On March 23, 2018, the Federal Communications Commission (FCC) released a Report and Order, Third Order on Reconsideration, and Notice of Proposed Rulemaking (NPRM) 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]

In the Third Order on Reconsideration, the FCC provides some budgetary relief for “legacy” rate-of-return carriers – those carriers that did not opt in to the A-CAM or those subject to the Alaska Plan. In the NPRM, the FCC proposes permanent changes to the high-cost budget that controls USF support amounts for those carriers. Comments in response to the NPRM will be due 30 days after a summary of the NPRM is published in the Federal Register. Reply comments will be due 60 days after publication.

Rate-of-Return USF Budget Breakdown: What is it? Who gets What? How? Why?

A hard cap of $4.5 billion of support per year was applied to the USF’s high-cost mechanism in 2011, with $2 billion of that amount allocated to rate-of-return carriers. That $2 billion piece of pie is split into four types of support that flows to rate-of-return carriers:

• Cost Model Support (rate-of-return carriers that opted-in to the A-CAM)
• Alaska Plan Support (Alaska rate-of-return carriers)
• CAF-ICC Support (rate-of-return carrier reimbursements for reductions in switched access charges incurred as part of comprehensive intercarrier compensation reform)
• HCLS and CAF BLS (rate-of-return carriers subject to revised cost-based rules)

Support amounts for A-CAM carriers and Alaska Plan carriers are fixed through the end of 2026, while the CAF-ICC support mechanism continues to decrease over time. Only legacy carrier support is neither fixed nor subject to a gradual phase down, and HCLS and CAF BLS are subject to possible reductions “after the fact” to ensure the overall budget is not exceeded. Support currently available for legacy carriers – provided through CAF BLS and HCLS – is approximately $1.23 billion, but the FCC’s expects that amount to increase over time as total CAF ICC support decreases.

NPRM – Permanent (Minor) Revisions to The Legacy Rate-of-Return USF Support Budget

The FCC kicks off the NPRM by noting it has not revised the USF budget since it was adopted in 2011. A lot has happened since then. For instance, there have been a number of important changes to the FCC’s definition of broadband and broadband deployment obligations that come with the receipt of USF support, including the following: (1) In December 2014, the FCC further clarified a requirement that rate-of-return carriers receiving USF support offer at least 10/1 Mbps broadband service upon reasonable request; [2] (2) For purposes of examining progress in U.S. broadband deployment pursuant to Section 706, in 2015, the FCC’s definition of broadband Internet access service went from service providing speeds of at least 4 Mbps downstream and 1 Mbps upstream to service with speeds of 25/3 Mbps; [3] and (3) In the 2016 Rate-of-Return Reform Order, the FCC imposed new deployment obligations requiring legacy rate-of-return carrier to target a defined percentage of CAF BLS support to the deployment of 10/1 Mbps broadband service where it is currently lacking. [4]

So what’s the point here? What’s really going on? The point is, the FCC is finally officially acknowledging that the portion of the high-cost USF budget devoted to legacy rate-of-return carriers is insufficient to a point where it is hindering rural broadband deployment. Here’s the FCC, in its own words, admitting that the budget it set nearly seven years ago isn’t cutting it today: “A budget designed to speed the deployment of 4 Mbps/1 Mbps broadband to rural America may be insufficient to encourage the deployment of the high-speed broadband networks that residents of rural America need.” [5] The FCC wants to hit the reset button, and here’s how...

1. How To Set The Initial Budget For Legacy Rate-Of-Return Carriers

In the NPRM, the FCC first seeks comment on re-setting the amount of high-cost USF support devoted to legacy rate-of-return carriers (HCLS and CAF BLS), and ensuring that amount meets Section 254’s requirement that support to be “predictable and sufficient...to preserve and advance universal service.” Here are the FCC’s primary proposals:

Should we establish a separate budget dedicated to HCLS and CAF BLS set at $1.23 billion (the current amount available for HCLS and CAF BLS)?

Should we establish a separate budget dedicated to HCLS and CAF BLS set at $1.35 billion (current available amount adjusted by the inflationary ratio that reflects inflation since 2011)?

Should we establish a separate budget dedicated to HCLS and CAF BLS set at some other amount?

Should the amount of support available for legacy rate-of-return carriers (HCLS and CAF BLS) continue to be calculated by subtracting A-CAM, Alaska Plan, and CAF ICC support from a single rate-of-return budget?

All the possible ways for setting an initial budget present an excellent opportunity for legacy rate-of-return carriers to once again explain to the FCC how damaging the cramped budget has been to rural broadband deployment. It’s becoming routine – carriers have been doing this in comments and ex partes since 2011. When commenting on the budget proposals in the NRPM, the FCC wants legacy rate-of-return carriers to provide information on the amount of support they would need to meet the FCC’s mandatory broadband buildout requirements, and the requirement that they offer at least one service plan meeting the comparative benchmark rate. For probably a very large number of legacy carriers, this should be easy. They can look to the amounts the A-CAM spits out for their study areas, if they were able to move to the model. Others have cost studies detailing the need for more support than the current budget provides. Nevertheless, legacy rate-of-return carriers face an uphill battle in their quest for a significant increase in high-cost funding. But, here’s the bright side – the FCC has acknowledged the budget needs to be tweaked, and the FCC is leaning heavily toward allowing an annual increase to account for inflation.

2. FCC Set To Apply Inflationary Factor To Legacy USF Budget, Allow For Modest Annual Growth

After the FCC chooses a way to set the annual budget amount for legacy carriers, it expects to incorporate an inflationary factor that will result in a modest increase to that amount each year to account for rising costs. [6] After all, one dollar seven years ago does not equal one dollar today.

To account for inflation, the FCC proposes using the United States Department of Commerce’s Gross Domestic Product–Chained Price Index (GDP–CPI). It’s the same inflationary factor used in the rural growth factor, but more importantly, it’s also the variable the FCC added to the formula for calculating legacy rate-of-return carrier opex limitations in the Third Order On Reconsideration. Based on everything in the Report and Order, Third Order on Reconsideration, and NPRM, the addition of an inflationary factor to the budget seems like a done deal.

3. Next Budget Review?

Finally, the FCC asks when it should schedule the next review of the rate-of-return carrier high-cost budget. There are a couple of options. First, the FCC asks whether it should revisit the budget again in six years – the same timeframe set out in the USF/ICC Transformation Order when the budget was initially introduced. Second, the FCC asks whether it should revisit the budget in 2026, the year current A-CAM funding is set to conclude.

FCC Commissioner O’Rielly’s Request For Comment on USF Budgets - All USF Budgets

Imagine a pack of hungry lions fighting over the carcass of a dead wildebeest in the middle of the Serengeti. That fight might come to mind for some people if they were asked to envision an FCC proceeding in which stakeholders from each individual USF support mechanism weighed in on why their program should see an increase in funding to the detriment of all three other programs. This type of “discussion and analysis,” according to FCC Commissioner O’Rielly, is needed to best determine whether a particular program deserves additional funds. He made the suggestion during a recent speech that suggested “it is time to institute the practice that any further increases in one program must be paired with offsets from another.” These remarks should come as no surprise since Commissioner O’Rielly has called for limits on USF spending consistently throughout his tenure at the Commission. And he’s not afraid to share his outside the box thinking. If anyone takes him up on his suggestion, it will be interesting to see how they do it. To be fair, their arguments probably won’t be as combative as the image invoked above.

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[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) (NPRM).

[2] Connect America Fund, WC Docket No. 10-90, ETC Annual Reports and Certifications, WC Docket No. 14-58, Petition of USTelecom for Forbearance Pursuant to 47 U.S.C. § 160(c) from Obsolete ILEC Regulatory Obligations that Inhibit Deployment of Next-Generation Networks, WC Docket No. 14-192, Report and Order, FCC 14-190, ¶ 20 (rel. Dec. 18, 2014).

[3] See Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act, GN Docket No. 14-126, 2015 Broadband Progress Report and Notice of Inquiry on Immediate Action to Accelerate Deployment, FCC 15-10 (rel. Feb. 4, 2015).

[4] 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, ¶ 168 (rel. Mar. 30, 2016).

[5] NPRM at ¶ 108.

[6] NPRM at ¶ 114.