# Before the 

# Federal Communications Commission

**Washington, D.C.**

In the Matter of )

)

ATEAC, Inc. )

Alaska Telephone Company ) CCB/CPD No. 00-03

Arctic Slope Telephone Association )

Cooperative, Inc. )

Interior Telephone Company, Inc. )

Mukluk Telephone Company, Inc. )

United-KUC, Inc. )

)

Petition for Waiver of )

Sections 61.41(c) and (d) )

of the Commission's Rules )

**MEMORANDUM OPINION AND ORDER**

**Adopted:** August 16, 2000 **Released:** August 18, 2000

By the Deputy Chief, Common Carrier Bureau:

**I. INTRODUCTION**

Number range level0Number range level1Number range level2Number range
level3Number range level4Number range level5Number range level6Number
range level71. On February 8, 2000, ATEAC, Inc. (ATEAC),[^1] Alaska
Telephone Company (ATC), Arctic Slope Telephone Association Cooperative
Inc. (ASTAC), Interior Telephone Company, Inc. (ITC), Mukluk Telephone,
Inc. (MTC), and United KUC, Inc. (Petitioners, collectively), filed a
petition requesting a waiver of sections 61.41 (c) and (d) of the
Commission's rules. 47 C.F.R. §§ 61.41(c), 61.41(d). Petitioners[^2]
request that we waive the Commission\'s rules in order to allow them to
operate thirteen Alaska telephone exchanges as cost carriers under rate
of return regulation following ATEAC's acquisition of these exchanges
from GTE Alaska, Incorporated (GTEAC), a price cap carrier.[^3] On March
1, 2000, the Common Carrier Bureau (Bureau) released a Public Notice
requesting comment on the Petition.[^4] No comments or reply comments
opposing the Petition were filed in response to the Public Notice. The
Commission received two comments in support of the Petition.[^5] In this
Memorandum Opinion and Order, we grant Petitioners' waiver request.

# II. BACKGROUND

2\. Section 61.41(c)(1) of the Commission\'s rules provides that any
price cap telephone company subject to a merger, acquisition, or similar
transaction shall continue to be subject to price cap regulation
notwithstanding such transaction.[^6] In addition, the Commission\'s
rules provide that when a non-price cap company acquires, merges with,
or otherwise becomes affiliated with a price cap company or any part
thereof, the acquiring company becomes subject to price cap regulation
and must file price cap tariffs within a year.[^7] Section 61.41(d) of
the Commission\'s rules further provides that local exchange carriers
(LECs) that become subject to price cap regulation are not permitted to
withdraw from such regulation.[^8]

3\. On May 20, 1999, GTEA, GTE, and ATEAC entered an asset purchase
agreement for the sale of all thirteen of GTEA's[^9] Alaska exchanges
(approximately 23,796 access lines) to ATEAC. GTEA and GTE are both
price cap carriers. On September 3, 1999, GTEA and ATEAC jointly applied
to the Regulatory Commission of Alaska ("Alaska Commission") for
authorization to transfer GTEA's Certificate of Public Convenience and
Necessity No. 3 for the thirteen exchanges to ATEAC. On December 28,
1999, GTEA filed an application under Section 214(a) of the
Communications Act and section 63.71 of the Commission's rules[^10],
requesting authority to discontinue providing interstate services in
Alaska, effective with the sale of its thirteen Alaska local exchanges
to ATEAC.[^11] The Petitioners filed applications with the Alaska
Commission for authorization to transfer operating assets and state
certificates for the thirteen exchanges from ATEAC to the other
petitioners.[^12] These applications were granted by the Alaska
Commission on July 11, 2000.

4\. The Petitioners state that, with the Alaska Commission's
authorization to transfer the thirteen exchanges from GTEA to ATEAC,
GTEA, GTE, and ATEAC can now close the asset purchase agreement
transaction if the Commission grants GTEA's Section 214(a)
application[^13]. The Petitioners further state that, with the Alaska
Commission's approval of the "drop down" transactions, ownership of the
thirteen exchanges will pass to ATC, ASTAC, ITC, MTC and
United-KUC.[^14] The thirteen exchanges will continue to be included
within the ATEAC study area until Petitioners request and receive a
study area waiver from the Commission to divide the ATEAC Alaska study
area and distribute the exchanges among existing study areas of ATC,
ASTAC, ITC, and MTC and the new study area of United-KUC.[^15]

5\. Petitioners ATC, ASTAC, ITC and MTC are rate of return carriers
(cost carriers). They are Issuing Carriers in the interstate access
tariffs of the National Exchange Carriers Association (NECA) and
participants in NECA's Common Line and Traffic Sensitive pools.
United-KUC is not yet a cost carrier, but wishes to become a cost
carrier, an Issuing Carrier in NECA tariffs, and would participate in
NECA's Common Line and Traffic Sensitive pools. ATEAC states that, if
necessary, it would become a cost carrier, an Issuing Carrier in the
NECA tariffs, and a participant in NECA's Common Line and Traffic
Sensitive pools. Both ATEAC and United-KUC will be eligible to
participate in the NECA tariffs and pools under section 69.601 of the
Commission's rules.[^16]

6\. Petitioners state that ATEAC, its stockholders and their
subsidiaries and affiliates have no common stock ownership or other
corporate affiliations with GTE, GTEA and other GTE subsidiaries and
affiliates[^17]. They also state that there is no overlap in the
respective boards of directors or officers of ATEAC, its stockholders
and their subsidiaries and affiliates, on the one hand, and GTE, GTEA
and other GTE subsidiaries and affiliates, on the other.[^18]

7\. To support its request for a waiver, ATEAC argues that the
transaction involved in this request is essentially identical to the one
involved in a prior decision involving the Maine Telecommunications
Group, in which the Commission granted a price cap waiver.[^19] The
*Maine Waiver* transaction also involved the sale of several exchanges
within a state to an acquisition company comprised of multiple local
exchange carriers operating within the state. The Petitioners state
that, consistent with the circumstances involved in the *Maine Waiver*,
the subject exchanges also will be operated initially by the LECs within
the study area of the acquisition company; pending a grant of the study
area waiver, the acquired exchanges will be distributed among the study
areas of the individual LECs.[^20] In addition, ATEAC argues, in
evaluating requests for waivers of the "all or nothing" rule, the
Commission has generally taken into account the preference of small
carriers for rate of return regulation over price cap regulation.[^21]

8\. Alaska Communications System, Inc.("Alaska") and the National
Telephone Cooperative Association ("NTCA") filed comments supporting a
grant of the waiver. As argued by ATEAC, both commentors state that the
policy justifications behind the section 61.41(c) "all or nothing rule\"
and the section 61.41(d) "permanent choice" rule are inapplicable under
the circumstances surrounding the GTE/GTEA and ATEAC transaction. These
commentors assert that improper cost-shifting between rate of return and
price cap regulated affiliates is not likely to occur because
Petitioners' entire operation will be subject to rate of return
regulation.[^22] Commentors also assert that the arms-length transfer
between GTEA and the Petitioners, two non-affiliated companies, removes
any opportunity for "gaming" the system because GTEA will retain no
ability to bring the exchanges sold to Petitioners back under price
caps.[^23]

9\. In addition, the commentors agree with Petitioners that the proposed
transaction is in the public interest.[^24] Alaska also agrees with
Petitioners that price cap regulation may have an adverse effect on, and
was not intended to be applied to smaller LECs.[^25] Both Alaska and
NTCA favor Petitioners' plan to implement a system that has local
management and is designed to bring enhanced and more responsive service
to the residential and business customers in the thirteen Alaska
exchanges. They also agree with Petitioners that the waiver would
further the Commission's interest in relieving some of the
administrative burdens faced by small telephone companies.[^26]

## III. DISCUSSION

10\. For the reasons discussed below, we find that the Petitioners
demonstrate good cause for waiver of sections 61.41(c) and (d) of our
rules, and that it is in the public interest to grant the Petitioners'
waiver request. Under section 1.3 of the Commission\'s rules, \"\[a\]ny
provision of the rules may be waived by the Commission on its own motion
or on petition if good cause therefor is shown.\"[^27] As interpreted by
the courts, this requires that a petitioner demonstrate that \"special
circumstances warrant a deviation from the general rule and such
deviation will serve the public interest.\"[^28] In this case, we
believe that ATEAC has demonstrated that special circumstances warrant a
waiver of the Commission\'s rules and that a waiver will serve the
public interest.

11\. In the *LEC Price Cap Reconsideration Order*, the Commission
addressed two concerns it had regarding mergers and acquisitions
involving price cap companies. [^29] The first concern was that, in the
absence of the "all or nothing rule," a LEC might attempt to shift costs
from its price cap affiliate to its non-price cap affiliate, allowing
the non-price cap affiliate to charge higher rates to recover its
increased revenue requirement, while increasing the earnings of the
price cap affiliate.[^30] The second concern was that, absent sections
61.41(c) and (d), a LEC may have an incentive to \"game the system\" by
switching back and forth between rate of return regulation and price cap
regulation.[^31] The Commission noted, as an example, the incentive a
price cap company may have to increase earnings by opting out of price
cap regulation, building a large rate base under rate of return
regulation so as to raise rates and then, after returning to price cap
regulation, cutting costs back to an efficient level.[^32] It would not
serve the public interest, the Commission stated, to allow a carrier
alternately to \"fatten up\" under rate of return regulation and \"slim
down\" under price cap regulation, because the rates would not decrease
in the manner intended under price cap regulation.[^33] The Commission
nonetheless recognized that narrow waivers of these rules might be
justified if efficiencies created by the purchase and sale of a few
exchanges were to outweigh the threat of any gaming.[^34]

12\. The Petitioners argue that following completion of the asset
purchase, neither ATEAC, the Alaska corporations by which it is owned
(AP&T/ATC, ASTAC, TelAlaska/ITC/MTC, and United/UUI/United-KUC,) nor
GTE/GTEA will maintain one or more affiliates under price cap
regulation, and one or more affiliates under rate of return
regulation.[^35] Neither ATEAC nor any of the Alaska corporations by
which it is owned will operate under price cap regulation, whereas GTE
and all of its subsidiaries and affiliates will remain under price cap
regulation. The Petitioners argue that, therefore, there is no danger of
improper cost-shifting between price cap and rate of return
affiliates.[^36] We agree. ATEAC's acquisition of the thirteen Alaska
exchanges fails to give rise to the dangers of cost-shifting.

13\. ATEAC also contends that "gaming" is not a concern. ATEAC argues
that the transfer of the thirteen Alaska exchanges is an \"an
arms-length sale,\" by GTEA to the "wholly separate and unrelated ATEAC
(and ATC, ASTAC, ITC, MTC and United-KUC).[^37] ATEAC argues that "there
is no possibility that GTE and its subsidiaries and affiliates will be
able to 'game' the system" by switching ownership back and forth between
rate of return regulation and price cap regulation.[^38] GTE/GTEA and
its subsidiaries will remain under price cap regulation, and the
thirteen Alaska exchanges will be operated by Petitioners, which are
unrelated to, and separate and apart from GTE/GTEA and their
subsidiaries and affiliates, and totally outside of GTE/GTEA's
control.[^39] We are persuaded that "gaming" is not a concern.

14\. We conclude, therefore, that petitioners have established good
cause to support a waiver of our rules, and that the waiver will serve
the public interest. The Commission's concerns over cost shifting and
gaming of the system are not at issue here. The size of ATEAC after
acquisition of the Alaska exchanges will be far smaller than the LECs
for which price cap regulation is mandatory.[^40] The circumstances of
Petitioners' request are substantially similar to those involved in our
decision granting the *Maine Waiver*, and to our decisions in other
cases involving sales of exchanges by price cap carriers to small rate
of return carriers.[^41]

# IV. ORDERING CLAUSES

15\. Accordingly, IT IS ORDERED, pursuant to sections 4(i) and 201 of
the Communications Act of 1934, as amended, 47 U.S.C. §§ 154(i) and 201,
and sections 1.3, 0.91, and 0.291 of the Commission\'s rules, 47 C.F.R.
§§ 1.3, 0.91, and 0.291, that ATEAC, Inc.'s, Alaska

Telephone Company's, Arctic Slope Telephone Association Cooperative,
Inc.'s, Interior Telephone Company, Inc.'s, Mukluk Telephone Company,
Inc.'s, and United-KUC, Inc.'s request for waiver of sections 61.41(c)
and (d) of the Commission\'s rules, 47 C.F.R. §§ 61.41(c) and (d), IS
GRANTED.

FEDERAL COMMUNICATIONS COMMISSION

Mary Beth Richards

Deputy Chief,

Common Carrier Bureau

[^1]: ATEAC is an Alaska corporation which is owned by four Alaska
    Corporations: (1) Alaska Power & Telephone Company ("AP&T"), the
    parent company of ATC which serves fourteen Alaska exchanges
    (approximately 4,523 access lines); (2) ASTAC, a local exchange
    carrier (LEC) which serves eight Alaska exchanges (approximately
    2,367 access lines); (3) TelAlaska, Inc. ("TelAlaska"), the parent
    company of ITC, a local exchange company which serves nine Alaska
    exchanges (approximately 4,777 access lines) and of MTC, local
    exchange carriers which serves twelve Alaska exchanges
    (approximately 1,295 access lines) and (4) United Companies, Inc.
    ("United"), the parent company of United-KUC, a new Alaska local
    exchange carrier, and of United Utilities, Inc.("UUI"), a local
    exchange carrier which serves fifty-seven Alaska exchanges
    (approximately 5,911 access lines). AP&T, ASTAC, TelAlaska and
    United each own 25 percent of ATEAC's issued and outstanding stock.

[^2]: Petitioners note that ATC, ASTAC, ITC, MTC, and UUI qualify as
    "rural telephone companies" under Section 3 (37) of the
    Communications Act of 1934, as amended, 47 U.S.C. §3 (37), and
    section 51.5 of the Commission's rules, 47 C.F.R. § 51.5, and
    further note that United-KUC, a new Alaska local exchange carrier,
    will also qualify as a "rural telephone company" under these two
    provisions. Petition at 2.

[^3]: Petition at 1.

[^4]: ATEAC, Inc. et. al. Petitions for Waiver of Sections 61.41(c) and
    (d) of the Commission\'s Rules, Public Notice, DA 00-441 (rel. March
    1, 2000).

[^5]: Comments of Alaska Communications Systems, Inc., (filed March 24,
    2000) (*Alaska Comments*) and The National Telephone Cooperative
    Association (filed March 24, 2000) (*NTCA Comments*).

[^6]: 47 C.F.R. § 61.41(c)(1).

[^7]: 47 C.F.R. § 61.41(c)(2). *See also Policy and Rules Concerning
    Rates for Dominant Carriers*, Second Report and Order, 5 FCC Rcd
    6786, 6821 (1990) (*LEC Price Cap Order*), *Erratum*, 5 FCC Rcd 7664
    (Com. Car. Bur. 1990), *modified on recon*., *Order on
    Reconsideration*, 6 FCC Rcd 2637 (1991) (*LEC Price Cap
    Reconsideration Order*), *aff\'d sub nom. National Rural Telecom
    Ass\'n v. FCC*, 988 F.2d 174 (D.C. Cir. 1993); *Petitions for
    Further Recon. dismissed*, 6 FCC Rcd 7482 (1991), *further
    modification on recon*., *Amendments of Part 69 of the Commission\'s
    Rules Relating to the Creation of Access Charge Subelements for Open
    Network Architecture, Policy and Rules Concerning Rates for Dominant
    Carriers, Report and Order and Order on Further Reconsideration and
    Supplemental Notice of Proposed Rulemaking*, 6 FCC Rcd 4524 (1991)
    *(ONA Part 69 Order), further recon., Memorandum Opinion and Order
    on Second Further Reconsideration*, 7 FCC Rcd 5235 (1992).

[^8]: 47 C.F.R. § 61.41(d).

[^9]: GTEA, an Alaska corporation, is a wholly owned subsidiary of GTE
    Corporation ("GTE"), a New York corporation.

[^10]: 47 U.S.C. §214(a); 47 C.F.R §63.71.

[^11]: On January 7, 2000, the Commission released a Public Notice
    requesting comments and objections by interested parties.

[^12]: These "drop down" transactions are as follows: (a) six of the
    exchanges, (Haines, Hyder, Klukwan, Metlakatla, Petersburg and
    Wrangell, comprising approximately 7,593 aggregate access lines) are
    to be transferred from ATEAC to ATC (Alaska Commission Docket No.
    U-99-119); (b) one of the exchanges (Barrow, comprising
    approximately 3,693 access lines) is to be transferred from ATEAC to
    ASTAC (Docket No. U-99-120); (c) two of the exchanges (Moose Pass
    and Seward, comprising approximately 4,096 aggregate access lines)
    are to be transferred from ATEAC to ITC (Docket No. U-99-121); (d)
    one of the exchanges (Nome, comprising approximately 3,398 access
    lines) is to be transferred from ATEAC to MTC (Docket No. U-99-122);
    and (e) three of the exchanges (Bethel, McGrath and Unalakleet,
    comprising approximately 5,016 aggregate access lines) are to be
    transferred from ATEAC to United-KUC (Docket No. U-99-123. *See*
    Petition, pp. 3-4.

[^13]: Petition at 4.

[^14]: *Id.*.

[^15]: Petition at 4-5.

[^16]: As assignees of GTEA, a pre-February 8, 1996 incumbent local
    exchange carrier, ATEAC and United-KUC each will qualify as a
    "telephone company" under section 69.2 (hh) of the Commission's
    rules, 47 C.F.R. § 69.2 (hh), and Section 251(h)(1)(B)(ii) of the
    Communications Act, 47 USC § 251(h)(1)(B)(ii). They would,
    therefore, be eligible to participate in the NECA tariffs and pools
    under section 69.601 of the Commission's rules. 47 C.F.R. § 69.601.

[^17]: Petition at 6.

[^18]: Petition at 6.

[^19]: S*ee Maine Telecommunications Group, Inc.*, 9 FCC Rcd 3082 (1994)
    (*Maine Waiver*).

[^20]: *See* Petition at 4-5.

[^21]: Petition at 9 (citing *Maine Telecommunications Group et al.,* 9
    FCC Rcd 3082 (1994); *Minburn Telecommunications, Inc*., 14 FCC Rcd
    14,184 (1999); *US West Communications, Inc. and South Central Utah
    Telephone Association, Inc.*, 9 FCC Rcd 198 (Com. Car. Bur. 1993);
    *US West Communications, Inc. and Triangle Telephone Cooperative
    Association, Inc. et al*., 9 FCC Rcd 202 (Com. Car. Bur. 1993); and
    *US West Communications, Inc. and Nemont Telephone Cooperative
    Inc*., 9 FCC Rcd 721 (Com. Car. Bur. 1994)).

[^22]: Alaska Comments at 2; NTCA Comments at 3.

[^23]: Alaska Comments at 2; NTCA Comments at 3.

[^24]: Alaska Comments at 2; NTCA Comments 3-4.

[^25]: Alaska Comments at 2-3; Petition at 8.

[^26]: *Id.*

[^27]: 47 C.F.R. § 1.3. Sections 0.91 and 0.291 of the Commission\'s
    rules permit the Chief of the Common Carrier Bureau to review such
    petitions for waiver of the Commission\'s rules under delegated
    authority. 47 C.F.R. §§ 0.91 and 0.291.

[^28]: *Northeast Cellular Telephone Co. v. FCC*, 897 F.2d 1164 (D.C.
    Cir. 1990) (citing *Wait Radio v. FCC*, 418 F.2d 1153, 1158 (D.C.
    Cir. 1969), cert. denied, 409 U.S. 1027 (1972).

[^29]: *See LEC Price Cap Reconsideration Order*, 6 FCC Rcd at 2637,
    2706.

[^30]: *Id*.

[^31]: *Id*.

[^32]: *Id*.

[^33]: *Id.*

[^34]: *Id*.

[^35]: Petition at 7.

[^36]: *Id*.

[^37]: Petition at 8.

[^38]: *Id.*.

[^39]: *Id.*

[^40]: In the *LEC Price Cap Order*, the Commission decided that small
    telephone companies would not be required to operate under a
    regulatory regime that was designed largely on the basis of the
    historical performance of the largest LECs. The Commission therefore
    limited the mandatory application of price cap regulation to the
    regional Bell Operating Companies and GTE. *LEC* *Price Cap Order*,
    5 FCC Rcd at 6818-19.

[^41]: *See, e.g., In the Matter of* *Minburn Communications, Inc*., 14
    FCC Rcd 14,184 (1999) (*Minburn*).