In the 2016 Rate-of-Return Reform Order, the Federal Communications Commission (“FCC”) imposed a strict budget control mechanism over the $2 billion rate-of-return portion of the total $4.5 billion universal service high-cost fund. [1] In the event total High-Cost Loop Support (“HCLS”) and Connect America Fund Broadband Loop Support (“CAF-BLS”) is forecasted to exceed $2 billion in any given year, this self-effectuating control mechanism will kick in to reduce carriers’ quarterly disbursements, keeping funding within the budget. To further control rate-of-return universal service fund (“USF”) disbursements, the FCC’s 2016 Order also imposed a limitation on operating expenses that are eligible for support under both HCLS and CAF BLS, as well as a capital investment allowance mechanism to limit the extent to which USF support may be used to support future capital investments by carriers. Of course, these are not the only caps, controls, and constraints imposed on rate-of-return carriers (e.g., the local service rate floor and reduction of the authorized interstate rate-of-return), and there is one regulation on the horizon that could significantly shrink USF disbursements for some carriers – elimination of USF support for areas served by unsubsidized competitors.

For those rate-of-return carriers that did not elect model-based USF support and remain subject to modified cost-recovery rules, the Rate-of-Return Reform Order is proving to be more harmful than helpful. The fixed USF budget results in a guaranteed annual shortfall of support – estimated at $173 million over the next 12 months. The USF budget shortfall is having a negative effect on the long-term deployment plans and short-term operations of rural broadband providers. Deployment plans have been scrapped or scaled back. The shortfall is causing uncertainty over the best way to meet buildout obligations. It’s also increasing the price rural Americans pay for monthly broadband service.

According to a recent survey conducted by NTCA—The Rural Broadband Association, 64% of the rural companies responding to the survey indicated they would be reducing future network investment over the next 12 months because of reduced USF support over the period of July 2017 through June 2018. The survey also shows that because of the USF shortfall rural consumers will see higher monthly prices for broadband service and receive slower broadband speeds. In meetings with FCC staff, individual rural broadband providers have confirmed the results of NTCA’s survey. Insufficient USF budget is undermining their efforts to serve rural America. The USF budget and everchanging expense limitations have spawned a large dose of regulatory uncertainty, causing rural providers to push pause on current and future broadband deployment plans. Plus, reduced USF support is preventing rate-of-return carriers from providing standalone broadband service in rural areas at rates that are reasonably comparable to those in urban areas.

To sum it up, for nearly all rural rate-of-return carriers, the 2016 Rate-of-Return Reform Order is harmful. Instead of making rural broadband providers more efficient, the order has left cost-based carriers uncertain of how their operations will be affected from year to year, and thus unable to plan their operations. Instead of increasing rural broadband deployment, the order has produced a budget that is inadequate to support broadband deployment by rate-of-return carriers.

The FCC has yet to publicly indicate it agrees with the arguments made by rural broadband providers, nor has it hinted it is ready to re-think the high-cost budget. NTCA, however, believes it is time for the FCC to conduct a full review of the high-cost budget. In a future blog post, we’ll take a look into why NTCA is calling for a budgetary review...

[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 (rel. Mar. 30, 2016) (Rate-of-Return Reform Order). The FCC established a defined budget for the high-cost component of the USF for the first time in the 2011 USF/ICC Transformation Order.