**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the matter of                 | *  | WCB/Pricing No. 05-37        |
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| Valor Communications Group, Inc. | ** |                              |
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| Petition for Waiver              | ** |                              |
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**ORDER**

**Adopted: January 31, 2006 Released: January 31, 2006**

By the Chief, Wireline Competition Bureau:

# Introduction

1.  By this Order, we grant New Valor's petition[^1] requesting that the
    Commission waive relevant portions of the Commission's
    "all-or-nothing" rule codified in section 61.41 of the Commission's
    rules.[^2] New Valor will be formed as a result of the merger of
    Valor Communications Group, Inc. ("Valor"), and the wireline
    properties of ALLTEL Holding Corp., a wholly-owned subsidiary of
    ALLTEL Corporation ("ALLTEL").[^3] With this waiver, New Valor will
    be able to continue to operate the ALLTEL and Valor properties under
    the existing regulatory regime applicable to each of the local
    exchange companies, which includes existing waivers under which
    ALLTEL and Valor each hold incumbent local exchange companies --
    some of which operate under price cap regulation and others that
    operate under rate-of-return regulation.[^4] As discussed below, we
    find that grant of the unopposed waiver request would be in the
    public interest, subject to the outcome of the pending review of the
    all-or-nothing rule.[^5]

# Background

2.  Section 61.41 of the Commission's rules, commonly referred to as the
    "all-or-nothing rule," is designed to ensure that all of a carrier's
    study areas and affiliates are subject to a single form of pricing
    regulation -- either price cap regulation or rate-of-return
    regulation. Specifically, the rule provides that, if an individual
    rate-of-return carrier or study area converts to price cap
    regulation, all of its affiliates or study areas also must do so,
    except for those using average schedules.[^6] This section also
    provides that, if a price cap carrier enters into a merger,
    acquisition, or similar transaction, it must continue to operate
    under price cap regulation after the transaction.[^7] In addition,
    when rate-of-return and price cap carriers merge or acquire one
    another, the rate-of-return carrier must convert to price cap
    regulation within one year,[^8] except that rate-of-return carriers
    may bring recently acquired price cap lines back to rate-of-return
    regulation without obtaining a waiver.[^9] The all-or-nothing
    requirements address two concerns the Commission has regarding
    mergers and acquisitions involving price cap and non-price cap
    companies. First, a carrier might attempt to shift costs from its
    price cap affiliates to its non-price cap affiliates.[^10] This
    would allow a non-price cap affiliate to charge higher rates than
    otherwise possible to recover its higher revenue requirement while
    simultaneously increasing profits of a price cap affiliate as a
    result of its cost savings.[^11] Second, a carrier might attempt to
    "game the system" by switching back and forth between rate-of-return
    regulation and price cap regulation.[^12] A rate-of-return carrier
    could build a large rate base in order to raise rates, and then
    return to price cap regulation and reduce costs to an efficient
    level, thereby maximizing its profits at the expense of
    ratepayers.[^13]

3.  The all-or-nothing rule is under consideration in the *MAG Second
    Further Notice*.[^14] In the *Notice*, the Commission stated that it
    was looking at the issues surrounding alternative regulation plans
    for rate-of-return carriers and the modification or retention of the
    all-or-nothing rule as it relates to the ability of rate-of-return
    carriers to elect to adopt an alternative regulation plan for only
    some of its study areas.[^15] The Commission tentatively concluded
    that any alternative regulation plan would be optional on the part
    of the rate-of-return carrier and would permit a rate-of-return
    carrier to elect participation in the alternative plan by study
    area.[^16] To provide a degree of certainty to mergers and
    acquisitions, the Commission also tentatively concluded that the
    CALLS plan, the access charge and universal service plan applicable
    to price cap carriers, was not designed to be open to new carriers
    or study areas.[^17] Finally, addressing the outstanding waivers of
    the all-or-nothing rule, the Commission tentatively concluded that,
    whatever final rule it adopts with respect to the election of
    alternative regulation on a study area basis, that rule should also
    apply when carriers under different regulatory plans come together
    by merger or acquisition.[^18] The Commission accordingly determined
    that all outstanding interim waivers of the all-or-nothing rule that
    depend on the Commission's review of the all-or-nothing rule shall
    continue in effect until the Commission issues a final order.[^19]

# discussion

4.  Generally, the Commission\'s rules may be waived for good cause
    shown.[^20] As noted by the Court of Appeals for the D.C. Circuit,
    however, agency rules are presumed valid.[^21] The Commission may
    exercise its discretion to waive a rule where the particular facts
    make strict compliance inconsistent with the public interest.[^22]
    In addition, the Commission may take into account considerations of
    hardship, equity, or more effective implementation of overall policy
    on an individual basis.[^23] Waiver of the Commission\'s rules is
    therefore appropriate only if special circumstances warrant a
    deviation from the general rule, and such a deviation will serve the
    public interest.[^24]

5.  New Valor states that granting a waiver here is consistent with
    Commission policy and prior waiver decisions regarding the
    all-or-nothing rule.[^25] It notes that, in the *MAG Second Further
    Notice,* the Commission specifically stated that, "until such time
    as the all-or-nothing rule may be further revised, carriers can
    continue to petition for waiver of the all-or-nothing rule so that
    they may operate affiliates under both rate-of-return and price cap
    regulation."[^26] New Valor states that the Commission has routinely
    granted or extended waivers to carriers, including ALLTEL and Valor,
    as a result of the pending rulemaking on the all-or-nothing
    rule.[^27] Furthermore, New Valor argues that strict application of
    the all-or-nothing rule would be inconsistent with the purposes and
    structure of price cap regulation. It asserts that its small size
    and dispersed service areas make it especially unsuited for price
    cap regulation, which was designed for the operating characteristics
    of much larger carriers.[^28] New Valor states that the merger does
    not change these characteristics.[^29] New Valor also states that
    the vast majority of its exchange areas will have fewer than 2000
    access lines and that the average density is 25 access lines per
    square mile, compared to 128 for the non-rural carriers.[^30]

6.  New Valor further asserts that the policy concerns underlying the
    all-or-nothing rule are not implicated by this waiver request. The
    increasing vigor of both inter- and intramodal competition and the
    Commission's pro-competitive policies have suppressed
    cross-subsidization incentives and undercut cost shifting
    opportunities, according to New Valor.[^31] New Valor also states
    that it is not attempting to game the system. It only seeks to
    maintain the status quo and will not be shifting between price cap
    and rate-of-return regulation.[^32]

7.  Finally, New Valor contends that a waiver would promote the public
    interest. Under the waiver, customers of New Valor's price cap and
    rate-of-return companies, according to New Valor, will continue to
    enjoy the respective benefits of those policies rather than having
    to move all study areas to either price caps or rate of return.[^33]
    It notes that, under the tentative conclusion in the *MAG Second
    Further Notice*, it would not receive universal service support
    under the CALLS regime applicable to price cap carriers.[^34] New
    Valor states that it will improve broadband penetration to the rural
    public, will realize significant economic, marketing, and technical
    service synergies and efficiencies, and will benefit from the
    substantial managerial and technical expertise and resources of the
    combined operations.[^35] Thus, New Valor states that there is good
    cause for the requested waiver. No party has opposed the grant of
    the requested waiver.

8.  We find good cause to grant New Valor's unopposed request for waiver
    of the Commission's all-or-nothing rule. When the Commission adopted
    the all-or-nothing rule, it noted that it would entertain requests
    for waiver of the rule because efficiencies created by the purchase
    and sale of exchanges may outweigh the threat of cost shifting or
    gaming the system.[^36] In addition, the Commission has stated that,
    although it believes that incentive-based regulation is generally
    superior to rate-of-return regulation, it is sensitive to the needs
    of smaller carriers.[^37] In prior waiver orders, the Commission has
    observed that the public interest can be served by allowing smaller
    carriers to purchase exchanges.[^38] The Commission also has noted
    that rate-of-return carriers confront numerous serious and complex
    issues regarding universal service support whenever the
    all-or-nothing rule requires them to convert to price cap
    regulation.[^39] Here, we believe that the benefits to be gained
    from the proposed merger outweigh any threat of cost shifting or
    gaming the system. To safeguard against possible gaming that could
    result from attempts to elect price cap regulation while these rules
    are under review, we extend to New Valor the requirement already
    applicable to ALLTEL to seek prior Commission approval before
    seeking to elect price cap regulation.[^40] At that time, we can
    determine whether the transaction raises concerns addressed by
    section 61.41.

9.  We do not find that the proposed merger presents significantly
    different circumstances from those analyzed in the earlier separate
    ALLTEL and Valor waivers so as to warrant a different conclusion
    from that reached in those decisions. The Commission currently is
    considering whether to modify or eliminate the all-or-nothing
    rule.[^41] Under these special circumstances, we do not believe the
    public interest would be served by requiring New Valor to undertake
    the burdens of converting its merged exchanges to price cap
    regulation based on a rule that may be modified or eliminated in the
    near future. For the above reasons, we find good cause to grant the
    unopposed New Valor request for waiver of the Commission's
    all-or-nothing rule and to allow it to retain its current regulatory
    status until the Commission concludes its review of the
    all-or-nothing rule in the *MAG Second Further Notice*. [^42]

# ordering clauses

10. Accordingly, IT IS ORDERED, pursuant to sections 1, 4(i), 5(c), 201,
    and 202 of the Communications Act of 1934, as amended, 47 U.S.C. §§
    151, 154(i), 155(c), 201, and 202, and sections 0.91, 0.291, and 1.3
    of the Commission's rules, 47 C.F.R. §§ 0.91, 0.291, and 1.3, that
    the petition for waiver of the Commission's rules, 47 C.F.R. §
    61.41, filed by New Valor on December 22, 2005, IS GRANTED to the
    extent described herein.

    FEDERAL COMMUNICATIONS COMMISSION

Thomas J. Navin

> Chief, Wireline Competition Bureau

[^1]: Valor Communications Group, Inc., Petition for Waiver (filed Dec.
    22, 2005) ("Petition"), *erratum*, (Dec. 30, 2005).

[^2]: 47 C.F.R. § 61.41.

[^3]: New Valor states that it likely will be renamed after consummation
    of the merger. Petition at 1 n.5. Valor serves approximately 550,000
    access lines in four states, and ALLTEL serves approximately 2.9
    million access lines in fifteen states. Petition at 2. The
    associated domestic section 214 application for transfer of control
    was granted on January 25, 2006. *Wireline Competition Bureau Grants
    Consent for Transfer of Control of Valor Communications Group, Inc.
    and Its Subsidiaries From Valor Communications Group, Inc. to New
    Valor, and the Transfer of Control of ALLTEL Holding Corp. and Its
    Subsidiaries From ALLTEL Corporation to New Valor*, WC Docket No.
    05-354, Public Notice, DA 06-154 (WCB/CPD rel. Jan. 25, 2006).

[^4]: *See* *Valor Telecommunications, LLC Petition for Waiver of
    Section 61.41 of the Commission's Rules*, WCB/Pricing 02-26,
    Memorandum Opinion and Order, 17 FCC Rcd 25544 (WCB 2002) ("*Valor
    Waiver Order*"); *ALLTEL Corporation Petition for Waiver of Section
    61.41, et al.*, CCB/CPD Nos. 01-28, 99-01, 01-36, 01-30, and 99-36,
    Memorandum Opinion and Order, 17 FCC Rcd 27696 (WCB 2002) ("*ALLTEL
    Waiver Order*").

[^5]: *See* *Multi-Association Group (MAG) Plan for Regulation of
    Interstate Services of Non-Price Cap Incumbent Local Exchange
    Carriers and Interexchange Carriers; Federal-State Joint Board on
    Universal Service,* CC Docket Nos. 00-256 and 96-45, Report and
    Order and Second Further Notice of Proposed Rulemaking, 19 FCC Rcd
    4122 (2004) ("*MAG Second Further Notice*").

[^6]: 47 C.F.R. § 61.41(b).

[^7]: 47 C.F.R. § 61.41(c)(1).

[^8]: 47 C.F.R. § 61.41(c)(2).

[^9]: 47 C.F.R. § 61.41(c)(3); *MAG Second Further Notice*, 19 FCC Rcd
    at 4129-31, paras. 10-15.

[^10]: *Multi-Association Group (MAG) Plan for Regulation of Interstate
    Services of Non-Price Cap Incumbent Local Exchange Carriers and
    Interexchange Carriers; Federal-State Joint Board on Universal
    Service,* CC Docket Nos. 00-256 and 96-45, Report and Order and
    Further Notice of Proposed Rulemaking, 16 FCC Rcd 19613, 19781,
    para. 261 (2001) ("*MAG Further Notice"*).

[^11]: *Id.*

[^12]: *Id.*

[^13]: *Id.*

[^14]: *MAG Second Further Notice,* 19 FCC Rcd at 4153-64, paras. 69-94.
    The examination was a continuation of the inquiry begun in the *MAG
    Further Notice* 16 FCC Rcd at 19703-11, paras. 213-240, 19717-24,
    paras. 260-71.

[^15]: *MAG Second Further Notice,* 19 FCC Rcd at 4161, para. 85.

[^16]: *Id*. at 4161, para. 86.

[^17]: *Id* at 4163, para. 93 (discussing *Access Charge Reform, Price
    Cap Performance Review for Local Exchange Carriers, Low-Volume Long
    Distance Users, and Federal-State Joint Board On Universal Service,*
    CC Docket Nos. 96-262, 94-1, 99-249, and 96-45, Sixth Report and
    Order in CC Docket Nos. 96-262 and 94-1, Report and Order in CC
    Docket No. 99-249, Eleventh Report and Order in CC Docket No. 96-45,
    15 FCC Rcd 12962 (2000) (subsequent history omitted)).

[^18]: *Id*. at 4164, para. 94.

[^19]: *Id.* at 4129 n.40.

[^20]: 47 C.F.R. § 1.3.

[^21]: *WAIT Radio v. FCC*, 418 F.2d 1153, 1159 (D.C. Cir. 1969), *cert.
    denied*, 409 U.S. 1027 (1972).

[^22]: *Northeast Cellular Telephone Co. v. FCC*, 897 F.2d 1164, 1166
    (D.C. Cir. 1990).

[^23]: *WAIT Radio*, 418 F.2d at 1159; *Northeast Cellular Telephone*,
    897 F.2d at 1166.

[^24]: *Id.*

[^25]: Petition at 3.

[^26]: *Id*.; *MAG Second Further Notice*, 19 FCC Rcd at 4129 n.39.

[^27]: Petition at 4 (citing *ALLTEL Waiver Order,* 17 FCC Rcd 27696
    (the order also extended outstanding waivers for ALLTEL/Aliant,
    CenturyTel, and Puerto Rico Telephone Company pending the review of
    the all-or-nothing rule); *Valor Waiver Order,* 17 FCC Rcd 25544).

[^28]: Petition at 9-10.

[^29]: Petition at 5, 10-11.

[^30]: Petition at 12.

[^31]: Petition at 5.

[^32]: Petition at 5, 12-16.

[^33]: *Id*. at 16-17.

[^34]: *Id*. at 16; *MAG Second Further Notice*, 19 FCC Rcd at 4164,
    para. 94.

[^35]: Petition at 17-18.

[^36]: *See Policy and Rules Concerning Rates for Dominant Carriers,* CC
    Docket No. 87-313, Order on Reconsideration, 6 FCC Rcd 2637, 2706,
    n.207 (1991) (subsequent history omitted) (*LEC Price Cap*
    *Reconsideration Order*).

[^37]: *See* *ALLTEL Corporation Petition for Waiver of Section 61.41 of
    the Commission's Rules and Applications for Transfer of Control*,
    CCB/CPD No. 99-1, Memorandum Opinion and Order, 14 FCC Rcd 14191,
    14202, para. 34 (1999).

[^38]: *See Citizens Telecommunications Company of Wyoming and Qwest
    Corp. Joint Petition for Waiver of the Definition of "Study Area"
    Contained in the Part 36 Appendix-Glossary of the Commission's
    Rules,* CC Docket No*.* 96-45, Order, 16 FCC Rcd 3563, 3567, para.
    11 (Com. Car. Bur. 2001) (*Citizens Waiver Order*); *Valor
    Telecommunications of Texas and GTE Southwest Inc. Joint Petition
    for Waiver of the Definition of "Study Area" Contained in the Part
    36 Appendix-Glossary of the Commission's Rules,* CC Docket No*.*
    96-45, Order, 15 FCC Rcd 15816, 15821, para. 11 (Com. Car. Bur.
    2000). *See generally Price Cap Performance Review for Local
    Exchange Carriers,* CC Docket No. 94-1, First Report and Order, 10
    FCC Rcd 8961, 9102, para. 323 (1995); *Price Cap Performance Review
    for Local Exchange Carriers*, CC Docket No. 94-1, Notice of Proposed
    Rulemaking, 9 FCC Rcd 1687, 1704, para. 88 (1994).

[^39]: *See, e.g.,* Valor Waiver Order, 17 FCC Rcd at 25547, para. 8;
    *ALLTEL Waiver Order,* 17 FCC Rcd at 27704, para. 20 (citing *Puerto
    Rico Telephone Company Petition for Waiver of Section 61.41 or
    Section 54.303(a) of the Commission's Rules*, CCB/CPD No. 99-36,
    Order, 15 FCC Rcd 9680, 9682-83 para. 5 (2000)).

[^40]: *See ALLTEL Waiver Order*, 17 FCC Rcd at 27699, para. 9.

[^41]: *See* *MAG Second Further Notice*, 19 FCC Rcd at 4153-64, paras.
    69-94.

[^42]: In the event the Commission modifies the all-or-nothing rule, we
    anticipate that it will provide carriers with some period of time to
    evaluate any changes to the rule before carriers are required to
    elect a particular form of pricing regulation. In the event the
    Commission chooses not to modify the rule, we expect that it will
    specify the time period in which carriers with pending waivers must
    come into compliance with the rule.