Connect America Fund; A National Broadband Plan for Our Future; Establishing Just and Reasonable Rates for Local Exchange Carriers; High-Cost Universal Service Support, 78384-78447 [2011-31924]

Agencies

• FEDERAL COMMUNICATIONS COMMISSION

[Federal Register Volume 76, Number 242 (Friday, December 16, 2011)]
[Proposed Rules]
[Pages 78384-78447]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31924]



[[Page 78383]]

Vol. 76

Friday,

No. 242

December 16, 2011

Part III





 Federal Communications Commission





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47 CFR Part 54





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

Federal Register / Vol. 76 , No. 242 / Friday, December 16, 2011 / 
Proposed Rules

[[Page 78384]]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 54

[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: Proposed rule.

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SUMMARY: In this document, the Federal Communications Commission 
(Commission) seeks comment on several issues related to Eligible 
Telecommunications Carriers obligations, the funding mechanisms for 
rate-of-return, price cap and mobile carriers, and a Remote Areas Fund. 
The Commission also seeks comment on several issues related to bill-
and-keep, end user charges, IP-to-IP interconnection, and call 
signaling rules. This is information will help the Commission to 
comprehensively reform and modernize 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.

DATES: Comments on the matters synopsized in paragraphs 1-303 of the 
Supplementary Information and proposed 47 CFR part 54, subparts L, M, 
and N are due on or before January 18, 2012 and reply comments on the 
matters synopsized in paragraphs 1-303 of the Supplementary Information 
and proposed 47 CFR part 54, subparts L, M, and N are due on or before 
February 17, 2012. Comments on the matters synopsized in paragraphs 
304-406 of the Supplementary Information are due on or before February 
24, 2012 and reply comments on the matters synopsized in paragraphs 
304-406 of the Supplementary Information are due on or before March 30, 
2012. If you anticipate that you will be submitting comments, but find 
it difficult to do so within the period of time allowed by this FNPRM, 
you should advise the contact listed below as soon as possible.

ADDRESSES: You may submit comments, identified by 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, by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Federal Communications Commission's Web Site: https://fjallfoss.fcc.gov/ecfs2/. Follow the instructions for submitting 
comments.
     People With Disabilities: Contact the FCC to request 
reasonable accommodations (accessible format documents, sign language 
interpreters, CART, etc.) by email: FCC504@fcc.gov or phone: (202) 418-
0530 or TTY: (202) 418-0432.

    For detailed instructions for submitting comments and additional 
information on the rulemaking process, see the SUPPLEMENTARY 
INFORMATION section of this document.

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 synopsis of the Commission's 
Further Notice of Proposed Rulemaking (FNPRM) in WC Docket No. 10-90, 
GN Docket No. 09-51, WC Docket No. 07-135, WC Docket No. 05-337, CC 
Docket No. 01-92, CC Docket No. 96-45, WC Docket No. 03-109, and WT 
Docket No. 10-208; FCC 11-161, released November 18, 2011. The complete 
text of this document is available for inspection and copying during 
normal business hours in the FCC Reference Information Center, Portals 
II, 445 12th Street SW., Room CY-A257, Washington, DC 20554. The 
document may also be purchased from the Commission's duplicating 
contractor, Best Copy and Printing, Inc., 445 12th Street SW., Room CY-
B402, Washington, DC 20554, telephone (800) 378-3160 or (202) 863-2893, 
facsimile (202) 863-2898, or via the Internet at https://www.bcpiweb.com. It is also available on the Commission's Web site at 
https://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-11-161A1.pdf.
    Pursuant to Sec. Sec.  1.415 and 1.419 of the Commission's rules, 
47 CFR 1.415, 1.419, interested parties may file comments and reply 
comments on or before the dates indicated on the first page of this 
document. Comments may be filed using the Commission's Electronic 
Comment Filing System (ECFS). See Electronic Filing of Documents in 
Rulemaking Proceedings, 63 FR 24121, May 1, 1998.



0
Electronic Filers: Comments may be filed electronically using the 
Internet by accessing the ECFS: https://fjallfoss.fcc.gov/ecfs2/.

0
Paper Filers: Parties who choose to file by paper must file an original 
and one copy of each filing. If more than one docket or rulemaking 
number appears in the caption of this proceeding, filers must submit 
two additional copies for each additional docket or rulemaking number.
    Filings can be sent by hand or messenger delivery, by commercial 
overnight courier, or by first-class or overnight U.S. Postal Service 
mail. All filings must be addressed to the Commission's Secretary, 
Office of the Secretary, Federal Communications Commission.

0
All hand-delivered or messenger-delivered paper filings for the 
Commission's Secretary must be delivered to FCC Headquarters at 445 
12th St SW., Room TW-A325, Washington, DC 20554. The filing hours are 8 
a.m. to 7 p.m. All hand deliveries must be held together with rubber 
bands or fasteners. Any envelopes and boxes must be disposed of before 
entering the building.

0
Commercial overnight mail (other than U.S. Postal Service Express Mail 
and Priority Mail) must be sent to 9300 East Hampton Drive, Capitol 
Heights, MD 20743.

0
U.S. Postal Service first-class, Express, and Priority mail must be 
addressed to 445 12th Street SW., Washington DC 20554.

    People with Disabilities: To request materials in accessible 
formats for people with disabilities (braille, large print, electronic 
files, audio format), send an email to fcc504@fcc.gov or call the 
Consumer & Governmental Affairs Bureau at (202) 418-0530 (voice), (202) 
418-0432 (tty).

I. Further Notice of Proposed Rulemaking

A. Broadband Public Interest Obligations

i. Measuring Broadband Service
    1. In the USF/ICC Transformation Order, adopted concurrently with 
the FNPRM, the Commission adopts a rule requiring that actual speed and 
latency be measured on the access network of each eligible 
telecommunications carriers (ETC) from the end-user interface to the 
nearest Internet access point, and requires that ETCs certify to and 
report the results to the Universal Service Administrative Company

[[Page 78385]]

(USAC) on an annual basis. The Commission seeks comment on whether it 
should adopt a specific measurement methodology beyond what is 
described in the USF/ICC Transformation Order and the format in which 
ETCs should report their results.
    2. The Measuring Broadband America Report concludes that a 
standardized set of broadband measurements can be implemented across a 
range of ISPs and scaled to support detailed regional assessments of 
broadband deployment and performance. The Commission notes that 
commercial hardware and software as well as some free, non-commercial 
options are available. Should the Commission adopt a uniform 
methodology for measuring broadband performance? If so, should it be 
uniform across different technologies? The Commission notes that it has 
requested more information on measurement approaches for mobile 
broadband in Comment Sought on Measurement of Mobile Broadband Network 
Performance and Coverage, 75 FR 33303, June 11, 2010, and seeks to 
incorporate that proceeding's record. How should wireless providers 
measure speed? Should the Commission require fixed funding recipients 
to install SamKnows-type white boxes at consumer locations to monitor 
actual performance in a standardized way?
    3. Should the Commission specify a uniform reporting format? Should 
test results be recorded in a format that can be produced to USAC and 
auditable such that USAC or the state commissions may confirm that a 
provider is, in fact, providing broadband at the required minimum 
speeds?
    4. Should providers be required to provide the underlying raw 
measurement data to USAC? Are there legitimate concerns with 
confidentiality if such data are made public? Is it sufficient to have 
a provider certify to USAC that its network is satisfying the minimum 
broadband metrics and retain the results of its own performance 
measurement to be produced on request in the course of possible future 
audits?
    5. Should the Commission consider easing the performance measuring 
obligations on smaller broadband providers? If so, what would be the 
appropriate threshold for size of provider before granting relief for 
measuring broadband? If so, how can it ensure that their customers are 
receiving reasonably comparable service?
ii. Reasonably Comparable Voice and Broadband Services
    6. In the USF/ICC Transformation Order, the Commission directs the 
Wireline Competition Bureau (WCB) and Wireless Telecommunications 
Bureau (WTB) (together, the Bureaus) to develop and conduct a survey of 
voice and broadband rates to compare urban and rural voice and 
broadband rates. The Commission seeks comment on the components of the 
survey.
    7. With respect to determining reasonable comparability of voice 
service rates for universal service purposes, should the Commission 
separately collect data on fixed and mobile voice telephony rates? 
Should fixed and mobile voice services have different benchmarks for 
purposes of reasonable comparability?
    8. In the landline context, the Commission has previously surveyed 
the basic R-1 voice rate. What would the equivalent basic offering be 
in the mobile context? How should the Commission take into account 
packages that offer varying numbers of minutes of usage and/or 
additional features such as texting?
    9. With respect to determining reasonable comparability of 
broadband services, should the Commission separately collect data on 
fixed and mobile broadband pricing and capacity requirements (if any)? 
For purposes of that analysis, how should the Commission consider, if 
at all, data cards provided by mobile providers?
    10. For fixed broadband offerings subject to the Commission's 
initial Connect America Fund (CAF) requirements of 4 Mbps downstream/1 
Mbps upstream, should the Commission survey advertised rates for such 
service, or the closest available offering in urban areas? How should 
the Commission take into account promotional pricing that may require a 
specific contractual commitment for a period of time?
    11. Should fixed and mobile broadband services have different or 
the same benchmarks for purposes of reasonable comparability?
    12. The Commission also seeks comment on how to compare mobile 
broadband to fixed broadband as product offerings evolve over time.
    13. In the USF/ICC Transformation Order, the Commission also 
determines that rural rates for broadband service would be reasonably 
comparable to urban rates under 47 U.S.C. 254(b)(3) if rural rates fall 
within a reasonable range of the national average urban rate for 
broadband service. The Commission seeks comment on how specifically to 
define that reasonable range for broadband.
    14. The Commission notes that in the voice context, today it 
requires states to certify that basic R-1 voice rates for non-rural 
carriers are no more than two standard deviations above the national 
average R-1 rate. Would using two standard deviations be the 
appropriate measure for reasonable comparability in the broadband 
context, or should the Commission adopt a different methodology for 
establishing such a reasonable range? Do unregulated broadband prices 
show relatively small variations, making another methodology more 
appropriate? For example, would prices normalized to disposable income 
be appropriate?
    15. Should the Commission adopt a presumption that if a given 
provider is offering the same rates, terms and conditions (including 
capacity limits, in any) to both urban and rural customers, that is 
sufficient to meet the statutory requirement that services be 
reasonably comparable?
iii. Additional Requirements
    16. Some commenters propose to require CAF recipients to comply 
with certain interconnection requirements. The Commission seeks comment 
on whether the Commission should require CAF recipients to offer IP-to-
IP interconnection for voice service, beyond whatever framework it 
adopts more broadly. If so, what would the scope and nature of any such 
requirement be? Should any obligations be based on the requirements of 
47 CFR 251(a)(1), since, as ETCs, the providers subject to these 
requirements will be telecommunications carriers? How would any such 
obligations be enforced?
    17. The Commission also seeks additional comment on the proposal of 
Public Knowledge and the Benton Foundation that CAF recipients be 
required to make interconnection points and backhaul capacity available 
so that unserved high-cost communities could deploy their own broadband 
networks. How would such a requirement operate? Is it sufficient to 
require CAF recipients to negotiate in good faith with community 
broadband networks to determine a point of interconnection? If there 
are disputes, who should resolve them? Should there be reporting 
requirements associated with such an obligation (i.e., should CAF 
recipients be required to report annually on unfulfilled requests for 
interconnection from community broadband networks)? What benefits might 
such a requirement bring that the Commission's other universal service 
policies are not meeting? What would the costs of such a requirement 
be, on funding recipients and on administration of the requirement?
    18. The Commission also seeks comment on the proposal of Public 
Knowledge and the Benton Foundation

[[Page 78386]]

that the Commission should create a fund for a Technology Opportunities 
Program to assist communities with deploying their own broadband 
networks. How much money should the Commission set aside for such a 
program? Are there any legal impediments to the Commission running such 
a pilot program out of the universal service fund? The Commission 
acknowledges the important role that WISPs, non-profits, and other 
small and non-traditional communications providers play in extending 
broadband in rural America, including in areas where traditional 
commercial providers have not deployed. Are there other things the 
Commission should be doing to enable such entities to further extend 
broadband coverage, particularly in currently unserved areas?

B. Connect America Fund for Rate-of-Return Carriers

    19. In response to the USF/ICC Transformation NPRM, 75 FR 26906, 
May 13, 2010, the Rural Associations (NECA, NTCA, OPASTCO, ERTA, and 
WTA) proposed the creation of a new broadband-focused CAF mechanism 
that ultimately would entirely replace existing support mechanisms for 
rate-of-return carriers. Subsequently, the Rural Associations provided 
draft rules that provide additional context regarding the operation of 
their proposed CAF. The Commission now seeks focused comment on this 
proposal and asks whether and how it could be modified consistent with 
the framework adopted in the USF/ICC Transformation Order to provide a 
path forward for rate-of-return or carriers to invest in extending 
broadband to unserved areas. The Commission sets forth in Appendix G of 
the USF/ICC Transformation Order the draft rules, modified to take into 
account the rule changes adopted in the USF/ICC Transformation Order, 
and seeks comment on those draft rules. These rules, as modified, are 
not reproduced here, but are available in their entirety at https://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db1122/FCC-11-161A1.pdf.
    20. Under the Rural Association Plan, loop costs would be allocated 
to the interstate jurisdiction based on the current 25 percent 
allocator or the individual carrier's broadband adoption rate, 
whichever is greater. This would have the practical effect of reducing 
over time the size of legacy support mechanisms, like HCLS, that offset 
some intrastate costs. The new interstate revenue requirement would 
also include certain key broadband-related costs (i.e., middle mile 
facilities and Internet backbone access). In conjunction with this 
proposal, the Rural Associations also propose that their authorized 
rate-of-return be reduced from 11.25 percent to 10 percent. CAF support 
would be provided under this new mechanism for any provider's broadband 
costs that exceeded a specified benchmark representing wholesale 
broadband costs in urban areas. In particular, under this proposal, CAF 
funding would be computed by subtracting the product of an urban 
broadband transmission cost benchmark times the number of broadband 
lines in service, from the actual company broadband network costs 
(which would be the sum of last mile, second mile, middle mile, and 
Internet connection costs). The broadband transmission benchmark would 
have a fixed component that would increase from $19.25 in the first 
year to $24.75 in the eighth year, and a variable component that is 
tied to an individual company's broadband take rate. In addition, there 
would be certain provisions to mitigate the impact on companies that 
would receive reduced support under the modified mechanism. The purpose 
of the transitional stability mechanism would be to ensure that no 
study area would experience a reduction in total support of more than 
five percent, on an annual basis, which would be funded by carriers 
that receive a net increase in support.
    21. The Rural Associations explain that their plan is calibrated to 
aim for a budget target of $2.05 billion in combined funding for USF 
and their suggested access restructure mechanism in the first year of 
implementation, and may grow to $2.3 billion by the sixth year. In the 
USF/ICC Transformation Order, the Commission adopts an overall budget 
target for rate-of-return companies of $2 billion over the next six 
years. Given that, how could the Commission best accommodate the Rural 
Association Plan within the Commission's budgetary framework? If 
savings are realized in other components of the CAF--for example, if 
competitive bidding leads to less support being disbursed through the 
CAF for price cap areas than has been budgeted for--should those 
savings be used to increase funding for rate-of-return carriers under 
the Rural Association Plan? Could the Commission more quickly 
transition existing support mechanisms to the framework proposed by the 
Rural Associations to stay within the overall budget? The Commission 
seeks year-by-year financial projections of any new mechanisms and the 
related impact on legacy support mechanisms, as well as the associated 
data and assumptions supporting those projections.
    22. With respect to plan specifics, the Commission seeks comment on 
the benefits and the costs of providing support for middle mile 
facilities and access to the Internet backbone under the Rural 
Associations' proposal. On average for smaller carriers, approximately 
what proportion of the costs to deploy broadband networks and provide 
broadband services are attributable to middle mile and Internet 
backbone costs today? Commenters are encouraged to provide factual 
information to support any projections they submit into the record. 
Consistent with the overall framework adopted in the USF/ICC 
Transformation Order to impose reasonable limits on recovery of loop 
expenses, how could the Commission impose a constraint on the recovery 
of middle mile costs under this proposal?
    23. The Rural Associations propose that costs be shifted to the 
interstate jurisdiction based on an individual carrier's Broadband Take 
Rate, which equals its total broadband lines divided by its total 
working access lines. Should this calculation be limited to residential 
lines? The Rural Associations define Broadband Line to include any line 
that supports voice and broadband, or only broadband, at a minimum 
speed of 256 Kbps downstream. The Commission seeks comment on that 
proposal, and asks whether broadband lines should be defined consistent 
with the broadband characteristics required in its public interest 
obligations. What would be the impact of a more stringent definition of 
a broadband line in this context? If the Commission were to adopt this 
proposal but shift costs to the interstate jurisdiction only for loops 
that provide speeds of at least 4 Mbps downstream and 1 Mbps upstream, 
how would that affect the financial projections regarding this 
proposal? Are there any legal, policy or practical implications to 
providing CAF support for lines where the end user customer does not 
subscribe to voice service from the ETC? The Rural Associations' Plan 
contemplates that rate-of-return carriers may offer standalone 
broadband; to the extent they do so, absent any other rule changes, 
what would be the impact on USF support for rate-of-return carriers? 
What rule changes would help provide appropriate incentives for 
investment in broadband-capable networks, while limiting unrestrained 
growth in support provided to rate-of-return companies?
    24. How does the Rural Associations' proposal to alter the current 
25 percent allocation of loop costs fit within, or inform, the Federal-
State Joint Board on

[[Page 78387]]

Jurisdictional Separations' ongoing work to reform the separations 
process? Are there components of the Rural Association plan that should 
be referred to the Separations Joint Board and examined directly in 
that ongoing process?
    25. In the USF/ICC Transformation Order, the Commission adopts a 
requirement that rate-of-return carriers offer speeds of 4 Mbps 
downstream and 1 Mbps upstream upon reasonable request. Should the 
Commission adopt a rule that rate-of-return carriers are not required 
to serve any location within their study area that is served by an 
unsubsidized competitor and will not receive support for those lines to 
the extent they choose to extend service to areas of competitive 
overlap? How would the Commission implement the Rural Associations' 
proposal in conjunction with such a rule? In particular, what would be 
the methodology for removing the broadband costs associated with areas 
of competitive overlap from the calculation of the proposed CAF 
support?
    26. Is a broadband urban wholesale benchmark the right approach to 
determine support under a new rate-of-return mechanism, or would 
another approach be more in keeping with the statute and prior 
precedent? How does comparing wholesale urban costs relate to the 
Commission's obligation to ensure that rural retail rates are 
reasonable? Should such a benchmark be based on the wholesale cost of 
providing broadband, or another metric? Can wholesale broadband costs 
be calculated reliably, particularly where wholesale broadband services 
are not typically offered in urban areas? As an alternative, should the 
relevant benchmark be set based on the price of comparable retail 
services in a sample of urban areas?
    27. The Rural Associations' benchmark proposal contemplates a fixed 
and variable component of the rural benchmark. How should the 
Commission establish the levels for those components, and should there 
be a company-specific component of the benchmark? If the benchmark is 
tied in any manner to the National Exchange Carrier Association (NECA) 
tariff rates or another industry metric, does that proposal bear any 
risks of gamesmanship by carriers to raise or lower individual rates to 
maximize universal service receipts?
    28. What information would the Commission need to require from 
carriers to evaluate and implement that Rural Association proposal? 
Prior to implementation, should the Commission, for instance, require 
carriers to submit analyses showing their broadband adoption trends for 
service at varying speeds for the last five years for us to develop 
reasonable projections regarding broadband penetration in the future? 
What information should the Commission obtain regarding their middle 
mile costs to better understand the implications of the proposal to 
include middle mile costs in support calculations?
    29. How would the proposed transitional stability plan mechanism 
operate? What would be the distributional impact of this proposal in 
terms of the number of companies that would see increases in support, 
compared to the number of companies that would see decreases in 
support?
    30. The Rural Associations propose that incremental broadband 
build-out commitments would be tied to an individual company's ability 
to receive incremental CAF support for new investment, subject to 
prospective capital investment constraints and the budget target 
adopted by the Commission. If the Commission were to adopt such an 
approach, what specific metrics or build-out milestones should be 
established, and what reporting and certifications should be imposed to 
improve the Commission's ability to enforce such commitments? How 
should CAF associated with intercarrier compensation reform be 
incorporated into any rate-of-return CAF mechanism? Would the public 
interest obligations for CAF associated with intercarrier compensation 
reform be updated to reflect any new obligations? The Commission seeks 
comment more broadly on how its universal service policies can best 
accelerate broadband deployment to consumers served by rate-of-return 
carriers, many of whom reside in rural America. In the long term, 
should universal service support for rate-of-return carriers be 
distributed through separate mechanisms from the mechanisms used to 
distribute support for other types of carriers, or is a uniform 
national approach preferable to achieve its universal service 
objectives? The Commission seeks comment on any other proposals to 
transition areas served by rate-of-return carriers to CAF, or any other 
analysis or recommendations that could facilitate this process.

C. Interstate Rate of Return Represcription

    31. As explained in the Order, rate-of-return carriers will 
continue to receive for some time a modified version of their legacy 
universal service support. The level of support they receive depends, 
in part, on the interstate rate of return allowed for plant in service. 
As a result, the Commission concluded it was necessary to evaluate the 
authorized interstate rate of return for rate-of-return carriers, which 
has not been updated in over 20 years. Three major associations 
representing rate-of-return carriers, as well as the State Members of 
the Federal-State Joint Board on Universal Service, have proposed a 
reduction in the current rate of return, which is currently set at 
11.25 percent, in the context of overall reform. The Commission agrees 
that it is appropriate at this time to reexamine the rate of return as 
part of comprehensive reform of the universal service fund. The 
Commission seeks comment more generally on how this prescription fits 
within the broader reform framework for rate-of-return carriers, and 
specifically in what manner this prescription process should be linked 
to other proposals in this FNPRM, including the separate CAF support 
mechanism for rate-of-return carriers.
    32. With respect to the prescription process itself, the 
Commission's statutory authority under 47 U.S.C. 205 provides the power 
to determine and prescribe those elements that make up the charge, 
including the interstate rate of return. The rate of return must be 
high enough to provide confidence in the financial integrity of the 
carrier, so that it can maintain its credit and attract capital. The 
return should also be commensurate with returns on investments in other 
enterprises having corresponding risks. On the other hand, the return 
should not be higher than necessary for this purpose.
    33. The Commission last prescribed the authorized interstate rate 
of return in 1990, reducing it from 12 percent to 11.25 percent. The 
Commission believes fundamental changes in the cost of debt and equity 
since 1990 no longer allow it to conclude that a rate of return of 
11.25 percent is necessarily just and reasonable as required by 47 
U.S.C. 201(b). The rate-of-return carrier associations proposed a 
reduction in the interstate rate of return from the current 11.25 
percent to 10 percent. The State Members of the Federal-State Joint 
Board proposed that the rate be reduced further to 8.5 percent. The 
State Members highlight that the interest rate on a three month 
Treasury Bill has fallen from 7.83 percent in 1990 to 0.15 percent in 
January 2011. Further, the Commission observes that the average 10-year 
treasury constant maturity rate has declined from approximately 8.1 
percent in January 1991 to

[[Page 78388]]

approximately 2 percent in September 2011.
    34. The Commission finds compelling evidence that its presently 
applied interstate rate-of-return, 11.25 percent, is no longer 
reflective of the cost of capital. The Commission believes updating the 
rate of return is necessary for rate-of-return carriers to both attract 
capital on reasonable terms in today's markets and encourage 
economically sound network investments. The Commission welcomes input 
from state regulators that may have insights from conducting intrastate 
rate of return represcriptions in recent years. The Commission also 
invites comment on how the Commission can ensure that the rate of 
return over time remains consistent with changes in the financial 
markets and cost of capital. The Commission seeks comment on means by 
which the rate of return can be adjusted automatically based on some 
set of financial triggers, and how any such triggers would operate.
    35. When it last initiated an interstate rate of return 
prescription proceeding in 1998, the Commission sought comment on the 
methods by which it could calculate incumbent LECs' costs of capital. 
The Commission seeks comment on the issues raised in the 1998 
Prescription Notice generally and asks parties to provide the data 
responsive to the previous requests. In particular, the Commission 
seeks comment on the following:
    36. WACC. Weighted average cost of capital (WACC) identifies the 
rate of return required to maintain the current value of a firm; 
alternatively, it is the minimum rate of return the firm needs to offer 
to investors to maintain access to its current supply of capital. WACC 
is the key component for prescribing the rate of return. The Commission 
seeks comment on how to calculate the WACC for the relevant companies. 
The Commission asks whether the formula to determine the WACC in 47 CFR 
65.301-305 is the proper framework for this represcription, and whether 
any modification or update to the formula or inputs is warranted or 
necessary. Specifically, the Commission's rules provide that WACC is 
the sum of the cost of debt, the cost of preferred stock, and the cost 
of equity, each weighted by its proportion in the capital structure. 
Does this remain the correct approach? Should the Commission augment, 
or replace, its WACC calculation with any other analysis or approaches? 
Looking to the WACC calculated for an entire company, rather than for a 
specific line of business, is appropriate, for example, when thinking 
about setting an allowed rate-of-return for an entire company. In 
contrast, this overall WACC would not in general inform a business as 
to whether to undertake a specific project. Typically, specific 
projects that have greater risk and therefore a greater cost of capital 
than the entire company are only undertaken when much higher rates of 
return are expected. Given that many rate-of-return companies have 
diversified beyond regulated voice services, for example to offer 
broadband, video, or wireless services, should the WACC be computed for 
only the regulated portion of the company's business, or at the level 
of the entire company? The Commission seeks comment on this analysis, 
and how, if at all, it should impact its rate-of-return calculation, 
and use of WACC for these purposes.
    37. Data. The Commission seeks comment on the appropriate data and 
methodologies the Commission should use to calculate the WACC. The 
Commission notes that some of the formulas in the rules rely on ARMIS 
data, which are no longer collected. In the absence of ARMIS data, what 
additional data should the Commission require and rely upon, and who 
should be required to file the data? Are there other publicly available 
data that could provide the necessary information? Does the absence of 
any particular data necessitate a different approach to any of the 
necessary calculations?
    38. Capital Structure. Under the Commission's WACC calculation, the 
estimated cost of debt, preferred stock, and equity of a company are 
all weighted relative to their proportion in the firm's capital 
structure. A firm's capital structure can be measured on a book basis 
or market basis. The Commission seeks comment on whether the formula in 
47 CFR 65.304 based on book values remains the correct approach, and 
whether any modification to the formula or inputs is warranted or 
necessary. Are there other components of the cost of capital that 
should be included in the capital structure, and should any of the 
elements listed in the rules be excluded?
    39. Surrogates. Because the vast majority of rate-of-return 
carriers are not publicly traded, the Commission must select an 
appropriate set of surrogate firms, for which financial data is 
available publicly, to use as a basis for the cost of capital analysis. 
To do so, the Commission must select a group of companies for which 
there is available financial data and that face similar risks to rate-
of-return carriers. The Commission's rules provide that the proper 
group of surrogates is all local exchange carriers with annual revenues 
equal to or above the indexed revenue threshold, which is $146 million 
this year. In the 1998 Prescription Notice the Commission sought 
comment on what group of companies should be selected as surrogates and 
tentatively concluded at that time that the Regional Bell Operating 
Companies' (RBOCs) risk most closely resembled the risk encountered by 
the rate-of-return carriers. The Commission seeks comment on whether 
that group should be used as surrogates here, or whether another group 
of providers, for example smaller publicly traded carriers, not 
including the RBOCs, would better serve this purpose. Should the 
surrogate group include publicly traded rate-of-return companies only, 
or a mixture of publicly traded rate-of-return companies and smaller 
price-cap companies? Commenters proposing a particular surrogate group 
should clearly define that group, identify the publicly available 
financial data for that group, and explain how that group best reflects 
the business risks and cost of capital of rate-of-return carriers.
    40. Cost of Debt. A firm's cost of debt can be estimated by 
dividing its total annual interest expense by its average outstanding 
debt measured on a historic book basis, or alternatively, on a market 
basis using the current yield to maturity. The Commission seeks comment 
on the cost of debt formula in 47 CFR 65.302 of the Commission's rules 
based on book values. The Commission had previously noted that the book 
basis is more objectively ascertainable, but may not fully reflect 
current investor expectations. The Commission seeks comment on that 
assessment, and the relative weight either the book or market approach 
should be given in its calculations. The Commission's rules provide 
that this measurement should occur for the most recent two years. Is 
this the correct time period, or is a longer or shorter period 
warranted?
    41. Cost of Preferred Stock. A firm's cost of preferred stock can 
be calculated by dividing the total annual preferred dividends by the 
total proceeds from the issuance of preferred stock. The Commission 
asks whether the formula in 47 CFR 65.303 remains the correct one, and 
whether any modification to the formula or inputs is warranted or 
necessary. The Commission's rules provide that this measurement should 
occur for the most recent two years. Is this the correct time period, 
or is a longer or shorter period warranted? Can the WACC calculation be 
simplified by ignoring the cost of preferred stock (and the amount of 
preferred stock in the capital structure) without significantly 
affecting the accuracy of the WACC?

[[Page 78389]]

    42. Cost of Equity. A firm's cost of equity can be estimated using 
a number of different approaches. The Commission's rules do not provide 
a specific formula for determining the cost of equity. In 1990, the 
Commission relied heavily on the discounted cash flow (DCF) 
methodology, which assesses a firm's stock price and dividend rate and 
forecasted growth rates to determine the cost of equity. There are a 
number of different variations of DCF, including historic and classic 
calculations. Alternatively, a firm's cost of equity can be calculated 
using the capital asset pricing model (CAPM). To use the CAPM, 
estimates of the risk free rate, the market risk premium, and the 
correlation of surrogate companies' common stock returns with the 
returns of the entire market of securities (or betas) must be made. The 
Commission seeks comment on these approaches, and asks whether any 
other methodologies should be incorporated into its analysis. For 
instance, should the Commission rely upon any cost of equity 
calculations made in state proceedings addressing intrastate rate of 
return, or other benchmarks based on the stock market as a whole, or a 
subset of companies or industries? Proponents of any particular 
methodology should detail their preferred approach and the relevant 
data required to perform the necessary calculations. Commenters should 
also justify the relative weight any particular methodology or 
comparison should have in the Commission's ultimate calculation. The 
Commission also seeks comment on the need, if any, to make adjustments 
with respect to flotation costs (i.e., costs of selling new securities 
in the market) or dividends.
    43. Zone of Reasonableness. The cost of equity, based on different 
methodologies and sets of reasonable assumptions and input values, as 
well as the WACC calculation can be used to develop a range from which 
the Commission can prescribe the new authorized interstate rate of 
return. This zone of reasonableness allows the Commission to take into 
account additional policy considerations before finalizing the new rate 
of return. The Commission seeks comment on the factors the Commission 
should consider in determining the rate of return from within that zone 
of reasonableness. The Commission asks how infrastructure deployment, 
particularly broadband deployment, and today's reforms should be 
accounted for in its analysis. Is the deployment of broadband 
significantly more risky than the voice telephony business, and does it 
have a significantly greater cost of capital? The Commission notes, for 
instance, that voice telephony has nearly universal penetration, while 
broadband adoption is more than 65 percent nationally. If some or all 
of the surrogates on which the WACC estimates are based are large 
companies such as Verizon and AT&T, should unique competitive and 
market conditions for rate-of-return carriers be reflected, and should 
any differences in diversification in rate-of-return carrier offerings 
compared to large carrier offerings, which now may include voice, 
video, wireless, and data services, be reflected, if at all? Should any 
allowances made in 1990, or proposed in 1998, apply here? The 
Commission also seeks comment on the need to make any adjustments to 
capture changes in the telecommunications market generally, and ask 
commenters proposing any such adjustments to explain why they are 
necessary to prescribe the allowable rate of return for multi-use plant 
that can provide voice, data, video and other services, in particular, 
and how any such adjustments should be structured. Lastly, the 
Commission asks whether any of these policy considerations should also 
be reflected in any other components of the WACC calculation, and, if 
so, in what manner.
    44. Preliminary Analysis. The Commission estimate, using recent 
public data, the WACC for AT&T and Verizon and find it in the range of 
6 to 8 percent. This range is consistent with other analysts' 
estimates. The Commission finds a similar range when considering other 
mid-size and competitive carriers. Even if the interest rate were to 
increase by 1.5 percent, which seems unlikely in today's economy, the 
WACC would remain in the range of approximately 7 to 8 percent. This 
preliminary analysis would conservatively suggest that the authorized 
interstate rate of return should be no more than 9 percent. The 
Commission seeks comment on this analysis and note that this 
preliminary analysis does not prejudge the Commission's ability to 
select a higher or lower rate of return in this proceeding.
    45. Impact on Universal Service Funding. The Commission proposes 
that any reduction in the rate of return be reflected in its universal 
service rules by reducing the HCLS cap by a corresponding amount, and 
repurposing that funding amount consistent with the CAF framework and 
budget. The Commission also proposes that ICLS support be reduced by a 
corresponding amount as well. The Commission seeks comment on these 
proposals and how to calculate any such reductions. The Commission 
seeks comment on whether any savings realized from reducing the rate of 
return should be used to establish a new CAF mechanism for rate of 
return companies that would support new broadband investment. How would 
a change in the rate of return impact the Rural Association's CAF 
proposal discussed in this FNPRM, and does this prescription process 
impact the timing or operation of that proposal or any other transition 
of rate-of-return carriers to CAF-based support? In the alternative, 
the Commission seeks comment on the potential benefits of retaining the 
HCLS cap at the same amount even if the rate of return is reduced, 
which would have the effect of allowing funding to be redistributed to 
lower cost rate-of-return carriers that are ineligible for HCLS support 
today. Are there any other changes to other universal service 
distribution mechanisms that should be made to reflect a change to the 
rate of return?
    46. Tribally-Owned and Operated Carriers. The Commission seeks 
comment on how to account for Tribally-owned and operated carriers in 
this prescription, and whether a different rate of return is warranted 
for these carriers. Tribal governments, and by extension, Tribally-
owned and operated carriers, play a vital role in serving the needs and 
interests of their local communities, often in remote, low-income, and 
underserved regions of the country. Tribally-owned and operated 
carriers serve cyclically impoverished communities with a historical 
lack of critical infrastructure. Reservation-based economies lack 
fundamental similarities to non-reservation economies and are among the 
most impoverished economies in the country. Tribal Nations also cannot 
collateralize trust land assets, and as a result, have more limited 
abilities to access credit and capital. The Commission seeks comment on 
how such considerations should be reflected in its analysis.
    47. Other Considerations. Finally, the Commission asks commenters 
to address any other changes that are needed to: (1) The data used in 
the prescription process; or (2) the calculations the Commission must 
perform to prescribe a new interstate rate of return. The Commission 
also invites commenters to provide any other relevant evidence or 
studies that could assist in this represcription.

D. Eliminating Support for Areas With an Unsubsidized Competitor

    48. In the USF/ICC Transformation Order, the Commission concludes 
that it will phase out all high-cost support

[[Page 78390]]

received by incumbent rate-of-return carriers over three years in study 
areas where an unsubsidized competitor, or combination of unsubsidized 
competitors, offering voice and broadband service that meets its 
performance obligations serves 100 percent of the residential and 
business locations in the incumbent's study area. The Commission seeks 
comment on a proposed methodology for determining the extent of 
overlap, a process for preliminary determinations of such overlap, a 
process for the affected ETC to challenge the accuracy of the purported 
overlap, with input from the relevant state commission and the public, 
and how to adjust support levels in situations with less than 100 
percent overlap.
    49. To determine what rate-of-return study areas have 100 percent 
overlap by an unsubsidized competitor, staff performed a preliminary 
analysis. The analysis relies on two sets of data: TeleAtlas Wire 
Center Boundaries (6/2010) and data from the State Broadband Initiative 
(SBI) program administered by NTIA as of December, 2010.
    50. First, staff identified which census blocks are in each rate-
of-return study area, including a census block in a study area if the 
centroid of that census block is within the TeleAtlas boundaries for a 
wire center associated with the study area. Next, staff identified 
study areas where a wired provider other than the incumbent local 
exchange carrier offered broadband service at speeds of at least 3 Mbps 
downstream/768 kbps upstream to all of the census blocks in the study 
area. Staff excluded all resellers as identified in the SBI data and 
included only xDSL, cable, and fiber technologies.
    51. The Commission seeks comment on whether this is an appropriate 
methodology for determining areas of overlap, which will result in 
adjustments to support levels for the rate-of-return ETC.
    52. The Commission's staff performed a preliminary analysis 
examining census blocks smaller than two square miles and identified 18 
rate-of-return study areas with 99 percent or greater overlap; and an 
additional 19 with greater than 95 percent overlap (a total of 37 study 
areas with greater than 95 percent overlap).
    53. This analysis has several potential limitations. TeleAtlas data 
may not represent the actual incumbent local exchange carrier footprint 
in all instances. In addition, TeleAtlas data generally assign all 
geographies to one incumbent provider's footprint or another; however, 
in reality, there are large, generally unpopulated areas not served by 
any incumbent carrier facilities. As such, this analysis may over-
estimate the rate-of-return ETC's footprint and under-estimate the 
extent to which the populated portions of that footprint are completely 
overbuilt by competitive networks.
    54. SBI data have their limitations as well, as the Commission 
acknowledged in its most recent Broadband Progress Report. In addition, 
SBI data only measure the availability of broadband capable of 
delivering at least 768 kbps downstream and 200 kbps upstream. There is 
no direct measure of the availability of voice service, but the 
Commission presumed that an unsubsidized xDSL, fiber, or cable 
competitor that has deployed a broadband network that meets the SBI 
standard also is offering voice services.
    55. The Commission notes that small blocks could be reported as 
served if as few as one location in that block has service or could 
have service within a typical service interval. The Commission seeks 
comment on whether this could lead us to count areas as served by an 
unsubsidized competitor even if a meaningful number of locations are, 
in fact, not served.
    56. The Commission seeks comment on how best to deal with data 
relating to large blocks. Since neither NTIA nor the Commission has 
access to the actual location of businesses or homes, SBI population 
estimates data relies on estimating home locations by random placement 
of locations along roads. While this will provide an accurate view of 
the fraction of large blocks that are served in aggregate, it will 
likely lead to over- or under-estimates in any small number of some 
large blocks. How can the Commission use such data to determine whether 
a large block is served or not?
    57. The Commission seeks comment on a process for identifying areas 
with greater than 75 percent overlap. The Commission proposes that WCB 
identify areas with greater than 75 percent overlap, utilizing the 
finalized methodology, and then publish the results of that analysis. 
The Commission proposes that WCB provide the affected ETC an 
opportunity to challenge the accuracy of the purported overlap and to 
take public comment for a period of time, such as 45 days. The 
Commission seeks comment on this proposal.
    58. Several commenters supported state involvement in a process to 
determine areas of overlap. How could state commissions play a role in 
determining the extent of overlap? For instance, after WCB performs the 
overlap analysis, should there be a period of time for the relevant 
state commission to comment on the analysis? What would be a reasonable 
time frame to request an evaluation from a state commission regarding 
such overlap? Alternatively, could the Commission establish a process 
in which state commissions advise us, by a date certain, which study 
areas served by rate-of-return carriers have unsubsidized facilities-
based competitors, and therefore should be subject to potential 
adjustments in high-cost support?
    59. The Commission also seeks comment on whether support levels 
would need to be adjusted in areas where there is less than 100 percent 
overlap by an unsubsidized facilities-based provider of terrestrial 
fixed voice and broadband service. To the extent support levels do need 
to be adjusted, the Commission seeks further comment on how to do so.
    60. In the August 3 Public Notice, 76 FR 49401, August 10, 2010, 
the Commission sought comment on how to allocate costs between the 
overlap areas and the ILEC-only areas, including whether the Commission 
should use a cost model to accomplish that allocation.
    61. In response to the August 3 Public Notice, NCTA recommended 
that the Commission should identify study areas served by rate-of-
return regulated incumbent LECs where (1) unsubsidized broadband 
providers serve more than 75 percent of homes; and (2) current high-
cost support exceeds projected support under the cost model for the 
remaining areas by more than 10 percent. During the interim period, in 
any study area that meets those criteria, the Commission should provide 
notice to the carrier that support will be reduced to the level 
suggested by the cost model unless it can demonstrate that a higher 
amount is necessary. The Commission seeks comment on this proposal.
    62. The Commission notes that in the USF/ICC Transformation Order, 
it directed WCB to develop and finalize a cost model for use in price 
cap territories. Would it be appropriate to use such a model, after 
appropriate public input, in the way described by NCTA to create a 
presumptive reduction in support levels for rate-of-return carriers? 
For purposes of determining whether model-determined support in the 
remaining areas (i.e., the areas of no overlap) exceeded current 
support by more than 10 percent, would the Commission need to allocate 
the current high-cost support between the areas of overlap and the 
areas where there is no overlap? To the extent that support would need 
to be allocated between

[[Page 78391]]

areas of overlap and no overlap, what criteria or standards would 
govern any such allocation? Should there be a rebuttable presumption 
that all costs are divided pro rata among access lines, and allocated 
to the census block in which that access line is located, so that 
absent an appropriate showing the recipient would receive the same 
support amounts per line, but only for those lines that fall outside 
the area of overlap? Cablevision suggests that only costs solely 
attributable to the non-competitive area should be supported, and that 
most of the costs of overhead (which presumably are largely associated 
with customers in the areas where there is competitive overlap) should 
not be recoverable. Would that be a workable approach? How should the 
Commission allocate costs associated with cable and wire facilities, 
and central office equipment, between competitive and non-competitive 
areas?
    63. NCTA suggests that there be a process in which a carrier 
subject to reductions could demonstrate that a higher amount is 
necessary. Should reductions commence within a specified time period, 
such as 120 days, absent a showing that additional support is 
necessary? What process should be established for rate-of-return 
carriers subject to potential support adjustments to contest any such 
adjustments? For instance, should they be required to show that the 
adjusted levels would be inadequate to continue to provide voice 
service to consumers, for example, using the criteria the Commission 
set forth in the USF/ICC Transformation Order for petitions for waiver? 
Should the Commission undertake a total company earnings review in 
those circumstances? Should the Commission seek input from the relevant 
state commission on whether support amounts should be adjusted, and how 
that would impact consumers in the relevant communities?
    64. If the Commission were to adopt any of these proposals to 
adjust support levels, over what time period should support levels be 
transitioned to new levels in situations where there is less than 100 
percent overlap?

E. Limits on Reimbursable Capital and Operating Costs for Rate-of-
Return Carriers

    65. In the USF/ICC Transformation Order, the Commission adopts a 
rule to use benchmarks for reasonable costs to impose limits on 
reimbursable capital and operating costs for high-cost loop support 
received by rate-of-return companies. A specific methodology for 
calculating individual company caps for HCLS is set forth in Appendix H 
of the USF/ICC Transformation Order, which is available in its entirety 
at https://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db1122/FCC-11-161A1.pdf, and is summarized herein at section I.E.1. The 
Commission seeks comment on using this methodology to impose limits on 
reimbursement from HCLS and proposes to implement this methodology for 
support calculations beginning July 1, 2012.
    66. Appendix H of the USF/ICC Transformation Order uses, the 
methodology of quantile regression analyses to generate a set of limits 
for each rate-of-return cost company study area. These would limit the 
values used in eleven of the twenty-six steps in NECA's Cost Company 
Loop Cost Algorithm, which is used to calculate the study area's total 
unseparated cost per loop, and ultimately its HCLS. The regression-
derived limits are set at the 90th percentile of costs for each 
individual step in NECA's Cost Company Loop Cost Algorithm, compared to 
similarly situated companies for each individual step. In other words, 
a company whose actual costs for a particular step in the algorithm are 
above the 90th percentile, compared to similarly situated companies, 
would be limited to recovering amounts that correspond to the 90th 
percentile of cost, i.e. the amount of cost that ninety percent of 
similarly situated companies are at or below when they submit costs for 
that particular step in the algorithm. The Commission seeks comment on 
whether the 90th percentile is the appropriate dividing line to 
disallow recovery of cost, or whether the Commission should establish a 
lower or higher threshold, such as the 85th percentile or the 95th 
percentile.
    67. For the dependent variable in the regression analysis, 
Commission staff limited its analysis to cost data filed by rural rate-
of-return companies that submit cost data, and excluded cost data filed 
by price cap carriers. For the independent variables, staff used 2010 
block-level Census data that it mapped to each study area. The 
independent variables included: number of loops, number of housing 
units (broken out by whether the housing units are in urbanized areas, 
urbanized clusters, and nonurban areas), as well as several geographic 
measures such as land area, water area, and the number of census blocks 
(all broken out by urbanized areas, urbanized clusters, and nonurban 
areas). The analysis thereby recognizes that many smaller study areas 
(those with lower populations to serve) and more rural geographies 
(those with lower population densities) legitimately have higher costs 
per line (i.e., compared to the national average cost per loop) than 
larger study areas that contain significant urban populations.
    68. As explained more fully in Appendix H of the USF/ICC 
Transformation Order, quantile regression has several advantages over 
other statistical techniques for identifying outliers. Although the 
Commission finds that quantile regression is an appropriate technique 
to use in setting benchmarks on reimbursable investment and expenses, 
the Commission invites further comment on alternative statistical 
techniques.
    69. This methodology utilized variables that are currently 
available to the Commission. The Commission acknowledges that in their 
analysis using proprietary cost data, the Nebraska Companies also 
included variables for frost index, wetlands percentage, soils texture, 
and road intersections frequency. As noted in the USF/ICC 
Transformation Order, the soils data from the Natural Resource 
Conservation Service (NRCS) that the Nebraska study used do not cover 
all the study areas used in its regressions (such as Puerto Rico, Guam, 
American Samoa, U.S. Virgin Islands, Northern Mariana Islands, and 
Alaska). The Commission seeks comment on sources of other soil data 
that completely cover all the study areas or how to deal with those 
study areas where the SSURGO data are missing or incomplete. To the 
extent any commenter advocates use of a methodology that includes 
additional independent variables, they should identify with specificity 
the data source and the completeness and cost of the additional data, 
if not publicly available.
    70. In the USF/ICC Transformation Order, the Commission concludes 
that support will be redistributed to those carriers whose unseparated 
loop cost is not limited by operation of the benchmark methodology. 
Based on 2010 NECA data filed with the Commission, and using an 
estimate of $455 for the national average cost per loop, it estimates 
this proposed methodology would reduce HCLS payments to about 280 rural 
rate-of-return cost study areas by an estimated $110 million, with 
approximately $55 million redistributed to approximately 340 cost 
company study areas whose unseparated loop cost is not limited by 
operation of the benchmark methodology. The Commission thus estimates 
that more study areas could see increases in HCLS than would see 
decreases.
    71. In the USF/ICC Transformation Order, the Commission concludes 
that it should also limit recovery of excessive

[[Page 78392]]

capital and operating costs through the interstate common line support 
mechanism. The Commission seeks comment on how specifically to 
implement such a limit for ICLS.
    72. Although the Commission currently does not receive detailed 
cost data for determining ICLS, the Commission believes the best 
approach for calculating benchmarks to limit reimbursable capital and 
operating costs for ICLS would be to use a methodology similar to the 
one developed for HCLS, and seeks comment on this proposal. In the USF/
ICC Transformation Order, the Commission modifies its rules to require 
NECA to provide to the Commission upon request underlying data 
collected from ETCs to calculate payments under the current support 
mechanisms, including ICLS. In the USF/ICC Transformation Order, the 
Commission directs NECA to file the detailed revenue requirement data 
it receives from carriers no later than thirty days after release of 
the USF/ICC Transformation Order so that WCB could evaluate whether it 
should adopt a methodology using these data.
    73. The Commission seeks comment on two other alternatives that 
would not use the detailed revenue data from NECA or require carriers 
to file additional data. First, the Commission could run a single 
regression using the total interstate revenue requirement for each 
carrier, but this approach does not distinguish between capital and 
operating costs. Second, the Commission could use the decrease in cost 
per loop resulting from the regressions used to limit HCLS to limit a 
carrier's interstate revenue requirement. While the Commission 
recognizes that there are some differences between the costs used to 
calculate unseparated loop costs and the common line revenue 
requirement, and between loops and access lines, the Commission seeks 
comment on whether they are equivalent enough for purposes of 
establishing benchmarks for reasonable costs.
    74. The Commission seeks comment generally on whether network 
operation and investment by Tribally-owned and operated carriers is 
significantly different from non-Tribal conditions to warrant special 
treatment for purposes of establishing benchmarks for permissible 
capital and operating costs. The Commission seeks comment on whether 
the 90th percentile is the appropriate dividing line to disallow 
recovery of costs, or whether it should establish a lower or higher 
threshold, such as the 85th percentile or the 95th percentile. The 
Commission seeks comment here on whether a different percentile is 
appropriate for Tribally-owned and operated carriers, or whether it 
should otherwise alter the methodology to take into account the unique 
circumstances of Tribally-owned and operated carriers that are just 
beginning to serve their communities.
1. Modeling Limits on Reimbursable Operating and Capital Costs
    75. Overview. This section summarizes the methodology set forth in 
Appendix H of the USF/ICC Transformation Order, which is available in 
its entirety at https://transition.fcc.gov/Daily_Releases/Daily_Business/2011/db1122/FCC-11-161A1.pdf, for determining carrier-specific 
limits on High Cost Loop Support (HCLS) payments to rate-of-return cost 
carriers with very high capital expenses (capex) and operating expenses 
(opex) relative to their similarly situated peers. The methodology 
operates within the current HCLS calculation algorithm, using 
information that is readily available to the Commission and to the 
public. This section describes both the econometric process used to 
establish carrier-specific limits to HCLS payments and the 
implementation process.
    76. This work significantly extends the analyses submitted by the 
Nebraska Rural Independent Companies, which use ordinary least squares 
regression analysis to develop a framework to predict capital and 
operating expenditures. The Nebraska study examines data for a subset 
of rural rate-of-return carriers, and uses proprietary data not 
available to the Commission or to the public. In contrast, the proposed 
methodology described herein uses data currently available to the 
Commission and sets forth a detailed and implementable mechanism for 
examining all rural rate-of-return cost study areas and limiting HCLS 
pa