Rate-Of-Return Broadband Order: FCC Eliminates Capital Investment Allowance, Simplifies Budget Control Mechanism, And Reduces Monthly Per-Line Limit On Support
The Federal Communications Commission has approved and released a Report and Order and Further Notice of Proposed Rulemaking that revises many universal service fund (USF) rules that apply to rate-of-return incumbent local exchange carriers.[1] This blog post will cover the following three topics:
The elimination of the capital investment allowance because its burdens and inefficiencies outweigh any benefits.
The simplification of the budget control mechanism calculation and elimination of the per-line reduction calculation that is part of the budget control mechanism.
The reduction of the monthly per-line limit on universal service support to $225, effective July 1, 2019, and then to $200, effective July 1, 2021.
Elimination of the Capital Investment Allowance (It Didn’t Work)
In an attempt to ensure that finite USF support is used “as efficiently as possible,” the FCC adopted a capital investment allowance mechanism in the 2016 Rate-of-Return Reform Order. It limited the extent to which USF support could be used to support future capital investments by those rate-of-return carriers that were above the national average in broadband deployment.[2] The capital investment allowance acted as a limitation on a rate-of-return ILEC’s annual budget for universal service-eligible investment, affecting high-cost loop support (HCLS) and Connect America Fund Broadband Loop Support (CAF-BLS). In other words, the capital investment allowance limited the total amount a carrier could spend on a broadband deployment project. To show compliance with the rule, legacy rate-of-return carriers were required to track every capital expenditure and allocate it to locations affected by that expenditure – a brand new administrative obligation. This bookkeeping turned out to be very difficult and time consuming. Moreover, carriers found out the limitation did not encourage efficient spending.
Two and one half years later, the FCC has decided to eliminate the capital investment allowance after concluding its burdens and inefficiencies outweigh any benefits. According to the FCC, the capital investment allowance may discourage marginal capital expenditures that are economically efficient. How so? The cap may deter carriers from connecting additional locations as part of an existing project if those related costs would cause the project to blow through the limit. The FCC has “found no evidence that the capital investment allowance has encouraged additional capital investment by those carriers below the average level of broadband deployment.”[3] For these reasons, the FCC has concluded “that elimination of the capital investment allowance is appropriate.”
Simplifying The Rate-Of-Return Budget Control Mechanism Calculation
In the 2016 Rate-of-Return Reform Order, the FCC implemented a method for enforcing the rate-of-return high-cost budget. When necessary, the budget control mechanism reduces HCLS and CAF BLS. This overall reduction in support consists of per-line reductions and a pro rata reductions applied to each rate-of-return study area. In a 2018 NPRM, the FCC proposed eliminating the per-line reduction and using only a pro rata reduction in the calculation of the budget control mechanism.
The FCC has eliminated the per-line reduction from the budget control mechanism. The reason? Including the per-line reduction when calculating the budget control “has resulted in some carriers bearing an unreasonably large share of the support limit.”[4] The FCC expected the budget control mechanism to strike a fair balance, but instead “resulted in an increasingly wide variation of cuts to carriers’ support.” A chart is included in the order that details the variation in support reductions. Additionally, the FCC believes the change “will make it easier for carriers to determine what their specific support reduction will be and make application of the budget control mechanism more transparent.”[5]
New Limit On Monthly Per-Line Support: $225 on July 1, 2019 & $200 on July 1, 2021
In the 2011 USF/ICC Transformation Order, the FCC capped per-line support at $250 per month, even though it was estimated that only 12 incumbent rate-of-return carriers would eventually be hit by the limit. Carriers that thought they had legitimate reasons for needing more per-loop support were encouraged to seek a waiver of the cap. In March 2018, the FCC sought comment on lowering the cap on per-line support to $200 per month.
The FCC has amended its USF rules to reduce the monthly per-line limit on support from $250 to $225, effective July 1, 2019, and then to $200, effective July 1, 2021.
According to the FCC, approximately 14 study areas were affected by the monthly $250 per-line limit. Carriers filed waivers for 10 of those study areas, and two were granted, which according to the FCC, shows that carriers cannot justify high per-loop expenses. A reduction in per-line support to $200, the FCC explains, will currently affect approximately 30 study areas that are not already subject to the $250 per-line monthly limit. As a final piece of evidence for lowering the per-line support cap, the FCC notes that impacted carriers can always file a waiver.
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For More Information On This Topic, Try These Blog Posts:
A-CAM II: A New Model Offer for “Legacy” Rate-of-Return Carriers (November 2018)
FCC Considering Minor Changes to “Legacy” Rate-of-Return USF Budget (April 2018)
FCC Provides More Funding For A-CAM Carriers (March 2018)
A-CAM Companies Make Final Push For More Funding (December 2017)
NTCA Presses FCC To Review High-Cost USF Budget (August 2017)
NTCA Survey Says: High-Cost USF Shortfall Harming Rural Broadband Deployment (August 2017)
A Watershed Moment: The FCC’s 2016 Rate-of-Return Reform Order (March 2016)
*****FOOTNOTES*****
[1] Connect America Fund, WC Docket No. 10-90; ETC Annual Reports and Certifications, WC Docket No. 14-58; Establishing Just and Reasonable Rates for Local Exchange Carriers, WC Docket No. 07-135; Developing a Unified Intercarrier Compensation Regime, CC Docket No. 01-92, Report And Order, Further Notice Of Proposed Rulemaking, And Order On Reconsideration, FCC 18-176 (Dec. 13, 2018) (2018 Rural Broadband Order).
[2] 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, ¶¶105-115 (Mar. 30, 2016) (2016 Rate-of-Return Reform Order).
[3] 2018 Rural Broadband Order at ¶ 116.
[4] 2018 Rural Broadband Order at ¶ 121.
[5] 2018 Rural Broadband Order at ¶ 124.