Connect America Fund; A National Broadband Plan for Our Future; Establishing Just and Reasonable Rates for Local Exchange Carriers; High-Cost Universal Service Support, 73830-73883 [2011-30378]

Agencies

• FEDERAL COMMUNICATIONS COMMISSION

[Federal Register Volume 76, Number 229 (Tuesday, November 29, 2011)]
[Rules and Regulations]
[Pages 73830-73883]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-30378]



[[Page 73829]]

Vol. 76

Tuesday,

No. 229

November 29, 2011

Part III





Federal Communications Commission





-----------------------------------------------------------------------





47 CFR Parts 0, 1, 20, et al.





Connect America Fund; A National Broadband Plan for Our Future; 
Establishing Just and Reasonable Rates for Local Exchange Carriers; 
High-Cost Universal Service Support; Final Rule

Federal Register / Vol. 76 , No. 229 / Tuesday, November 29, 2011 / 
Rules and Regulations

[[Page 73830]]


-----------------------------------------------------------------------

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 0, 1, 20, 36, 51, 54, 61, 64, and 69

[WC Docket Nos. 10-90, 07-135, 05-337, 03-109; GN Docket No. 09-51; CC 
Docket Nos. 01-92, 96-45; WT Docket No. 10-208; FCC 11-161]


Connect America Fund; A National Broadband Plan for Our Future; 
Establishing Just and Reasonable Rates for Local Exchange Carriers; 
High-Cost Universal Service Support

AGENCY: Federal Communications Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: In this document, the Federal Communications Commission 
(Commission) comprehensively reforms and modernizes the universal 
service and intercarrier compensation systems to ensure that robust, 
affordable voice and broadband service, both fixed and mobile, are 
available to Americans throughout the nation. The Commission adopts 
fiscally responsible, accountable, incentive-based policies to 
transition these outdated systems to the Connect America Fund, ensuring 
fairness for consumers and addressing the communications infrastructure 
challenges of today and tomorrow. The Commission uses measured but firm 
glide paths to provide industry with certainty and sufficient time to 
adapt to a changed regulatory landscape, and establish a framework to 
distribute universal service funding in the most efficient and 
technologically neutral manner possible, through market-based 
mechanisms such as competitive bidding.

DATES: Effective December 29, 2011, except for Sec. Sec.  1.21001(b) 
through (d); 1.21002(c) and (d); 1.21004(a); 51.907(b)(1), (c)(1), and 
(d) through (h); 51.909(b)(1), and (c) through (k); 51.911(b) and (c); 
51.915(e)(5) and (f)(7); 51.917(e)(6) and (f)(3); 51.919; 54.304; 
54.312(b)(3); 54.313(a)(7) through (a)(11); 54.313(b) through (h); 
54.314; 54.320(b); 54.1003; 54.1004(a), (c), and (d); 54.1005(a) and 
(b); 54.1006(a) through (e); 54.1007(a) and (b); 54.1008(d) and (e); 
54.1009(a) through (c); 54.1010; 61.3(bbb)(2); and 69.3(e)(12) which 
contain information collection requirements that are not effective 
until approved by the Office of Management and Budget. The Federal 
Communications Commission will publish a document in the Federal 
Register announcing the effective date for those sections.

FOR FURTHER INFORMATION CONTACT: Amy Bender, Wireline Competition 
Bureau, (202) 418-1469, Victoria Goldberg, Wireline Competition Bureau, 
(202) 418-7353, and Margaret Wiener, Wireless Telecommunications 
Bureau, (202) 418-2176 or TTY: (202) 418-0484.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report 
and Order (R&O) in WC Docket Nos. 10-90, 07-135, 05-337, 03-109; GN 
Docket No. 09-51; CC Docket Nos. 01-92, 96-45; WT Docket No. 10-208; 
FCC 11-161, released on November 18, 2011. The full text of this 
document is available for public inspection during regular business 
hours in the FCC Reference Center, Room CY-A257, 445 12th Street SW., 
Washington, DC 20554. Or at the following Internet address: https://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-11-161A1.pdf.

I. Executive Summary

A. Universal Service Reform

    1. Principles and Goals. We begin by adopting support for 
broadband-capable networks as an express universal service principle 
under section 254(b) of the Communications Act, and, for the first 
time, we set specific performance goals for the high-cost component of 
the USF that we are reforming today, to ensure these reforms are 
achieving their intended purposes. The goals are: (1) Preserve and 
advance universal availability of voice service; (2) ensure universal 
availability of modern networks capable of providing voice and 
broadband service to homes, businesses, and community anchor 
institutions; (3) ensure universal availability of modern networks 
capable of providing advanced mobile voice and broadband service; (4) 
ensure that rates for broadband services and rates for voice services 
are reasonably comparable in all regions of the nation; and (5) 
minimize the universal service contribution burden on consumers and 
businesses.
    2. Budget. We establish, also for the first time, a firm and 
comprehensive budget for the high-cost programs within USF. The annual 
funding target is set at no more than $4.5 billion over the next six 
years, the same level as the high-cost program for Fiscal Year 2011, 
with an automatic review trigger if the budget is threatened to be 
exceeded. This will provide for more predictable funding for carriers 
and will protect consumers and businesses that ultimately pay for the 
fund through fees on their communications bills. We are today taking 
important steps to control costs and improve accountability in USF, and 
our estimates of the funding necessary for components of the Connect 
America Fund (CAF) and legacy high-cost mechanisms represent our 
predictive judgment as to how best to allocate limited resources at 
this time. We anticipate that we may revisit and adjust accordingly the 
appropriate size of each of these programs by the end of the six-year 
period, based on market developments, efficiencies realized, and 
further evaluation of the effect of these programs in achieving our 
goals.
    3. Public Interest Obligations. While continuing to require that 
all eligible telecommunications carriers (ETCs) offer voice services, 
we now require that they also offer broadband services. We update the 
definition of voice services for universal service purposes, and 
decline to disrupt any state carrier of last resort obligations that 
may exist. We also establish specific and robust broadband performance 
requirements for funding recipients.
    4. Connect America Fund. We create the Connect America Fund, which 
will ultimately replace all existing high-cost support mechanisms. The 
CAF will help make broadband available to homes, businesses, and 
community anchor institutions in areas that do not, or would not 
otherwise, have broadband, including mobile voice and broadband 
networks in areas that do not, or would not otherwise, have mobile 
service, and broadband in the most remote areas of the nation. The CAF 
will also help facilitate our ICC reforms. The CAF will rely on 
incentive-based, market-driven policies, including competitive bidding, 
to distribute universal service funds as efficiently and effectively as 
possible.
    5. Price Cap Territories. More than 83 percent of the approximately 
18 million Americans that lack access to residential fixed broadband at 
or above the Commission's broadband speed benchmark live in areas 
served by price cap carriers--Bell Operating Companies and other large 
and mid-sized carriers. In these areas, the CAF will introduce 
targeted, efficient support for broadband in two phases.
    6. Phase I. To spur immediate broadband buildout, we will provide 
additional funding for price cap carriers to extend robust, scalable 
broadband to hundreds of thousands of unserved Americans beginning in 
early 2012. To enable this deployment, all existing legacy high-cost 
support to price cap carriers will be frozen, and an additional $300 
million in CAF funding will be made available. Frozen support will be 
immediately subject to the goal of achieving universal availability of 
voice and broadband, and subject to obligations to build and operate 
broadband-capable networks in areas unserved by an unsubsidized

[[Page 73831]]

competitor over time. Any carrier electing to receive the additional 
support will be required to deploy broadband and offer service that 
satisfies our new public interest obligations to an unserved location 
for every $775 in incremental support. Specifically, carriers that 
elect to receive this additional support must provide broadband with 
actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, with 
latency suitable for real-time applications and services such as VoIP, 
and with monthly usage capacity reasonably comparable to that of 
residential terrestrial fixed broadband offerings in urban areas. In 
addition, to ensure fairness for consumers across the country who pay 
into USF, we reduce existing support levels in any areas where a price 
cap company charges artificially low end-user voice rates.
    7. Phase II. The next phase of the CAF will use a combination of a 
forward-looking broadband cost model and competitive bidding to 
efficiently support deployment of networks providing both voice and 
broadband service for five years. We expect that the CAF will expand 
broadband availability to millions more unserved Americans.
    8. We direct the Wireline Competition Bureau to undertake a public 
process to determine the specific design and operation of the cost 
model to be used for this purpose, with stakeholders encouraged to 
participate in that process. The model will be used to establish the 
efficient amount of support required to extend and sustain robust, 
scalable broadband in high-cost areas. In each state, each incumbent 
price cap carrier will be asked to undertake a ``state-level 
commitment'' to provide affordable broadband to all high-cost locations 
in its service territory in that state, excluding extremely high cost 
areas as determined by the model. Importantly, the CAF will only 
provide support in those areas where a federal subsidy is necessary to 
ensure the build-out and operation of broadband networks. The CAF will 
not provide support in areas where unsubsidized competitors are 
providing broadband that meets our definition. Carriers accepting the 
state-level commitment will be obligated to meet rigorous broadband 
service requirements--with interim build-out requirements in three 
years and final requirements in five years--and will receive CAF 
funding, in an amount calculated by the model, over a five-year period, 
with significant financial consequences in the event of non- or under-
performance. We anticipate that CAF obligations will keep pace as 
services in urban areas evolve, and we will ensure that CAF-funded 
services remain reasonably comparable to urban broadband services over 
time. After the five-year period, the Commission will use competitive 
bidding to distribute any universal service support needed in those 
areas.
    9. In areas where the incumbent declines the state-level 
commitment, we will use competitive bidding to distribute support in a 
way that maximizes the extent of robust, scalable broadband service 
subject to an overall budget. In the Further Notice of Proposed 
Rulemaking (FNPRM) that accompanies this R&O, we propose a structure 
and operational details for the competitive bidding mechanism, in which 
any broadband provider that has been designated as an ETC for the 
relevant area may participate. The second phase of the CAF will 
distribute a total of up to $1.8 billion annually in support for areas 
with no unsubsidized broadband competitor. We expect that the model and 
competitive bidding mechanism will be adopted by December 2012, and 
disbursements will ramp up in 2013 and continue through 2017.
    10. Rate-of-Return Reforms. Although they serve less than five 
percent of access lines in the U.S., smaller rate-of-return carriers 
operate in many of the country's most difficult and expensive areas to 
serve. Rate-of-return carriers' total support from the high-cost fund 
is approaching $2 billion annually. We reform our rules for rate-of-
return companies in order to support continued broadband investment 
while increasing accountability and incentives for efficient use of 
public resources. Rate-of-return carriers receiving legacy universal 
service support, or CAF support to offset lost ICC revenues, must offer 
broadband service meeting initial CAF requirements, with actual speeds 
of at least 4 Mbps downstream and 1 Mbps upstream, upon their 
customers' reasonable request. Recognizing the economic challenges of 
extending service in the high-cost areas of the country served by rate-
of-return carriers, this flexible approach does not require rate-of-
return companies to extend service to customers absent such a request.
    11. Alongside these broadband service rules, we adopt reforms to: 
(1) Establish a framework to limit reimbursements for excessive capital 
and operating expenses, which will be implemented no later than July 1, 
2012, after an additional opportunity for public comment; (2) encourage 
efficiencies by extending existing corporate operations expense limits 
to the existing high-cost loop support and interstate common line 
support mechanisms, effective January 1, 2012; (3) ensure fairness by 
reducing high-cost loop support for carriers that maintain artificially 
low end-user voice rates, with a three-step phase-in beginning July 1, 
2012; (4) phase out the Safety Net Additive component of high-cost loop 
support over time; (5) address Local Switching Support as part of 
comprehensive ICC reform; (6) phase out over three years support in 
study areas that overlap completely with an unsubsidized facilities-
based terrestrial competitor that provides voice and fixed broadband 
service, beginning July 1, 2012; and (7) cap per-line support at $250 
per month, with a gradual phasedown to that cap over a three-year 
period commencing July 1, 2012. In the Notice, we seek comment on 
establishing a long-term broadband-focused CAF mechanism for rate-of-
return carriers, and relatedly seek comment on reducing the interstate 
rate-of-return from its current level of 11.25 percent. We expect rate-
of-return carriers will receive approximately $2 billion per year in 
total high-cost universal service support under our budget through 
2017.
    12. CAF Mobility Fund. Concluding that mobile voice and broadband 
services provide unique consumer benefits, and that promoting the 
universal availability of such services is a vital component of the 
Commission's universal service mission, we create the Mobility Fund, 
the first universal service mechanism dedicated to ensuring 
availability of mobile broadband networks in areas where a private-
sector business case is lacking. Mobile broadband carriers will receive 
significant legacy support during the transition to the Mobility Fund, 
and will have opportunities for new Mobility Fund dollars. The 
providers receiving support through the CAF Phase II competitive 
bidding process will also be eligible for the Mobility Fund, but 
carriers will not be allowed to receive redundant support for the same 
service in the same areas. Mobility Fund recipients will be subject to 
public interest obligations, including data roaming and collocation 
requirements.
    Phase I. We provide up to $300 million in one-time support to 
immediately accelerate deployment of networks for mobile voice and 
broadband services in unserved areas. Mobility Fund Phase I support 
will be awarded through a nationwide reverse auction, which we expect 
to occur in third quarter 2012. Eligible areas will include census 
blocks unserved today by mobile broadband services, and carriers may 
not receive support for areas they have previously stated they plan to 
cover. The auction will

[[Page 73832]]

maximize coverage of unserved road miles within the budget, and winners 
will be required to deploy 4G service within three years, or 3G service 
within two years, accelerating the migration to 4G. We also establish a 
separate and complementary one-time Tribal Mobility Fund Phase I to 
award up to $50 million in additional universal service funding to 
Tribal lands to accelerate mobile voice and broadband availability in 
these remote and underserved areas.
    Phase II. To ensure universal availability of mobile broadband 
services, the Mobility Fund will provide up to $500 million per year in 
ongoing support. The Fund will expand and sustain mobile voice and 
broadband services in communities in which service would be unavailable 
absent federal support. The Mobility Fund will include ongoing support 
for Tribal areas of up to $100 million per year as part of the $500 
million total budget. In the Notice we propose a structure and 
operational details for the ongoing Mobility Fund, including the proper 
distribution methodology, eligible geographic areas and providers, and 
public interest obligations. We expect to adopt the distribution 
mechanism for Phase II in 2012 with implementation in 2013.
    13. Identical Support Rule. In light of the new support mechanisms 
we adopt for mobile broadband service and our commitment to fiscal 
responsibility, we eliminate the identical support rule that determines 
the amount of support for mobile, as well as wireline, competitive ETCs 
today. We freeze identical support per study area as of year end 2011, 
and phase down existing support over a five-year period beginning on 
July 1, 2012. The gradual phase down we adopt, in conjunction with the 
new funding provided by Mobility Fund Phase I and II, will ensure that 
an average of over $900 million is provided to mobile carriers for each 
of the first four years of reform (through 2015). The phase down of 
competitive ETC support will stop if Mobility Fund Phase II is not 
operational by June 30, 2014, ensuring approximately $600 million per 
year in legacy support will continue to flow until the new mechanism is 
operational.
    14. Remote Areas Fund. We allocate at least $100 million per year 
to ensure that Americans living in the most remote areas in the nation, 
where the cost of deploying traditional terrestrial broadband networks 
is extremely high, can obtain affordable access through alternative 
technology platforms, including satellite and unlicensed wireless 
services. We propose in the FNPRM a structure and operational details 
for that mechanism, including the form of support, eligible geographic 
areas and providers, and public interest obligations. We expect to 
finalize the Remote Areas Fund in 2012 with implementation in 2013.
    15. Reporting and Enforcement. We establish a national framework 
for certification and reporting requirements for all universal service 
recipients to ensure that their public interest obligations are 
satisfied, that state and federal regulators have the tools needed to 
conduct meaningful oversight, and that public funds are expended in an 
efficient and effective manner. We do not disturb the existing role of 
states in designating ETCs and in monitoring that ETCs within their 
jurisdiction are using universal service support for its intended 
purpose. We seek comment on whether and how we should adjust federal 
obligations on ETCs in areas where legacy funding is phased down. We 
also adopt rules to reduce or eliminate support if public interest 
obligations or other requirements are not satisfied, and seek comment 
on the appropriateness of additional enforcement mechanisms.
    16. Waiver. As a safeguard to protect consumers, we provide for an 
explicit waiver mechanism under which a carrier can seek relief from 
some or all of our reforms if the carrier can demonstrate that the 
reduction in existing high-cost support would put consumers at risk of 
losing voice service, with no alternative terrestrial providers 
available to provide voice telephony.

B. Intercarrier Compensation Reform

    17. Immediate ICC Reforms. We take immediate action to curtail 
wasteful arbitrage practices, which cost carriers and ultimately 
consumers hundreds of millions of dollars annually:
     Access Stimulation. We adopt rules to address the practice 
of access stimulation, in which carriers artificially inflate their 
traffic volumes to increase ICC payments. Our revised interstate access 
rules generally require competitive carriers and rate-of-return 
incumbent local exchange carriers (LECs) to refile their interstate 
switched access tariffs at lower rates if the following two conditions 
are met: (1) A LEC has a revenue sharing agreement and (2) the LEC 
either has (a) a three-to-one ratio of terminating-to-originating 
traffic in any month or (b) experiences more than a 100 percent 
increase in traffic volume in any month measured against the same month 
during the previous year. These new rules are narrowly tailored to 
address harmful practices while avoiding burdens on entities not 
engaging in access stimulation.
     Phantom Traffic. We adopt rules to address ``phantom 
traffic,'' i.e., calls for which identifying information is missing or 
masked in ways that frustrate intercarrier billing. Specifically, we 
require telecommunications carriers and providers of interconnected 
VoIP service to include the calling party's telephone number in all 
call signaling, and we require intermediate carriers to pass this 
signaling information, unaltered, to the next provider in a call path.
    18. Comprehensive ICC Reform. We adopt a uniform national bill-and-
keep framework as the ultimate end state for all telecommunications 
traffic exchanged with a LEC. Under bill-and-keep, carriers look first 
to their subscribers to cover the costs of the network, then to 
explicit universal service support where necessary. Bill-and-keep has 
worked well as a model for the wireless industry; is consistent with 
and promotes deployment of IP networks; will eliminate competitive 
distortions between wireline and wireless services; and best promotes 
our overall goals of modernizing our rules and facilitating the 
transition to IP. Moreover, we reject the notion that only the calling 
party benefits from a call and therefore should bear the entire cost of 
originating, transporting, and terminating a call. As a result, we now 
abandon the calling-party-network-pays model that dominated ICC regimes 
of the last century. Although we adopt bill-and-keep as a national 
framework, governing both inter- and intrastate traffic, states will 
have a key role in determining the scope of each carrier's financial 
responsibility for purposes of bill-and-keep, and in evaluating 
interconnection agreements negotiated or arbitrated under the framework 
in sections 251 and 252 of the Communications Act. We also address 
concerns expressed by some commenters about potential fears of traffic 
``dumping'' and seek comment in the Notice on whether any additional 
measures are necessary in this regard.
    19. Multi-Year Transition. We focus initial reforms on reducing 
terminating switched access rates, which are the principal source of 
arbitrage problems today. This approach will promote migration to all-
IP networks while minimizing the burden on consumers and staying within 
our universal service budget. For these rates, as well as certain 
transport rates, we adopt a gradual, measured transition that will 
facilitate predictability and stability. First, we require carriers to 
cap most ICC rates as of the effective date of this

[[Page 73833]]

R&O. To reduce the disparity between intrastate and interstate 
terminating end office rates, we next require carriers to bring these 
rates to parity within two steps, by July 2013. Thereafter, we require 
carriers to reduce their termination (and for some carriers also 
transport) rates to bill-and-keep, within six years for price cap 
carriers and nine for rate-of-return carriers. The framework and 
transition are default rules and carriers are free to negotiate 
alternatives that better address their individual needs. Although the 
R&O begins the process of reforming all ICC charges by capping all 
interstate rate elements and most intrastate rate elements, the Notice 
seeks comment on the appropriate transition and recovery for the 
remaining originating and transport rate elements. States will play a 
key role in overseeing modifications to rates in intrastate tariffs to 
ensure carriers are complying with the framework adopted in this R&O 
and not shifting costs or otherwise seeking to gain excess recovery. 
The Notice also seeks comment on interconnection issues likely to arise 
in the process of implementing a bill-and-keep methodology for ICC.
    20. New Recovery Mechanism. We adopt a transitional recovery 
mechanism to mitigate the effect of reduced intercarrier revenues on 
carriers and facilitate continued investment in broadband 
infrastructure, while providing greater certainty and predictability 
going forward than the status quo. Although carriers will first look to 
limited increases from their end users for recovery, we reject notions 
that all recovery should be borne by consumers. Rather, we believe, 
consistent with past reforms, that carriers should have the opportunity 
to seek partial recovery from all of their end user customers. We 
permit incumbent telephone companies to charge a limited monthly Access 
Recovery Charge (ARC) on wireline telephone service, with a maximum 
annual increase of $0.50 for consumers and small businesses, and $1.00 
per line for multi-line businesses, to partially offset ICC revenue 
declines. To protect consumers, we adopt a strict ceiling that prevents 
carriers from assessing any ARC for any consumer whose total monthly 
rate for local telephone service, inclusive of various rate-related 
fees, is at or above $30. Although the maximum ARC is $0.50 per month, 
we expect the actual average increase across all wireline consumers to 
be no more than $0.10-$0.15 a month, which translates into an expected 
maximum of $1.20-$1.80 per year that the average consumer will pay. We 
anticipate that consumers will receive more than three times that 
amount in benefits in the form of lower calling prices, more value for 
their wireless or wireline bill, or both, as well as greater broadband 
availability. Furthermore, the ARC will phase down over time as 
carriers' eligible revenue decreases, and we prevent carriers from 
charging any ARC on Lifeline customers or further drawing on the 
Lifeline program, so that ICC reform will not raise rates at all for 
these low-income consumers. We also seek comment in the Notice about 
reassessing existing subscriber line charges (SLCs), which are not 
otherwise implicated by this R&O, to determine whether those charges 
are set at appropriate levels.
    21. Likewise, although we do not adopt a rate ceiling for multi-
line businesses customers, we do adopt a cap on the combination of the 
ARC and the existing SLC to ensure that multi-line businesses do not 
bear a disproportionate share of recovery and that their rates remain 
just and reasonable. Specifically, carriers cannot charge a multi-line 
business customer an ARC when doing so would result in the ARC plus the 
existing SLC exceeding $12.20 per line. Moreover, to further protect 
consumers, we adopt measures to ensure that carriers must apportion 
lost revenues eligible for ICC recovery between residential and 
business lines, appropriately weighting the business lines (i.e., 
according to the higher maximum annual increase in the business ARC) to 
prevent carriers that elect not to receive ICC CAF from recovering 
their entire ICC revenue loss from consumers. Carriers may receive CAF 
support for any otherwise-eligible revenue not recovered by the ARC. In 
addition, carriers receiving CAF support to offset lost ICC revenues 
will be required to use the money to advance our goals for universal 
voice and broadband.
    22. In defining how much of their lost revenues carriers will have 
the opportunity to recover, we reject the notion that ICC reform should 
be revenue neutral. We limit carriers' total eligible recovery to 
reflect the existing downward trends on ICC revenues with declining 
switching costs and minutes of use. For price cap carriers, baseline 
recovery amounts available to each price cap carrier will decline at 10 
percent annually. Price cap carriers whose interstate rates have 
largely been unchanged for a decade because they participated in the 
Commission's 2000 CALLS plan will be eligible to receive 90 percent of 
this baseline every year from ARCs and the CAF. In those study areas 
that have recently converted from rate-of-return to price cap 
regulation, carriers will initially be permitted to recover the full 
baseline amount to permit a more gradual transition, but we will 
decline to 90 percent recovery for these areas as well after 5 years. 
All price cap CAF support for ICC recovery will phase out over a three-
year period beginning in the sixth year of the reform.
    23. For rate-of-return carriers, recovery will be calculated 
initially based on rate-of-return carriers' fiscal year 2011 interstate 
switched access revenue requirement, intrastate access revenues that 
are being reformed as part of this R&O, and net reciprocal compensation 
revenues. This baseline will decline at five percent annually to 
reflect combined historical trends of an annual three percent 
interstate cost and associated revenue decline, and ten percent 
intrastate revenue decline, while providing for true ups to ensure CAF 
recovery in the event of faster-than-expected declines in demand. Both 
recovery mechanisms provide carriers with significantly more revenue 
certainty than the status quo, enabling carriers to reap the benefits 
of efficiencies and reduced switching costs, while giving providers 
stable support for investment as they adjust to an IP world.
    24. Treatment of VoIP Traffic. We make clear the prospective 
payment obligations for VoIP traffic exchanged in TDM between a LEC and 
another carrier, and adopt a transitional framework for VoIP 
intercarrier compensation. We establish that default charges for 
``toll'' VoIP-PSTN traffic will be equal to interstate rates applicable 
to non-VoIP traffic, and default charges for other VoIP-PSTN traffic 
will be the applicable reciprocal compensation rates. Under this 
framework, all carriers originating and terminating VoIP calls will be 
on equal footing in their ability to obtain compensation for this 
traffic.
    25. CMRS-Local Exchange Carrier (LEC) Compensation. We clarify 
certain aspects of CMRS-LEC compensation to reduce disputes and address 
existing ambiguity. We adopt bill-and-keep as the default methodology 
for all non-access CMRS-LEC traffic. To provide rate-of-return LECs 
time to adjust to bill-and-keep, we adopt an interim transport rule for 
rate-of-return carriers to specify LEC transport obligations under the 
default bill-and-keep framework for non-access traffic exchanged 
between these carriers. We also clarify the relationship between the 
compensation obligations in section 20.11 of the Commission's rules and 
the reciprocal

[[Page 73834]]

compensation framework, thus addressing growing concerns about 
arbitrage related to rates set without federal guidance. Further, in 
response to disputes, we make clear that a call is considered to be 
originated by a CMRS provider for purposes of the intraMTA rule only if 
the calling party initiating the call has done so through a CMRS 
provider. Finally, we affirm that all traffic routed to or from a CMRS 
provider that, at the beginning of a call, originates and terminates 
within the same MTA, is subject to reciprocal compensation, without 
exception.
    26. IP-to-IP Interconnection. We recognize the importance of 
interconnection to competition and the associated consumer benefits. We 
anticipate that the reforms we adopt will further promote the 
deployment and use of IP networks, and seek comment in the accompanying 
Notice regarding the policy framework for IP-to-IP interconnection. We 
also make clear that even while our Notice is pending, we expect all 
carriers to negotiate in good faith in response to requests for IP-to-
IP interconnection for the exchange of voice traffic.
    27. In addition, we adopt a limited exception to the phase-down of 
support for competitive eligible telecommunications carriers for 
Standing Rock Telecommunications, Inc. (Standing Rock), a Tribally-
owned competitive ETC that had its ETC designation modified recently 
for the purpose of providing service throughout the entire Standing 
Rock Sioux Reservation. We find that granting a two-year exception to 
the phase-down of support to this Tribally-owned competitive ETC is in 
the public interest. For a two-year period, Standing Rock will receive 
per-line support amounts that are the same as the total support per 
line received in the fourth quarter of this year. We adopt this 
approach in order to enable Standing Rock to reach a sustainable scale 
so that consumers on the Reservation can realize the benefits of 
connectivity that, but for Standing Rock, they might not otherwise have 
access to.

II. Procedural Matters

A. Paperwork Reduction Act Analysis

    28. The Report and Order contains new information collection 
requirements subject to the Paperwork Reduction Act of 1995 (PRA), 
Public Law 104-13. The new requirements will be submitted to the Office 
of Management and Budget (OMB) for review under section 3507(d) of the 
PRA. OMB, the general public, and other Federal agencies are invited to 
comment on the new information collection requirements contained in 
this proceeding. We note that pursuant to the Small Business Paperwork 
Relief Act of 2002, Public Law 107-198, see 44 U.S.C. 3506(c)(4), we 
previously sought specific comment on how the Commission might 
``further reduce the information collection burden for small business 
concerns with fewer than 25 employees.'' We describe impacts that might 
affect small businesses, which includes most businesses with fewer than 
25 employees, in the Final Regulatory Flexibility Analysis, infra.

B. Congressional Review Act

    29. The Commission will send a copy of this Report and Order to 
Congress and the Government Accountability Office pursuant to the 
Congressional Review Act, see 5 U.S.C. 801(a)(1)(A).

C. Final Regulatory Flexibility Analysis

    30. As required by the Regulatory Flexibility Act of 1980 (RFA), as 
amended, Initial Regulatory Flexibility Analyses (IRFAs) were 
incorporated in the Notice of Proposed Rule Making and Further Notice 
of Proposed Rulemaking (USF/ICC Transformation NRPM), 76 FR 11632, 
March 3, 2011, in the Notice of Inquiry and Notice of Proposed 
Rulemaking (USF Reform NOI/NPRM), and in the Notice of Proposed 
Rulemaking (Mobility Fund NPRM), 75 FR 67060, November 1, 2010, for 
this proceeding. The Commission sought written public comment on the 
proposals in the USF/ICC Transformation NRPM, including comment on the 
IRFA. The Commission received comments on the USF/ICC Transformation 
NPRM IRFA. The comments received are discussed below. The Commission 
did not receive comments on the USF Reform NOI/NPRM IRFA or the 
Mobility Fund NPRM IRFA. This present Final Regulatory Flexibility 
Analysis (FRFA) conforms to the RFA.

D. Need for, and Objectives of, the R&O

    31. The R&O adopts fiscally responsible, accountable, incentive-
based policies to transition outdated universal service and 
intercarrier compensation (ICC) systems to the Connect America Fund 
(CAF), ensuring fairness for consumers and addressing the challenges of 
today and tomorrow, instead of yesterday. We adopt measured but firm 
glide paths to provide industry with certainty and sufficient time to 
adapt to a changed landscape, and establish a regulatory framework 
which will ultimately distribute all universal service funding in the 
most efficient and technologically neutral manner possible.
    32. For decades, the Commission and the states have administered a 
complex system of explicit and implicit subsidies to support voice 
connectivity to the highest cost, most rural, and insular communities 
in the nation. Networks that provide only voice service, however, are 
no longer adequate for the country's communication needs. Broadband and 
mobility have become crucial to our nation's economic development, 
global competitiveness, and civic life. Businesses need broadband and 
mobile communications to attract customers and employees, job-seekers 
need them to find jobs and training, and children need them to get a 
world-class education. Broadband and mobility also help lower the costs 
and improve the quality of health care, and enable people with 
disabilities and Americans of all income levels to participate more 
fully in society. Broadband-enabled jobs are critical to our nation's 
economic recovery and long-term economic health, particularly in small 
towns, rural and insular areas, and Tribal lands.
    33. Too many Americans today, however, do not have access to modern 
networks that support mobility and broadband. Millions of Americans 
live in areas where there is no access to any broadband network. And 
millions of Americans live, work, or travel in areas without mobile 
broadband. There are unserved areas in every state of the nation and 
its territories, and in many of these areas there is little reason to 
believe that access to broadband service will be provided to these 
areas in the near future with current policies.
    34. Consistent with the challenge of ensuring that all Americans 
are offered basic voice service and access to networks that support 
high-speed Internet access where they live, work and travel, extending 
and accelerating broadband and advanced mobile wireless deployment have 
been two of the Commission's top priorities over the past few years. 
The R&O focuses on those remote and expensive-to-serve communities 
where the immediate prospect for stand-alone private sector action is 
limited.
    35. Our existing voice-centric universal service system is built on 
decades-old assumptions that fail to reflect today's networks, the 
evolving nature of communications services, or the current competitive 
landscape. As a result, the current system is not equipped to address 
the universal service challenges raised by broadband, mobility, and the 
transition to Internet Protocol (IP) networks.

[[Page 73835]]

    36. With respect to voice services, consumers are increasingly 
obtaining such services over broadband networks as well as over 
traditional circuit switched telephone networks. In the R&O, the 
Commission amends its rules to specify that the functionalities of 
eligible voice telephony services. The amended definition shifts to a 
technologically neutral approach, allowing companies to provision voice 
service over any platform, including the PSTN and IP networks.
    37. With respect to broadband, the component of the Universal 
Service Fund (USF) that supports telecommunications service in high-
cost areas has grown from $2.6 billion in 2001 to a projected $4.5 
billion in 2011, but recipients lack any accountability for advancing 
broadband-capable infrastructure that delivers voice service. We also 
lack sufficient mechanisms to ensure all Commission funded broadband 
investments are prudent and efficient, including the means to target 
investment to areas that lack a private business case to build 
broadband. In addition, the ``rural-rural'' divide must also be 
addressed-- some parts of rural America are connected to state-of-the-
art broadband, while other parts of rural America have no broadband 
access, because the existing program fails to direct money to all parts 
of rural America where it is needed. Similarly, the Fund supports some 
mobile providers, but only based on cost characteristics and locations 
of wireline providers. As a result, the universal service program 
provides more than $1 billion in annual support to wireless carriers, 
yet there remain many areas of the country where people live, work, and 
travel that lack mobile voice coverage, and still larger geographic 
areas that lack mobile broadband coverage.
    38. For the first time, the Commission establishes a defined budget 
for the high-cost component of the universal service fund. Establishing 
a CAF budget ensures that individual consumers will not pay more in 
contributions due to the reforms we adopt today. We therefore establish 
an annual funding target, set at the same level as our current estimate 
for the size of the high-cost program for FY 2011, of no more than $4.5 
billion. The total $4.5 billion budget will include CAF support 
resulting from intercarrier compensation reform, as well as new CAF 
funding for broadband and support for legacy programs during a 
transitional period.
    39. In the R&O, the Commission adopts rules that transform the 
existing high-cost program--the component of USF directed toward high-
cost, rural, and insular areas--into a new, more efficient, broadband-
focused Connect America Fund (CAF). In particular, we adopt a framework 
for the Connect America Fund that will provide support in price cap 
territories based on a combination of competitive bidding and a 
forward-looking cost model.
    40. In order to take immediate steps to accelerate broadband 
deployment to unserved areas across America, we modify our rules to 
provide support to price cap carriers under a transitional distribution 
mechanism, CAF Phase I, while the cost model is being developed and 
competitive bidding rules finalized. Specifically, effective in 2012, 
we freeze support to price cap carriers and their rate-of-return 
affiliates under our existing high-cost support mechanism: high-cost 
loop support (HCLS) including safety net additive (SNA), forward-
looking model support, local switching support (LSS), interstate access 
support (IAS), and frozen interstate common line support (ICLS). In 
addition, we will dedicate up to $300 million in incremental support to 
price cap carriers each year of CAF Phase I, allocated to carriers 
serving areas with the highest costs; carriers accepting incremental 
support will be required to meet defined broadband deployment 
obligations.
    41. We adopt an approach that enables competitive bidding for CAF 
Phase II support in the near-term in some price cap areas, while in 
other areas holding the incumbent carrier to broadband and other public 
interest obligations over large geographies in return for five years of 
CAF support. Specifically, we adopt the following methodology for 
providing CAF support in price cap areas. First, the Commission will 
model forward-looking costs to estimate the cost of deploying 
broadband-capable networks in high-cost areas and identify at a 
granular level the areas where support will be available. Second, using 
the cost model, the Commission will offer each price cap LEC annual 
support for a period of five years in exchange for a commitment to 
offer voice across its service territory within a state and broadband 
service to supported locations within that service territory, subject 
to robust public interest obligations and accountability standards. 
Third, for all territories for which price cap LECs decline to make 
that commitment, the Commission will award ongoing support through a 
competitive bidding mechanism.
    42. We reform legacy support mechanisms for rate-of-return carriers 
to transition towards a more incentive-based form of regulation with 
better incentives for efficient operations. In particular, we implement 
a number of reforms to eliminate waste and inefficiency and improve 
incentives for rational investment and operation by rate-of-return 
LECs. Consistent with the framework we establish for support in price 
cap territories that combines a new forward-looking cost model and 
competitive bidding, we also lay the foundation for subsequent 
Commission action that will advance rate-of-return companies on a path 
toward a more incentive-based form of regulation.
    43. We adopt the following reforms that will ensure that the 
overall size of the Fund is kept within budget while we transition a 
system that supports only telephone service to a system that will 
enable the deployment of modern high-speed networks capable of 
delivering 21st century broadband services and applications, including 
voice: First, we establish benchmarks that, for the first time, will 
establish parameters for what actual costs carriers may seek recovery 
under the federal universal service program. Second, we take immediate 
steps to ensure that carriers in rural areas are not unfairly burdening 
consumers across the nation by using excess universal service support 
to subsidize artificially low end-user rates. Third, we eliminate the 
safety net additive program, which is no longer meeting its intended 
purpose. Fourth, we eliminate local switching support in July 2012 
whereby recovery for switching investment will occur through the ICC 
recovery mechanism. Fifth, we eliminate support for rate-of-return 
companies in any study area that is completely overlapped by an 
unsubsidized facilities-based terrestrial competitor that offers fixed 
voice as well as broadband services meeting specified performance 
standards, as there is no need for universal service subsidies in these 
cases. Sixth, starting January 1, 2012, support in excess of $250 per 
line per month will no longer be provided to any carrier.
    44. We eliminate the identical support rule. Over a decade of 
experience with the operation of the current rule and having received a 
multitude of comments noting that the current rule fails to efficiently 
target support where it is needed, we conclude that this rule has not 
functioned as intended. Identical support does not provide appropriate 
levels of support for the efficient deployment of mobile services in 
areas that do not support a private business case for mobile voice and 
broadband. Because the explicit support for mobility that we adopt 
today will be designed to appropriately target funds to such areas, the 
identical support rule is

[[Page 73836]]

no longer necessary or in the public interest.
    45. We transition existing competitive ETC support to the CAF, 
including our reformed system for supporting mobile service over a 
five-year period beginning July 1, 2012. We find that a transition is 
desirable in order to avoid shocks to service providers that may result 
in service disruptions for consumers. During this period, competitive 
ETCs offering mobile wireless services will have the opportunity to bid 
in the Mobility Fund Phase I auction in 2012 and participate in the 
second phase of the Mobility Fund in 2013. Competitive ETCs offering 
broadband services that meet the performance standards described above 
will also have the opportunity to participate in competitive bidding 
for CAF support in areas where price cap companies decline to make a 
state-level broadband commitment in exchange for model-determined 
support in 2013. With these new funding opportunities, many carriers, 
including wireless carriers, could receive similar or even greater 
amounts of funding after our reforms than before, albeit with that 
funding more appropriately targeted to the areas that need additional 
support.
    46. For the purpose of this transition, we conclude that each 
competitive ETC's baseline support amount will be equal to its total 
2011 support in a given study area, or an amount equal to $3,000 times 
the number of reported lines as of year-end 2011, whichever is lower. 
Using a full calendar year of support to set the baseline will provide 
a reasonable approximation of the amount that competitive ETCs would 
currently expect to receive, absent reform, and a natural starting 
point for the phase-down of support. In addition, we limit the baseline 
to $3,000 per line in order to reflect similar changes to our rules 
limiting support for incumbent wireline carriers to $3,000 per line per 
year.
    47. Competitive ETC support per study area will be frozen at the 
2011 baseline, and that monthly baseline amount will be provided from 
January 1, 2012 to June 30, 2012. Each competitive ETC will then 
receive 80 percent of its monthly baseline amount from July 1, 2012 to 
June 30, 2013, 60 percent of its baseline amount from July 1, 2013, to 
June 30, 2014, 40 percent from July 1, 2014, to June 30, 2015, 20 
percent from July 1, 2015, to June 30, 2016, and no support beginning 
July 1, 2016. The purpose of this phase down is to avoid unnecessary 
consumer disruption as we transition to new programs that will be 
better designed to achieve universal service goals, especially with 
respect to promoting investment in and deployment of mobile service to 
areas not yet served. We do not wish to encourage further investment 
based on the inefficient subsidy levels generated by the identical 
support rule. We conclude that phasing down and transitioning existing 
competitive support will not create significant or widespread risks 
that consumers in areas that currently have service, including mobile 
service, will be left without any viable mobile service provider 
serving their area. We do, however, delay by two years the phasedown 
for certain carriers serving remote parts of Alaska and a Tribally-
owned competitive ETC, Standing Rock Telecommunications, that received 
its ETC designation in 2011.
    48. We establish the Mobility Fund based on our conclusion that 
mobile voice and broadband services provide unique consumer benefits 
and that promoting the universal availability of advanced mobile 
services is a vital component of the Commission's universal service 
mission. The Mobility Fund, which will have two phases, will allow 
funding for mobility while rationalizing how universal service funding 
is provided, thereby ensuring that funds are cost-effective and 
targeted to areas that require public funding to receive the benefits 
of mobility. The purpose of the Mobility Fund is to accelerate the 
deployment of advanced mobile networks in areas where a private-sector 
business case is lacking. Mobility Fund recipients will be subject to 
public interest obligations, including data roaming and collocation 
requirements.
    49. The first phase of the Mobility Fund will provide $300 million 
in one-time support to immediately accelerate deployment of networks 
for mobile broadband services in unserved areas. Mobility Fund Phase I 
support will be awarded through a nationwide reverse auction. Eligible 
areas will include census blocks unserved today by advanced mobile 
wireless services. Carriers will be prohibited from receiving support 
for areas they have previously stated they plan to cover. The auction 
will maximize coverage of unserved road miles, with the lowest per-unit 
bids winning. A 25 percent bidding credit will be available for 
Tribally-owned or controlled providers that participate in the auction 
and place bids for the eligible census blocks located within the 
geographic area defined by the boundaries of the Tribal land associated 
with the Tribal entity seeking support. The auction will also help the 
Commission develop expertise in running reverse auctions for universal 
service support. We expect to distribute this support as quickly as 
feasible, with the goal of holding an auction in the third quarter of 
2012. As part of this first phase, we also establish a separate and 
complementary one-time Tribal Mobility Fund Phase I to award $50 
million in additional universal service funding for advanced mobile 
services on Tribal lands and Alaska Native regions. We do so in order 
to accelerate mobile broadband availability in these remote and 
underserved areas.
    50. We also establish a Mobility Fund Phase II, which will provide 
up to $500 million per year in ongoing support to ensure universal 
availability of advanced mobile services. The Fund will expand and 
sustain mobile voice and broadband service in communities in which 
service would be unavailable absent federal support. The Mobility Fund 
Phase II will include ongoing support for Tribal lands of up to $100 
million per year, as part of the $500 million total budget. We also 
establish a budget of at least $100 million annually for CAF support in 
remote areas. This reflects our commitment to ensuring that Americans 
living in the most remote areas of the nation, where the cost of 
deploying wireline or cellular terrestrial broadband technologies is 
extremely high, can obtain affordable broadband through alternative 
technology platforms such as satellite and unlicensed wireless. By 
setting aside designated funding for these difficult-to-serve areas, we 
can ensure that those who live and work in remote locations also have 
access to affordable broadband service.
    51. In the R&O, we also take steps to comprehensively reform the 
intercarrier compensation system to bring substantial benefits to 
consumers, including reduced rates for all wireless and long distance 
customers, more innovative communications offerings, and improved 
quality of service for wireless consumers and consumers of long 
distance services. The existing intercarrier compensation system--built 
on geographic and per-minute charges and implicit subsidies--is 
fundamentally in tension with and a deterrent to deployment of all-IP 
networks. And the system is eroding rapidly as demand for traditional 
telephone service falls, with consumers increasingly opting for 
wireless, VoIP, texting, email, and other phone alternatives. To 
address these issues, we take immediate action to combat two of the 
most prevalent arbitrage activities today, phantom traffic and access 
stimulation. We also launch long-term intercarrier compensation reform 
by adopting bill-and-keep as the ultimate uniform, national methodology 
for all

[[Page 73837]]

telecommunications traffic exchanged with a local exchange carrier 
(LEC). We begin the transition to bill-and-keep with terminating 
switched access rates, which are the main source of arbitrage today. We 
also begin the process of reforming originating access and other rate 
elements by capping all interstate rates and most intrastate rates. We 
provide for a measured, gradual transition to bill-and-keep for these 
rates, and adopt a recovery mechanism that provides carriers with 
certain and predictable revenue streams. We make clear the prospective 
payment obligations for VoIP traffic and adopt a transitional 
intercarrier compensation framework for VoIP. And finally, we clarify 
certain aspects of CMRS-LEC compensation to reduce disputes and 
eliminate ambiguities in our rules.
    52. We first adopt revisions to our interstate switched access 
charge rules to address access stimulation. Access stimulation occurs 
when a LEC with high switched access rates enters into an arrangement 
with a provider of high call volume operations such as chat lines, 
adult entertainment calls, and ``free'' conference calls. Consistent 
with the approach proposed in the USF/ICC Transformation NPRM, we adopt 
a definition of access stimulation which has two conditions: (1) A 
revenue sharing condition, revised slightly from the proposal in the 
USF/ICC Transformation NPRM; and (2) an additional traffic volume 
condition, which is met where the LEC either: (a) has a three-to-one 
interstate terminating-to-originating traffic ratio in a calendar 
month; or (b) has had more than a 100 percent growth in interstate 
originating and/or terminating switched access minutes of use in a 
month compared to the same month in the preceding year. If both 
conditions are satisfied, the LEC generally must file revised tariffs 
to account for its increased traffic and will be required to reduce its 
interstate switched access tariffed rates to the rates of the price cap 
LEC in the state with the lowest rates, which are presumptively 
consistent with the Act. The new access stimulation rules will 
facilitate enforcement when a LEC does not refile as required.
    53. Next, we amend the Commission's rules to address ``phantom 
traffic'' by ensuring that terminating service providers receive 
sufficient information to bill for telecommunications traffic sent to 
their networks, including interconnected VoIP traffic. ``Phantom 
traffic'' refers to traffic that terminating networks receive that 
lacks certain identifying information. Collectively, problems involving 
unidentifiable or misidentified traffic appear to be widespread and 
this sort of gamesmanship distorts the intercarrier compensation 
system. To address the problem, we adopt the core of the proposal 
contained in the USF/ICC Transformation NPRM--we modify our call 
signaling rules to require originating service providers to provide 
signaling information that includes calling party number (``CPN'') for 
all voice traffic, regardless of jurisdiction, and to prohibit 
interconnecting carriers from stripping or altering that call signaling 
information. Service providers that originate interstate or intrastate 
traffic on the PSTN, or that originate inter- or intrastate 
interconnected VoIP traffic destined for the PSTN, will now be required 
to transmit the telephone number associated with the calling party to 
the next provider in the call path. Intermediate providers must pass 
calling party number or charge number signaling information they 
receive from other providers unaltered, to subsequent providers in the 
call path.
    54. We adopt bill-and-keep as the methodology for all intercarrier 
compensation traffic, consistent with the National Broadband Plan's 
recommendation to phase out per-minute intercarrier compensation rates. 
Under bill-and-keep arrangements, a carrier generally looks to its end-
users--who are the entities making the choice to subscribe to the 
carrier's network--rather than looking to other carriers and their 
customers to recover its costs. We have legal authority to adopt a 
bill-and-keep methodology as the end point for reform pursuant to our 
rulemaking authority to implement sections 251(b)(5) and 252(d)(2), in 
addition to authority under other provisions of the Act, including 
sections 201 and 332.
    55. We conclude that a uniform, national framework for the 
transition of intercarrier compensation to bill-and-keep, with an 
accompanying federal recovery mechanism, best advances our policy goals 
of accelerating the migration to all IP networks, facilitating IP-to-IP 
interconnection, and promoting deployment of new broadband networks by 
providing certainty and predictability to carriers and investors. We 
adopt a gradual transition for terminating access, providing price cap 
carriers six years and rate-of-return carriers nine years to reach the 
end state. We believe that initially focusing the bill-and-keep 
transition on terminating access rates will allow a more manageable 
process and will focus reform where some of the most pressing problems, 
such as access charge arbitrage, currently arise. The transition we 
adopt sets a default framework, leaving carriers free to enter into 
negotiated agreements that allow for different terms.
    56. We conclude it is appropriate to clarify certain aspects of the 
obligations the Commission adopted in the 2005 T-Mobile Order, 70 FR 
1641, March 30, 2005, especially as parties have asked the Commission 
to make clear when they have the ability to require other carriers to 
negotiate to reach an interconnection agreement. We reaffirm the 
findings in the T-Mobile Order that incumbent LECs can compel CMRS 
providers to negotiate in good faith to reach an interconnection 
agreement, and make clear we have authority to do so pursuant to 
sections 332, 201, 251 as well as our ancillary authority under 4(i). 
We also clarify that this requirement does not impose any section 
251(c) obligations on CMRS providers, nor does it extend section 252 of 
the Act to CMRS providers. We decline, at this time, to extend the 
obligation to negotiate in good faith and the ability to compel 
arbitration to other contexts.
    57. As part of our comprehensive reforms, we adopt a recovery 
mechanism to facilitate incumbent LECs' gradual transition away from 
existing intercarrier revenues. This mechanism allows the LECs to 
recover ICC revenues reduced due to our reforms, up to a defined 
baseline, from alternate revenue sources: reasonable, incremental 
increases in end user rates and, where appropriate, through ICC CAF 
support. The recovery mechanism is limited in time and carefully 
balances the benefits of certainty and a gradual transition with the 
need to contain the size of the federal universal service fund and 
minimize the overall burden on end users. The recovery mechanism is not 
100 percent revenue neutral relative to today's revenues, but it 
eliminates much of the uncertainty carriers face under the existing ICC 
system, allowing them to make investment decisions based on a full 
understanding of their revenues from ICC for the next several years.
    58. In setting the framework for recovery, we believe that carriers 
should first look to reasonable but limited recovery from their own end 
users, consistent with the principle of bill-and-keep and the model in 
the wireless industry, but take measures to ensure that rates remain 
affordable and reasonably comparable. Our recovery mechanism has two 
basic components. First, we define the revenue incumbent LECs are 
eligible to recover, which we refer to as ``Eligible Recovery.'' 
Second, we specify how incumbent LECs may recover Eligible Recovery 
through end-user charges and CAF support. Although we limit a specific 
recovery

[[Page 73838]]

mechanism to incumbent LECs, competitive LECs are free to recover their 
reduced revenues through end user charges.
    59. Consistent with past ICC reforms, we permit carriers to recover 
a reasonable, limited portion of their Eligible Recovery from their end 
users through a monthly fixed charge called an Access Recovery Charge 
(ARC). We take measures to help ensure that any ARC increase on 
consumers does not impact affordability of rates and the annual 
increase is limited to $0.50 per month. To protect consumers, and to 
recognize states that have already rebalanced rates in prior state 
intercarrier compensation reforms, we adopt a $30 Residential Rate 
Ceiling to ensure that consumers paying $30 or more do not see any 
increases through ARCs as a result of our current reform. We also take 
measures to ensure that multi-line businesses' total subscriber line 
charge (SLC) plus ARC line items are just and reasonable, we do not 
permit LECs to charge a multi-line business ARC where the SLC plus ARC 
would exceed $12.20 per line. Although we limit a specific recovery 
mechanism to incumbent LECs, competitive LECs are free to recover their 
reduced revenues through end user charges.
    60. The Commission has recognized that some areas are uneconomic to 
serve absent implicit or explicit support. As we continue the 
transition from implicit to explicit support that the Commission began 
in 1997, recovery from the CAF for incumbent LECs will be available to 
the extent their Eligible Recovery exceeds their permitted ARCs. For 
price cap carriers that elect to receive CAF support, such support is 
transitional and phases out over three years, beginning in 2017. For 
rate-of-return carriers, ICC-replacement CAF support will phase down 
with Eligible Recovery over time. All incumbent LECs that elect to 
receive CAF support as part of this recovery mechanism will have 
broadband obligations and be held to the same accountability and 
oversight requirements adopted in section VIII. Competitive LECs, which 
have greater freedom in setting rates and picking which customers to 
serve, will not be eligible for CAF support to replace reductions in 
ICC revenues.
    61. We establish a rebuttable presumption that the reforms adopted 
in this R&O, including the recovery of Eligible Recovery from the ARC 
and CAF, allow incumbent LECs to earn a reasonable return on their 
investment. We establish a ``Total Cost and Earnings Review,'' through 
which a carrier may petition the Commission to rebut this presumption 
and request additional support. We identify certain factors in addition 
to switched access costs and revenues that may affect our analysis of 
requests for additional support, including: (1) Other revenues derived 
from regulated services provided over the local network, such as 
special access; (2) productivity gains; (3) incumbent LEC ICC expense 
reductions and other cost savings; and (4) other services provided over 
the local network.
    62. Under the new intercarrier compensation regime, all traffic--
including VoIP traffic--ultimately will b