**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | *  | CC Docket No. 96-45          |
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| Federal-State Joint Board on     | ** |                              |
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| Universal Service                | *  |                              |
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| National Telephone Cooperative   | ** |                              |
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| Petition for Reconsideration     | *) |                              |
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**ORDER AND ORDER ON RECONSIDERATION**

**Adopted: January 4, 2005 Released: January 10, 2005**

By the Commission:

# introduction

1.  In this Order and Order on Reconsideration, we amend section 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, and we grant a request by the National
    Telephone Cooperative Association (NTCA) to provide that rural
    carriers may receive "safety valve" support for investment made in
    the first year of operating acquired exchanges.[^1] 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.

# background

2.  *[Section 54.305]{.underline}.* Section 54.305 of the Commission\'s
    rules provides that a carrier acquiring exchanges from an
    unaffiliated carrier shall receive the same per-line levels of
    high-cost universal service support for which the acquired exchanges
    were eligible prior to their transfer.[^2] Section 54.305 was
    adopted in the *Universal Service First Report and Order* as an
    interim measure aimed at discouraging carriers from transferring
    exchanges merely to increase their share of high-cost universal
    service support.[^3] The Commission was concerned that, while
    support is calculated for carriers based on separate rural and
    non-rural mechanisms, potential universal service payments may
    unduly influence a carrier's decision to purchase exchanges from
    other carriers.[^4]

3.  When the Commission adopted the forward-looking mechanism for
    non-rural carriers, it also adopted an interim hold-harmless
    provision to ensure that no sudden or undue disruption in consumer
    rates occurs during the transition to the forward-looking
    mechanism.[^5] The Commission subsequently adopted measures
    requiring that interim hold-harmless support be phased down for
    non-rural carriers beginning January 1, 2001.[^6] Interim
    hold-harmless support transferred to non-rural carriers pursuant to
    section 54.305 is also phased down, but interim hold-harmless
    support transferred to rural carriers is not.[^7] The Commission
    sought comment on whether to continue to apply section 54.305 of its
    rules to transfers of exchanges between non-rural carriers following
    the phase-down of hold harmless support.[^8] When the Commission
    sought comment on this rule change, it indicated a strong likelihood
    that it would adopt the proposed change. [^9] No parties filed
    comments opposing this proposed rule change.[^10]

4.  In the *Rural Task Force Order*, the Commission found that section
    54.305 should be retained, but modified it to provide safety valve
    support to rural carriers that make substantial investment after
    acquiring exchanges.[^11] While the Commission reiterated its
    support for section 54.305's intended purpose of discouraging
    carriers from transferring exchanges merely to increase their share
    of high-cost universal service support, the Commission also
    recognized that section 54.305 may have the unintended consequence
    of discouraging rural carriers from acquiring high-cost exchanges
    from carriers with low average costs and preventing rural carriers
    from receiving support for new investments in recently-acquired
    high-cost exchanges.[^12]

5.  Specifically, the Commission found that safety valve support should
    be provided for up to 50 percent of any positive difference between
    the rural incumbent local exchange carrier's index year expense
    adjustment for the acquired exchanges and subsequent year expense
    adjustments.[^13] The Commission further found that, for purposes of
    determining a rural carrier's safety valve support, the index year
    expense adjustment shall be 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.[^14] The
    total 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.[^15]

6.  The Commission declined to define the index year expense adjustment
    as prior to the end of an acquiring carrier's first year of
    operations of the acquired exchanges.[^16] Because rural carriers
    most often acquire high-cost exchanges from non-rural carriers
    operating in large study areas with lower average costs, the
    Commission concluded that it would be inappropriate for acquiring
    carriers to rely on the cost data of selling carriers in
    establishing the index year expense adjustment.[^17] The Commission
    also stated that establishing the index year expense adjustment
    prior to the end of acquiring carriers' first year of operations
    also would result in additional filing requirements beyond those
    included in sections 36.611 and 36.612 of the Commission's
    rules.[^18]

7.  *[NTCA's Petition for Reconsideration]{.underline}*. On July 5,
    2001, NTCA filed a petition for reconsideration in response to the
    *Rural Task Force Order*.[^19] Among other things, NTCA requested
    that the Commission further amend its rules to provide safety valve
    support for the first year of operation of acquired exchanges.[^20]
    NTCA argues that because acquiring carriers must wait until the end
    of their first year of operation to establish their index year
    expense adjustment and begin receiving safety valve support, the
    safety valve rules create a "considerable disincentive" for rural
    carriers to invest in that first year.[^21] NTCA asserts that this
    has an adverse effect on both consumers and rural carriers, because
    carriers operating acquired exchanges frequently make substantial
    investments in the first year of operation in an effort to upgrade
    old and inefficient equipment, and the first year after acquisition
    is the most significant year for the acquiring carrier to establish
    a good working relationship with consumers in the acquired
    exchange.[^22] NTCA claims that, "\[w\]ithout sufficient universal
    service support to assist rural carriers during the first year to
    implement necessary upgrades to acquired exchanges, the acquiring
    carrier's first year of operation can result in continued poor
    service and customer disdain."[^23]

8.  NTCA's petition requests that the Commission amend its rules to
    permit carriers to receive safety valve support for the first year
    of operation of acquired exchanges. NTCA proposes 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.[^24] In
    subsequent years, the index year expense adjustment would be the
    acquiring carrier's expense adjustment calculated at the end of the
    company's first year of operating the acquired exchanges and safety
    valve support would be calculated the same as it is calculated under
    the current rules.[^25] NTCA asserts that this would create the
    proper incentive for rural carriers to invest in the acquired
    exchanges without delay and provide consumers with improved service
    within the first year after acquisition. NTCA argues that the
    Commission's concerns regarding the inappropriateness of acquiring
    carriers relying on the cost data of selling carriers to establish
    the index year expense adjustment would be mitigated significantly
    because the selling carrier's expense adjustment would be used for
    determining the safety valve support only for the first year.[^26]

# discussion

9.  We amend section 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.[^27] The Commission
    adopted section 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\[.\]'"[^28] The Commission anticipated that the rule would
    no longer be necessary once all carriers receive support based on
    forward-looking economic costs.[^29] 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 section 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, section 54.305
    will not be applicable to the sale or transfer of exchanges between
    non-rural carriers.

10. We agree with NTCA that we should amend section 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 section 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.

11. While we continue to believe that section 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.[^30] 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.[^31]
    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.

12. 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.[^32] 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.

13. 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.[^33] 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.

14. 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.[^34] 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."[^35] 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.[^36]

15. 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,"[^37] and would "drive up the price of
    the exchange."[^38] 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.[^39] 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.

16. 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.[^40]
    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).[^41]

17. 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,[^42] 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.[^43] 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 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.[^44] 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 section 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.

18. Our action today does not modify the existing safety valve mechanism
    as set forth in the *Rural Task Force Order* 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.[^45] 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.

# procedural matters

## Paperwork Reduction Act

19. The action contained herein has been analyzed with respect to the
    Paperwork Reduction Act of 1995 (PRA) and found to impose no new or
    modified reporting and/or recordkeeping requirements or burdens on
    the public.

## Supplemental Final Regulatory Flexibility Analysis

20. In compliance with the Regulatory Flexibility Act (RFA),[^46] this
    Supplemental Final Regulatory Flexibility Analysis (Supplemental
    FRFA) supplements the Final Regulatory Flexibility Analysis (FRFA)
    included in the *Rural Task Force Order*,[^47] 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,[^48] 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.[^49]

### Need for, and Objective of, the Order

21. 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.[^50] In the *Rural Task Force
    Order*, the Commission modified section 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 section 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.

### Summary of Significant Issues Raised by the Public

22. No petition for reconsideration was submitted directly in response
    to the previous FRFA. On reconsideration, however, NTCA argued that
    reconsideration of section 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.

### Description and Estimate of the Number of Small Entities to Which this Order Will Apply

23. 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."[^51]

24. 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*.

### Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements

25. The rule amendment adopted in this Order contains no new reporting,
    recordkeeping, or other compliance requirements.

### Steps Taken to Minimize the Significant Economic Impact on Small Entities, and Significant Alternatives Considered

26. 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 issues are presented in this Order, we incorporate by
    reference paragraphs 233-235 of the *Rural Task Force Order*.[^52]
    In this Order, we amend section 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,[^53]
    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.

### Report to Congress

27. 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).

# ordering clauses

28. Accordingly, IT IS ORDERED that, 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
    section 1.425 of the Commission's rules, 47 C.F.R. § 1.425, this
    ORDER is ADOPTED.

29. IT IS FURTHER ORDERED that, 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 section 1.429 of the
    Commission's rules, 47 C.F.R. § 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.

30. IT IS FURTHER ORDERED that Part 54 of the Commission's rules, 47
    C.F.R. Part 54, IS AMENDED as set forth in Appendix A attached
    hereto, effective thirty (30) days after publication in the Federal
    Register.

31. IT IS FURTHER ORDERED that the Commission's Consumer and
    Governmental Affairs Bureau, Reference Information Center, SHALL
    SEND a copy of this Order, including the Final Supplemental
    Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy
    of the Small Business Administration.

    FEDERAL COMMUNICATIONS COMMISSION

    Marlene H. Dortch

    Secretary

APPENDIX

FINAL RULES

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

**PART 54 --UNIVERSAL SERVICE**

**Subpart D---Universal Service Support for High Cost Areas**

1\. Section 54.305 is amended by revising paragraphs (a), (b), (c), (d),
and (e), and (f) to read as follows:

**§ 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 section 54.311
of this part, 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 § 54.305(b),
would qualify for high-cost loop support for the acquired exchanges
under § 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 §§ 36.611 and 36.612 of this chapter, shall be
calculated pursuant to § 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 §§
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 §§ 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 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 §§ 36.611 and 36.612 of this
chapter and shall be calculated in accordance with § 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 § 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 § 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 § 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 § 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 § 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 § 36.603 of this
chapter or the sum of rural incumbent local exchange carrier expense
adjustments calculated pursuant to § 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.

[^1]: *See* 47 C.F.R. § 54.305; National Telephone Cooperative
    Association, Petition for Reconsideration and Clarification; CC
    Docket Nos. 96-46, 00-256, filed July 5, 2001 (NTCA Petition). The
    Commission adopted the safety valve support mechanism in the *Rural
    Task Force Order*. *See Federal-State Joint Board on Universal
    Service; Multi- Association Group (MAG) Plan for Regulation of
    Interstate Services of Non-Price Cap Incumbent Local Exchange
    Carriers and Interexchange Carriers*, Fourteenth Report and Order,
    Twenty-Second Order on Reconsideration, and Further Notice of
    Proposed Rulemaking in CC Docket No. 96-45, and Report and Order in
    CC Docket No. 00-256, 16 FCC Rcd 11244,11281-93, paras. 91-119
    (2001), as corrected by Errata, CC Docket Nos. 96-45, 00-256 (Acc.
    Pol. Div. rel. June 1, 2001) (*Rural Task Force Order*).

[^2]: 47 C.F.R. § 54.305. For example, if a rural carrier purchases an
    exchange from a non-rural carrier that receives support based on the
    Commission\'s high-cost support mechanism for non-rural carriers the
    loops of the acquired exchange shall receive the same per-line
    support as calculated under the non-rural mechanism, regardless of
    the support the rural carrier purchasing the exchange may receive
    for any other exchanges. The mechanism for non-rural carriers
    directs support to carriers based on the forward-looking economic
    cost of operating a given exchange. *See* 47 C.F.R. § 54.309. Rural
    carriers, on the other hand, receive high-cost loop support based on
    the extent to which their reported average cost per loop exceeds 115
    percent of the nationwide average cost per loop. See 47 C.F.R. §§
    36.601-36.631.

[^3]: *See Federal-State Joint Board on Universal Service,* CC Docket
    No. 96- 45, Report and Order, 12 FCC Rcd 8776, 8942-43 (1997)
    (*Universal Service First Report and Order*), as corrected by
    Federal-State Joint Board on Universal Service, Errata, CC Docket
    No. 96-45, FCC 97-157 (rel. June 4, 1997*), affirmed in part,
    reversed in part and remanded in part sub nom. Texas Office of
    Public Utility Counsel v. FCC*, 183 F.3d 393 (5th Cir. 1999), *cert.
    denied*, 530 U.S. 1210 (2000), *cert. dismissed*, 531 U.S. 975
    (2000).

[^4]: *See Universal Service First Report and Order,* 12 FCC Rcd at
    8942-43 para. 308.

[^5]: *Federal-State Joint Board on Universal Service*, Ninth Report and
    Order, 14 FCC Rcd 20432, 20473, paras. 79 (*Ninth Report and
    Order*), *remanded*, *Qwest Corp. v. FCC*, 258 F.3d 1191 (10th Cir.
    2001) (*Qwest*); *Federal-State Joint Board on Universal* Service,
    Order on Remand, Further Notice of Proposed Rulemaking, and
    Memorandum Opinion and Order, CC Docket 96-45, 18 FCC Rcd 22559
    (2003) (*Tenth Circuit Remand Order*), *appeal pending sub nom.*
    *Qwest Communications International Inc. v. FCC & USA*, Tenth Cir.
    No. 03-9617; *SBC Communications Inc. v. FCC & USA*, Tenth Cir. No.
    04-9518; and *Vermont Public Service Board v. FCC & USA,* Tenth Cir.
    No. 04-9519.

[^6]: *See Federal-State Joint Board on Universal Service*, Thirteenth
    Report and Order and Further Notice of Proposed Rulemaking, CC
    Docket No. 96-45, 15 FCC 24422 (2000) (*Thirteenth Report and
    Order*). Specifically, the Commission determined that interim
    hold-harmless support, excluding long term support (LTS), would be
    phased down beginning January 1, 2001, through annual \$1.00
    reductions in each carrier's average monthly, per-line support until
    that support is eliminated. *See id.* at 24426, 24428, paras. 9, 12.
    The Commission consolidated LTS into Interstate Common Line Support
    (ICLS) and eliminated LTS as a distinct mechanism, effective July 1,
    2004. *See Multi-Association Group (MAG) Plan for Regulation of
    Interstate Services of Non-Price Cap Incumbent Local Exchange
    Carriers and Interexchange Carriers*, CC Docket No. 00-256,
    *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Report and Order and Second Further Notice of Proposed
    Rulemaking, 19 FCC Rcd 4122, 4150-53 paras. 61-67 (2004), as
    corrected by Errata, CC Docket Nos. 96-45, 00-256, 19 FCC Rcd 6872
    (Pricing Pol. Div. 2004).

[^7]: The Commission adopted the Joint Board's recommendation not to
    phase down interim hold-harmless support for exchanges transferred
    to rural carriers until it reexamines section 54.305 or until rural
    high-cost reform is complete. *See* *Thirteenth Report and Order*,
    15 FCC Rcd at 24433, para. 21.

[^8]: *Id*. at 24434, paras. 23-24

[^9]: *See* *id*. at 24434 para. 24. ("We believe this rule change is
    necessary . . . because application of section 54.305 to transfers
    between non-rural carriers may impede operation of the
    forward-looking mechanism by preventing calculation of the
    forward-looking economic costs of operating a transferred exchange
    on an ongoing, quarterly basis.").

[^10]: *But see* NTCA Comments; Valor Reply Comments (requesting that
    the Commission repeal or amend section 54.305 as it applies to
    transfers of exchanges from non-rural to rural carriers).

[^11]: *See Rural Task Force Order*, 16 FCC Rcd at 11284, para. 97.

[^12]: *See id*. at 11284, para. 97.

[^13]: *See id*. at 11285, para. 98.

[^14]: *See id*. at 11285, para. 99.

[^15]: If the total amount of eligible safety valve support in a given
    year exceeds the five percent cap, the percentage used to calculate
    safety valve loop cost expense adjustment will be reduced until all
    safety valve support fits under the five percent cap. That is, in
    such years, carriers eligible for safety valve support will receive
    less than 50 percent of the positive difference between the
    subsequent year expense adjustment and the index year expense
    adjustment. *See id*. at 11288-89, paras. 107-109.

[^16]: *See id*. at 11287, para. 103.

[^17]: *See id*. at 11287, para. 103.

[^18]: *See id*. at 11287, para. 103; 47 C.F.R. §§ 36.611, 36.612.

[^19]: Although the Commission resolved certain portions of NTCA's
    request for reconsideration of the *Rural Task Force Order* in
    earlier orders, the Commission specifically deferred any resolution
    of NTCA's request to amend its rules to provide safety valve support
    for the first year of investment in acquired exchanges. *See
    Federal-State Joint Board on Universal Service; Multi-Association
    Group (MAG) Plan for Regulation of Interstate Services of Non-Price
    Cap Incumbent Local Exchange Carriers and Interexchange Carriers*,
    CC Docket Nos. 96-45, 00-256, Order on Reconsideration, 17 FCC Rcd
    11472 (2002) (addressing petitions for reconsideration filed by the
    Coalition of Rural Telephone Companies, the Competitive Universal
    Service Coalition, the Illinois Commerce Commission, and NTCA). The
    Commission also corrected on its own motion an issue raised by NTCA.
    *See Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Twenty-Third Order on Reconsideration, 16 FC Rcd 14097 (2001)
    (correcting calculation of safety net additive support). This order
    fully resolves NTCA's petition.

[^20]: *See* NTCA Petition at 4-8; *supra* note 1.

[^21]: *See id*. at 1.

[^22]: *See id*. at 4.

[^23]: *See id*. at 5.

[^24]: For the first year of operation only, the acquiring carrier's
    first year expense adjustment would be compared to the seller's
    index year expense adjustment to determine any positive difference
    eligible for safety valve support in the acquiring carrier's first
    year of operation. *See id*. at 6.

[^25]: *See id*. at 6.

[^26]: *See id*. at 6-7. NTCA also argues that state regulatory review
    and competitive pressures prevent rural carriers from investing
    unwisely in acquired exchanges. *Id*. at 8.

[^27]: No non-rural carriers received interim hold-harmless high-cost
    loop support for 2004. With the consolidation of LTS into ICLS, no
    carriers will receive interim hold-harmless LTS support in the Third
    Quarter of 2004 or thereafter. *See supra* note Error: Reference
    source not found.

[^28]: *Thirteenth Report and Order*, 15 FCC Rcd 24434, para. 23
    (quoting *First Universal Service Report and Order*, 12 FCC Rcd at
    8942-43, para. 308).

[^29]: *See* *First Universal Service Report and Order*, 12 FCC Rcd at
    8942-43, para. 308 ("We note that, when all carriers receive support
    based on forward-looking economic costs, the level of support will
    not be a primary factor in a carrier's decision to purchase
    exchanges because the carrier's support will not be based on the
    size of the study area nor embedded costs.)."

[^30]: *See* NTCA Petition at 6 ("The proposed rule changes will create
    the proper incentive for rural carriers to invest in the acquired
    exchange without delay and provide consumers living in these . . .
    exchanges with improved service within the first year after
    acquisition."); CenturyTel Comments at 3 ("Although most of the
    rules adopted in the RTF Order encourage rural investment, failure
    to permit acquiring carriers to receive safety valve support for
    first year investment has the effect of discouraging immediate
    post-acquisition investment in newly acquired exchanges.").

[^31]: *See* CenturyTel Comments at 3 ("Moreover, as Legg Mason has
    noted, the safety valve mechanism has the perverse effect of
    inducing carriers to postpone investment until the second year of
    operation in an effort to keep the first year expense adjustment low
    with a more pronounced difference in subsequent years, which will
    yield higher support payments.").

[^32]: *See* CenturyTel Comments at 5 ("Additionally, state commissions
    that are aware of past infrastructure neglect by larger selling
    carriers may request or require companies buying those properties to
    make needed investments, replace switches, deploy broadband, or meet
    higher quality standards. For example, as part of CenturyTel's
    acquisition of several rural exchanges from a large carrier, the
    Wisconsin state commission required CentryTel to replace the
    seller's outdated switches, as one of the conditions of its approval
    of the transfer."). Worldcom claims that "there is no evidence that
    a one-year delay would in any way harm customers in the acquired
    exchanges, particularly since the types of upgrade projects that the
    safety valve mechanism is intended to support are unlikely to be
    planned and engineered to any significant degree prior to the end of
    the first year." Worldcom Comments at 3-4. CenturyTel states,
    however, that a year or more may lapse between the time the seller
    decides to sell the exchanges and the actual closing. *See*
    CenturyTel Comments at 4. This probably would provide time for the
    acquiring carrier to plan upgrades for the first year, particularly
    if they were required as a condition of the sale.

[^33]: *See Rural Task Force Order*, 16 FCC Rcd at11284, para. 97.

[^34]: *See* NTCA Petition at 7 ("The Commission's concerns would
    therefore be mitigated significantly by the fact that the seller's
    cost data, is only used for a first year comparison and consumers
    are provided with immediate relief during the critical first year
    after acquisition."); *see also* CenturyTel Comments at 6
    ("CenturyTel fully supports the NTCA proposal to use the seller's
    costs as an interim baseline to compensate safety valve support
    during the first year following an acquisition of rural \[sic\]
    lines by a rural carrier. Century believes that the limitations that
    NTCA proposes will ameliorate any threat to the universal service
    fund that the use of the seller's costs might otherwise create.").

[^35]: *See Rural Task Force Order*, 16 FCC Rcd at11287, para. 103.

[^36]: *See Ninth Report and Order*, 14 FCC Rcd at 20470-73, 20476-78,
    paras. 68-76, 82-86. In the *Ninth Report and Order*, the Commission
    adopted rules targeting high-cost model support and interim
    hold-harmless support to high-cost wire centers based on the cost
    estimates generated by the Commission's forward-looking cost model.
    *See Federal-State Joint Board on Universal Service, Forward-Looking
    Mechanism for High Cost Support for Non-Rural LECs*, Tenth Report
    and Order, CC Docket Nos. 96-45, 97-160, 14 FCC Rcd 20156 (1999)
    (*Tenth Report and Order*), *affirmed*, *Qwest*, 258 F.3d 1191. The
    court did not remand the targeting rules. *See supra* note Error:
    Reference source not found.

[^37]: Worldcom Comments at 3.

[^38]: AT&T Opposition at 4.

[^39]: *See supra* para. 5.

[^40]: The Commission previously rejected proposals that would permit
    acquiring carriers to rely on projected costs to establish their
    index year expense adjustment, because "\[s\]uch a proposal would
    provide acquiring carriers with incentives to underestimate their
    expenses in the index year in order to maximize future safety valve
    support." *Rural Task Force Order*, 16 FCC at 11287, para. 103.
    Using projected costs also would impose additional administrative
    burdens because support amounts would have to be trued-up. In reply
    comments, NTCA proposed another alternative, which we reject below.
    *See* para. 17

[^41]: In the *Rural Task Force Order*, the Commission stated that
    "\[e\]stablishing the index year expense adjustment prior to the end
    of acquiring carriers' first year of operations also would result in
    additional filing requirements beyond those included in sections
    36.611 and 36.612 of our rules." *Rural Task Force Order*, 16 FCC
    Rcd at 11287, para. 103. This statement refers to the proposal
    rejected by the Commission to rely on projected expenses to
    establish the acquiring carrier's index year expense adjustment.
    Relying on the selling carrier's expense adjustment would not
    require the seller to file any additional information. It is not
    significant that the Commission eliminated the quarterly filing of
    cost data requirement for non-rural carriers in the *Rural Task
    Force Order*, as AT&T suggests. *See* AT&T Opposition at 4 ("Not
    only has the \[*Rural Task Force Order*\] eliminated nonrural LEC
    quarterly reporting of expense data, but such annual reporting as
    does occur is inapposite because nonrural LECs report their expenses
    on a study area level rather than related to the particular
    exchanges that have been sold."). *See Rural Task Force Order*, 16
    FCC Rcd at 11270, para. 59. We are not persuaded by AT&T's claim
    that "NTCA's proposal could not be implemented because it is
    premised on defining the first (index) year expense adjustment as
    the selling carrier's expense adjustment at the time of the sale."
    *See* AT&T Opposition at 4. AT&T argues that we should not use the
    seller's expense adjustment, but offers no reason why we cannot. In
    contrast, the National Exchange Carrier Association (NECA) argues
    that NTCA's proposal is workable and reasonable. *See* NECA Reply
    Comments at 3. We agree. Because non-rural support is targeted to
    wire centers, USAC should be able to easily identify the per-line
    support amounts the seller was receiving for the acquired exchanges.

[^42]: *See* AT&T Opposition at 4. ("Thus, there is no available
    exchange-level expense data that is germane for the property
    sold.").

[^43]: *See* NTCA Reply to Oppositions to Petition for Reconsideration
    (NTCA Reply) at 4-5. NTCA proposes that the difference between the
    revenue requirement for the net plant at the time of sale and the
    revenue requirement for the net plant in service one year later be
    used as the expense adjustment for the first year for calculating
    safety valve support. Safety valve support is calculated by
    comparing expense adjustments, not revenue requirements. If NTCA is
    suggesting that we now use revenue requirements instead of expense
    adjustments to determine safety valve support, we find that this
    would not be appropriate because the revenue requirement includes
    more than the costs associated with loop plant and is recovered
    through rates, as well as universal service support. We address in
    this order why we decline to use the rate base of the plant sold to
    estimate an expense adjustment for the sold plant for purposes of
    determining safety valve support for the first year. NTCA further
    proposes that the expense adjustment for the first year be added to
    existing expense adjustment rules "to continue to capture the
    investments made by the acquiring company in the first year." NTCA
    Reply at 5. We note that this proposal goes beyond NTCA's proposal
    in its petition and would alter the balance the Commission sought in
    retaining section 54.305 of its rules and adding the safety valve
    mechanism.

[^44]: *See* 47 C.F.R. § 36.631(c)-(d); 47 C.F.R. § 54.309.

[^45]: *See supra* para. 5

[^46]: *See* 5 U.S.C. § 604. The RFA, *see* 5 U.S.C. §§ 601-612, has
    been amended by the Contract with America Advancement Act of 1996,
    Pub. L. No. 104-121, 110 Stat. 847 (1996) (CWAAA). Title II of the
    CWAAA is the Small Business Regulatory Enforcement Fairness Act of
    1996 (SBREFA).

[^47]: *Rural Task Force Order*, 16 FCC Rcd at 11327-34, paras. 212-236.

[^48]: 5 U.S.C. § 603.

[^49]: *Federal-State Joint Board on Universal Service*, Further Notice
    of Proposed Rulemaking, CC Docket No. 96-45, 16 FCC Rcd 6141,
    6143-49, paras. 9-29 (2001).

[^50]: 47 U.S.C. § 254.

[^51]: 5 U.S.C. § 603(c)(1) -- (c)(4).

[^52]: *Rural Task Force Order*, 16 FCC Rcd at 11333-34, paras. 233-235.

[^53]: *See supra* paras. 11-15.