*Pages 1--9 from  Microsoft Word - 45262.doc*
 Federal  Communications  Commission  FCC  05-  2 
 Before  the  Federal  Communications  Commission 

 Washington,  DC  20554 
 In  the  Matter  of 
 Federal-  State  Joint  Board  on  Universal  Service 

 Valor  Telecommunications  of  Texas,  L.  P.  Request  for  Waiver  of  Section  54.305 
 of  the  Commissions  Rules 

 )  ) 
 )  ) 
 )  ) 
 )  ) 

 CC  Docket  No.  96-  45 

 ORDER 
 Adopted:  January  4,  2005  Released:  January  10,  2005 
 By  the  Commission: 

 I.  INTRODUCTION 
 1.  In  this  Order,  we  deny  in  part  and  grant  in  part  a  request  by  Valor  Telecommunications  of  Texas,  L.  P.  (Valor),  a  rural  incumbent  local  exchange  carrier  formed  through  the  acquisition  of 

 approximately  315,000  lines  from  GTE  in  2000,  for  waiver  of  section  54.  305  of  the  Federal  Communications  Commissions  (Commission)  rules.  1  In  particular,  we  grant  Valor  a  limited  waiver  of 
 section  54.305  of  the  Commissions  rules  to  allow  it  to  receive  additional  safety  valve  support  consistent  with  the  modifications  to  the  safety  valve  mechanism  that  we  adopt  today  in  a  companion  order.  2  This 
 limited  waiver  will  allow  Valor  to  receive  additional  safety  valve  support  for  the  costs  that  it  incurred  in  its  first  year  of  operation,  as  well  as  in  subsequent  years  that  the  Rural  Task  Force  plan  is  in  place.  3 

 II.  BACKGROUND 
 2.  Section  54.305.  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 

 1  Valor  Telecommunications  of  Texas,  L.  P.,  Petition  for  Waiver  of  Section  54.  305  of  the  Commissions  Rules,  CC 
 Docket  No.  96-  45,  filed  April  30,  2003  (Petition). 
 2  Federal-  State  Joint  Board  on  Universal  Service,  National  Telephone  Cooperative  Association,  Petition  for 
 Reconsideration,  Order  and  Order  on  Reconsideration,  CC  Docket  No.  96-  45,  FCC  05-  01  (rel.  January  10,  2005)  (NTCA  Reconsideration  Order). 

 3  The  safety  valve  support  mechanism  was  adopted  as  part  of  the  Rural  Task  Forces  five-  year  plan  for  providing 
 modified  embedded  cost  support  to  rural  carriers.  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). 
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 universal  service  support  for  which  the  acquired  exchanges  were  eligible  prior  to  their  transfer.  4  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.  5  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  carriers  decision  to  purchase  exchanges  from  other  carriers.  6 

 3.  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.  7  While  the  Commission  reiterated  its  support  for  section  54.305s  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.  8 

 4.  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  carriers  index  year 
 expense  adjustment  for  the  acquired  exchanges  and  subsequent  year  expense  adjustments.  9  The  Commission  further  found  that,  for  purposes  of  determining  a  rural  carriers  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  companys  first  year  of  operating  the  exchanges.  10  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.  11 

 4  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. 
 5  See  Universal  Service  First  Report  and  Order,  12  FCC  Rcd  at  8942-  43,  para.  308. 

 6  Id. 
 7  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,  11282,  para.  97  (2001),  as  corrected  by  Errata,  CC  Docket  Nos.  96-  45,  00-  256  (Acc.  Pol.  Div.  rel.  June  1,  2001)  (Rural  Task  Force  Order). 

 8  See  id. 
 9  See  id.  at  11285,  para.  98. 
 10  See  id.  at  11285,  para.  99. 
 11  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 
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 5.  Valors  Petition  for  Waiver.  On  September  1,  2000,  Valor  purchased  approximately  315,000  access  lines  in  197  exchanges  formerly  owned  by  GTE.  12  These  lines  were  removed  from  GTEs 
 two  Texas  study  areas  and  consolidated  into  a  new  study  area  for  Valor.  13  Section  54.305  limits  Valors  high-  cost  universal  service  support  to  the  per-  line  support  levels  that  GTE  received  prior  to  the  transfer  of 
 the  exchanges.  14  Valor  seeks  a  waiver  of  section  54.305  to  receive  high-  cost  support  based  on  the  average  cost  of  all  of  its  access  lines,  including  the  acquired  lines  at  issue  here,  rather  than  limiting  the  per-  line 
 level  of  support  for  the  acquired  lines  to  the  amount  of  support  for  which  they  were  eligible  prior  to  their  transfer. 

 6.  Valor  argues  that  it  faces  a  combination  of  unique  circumstances  that  warrant  a  waiver  of  section  54.305.  15  Valor  states  that  it  acquired  from  GTE  a  highly  depreciated  network  that  requires 
 substantial  modernization  to  provide  quality  services  at  affordable  rates  for  its  customers.  16  Valor  describes  in  its  Petition  a  five-  year  program  that  it  has  undertaken  to  upgrade  and  modernize  the  network 
 and  claims  that,  absent  additional  support,  it  will  not  be  able  to  complete  its  five-  year  program  in  a  timely  manner.  17  Valor  contends  that  the  limited  support  it  receives  based  on  the  support  that  GTE  was 
 receiving  prior  to  the  acquisition  does  not  accurately  reflect  the  average  cost  of  the  lines  at  the  time  of  the  transfer  because  of  extraordinary  cost  reductions  taken  by  GTE  immediately  prior  to  the  transfer.  18 
 Valor  claims  that  it  was  not  aware  at  the  time  of  sale  that  GTE  had  recognized  net  pension  plan  gains  of  $57.2  million  stemming  from  a  lump-  sum  settlement  of  pension  obligations  in  association  with  an 
 employee-  reduction  program.  19  According  to  Valor,  these  pension  plan  gains  significantly  lowered  GTEs  operating  costs  and  thus  its  average  loop  cost,  which  lowered  the  support  levels  for  GTE  at  the 
 time  of  the  sale.  20 
 7.  Valor  further  states  that  since  it  began  operations  in  2000,  it  has  incurred  substantial  capital  expenditures,  in  part  due  to  circumstances  beyond  its  control.  21  For  example,  Valor  claims  that  it 

 of  the  positive  difference  between  the  subsequent  year  expense  adjustment  and  the  index  year  expense  adjustment.  See  id.  at  11288-  89,  paras.  107-  09. 
 12  Petition  at  n.  6. 
 13  See  Valor  Telecommunications  of  Texas,  L.  P.,  and  GTE  Southwest  Incorporated,  Joint  Petition  for  Waiver  of  the 
 Definition  of  Study  Area  Contained  in  the  Part  36  Appendix-  Glossary  of  the  Commissions  Rules,  CC  Docket  No.  96-  45,  Order,  15  FCC  Rcd  15816  (Acc.  Pol.  Div.  2000). 

 14  Valor  currently  receives  $850,000  annually  pursuant  to  section  54.305,  i.  e.,  the  same  support  that  GTE  received 
 prior  to  the  sale  of  the  exchanges. 
 15  Petition  at  8. 

 16  Id. 
 17  Id.  In  Valors  Petition,  it  estimated  that  a  grant  of  its  waiver  would  allow  it  to  receive  support  in  the  amount  of 
 $10.  2  million  annually.  In  a  subsequent  ex  parte  letter,  Valor  revised  that  estimate  to  $1.  5  million.  Letter  from  Gregory  Vogt,  Counsel  for  Valor,  to  Marlene  H.  Dortch,  Secretary,  FCC,  CC  Docket  No.  96-  45  (filed  February  24, 

 2004). 
 18  Petition  at  8. 

 19  Id.  at  11. 
 20  Id.  at  11-  12. 
 21  Id. 
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 had  incomplete  cost  information  at  the  time  of  the  acquisition  and  that  it  incurred  costs  to  connect  remote  switches  to  its  own  network  where  the  relevant  host  switches  remained  with  GTE.  Valor  also  asserts  that 
 it  incurred  additional  costs  as  a  result  of  conditions  imposed  by  the  Texas  Public  Utility  Commission.  22  Valor  further  claims  to  have  incurred  substantial  costs  as  the  result  of  an  ice  storm  in  December  2000  and 
 that  it  invested  over  $1  million  in  the  telecommunications  infrastructure  of  Crawford,  Texas  in  order  to  meet  the  telecommunications  needs  of  the  White  House  Communications  Agency  at  the  Presidents  ranch 
 outside  Crawford,  Texas.  Valor  submits  that,  as  a  result,  it  had  total  capital  expenditures  of  $56.6  million  in  calendar  year  2001,  an  amount  approximately  43  percent  greater  than  what  it  spent  in  2002.  23 

 8.  Valor  asserts  that  safety  valve  support  will  not  accurately  reflect  the  level  of  investment  required  to  modernize  and  upgrade  the  network  acquired  from  GTE.  24  Valor  argues  that,  because  safety 
 valve  support  is  calculated  based  on  the  difference  between  the  index  year  expense  adjustment  and  the  subsequent  year  expense  adjustment,  its  unusually  high  expenses  in  2001,  its  index  year,  artificially 
 reduce  its  safety  valve  support.  25  Valor  also  notes  that  the  safety  valve  mechanism  was  not  yet  in  place  when  it  acquired  the  lines  from  GTE  in  2000. 

 9.  The  Wireline  Competition  Bureau  released  a  Public  Notice  seeking  comment  on  the  Petition  on  April  20,  2004.  26  AT&  T,  the  Cellular  Telecommunications  &  Internet  Association  (CTIA), 
 Sprint  Corporation,  and  Western  Wireless  filed  comments  in  opposition  to  Valors  Petition  and  Valor  filed  a  reply  in  response  to  those  oppositions.  27  The  United  States  Telecom  Association  (USTA)  filed 
 comments  in  support  of  Valors  petition  and  the  Independent  Telephone  &  Telecommunications  Alliance  (ITAA)  filed  comments  urging  the  Commission  to  provide  relief  to  Valor  and  other  similarly-  situated 
 carriers  by  granting  the  NTCA  pending  petition  for  reconsideration  of  the  safety  valve  mechanism.  28 
 10.  Generally,  the  Commissions  rules  may  be  waived  for  good  cause  shown.  29  The  Commission  may  exercise  its  discretion  to  waive  a  rule  where  the  particular  facts  make  strict  compliance 

 inconsistent  with  the  public  interest.  30  In  addition,  the  Commission  may  take  into  account  considerations  of  hardship,  equity,  or  more  effective  implementation  of  overall  policy  on  an  individual  basis.  31  Waiver 

 22  Id.  at  13. 
 23  Id.  at  11. 
 24  Id.  at  12. 
 25  Id.;  see  also  supra  para.  7. 
 26  See  Wireline  Competition  Bureau  Seeks  Comment  on  Valor  Telecommunications  of  Texas,  L.  P.  Petition  for 
 Waiver  of  Section  54.305  of  the  Commissions  Rules,  Pleading  Cycle  Established,  Public  Notice,  DA  03-  1458  (rel.  April  20,  2003).  Comments  were  filed  on  May  30,  2003,  and  reply  comments  were  filed  on  June  16,  2003. 

 27  See  Federal-  State  Joint  Board  on  Universal  Service,  Valor  Telecommunications  of  Texas,  L.  P.,  Petition  for 
 Waiver  of  Section  54.305  of  the  Commissions  Rules,  CC  Docket  No.  96-  45,  CTIA  Comments  at  1-  4;  AT&  T  Opposition  to  Petition  for  Waiver  of  Section  54.  305  at  1-  9;  Western  Wireless  Comments  in  Opposition  to  Valor 

 Petition  for  Waiver  at  1-  10;  Opposition  of  Sprint  Corporation  at  1-  5. 
 28  USTA  Reply  Comments  at  1-  6;  ITTA  Reply  Comments  at  1-  8.  As  discussed  below,  the  Commission  is  releasing 
 a  companion  order  addressing  NTCAs  petition  for  reconsideration.  See  infra  para.  14 
 29  47  C.  F.  R.    1.3. 

 30  Northeast  Cellular  Telephone  Co.  v.  FCC,  897  F.  2d  1164,  1166  (D.  C.  Cir.  1990)  (Northeast  Cellular). 
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 of  the  Commissions  rules  is  therefore  appropriate  only  if  special  circumstances  warrant  a  deviation  from  the  general  rule,  and  such  a  deviation  will  serve  the  public  interest. 
 III.  DISCUSSION 
 11.  For  the  reasons  set  forth  below,  we  find  that  Valor  has  not  demonstrated  special  circumstances  that  would  warrant  a  complete  waiver  of  section  54.305  of  the  Commissions  rules. 

 However,  we  grant  Valor  a  waiver  of  section  54.305  so  that  it  can  receive  additional  support  consistent  with  the  modifications  to  the  safety  valve  mechanism  that  we  adopt  today  in  the  companion  NTCA 
 Reconsideration  Order.  32 
 12.  We  are  not  persuaded  that  Valors  claims  regarding  GTEs  highly  depreciated  network,  the  need  for  substantial  network  upgrades,  or  the  fact  that  the  transferred  support  does  not  accurately 

 reflect  the  average  cost  of  its  lines  constitute  special  circumstances.  The  Commission  previously  has  stated  that  carriers  seeking  a  waiver  of  section  54.305  must  bear  a  heavy  burden.  33  Valor  had  the 
 opportunity  to  evaluate,  before  purchasing  these  exchanges  from  GTE,  the  state  of  the  network,  the  costs  it  would  need  to  incur  for  any  upgrades,  and  the  amount  of  transferred  support  that  it  would  receive.  We 
 are  not  convinced  that  Valor  could  not  have  identified  all  of  these  issues  prior  to  making  its  decision  to  purchase  the  lines  from  GTE.  34  To  the  extent  Valor  claims  that  it  faces  higher  costs  than  most  price  caps 
 carriers  because  it  serves  overwhelmingly  rural  lines,  Valor  should  have  taken  this  into  account  when  deciding  to  purchase  these  lines.  Indeed,  Valor  had  an  obligation  to  take  into  account  all  factors  that 
 could  have  had  an  impact  on  its  ability  to  operate  the  lines  effectively,  particularly  given  the  representations  Valor  made  to  the  Commission  at  the  time  in  its  request  for  waiver  of  the  study  area 
 boundary  freeze.  35 
 13.  When  Valor  sought  a  study  area  waiver  from  the  Commission  so  that  it  could  create  a  separate  study  area  for  the  lines  it  acquired  from  GTE,  Valor  certified  that  grant  of  the  study  area  waiver 

 31  WAIT  Radio,  418  F.  2d  1153,  1159  (D.  C.  Cir.  1969),  cert.  denied,  409  U.  S.  1027  (1972);  Northeast  Cellular,  897 
 F.  2d  at  1166. 
 32  NTCA  Reconsideration  Order. 

 33  See,  e.  g.,  Mescalero  Apache  Telecom,  Inc.,  Request  for  Waiver  of  Section  54.  305  of  the  Commissions  Rules,  CC 
 Docket  No.  96-  45,  FCC  01-  13,  16  FCC  Rcd  1312  (2001)  (Mescalero).  Mescalero,  which  predates  the  adoption  of  the  safety  valve  mechanism,  is  the  only  instance  in  which  the  Commission  has  granted  a  waiver  of  section  54.  305. 

 The  Commission  concluded  that  Mescalaro,  a  newly-  formed,  tribally-  owned  carrier,  warranted  a  deviation  from  the  general  rule  because,  among  other  things,  Mescalaro  intended  to  bring  additional  service  to  a  reservation  where  52 
 percent  of  the  residents  on  the  reservation  were  without  telephone  service.  Cf  Federal-  State  Joint  Board  on  Universal  Service,  Blackduck  Telephone  Company  and  Arvig  Telephone  Company,  Joint  Petition  for  Waiver  of  the 
 Definition  of  Study  Area  Contained  in  the  Part  36  Appendix-  Glossary  of  the  Commissions  Rules  and  Related  Waiver  of  Section  54.305  of  the  Commissions  Rules,  CC  Docket  No.  96-  45,  DA  02-  3386,  17  FCC  Rcd  24602 
 (Com.  Car.  Bur.  2002)  (denying  waiver  of  section  54.  305  on  the  ground  that  Blackducks  concerns  regarding  the  sufficiency  of  support  for  carriers  operating  newly-  acquired  lines  was  addressed  in  the  newly  adopted  safety  valve 
 mechanism). 
 34  See  Valor  Reply  Comments  at  8  (arguing  that  it  devoted  the  same  level  of  resources  in  its  due  diligence  activities 
 as  any  reasonable  acquiring  carrier  would  have  invested). 
 35  See  Valor  Telecommunications  of  Texas,  L.  P.,  and  GTE  Southwest  Incorporated,  Joint  Petition  for  Waiver  of  the 
 Definition  of  Study  Area  in  the  Appendix-  Glossary  of  Part  36  of  the  Commissions  Rules,  CC  Docket  No.  96-  45,  DA  00-  1908,  15  FCC  Rcd  15816  (Acct.  Policy  Div.  2000). 
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 would  not  have  an  impact  on  the  universal  service  fund  because  of  the  limitations  set  forth  in  section  54.305  of  the  Commissions  rules.  36  Valor  also  stated  that  granting  the  waiver  would  serve  the  public 
 interest  because  customers  would  receive  additional  and  improved  services  from  a  carrier  specializing  in  meeting  communications  needs  of  rural  and  small  urban  communities.  37  As  such  a  carrier,  Valor  clearly 
 knew  or  should  have  known  that  high-  cost  loop  support  would  be  an  important  source  of  funds  for  the  operation  of  an  exchange  with  high-  cost  loops  and  that  it  would  be  eligible  only  for  the  support  that  GTE 
 was  receiving  for  those  lines  prior  to  the  sale.  Carriers  acquiring  lines  have  the  responsibility  to  fully  explore  the  consequences  of  section  54.305  before  consummating  the  acquisition  of  an  exchange.  38 

 14.  We  agree  with  Valor  in  part,  however,  that  it  may  not  receive  adequate  support  under  the  safety  valve  mechanism.  39  More  generally,  we  conclude  that  Valors  Petition  highlights  a  deficiency  in 
 the  safety  valve  mechanism  and  raises  concerns  similar  to  those  raised  by  NTCA  in  its  pending  petition  for  reconsideration  of  the  Rural  Task  Force  Order.  40  Accordingly,  in  a  companion  order  adopted  today, 
 we  grant  NTCAs  petition  for  reconsideration  and  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.  41  The  modified  rule  provides  that  the  index  year  expense  adjustment  for  purposes  of  determining  safety  valve  support  for  the  first  year  of  operation  shall  be  defined 
 as  the  sellers  expense  adjustment  for  the  twelve-  month  period  prior  to  the  sale  of  exchanges.  The  Commissions  action  in  the  companion  NTCA  Reconsideration  Order  does  not  modify  the  existing  safety 
 valve  mechanism  for  support  beginning  in  an  acquiring  carriers  second  year  of  operation.  42  As  we  state  in  the  NTCA  Reconsideration  Order,  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.  43 
 15.  While  the  rule  adopted  in  the  companion  order  will  apply  prospectively,  the  costs  Valor  incurred  in  its  first  year  of  operation  as  a  result  of  a  severe  ice  storm  in  December  2000  constitute  special 

 circumstances  warranting  a  limited  waiver  of  section  54.305.  We  therefore  grant  Valor  a  waiver  of  section  54.305  so  that  it  can  receive  support  for  its  first  year  of  operations  based  on  its  actual  costs 
 relative  to  GTEs  costs,  consistent  with  the  modifications  we  make  today  to  the  safety  valve  mechanism.  44 
 36  Valor  Telecommunications  of  Texas,  LP  and  GTE  Southwest  Incorporated,  Joint  Petition  for  Waiver  of  the 
 Definition  of  Study  Area  in  the  Appendix    Glossary  of  Part  36,  CC  Docket  No.  96-  45,  at  6  (filed  April  24,  2000). 
 37  Id.  at  7. 

 38  See,  e.  g.,,  Fremont  Telecom  Company,  Petition  for  Waiver  of  Sections  36.  611  and  36.  612  of  the  Commissions 
 Rules,  AAD  97-  56,  DA  98-  127,  13  FCC  Rcd  12318  (Acct.  &  Audits  Div.  1998)  (Upholding  the  principle  that  the  waiver  process  is  not  a  remedy  for  imprudent  business  decisions  made  by  acquiring  carriers). 

 39  Petition  at  12.  See  also  ITTA  Reply  Comments  at  4-  5. 
 40  National  Telephone  Cooperative  Association,  Petition  for  Reconsideration  and  Clarification,  CC  Docket  Nos.  96-46, 
 00-  256,  filed  July  5,  2001;  see  also  ITTA  Reply  Comments  at  7-  8. 
 41  See  NTCA  Reconsideration  Order. 

 42  NTCA  Reconsideration  Order  at  para.  18. 
 43  NTCA  Reconsideration  Order  at  para.  1. 

 44  Valor  may  choose  to  establish  its  first  year  of  operations  beginning  with  fourth  quarter  2000  or  first  quarter  2001. 
 In  addition,  because  we  are  providing  Valor  relief  consistent  with  the  modifications  we  are  making  to  the  safety  valve  mechanism,  we  decline  to  grant  Valor  multi-  year  relief,  as  requested  by  Valor  in  its  April  7,  2004  ex  parte 
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 Allowing  Valor  to  receive  the  benefits  of  the  modified  safety  valve  mechanism  by  granting  a  waiver  of  section  54.305  provides  relief  that  is  appropriately  tailored  to  Valors  circumstances  in  its  first  year  of 
 operation.  45  Further,  by  providing  support  to  Valor  for  investments  made  in  its  first  year  of  operation,  Valor  will  be  able  to  benefit  from  the  modification  of  the  safety  valve  rule  despite  the  timing  of  its 
 acquisition,  which  occurred  prior  to  the  adoption  of  the  safety  valve  mechanism  in  the  Rural  Task  Force  Order.  46  Accordingly,  Valor  may  receive  safety  valve  support  for  its  first  year  of  operations  using  GTEs 
 expense  adjustment  for  the  twelve-  month  period  prior  to  the  sale  of  the  exchanges  as  its  index  year  expense  adjustment.  Consistent  with  the  rule  adopted  in  the  companion  order,  Valor  may  receive  safety 
 valve  support  in  subsequent  years  using  its  first-  year  costs  to  determine  a  new  index  year  expense  adjustment  .  47 

 16.  Because  we  provide  relief  to  Valor  consistent  with  the  modifications  to  the  safety  valve  mechanism,  we  decline  to  adopt  Valors  proposal  for  adjusting  its  index  year  that  was  set  forth  in  its 
 November  6,  2003  ex  parte  letter.  48  We  note,  however,  that  even  if  we  had  not  modified  the  safety  valve  mechanism,  we  would  have  rejected  Valors  proposal.  Valors  proposal  that  its  index  year  be  based  on  its 
 annualized  costs  for  the  last  quarter  of  2000  would  be  highly  subjective  and  inconsistent  with  the  intent  of  our  rules.  The  Commissions  rules  require  that  a  carriers  index  year  be  based  on  either  the  first 
 calendar  year  after  the  transfer  of  exchanges  (for  carriers  filing  their  cost  data  annually  pursuant  to  section  36.611  of  the  Commissions  rules),  or  the  first  quarter  following  the  transfer  (for  carriers  filing  quarterly 
 data  pursuant  to  section  36.  612).  49  Likewise,  we  believe  that  Valors  proposal  to  exclude  new  costs  to 

 letter.  See  Letter  from  Gregory  J.  Vogt,  Counsel  for  Valor,  to  Marlene  H.  Dortch,  Secretary,  FCC,  CC  Docket  No.  96-  45  (filed  April  7,  2004). 
 45  This  action  is  consistent  with  the  prior  grant  of  Valors  request  for  waiver  of  the  application  of  the  X-  factor  in  the 
 price  cap  indices  formula  set  forth  in  section  61.  45(  b)(  1)(  i)  of  the  Commissions  rules.  Valor  Telecommunications  of  Texas  and  Valor  Telecommunications  of  New  Mexico  Petition  for  Waiver  of  the  Operation  of  the  X-  Factor  in  the 

 Price  Cap  Indices  Formula  Set  forth  in    61.  45(  b)(  1)(  I),  Order,  WCB/  Pricing  File  02-  11,  DA  02-  1325,  17  FCC  Rcd  10646,  10650,  para.  14  (Wireline  Comp.  Bur.  2002).  See  also  47  C.  F.  R.    61.  45(  b)(  1)(  i).  In  that  case,  relying  in 
 part  on  the  ice  storm,  Valor  was  granted  a  waiver  of  the  X-  factor  for  2001. 
 46  In  its  reply  comments,  Valor  claims  that  strict  application  of  the  rules  would  be  inequitable  because  the  safety 
 valve  rule  was  adopted  in  the  middle  of  Valors  index  year.  See  Valor  Reply  Comments  at  5.  We  recognize  that,  because  the  modifications  to  the  safety  valve  mechanism  apply  to  the  first  year  of  operations  only,  the  limited 

 waiver  of  section  54.305  does  not  address  Valors  concerns  regarding  the  level  of  support  it  will  receive  in  subsequent  years.  The  action  we  take  today,  however,  strikes  a  reasonable  balance  between  preserving  the  policy 
 rationale  underlying  section  54.  305  and  providing  Valor  some  relief  from  the  extraordinary  costs  it  incurred  in  its  first  year  of  operations. 

 47  NTCA  Reconsideration  Order  at  para.  18.  The  Commission  does  not  modify  the  existing  safety  valve  mechanism 
 as  set  forth  in  the  Rural  Task  Force  Order  for  support  beginning  in  an  acquiring  carriers  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. 
 48  See  Letter  from  Gregory  Vogt,  Counsel  for  Valor,  to  Marlene  H.  Dortch,  Secretary,  FCC,  CC  Docket  No.  96-  45 
 (filed  November  6,  2003)  (November  6,  2003  Ex  Parte). 
 49  47  C.  F.  R.    54.305(  c). 
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 calculate  an  adjusted  index  year  expense  adjustment  would  be  inappropriate.  50  Excluding  new  costs  from  the  calculation  would  be  a  difficult,  and  most  likely  an  arbitrary  means  of  deriving  an  index  year 
 expense  adjustment,  and  distinguishing  such  new  costs  from  routine  or  recurring  costs  would  be  a  highly  subjective  process.  For  these  reasons,  we  find  Valors  proposal  unacceptable. 

 17.  Finally,  we  disagree  with  Valor  that  a  waiver  of  section  54.305  of  the  Commissions  rules  would  be  consistent  with  Commission  precedent.  Valor  erroneously  relies  on  case  law  that  predates  the 
 Commissions  adoption  of  section  54.305  to  support  its  claim  that  capping  high-  cost  loop  support  for  a  limited  time  is  sufficient  to  accomplish  the  goals  of  [s]  ection  54.305.  51  The  precedent  cited  by  Valor 
 involved  permanent  caps  that  were  placed  on  individual  carriers  in  the  context  of  study  area  waiver  requests  to  prevent  carriers  from  underestimating  universal  service  support  in  order  to  secure  Commission 
 approval  of  such  requests.  In  removing  those  caps,  the  Commission  concluded  that  the  caps,  which  had  been  in  place  for  three  years,  had  served  their  purpose  by  preventing  the  carriers  from  underestimating 
 the  effect  the  transfer  of  exchanges  would  have  on  the  high-  cost  loop  support  mechanism  immediately  following  the  transfer.  52  The  Commission  also  found  that  retaining  the  permanent  caps  could  have  the 
 unintended  effect  of  hindering  a  carriers  incentives  and  abilities  to  upgrade  its  networks.  53  In  contrast,  section  54.305  was  adopted  as  a  regulatory  measure  to  prevent  gaming  during  the  period  when  rural 
 and  non-  rural  carriers  would  be  receiving  support  based  on  two  distinct  support  mechanisms.  54  Moreover,  the  Commission  addressed  criticisms  regarding  the  effect  of  section  54.305  limitations  on 
 investment  incentives  when  it  adopted  the  safety  valve  mechanism  in  the  Rural  Task  Force  Order.  55 
 18.  In  adopting  the  safety  valve  mechanism,  the  Commission  did  not  limit  the  amount  of  time  that  section  54.305  would  apply  to  acquired  lines.  To  the  extent  Valor  is  relying  on  the  Cap  Removal 

 Orders  to  support  a  claim  that  the  limitations  set  forth  in  section  54.305  of  the  Commissions  rules  should  expire  three  years  after  a  transaction  has  occurred,  we  agree  with  Sprint  that  such  a  claim  is  more 
 appropriately  raised  in  the  context  of  a  rulemaking  proceeding.  56  We  find  that  the  precedent  cited  by  Valor  does  not  provide  a  basis  for  granting  Valor  a  waiver  of  section  54.305  of  the  Commissions  rules 
 three  years  after  consummation  of  the  transfer. 

 50  See  November  6,  2003  Ex  Parte. 
 51  Petition  at  5,  citing  Petitions  for  Waiver  and  Reconsideration  Concerning  Section  36.  611.  36.  612,  61.  41(  c)(  2), 
 69.  605(  c),  69.  3(  e)(  11)  and  the  Definition  of  Study  Area  Contained  in  Part  36  of  the  Appendix-  Glossary  of  the  Commissions  Rules  Filed  By  Copper  Valley  Telephone  et  al.,  Memorandum  Opinion  and  Order  on  Reconsideration, 

 DA  99-  1845,  1999  WL  700555  (F.  C.  C.)  (Com.  Car.  Bur.  1999)  (1999  Cap  Removal  Order). 
 52  1999  Cap  Removal  Order  at  para.  9. 

 53  Id. 
 54  Universal  Service  First  Report  and  Order,  12  FCC  Rcd  at  8942-  43,  para.  308. 
 55  See  supra  note  7. 
 56  Petition  at  5;  Sprint  Comments  at  4-  5. 
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 IV.  ORDERING  CLAUSE 
 19.  Accordingly,  IT  IS  ORDERED,  pursuant  to  sections  1-  4,  and  254  of  the  Communications  Act  of  1934,  as  amended,  47  U.  S.  C.    151-  154  and  254,  and  section  1.3  of  the  Commissions  rules,  47 

 U.  S.  C.    1.3,  that  the  petition  for  waiver  of  section  54.305  of  the  Commissions  rules,  47  C.  F.  R.    54.305,  filed  by  Valor  Telecommunications  of  Texas,  L.  P.,  on  April  30,  2003,  IS  DENIED  IN  PART  and 
 GRANTED  IN  PART  to  the  extent  provided  herein. 

 FEDERAL  COMMUNICATIONS  COMMISSION 

 Marlene  H.  Dortch  Secretary 
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