On March 30, 2016, the Federal Communications Commission 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. One of those changes gives some, but not all, rate-of-return incumbent local exchange carriers the option to move to cost model regulation.[1] 

The option to receive universal service support from the FCC’s the Alternative Connect America Cost Model (A-CAM) will not be available to any rate-of-return ILEC that has deployed 10/1 Mbps broadband service to 90 percent or more of its eligible locations in a state, based on June 2015 FCC Form 477 data that has been submitted as of the date of release of the order. 

For the rate-of-return carriers that are model eligible, the order brings them 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. With respect to the model option, carriers must review the election process, support amounts, mandatory broadband service standards, and 10-year deployment obligations. The blog post below summarizes the sections in the order that establish the rate-of-return A-CAM regulatory scheme.

Cost Model USF Support – The Basic Details

The FCC has created a process for some rate-of-return ILECs to voluntarily elect to receive model-based USF support from the A-CAM.  Carriers that opt in to the model will receive support for 10 years in exchange for meeting broadband build-out obligations over that time period.  Carriers will be required to elect to move to the model on a state-level basis.[2]  In year eight of the A-CAM support term, the FCC expects to conduct a rulemaking to determine how support will be determined after the end of the 10-year period. 

As previously mentioned, the cost model option will not be available to all rate-of-return carriers.  Specifically, the FCC will not make the offer of model-based support to any rate-of-return ILEC that has deployed 10/1 Mbps broadband service to 90 percent or more of its eligible locations in a state, based on June 2015 FCC Form 477 data that has been submitted as of the date of release of the order.[3]  No good deed goes unpunished? The FCC says this policy decision is needed to “preserve the benefits of the model for those companies that have more significant work to do to extend broadband to unserved consumers in high-cost areas, and will prevent companies from electing model-based support merely to lock in existing support amounts.”[4]

The “final” model platform will be A-CAM Version 2.1 and its current input values, including 9.75 percent for the “cost of money,” but it will ultimately incorporate updated broadband coverage data.  The A-CAM will provide support to all locations in census blocks where average costs are above a $52.50 funding benchmark, but support will be capped at $200 per-location.[5]  As further explained below in the sections on the A-CAM budget and election process, the funding benchmark is subject to reduction if an overwhelming number of carriers elect to move to model-based support. This is a very likely scenario, as many carriers have indicated the predictability of the model is very attractive.

The A-CAM will not provide support to census blocks where an ILEC or any of its affiliates are providing voice and 10/1 Mbps or better broadband services using either fiber-to-the-premises (FTTP) or cable technologies, based on  June 2015 FCC Form 477 data.  Additionally, support will not be provided to census blocks served by “qualifying” unsubsidized competitors.  To determine the presence of competitors, the A-CAM will use June 2015 FCC Form 477 data, which will be subject to a streamlined challenge process. Many stakeholders are already predicting the challenge process could be contentious.

A-CAM Support Comes With Broadband Deployment Obligations

As more fully explained below, a carrier accepting the offer of model-based support must offer at least 10/1 Mbps broadband service to all of its “fully funded” locations, and at least 25/3 Mbps to a subset of those locations.  These two requirements must be met by the end of the 10-year term of support.  A location is fully funded if the calculated average cost to serve is above $52.50 but at or below $252.50.[6]  Carriers electing model support will also be required to maintain existing voice and broadband service.

As part of their broadband service, these carriers must also offer a minimum usage allowance of 150 GB per month, or a usage allowance that reflects the average usage of a majority of consumers (based on  Measuring Broadband America data or a similar data source), whichever is higher.  Additionally, carriers accepting model-based support must certify that 95 percent or more of all peak period measurements of network round-trip latency are at or below 100 milliseconds, for fully funded locations.

The 25/3 Mbps Broadband Service Deployment Obligation

The number of locations subject to an electing carrier’s 25/3 Mbps broadband service requirement is determined based on the location density of the carrier’s service area.  There are three separate density groupings, each with a different 25/3 Mbps service requirement.  

·       Carriers with a state-level density of more than ten locations per square mile will be required to offer at least 25/3 Mbps service to at least 75 percent of the fully funded locations in the state by the end of their 10-year term. 

·       Carriers with a state-level density of ten or fewer, but more than five, locations per square mile will be required to offer at least 25/3 Mbps service to at least 50 percent of the fully funded locations in the state by the end of the 10-year term. 

·       Carriers with five or fewer housing units per square mile will be required to offer at least 25/3 Mbps to at least 25 percent of the fully funded locations. 

The density of each carrier’s study area or study areas in a state will be determined using the final 2015 study area boundary data collection information submitted by carriers, and the number of locations will be determined using U.S. Census data on housing units.[7]

The 4/1 Mbps Broadband Service Deployment Obligation (Capped Locations)

Carriers electing model-based support will be required to offer at least 4/1 Mbps broadband service to a defined number of locations that are not fully funded (i.e. those locations where the average cost to serve is above the $252.50 “funding cap”).  These locations are referred to as “capped locations.”  Carriers with a state-level density of more than 10 housing units per square mile will be required to offer at least 4/1 Mbps broadband service to 50 percent of all capped locations in the state by the end of the 10-year term.  Carriers with a state-level density of 10 or fewer housing units per square mile will be required to offer at least 4/1 Mbps service to 25 percent of all capped locations in the state by the end of the 10-year term.  Remaining “capped locations” will be subject to the reasonable request standard for broadband service deployment.  The Commission has stated that it will monitor carriers’ progress in connecting the capped locations that are subject to the reasonable request standard.[8]

Some Locations Will Remain “Unserved”

Electing carriers may identify census blocks where they expect not to extend broadband.  The FCC expects those census blocks to be included in an upcoming auction where parties, including the current provider, may bid for support to provide service there (presumably, this is the Remote Areas Fund auction).  However, carriers will be required to identify such census blocks within a certain time period following the deadline to elect model-based support.  Specifically, the Bureau will announce a date by public notice, no sooner than 60 days after elections are finalized, by which carriers electing model-support may identify any such census blocks.[9]  If a carrier identifies census blocks that it will not be able to serve by the date specified, its support will be reduced to reflect the fewer number of locations, and it will not be subject to the reasonable request standard for those locations if another provider wins those areas in an auction.[10]

The 10/1 Mbps Broadband Service Deployment Obligation

As previously explained, carriers that move to the model will have to offer at least 25/3 Mbps broadband service to 75, 50, or 25 percent of fully funded locations by the end of their 10-year support term, depending upon their state-level density.  As for the requirement to deploy 10/1 Mbps service to all other fully funded locations, carriers will have to meet various interim deployment milestones beginning in year four of the 10-year term.  Those 10/1 Mbps service milestones are as follows:

·       Year 4 (2020) – 40%

·       Year 5 (2021) – 50%

·       Year 6 (2022) – 60%

·       Year 7 (2023) – 70%

·       Year 8 (2024) – 80%

·       Year 9 (2025) – 90%

·       Year 10 (2026) – 100%[11]

The A-CAM Budget – Total Funding Under The Model

In the USF/ICC Transformation Order, the FCC established an annual budget of no more than $4.5 billion for the entire high-cost program, with $2 billion of that going to rate-of-return territories annually.  It is thought that many carriers that voluntarily opt into the A-CAM will do so because the amount of model-based support they will receive will be the same or greater than their current level of support under legacy USF mechanisms.  This could result in a “budget squeeze,” which could negatively impact those carriers that do not opt into the A-CAM.  To protect against budget issues and generally encourage carriers to elect model support, the FCC will provide additional funding from the high-cost reserve account to the A-CAM.[12]  Specifically, the FCC will bankroll the A-CAM with up to an additional $150 million annually, or up to $1.5 billion over the 10-year model support term.  Additionally, the Commission may allocate an additional $50 million per year to the A-CAM.

Moving To The A-Cam – A Voluntary Process

In the coming months, the FCC will publicly release the final A-CAM results, which announce (1) the maximum amount of A-CAM support a carrier may receive, and (2) carriers’ maximum number of associated locations that are either fully funded or capped.[13]  Upon the release of this data, carriers will have 90 days to indicate whether they are “interested” in electing model-based support.  However, as explained below, under two scenarios, a carrier’s indication of interest will be treated as an irrevocable election to move to model-based support.

After carriers have indicated their interest, the Wireline Competition Bureau (Bureau) will calculate the total amount of model-based support for electing carriers to determine the extent to which, in the aggregate, their model-based support plus transition payments exceed the total legacy support received for 2015 by that subset of rate-of-return carriers.

If that increase is $150 million or less, the offered support amounts and deployment obligations will not be adjusted, and the $200 per location funding cap will be maintained.  In this scenario, a carrier’s initial indication of interest is irrevocable and the carrier will be deemed to have elected the voluntary path to the model.

In a second scenario, after the calculation of the total amount of model-based support for electing carriers, the Commission may determine “circumstances warrant” the allocation of an additional $50 million per year to the A-CAM in order to maintain the $200 per location funding cap.  In this scenario, a carrier’s initial indication of interest is irrevocable and it will be deemed to have elected the voluntary path to the model.

In a third scenario, the per-location funding cap will be lowered to a figure below $200 per location to ensure that total support for carriers electing the model remains within the budget for this path.  Reducing the funding cap will reduce the number of fully funded locations subject to deployment obligations.  In this scenario, carriers will be required to confirm within 30 days of release of the revised final offer; if they fail to do so, they will be deemed to have declined the revised offer.

To move to the A-CAM for a state or multiple states, a carrier must submit an acceptance letter signed by an officer of the company.  A-CAM acceptance letters should be emailed to the Bureau at ConnectAmerica@fcc.gov.  If a carrier fails to submit any final election letter by the close of the 90-day election period, it will be deemed to have declined model-based support.

The Challenge Process – Determining A-Cam Competitive Coverage

In the coming days, the Bureau will incorporate into the A-CAM the recently released June 2015 FCC Form 477 data, and will then release a Public Notice announcing the updated version of the model.  Commenters may then challenge the competitive coverage contained in the updated version of the A-CAM or provide other relevant information.  Comments will be due 21 days from the release of the Public Notice.  During its April 4 webinar, Bureau staff stated that it would release the Public Notice commencing the challenge process by the end of the week (April 8).

Transition Process: Rate-Of-Return Carriers That Will Receive Less Support From The A-CAM

The Commission has adopted a transition for electing carriers for whom model-based support is less than their legacy support.  Thus, in addition to model-based support, these carriers will receive a transition amount based on the difference between model support and legacy support. Carriers will receive transition support based upon which one of three tiers applies to them:

Tier 1 – If the difference between a carrier’s model support and its 2015 legacy support is 10 percent or less, in addition to model-based support, it will receive 50 percent of that difference in year one, and then will receive model support in years two through ten.[14]

Tier 2 – If the difference between a carrier’s model support and its 2015 legacy support is 25 percent or less, but more than 10 percent, in addition to model-based support, it will receive an additional transition payment for up to four years, and then will receive model support in years five through ten.  The transition payments will be phased-down twenty percent per year, provided that each phase-down amount is at least five percent of the total legacy amount.  If twenty percent of the difference between model support and legacy support is less than five percent of the total legacy amount, the carrier would transition to model support in less than five years.[15]

Tier 3 – If the difference between a carrier’s model support and its 2015 legacy support is more than 25 percent, in addition to model-based support, it will receive an additional transition payment for up to nine years, and then will receive model support in year ten.  The transition payments will be phased-down ten percent per year, provided that each phase-down amount is at least five percent of the total legacy amount.  If ten percent of the difference between model support and legacy support is less than five percent of the total legacy amount, the carrier would transition to model support in less than ten years.[16]

The Election Of Model-Based Support Is A Huge Decision

For A-CAM eligible rate-of-return carriers, the election of model-based support is a huge decision – it places them in a different regulatory paradigm.  As explained by the FCC, the rate-of-return carriers that choose to move to the model are electing incentive regulation for common line offerings.  But, the model will provide something that has been missing for so many carriers since the USF/ICC Transformation Order – regulatory certainty.  Carriers will be locked into a definite amount of annual USF support for ten years.  The A-CAM has defined buildout obligations, so a carrier should have a good idea of the deployment commitment that it will be making if it elects to go the model route. Also, the voluntary model path may be a better option for those carriers that no longer receive high-cost loop support (HCLS) due to the past operation of the indexed cap on HCLS (the so-called “cliff effect”).

Here is the general timeline for making the move to the A-CAM.  FCC Wireline Competition Bureau staff expects to release the Public Notice commencing the competitive coverage challenge process by the end of this week (April 8).  Challenge comments will be due 21 days from the release of that notice.  Sometime after reviewing those filings, the Bureau will release the final A-CAM results, which announce the maximum offered amount model support amounts, along with the maximum number of associated locations that are either fully funded or capped.  The Bureau has stated that the earliest it could make this announcement is June 2016.  Carriers will then have 90 days to indicate whether they are “interested” in electing model-based support.  That could put the indication of interest deadline in September.  If the $200 funding cap then has to be lowered, support amounts and location data will have to be recalculated and released, which would trigger the 30-day period for confirming or declining the revised offers.  All things aside, the Commission is planning to have A-CAM support kick in for electing carriers on January 1, 2017. These are exciting times for many rate-of-return carriers.

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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 (rel. Mar. 30, 2016) (2016 Rate-of-Return Reform Order or Order).

[2] Order at ¶65

[3] Order at ¶66.

[4] Id.

[5] The $52.50 funding benchmark is the product of a blended average revenue per user (ARPU) of $75 and a 70 percent expected broadband service subscription rate.  The methodology used to derive the $52.50 funding benchmark is the same one that was used for the final version of the cost model that the Commission used to offer model-based support to price cap carriers in Phase II of the Connect America Fund (CAF).  Order at ¶¶53-55.  Census blocks with average costs below $52.50 are not “high-cost,” and therefore are not supported by the A-CAM.  The methodology used to derive the $52.50 funding benchmark is the same one that was used for the final version of the cost model that the Commission used to offer of model-based support to price cap carriers in Phase II of the CAF.

[6] Rate-of-return carriers that comply with the performance requirements established in the Order for the duration of the 10-year A-CAM support term will be deemed in compliance even if the FCC subsequently establishes different standards that are generally applicable to high-cost support mechanisms before the end of the 10-year term.  Order at ¶24.

[7] See Order at ¶25.  A list showing the state-level density for each carrier will be released prior to the deadline for electing the model. 

[8] See Order at ¶26.

[9] See Order at ¶26.

[10] Order at ¶29.

[11] Carriers will be permitted to deploy to 95 percent of the required number of locations by the end of the 10-year term. To the degree an electing carrier deploys to less than 100 percent of the requisite locations, the remaining percentage of locations would be subject to the deployment obligations for the carrier’s capped locations.  Order at ¶33.

[12] In the USF/ICC Transformation Order, the FCC instructed the Universal Service Administrative Company (USAC) that if USF contributions assigned to high-cost support mechanisms exceeded high-cost demand, excess contributions were to be credited to a CAF reserve account. See USF/ICC Transformation Order at ¶561.  At last estimate, that account exceeds just over $2 billion.  Based on its decision to use CAF reserve funds to implement the A-CAM, the FCC has now concluded that there is no need to maintain a separate CAF reserve account.  Therefore, to simplify the accounting treatment of high-cost reforms going forward, the FCC has directed USAC to eliminate the CAF reserve account and transfer its funds to the general high-cost account.  Order at footnote 130.  Going forward, USAC will credit excess contributions to support the high-cost mechanism to the high-cost account and will use funds from the high-cost account to reduce high-cost demand to $1.125 billion in any quarter that would otherwise exceed $1.125 billion.  See USF/ICC Transformation Order at ¶562.

[13] Carriers that discover there is a widely divergent number of locations in their funded census blocks as compared to the number produced by the final run of the A-CAM may have the opportunity to seek an adjustment to modify the deployment obligations.  Order at ¶34.

[14] Order at ¶73.

[15] Order at ¶74.  For example, if legacy support were $100 and model support were $80, 20% of the difference ($20) is only $4, which is less than 5% of legacy support ($5), so in this case the carrier would receive $95 in year one, $90 in year two, $85 in year three and model support ($80) in year four.  Order at footnote 150.

[16] Order at ¶75.