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                            Before the
                Federal Communications Commission
                      Washington, D.C. 20554

In the Matter of                )
                                )
Petition for Agreement with Designation of)       CC Docket No. 96-45
Rural Company Eligible Telecommunications)
Carrier Service Areas and for Approval of the)
Use of Disaggregation of Study Areas for the)
Purpose of Distributing Portable Federal)
Universal Service Support       )
                                )
Washington Utilities and Transportation)
Commission; Asotin Telephone Co.;)
Century Tel of Cowiche; Ellensburg Tele.)
Co.; Century Tel of Washington; Hat)
Island Telephone Co.; Hood Canal Telephone)
Co., Inc.; Inland Telephone Co.: Kalama)
Telephone Co.; Lewis River Telephone)
Co.; Mashell Telecom, Inc.; McDaniel )
Telephone Co.; Pend Oreille Telephone Co.;)
Pioneer Telephone Co.; St. John,)
Co-operative Telephone and Telegraph Co.;)
Tenino Telephone Co.; The Toledo Telephone)
Co., Inc.; United Telephone Co. of the)
Northwest; Western Wahkiakum County)
Telephone Co.; Whidbey Telephone Co.; and)
Yelm Telephone Co.              )


                   MEMORANDUM OPINION AND ORDER


Adopted:  September 9, 1999                  Released:  September 9, 1999


By the Common Carrier Bureau:

                         I.  INTRODUCTION

     1.   The Washington Utilities and Transportation Commission (Washington
Commission) and twenty rural incumbent local exchange carriers (rural LEC Petitioners) filed a
petition that requests the Commission's agreement with the Washington Commission's designation
of the individual exchanges of fifteen rural LECs to be their service areas.  The Washington
Commission's proposal also requests a waiver for Washington rural carriers from the method of
calculating universal service funds prescribed in section 54.307 of the Commission's rules. 
Specifically, the petition proposes to disaggregate federal high cost support currently given at the
study area level, by using the Benchmark Cost Proxy Model (BCPM) to estimate the cost of
providing service in density zones within each exchange served by the rural carriers.  The rural
LEC petitioners' support of the request for service area designation is conditioned on this
Commission's approval of the request for disaggregated study area support.  For the reasons
discussed herein, we agree with the Washington Commission's proposed service area designation,
and grant the requested waiver to permit the disaggregation of federal high cost support currently
given at the study area level.

                         II.  BACKGROUND

     2.   For areas served by a rural telephone company, section 214(e)(5) of the
Communications Act, as amended (the Act), provides that the company's "service area" will be
its study area "unless and until the Commission and the States, after taking into account the
recommendations of a Federal-State Joint Board instituted under section 410(c) of the Act,
establish a different definition of service area for such company."  Section 54.207 of the
Commission's rules, and the Universal Service Order, set forth the Commission's procedures
for consideration of petitions filed by state commissions seeking to designate rural service areas
for rural telephone companies that are different from such companies' study areas.  Section 54.207
provides that the Commission may initiate a proceeding to consider such a petition within ninety
days of the release date of a Public Notice of the petition or, in the alternative, may act on the
petition without initiating a proceeding.  Pursuant to this rule, the Commission issued a Public
Notice on August 24, 1998 to elicit comment from interested parties.  On November 24, 1998,
the Commission initiated a proceeding to continue its consideration of the petition. 

     3.   Petitioners assert that the Washington Commission has taken into account the
recommendations of the Federal-State Joint Board, as required by the Act and the Commission's
rules, in proposing exchange level service areas for the rural LEC petitioners.  Petitioners also
contend that establishment of service areas at the exchange level will promote the procompetitive
policies and goals of the Commission and the Washington Commission.

     4.   Petitioners also seek a waiver of the existing method of calculating the amount of
universal service support that a competitive eligible telecommunications carrier should receive
pursuant to section 54.307 of the Commission's rules, and for approval of a proposed alternative
methodology for determining the amount of universal service support, developed through a series
of workshops held by the Washington Commission.  Under the methodology proposed by
petitioners, the individual exchanges of the rural LECs would first be designated as their service
areas.  Then the federal high cost support that is currently provided to the rural LEC petitioners
on a study area basis would be disaggregated and redistributed among the smaller geographic
service areas.  Under this methodology, the amount of universal service support available to the
proposed service areas in the aggregate would be the total amount of support currently provided
to the existing study area in which they are located.  The methodology proposed to disaggregate
and distribute this total support amount among the proposed service areas is an adaptation of the
BCPM.  This methodology would be used to estimate the relative cost of providing service in a
lower-cost and a higher-cost density zone within each exchange.  This cost data would then be
used to set the support amount for carriers providing service within each of these density zones. 
Because the model would be used only to disaggregate and redistribute the federal high cost
support currently provided for each of the rural LEC petitioner's existing study areas, the proposal
would not increase or change the aggregate amount of federal support provided for those study
areas.  Under petitioners' proposal, high cost support for each of the current study areas would
continue to be recalculated each year based on the average loop cost in the study area.  Thus, the
amount of support calculated for each study area before disaggregation would still be limited by
the mechanisms that limit the overall growth in the fund.  Petitioners assert that disaggregation
under this methodology is relatively easy to administer and track, and the necessary information
can be supplied to or developed by the Universal Service Administrative Company (USAC).
  
     5.   Several commenters express support for the Washington Commission's designation
of the individual exchanges of the rural LECs as their service areas.  A number of commenters
also urge us to grant the petition in its entirety because the proposed geographical disaggregation
is intertwined with the Washington Commission's proposed designation of individual exchanges as
service areas, and approving the service area designation alone would create the potential for
"cream skimming."  If the exchanges, rather than the current study areas, are designated as the
service areas, and universal service support is not geographically disaggregated, a competitive
LEC could receive a windfall by entering a relatively low cost exchange and receiving support
based on the higher average cost within the study area.  Petitioners, and commenters that
support the petition, claim that the proposed geographical disaggregation would avoid such
problems.  NECA agrees with other commenters that the Commission should grant the petition,
but cautions the Commission not to "establish the Washington proposal as a de facto standard for
disaggregating interstate universal service support in other areas."  NECA explains that whereas
the approach espoused by the Washington Commission may prove workable on an interim basis,
subsequent developments in forward looking cost methods for rural companies may prove that
other methods work better.  

     6.   USTA and GTE oppose the petition.  USTA expresses concern about the
precedential effects of our decision in this proceeding.  It contends that the issues raised by the
petition have the potential of altering established universal service policies and policies that are
being formulated in ongoing proceedings.  GTE declares that while it supports the petition's
objective to better target federal universal service support, it cannot support the petition unless
the petition is amended to include GTE Northwest's Contel Washington study area in the
proposed change in service area definition for rural areas.  GTE also claims that the proposed
methodology to disaggregate support to areas smaller than a wire center does not fully resolve the
universal service issues in Washington state, even for rural areas, and proposes an alternative
methodology.  GTE recommends that if the Commission allows a state to "experiment with
modifications to its transitional universal service support for rural areas," then the Commission
should set forth guidelines for "any such experimentation."  In reply, the Washington
Commission states that, in light of GTE's subsequent certification of its Contel study area as rural,
it will work with GTE regarding the inclusion of the Contel study area in petitioners' proposal.    
  

                         III.  DISCUSSION

     7.   To begin, we recognize that the request for disaggregated study area support is
inextricably intertwined with the request for agreement with the Washington Commission's
proposed designation of the individual exchanges of the fifteen rural carriers as service areas.  We
also recognize that petitioners' proposed methodology to disaggregate and redistribute the federal
high cost support has not been tested, or even studied, outside the context of the Washington
Commission's limited study.  We also note that much remains to be done in the development of
the forward-looking economic cost model before being used to distribute universal service
support to rural carriers.  The Rural Task Force is developing recommendations on this subject
for the Universal Service Joint Board, which will be followed by the recommendations of that
Joint Board.  Pending completion of these steps, and the Commission's decision on the high cost
support mechanism for rural carriers, rural carriers will continue to receive support under the
existing mechanism until, at least, the year 2001.  For the reasons described below, however, we
agree with the proposed service areas and grant, on an interim basis until we adopt a new high
cost support mechanism for all rural carriers, the proposed waiver of section 54.307 of the
Commission's rules.  When the Commission adopts an order establishing a new support
mechanism for rural carriers, that order will supersede this order, and rural carriers in Washington
will receive high cost support based on the new mechanism.  

     8.   Service Area Designation.  We find that our concurrence with rural LEC
petitioners' request for designation of their individual exchanges as service areas is warranted in
order to promote competition.  The Washington Commission is particularly concerned that rural
areas, of which there are many in Washington, are not left behind in the move to greater
competition.  Petitioners also state that designating eligible telecommunications carriers at the
exchange level, rather than at the study area level, will promote competitive entry by permitting
new entrants to provide service in relatively small areas.  The proposed methodology will more
closely associate support with the cost of providing service than do the current rules.  This, in
turn, should encourage efficient entry in the higher-cost fringe areas as well as the lower-cost core
areas within each exchange.  We conclude that this effort to facilitate local competition justifies
our concurrence with the proposed service area designation.  

     9.   We also conclude that the Washington Commission has addressed the concerns
expressed by the Federal-State Joint Board on Universal Service, as required by the Act and the
Commission's rules.  In the First Recommended Decision, the Joint Board listed three reasons
for retaining, at least initially, the current study areas of rural telephone companies as their service
areas.   First, the Joint Board suggested that retaining study areas would minimize potential
"cream skimming," because competitors would be required, as a condition of eligibility, to provide
service throughout the rural telephone company's study area.  The Commission expressed its
agreement with this analysis in adopting the Joint Board's recommendations regarding the study
areas of rural carriers.  Second, the Joint Board noted that the 1996 Act places rural telephone
companies on a different footing from other local exchange companies, making allowances for
considerations of administrative, technical and economical feasibility.  Finally, the Joint Board
expressed concern that determining embedded costs on a basis other than study areas would
impose an administrative burden on rural companies.  We conclude that petitioners have taken
these concerns into account in crafting the proposed methodology for disaggregating and
redistributing support currently distributed on a study area basis.  In particular, this methodology
is designed to address opportunities for "cream skimming" by competitors.  Moreover, to the
extent the Joint Board was concerned about the interests of rural companies, we find it significant
that the rural LEC petitioners support the proposed service area designation, conditioned on
approval of the proposal to disaggregate support.   
         
     10.  Proposal to Disaggregate and Redistribute Support.  As to petitioners' request for
waiver of section 54.307, the Commission's rules generally may be waived for good cause
shown.  But, as noted by the Court of Appeals for the D.C. Circuit, agency rules are presumed
valid, and "an applicant for waiver faces a high hurdle even at the starting gate."  The
Commission may exercise its general discretion to waive a rule where the particular facts make
strict compliance inconsistent with the public interest.  In addition, the Commission may take
into account considerations of hardship, equity, or more effective implementation of overall policy
on an individual basis.  Waiver is, therefore, appropriate if special circumstances warrant a
deviation from the general rule, and such deviation would better serve the public interest than
strict adherence to the general rule.  

     11.  We believe that special circumstances warrant the deviation from the existing
section 54.307 of the Commission's rules.  The petition proposes an experiment for the
distribution of universal service support to rural carriers serving high cost areas in the State of
Washington.  As such, it will provide useful information in the pending Joint Board and
Commission proceedings to determine how best to distribute universal service support to rural
carriers serving high cost areas across the nation.  In addition, the proposal before us represents
the consensus of a state and 20 of its rural carriers, and the Washington Commission has stated its
willingness to take steps to include GTE's Contel exchanges, as well.

     12.  We also find that petitioners have demonstrated that permitting them to deviate
from section 54.307 of the Commission's rules by implementing their proposal will better serve
the public interest than will strict adherence to the rules.  Without this waiver of section 54.307,
the proposed designation of service areas at the exchange level could result in the potential harms
that the Joint Board sought to avoid in recommending that rural telephone companies' study areas
be retained as their service areas.  Specifically, if service areas were designated as the exchanges,
rather than the study areas, and universal service support were not geographically disaggregated,
a competitor could receive a windfall by providing service in a relatively low cost exchange and
receiving support based on the average cost within the study area.  Petitioners' proposal to
disaggregate support is designed to reduce such opportunities for cream skimming.

     13.  We also conclude that the proposed methodology's use of the BCPM is not a basis
for finding that deviation from the current rule would not better serve the public interest. 
Although the Commission has adopted the synthesis model, rather than the BCPM, for use in
determining high cost support for non-rural carriers, the synthesis model has not yet been
finalized.  As noted above, the Joint Board will be making recommendations, after receiving input
from the Rural Task Force, concerning the nature of the high cost support mechanism that should
be used for rural carriers.  Petitioners' proposed methodology will be superseded by the
Commission's adoption of a new support mechanism for rural carriers. 

     14.  We also note that in the proposed methodology the BCPM will be used in a
different manner than the synthesis model, which the Commission adopted to estimate the cost for
non-rural carriers to provide service.  In the proposed methodology, the BCPM will be used
simply to estimate the relative cost of providing service in density zones within the exchanges
served by the rural LEC petitioners.  We believe that the BCPM is sufficiently accurate for such
purposes on an interim basis.  We emphasize, however, that our approval of the proposed
methodology is not intended as an endorsement of the BCPM for any purpose other than that in
the proposed methodology and for the purposes of this particular situation.  

     15.  Finally, we recognize that it was not possible for petitioners to include the
synthesis model in their proposed methodology because the Commission had not yet adopted it
when the petition was filed.  The Washington Commission and rural LEC petitioners have
invested significant time and effort in developing the proposed methodology, which represents a
significant step forward.  Denying the petition because it uses BCPM would likely result in a
significant delay in the Washington Commission's efforts to promote competition in the areas
served by the rural LEC petitioners.  While the Washington Commission and the rural LEC
petitioners could revise the proposed methodology to include the synthesis model, rather than the
BCPM, and then seek our concurrence, experience suggests that this would be difficult and time
consuming.  On balance, we therefore believe it is appropriate to approve the petition as
proposed.

     16.  Nevertheless, we urge petitioners to consider substituting the synthesis model in
the proposed methodology when it is finalized.  We urge petitioners to take this course because
regardless of the Commission's ultimate decision on whether to apply the synthesis model to rural
carriers, we believe that the synthesis model provides more accurate cost estimates than does the
BCPM and use of the synthesis model will make it easier for USAC to administer petitioners'
methodology.  We hereby give advance approval to modifications to petitioners' proposal to
conform the model platform and inputs to those adopted by this Commission.

     17.  Petitioners suggest that the information necessary for disaggregation of support
can be either supplied to or developed by USAC.  As discussed earlier, such information will be
obtained by running a modified version of the BCPM.  In light of USAC's responsibility for
administering the disbursement of federal support, we conclude that USAC should administer
petitioners' proposal, including the running of the cost model and determination of disaggregated
support amounts in the rural LEC petitioners' current service areas.  We recognize that USAC
will have to work closely with the Washington Commission and rural LEC petitioners to obtain
information necessary to implement the proposal.  We delegate authority to USAC to obtain such
information from these and other parties, as necessary.  For ease of administration, we conclude
that USAC should implement the proposed methodology on January 1, 2000.

     18.  In reaching these conclusions, we make no judgment regarding similar requests
that we may receive in the future and decline to adopt GTE's suggestion that we adopt guidelines
for such requests.  We will examine each request on a case-by-case basis.  We disagree with
USTA's assertion that we should deny the petition because it raises significant issues that have
"the potential of altering the Commission's universal service policies" established by and being
reformulated in ongoing proceedings.  This decision will permit the Washington Commission to
experiment with an alternative method of distributing universal service support to rural carriers
and may provide information useful in the Commission's ongoing proceeding on this subject.  Our
approval of petitioners' proposal on an interim basis permits it to be applied only in the
circumstances outlined in their petition.  It is in no way indicative of what we may decide in any
pending proceeding or how the issues in that proceeding will be addressed.  Finally, we believe
that our decision in this matter accords with the Commission's endeavor to encourage states and
carriers to find innovative ways to foster a pro-competitive environment, and to foster better use
of available support.

                     IV.  ORDERING CLAUSES


     19.  Accordingly, IT IS ORDERED, pursuant to section 214 (e)(5) of the
Communications Act of 1934, as amended, 47 U.S.C.  214(e)(5), sections 54.207 and 54.307 of
the Commission's rules, 47 C.F.R.  54.207, 54.307, and authority delegated by section
54.207(e) of the Commission's rules, 47 C.F.R.  54.207(e), that the petition filed by the
petitioners IS GRANTED to the extent stated herein.

     20.  IT IS FURTHER ORDERED that this ORDER IS EFFECTIVE thirty (30) days
from its release date.  USAC is directed to use the proposed methodology beginning on January
1, 2000.



                         FEDERAL COMMUNICATIONS COMMISSION




                         Lisa M. Zaina
                         Acting Deputy Chief, Common Carrier Bureau