In what can only be described as a watershed moment, the Federal Communications Commission has released a Report and Order, Order and Order on Reconsideration, and Further Notice of Proposed Rulemaking that make significant changes to the universal service rules governing rate-of-return incumbent local exchange carriers.[1] 

Generally speaking, the FCC’s 2016 Rate-of-Return Reform Order contains what rate-of-return carriers expected it would. Nevertheless, carriers need to spend considerable time reviewing the order to fully understanding how it impacts them. The order brings many, but not all, rate-of-return carriers to a fork in the road – one direction says cost model regulation, while the other direction says revised cost-based universal service rules. Those rate-of-return carriers facing these two options must determine the pros and cons of each, predict how they will play out over the next 10 years, and choose the best path forward.

The information below covers everything except for the lengthy section on the voluntary path to cost model support.

USF Support For Stand-Alone Broadband – A New Mechanism – CAF BLS

Arguably the most important reform adopted by the FCC in the Order is the creation of a new mechanism that will allow rate-of-return carriers to receive universal service fund (USF) support for costs associated with the provision of stand-alone broadband service. It will “allow carriers to receive federal high-cost universal service support for their network investment regardless of what services are ultimately purchased by the customer.” To create the new support mechanism, the FCC has expanded and reformed its existing interstate common line support (ICLS) rules to provide support for stand-alone broadband service. The reformed ICLS mechanism will be referred to as Connect America Fund Broadband Loop Support (CAF BLS).[2] In general, the new CAF BLS “build[s] upon the framework of an existing rule that carriers are familiar with, which will not require significant changes to their internal existing accounting systems and other processes for the development of cost studies.” The FCC’s target date for full implementation of CAF BLS is January 1, 2017.

CAF BLS will provide support for consumer broadband-only loop costs to the extent that those costs exceed an imputed revenue amount.[3] For the purpose of calculating CAF BLS, the FCC has adopted a revenue imputation of $42 per loop per month ($42 benchmark), or $504 per loop, per year for consumer broadband-only loops, with a few minor exceptions.[4] In other words, carriers will recover consumer broadband-only loop costs via a $42 end-user charge, and CAF BLS will cover costs above that $42 benchmark (subject to a budgetary constraint). A carrier will be allowed to recover additional revenue through its tariffed charge to the extent that the FCC’s new rate-of-return budget constraint prevents the carrier from meeting its revenue requirement.  To prevent double recovery of the costs associated with broadband-only loops – once through the CAF BLS mechanism and a second time through special access rates – an amount equal to the broadband-only loop revenue requirement will be removed from the special access cost category when making CAF BLS calculations.[5] 

In more practical terms, a carrier will first apply the CAF BLS it receives to ensure that its interstate common line and consumer broadband revenue requirements are being met for the periods currently being trued up.[6] Next, CAF BLS will be applied to meet the carrier’s forecasted interstate common line revenue requirement for the current tariff year (support plus the revenues from end-user charges will meet the carrier’s interstate common line revenue requirement). A carrier will then apply the remainder of its CAF BLS to the forecasted revenue requirement for the new consumer broadband-only loop category during the current tariff year. Any remaining unmet consumer broadband loop revenue requirement will be met through the consumer broadband loop rate.[7]

There are two cases in which the FCC rules will impute a different consumer broadband loop revenue amount than $42 per loop per month:

(1) First, when a carrier’s consumer broadband loop revenue requirement is less than $42 per loop per month, CAF BLS will only impute the actual consumer broadband loop revenue requirement.  Without this exception, consumer broadband loops could create “negative” CAF-BLS amounts for some carriers in its initial calculation, which would reduce overall CAF BLS and require above-cost consumer broadband rates to replace lost CAF BLS that would otherwise subsidize voice loops.[8]

(2) Second, solely for the purpose of calculating true-ups, CAF BLS will impute the consumer broadband rate the carrier was permitted to charge, if it is higher than the amount that would be imputed otherwise.  Using actual revenues for true-ups in this way will recognize additional revenue that the carrier would have received and prevent duplication of cost recovery between CAF BLS and special access rates.[9]

CAF BLS Tariffing and USF Contribution Issues

When the CAF BLS rules become effective, a rate-of-return carrier may tariff a consumer broadband-only loop charge for consumer broadband-only loop service. Alternatively, it may detariff such a charge. A carrier may not, however, tariff the charge to some customers, while detariffing it for others. If a rate-of-return carrier chooses to detariff its wholesale consumer broadband-only loop offering, it no longer will be voluntarily offering the transmission as a service that is assessable for USF contributions purposes. As such, it would not have a USF contributions obligation for that service, similar to other carriers that previously chose not to offer a separate tariffed broadband transmission service. If a carrier chooses to assess a tariffed wholesale consumer broadband-only loop charge, the revenues for that transmission service are subject to a USF contribution obligation.[10]

Eligible Recovery, ARC, and CAF-ICC Issues

The FCC adopted its Eligible Recovery mechanism in the USF/ICC Transformation Order to ease the impact of decreased intercarrier compensation revenues during the move to bill-and-keep. To prevent an unplanned fluctuation in support provided by the Eligible Recovery mechanism due to the new CAF BLS, the FCC has revised certain Eligible Recovery rules.

First, the new rules should make stand-alone broadband more affordable, which should cause more customers to migrate from ARC-eligible voice and voice/data services to broadband-only lines that are not ARC-eligible. This will reduce carriers’ ARC-eligible lines and thus the amount of Eligible Recovery that a carrier can recover via ARC charges, which will cause CAF-ICC support to increase. Accordingly, the FCC will require rate-of-return carriers to impute an amount equal to the ARC charge they assess on voice/broadband lines to their supported consumer broadband-only lines.

Second, migration from voice/data lines to broadband-only lines will cause a carrier’s switched access revenue to decrease, which will produce a higher Eligible Recovery for the carrier and a higher CAF ICC amount. The FCC believes it’s likely that some of the facilities used to support the lost switched access services (such as transport and circuit equipment) will be reused to provide a portion of the broadband-only service. Thus, it’s possible a carrier could receive some special access revenue recovering the costs of facilities formerly used to provide switched access services, which would be double recovery because the carrier would receive CAF ICC as well as special access revenues for the service being offered – either tariffed or detariffed. Accordingly, carriers must reflect any revenues recovered for use of facilities previously used to provide such service as double recovery in its Tariff Review Plans filed with the Commission, which will ultimately reduce the amount of CAF ICC it will receive.[11] 

The First Cap: Limitation On Recovery Of Operating Expenses

To further incent rate-of-return ILECs “to be prudent and efficient in their expenditures,” the FCC has adopted a limitation on operating expenses (opex) that are eligible for support under rate-of-return support mechanisms – both high-cost loop support (HCLS) and the new CAF BLS.  The opex limitation is based on the regression methodology proposed by the rate-of-return industry associations, with a few modifications.[12] Support reductions associated with the opex limitation will be made available to other rate-of-return carriers.

The mechanism will limit opex costs by comparing each study area’s opex cost per location to the regression model-generated opex per location plus 1.5 standard deviations.[13] It will be applied proportionately to the accounts used to determine a carrier’s eligible opex for HCLS and CAF BLS. For example, if the regression methodology determines that a carrier’s eligible operating expense should be reduced by 10 percent, then each account used to determine that carrier’s eligible operating expense shall be reduced by 10 percent. The entire regression formula that will be used to limit opex recovery is shown in paragraph 99 of the Order.

The opex limitation will be introduce using a “one-year transition.” For the first year in which the opex cap is implemented, the eligible operating expense of those carriers subject to the cap will be reduced by only one-half of the percentage amount determined by the regression methodology.[14] Within 30 days of the effective date of the Order, NECA will submit to USAC a schedule of companies subject to the new opex limits, along with the dollar amount of reductions in HCLS and CAF-BLS for each carrier.

The Second Cap: Capital Expenditure Allowance

In order to help ensure that finite USF support is used “as efficiently as possible,” the FCC has adopted a capital investment allowance mechanism that will limit the extent to which USF support may be used to support future capital investments by those rate-of-return carriers that are above the national average in broadband deployment.[15] This capital expenditure (capex) limitation, referred to as the “Capital Expenditure Allowance,” will apply to HCLS, which supports the intrastate portion of the exchange loop, and CAF-BLS, which supports the interstate portion. 

The Capital Expenditure Allowance adopted by the FCC is similar to the revised capital budget allowance mechanism proposed by the rate-of-return industry associations, but with a few modifications. In basic terms, that industry proposed mechanism establishes a Total Allowed Loop Plant Investment (TALPI) for each rural carrier based on each carrier’s inflation-adjusted total loop investment and accumulated depreciation. Using each carrier’s TALPI, an Annual Allowable Loop Plant Investment (AALPI) is calculated using an equation that annualizes the amount of TALPI for each carrier. The industry associations’ proposed mechanism contains a number of further constraints and requirements. Generally, the Capital Expenditure Allowance adopted by the FCC revises the industry associations’ proposal in four ways.

As a starting point, June 2015 FCC Form 477 data will be used to determine the weighted average broadband deployment for all rate-of-return carriers, and deployment figures for each individual carrier. Next, the Commission will use a carrier’s TALPI as the basis for calculating loop plant investment limitations for both HCLS and CAF-BLS.[16]  But, the Commission will modify the investment categories proposed by the rural associations to determine a carrier’s TALPI so that they correspond to those used to determine a carrier’s HCLS and CAF BLS.

Then, the Commission will refine carriers’ AALPI adjustments for areas covered by a pre-existing loan for which a previously planned loan disbursement has been made and that loan disbursement was used to increase the annual loop expenditure for the year, or years, in which the AALPI adjustment is taken.  The Commission believes that an outstanding loan does not per se warrant an increase in a carrier’s AALPI unless a previously planned disbursement of that loan leads to an increase in the carrier’s loop plant investment.  Finally, the Commission will adjust a carrier’s AALPI by one percentage point for every percentage point that the carrier’s deployment differs from the target availability, instead of by only one half of a percentage point, as was originally proposed.

The Commission has directed NECA to submit to USAC, for each quarterly or annual data reporting period, all of the data needed to implement the capex limitation.  USAC will be required to validate all calculations received from NECA before making disbursements subject to any support reductions due to the Capital Investment Allowance.  The new Capital Investment Allowance is expected to impact CAF BLS in 2017 and HCLS in 2018.

Of all the rate-of-return reforms adopted in the Order, the Capital Investment Allowance mechanism is perhaps the most complex.  For those that were not already familiar with the original capital budget mechanism proposed by the industry associations, the Commission’s Order will not provide a sufficient explanation of how the new Capital Investment Allowance will work.  In order to fully understand it, one will need to carefully study the final rules contained in Appendix B of the Order.

Competitive Overlap: Elimination Of CAF BLS Support In Areas Served By An Unsubsidized, Qualifying Competitor

Build on related prior efforts, the Commission will prohibit rate-of-return ILECs from receiving CAF BLS in census blocks that are served by a qualifying unsubsidized competitor.  Specifically, a census block will be deemed to be “served by a qualifying competitor” and prohibited from receiving support if the competitor holds itself out to the public as offering “qualifying voice and broadband service” to at least 85 percent of the residential locations in the census block.  If a carrier loses support due to unsubsidized competition, it will disaggregate BLS support in those areas using one of three mechanisms, with the support reductions being phased in over either three or six years.[17]  The determination of whether census blocks are competitively served will be made using a challenge process, which is expected to commence in late 2016.  Thereafter, the competitive overlap challenge process will be conducted every seven years.

Qualifying Unsubsidized Competitor

To be considered a qualifying unsubsidized competitor in a given census block, a facilities-based fixed service provider must meet the following requirements:

·       Offer fixed terrestrial broadband service with actual download speeds of at least 10 Mbps and actual upload speeds of at least 1 Mbps, and at rates that are reasonably comparable to those in urban areas;

·       Offer fixed terrestrial broadband service with latency suitable for real time applications, including Voice over Internet Protocol (VoIP);[18]

·       Offer fixed terrestrial broadband service with monthly usage allowance that is reasonably comparable to offerings in urban areas (150 gigabytes (GB));[19]

·       Offer fixed voice service at rates under the applicable reasonable comparability benchmark (to the extent a competitor is meeting the voice service obligation through interconnected VoIP, it is subject to E911 and CALEA requirements);[20]

·       Be able to port telephone numbers in the census blocks at issue.[21]

Challenge Process To Determine Competitive Overlap

The implementation of the competitive overlap rule centers on a challenge process that will ultimately determine which census blocks are served by a qualifying unsubsidized competitor.  First, the Bureau will publish a preliminary list of census blocks that are possibly being served by qualifying unsubsidized competitors, based on FCC Form 477 data.  Competitive Eligible Telecommunications Carriers (CETCs) receiving universal service support, as well as ILEC affiliates will be excluded from the analysis used to determine the preliminary list of census blocks that are competitively served.[22]

Next, in order for a challenge to a particular census block to go forward, a qualifying unsubsidized competitor will be required to certify that it is “offering” service to at least 85 percent of the locations in the census block, and it must provide sufficient evidence showing it offers service in the specific geographic area in question.  To meet the requirement to “offer” service, the competitor must be willing and able to provide qualifying voice and broadband service to a requesting customer within ten business days.[23]  If the competitor fails to provide any evidence, the census blocked will be classified as not competitively served and removed from the list.  If the competitor does provide evidence confirming voice and broadband service within the specific census blocks, then the relevant ILEC and other interested parties such as state public utility commissions and Tribal governments will have the opportunity to contest the competitor’s assertions.

The ultimate burden of persuasion will rest on the competitor to establish that it offers service to at least 85 percent of the locations in the contested census block, based on all the evidence in the record.  Rate-of-return ILECs should note that the Bureau has noted that “it is extremely difficult for an incumbent provider to prove a negative – that a competitor is not serving an area.”  Nevertheless, examples of information that may be persuasive to establish that a competitor is not offering service includes evidence that a competitor’s online service availability tool shows “no service available” for customers in the geographic area that the competitor certifies it serves or filings from consumers residing in the geographic area that the competitor has certified is served that they were unable to obtain service meeting the specified requirements from the purported competitor within the relevant time frame.[24]  The Bureau will make a final determination of which census blocks are competitively served after weighing all of the evidence in the record.  The Order does not provide exact details on the duration of the challenge process.

Disaggregation and Transition of Support Eliminated Due to Competitive Overlap

If a carrier loses support in certain census blocks due to unsubsidized competition, it will disaggregate BLS support between competitive and noncompetitive areas using one of three methods:[25]

·       Density Based Disaggregation – Carriers may disaggregate their CAF BLS using a methodology that allocates the revenue requirement between competitive and non-competitive areas, based on the relative density of competitive and non-competitive areas.

·       Square Mileage Based Disaggregation – Carriers may disaggregate their CAF BLS using a ratio of competitive to non-competitive square miles in a study area.

·       A-CAM Based Disaggregation – Carriers may disaggregate their CAF BLS using an allocation derived from the A-CAM.

One of two transitions will apply to reductions in CAF BLS in areas that are deemed to be competitively served:

·       (1) Where the reduction of CAF BLS from competitive census blocks represents less than 25 percent of the total CAF BLS support the carrier would have received in the study area in the absence of the competitive overlap rule, disaggregated support associated with the competitive census blocks will be reduced 33 percent in the first year, 66 percent in the second year, with that support associated with the competitive census blocks fully phased-out by the beginning of the third year.

·       (2) Where the reduction of CAF BLS from competitive census blocks represents more than 25 percent of the total CAF BLS support the carrier would have received in the study area in the absence of the competitive overlap rule, disaggregated support associated with the competitive census blocks will be reduced 17 percent in the first year, 34 percent in the second year, 51 percent in the third year, 68 percent in the fourth year, 85 percent in the fifth year, and fully phased-out by the beginning of the sixth year.

A Mechanism To Control The Rate-Of-Return Budget

Presently, there is an overall budget of $4.5 billion for the universal service high-cost program, and a budget within that amount of $2 billion per year for high-cost support for rate-of-return carriers.  In the Order, the FCC has adopted a method for enforcing the budget for rate-of-return carriers in the event total support is forecasted to exceed the  $2 billion budget in a given year.  The budget control mechanism will be applied to forecasted disbursements each quarter so there will be no retroactive application.

First, target amounts are identified for HCLS and CAF BLS by multiplying the forecasted disbursements for each mechanism by the ratio of the budgeted amount to the total calculated support for the mechanisms.  Targeted amounts will be calculated for each mechanism once per year prior to annual tariff filings.

Then, when necessary the new budget control mechanism will make support reductions.  The reduction of support under each mechanism – HCLS and CAF BLS – will be split between a per-line reduction and a pro rata reduction applied to each rate-of-return study area.  The per-line reduction will be calculated by dividing one half of the difference between the calculated support and the target amount for each mechanism by the total number of eligible loops in the mechanism.  The pro rata reduction will then be applied as necessary to achieve the target amount.  For CAF-BLS, the per-line and pro rata reductions will be calculated once per year, prior to the annual filing of tariffs.  For HCLS, the per-line and pro rata reductions will be calculated quarterly, using the most recently announced target amount.[26]

This Is New: You Get Support, You Have Broadband Deployment Obligations

In order to promote accountability and ensure broadband expansion, the FCC has adopted specific, defined deployment obligations that are a condition of the receipt of high-cost support for every carrier.  These new deployment obligations will apply over a defined five-year period.  More specifically, each rate-of-return carrier will be required to target a defined percentage of its five-year forecasted CAF-BLS support to the deployment of broadband service where it is currently lacking.  The percentage of support that must be used for new broadband deployment will be determined on a carrier-by-carrier basis in the following way:

·       Rate-of-return carriers with less than 20 percent deployment of 10/1 Mbps broadband service in their entire study area, based on June 2015 FCC Form 477 data, will be required to utilize 35 percent of their five-year forecasted CAF-BLS support specifically for the deployment of 10/1 Mbps broadband service where it is currently lacking.

·       Rate-of-return carriers with 20 percent or greater but less than 40 percent deployment of 10/1 Mbps broadband service in their entire study areas, will be required to utilize 25 percent of their five-year forecasted CAF-BLS support specifically for the deployment of broadband service where it is currently lacking.

·       Rate-of-return carriers with 40 percent or greater but less than 80 percent deployment of 10/1 Mbps broadband service in their entire study areas, will be required to utilize 20 percent of their five-year forecasted CAF-BLS support specifically for the deployment of broadband service where it is currently lacking.

·       There is no obligation for carriers that have deployed to greater than 80 percent of their entire study areas.  However, these carriers must continue to deploy 10/1 Mbps or better broadband service where cost-effective and utilize alternative technologies where terrestrial wireline infrastructure is too costly, and report, as part of their annual Form 481 filing, progress on the number of locations where 10/1 Mbps or better broadband service have been deployed within their study area in the prior calendar year.

The actual number of locations to which a carrier must deploy service will be determined by dividing the dollar amount of the CAF BLS percentage that must be used by the cost-per-location figure.  A carrier’s cost per location will be determined using one of two methods: (1) the average cost of providing 10/1 Mbps broadband service, based on the actual costs of carriers with similar density that have widely deployed 10/1 service, or (2) the A-CAM’s calculation of the cost of providing 10/1 Mbps broadband service in the unserved census blocks in the carrier’s study area.[27]  Detailed explanations of both methods are provided in the Order.[28]  If a carrier has less than 80 percent broadband deployment at the end of the five-year period, it will be subject to another five-year deployment obligation.

Carriers subject to a defined five-year deployment obligation may choose to meet their obligation at any time during the five-year period – a carrier can evenly space out construction on an annual basis or complete all of its required deployment within a single year.  However, if a carrier fails to meet its deployment obligation, it may be subject to support reductions.  In situations where a carrier makes no progress towards meeting its defined five-year deployment obligation, and fails to establish extenuating circumstances, the Commission reserves the right to include such census blocks in an upcoming auction.  Additionally, the FCC will not require deployment using terrestrial wireline technology for any rate-of-return carrier in any census block if doing so would result in total support per line in the study area to exceed the $250 per-line per-month cap.  The FCC is expected to announce deployment obligation information near the end of 2016, and begin the five-year compliance period on January 1, 2017.

Example Broadband Deployment Obligation – Carrier X

·       Carrier X’s forecasted five-year CAF BLS amount is $5,000,000.

·       Carrier X has deployed 10/1 service to 35 percent of its entire study area.

·       Carrier X must use 25 percent of its five-year forecasted CAF-BLS support specifically for the deployment of broadband service where it is currently lacking.

·       Carrier X must use $1,250,000 for new broadband deployment in the next five years.

·       (25 percent of $5,000,000 = $1,250,000)

·       Carrier X’s cost per location is $1,000.

·       Carrier X must deploy 10/1 service to 1,250 locations where it is currently lacking in the next five years. ($1,250,000 / $1,000 = 1,250)

The Obligation To Provide Service Upon Reasonable Request

In addition to the new broadband deployment obligations, rate-of-return carriers remain subject to the reasonable request standard for their remaining locations.  “Rate-of-return carriers are required to demonstrate in an audit or other inquiry that they have a documented process for evaluating requests for service under the reasonable request standard and produce the methodology for determining where upgrades are reasonable.  Carriers that make no progress in extending broadband to locations unserved with 10/1 Mbps broadband over an extended period of time should be prepared to explain why that is the case.”[29]

Remote Areas Fund

As explained in the Order, the FCC expects that rate-of-return carriers will be invited later in 2016 to identify census blocks where they do not anticipate being able to deploy service under the existing reasonable request standard (i.e. where it is unreasonable to extend broadband meeting the FCC’s current requirements) “for inclusion in the next Commission auction.”[30]  To facilitate this, the Bureau will issue a public notice setting a deadline for identifying such “unservable” census blocks in advance of the timeframe for finalizing the list of eligible areas that will be subject to auction.  Further information on how the Remote Areas Fund auction will operate will also need to be released by the Bureau because many of the details remain unclear.  For example, it’s unknown whether the obligation to serve a census block that was included in the auction will revert back to an ILEC if the auction produces no winner for that census block.  However, the Commission has concluded that “should a carrier choose to place census blocks in the next Commission auction and another entity is authorized to receive support for those census blocks to provide voice and broadband service subsequent to the auction, the incumbent will not be subject to the reasonable request standard and no longer will receive support for those areas.”[31]

Reporting Requirements Remade

In the Order, the FCC has made several changes to the reporting requirements that apply to rate-of-return eligible telecommunications carriers (ETCs).  Generally, rate-of-return ETCs will be required to provide USAC and the FCC more specific details regarding their broadband deployment during each year.  The new reporting requirements are summarized below:

·       All rate-of-return ETCs, starting in 2017 and on a recurring basis thereafter, will be required to submit to USAC the geocoded locations to which they have newly deployed broadband service.  Carriers also will be required to provide information on the broadband speeds provided to newly served locations.[32]

·       Rate-of-return ETCs will have an annual deadline of March 1 to file location data reflecting their deployments for the prior calendar year.[33]  However, the FCC recommends that rate-of-return ETCs report new broadband deployment information on a rolling basis, and further recommends that the information be submitted no later than 30 days after service is initially offered to locations.

·       Rate-of-return ETCs electing model-based support will be required to provide geocode information for the locations already served with broadband at the time they move to cost model support.  These carriers will be required to submit such geocode information on pre-existing broadband-capable locations to USAC no later than March 1, 2019.

·       The Commission has directed the Bureau to work with USAC to develop an online portal that will be available for rate-of-return carriers to submit geocode location information on a rolling basis throughout the year.

·       Rate-of-return ETCs will be required to file a certification within 60 days of the deadline for meeting their defined CAF BLS broadband deployment obligations (i.e., March 1, 2022 and March 1, 2027).

·       In light of the new geocode location data requirement, the FCC has eliminated the requirement that rate-of-return ETCs file a five-year plan and annual progress reports on that plan.  Because it likely that this change will not go into effect by the time the 2015 Form 481 is due on July 1, 2016, “the form and content of that filing will remain unaffected.”  However, it is possible that the FCC may waive the five-year plan requirements for this year’s filings, and carriers should continue to monitor this issue.

·       The Commission has directed USAC to publish in open, electronic formats all non-confidential information submitted by recipients of high-cost universal service support.  All rate-of-returns should take note of this directive, and consider seeking confidential treatment of certain information as necessary before filing it with USAC.

Reducing The Authorized Interstate Rate Of Return – All The Way To 9.75 Percent

In the Order, the Commission represcribes the currently authorized rate of return from 11.25 percent to 9.75 percent in all situations where a Commission-prescribed rate of return is used for ILECs (i.e., calculating interstate common line rates, calculating consumer broadband-only loop rates, calculating special access rates, and determining some forms of universal service support).

To minimize any immediate financial impacts that the new 9.75 percent rate may impose on carriers, it will be phased in over a period of six years.  Specifically, beginning July 1, 2016, the 11.25 percent rate of return will be reduced by 25 basis points per year until the represcribed 9.75 percent rate of return is reached.

·       July 1, 2016 – 11.0%

·       July 1, 2017 – 10.75%

·       July 1, 2018 – 10.5%

·       July 1, 2019 – 10.25%

·       July 1, 2020 – 10.0%

·       July 1, 2021 – 9.75%

Alaska Plan?

In the Order, the Commission notes that “the Alaska Telephone Association has proposed an integrated incentive regulation plan for Alaska’s rate-of-return and mobile competitive eligible telecommunications carriers that would, among other things, allow Alaska rate-of-return carriers voluntarily to elect to receive a frozen amount of high-cost support with defined performance obligations to extend and support fixed and mobile broadband service.”[34]  The Commission further states that it “believe[s] that a framework tailored to the unique circumstances that exist in Alaska merits serious consideration and plan[s] to review the comprehensive Alaska proposal in the months ahead.”  For the time being, the FCC has deferred implementation of the operating expense limits and capital investment allowance for Alaska carriers as it continues to consider the full Alaska rate-of-return USF reform plan.[35]  Additionally, Alaska rate-of-return carriers may elect to voluntary move to the A-CAM cost model.

It Really Is A Watershed Moment

It’s been nearly four and a half years since the FCC released the USF/ICC Transformation Order which was touted as a paradigm-shifting order that would, among other things, modernize the universal service regime for rate-of-return carriers by making them more efficient and targeting USF support where it was most needed.  Looking back on that now, those reforms and the tremendous regulatory uncertainty they caused was a nightmare of epic proportion.  That order actually decreased broadband deployment in rural areas – the exact opposite of what it intended to accomplish. We now have the FCC’s “do-over.”  This rate-of-return reform Order was issued in hopes of accomplishing the same goal as the last one – to preserve and advance voice and broadband services in rural areas. Were it not for the tireless work of the rural industry associations, this Order would have been a lot worse. But let’s be honest.  There are some really crummy things in the Order.  One way to describe the end result produced by the collection of reforms in the Order is “do more with less.”  The new limitations on support will cause a slow bleed of support for many carriers.  One way or another, the reforms can be traced back to the high cost budget that was adopted in 2011, and it seems every action taken by the Commission in the Order was made with one eye on the budget. 

Predictably, the FCC isn’t focused on how the reforms and new regulatory requirements in the Order will force every rate-of-return carrier to do more with less support. This is baffling, especially when one considers the support constraints and increased regulation contained in the Order together with the new Federal regulatory requirements that are on the horizon, some of which could be very costly in terms of time and money (i.e., impending broadband privacy rules, new Lifeline requirements, eventual bill-and-keep for ICC, and net neutrality compliance). 

The FCC believes that the reform mechanisms it adopted “to keep disbursements within the previously adopted budget will provide rate-of-return carriers with support that is sufficient to meet the Commission’s universal service goals.”  This couldn’t be any farther from the truth.  Every rate-of-return carrier knows that the current $2 billion budget is not a sufficient amount of support to bring reasonably comparable broadband service to rural America.  Unfortunately, if the FCC says that the budgeted amount is sufficient, then for the most part, the conversation stops there.[36]  But that is not the end of the story – a USF contributions battle is brewing.  That is the other component that must be fixed if the universal service program is to be truly modernized.

**********************************************

[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) (2016 Rate-of-Return Reform Order or Order).  The Order becomes effective 30 days after its publication in the Federal Register, except for those rules and requirements involving Paperwork Reduction Act burdens, which become effective immediately upon announcement in the Federal Register of Office of Management and Budget approval.

[2] The current ICLS mechanism operates by providing each carrier with the difference between its interstate common line revenue requirement and its interstate common line revenues. Going forward, CAF-BLS also will provide cost recovery for the difference between a carrier’s loop costs associated with providing broadband-only service, called the “consumer broadband-only loop revenue requirement” and its consumer broadband-only loop revenues. Order at ¶88.

[3] Consumer broadband-only loop costs are defined as the same costs, on a per-line basis, that are currently recoverable for a voice-only or voice/broadband line in ICLS.  Order at ¶88.  Furthermore, the facilities associated with common lines and consumer broadband loops run between end-user premises and the central office, and are often the same technology or share some common transmission capacity. Thus, the FCC has concluded that the costs associated with these two types of lines are very similar.  See Order at ¶191. Costs associated with broadband-only loops will be allocated 100 percent to the interstate jurisdiction by the separations procedures in Part 36 of the FCC’s rules.

[4] Order at ¶92.  The $42 benchmark presumes that carriers would still need additional end-user revenues to cover non-loop related costs, such as middle-mile costs.  Id.

[5] Order at ¶88. The Commission has made a number of revisions to its Part 69 rules to implement the CAF BLS mechanism, including the creation of a new “Consumer Broadband-Only Loop” category which will encompass the costs of consumer broadband-only loop facilities that today are recovered through special access rates. See Order at ¶191. Carriers will be required to certify to USAC, as part of their CAF-BLS data filings, that they have complied with the FCC’s cost allocation rules and are not recovering any of the consumer broadband-only loop cost through the special access cost category. Order at footnote 180.

[6] See Order at ¶155.

[7] This process will permit, in some cases, consumer broadband-only loop rates to rise above $42. The $42 benchmark is well below the reasonably comparable rate for retail broadband service.  The results of the 2016 urban rate survey show that for 10/1 broadband service with a monthly usage allowance of 150 GB, the reasonable comparability benchmark is currently $71.17.  See Wireline Competition Bureau Announces Results of 2016 Urban Rate Survey For Fixed Voice And Broadband Services, Posting Of Survey Data And Explanatory Notes, And Required Minimum Usage Allowance For ETCs Subject To Broadband Public Interest Obligations, WC Docket No. 10-90, Public Notice, DA 16-362 (Apr. 5, 2016).

[8] Order at ¶93.

[9] Order at ¶94.

[10] See Order at ¶¶192-194.  See also Protecting and Promoting the Open Internet, GN Docket No. 14-28, Report and Order on Remand, Declaratory Ruling, and Order, FCC 15-24, ¶491 (rel. Mar. 12, 2015).

[11] See Order at ¶204.

[12] Unlike the original industry proposal, the FCC includes corporate expenses (calculated according to the current limitation) within the regression.  Order at ¶102. The FCC also declined to set different limits based on the separate density categories.  Order at ¶101. Other modifications are explained in paragraphs 95-104.

[13] Order at ¶99. Using last year’s data, the FCC estimates that using 1.5 standard deviations will impact roughly 50 carriers. See Order at ¶100.

[14] For example, if the regression methodology determines that a carrier’s eligible operating expense should be reduced by 10 percent for the first year in which the opex cap is implemented, then each account used to determine that carrier’s eligible operating expense shall be reduced by only 5 percent. However, in all subsequent years, the carrier’s eligible operating expense shall be reduced by the full percentage amount determined by the regression methodology. Order at ¶103.

[15] See Order at ¶¶105-115. The FCC believes that the capital investment allowance “will help target support to those areas with less broadband deployment so that carriers serving those areas have the opportunity to catch up to the average level of broadband deployment in areas served by rate-of-return carriers.”

[16] A carrier’s TALPI is based on the carrier’s inflation-adjusted total loop investment and accumulated depreciation.  The TALPI concept was originally proposed by the rural industry associations (NTCA, WTA, and NECA).

[17] Carriers affected by the competitive overlap rule may seek a waiver of support reductions under existing FCC precedent.  See Order at ¶145.

[18] For purposes of preparing the preliminary list of census blocks that are competitively served, if a competitive provider meets the broadband speed requirement, it will also be presumed to meet the latency requirement.  See Order at ¶126.  One of the lessons learned from the CAF Phase II challenge process was that no party was able to demonstrate high latency by competitors, and very few providers prevailed in a challenge exclusively focused on a competitor’s usage/price.  Order at ¶127.

[19] For purposes of preparing the preliminary list of census blocks that are competitively served, if a competitive provider meets the broadband speed requirement, it will also be presumed to meet the usage allowance requirement.  See Order at ¶126.

[20] In order to file FCC Form 477, a VoIP provider must be offering interconnected VoIP, which means that the provider is required to provide E911 and comply with CALEA, among other things.  Order at ¶128.  For purposes of preparing the preliminary list of census blocks that are competitively served, the Bureau will assume if a broadband provider reported any fixed voice connections in a state in its FCC Form 477 filing, then it offers voice service throughout its entire broadband service area in that state.  Order at ¶128.

[21] Order at ¶131.

[22] Order at ¶129.

[23] Order at ¶121.

[24] Order at ¶132.

[25] Total support in a study area shall not exceed the support that otherwise would be available in the study area absent disaggregation, and the FCC may examine the results of any one of the adopted disaggregation methods to ensure that it fulfills the FCC’s intended objectives.  Order at ¶139.

[26] Order at ¶153.  To account for the existing HCLS cap, the Commission has directed NECA to rebase the cap to reflect the election of model-based support by HCLS-eligible rate-of-return carriers.  In the first annual HCLS filing following the election of model-based support, NECA will calculate the amount of HCLS that those carriers would have received in the absence of their election, subtract that amount from the HCLS cap, then recalculate HCLS for the remaining carriers using the rebased amount.  Order at ¶154.

[27] Order at ¶166.

[28] See Order at ¶¶169-171.  After carriers notify USAC which method they elect, USAC will perform the necessary mathematical calculations and provide the Bureau a schedule of broadband obligations for each carrier, which then will be published in an FCC public notice.  If a carrier’s CAF BLS is subsequently reduced because of competitive overlap rule, USAC will recalculate that carrier’s deployment obligation based on a revised forecast of that carrier’s CAF BLS.  See Order at ¶167.

[29] Order at ¶178.

[30] Order at ¶179.

[31] Order at ¶180.

[32] Rate-of-return ETCs will also be required to report the number of locations at the minimum speeds required by the FCC’s rules.  Location and speed data will be used to determine compliance with new broadband deployment obligations adopted in the Order.  The geocoded location information should reflect those locations that are broadband-enabled where the company is prepared to offer service meeting the FCC’s minimum requirements for high-cost recipients subject to broadband public interest obligations, within 10 business days.  See Order at ¶210.

[33] Rate-of-return ETCs that fail to file their geocode location data and associated deployment certifications due by March 1 of each year in a timely manner will be subject to the same penalties that currently apply to ETCs for failure to file the information required by Section 54.313 of the FCC’s rules on July 1 of each year.  See Order at ¶215.

[34] Order at footnote 10.

[35] See Order at footnote 196 and 213.

[36] This notion has been affirmed many times by multiple courts, most recently by the Tenth Circuit Court of Appeals in its decision on the USF/ICC Transformation Order.  See In re: FCC 11-161, 753 F.3d 1015 (10th Cir. 2014).  See also Rural Cellular Ass’n v. FCC, 588 F.3d 1095, 1102 (D.C. Cir. 2009) (finding that the FCC reasonably interpreted Congress’s directive that it preserve universal service as also requiring that it sustain universal service, which, in turn, requires ensuring the sustainability of the USF); Alenco Communications v. FCC, 201 F.3d 608, 620-621 (5th Cir. 2000) (acknowledging that the FCC’s broad discretion to provide sufficient universal service funding includes the decision to impose cost controls to avoid excessive expenditures that will detract from universal service).