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]

In the Third Order on Reconsideration, the FCC addresses a slew of issues related to the rate-of-return portion of the overall high-cost support mechanism: mitigation of the budget control mechanism from July 2017 to June 2018; addition of an inflation factor to calculate the operating expenses limitation; inclusion of broadband-only loops in calculating each carrier’s corporate operations expense limitation; treatment of transferred exchanges; streamlined waivers; and the effect of the first Alternative Connect America Cost Model (A-CAM) election on the current budget for legacy rate-of-return carriers.

The information below summarizes the FCC’s decision to mitigate the impact of the budget control mechanism by fully funding support claims for the July 2017 – June 2018 time period. Rate-of-return carriers should take note of what the FCC has done here. The decision to provide additional funding, even if it is only temporary, is the FCC recognizing and conceding that the current high-cost budget is insufficient.

The FCC’s Rate-of-Return Budget Control Mechanism & Regulatory Uncertainty

In the 2016 Rate-of-Return Reform Order, the FCC imposed a strict budget control mechanism over the $2 billion rate-of-return portion of the total $4.5 billion universal service high-cost fund. [2] In the event total High-Cost Loop Support (“HCLS”) and Connect America Fund Broadband Loop Support (“CAF-BLS”) is forecasted to exceed $2 billion in any given year, the self-effectuating control mechanism kicks in to reduce carriers’ quarterly disbursements, keeping funding within the budget. Because USF support amounts for rate-of-return carriers subject to the A-CAM and Alaska Plan are fixed, the budget control mechanism only hurts those carriers receiving CAF BLS and HCLS (referred to as “legacy carriers” or carriers subject to revised cost-based USF rules). The 2016 Rate-of-Return Reform Order effectively split carriers into two camps – A-CAM “model-based carriers” and so-call “legacy carriers” subject to revised cost-based USF rules.

Following adoption of the budget control mechanism, rate-of-return carrier association NTCA-The Rural Broadband Association (and WTA-Advocates For Rural Broadband) sought reconsideration, arguing it produces insufficient USF support amounts and does not comply with the universal service statute’s requirement 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.” Without a doubt, the effect of 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. For over two years, rate-of-return carriers have clamored to the FCC that reduced USF support is indeed preventing them from providing standalone broadband service in rural areas at rates that are reasonably comparable to those in urban areas. The Third Order on Reconsideration finally acknowledges and acts on these complaints.

The FCC eliminates the effect of the budget control mechanism for the period current budget year (from June 2017 to July 2018)

During this current budget year (June 2017 to July 2018), the budget control mechanism has reduced legacy rate-of-return carrier support by roughly $180 million – a 13 percent reduction in support that has not been evenly distributed among states or carriers. In consideration of this support reduction, data gleaned from FCC Forms 481, and other data in the record detailing the budget control mechanism’s negative impact, the FCC has concluded that “large and variable reductions in support have made support not sufficiently ‘predictable’ for affected rate-of-return carriers to engage in the long-term planning for the high-speed broadband deployment needed in rural America.” [3]

Accordingly, the FCC has granted, in part, NTCA’s petition for reconsideration. Specifically, the FCC has “reconsider[ed] implementation of the budget control mechanism affecting claims from July 2017 to June 2018 by fully funding carrier claims during that period.” In other words, the FCC’s decision provides additional USF support for rate-of-return legacy carriers subject to revised cost-based USF rules.

The Wireline Competition Bureau and USAC will determine the USF support amounts withheld as a result of the budget control mechanism and make payments to fully fund support claims to affected carriers in a lump sum payment in the second full quarter after the effective date of the Third Order on Reconsideration. The lump sum payment will come from funds available in USAC’s reserve account. [4]

Sorry, The FCC Will Not Conduct A Review Of The Budget At This Time, But Will Instead Seek Comment

NTCA and others previously urged the FCC to conduct a thorough review of the high-cost USF budget before the end of 2017. Further, they argued the FCC was obligated to do so because the Tenth Circuit upheld the part of the 2011 USF/ICC Transformation Order imposing the budget based in large part upon the FCC’s representation that it would conduct a budgetary review within the next six years. [5] A review, rate-of-return carriers have argued, is certain to lead the FCC to conclude the high-cost budget is insufficient to maintain and increase deployment of rural broadband networks.

In a disappointing move, the FCC will not “initiate a budget review to determine whether the current level of support is sufficient and predictable enough for carriers serving rural areas to provide service at rates comparable to those in urban areas.” Instead, it has merely asked for comments in the accompanying NPRM on how it can encourage more efficient use of carrier support, and whether and how it can modify the budget control mechanism to provide more predictable support. Nevetheless, it's important for rate-of-return carriers to take a step back and read between the lines here. The FCC's decision to provide additional funding, even if it is only temporary, is the FCC recognizing and conceding that the current high-cost budget is insufficient. That is the key here.

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

[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) (Third Order On Reconsideration).

[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 (rel. Mar. 30, 2016) (Rate-of-Return Reform Order). The FCC established a defined budget for the high-cost component of the USF for the first time in the 2011 USF/ICC Transformation Order.

[3] Third Order On Reconsideration at ¶ 81.

[4] As of November 1, 2017, USAC estimated it would have $129 million left in the high-cost cash account at the end of 2017 that is not necessary for support payments to existing programs. Third Order On Reconsideration at ¶ 69; Wireline Competition Bureau Provides Guidance to the Universal Service Administrative Company Regarding the High-Cost Universal Service Mechanism Budget, WC Docket No. 10-90, Public Notice, DA 17-1067 (Nov. 1, 2017).

[5] See In re: FCC 11-161, 753 F.3d 1015, 1060 (10th Cir. 2014).