Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of ) ) Jurisdictional Separations and Referral ) CC Docket No. 80-286 To the Federal-State Joint Board ) ) Petition by Eastex Telephone Cooperative, Inc. ) For Waiver of 47 C.F.R. Sections 36.3, 36.123-126, ) 36.141, 36.152-157, 36.191 and 36.372-382 ) to Unfreeze Part 36 Category Relationships ) To: Chief, Wireline Competition Bureau PETITION OF EASTEX TELEPHONE COOPERATIVE, INC. FOR WAIVER OF 47 C.F.R. SECTIONS 36.3, 36.123-126, 36.141, 36.152-157, 36.191 AND 36.372- 382 TO UNFREEZE PART 36 CATEGORY RELATIONSHIPS Pursuant to Section 1.3 of the rules of the Federal Communications Commission (“FCC” or “Commission”), 1 Eastex Telephone Cooperative, Inc. (“Eastex” or the “Cooperative”) hereby requests a permanent waiver of 47 C.F.R. Sections 36.3, 36.123- 126, 36.141, 36.152-157, 36.191 and 36.372-382 (hereinafter referred to as “Frozen Category Rules”) as these rules relate to frozen category relationships entirely removing the category freeze for Eastex. Alternatively, Eastex requests a temporary waiver of the Frozen Category Rules to allow Eastex to “unfreeze” its category relationships for one year after which it would “refreeze” its category relationships. Waiver of these rules would allow Eastex to properly allocate its costs enabling the Cooperative to receive additional cost-based settlements without in any way burdening the high-cost fund. As demonstrated herein, grant of this waiver is warranted due to the fact that the “good 1 47 C.F.R. § 1.3. 2 cause” waiver standard has been satisfied, and grant of this waiver would be in the public interest. I. Background Eastex is a rural telephone cooperative that serves over 24,000 access lines and is the second largest telephone cooperative in Texas in terms of access lines. As shown in the attached map, 2 the Cooperative’s service territory is quite vast. It extends to 21 exchanges over 11 rural counties in East Texas, stretches 125 miles from its upper to its lower boundaries and is comprised of six noncontiguous portions of one study area. The noncontiguous portions are grouped into three geographic regions and served by separate business offices located at Henderson, Livingston and Waskom Texas. As of December 31, 2010, Eastex had a total of 19,839 residential lines (19 percent are Lifeline and Tele-assistance recipients) and 4,344 business lines for a total of 24,183 subscribers (10.75 subscribers per square mile and 4.3 subscribers per route mile of cable). Specific to Internet service, 3 as of the same date, Eastex had a total of 8,110 Digital Subscriber Line (“DSL”) customers, offering 3 Mbps service to approximately 80 percent of the service territory and offering 768 kbps to 95 percent of the service area. 4 Eastex has a strong community presence throughout its three geographical regions. At 2 See Attachment 1. 3 Eastex provides Internet service in conjunction with its wholly-owned affiliate, Eastex Telecom. Accordingly, when Eastex’s Internet service is referenced in this petition, this reference includes the services provided by both Eastex and its affiliate. 4 Eastex provides four levels of DSL service: (1) Play (256 kbps downstream and 128 kbps upstream) for $19.95 per month; Power (768 kbps downstream and 256 kbps upstream) for $49.95 per month; Prime (1.5Mbps downstream and 512 kbps upstream) for $69.95 per month; and Platinum (3Mbps downstream and 512 kbps upstream) for $89.95 per month. As of December 31, 2010, Eastex had 1,439 Play subscribers, 5,446 Power subscribers, 1,061 Prime subscribers and 164 Platinum subscribers for a total of 8,110 DSL subscribers. Additionally, there were 83 DSL employee subscribers. 3 129 full-time employees, Eastex is one of the largest employers in the area. Among the anchor institutions that the Cooperative serves, approximately 91 are municipalities, fire departments, schools, county facilities, law enforcement and forestry services. Formed in 1950, Eastex has made significant investments through the years to engineer, build, and maintain its expansive network which today offers local, long distance, and broadband Internet service to its customers who are predominantly families, farmers, ranchers, and small businesses that have chosen to make a livelihood in the rural area some 125 miles east of Dallas. To fulfill its commitment to its cooperative members, Eastex ensures that its network is one that is dependable, sustainable and one of the most advanced broadband networks, capable of providing robust broadband services to meet the needs of customers through its approximately 5,241 route miles of copper cable and 377 miles of fiber optic cable. Specifically this has meant that the Cooperative has equipped all of its exchanges with digital switches and, as of December 31, 2010, had converted all its switches to new softswitches. 5 Eastex has also actively been installing fiber optic cable throughout the service area to shorten loop lengths in order to be able to provide more bandwidth. The costs to provide these high quality telecommunications and robust broadband services to these rural areas are significant due in large part to the vastness and unique configuration of the Cooperative’s service territory. As demonstrated herein, the Frozen Category Rules have prevented Eastex from properly allocating its costs thus preventing the Cooperative from receiving additional cost-based settlements. Grant of this instant petition would allow the Cooperative to 5 The Cooperative purchased these softswitches out of general funds. 4 begin to receive additional interstate pool settlements and would not in any way burden the high-cost loop fund. II. Waiver Standard In general, the FCC’s rules may be waived for good cause shown. 6 Waiver is appropriate where the “particular facts would make strict compliance inconsistent with the public interest.” 7 The FCC may grant a waiver of its rules where the requested relief would not undermine the policy objective of the rule in question, special circumstances warrant a deviation from the general rule, and such deviation will serve the public interest. 8 III. Waiver is Justified A. Eastex Invested with the Expectation that the Freeze Would End in the Five-Year Time Period Specified by the FCC In 2001, the FCC required all rate-of-return carriers to freeze their allocation factors and allowed these carriers the option of freezing their category relationships. 9 6 47 C.F.R. § 1.3. 7 See AT&T Wireless Services, Inc. et al. v. Federal Communications Commission, No. 00-1304 (D.C. Cir. 2001), citing Northeast Cellular Tel. Co. v. FCC, 897 F.2d 1164, 1166 (D.C. Cir. 1990) (“Northeast Cellular”). 8 See generally, WAIT Radio v. FCC, 418 F.2d 1153 (D.C. Cir. 1969), cert. denied, 409 U.S. 1027 (1972); see also Northeast Cellular (D.C. Cir. 1990). 9 See Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Report and Order, 16 FCC Rcd 11382 (2001) (“2001 Separations Freeze Order”). Category relationships are “the percentages of a carrier’s costs for equipment and investment, recorded in Part 32 accounts, that are assigned to various Part 36 categories based on how the equipment or investment in that category is being used.” In the Matter of Petition by Gila River Telecommunications, Inc. Pursuant to 47 C.F.R. Sections 36.3, 36.123-126, 36.152-157, and 36.372-382 for Commission Approval to Unfreeze Part 36 Category Relationships, CC Docket No. 80-286, Order, FCC 10-199 (rel. Dec. 2, 2010) at n.7. 5 When the Cooperative made its election to freeze its categories, it did not anticipate that the freeze would last for such an extended period of time. Initially, the freeze was set to expire on June 30, 2006 or until the Commission completed comprehensive separations reform whichever came first. 10 Based upon this understanding, on August 31, 2001 Eastex notified the National Exchange Carrier Association (“NECA”) of its election to freeze its category relationships “during the period of July 1, 2001 through June 30, 2006.” 11 In 2006, however, the FCC extended the freeze for three years or until the Commission completed comprehensive separations reform whichever came first 12 and then continued to extend the freeze for one year intervals with the most recent decision extending the freeze until June 30, 2012. 13 During this period of time, the demand from Eastex customers for quality telecom and broadband services continued to increase. To meet these demands, Eastex continued to invest in expanding its network. In the four years from January 2007 through December 2010, Eastex invested $55 million in plant additions, to provide both telephone and broadband services to customers. With few exceptions, without Eastex services, many customers would have no service of any kind at their residence. A portion of the investments made in the Cooperative’s network to provide DSL services came from 10 See 2001 Separations Freeze Order at para 9 . 11 Letter from Allen Dorman, General Manager of Eastex to Mr. Dean E. Schneberger, Director, Southwestern Region, NECA dated August 31, 2001. 12 See Jurisdictional Separations and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Order and Further Notice of Proposed Rulemaking, 21 FCC Rcd 5516, 5523, para. 16 (2006). 13 See Jurisdictional Separations Reform and Referral to the Federal-State Joint Board, CC Docket No. 80- 286, Report and Order, FCC 09-44 (rel. May 15, 2009) (“2009 Separations Freeze Extension Order”); Jurisdictional Separations Reform and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Report and Order, FCC 10-89 (rel. May 25, 2010);. Jurisdictional Separations Reform and Referral to the Federal-State Joint Board, CC Docket No. 80-286, Report and Order, FCC 11-71 (rel. May 4, 2011). 6 funds obtained from a loan from Citizen’s National Bank – Henderson (“CNB”). As of December 31, 2010, Eastex had long term debt of $8.7 million, all of which was from advances from the CNB loan which were used to deploy DSL. 14 B. Allowing Eastex to Unfreeze Categories Under These Circumstances Constitutes “Good Cause” and is in the Public Interest   While making these investments, Eastex has been unable to properly assign its costs related to broadband deployment due to the Frozen Category Rules. In its 2009 Separations Freeze Extension Order, the FCC recognized that companies such as Eastex may have made their decision for “administrative convenience, expecting that when they were ready to undertake new investment after the end of the five-year freeze, they would be allowed to allocate the investment to the appropriate categories.” 15 Believing this to be a matter that should be addressed, the FCC asked the Federal-State Joint Board on Jurisdictional Separations (“Joint Board on Separations” or “Board”) to consider “whether allowing carriers a one-time opportunity to freeze or unfreeze category relationships is warranted under the circumstances.” 16 Based on this directive, on March 5, 2010, the state members of the Joint Board on Separations submitted a proposal to the Board recommending an interim adjustment of separations allocation factors and category relationships pending comprehensive reform. 17 Part I of the Proposal addressed the “cost-revenue mismatch” for carriers that have frozen their category relationships due 14 Eastex does not provide fiber-to-the-home except where the customer requires higher bandwidths such as schools and cell towers. 15 2009 Separations Freeze Extension Order at para. 19. 16 Id. 17 See Letter from Steve Kolbeck, State Chairman, Federal-State Joint Board on Jurisdictional Separations, to Marlene H. Dortch, Secretary, FCC, CC Docket No. 80-286 (Mar. 5, 2010) (“Proposal”). 7 to the fact that these carriers “have not directly assigned their interstate special access investment during the freeze.” 18 According to the Proposal, the cost studies on which the category relationships were based “is governed by separations studies that are nine years old” which “are unlikely to reflect current conditions” and thus “no longer have any basis in fact.” 19 The Proposal then declares, “[w]hile some inaccuracy of the separations process is permissible, currently the actual use to which the property is put is almost completely ignored [which] is contrary to the Supreme Court’s instructions in Smith v. Illinois.” 20 As further explained in the Proposal, Companies’ use of the same frozen categorization percentages that they used in 2001, regardless of the actual uses of their current plant, is not sufficient to properly separate costs between jurisdictions. . . . We believe that the freeze and the FCC staff directive to ignore direct assignment rules have led to a mis-assignment of special access costs. This mis- assignment is created by the growth in interstate special access lines and revenues over time without a commensurate growth in interstate assignment of costs. This mis-assignment is accentuated by the fact that much of the revenue benefit due to the growth in the number of special access circuits would have been allocated to the interstate jurisdiction given the FCC’s assertion of jurisdiction over certain exchange special access lines with even minimal levels of interstate traffic. In contrast the associated special access costs under the freeze would in large part have been allocated to the state jurisdiction at the same relative level as before the freeze. 21 Although to date, no action has been taken on the Proposal, it is evident that both the FCC and the Board believe it is important that the cost-revenue mismatch caused by 18 Id. At p. 5. 19 Proposal at 2-3. 20 Id. at 3 citing Smith v. Illinois Bell Tel. Co., 282 U.S. 133, 148 (1930). 21 Id. at 5-6. Subsequent to the release of the Proposal, the Board sought comment on the Proposal as well as issues related to comprehensive permanent separations reform that the FCC had referred to it. See Federal-State Joint Board on Separations Seeks Comment on Proposal for Interim Adjustments to Jurisdictional Separations Allocation Factors and Category Relationships Pending Comprehensive Reform and Seeks Comment on Comprehensive Reform, CC Docket No. 80-286, Public Notice, 25 FCC Rcd 3336. 8 the freeze of category relationships be addressed. Grant of this waiver would be a step in that direction in that it would allow Eastex to properly allocate its costs enabling the Cooperative to receive additional cost-based settlements without in any way burdening the high-cost fund. 22 1. The Cooperative Would Receive Additional Cost-Based Settlements Without Burdening the High-Cost Fund Specifically, grant of this waiver would allow Eastex to allocate more of its costs to the interstate jurisdiction which would allow the Cooperative to receive additional cost-based settlements that would come from interstate pool settlements – not from the high-cost loop fund. 23 Accordingly, grant of this waiver would not burden the high-cost loop fund in any manner. To illustrate, as shown in Section II of Attachment 2, based on 2009 cost data, Eastex estimates that if the FCC grants this instant waiver, the proportion of net investment allocated to the intrastate jurisdiction would decrease while net investment allocated to the interstate jurisdiction would increase resulting in a shift of 13 percent of net investment to interstate. Similarly, Eastex estimates that the proportion of expenses 22 The majority of Eastex’s costs which have been mis-allocated are special access costs. 23 Eastex is a “cost company.” The Commission has explained the NECA pooling process as it relates to cost companies as follows: “Incumbent LECs that participate in NECA pools collect access charges from interexchange carriers at the rates contained in tariffs filed by NECA. Each pool participant receives settlements from the pools to recover the cost of providing service plus a pro-rata share of the pool’s earnings. NECA pool participants’ interstate access charge settlements are determined either on the basis of cost studies or average schedule formulas. Cost companies are incumbent LECs that receive compensation for interstate telecommunications services based on their actual interstate investment and expenses, calculated from detailed cost studies. Average schedule companies are those incumbent LECs that receive compensation for use of their interstate common carrier services on the basis of formulas that are designed to simulate the disbursements that would be received by a cost company that is representative of average schedule companies.” Federal-State Joint Board on Universal Service; Iowa Telecommunications Services, Inc.; and Wellman Cooperative Telephone Association, Joint Petition for Waiver of the Definition of “Study Area” Contained in Part 36, Appendix-Glossary of the Commission’s Rules; Petition for Waiver of Sections 69.605(c) and 54.305 of the Commission’s Rule, CC Docket No. 96- 45, Order, DA 10-1027 (rel. June 4, 2010) at para. 12. 9 allocated to the intrastate jurisdiction would decrease while expenses allocated to the interstate jurisdiction would increase resulting in a shift of 7 percent to interstate. As shown in Section I of Attachment 2, this shift in cost allocation would result in the Cooperative receiving $584,005 less in high-cost loop support and $2,577,407 in additional cost-based settlements or an estimated net gain in settlements of $1,993,402. 24 All of the additional settlements would come from the NECA interstate traffic sensitive pool settlements and would actually reduce the burden on the high-cost loop fund. 25 2. The Additional Settlements Would Be Used to Expand and Enhance Broadband Offerings Eastex will use the additional cost-based settlements to reduce the $8.7 million debt that has already been incurred which was used to deploy DSL throughout the Cooperative’s rural service territory. Additionally, Eastex will use the additional settlements to continue expanding its network and enhancing broadband service to its subscribers. One of the ways that it will accomplish this will be to continue to shorten loop lengths to provide more bandwidth. Eastex will also continue to install more fiber to the more than ninety anchor institutions within its service territory to provide critical broadband infrastructure as well as to provide infrastructure to other service providers for their use. For example, the Cooperative already provides copper and fiber facilities to cell towers enabling wireless carriers to provide service in this rural portion of Texas. 24 See Attachment 3 using 2009 cost data to illustrate that costs related to DSL are the primary driver for the shift in costs to interstate if the FCC were to grant this waiver allowing Eastex to unfreeze its categories. 25 These numbers do not take into consideration the near-term universal service reform proposals which the Commission is currently considering and would need to be adjusted to reflect whatever rule changes are adopted. See In the Matter of Connect America Fund, A National Broadband Plan for Our Future, Establishing Just and Reasonable Rates for Local Exchange Carriers, High-Cost Universal Service Support, Developing an Unified Intercarrier Compensation Regime, Federal-State Joint Board on Universal Service, and Lifeline and Link-Up, WC Dockets No. 10-90 et al., Notice of Proposed Rulemaking and Further Notice of Proposed Rulemaking, FCC 11-13 (rel. Feb. 9, 2011). 10 C. Costs Are Not Being Recovered from the State Universal Service Fund As explained above, due to the operation of the Frozen Category Rules, costs that should have been allocated to the interstate jurisdiction instead have been allocated to the state jurisdiction. As explained below, for Eastex, these mis-assigned costs are not recovered from the Texas Universal Service Fund. Accordingly, absent grant of this waiver, Eastex will never be able to recover these costs. In December 1998, the Public Utility Commission of Texas (“PUC”) adopted a new set of rules which expanded and restructured the Texas Universal Service Fund (“TUSF”). Under these rules in order for a telecommunications provider in Texas to receive funds from the TUSF, it must apply for designation as an Eligible Telecommunications Provider for state Universal Service Fund (“USF”) support and an Eligible Telecommunications Carrier for federal USF support. As part of this proceeding, on January 1, 1999, the PUC began implementing the Small and Rural ILEC (“SRILEC”) universal service funding plan. This plan called for monthly per-line TUSF support to replace the amount of implicit support Incumbent Local Exchange Carriers (“ILECs”) received from the intraLATA toll pool and reductions in toll rates which created an "explicit" funding of distributions from the SRILEC plan. This new plan also required USF payments to small and rural ILECs to be made monthly, based on a one- time "snapshot" per-access line basis. Specifically, this monthly amount is calculated by dividing the amount of the TUSF support for each SRILEC study area for the 1997 test year by the number of eligible lines which results in the amount of support per year and then dividing this amount by twelve to determine the monthly payments. ATTACHMENT 1 ATTACHMENT 2 Federal USF Interstate HCLF Support Pool Settlements TOTAL Impact (584,005)$ 2,577,407$ 1,993,402$ II. Cost Impact Analysis - Shift to Interstate Original Unfreeze Cat Cost Percentage State Costs State Costs Shift to Interstate Shift to Interstate Net Investments 46,199,000$ 40,358,648$ 5,840,352$ 13% Expenses 26,058,310$ 24,205,510$ 1,852,800$ 7% This shows the amount of net invest and expenses reassigned to Interstate during the 2009 study period. I. Revenue Impact - Un Freezing COE and CWF Categories Eastex Telephone Cooperative, Inc. ATTACHMENT 3 Frozen UnFrozen Frozen Cat. Unfrozen Cat. Interstate Interstate Part 32 COE Description 12/31/09 Category Category Allocated Costs Allocated Costs Variance Allocator Impact Account Category Costs Factors Factors 12/31/09 12/31/09 2210 2 Tandem Switching 0.015476 0.015476 332,453$ 332,453$ -$ 0.394667 -$ 3 Local Switching 0.984524 0.984524 21,148,807$ 21,148,807$ -$ 0.277922 -$ 5 Equal Access Total Switch Investment 21,481,260$ 1.000000 1.000000 21,481,260$ 21,481,260$ -$ -$ 2230 4.11 WideBand Exchange xDSL 0.084403 0.379988 3,214,560$ 14,472,121$ 11,257,561$ 1.000000 11,257,561$ 4.121 Exchange Trunk EAS 0.076063 0.021363 2,896,903$ 813,628$ (2,083,274)$ 0.000000 -$ 4.122 Exchange Trunk Toll - - -$ -$ -$ 4.123 Exchange Trunk Special - - -$ $ -$ 4.13 Exchange Line Circuit 0.653071 0.532366 24,872,709$ 20,275,553$ (4,597,156)$ 0.250000 (1,149,289)$ 4.21 IX Circuit - Other Company - - -$ -$ -$ 4.22 IX Circuit - Wideband - 0.011030 -$ 420,090$ 420,090$ 1.000000 420,090$ 4.23 IX Circuit - Other 0.186463 0.055253 7,101,593$ 2,104,371$ (4,997,222)$ 0.440000 (2,198,777)$ 4.3 Host / Remote - - Total Circuit Investment 38,085,764$ 1.000000 1.000000 38,085,764$ 38,085,764$ -$ 8,329,585$ Central Office Equipment (COE) Category Impact Summary Eastex Telephone Cooperative, Inc. Frozen UnFrozen Frozen Cat. Unfrozen Cat. Interstate Interstate Part 32 Cable & Wire Description 12/31/09 Category Category Allocated Costs Allocated Costs Variance Allocator Impact Account Category Costs Factors Factors 12/31/09 12/31/09 2410 1 Exchange Line 0.917459 0.943430 98,654,972$ 101,447,560$ 2,792,588$ 0.250000 698,147$ 2.1 Exchange Trunk - EAS 0.031263 0.021427 3,361,733$ 2,304,013$ (1,057,720)$ 0.000000 -$ 2.2 Exchange Trunk - Toll 0.000000 0.000000 -$ -$ -$ 0.000000 -$ 2.3 Exchange Trunk - WB 0.016102 0.011036 1,731,445$ 1,186,671$ (544,774)$ 1.000000 (544,774)$ 2.4 Exchange Trunk - 0.000000 0.000000 -$ -$ -$ 0.000000 -$ 3 Inter-exchange 0.035176 0.024108 3,782,454$ 2,592,360$ (1,190,094)$ 0.410000 (487,939)$ 4 Host / Remote 0.000000 0.000000 -$ -$ -$ 0.000000 -$ Total Cable and Wire Investment 107,530,604$ 1.000000 1.000000 107,530,604$ 107,530,604$ 0$ (334,565)$ Cable & Wire Facilities (C&WF) Category Impact Summary Eastex Telephone Cooperative, Inc.