FCC’s Draft Rural Broadband Order Attempts To Fix Inadequate Legacy USF Budget
Federal Communications Commission Chairman Ajit Pai has released a draft Report and Order and Further Notice of Proposed Rulemaking that will be considered at the FCC’s December open meeting.[1] The item revises universal service fund (USF) rules that apply to rate-of-return incumbent local exchange carriers.
In the draft order, the FCC acknowledges it needs to make changes to the USF budget to ensure sufficient and predictable support is available to rate-of-return carriers so they can increase rural broadband deployment. Accordingly, in the order, the FCC adopts a new USF budget for rate-of-return carriers subject to legacy cost-based rules that is based on uncapped 2018 claims, increased annually by inflation, along with a minimum threshold of support for carriers. The FCC estimates the new legacy USF budget to be approximately $1.42 billion. The increased budget, however, comes with the following condition: support recipients with deployment obligations must provide broadband service at speeds of 25/3 Mbps rather than 10/1 Mbps.
Background & Context: Insufficient USF Budget Suffocates Rural Broadband Deployment
The USF’s high-cost program provides funding support for the deployment of broadband networks in rural, insular, and high cost areas of the U.S. In 2011 USF/ICC Transformation Order, the FCC established an overall budget of $4.5 billion for the 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 2016 Rate-of-Return Reform Order, the FCC adopted a control mechanism to enforce the rate-of-return budget, which makes per-line and a pro rata reductions to each rate-of-return study area in the event total USF support is forecasted to exceed $2 billion in a given year.[2] The budget control mechanism only applies to those rate-of-return carriers receiving USF support under the traditional cost-based rules (also referred to as “legacy” carriers and legacy rules).
While the budget control mechanism was intended to ensure fiscal responsibility, it had the unintended consequence of choking off rural broadband deployment. It produced insufficient and unpredictable USF support amounts in violation of the universal service statute, and it prevented rate-of-return carriers from ensuring that consumers in rural areas have access to services “reasonably comparable to those services provided in urban areas...at rates that are reasonably comparable to rates charged for similar services in urban areas.”[3] Without a doubt, the budget has been detrimental to rural carriers, undermining their efforts to deploy broadband and execute long-term planning. The tight USF budget, combined with everchanging expense limitations, created a cloud of regulatory uncertainty, which caused rural providers to push pause on current and future broadband deployment plans.
In a March 2018 Third Order on Reconsideration, the FCC finally acknowledged the harms caused by the budget, and provided some temporary relief by fully funding legacy rate-of-return carrier claims for the July 2017 to June 2018 budget period. The decision provided a boost of support for carriers, but did not make any permanent changes to the flawed budget. Instead, in an accompanying NPRM, the FCC sought comment on how it can encourage more efficient use of USF support, and whether and how the FCC can modify the budget control mechanism to provide more predictable support. This brings us to the recently-released draft rural broadband order.
A Bigger Legacy Budget Based On What Carriers Are Spending Today
The new USF budget for legacy rate-of-return carriers will be based on 2018 uncapped support claims – roughly $1.42 billion – and subject to an annual inflationary factor to incrementally increase the budget each year (like the other USF support programs).[4] The FCC also has established a minimum threshold of support for legacy rate-of-return carriers. The FCC believes a budget based on what carriers are spending today – their 2018 support claims – is “better tailored for today’s broadband needs.” Will this be enough? In a perfect world the FCC would fully fund the high-cost program. Since that is unrealistic, the new budget based on 2018 uncapped claims will have to do. The FCC does not expect to review the budget prior to 2024, but it has noted it may be appropriate to revisit the budget at the end of five years to reevaluate whether any further changes are needed.[5]
For a step-by-step explanation of how USAC, the Wireline Competition Bureau, and NECA will work together to calculate the new budget on an annual basis starting with 2019, see paragraphs 93 – 95 of the draft order.
Some Immediate Relief – 2018 Refund
The FCC will provide some immediate relief to mitigate any harmful effects of the current, insufficient 2018 budget. Specifically, the FCC will refund all rate-of-return carrier support reductions due to the budget control mechanism from July 1, 2018 through December 31, 2018, or the effective date of the order, whichever is later. Also, there will be no reductions to legacy USF support from January 1, 2019 through June 30, 2019, because the FCC anticipates those support claims to increase only slightly over corresponding 2018 claims.[6]
GDP-CPI Inflationary Factor (Just Like Other USF Mechanisms Already Have)
The new USF budget for legacy rate-of-return carriers will be subject to an annual inflationary factor based on the GDP-CPI (gross domestic product and consumer price index), allowing the budget to increase incrementally each year. The GDP–CPI “measures price changes in goods and services purchased by consumers, businesses, and governments, and is the inflationary factor [that has been] used for many years in other legacy [USF] support mechanisms.”[7]
Delinking The Dueling Rate-Of-Return USF Program Budgets
To provide greater certainty and predictability for legacy providers, the new budget for legacy carriers will be separate and apart from the funding for the A-CAM programs (and Alaska Plan and CAF ICC to be exact). When the FCC allowed some rate-of-return carriers to move the A-CAM, it split carriers into two rival camps. With a single “budget” of USF support for both groups, the distribution of funding came to be seen as a zero-sum game. Any potential increase to one group was viewed as detrimental by the other group. This view was apparent in the comments filed in response to the FCC’s March 2018 NPRM. In light of this, the FCC has delinked A-CAM and legacy support.
Adjusting The Budget To Reflect Conversion To Broadband-Only Lines
For some time now, every rate-of-return carrier has been experiencing an increase in broadband-only lines and a corresponding decrease in voice-only and voice/broadband lines. When a “line” is converted to broadband-only, the costs are transferred to the interstate jurisdiction. When a carrier converts lines to broadband-only, the carrier’s interstate costs increase and the carrier may receive more USF support to cover those costs. Rate-of-return carriers have raised concerns “that as carriers convert voice and voice/broadband lines to broadband-only lines there will be additional pressure on the universal service budget because federal support for broadband-only lines is typically greater than for voice and voice/data lines.”[8]
The FCC expects the increase in USF demand due to broadband-only line conversion to “not exceed 7% of the adjusted budget over time.”[9] What will the FCC do about this? The FCC’s answer: have no fear, the A-CAM II is here (to offset those concerns). The FCC believes that any increase in legacy USF support caused by growth in broadband-only line conversions will be offset through legacy carriers accepting the new A-CAM II offer. Here is how:
For carriers that accept a new model offer that will receive more model support than their uncapped claims, USAC will take those claims out of the legacy budget.
For carriers accepting a new model offer that will receive less model support than their unconstrained claims (glide-path carriers), USAC will take only the carriers’ model support amounts out of the budget cap.
The FCC is betting that the total number of glide-path carriers accepting model-based support and their corresponding increase in the legacy budget will cover any increase caused by broadband-only lines. Just to be safe though, the FCC will increase the budget in July 2019 by 7%. Anything over that amount caused glide-path carriers moving to A-CAM II will remain in the budget.
Minimum Legacy USF Support Amounts
To further provide carriers with predictable support, the FCC will adopt a minimum threshold of support for each carrier based on the following: “The uncapped threshold will be based on a five-year CAF BLS forecast to be developed by NECA for establishing the carrier-specific deployment obligation, but any amounts greater than that may be subject to a budget control mechanism.”[10] This means no legacy rate-of-return carrier will receive less support as a result of budget constraints than predicted in the threshold forecast.
The minimum threshold of support for each carrier is “linked” to its minimum deployment obligation so that carriers will receive at a minimum, the amount of support that went into determining minimum deployment obligations. The new five-year threshold forecast will be calculated using the budget adopted in the order, including the annual inflation adjustment, and will be used to calculate each legacy carrier’s new mandatory deployment obligations
Revised Broadband Deployment Obligations For Legacy Rate-Of-Return Carriers
The increase to the USF budget and new minimum support threshold come with strings attached – an obligation to deploy 25/3 Mbps broadband service. Upon adoption of the draft order, the FCC will increase the minimum broadband speed obligation to 25/3 Mbps (up from 10/1 Mbps).[11] This means rate-of-return carriers receiving legacy USF support must use funding to deploy 25/3 Mbps service to a certain number of locations. The FCC will reset the five-year deployment term to run from the effective date of the order until December 31, 2023. For administrative convenience, the FCC will base this new term on the calendar year starting January 1, 2019.
Legacy rate-of-return carriers’ deployment obligations will be released just prior to or at the same time the FCC releases the A-CAM II offer, in order to give carriers all the information they need to make a decision.[12]
In the 2016 Rate-of-Return Reform Order, the FCC adopted defined deployment obligations for carriers receiving CAF BLS, which were based on each legacy carrier targeting a defined percentage of its five-year forecasted CAF BLS support to the deployment of 10/1 Mbps broadband where the carrier had not already deployed. Many legacy rate-of-return carriers did not have a 10/1 Mbps deployment obligation because they had already deployed that level of service to 80% or more of their service areas. All (it has to be all right?) of these carriers are now looking at deployment obligations as a result of the new 25/3 Mbps minimum service standard.
A carrier’s deployment obligation is still based on its five-year forecasted support, but every carrier’s will have to be updated to account for the revised budget and minimum support thresholds.[13] As in the past, depending on a carrier’s level of existing 25/3 Mbps deployment, the carrier must use a certain percentage of its five-year forecasted support to deploy 25/3 Mbps broadband service.[14] All legacy carriers will have to report the their deployed-to locations in the HUBB portal. Here are the specific requirements:
Legacy rate-of-return carriers with less than 20% deployment of 25/3 Mbps broadband service in their entire study area, based on the most recently available FCC Form 477 data, will be required to use 35% of their five-year forecasted CAF BLS support specifically for the deployment of 25/3 Mbps broadband service where it is currently lacking.
Rate-of-return carriers with more than 20% or greater but less than 40% deployment of 25/3 Mbps broadband service in their entire study areas, will be required to use 25% of their five-year forecasted CAF BLS support specifically for the deployment of 25/3 Mbps broadband service where it is currently lacking.
Rate-of-return carriers with 40% or greater deployment of 25/3 Mbps broadband service in their entire study areas, will be required to use 20% of their five-year forecasted CAF BLS support specifically for the deployment of 25/3 Mbps broadband service where it is currently lacking.
For all legacy carriers, the FCC will count locations recently served with 25/3 Mbps broadband. Specifically, any locations carriers receiving CAF BLS support have deployed to with at least 25/3 Mbps broadband service since May 25, 2016, regardless of whether the carriers had defined deployment obligations in the original term, will count towards the new five-year deployment obligation.[15] Carriers that have not had HUBB portal reporting obligations will have an opportunity to enter these 25/3 Mbps or higher locations deployed to since May 25, 2016 in the HUBB.
A future blog post will provide a summary of the sections of the order on (1) the elimination of the capital investment allowance; (2) The revisions to the budget control mechanism calculation; (3) The reductions to the monthly per-line limit on USF support from $250 to $225, effective July 1, 2019, and then to $200, effective July 1, 2021; (4) the decision to replace the 100% overlap process with competitive auctions for legacy service areas that are nearly entirely overlapped by unsubsidized competitors; (5) the two changes to the rules governing the filing of line count data by rate-of-return carriers; (6) the changes to the uniform system of accounts to incorporate new lease accounting standards: (7) the FCC’s decision to decline to make any changes to the rural growth factor or the application of the HCLS cap; (8) the decision to not make any changes to the rate-of-return operating expense limitation; (9) the FCC’s directions to USAC to maintain collecting USF contributions based on projected demand; (10) the further notice of proposed rulemaking; and (11) the order on reconsideration.
There may be another blog post that covers some thoughts on the FCC’s order and makes some predictions of what will happen. For example, some predictions on a mass exodus of carriers to the A-CAM II and the future of the USF’s high-cost support mechanism.
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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-CIRC1812-02 (Nov. 21, 2018) (2018 Draft Rural Broadband Order).
[2] See 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); Wireline Competition Bureau Announces Implementation of The Budget Control Mechanism For Rate-Of-Return Carriers, WC Docket No. 10-90, Public Notice, DA 16-736 (June 29, 2016).
[3] 47 U.S.C. § 254(b)(3), (5).
[4] 2018 Draft Rural Broadband Order at ¶ 74 – 82.
[5] 2018 Draft Rural Broadband Order at ¶ 92.
[6] 2018 Draft Rural Broadband Order at ¶ 78.
[7] 2018 Draft Rural Broadband Order at ¶ 83.
[8] 2018 Draft Rural Broadband Order at ¶ 85.
[9] 2018 Draft Rural Broadband Order at ¶ 86.
[10] 2018 Draft Rural Broadband Order at ¶ 90.
[11] 2018 Draft Rural Broadband Order at ¶ 99.
[12] Because the A-CAM II offer is planned for early 2019 and actual 2018 legacy USF claims will not be available until March 2019, projected support claims for 2018 may be used for calculating legacy carriers’ forecasted CAF BLS. 2018 Draft Rural Broadband Order at ¶ 101.
[13] Part of the calculation for determining deployment obligations is a cost-per-location figure based on one of two methodologies, both of which will be updated (both methodologies factor in the per-line, per-month cap, which has been revised). 2018 Draft Rural Broadband Order at ¶ 102.
[14] There will continue to be a prohibition on deploying terrestrial wireline technology in any census block if doing so would result in total support per line in the study area to exceed the per-line, per-month cap, as revised in the order. 2018 Draft Rural Broadband Order at ¶ 105.
[15] 2018 Draft Rural Broadband Order at ¶ 105.