Recent ex parte filings made by NTCA–The Rural Broadband Association and rural broadband providers show that the Federal Communications Commission’s (“FCC”) fixed budget for the high-cost portion of the universal service fund (“USF”) is having a negative effect on rural broadband deployment. NTCA estimates that the high-cost budget will produce a USF support shortfall of $173 million over the next 12 months. The impact of that shortage, however, has been immediate and widespread. Results from a recent survey conducted by NTCA show that the support shortfall has forced rural rate-of-return carriers to roll back broadband deployment plans and will lead to higher prices and slower broadband speeds for rural America.

Despite the fact that rural providers are pumping the brakes on their buildout plans, the FCC has not indicated it is ready to re-think the high-cost budget. NTCA, however, claims the FCC is obligated to perform a review of the budget, and make necessary adjustments, by the end of this year. NTCA is certain that a review will lead the FCC to conclude the high-cost budget is insufficient to maintain and increase deployment of rural broadband networks.

NTCA’s assertion that the FCC is obligated to perform a budgetary review is based on language in the Tenth Circuit’s decision upholding the FCC’s 2011 USF/ICC Transformation Order, in which the FCC, for the first time, defined a budget for the high-cost fund. [1] According to NTCA, the Tenth Circuit upheld the part of the FCC’s order imposing a budget based in large part upon the FCC’s representation that it would conduct a budgetary review by the end of 2017.

Let’s unpack NTCA’s budgetary review argument by taking a look at what the Tenth Circuit said in its opinion, and then examining whether the FCC is required to make a review or merely has the discretion to do so.

The Tenth Circuit’s Decision

One of the issues addressed by the U.S. Court of Appeals for the Tenth Circuit in its opinion upholding the FCC’s 2011 USF/ICC Transformation Order was whether the FCC acted arbitrarily in simultaneously imposing new broadband service requirements and reducing USF support. [2] Rural carriers challenging the Transformation Order argued that the FCC failed to ensure that USF support for rural carriers is sufficient to preserve and advance universal service.

In the USF/ICC Transformation Order, the FCC established a defined budget for the high-cost component of the USF for the next six years (2011-2017), capped certain USF support-eligible expenses, and eliminated certain USF support mechanisms, while at the same time, requiring rate-of-return carriers to provide 4/1 Mbps broadband service upon reasonable request. These FCC decisions – characterized by rate-of-return carriers as an overall reduction in USF support with a requirement to “do more” – form the basis of the sufficiency question.

The FCC adopted the budget pursuant to its authority under the universal service statute. At issue here is Section 254(b) of the Communications Act, which requires the FCC to base its policies for preserving and advancing universal service on a set of principles, one of which states that “[t]here should be specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal service.” Since the ’96 Act was passed, FCC decisions as to what constitutes sufficient support generally have been upheld, meaning the FCC has wide discretion to say what is or is not sufficient. [3] This is important to remember when analyzing the sufficiency arguments made by rate-of-return carriers in their challenge of the FCC’s Transformation Order, as well as the reasoning behind the FCC’s decision to adopt a high-cost USF budget.

Rural carriers that challenged the Transformation Order argued that the high-cost fund’s fixed budget violates Section 254 because it does not provide sufficient support. They claimed that the FCC’s decision to adopt the budget focused entirely on correcting inefficiencies and eliminating wasteful spending. By limiting its analysis to whether, without reform, USF support would be excessive, the FCC failed to consider whether too little support would be provided. Rural carriers claimed that the FCC made no effort to quantify whether support under the fixed USF budget would cover the efficient cost of providing voice service plus the added cost of satisfying the new broadband service requirements adopted in the order. The FCC’s failure to consider both sides of the equation, they argued, makes the decision arbitrary and violates the Communications Act.

How did the FCC respond to this “failure to analyze all sides of the issue” argument? The FCC said that calculating precise costs for some 800 rate-of-return carriers would have been too difficult. Rather than attempt to determine the cost for each USF recipient to meet the Transformation Order’s broadband requirements, the FCC simply froze the size of the high-cost fund at its current estimated level at the time the Order was released – $4.5 billion, with $2 billion of that amount allocated to rate-of-return carriers – and adopted regulations aimed at removing inefficiencies and waste. In its discretion, the FCC believed this action would best ensure a specific, predictable, and sufficient universal service mechanism. In other words, even though the FCC capped the fund at its 2011 level, the FCC considered this amount sufficient because it was eliminating inefficiencies and waste at the same time. [4]

At the outset of Tenth Circuit’s analysis of whether the FCC’s order failed to ensure sufficient USF support, the court stated that Section 254(b) identifies a set of principles, not specific commands. The Tenth Circuit further explained this view by citing a few legal nuggets from one of its previous decisions related to universal service – the FCC must base its policies on the 254(b) principles, any particular principle can be trumped in the appropriate case, but the FCC may not depart from the principles altogether to achieve some goal.

Because the term “sufficient” is ambiguous, the Tenth Circuit’s review of the FCC’s interpretation was conducted pursuant to Chevron step-two, which required the court to “determine...only that the FCC’s “sufficiency” analysis was not arbitrary, capricious, or manifestly contrary to the statute.”

Here is how the Tenth Circuit melted down the FCC’s decision to subject the high-cost fund to a budget:

In sum, the FCC determined that budgetary “sufficiency” for price cap and rate-of return carriers could be achieved through a combination of measures, including, but not limited to: (1) maintaining current USF funding levels while reducing or eliminating waste and inefficiencies that existed in the prior USF funding scheme; (2) affording carriers the authority to determine which requests for broadband service are reasonable; (3) allowing carriers, when necessary, to use the waiver process; and (4) conducting a budgetary review by the end of six years. [5]

In the end, the Tenth Circuit found that these determinations were not arbitrary, capricious, or manifestly contrary to the directives Section 254, leading the court to conclude that the FCC’s decision was reasonable, and thus sufficient to survive scrutiny under Chevron. Case closed. FCC high-cost budget approved.

NTCA’s Argument

The fourth measure identified by the Tenth Circuit is what is important here. In its opinion, the Tenth Circuit specifically noted that the FCC had indicated that it would need to evaluate the effect of reforms before adjusting its budget, and that the FCC specifically stated that it anticipated revisiting and adjusting accordingly the appropriate size of each of its programs by the end of the six-year period, based on market developments. The Tenth Circuit’s decision to bless the FCC’s high-cost budget was based, in part, on the FCC’s pledge to conduct a review of the USF high-cost budget before the end of 2017. But, what exactly did the FCC say in the USF/ICC Transformation Order about revisiting the budget? Here is the full paragraph containing the budget review language:

For the first time, we now establish a defined budget for the high-cost component of the universal service fund. We believe the establishment of such a budget will best ensure that we have in place “specific, predictable, and sufficient” funding mechanisms to achieve our universal service objectives. We are today taking important steps to control costs and improve accountability in USF, and our estimates of the funding necessary for components of the CAF and legacy high-cost mechanisms represent our predictive judgment as to how best to allocate limited resources at this time.  We anticipate that we may revisit and adjust accordingly the appropriate size of each of these programs by the end of the six-year period we budget for today, based on market developments, efficiencies realized, and further evaluation of the effect of these programs in achieving our goals. [6]

That language hardly gives a strong commitment. It’s a bit wishy-washy – “We anticipate that we may revisit and adjust...” Nor does the language indicate how thorough or extensive such a review would be, if the FCC decides to engage in such an undertaking. Similarly, the Tenth Circuit’s opinion does not say the reasonableness of the FCC’s decision to put the high-cost fund on a budget hinges solely on the FCC conducting a budgetary review by the end of 2017. Thus, if the FCC skips the review, the Tenth Circuit has still identified three other measures through which the FCC determined that budgetary “sufficiency” could be achieved. All of this points to the FCC having discretion to perform or decline to perform a budgetary review, rather than there being an obligation.

However, as NTCA has explained in ex partes, the reasonable request standard identified by the Tenth Circuit in measure (2) has changed since 2011. That 2011 standard required rate-of-return carriers to provide 4/1 Mbps broadband upon reasonable request. In the 2016 Rate-of-Return Reform Order, the FCC adopted specific 10/1 Mbps broadband service deployment obligations that are a condition of the receipt of high-cost support for every carrier.

Furthermore, the waiver provision in (3) arguably does not carry much weight. In its case before the Tenth Circuit, the FCC argued that “[c]ourts have repeatedly held that it is reasonable for the agency to rely on a waiver process to address any unforeseen shortfalls that might arise in specific instances.” [7] The FCC further explained that it “is not relying on the waiver process to save an otherwise irrational rule; to the contrary, the rule is rational and the waiver process addresses potential outlier cases.” Results from a recent NTCA survey, however, destroy the FCC’s “rational rule with a waiver to address outliers” argument. According to the NTCA survey, “due to the impacts of the budget control imposed on cost-based USF and the uncertainty of changes to that mechanism in future, 183 NTCA member RLECs have indicated that they will reduce their broadband investments over the next 12 months by nearly $950,000, on average, and must still charge rates for standalone broadband that are on average far in excess of those paid by urban consumers.” It should be noted that a modest amount of total NTCA members responded to the survey. To conclude, the FCC’ budget can hardly be described as a rational rule, when it has produced at least 183 outliers.

Regardless of whether the FCC is obligated to review the high-cost budget or it merely has discretion to take such action, based on data provided by NTCA and individual rural broadband providers, reviewing the high-cost budget is the best course of action. That is NTCA’s point. Overall, this is a great strategy and a great argument from NTCA.

[1] Connect America Fund et al., WC Docket Nos. 10-90 et al., Report and Order and Further Notice of Proposed Rulemaking, 26 FCC Rcd 17663, FCC 11-161 (2011) (USF/ICC Transformation Order).

[2] In re: FCC 11-161, 753 F.3d 1015, 1054 (10th Cir. 2014).

[3] See e.g., Texas Office of Public Util. Counsel v. FCC, 183 F.3d 393 (5th Cir. 1999); Alenco Commc’ns, Inc. v. FCC, 201 F.3d 608 (5th Cir. 2000); Rural Cellular Ass’n v. FCC, 685 F.3d 1083 (D.C. Cir. 2012).

[4] “At the same time, we do not believe a higher budget is warranted, given the substantial reforms we concurrently adopt to modernize our legacy funding mechanisms to address long-standing inefficiencies and wasteful spending.” USF/ICC Transformation Order at ¶125.

[5] In re: FCC 11-161, 753 F.3d 1015, 1060 (10th Cir. 2014).

[6] USF/ICC Transformation Order at ¶123.

[7] FCC Response To Principal Joint Universal Service Fund Brief Of Petitioners, In re: FCC 11-161, p. 35.