Order, we amend Sec.  54.305 of the 
Commission's rules to provide that rural carriers may receive safety 
valve support for investment made in the first year of operating 
acquired exchanges.
2. Summary of Significant Issues Raised by the Public
    15. No petition for reconsideration was submitted directly in 
response to the previous FRFA. On reconsideration, however, NTCA argued 
that reconsideration of Sec.  54.305 of the Commission's rules was 
needed to create the proper incentive for rural carriers to invest in 
acquired exchanges in the first year after acquisition. NTCA proposed 
that the selling carrier's expense adjustment at the time of the sale 
be used as the index year expense adjustment to determine safety valve 
support for the first year of operation of the acquired exchanges.
3. Description and Estimate of the Number of Small Entities to Which 
This Order Will Apply
    16. The RFA requires an agency to describe any significant 
alternatives that it has considered in developing its approach, which 
may include the following four alternatives (among others): ``(1) The 
establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance and reporting requirements under the rule for such small 
entities; (3) the use of performance rather than design standards; and 
(4) an exemption from coverage of the rule, or any part thereof, for 
such small entities.''
    17. In the FRFA at paragraphs 218-229 of the Rural Task Force 
Order, we described and estimated the number of small entities that 
would be affected by the new universal service rules for rural 
carriers. These entities consisted of local exchange carriers, 
competitive access providers, cellular licensees, broadband personal 
communications service (PCS), rural radiotelephone service specialized 
mobile radio (SMR), fixed microwave services, and 39 GHz licensees. The 
rule amendment adopted herein may apply to the same entities affected 
by the rules adopted in that order. We therefore incorporate by 
reference paragraphs 218-229 of the Rural Task Force Order.
4. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements
    18. The rule amendment adopted in this Order contains no new 
reporting, recordkeeping, or other compliance requirements.
5. Steps Taken To Minimize the Significant Economic Impact on Small 
Entities, and Significant Alternatives Considered
    19. In the Rural Task Force Order, we described the steps taken to 
minimize the significant economic impact on small entities consistent 
with the stated objectives associated with the adopted plan for 
providing high-cost support to rural carriers. Because many of the same

[[Page 10060]]

issues are presented in this Order, we incorporate by reference 
paragraphs 233-235 of the Rural Task Force Order. In this Order, we 
amend Sec.  54.305 of our rules consistent with the intent of the 
Commission in adopting the safety valve mechanism to provide additional 
support to rural carriers that make substantial investment after 
acquiring exchanges. The adopted rule, however, may have prevented 
rural carriers that make substantial investment in acquired exchanges 
from receiving the full benefits intended under the safety valve 
mechanism. As discussed above, the alternative option of denying the 
request for reconsideration on this issue was considered and deemed to 
be inconsistent with Commission's intent in adopting the safety valve 
mechanism.
6. Report to Congress
    20. The Commission will send a copy of this Order, including this 
Supplemental FRFA, in a report to be sent to Congress pursuant to the 
Congressional Review Act, see 5 U.S.C. 801(a)(1)(A). In addition, the 
Commission will send a copy of this Order, including the Supplemental 
FRFA, to the Chief Counsel for Advocacy of the Small Business 
Administration. A copy of the Order and Supplemental FRFA (or summaries 
thereof) will also be published in the Federal Register. See 5 U.S.C. 
604(b).

IV. Ordering Clauses

    21. Pursuant to the authority contained in sections 1, 4(i), 4(j), 
214, and 254 of the Communications Act of 1934, as amended, 47 U.S.C 
151, 154(i), 154(j), 214, and 254, and 1.425 of the Commission's rules, 
47 CFR 1.425, this Order and Order on Reconsideration is adopted.
    22. Pursuant to the authority contained in sections 1, 4(i), 4(j), 
214, 218-220, 254, and 405 of the Communications Act of 1934, as 
amended, 47 U.S.C. 151, 154(i), 154(j), 214, 218-220, 254, and 405, and 
1.429 of the Commission's rules, 47 CFR 1.429, the petition for 
reconsideration filed by National Telephone Cooperative Association on 
July 5, 2001 is granted in part, to the extent discussed herein.
    23. Part 54 of the Commission's rules, 47 CFR 54.305, is amended, 
as set forth effective April 1, 2005.
    24. The Commission's Consumer and Governmental Affairs Bureau, 
Reference Information Center, shall send a copy of this Order and Order 
on Reconsideration, including the Final Supplemental Regulatory 
Flexibility Analysis, to the Chief Counsel for Advocacy of the Small 
Business Administration.

List of Subjects in 47 CFR part 54

    Reporting and recordkeeping requirements, Telephone.

Federal Communications Commission.
Marlene H. Dortch,
Secretary.

Final Rules

0
Part 54 of Title 47 of the Code of Federal Regulations is amended as 
follows:

PART 54--UNIVERSAL SERVICE

0
1. The authority citation for part 54 continues to read as follows:

    Authority: 47 U.S.C. 1, 4(i), 201, 205, 214 and 254 unless 
otherwise noted.

0
2. Section 54.305 is revised to read as follows:


Sec.  54.305  Sale or transfer of exchanges.

    (a) The provisions of this section are not applicable to the sale 
or transfer of exchanges between non-rural carriers after the complete 
phase-down of interim hold-harmless support, pursuant to Sec.  54.311, 
for the non-rural carriers subject to the transaction.
    (b) Except as provided in paragraph (c) of this section, a carrier 
that acquires telephone exchanges from an unaffiliated carrier shall 
receive universal service support for the acquired exchanges at the 
same per-line support levels for which those exchanges were eligible 
prior to the transfer of the exchanges. If the acquired exchanges are 
incorporated into an existing rural incumbent local exchange carrier 
study area, the rural incumbent local exchange carrier shall maintain 
the costs associated with the acquired exchanges separate from the 
costs associated with its pre-acquisition study area. The transferred 
exchanges may be eligible for safety valve support for loop related 
costs pursuant to paragraph (d) of this section.
    (c) A carrier that has entered into a binding agreement to buy or 
acquire exchanges from an unaffiliated carrier prior to May 7, 1997 
will receive universal service support for the newly acquired lines 
based upon the average cost of all of its lines, both those newly 
acquired and those it had prior to execution of the sales agreement.
    (d) Transferred exchanges in study areas operated by rural 
telephone companies that are subject to the limitations on loop-related 
universal service support in paragraph (b) of this section may be 
eligible for a safety valve loop cost expense adjustment based on the 
difference between the rural incumbent local exchange carrier's index 
year expense adjustment and subsequent year loop cost expense 
adjustments for the acquired exchanges. Safety valve loop cost expense 
adjustments shall only be available to rural incumbent local exchange 
carriers that, in the absence of restrictions on high-cost loop support 
in Sec.  54.305(b), would qualify for high-cost loop support for the 
acquired exchanges under Sec.  36.631 of this chapter.
    (1) For carriers that buy or acquire telephone exchanges on or 
after January 10, 2005 from an unaffiliated carrier, the index year 
expense adjustment for the acquiring carrier's first year of operation 
shall equal the selling carrier's loop-related expense adjustment for 
the transferred exchanges for the 12-month period prior to the transfer 
of the exchanges. At the acquiring carrier's option, the first year of 
operation for the transferred exchanges, for purposes of calculating 
safety valve support, shall commence at the beginning of either the 
first calendar year or the next calendar quarter following the transfer 
of exchanges. For the first year of operation, a loop cost expense 
adjustment, using the costs of the acquired exchanges submitted in 
accordance with Sec. Sec.  36.611 and 36.612 of this chapter, shall be 
calculated pursuant to Sec.  36.631 of this chapter and then compared 
to the index year expense adjustment. Safety valve support for the 
first period of operation will then be calculated pursuant to paragraph 
(d)(3) of this section. The index year expense adjustment for years 
after the first year of operation shall be determined using cost data 
for the first year of operation of the transferred exchanges. Such cost 
data for the first year of operation shall be calculated in accordance 
with Sec. Sec.  36.611, 36.612 and 36.631 of this chapter. For each 
year, ending on the same calendar quarter as the first year of 
operation, a loop cost expense adjustment, using the loop costs of the 
acquired exchanges, shall be submitted and calculated pursuant to 
Sec. Sec.  36.611, 36.612, and 36.631 of this chapter and will be 
compared to the index year expense adjustment. Safety valve support for 
the second year of operation and thereafter will then be calculated 
pursuant to paragraph (d)(3) of this section.
    (2) For carriers that bought or acquired exchanges from an 
unaffiliated carrier before January 10, 2005, and are not subject to 
the exception in paragraph (c) of this section, the index year expense 
adjustment for acquired exchange(s) shall be equal to the rural 
incumbent local exchange carrier's high-cost loop expense adjustment 
for the acquired exchanges calculated for the carrier's first year of 
operation of the

[[Page 10061]]

acquired exchange(s). At the carrier's option, the first year of 
operation of the transferred exchanges shall commence at the beginning 
of either the first calendar year or the next calendar quarter 
following the transfer of exchanges. The index year expense adjustment 
shall be determined using cost data for the acquired exchange(s) 
submitted in accordance with Sec. Sec.  36.611 and 36.612 of this 
chapter and shall be calculated in accordance with Sec.  36.631 of this 
chapter. The index year expense adjustment for rural telephone 
companies that have operated exchanges subject to this section for more 
than a full year on the effective date of this paragraph shall be based 
on loop cost data submitted in accordance with Sec.  36.612 of this 
chapter for the year ending on the nearest calendar quarter following 
the effective date of this paragraph. For each subsequent year, ending 
on the same calendar quarter as the index year, a loop cost expense 
adjustment, using the costs of the acquired exchanges, will be 
calculated pursuant to Sec.  36.631 of this chapter and will be 
compared to the index year expense adjustment. Safety valve support is 
calculated pursuant to paragraph (d)(3) of this section.
    (3) Up to fifty (50) percent of any positive difference between the 
transferred exchanges loop cost expense adjustment and the index year 
expense adjustment will be designated as the transferred exchange's 
safety valve loop cost expense adjustment and will be available in 
addition to the per-line loop-related support transferred from the 
selling carrier to the acquiring carrier pursuant to Sec.  54.305(b). 
In no event shall a study area's safety valve loop cost expense 
adjustment exceed the difference between the carrier's study area loop 
cost expense adjustment calculated pursuant to Sec.  36.631 of this 
chapter and transferred support amounts available to the acquired 
exchange(s) under paragraph (b) of this section. Safety valve support 
shall not transfer with acquired exchanges.
    (e) The sum of the safety valve loop cost expense adjustment for 
all eligible study areas operated by rural telephone companies shall 
not exceed five (5) percent of the total rural incumbent local exchange 
carrier portion of the annual nationwide loop cost expense adjustment 
calculated pursuant to Sec.  36.603 of this chapter. The five (5) 
percent cap on the safety valve mechanism shall be based on the lesser 
of the rural incumbent local exchange carrier portion of the annual 
nationwide loop cost expense adjustment calculated pursuant to Sec.  
36.603 of this chapter or the sum of rural incumbent local exchange 
carrier expense adjustments calculated pursuant to Sec.  36.631 of this 
chapter. The percentage multiplier used to derive study area safety 
valve loop cost expense adjustments for rural telephone companies shall 
be the lesser of fifty (50) percent or a percentage calculated to 
produce the maximum total safety valve loop cost expense adjustment for 
all eligible study areas pursuant to this paragraph. The safety valve 
loop cost expense adjustment of an individual rural incumbent local 
exchange carrier also may be further reduced as described in paragraph 
(d)(3) of this section.
    (f) Once an acquisition is complete, the acquiring rural incumbent 
local exchange carrier shall provide written notice to the 
Administrator that it has acquired access lines that may be eligible 
for safety valve support. Rural telephone companies also shall provide 
written notice to the Administrator defining their index year for those 
years after the first year of operation for purposes of calculating the 
safety valve loop cost expense adjustment.

[FR Doc. 05-4018 Filed 3-1-05; 8:45 am]
BILLING CODE 6712-01-P