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 Federal  Communications  Commission  FCC  05-  1 
 Before  the  Federal  Communications  Commission 
 Washington,  D.  C.  20554 

 In  the  Matter  of 
 Federal-  State  Joint  Board  on  Universal  Service 

 National  Telephone  Cooperative  Association  Petition  for  Reconsideration 

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 CC  Docket  No.  96-  45 

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

 I.  INTRODUCTION 
 1.  In  this  Order  and  Order  on  Reconsideration,  we  amend  section  54.305  of  the  Commissions  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. 

 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 

 universal  service  support  for  which  the  acquired  exchanges  were  eligible  prior  to  their  transfer.  2  Section 
 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-(  continued....) 
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 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 
 carriers  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 

 (...  continued  from  previous  page)  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  carriers  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  Boards  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 
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 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  54.305s  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.  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  carriers  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  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.  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  carriers  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  Commissions  rules.  18 

 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. 
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 7.  NTCAs  Petition  for  Reconsideration.  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 
 carriers  first  year  of  operation  can  result  in  continued  poor  service  and  customer  disdain.  23 
 8.  NTCAs  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  carriers  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  carriers  expense  adjustment  calculated  at  the  end  of  the  companys  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  Commissions  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  carriers  expense  adjustment  would  be  used  for  determining  the  safety 
 valve  support  only  for  the  first  year.  26 

 19  Although  the  Commission  resolved  certain  portions  of  NTCAs  request  for  reconsideration  of  the  Rural  Task 
 Force  Order  in  earlier  orders,  the  Commission  specifically  deferred  any  resolution  of  NTCAs  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  NTCAs  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  carriers  first  year  expense  adjustment  would  be  compared  to  the  sellers  index  year  expense  adjustment  to  determine  any  positive  difference  eligible  for  safety  valve  support  in  the 

 acquiring  carriers  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. 
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 III.  DISCUSSION 
 9.  We  amend  section  54.305  of  the  Commissions  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  sellers  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 

 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  6. 

 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  carriers  decision  to  purchase  exchanges  because  the  carriers  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.). 
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 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  NTCAs  proposal  to  use  the  selling  carriers  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  sellers  expense  adjustment  in  this  limited  manner.  We  agree  with  NTCA  that  concerns  regarding  reliance  on  the  sellers 
 cost  data  are  mitigated  because  the  selling  carriers  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  carriers 

 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  CenturyTels 

 acquisition  of  several  rural  exchanges  from  a  large  carrier,  the  Wisconsin  state  commission  required  CentryTel  to  replace  the  sellers  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  Commissions  concerns  would  therefore  be  mitigated  significantly  by  the  fact  that 
 the  sellers  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  sellers  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  sellers  costs  might  otherwise  create.). 
 35  See  Rural  Task  Force  Order,  16  FCC  Rcd  at11287,  para.  103. 
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 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  sellers  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  carriers  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  NTCAs  proposal  to  use  the  selling  carriers  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  carriers  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 

 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  Commissions  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  5.  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  carriers  index  year  expense  adjustment.  Relying  on  the  selling  carriers  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&  Ts  claim  that  NTCAs  proposal 
 could  not  be  implemented  because  it  is  premised  on  defining  the  first  (index)  year  expense  adjustment  as  the  selling  carriers  expense  adjustment  at  the  time  of  the  sale.  See  AT&  T  Opposition  at  4.  AT&  T  argues  that  we  should  not 
 (continued....) 
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 17.  In  response  to  AT&  Ts  argument  that  it  is  not  appropriate  to  use  the  sellers  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  sellers  embedded  costs  to  estimate  the  index  year  expense  adjustment  would  be  preferable  to  using  the 
 sellers  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  Commissions  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  models 
 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  sellers  actual  expense  adjustment  to 
 determine  safety  valve  support  for  the  first  year  than  to  use  an  estimate  of  the  what  the  sellers  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  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 

 (...  continued  from  previous  page)  use  the  sellers  expense  adjustment,  but  offers  no  reason  why  we  cannot.  In  contrast,  the  National  Exchange  Carrier 
 Association  (NECA)  argues  that  NTCAs  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  NTCAs  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. 
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 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. 

 IV.  PROCEDURAL  MATTERS 
 A.  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. 
 B.  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 
 1.  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  Commissions  rules  to  provide  safety  valve  support  to  rural  carriers  that  make  substantial  investment  after  acquiring  exchanges.  For  purposes 
 of  determining  a  rural  carriers  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 
 companys  first  year  of  operating  the  exchanges.  In  this  Order,  we  amend  section  54.305  of  the  Commissions  rules  to  provide  that  rural  carriers  may  receive  safety  valve  support  for  investment  made  in 
 the  first  year  of  operating  acquired  exchanges. 
 2.  Summary  of  Significant  Issues  Raised  by  the  Public 
 22.  No  petition  for  reconsideration  was  submitted  directly  in  response  to  the  previous  FRFA. 
 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. 
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 On  reconsideration,  however,  NTCA  argued  that  reconsideration  of  section  54.305  of  the  Commissions  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  carriers  expense  adjustment  at  the  time  of  the  sale  be  used  as  the  index  year  expense  adjustment  to  determine  safety  valve  support  for  the  first  year  of 
 operation  of  the  acquired  exchanges. 
 3.  Description  and  Estimate  of  the  Number  of  Small  Entities  to  Which  this  Order  Will  Apply 

 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. 
 4.  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. 
 5.  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  Commissions  intent  in  adopting  the  safety 
 valve  mechanism. 

 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. 
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 6.  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). 
 V.  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  Commissions  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  Commissions  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  Commissions  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  Commissions  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 
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 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  carriers  first  year  of  operation 
 shall  equal  the  selling  carriers  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 
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 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 
 exchanges  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. 
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 (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. 
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