Over the last few weeks, various rate-of-return incumbent local exchange carriers that voluntarily transitioned to model-based universal service fund (USF) support have submitted ex parte letters urging the Federal Communications Commission (FCC or Commission) to allocate additional funding for the Alternative Connect America Cost Model (A-CAM). Specifically, A-CAM carriers want the FCC to fully fund the model – $200 of support per month, per location. The recent burst of advocacy is due to the FCC’s quickly approaching self-imposed December 31, 2017 deadline for deciding whether to increase total annual A-CAM support.

A-CAM companies, however, are not the only ones staking a claim to the reserve funds. Rate-of-return carriers operating under revised cost-based USF rules are in desperate need of additional funding to address the negative impact of the FCC’s high-cost budget. The FCC faces a difficult decision because there is a limited amount of high-cost reserve funds available for use, and allocating reserve funds to either group of carriers will result in increased broadband buildout in rural areas.

The A-CAM Support Paradigm

In the 2016 Rate-of-Return Reform Order, the FCC adopted rules allowing certain rate-of-return carriers to voluntarily receive model-based USF support derived from the Alternative Connect America Cost Model (“A-CAM”) over a ten-year period, in exchange for meeting broadband buildout requirements. [1] As adopted, the FCC’s cost model regime was set to provide support to all locations in a rate-of-return study area where average deployment costs are above a $52.50 funding benchmark, with support being capped at $200 per-location. [2] But, the A-CAM’s funding benchmark and per-location cap were subject to reduction in the event an overwhelming number of carriers chose to move to model-based support. [3]

A-CAM eligible carriers received offers of support in August 2016, [4] and two months later, the FCC announced that a total of 216 rate-of-return carriers submitted letters electing 274 separate offers of A-CAM support in 43 states. [5] Total model-based support and transition payments for these electing carriers, however, exceeded the A-CAM’s overall 10-year budget by more than $160 million annually, forcing the FCC back to the drawing board to calculate new, revised offers of support. To determine those amounts, the FCC first allocated an additional $50 million annually to the A-CAM. [6] Second, the FCC reduced the per location funding cap to $146.10. Finally, the FCC reduced support offers based on the percentage of locations lacking 10/1 Mbps within carriers’ study areas. Carriers with low overall broadband deployment received larger support offers, allowing the FCC to target model support toward areas that do not have access to high-speed broadband service.

A total of 191 carriers received 228 revised offers of A-CAM support, along with revised broadband deployment obligations. [7] Following a 30-day period, a total of 182 rate-of-return carriers accepted 217 revised offers of support in 39 states. [8] However, there was one caveat. Carriers that accepted revised offers were required to agree to meet the terms of their original A-CAM support offers if the Commission decides to fund the original offers before December 31, 2017. [9]

A-CAM Carriers Push for $200 Per Location Funding As FCC Deadline Approaches

In the Further Notice of Proposed Rulemaking (FNPRM) that accompanied the A-CAM Revised Offer Order, the FCC sought comment on whether to allocate additional funding for the A-CAM. All options are on the table. The FCC may “further increase the budget for A-CAM to provide the full amount of the original offer for some or all of those carriers that accepted the second offer of model-based support.” [10] Alternatively, the FCC could increase the A-CAM budget by a lesser amount.

While A-CAM carriers have consistently advocated for more funding since release of the FNPRM, they have ramped up those efforts over the past few weeks. Ex parte letters have been submitted by groups of A-CAM carriers that provide service within the same state, and many of those letters have been followed up by support from the relevant state’s public utility commission. They all make the same case for allocating additional funding of $200 per month, per location by quantifying the beneficial impact of increased USF support. For example, a group of 13 A-CAM companies located in Michigan explain that increasing support to $200 per month, per location will result in an additional 1,138 locations in Michigan having access to 25/3 Mbps broadband service, while 2,326 locations will “newly have access to service of at least 10/1 Mbps.” [11] Likewise, Mississippi A-CAM companies state that increasing support to $200 per month, per location will “result in an additional 1,359 rural consumers in Mississippi having access to a minimum of 25/3 Mbps broadband service and an additional 787 rural consumers having access to service of at least 10/1 Mbps.” [12] A-CAM companies in other states have submitted similar data. [13]

How Should High-Cost Reserve Funds Be Used? A-CAM or Cost-Based Carriers?

The arguments made by the A-CAM companies are straightforward and accurate. If the FCC allocates additional funding for the A-CAM, it will result in increased broadband buildout. It’s simple math. But, there is a limited amount of reserve funds at the FCC’s disposable, and it must take this into consideration before making a decision. How much, if any, should go to the A-CAM? Alternatively, should high-cost reserves be used for something else or a different set of broadband providers? Non-A-CAM rate-of-return carriers would answer YES! to that question.

Rate-of-return carriers that did not transition to the model, and those that were barred from even having the opportunity to consider moving to the A-CAM are being squeezed crushed by the current high-cost USF budget. The insufficient budget, combined with everchanging expense limitations, have forced cost-based rate-of-return carriers to shrink broadband network investment. Allocating additional funding to these carriers will increase their broadband deployment. This too is simple math.

Assuming for a minute that high-cost USF reserve funds will be allocated to only one group of rate-of-return carriers, which group should it be – A-CAM or cost-based carriers? Carriers receiving USF support from the A-CAM and carriers receiving USF support under the revised cost-based system both use it to construct and maintain networks that provide the same high-speed broadband service – the same connectivity that is needed for jobs, education, healthcare, public safety, and economic development. Both A-CAM and cost-based companies can show that additional funding will result in additional broadband deployment. Clearly, both are deserving.

However, cost-based companies can argue that they should be first in line for assistance because A-CAM companies have already received an additional allocation of reserve funding to address budgetary insufficiency. In response to the large amount of companies that elected to move to the model, the FCC allocated “an additional $50 million annually to the A-CAM budget from existing cash in the high-cost account.” [14] This adds up to $500 million over the 10-year A-CAM term “to help spur additional broadband deployment in rural areas.” [15] In contrast, rate-of-return carriers subject to the revised cost-based USF rules continue to operate under the weight of an insufficient budget, which is causing reduced network investments, lower broadband speeds, and higher consumer prices in their parts of rural America.

Cost-based companies can further argue that almost all the companies that moved to the A-CAM will receive more annual USF support than they received under the legacy cost-based USF regime. When A-CAM funding was authorized in 2017, the FCC’s Wireline Competition Bureau detailed the advantageous position that newly minted model-based carriers would soon occupy:

Collectively, the amount of legacy support, exclusive of CAF-ICC support, received in 2015 by all of the carriers accepting the offer of A-CAM support (both those authorized on Dec. 20, 2016 and those authorized today) was $328,837,694. The total amount of A-CAM support and transition payments that these authorized carriers will receive over the course of the 10-year term is $5,283,553,352, averaging $528,355,335 on an annualized basis. Therefore, the net increase in annualized support compared to legacy 2015 amounts is $199,517,641. [16]

The upshot of all this is that pumping reserve funds into either USF system – the new A-CAM or the revised cost-based regime – will result in increased broadband deployment in rural America. If you live in a rural area and are asked the question “how should USF reserve funds be used,” your answer will depend on whether you live in an area served by an A-CAM company or a cost-based company. Of course the best answer, regardless of your location, is both.

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[1] Connect America Fund, WC Docket No. 10-90, ETC Annual Reports and Certifications, WC Docket No. 14-58, Developing a Unified Intercarrier Compensation Regime, CC Docket No. 01-92, Report and Order, Order and Order On Reconsideration, and Further Notice Of Proposed Rulemaking, FCC 16-33, ¶¶ 17-79 (2016) (Rate-of-Return Reform Order).

[2] Support is provided in areas where costs are above a specified benchmark, referred to as the “funding benchmark.”

[3] Carriers were required to elect to move to the model on a state-level basis, which prevented the ability of carriers with multiple study areas in a state to cherry-pick study areas where model support is greater than legacy support, and retain legacy support in study areas where legacy support is greater. Rate-of-Return Reform Order at ¶ 65.

[4] Wireline Competition Bureau Announces Support Amounts Offered to Rate-of-Return Carriers to Expand Rural Broadband, WC Docket No. 10-90, Public Notice, DA 16-869 (2016).

[5] Wireline Competition Bureau Announces Results Of Rate-Of-Return Carriers That Accepted Offer Of Model Support, WC Docket No. 10-90, Public Notice, DA 16-1246 (2016).

[6] Connect America Fund, WC Docket No. 10-90, Report And Order And Further Notice Of Proposed Rulemaking, FCC 16-178, ¶ 7 (2016) (A-CAM Revised Offer Order).

[7] Wireline Competition Bureau Authorizes 35 Rate-Of-Return Companies To Receive More Than $51 Million Annually In Alternative Connect America Cost Model Support And Announces Offers Of Revised A-Cam Support Amounts To 191 Rate-Of-Return Companies To Expand Rural Broadband, WC Docket No. 10-90, Public Notice, DA 16-1422 (2016) (A-CAM Revised Offer PN). There was one exception to the FCC’s revised A-CAM offers. There were no revised offers for 35 carriers that received offers of model-based support that were less than the amounts of legacy USF support they received in 2015. Instead, the FCC locked these carriers into their original offers of A-CAM support, the $200 per location funding cap, and their original deployment obligations. These 35 “glide path carriers” accepted 45 offers of support. A-CAM Revised Offer Order at ¶ 7.

[8] Wireline Competition Bureau Authorizes 182 Rate-Of-Return Companies To Receive $454 Million Annually In Alternative Connect America Cost Model Support To Expand Rural Broadband, WC Docket No. 10-90, DA 17-99 (Jan. 24, 2017) (A-CAM 2nd Authorization PN).

[9] A-CAM Revised Offer Order at ¶¶ 12, 17.

[10] A-CAM Revised Offer Order at ¶ 17.

[11] Letter From Michigan A-CAM Companies to Marlene Dortch, FCC Secretary, WC Docket No. 10-90 (Dec. 7, 2017).

[12] Letter From Mississippi A-CAM Companies to Marlene Dortch, FCC Secretary, WC Docket No. 10-90 (Dec. 7, 2017). The Mississippi companies likely mean “locations” instead of “consumers.”

[13] See, e.g., letters submitted by A-CAM companies in Ohio, Pennsylvania, Alabama, Virginia, Colorado, Wisconsin, Oklahoma, and Minnesota.

[14] A-CAM Revised Offer Order at ¶ 6. The original A-CAM budget of $150 million annually was created using funding from the high-cost reserve account. Rate-of-Return Reform Order at ¶ 60.

[15] A-CAM Revised Offer Order at ¶ 6.

[16] A-CAM 2nd Authorization PN at 2.