The Federal Communications Commission (FCC) has released a Report and Order, Third Order on Reconsideration, and Notice of Proposed Rulemaking that continue the FCC’s efforts to reform the high-cost universal service fund (USF) support mechanism rules that apply to rate-of-return carriers. [1]

As expected, the Report and Order contains new rules “explicitly prohibiting the use of federal high-cost support for expenses that are not used for the provision, maintenance, and upgrading of facilities and services for which...support is intended.”  They codify existing precedent prohibiting the use of high-cost support to recover certain expenses, but also have the effect of clarifying and ostensibly expanding those prohibitions.

As they have in the past, rate-of-return carriers will have to work with their cost consultants to ensure compliance with the FCC’s expense rules. But, the FCC will now require rate-of-return carriers to identify – on their annual FCC Form 481 – their cost consultants or other third parties used to prepare their cost studies, or other calculations used to calculate high-cost support for their submission.

The Report and Order will be effective 30 days after a summary is published in the Federal Register, except for those rules and requirements involving Paperwork Reduction Act burdens, which will become effective immediately upon announcement in the Federal Register of OMB approval.

USF Support May Be Used To Recover Only Those Expenses “For The Provision, Maintenance, And Upgrading Of Facilities And Services For Which Support Is Intended”

Section 254(e) of the Communications Act specifies that carriers shall use high-cost USF support “only for the provision, maintenance, and upgrading of facilities and services for which the support is intended.” [2] Carriers must annually certify this condition has been met; though state commissions generally make the certification filing for them. Since the creation of the USF in 1996, there have been very few instances of carriers attempting to recover non-business expenses through high-cost support. Nevertheless, the FCC cites recent instances involving the use of high-cost support for goods and services not related to network investment as the basis for new explicit cost recovery rules. [3]

In reaction to such concerns triggered by waiver requests, audits, and enforcement actions concerning recoverable expenses, the FCC issued a Public Notice in October 2015 outlining certain expenses that cannot be recovered through the high-cost USF program. These expenses deemed “not necessary to the provision of supported services” included things such as alcohol, food, and scholarships. Thereafter, the FCC, led by Commissioners Clyburn and O’Rielly, continued to push for strict prohibited expense rules. The Further Notice accompanying the 2016 Rate-of-Return Reform Order called for an extensive review of investments and expenses that may be included in a carrier’s rate base and revenue requirement for ratemaking and USF purposes, something that had not been done since 1996. [4] It also proposed codifying certain guidance laid out in the October 2015 notice, and identified several other goods or services that were not previously explicitly prohibited from recovery through high-cost USF, including, among other things, artwork, corporate aircraft, watercraft, childcare, and cafeterias.

The recent Report and Order brings the FCC’s efforts to tighten up USF expense rules to fruition. First, the FCC reminds carriers that high-cost USF support must be used only for providing, maintaining and upgrading voice and broadband facilities and services. Rate-of-return carriers must not use support for purposes other than those. For instances in which a portion of an expense is attributable to a non-recoverable use, carriers may only recover from high-cost support that portion of the expense incurred for the provision, maintenance, and upgrading of facilities for which support is intended.

New Non-Exhaustive List Of Prohibited Expenses – Expense Categories That Are Precluded From Recovery Via The High-Cost USF

The FCC has adopted rules containing “a simple, clear, and carefully defined, non-exclusive, list of expense categories that are precluded from recovery via the high-cost [USF].” These expenses – prohibited because they are  not used “for the provision, maintenance and upgrading of supported facilities and services – are organized into three broad categories: (1) personal expenses, (2) expenses unrelated to operations, and (3) corporate luxury goods.

To be clear, while the list includes specific types of expenses, it is not a comprehensive list of expenses ineligible for high-cost support. When in doubt, the directive in Section 254(e) controls. Revised Section 54.7 of the FCC’s rules contains the expense categories that are precluded from recovery via USF:

§ 54.7 Intended use of federal universal service support.

*****

(c) Ineligible Expenses.  For those eligible telecommunications carriers as defined in § 54.5 of this part receiving universal service support pursuant to subparts K and M of this part, ineligible expenses include but are not limited to the following:

(1) Personal expenses of employees, executives, board members, and contractors, and family members thereof, or any other individuals affiliated with the eligible telecommunications carrier, including but not limited to personal expenses for housing, such as rent or mortgages, vehicles for personal use and personal travel, including transportation, lodging and meals;

(2) Gifts to employees; childcare; housing allowances or other forms of mortgage or rent assistance for employees except that a reasonable amount of assistance shall be allowed for work-related temporary or seasonal lodging; cafeterias and dining facilities; food and beverage except that a reasonable amount shall be allowed for work-related travel; entertainment;

(3) Expenses associated with: tangible property not logically related or necessary to the offering of voice or broadband services; corporate aircraft, watercraft, and other motor vehicles designed for off-road use except insofar as necessary or reasonable to access portions of the study area not readily accessible by motor vehicles travelling on roads; tangible property used for entertainment purposes; consumer electronics used for personal use; kitchen appliances except as part of work-related temporary or seasonal lodging assistance; artwork and other objects which possess aesthetic value;

(4) Political contributions; charitable donations; scholarships; membership fees and dues in clubs and organizations; sponsorships of conferences or community events; nonproduct-related corporate image advertising; and

(5) Penalties or fines for statutory or regulatory violations; penalties or fees for any late payments on debt, loans, or other payments.

FCC Compliance Measures – Hey Cost Consultants, We Are Watching You

Rate-of-return carriers will have to work with their cost consultants to ensure compliance with the new rules. The FCC will require rate-of-return carriers to identify – on their annual FCC Form 481 – their cost consultants or other third party used to prepare their cost studies, or other calculations used to calculate high-cost support for their submission. This will enable the FCC, USAC, NECA, and perhaps auditors to track cost consultants more closely, and identify how various cost consultants apply the FCC’s expenses rules. By the same token, the requirement may allow the FCC and USAC to “identify and rectify patterns of noncompliance, and potentially fraud, during audits.” [5] The FCC declined to adopt other compliance measures, and it declined to adopt a safe harbor that would insulate carriers from audit and enforcement liability arising out of the inclusion of certain prohibited expenses.

Important Narrow "Exceptions" To The Rules

There are a number of important exceptions to the FCC’s list of expense categories that are precluded from recovery via the high-cost USF. They are summarized below.

• Reasonable Work-Related Travel Expenses are Recoverable – Personal travel expenses may not be recovered using USF support. However, “reasonable work-related travel expenses are recoverable to the extent they are used for the provision, maintenance, and upgrading of facilities and services for which high-cost support is intended.” [6] For example, if a carrier’s technician travels to repair a supported facility and such travel requires overnight accommodation, the carrier would be able to recover that employee’s reasonable hotel costs.
• Company-Owned Vehicles – “To the extent a vehicle is used for both legitimate business purposes and nonbusiness purposes, [a carrier] may only recover from high-cost support that portion of expenses incurred in connection with the provision, maintenance, and upgrading of supported services and facilities for which high-cost support is intended.”
• Housing Expenses For Temporary & Seasonal Work – Carriers are prohibited from using federal high-cost USF support to provide housing allowances for employees. However, the FCC has acknowledged a “very narrow” exception – “it may be appropriate to seek high-cost support to recover the cost of providing temporary or seasonal lodging for employees providing service in remote areas with rugged terrain and extreme weather conditions where no other lodging is available.” [7] So, reasonable temporary or seasonal lodging can be a recoverable operating expense, but only if it is fits within the statutory test for recoverable expenses (used for the provision, maintenance, and upgrading of services and facilities for which high-cost support is intended). On a related note, “kitchen appliances may not be recovered from high-cost support except to the extent provided as part of temporary or seasonal lodging for employees providing supported service in rugged, remote areas.” [8]
• Certain Legal & Consulting Expenses Are Recoverable – Carriers are able to use support to recover expenses “incurred to meet state, local, or federal regulatory requirements or obligations to provide supported services.” For instance, expenses such as preparing tariff and service cost filings, obtaining plant construction permits, negotiating pole attachment rights-of-way, and negotiating interconnection agreements that are a precondition to providing supported service are recoverable from the high-cost USF program.
• Company-Issued Smart Phones, Laptops, and Other Electronic Devices – Carriers may seek high-cost USF support for expenses associated with consumer electronic devices such as laptops, monitors, smart phones, or other hand-held devices used for valid business purposes.

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

[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, Third Order On Reconsideration, and Notice Of Proposed Rulemaking, FCC 18-29 (rel. Mar. 23, 2018) (Report and Order).

[2] 47 U.S.C. § 254(e).

[3] The FCC cites proceedings involving Sandwich Isles, Adak Eagle Enterprises and Windy City Cellular, and Blanca Telephone.

[4] 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) (Rate-of-Return Reform Order).

[5] Report and Order at ¶ 42.

[6] Report and Order at ¶ 20.

[7] Report and Order at ¶ 23.

[8] Report and Order at ¶ 41.