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Vol. 81
Monday,
No. 79
April 25, 2016
Part IV
Federal Communications Commission
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47 CFR Parts 51, 54, 65, et al.
Connect America Fund, ETC Annual Reports and Certifications, Developing
a Unified Intercarrier Compensation Regime; Final Rule
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Federal Register / Vol. 81, No. 79 / Monday, April 25, 2016 / Rules and Regulations
FEDERAL COMMUNICATIONS
COMMISSION
47 CFR Parts 51, 54, 65, and 69
[WC Docket Nos. 10–90, 14–58; CC Docket
No. 01–92; FCC 16–33]
Connect America Fund, ETC Annual
Reports and Certifications, Developing
a Unified Intercarrier Compensation
Regime
Federal Communications
Commission.
ACTION: Final rule.
AGENCY:
In this document, the Federal
Communications Commission
(Commission) adopts significant reforms
to place the universal service program
on solid footing for the next decade to
‘‘preserve and advance’’ voice and
broadband service in areas served by
rate-of-return carriers.
DATES: Effective May 25, 2016, except
for the amendments to §§ 51.917(f)(4),
54.303(b), 54.311(a), 54.313(a)(10),
(e)(1), (e)(2) and (f)(1), 54.316(a)(b),
54.319(e), 54.903(a), 69.132, 69.311,
69.4(k), and 69.416 which contain new
or modified information collection
requirements that will not be 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:
Alexander Minard, Wireline
Competition Bureau, (202) 418–0428 or
TTY: (202) 418–0484.
SUPPLEMENTARY INFORMATION: This is a
summary of the Commission’s Report
and Order, Order and Order on
Reconsideration in WC Docket Nos. 10–
90, 14–58; CC Docket No. 01–92; FCC
16–33, adopted on March 23, 2016 and
released on March 30, 2016. 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://
transition.fcc.gov/Daily_Releases/Daily_
Business/2016/db0330/FCC-1633A1.pdf. The Further Notice of
Proposed Rulemaking (FNPRM) that
was adopted concurrently with the
Report and Order, Order and Order on
Reconsideration are published
elsewhere in this issue of the Federal
Register.
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SUMMARY:
I. Introduction
1. With this Report and Order, Order
and Order on Reconsideration, and
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concurrently adopted Further Notice of
Proposed Rulemaking (FNPRM), the
Commission adopts significant reforms
to place the universal service program
on solid footing for the next decade to
‘‘preserve and advance’’ voice and
broadband service in areas served by
rate-of-return carriers. In 2011, the
Commission unanimously adopted
transformational reforms to modernize
universal service for the 21st century,
creating programs to support explicitly
broadband-capable networks. In this
Report and Order, Order, Order on
Reconsideration, and concurrently
adopted FNPRM, the Commission takes
necessary and crucial steps to reform
our rate-of-return universal service
mechanisms to fulfill our statutory
mandate of ensuring that all consumers
‘‘have access to . . . advanced
telecommunications and information
services.’’ In particular, after extensive
coordination and engagement with
carriers and their associations, the
Commission modernizes the rate-ofreturn program to support the types of
broadband offerings that consumers
increasingly demand, efficiently target
support to areas that need it the most,
and establish concrete deployment
obligations to ensure demonstrable
progress in connecting unserved
consumers. This will provide the
certainty and stability that carriers seek
in order to invest for the future in the
years to come. The Commission
welcomes ongoing input and
partnership as the Commission moves
forward to implementing these reforms.
2. Rate-of-return carriers play a vital
role in the high-cost universal service
program. Many of them have made great
strides in deploying 21st century
networks in their service territories, in
spite of the technological and
marketplace challenges to serving some
of the most rural and remote areas of the
country. At the same time, millions of
rural Americans remain unserved. In
2011, the Commission unanimously
concluded that extending broadband
service to those communities that
lacked any service was one of core
objectives of reform. At that time, it
identified a rural-rural divide, observing
that ‘‘some parts of rural America are
connected to state-of-the art broadband,
while other parts of rural America have
no broadband access.’’ The Commission
focuses now on the rural divide that
exists within areas served by rate-ofreturn carriers. According to December
2014 Form 477 data, an estimated 20
percent of the housing units in areas
served by rate-of-return carriers lack
access to 10 Mbps downstream/1 Mbps
upstream (10/1 Mbps) terrestrial fixed
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broadband service. It is time to close the
gap, and take action to bring service to
the consumers served by rate-of-return
carriers that lack access to broadband.
The Commission needs to modernize
comprehensively the rate-of-return
universal service program in order to
benefit rural consumers throughout the
country.
3. For years, the Commission has
worked with active engagement from a
wide range of interested stakeholders to
develop new rules to support
broadband-capable networks. One
shortcoming of the current high-cost
rules identified by rate-of-return carriers
is that support is not provided if
consumers choose to drop voice service,
often referred to as ‘‘stand-alone
broadband’’ or ‘‘broadband-only’’ lines.
In the April 2014 Connect America
FNPRM, 79 FR 39196, July 9, 2014, the
Commission unanimously articulated
four general principles for reform to
address this problem, indicating that
new rules should provide support
within the established budget for areas
served by rate-of-return carriers;
distribute support equitably and
efficiently, so that all rate-of-return
carriers have the opportunity to extend
broadband service where it is costeffective to do so; support broadbandcapable networks in a manner that is
forward looking; and ensure no doublerecovery of costs. The package of
reforms outlined below solve the standalone broadband issue and update the
rate-of-return program consistent with
those principles. The Commission also
takes important steps to act on the
recommendation of the Governmental
Accountability Office to ensure greater
accountability and transparency in the
high-cost program.
4. The Report and Order establishes a
new forward-looking, efficient
mechanism for the distribution of
support in rate-of-return areas.
Specifically, the Commission adopts a
voluntary path under which rate-ofreturn carriers may elect model-based
support for a term of 10 years in
exchange for meeting defined build-out
obligations. The Commission
emphasizes the voluntary nature of this
mechanism; no carrier will be required
to take model-based support. This
action will advance the Commission’s
longstanding objective of adopting
fiscally responsible, accountable and
incentive-based policies to replace
outdated rules and programs. The cost
model, which has proven successful in
distributing support for price cap
carriers, has been adjusted in multiple
ways over more than a year to take into
account the circumstances of rate-ofreturn carriers. The Commission makes
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all necessary decisions to finalize the
Alternative Connect America Cost
Model (A–CAM) and direct the Wireline
Competition Bureau (Bureau) to publish
support amounts for this new
component of the Connect America
Fund (CAF ACAM) and associated
deployment obligations for potential
consideration by rate-of-return carriers.
The Commission will make available up
to an additional $150 million annually
from existing high-cost reserves to
facilitate this voluntary path to the
model over the next decade. This
approach will spur additional
broadband deployment in unserved
areas, while preserving additional
funding in the high-cost account for
other high-cost reforms.
5. The Commission also makes
technical corrections to modernize our
existing interstate common line support
(ICLS) rules to provide support in
situations where the customer no longer
subscribes to traditional regulated local
exchange voice service, i.e. stand-alone
broadband. Going forward, this
reformed mechanism will be known as
Connect America Fund Broadband Loop
Support (CAF BLS). This simple,
forward-looking change to the existing
mechanism will provide support for
broadband-capable loops in an equitable
and stable manner, regardless of
whether the customer chooses to
purchase traditional voice service, a
bundle of voice and broadband, or only
broadband. This will create incentives
for carriers to deploy modern networks
and encourage adoption of broadband.
The Commission expects this approach
will provide carriers, including those
that no longer receive high cost loop
support (HCLS), with appropriate
support going forward to invest in
broadband networks, while not
disrupting past investment decisions.
6. One of the core principles of reform
since 2011 has been to ensure that
support is provided in the most efficient
manner possible, recognizing that
ultimately American consumers and
businesses pay for the universal service
fund (USF). The Commission continues
to move forward with our efforts to
ensure that companies do not receive
more support than is necessary and that
rate of return carriers have sufficient
incentive to be prudent and efficient in
their expenditures, and in particular
operating expenses. Therefore, the
Commission adopts a method to limit
operating costs eligible for support
under rate-of-return mechanisms, based
on a proposal submitted by the carriers.
The Commission also adopts measures
that will limit the extent to which USF
support is used to support capital
investment by those rate-of-return
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carriers that are above the national
average in broadband deployment in
order to help target support to those
areas with less broadband deployment.
Lastly, in order to ensure disbursed
high-cost support stays within the
established budget for rate-of-return
carriers, building on proposals in the
record, the Commission adopts a selfeffectuating mechanism to control total
support distributed pursuant to the
HCLS and CAF–BLS mechanisms. The
Commission recognizes that many
carriers are eager to upgrade their
existing broadband networks to provide
service that exceeds the minimum
standards that the Commission has
established for recipients of high-cost
support. But first, the Commission must
ensure that our baseline service is truly
universal. Each dollar spent on
upgrading networks that already are
capable of delivering 10/1 Mbps service
is a dollar not available to extend
service to those consumers that lack
such service. Taken together, the
Commission anticipates that these
controls and limitations will encourage
efficient spending by rate-of-return
carriers, thereby enabling universal
service support to be more effectively
targeted to support investment in
broadband-capable facilities in areas
that remain unserved.
7. One of the core tenets of reform for
the Commission in 2011 was to ‘‘require
accountability from companies
receiving support to ensure that public
investments are used wisely to deliver
intended results.’’ The Commission
stated its expectation that rate-of-return
carriers would deploy scalable
broadband in their communities, but it
declined at that time to adopt specific
build-out milestones for rate-of-return
carriers. Instead, it concluded that it
would allow carriers to extend service
upon reasonable request. Since that
time, rate-of-return carriers have
continued to extend service, with a 45
percent increase in availability of 10/1
Mbps service between 2012 and 2014.
To build on that progress, the
Commission now adopts specific
broadband deployment obligations for
all rate-of-return carriers, and not just
for those that elect the voluntary path to
the model. The Commission adopts
deployment obligations for all rate-ofreturn carriers that can be measured and
monitored, while tailoring those
obligations to the unique circumstances
of individual carriers. Those obligations
will be individually sized for each
carrier not electing model support,
based on the extent to which it has
already deployed broadband and its
forecasted CAF BLS, taking into account
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the relative amount of depreciated plant
and the density characteristics of
individual carriers.
8. Another core tenet of reform
adopted by the Commission in 2011,
and unanimously reaffirmed in 2014,
was to target support to areas that the
market will not serve absent subsidy. To
direct universal service support to those
areas where it is most needed, the
Commission adopts a rule prohibiting
rate-of-return carriers from receiving
CAF–BLS support in those census
blocks that are served by a qualifying
unsubsidized competitor. The
Commission adopts a robust challenge
process to determine which areas are in
fact served by a qualifying unsubsidized
competitor. The Commission does not
expect the challenge process to be
completed before the end of 2016, with
support adjustments occurring no
earlier than 2017. Carriers may elect one
of several options for disaggregating
support for those areas found to be
competitive. Any support reductions
resulting from implementation of this
rule will be more effectively targeted to
support existing and new broadband
infrastructure in areas lacking a
competitor.
9. Finally, the Commission takes
action to modify our existing reporting
requirements in light of lessons learned
from their implementation. The
Commission revises eligible
telecommunications carriers’ (ETC)
annual reporting requirements to better
align those requirements with our
statutory and regulatory objectives. The
Commission concludes that the public
interest will be served by eliminating
the requirement to file a narrative
update to the five-year plan. Instead, the
Commission adopts narrowly tailored
reporting requirements regarding the
location of new deployment offering
service at various speeds, which will
better enable the Commission to
determine on an annual basis how highcost support is being used to ‘‘improve
broadband availability, service quality,
and capacity at the smallest geographic
area possible.’’
10. In the Order and Order on
Reconsideration, as part of our
modernization of the rules governing
rate-of-return carriers, the Commission
represcribes the currently authorized
rate of return from 11.25 percent to 9.75
percent. The rate of return is a key input
in a rate-of-return incumbent local
exchange carrier (LEC) revenue
requirement calculation, which is the
basis for both its common line and
special access rates, and high-cost
support as applicable. The current 11.25
percent rate of return is no longer
consistent with the Act and today’s
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financial conditions. Relying primarily
on the methodology and data contained
in a Bureau Staff Report—with some
minor corrections and adjustments—the
Commission identifies a more robust
zone of reasonableness and adopts a
new rate of return at the upper end of
this range. This reform will be phased
in over six years. This change not only
will improve the efficiency of the highcost program, but also will lower prices
for rate-of-return customers in rural
areas.
11. The actions the Commission takes
today, combined with the rate-of-return
reforms undertaken in the past two
years, will allow us to continue to
advance the goal of ensuring
deployment of advanced
telecommunications and information
services networks throughout ‘‘all
regions of the nation.’’ Importantly, they
build on proposals from and
collaboration with the carriers and their
associations. Through the coordinated
reforms the Commission takes today,
they will provide rate-of-return carriers
with equitable and sustainable support
for investment in the deployment and
operation of 21st century broadband
networks throughout the country,
providing stability for the future.
Achieving universal access to
broadband will not occur overnight, but
today marks another step on the path
toward that goal.
II. Report and Order
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A. Voluntary Path to the Model
1. Discussion
12. In this section, the Commission
adopts a voluntary path for rate-ofreturn carriers to elect to receive modelbased support in exchange for deploying
broadband-capable networks to a predetermined number of eligible locations.
By creating a voluntary pathway to
model-based support, the Commission
will spur new broadband deployment in
rural areas, which will help close the
digital divide among rate-of-return
carriers. As noted above, there is a wide
disparity among rate-of-return study
areas regarding the extent of coverage
meeting the Commission’s minimum
standard of 10/1 Mbps service: Based on
December 2014 FCC Form 477 data, an
estimated 20 percent of housing units in
census blocks served by rate-of-return
carriers lack access to 10/1 Mbps
terrestrial fixed broadband service,
while other rate-of-return carriers have
deployed 10/1 Mbps to nearly all of
their study area. The option of receiving
model-based support will provide the
opportunity for carriers that have made
less progress in their broadband
deployment than other rate-of-return
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carriers to ‘‘catch up.’’ By creating
defined performance and deployment
obligations for specific and predictable
support amounts, the Commission is
completing the framework envisioned
by the Commission in the 2011 USF/ICC
Transformation Order, 76 FR 73830,
November 29, 2011. The Commission
also is taking additional steps to fulfill
the Commission’s longstanding
objective of providing support based on
forward-looking efficient costs. And
finally, the model path may well be a
viable option for high-cost companies
that no longer receive HCLS due to the
past operation of the indexed cap on
HCLS, often referred to as the ‘‘cliff
effect.’’ The Commission took steps to
address this problem in December 2014
by modifying the methodology used to
adjust HCLS to fit within the existing
cap, but that did not restore HCLS to
those companies that previously had
fallen off the cliff.
13. As discussed more fully below,
the election of model-based support
places those carriers in a different
regulatory paradigm. They no longer
will be subject to rate-of-return
regulation for common line offerings,
and they no longer will participate in
the National Exchange Carrier
Association’s (NECA’s) common line
pool. Effectively, the carriers that
choose to take the voluntary path to the
model are electing incentive regulation
for common line offerings.
14. Term of Support. The Commission
adopts a 10-year term for rate-of-return
carriers electing to receive model-based
support. Carriers electing this option
will have the certainty of receiving
specific and predictable monthly
support amounts over the 10 years.
Predictable support will enhance the
ability of these carriers to deploy
broadband throughout the term. In year
eight, the Commission expects they will
conduct a rulemaking to determine how
support will be determined after the end
of the 10-year period. The Commission
expects that prior to the end of the 10year term, the Commission will have
adjusted its minimum broadband
performance standards for all ETCs, and
other changes may well be necessary
then to reflect marketplace realities at
that time.
15. Broadband Speed Obligations. In
December 2014, the Commission
adopted a minimum speed standard of
10/1 Mbps for price-cap and rate-ofreturn carriers receiving high-cost
support. As a result, price cap carriers
accepting model-based support are
required to offer at least 10/1 Mbps
broadband service to the requisite
number of high-cost locations by the
end of a six-year support term. And rate-
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of-return carriers were required to offer
at least 10/1 Mbps broadband service
upon reasonable request. At that time,
the Commission also decided that 10/1
Mbps should not be our end goal for the
10-year term for providers awarded
support through the Connect America
Phase II bidding process.
16. Similarly, here, the Commission
recognizes that their minimum
requirements for rate-of-return carriers
will likely evolve over the next decade.
NTCA argues that a universal service
program premised upon achieving
speeds of 10/1 Mbps risks locking rural
America into lower service levels. The
Commission agrees that our policies
should take into account evolving
standards in the future. At the same
time, the Commission recognizes that it
is difficult to plan network deployment
not knowing the performance
obligations that might apply by the end
of the 10-year term. The Commission
finds that establishing speed and other
performance requirements now for
carriers electing model-based support is
preferable to doing so at some point
mid-way through the 10-year term, as it
will provide more certainty for carriers
electing this voluntary path. Rate-ofreturn carriers that comply with the
performance requirements the
Commission establishes today for the
duration of the 10-year term will be
deemed in compliance even if the
Commission subsequently establishes
different standards that are generally
applicable to the high-cost support
mechanisms before the end of the 10year term.
17. The Commission concludes that
rate-of-return carriers electing model
support will be required to maintain
voice and existing broadband service
and to offer at least 10/1 Mbps to all
locations ‘‘fully funded’’ by the model,
and at least 25/3 Mbps to a certain
percentage of those locations, by the end
of the support term. The Commission
adopts with minor modifications ITTA
and USTelecom’s proposal to require
carriers with a state-level density of
more than ten locations per square mile
to offer at least 25/3 Mbps to at least 75
percent of the fully funded locations in
the state by the end of the 10-year term.
For administrative convenience, the
Commission will determine these
density thresholds based on housing
units, rather than locations in the
model, because other density measures
adopted in this Order will rely on U.S.
Census data for housing units. The
Commission concludes that carriers
with a state-level density of ten or
fewer, but more than five, housing units
per square mile will be required to offer
at least 25/3 Mbps to at least 50 percent
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of the fully funded locations in the state
by the end of the 10-year term, and
carriers with five or fewer housing units
per square mile will be required to offer
at least 25/3 Mbps to at least 25 percent
of the fully funded locations, as
suggested by WTA and other
commenters. The density of each
carrier’s study area or study areas in a
state will be determined using the final
2015 study area boundary data
collection information submitted by
carriers, and the number of locations
will be determined using U.S. Census
data. The Commission directs the
Bureau to publish a list showing the
state-level density for each carrier prior
to issuing the public notice announcing
the final version of the adopted model,
so carriers will know in advance of the
timeframe for electing model-based
support which deployment obligations
will be applicable.
18. In addition, the Commission
establishes defined requirements for
making progress towards extending
broadband to capped locations within
their service areas. Specifically, carriers
electing model support will be required
to offer at least 4/1 Mbps to a defined
number of locations that are not fully
funded (i.e., with a calculated average
cost above the ‘‘funding cap’’). The
Commission adopts a modified version
of ITTA’s proposal, again using housing
units to determine density. The
Commission will require carriers with a
state-level density of more than 10
housing units per square mile to offer at
least 4/1 Mbps to 50 percent of all
capped locations in the state by the end
of the 10-year term. Carriers with a
state-level density of 10 or fewer
housing units per square mile will be
required to offer at least 4/1 Mbps to 25
percent of all capped locations in the
state by the end of the 10-year term The
remaining capped locations will be
subject to the reasonable request
standard, and the Commission will
monitor progress in connecting these
locations as well. The Commission
encourages carriers electing the
voluntary path to the model to identify
any census blocks where they expect
not to extend broadband, so that such
census blocks may be included in an
upcoming auction where parties,
including the current provider, may bid
for support. The Bureau will announce
a date by public notice, no sooner than
60 days after elections are finalized, by
which carriers electing model-support
may identify any such census blocks.
Our goal is to ensure that all consumers
have an opportunity to receive service
within a reasonable timeframe. If
carriers know that support provided
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through the voluntary path to the model
will be insufficient to reach certain parts
of their territories within 10 years,
identifying these territories now, rather
than 10 years from now, will enable the
Commission to find another, more
timely path to bring broadband to
consumers in these areas. Carriers that
provide the Commission notice within
the requisite time would not be required
to provide service upon reasonable
request in the identified areas.
19. Usage and Latency. In the April
2014 Connect America FNPRM, the
Commission proposed to apply the same
usage allowances and latency standards
that the Bureau previously had adopted
for price cap carriers accepting modelbased support to rate-of-return carriers
that are subject to broadband
performance obligations. The
Commission now adopts a usage
threshold for rate-of-return carriers
electing model support that should
ensure that consumers in these areas
have access to an evolving level of
service over the 10-year term: The
Commission requires them to offer a
minimum usage allowance of 150 GB
per month, or a usage allowance that
reflects the average usage of a majority
of consumers, using Measuring
Broadband America data or a similar
data source, whichever is higher. The
first prong of the usage requirement—
the 150 GB usage allowance—is similar
to the approach adopted by the Bureau
for price cap carriers to set an evolving
level of service over the term of support:
The Commission requires them to offer
a usage allowance that meets or exceeds
the usage level of 80 percent of cable or
fiber-based fixed broadband subscribers,
whichever is higher, according to the
most current publicly available
Measuring Broadband America usage
data. According to the Commission’s
2015 Measuring Broadband America
data, 80 percent of cable broadband
subscribers used 156 GB or less per
month. For simplicity, the Commission
adopts a monthly usage allowance of
150 GBs for rate-of-return carriers
electing to receive CAF–ACAM support.
The second prong of the usage
requirement—to provide a usage
allowance that will allow consumers to
use their connections in a way similar
to usage of a majority of consumers
nationwide—ensures that consumers
served by rate-of-return carriers will be
not be offered service that is
significantly different than what is
available in urban areas over the full 10year term. The Commission expects that
carriers accepting model-based support
will have economic incentives
irrespective of these mandates to
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provide consumers with an evolving
array of service offerings, and adopt this
second prong as a regulatory backstop to
ensure that this happens.
20. In addition, the Commission
adopts our proposal to require rate-ofreturn carriers accepting model-based
support to certify that 95 percent or
more of all peak period measurements
of network round-trip latency are at or
below 100 milliseconds. No party
objected to adopting this standard for
public interest obligations for rate-ofreturn carriers. This latency standard
will apply to all locations that are fully
funded. As discussed below, the
Commission recognizes there may be
need for relaxed standards in areas that
are not fully funded, where carriers may
use alternative technologies to meet
their public interest obligations.
21. Deployment Obligations. The
Commission require rate-of-return
carriers accepting the offer of modelbased support to offer at least 10/1 Mbps
broadband service to the number of
locations identified by the model where
the average cost is above the funding
benchmark and below the funding per
location cap, and at least 25/3 Mbps to
a subset of those locations. These are the
locations that are ‘‘fully funded’’ with
model-based support. In contrast to the
approach taken in price cap areas,
where the Commission did not provide
support to locations above an extremely
high-cost threshold, in rate-of-return
areas the Commission will provide
support to all census blocks with
average costs above the funding
benchmark. However, each location
within census blocks where the average
cost exceeds the funding cap will
receive the same amount of support.
This funding for locations above the
funding cap should be sufficient to
preserve existing service and allow
carriers to extend broadband service to
a defined number of the capped
locations, and to the remaining
locations upon reasonable request, using
alternative technologies where
appropriate. If a carrier identifies census
blocks that it will not be able to serve
by the date specified by public notice,
as discussed above, its support will be
reduced to reflect the fewer number of
locations, and it will not be subject to
the reasonable request standard for
those locations if another provider wins
those areas in an auction.
22. The Commission declines to adopt
an approach that would base a
company’s build-out obligations solely
on the extent to which its model-based
support exceeds its legacy support. The
Commission agrees with proponents of
such an approach that the locations to
which a company will be required to
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deploy broadband should be based on
the A–CAM modeled cost
characteristics of each company, but the
Commission finds that our approach is
preferable and more consistent with the
overall framework of providing modelbased support. Like CAM, A–CAM
estimates ‘‘the full average monthly cost
of operating and maintaining an
efficient, modern network,’’ and
includes both capital and operating
costs. Although actual costs may differ
from forward-looking economic costs at
any particular point in time, allowing
monthly recovery of the model’s
levelized cost means, on average, all
carriers will earn an amount that would
allow them to maintain the specified
level of service going forward over the
longer term.
23. The Commission is not persuaded
by the argument that they should tie
broadband deployment obligations only
to the supplemental support in excess of
legacy support and determine the extent
of new broadband deployment
obligations based on modeled capital
costs. Our methodology is based on
modeled capital and operating costs for
each census block and provides the
entire support amount calculated for
areas above the funding benchmark and
below the per-location funding cap; that
is, these locations will be ‘‘fully
funded’’ by the model under our
method.
24. Interim Deployment Milestones.
The Commission adopts evenly spaced
annual interim milestones over the 10year term for rate-of-return carriers
electing model-based support, as
proposed by ITTA, NTCA, USTelecom,
and WTA with a minor modification.
The Commission adopts enforceable
milestones beginning in year four,
whereas the enforceable milestones
proposed by the rural associations
would begin in year five. As shown in
the chart below, the Commission
requires carriers receiving model-based
support to offer to at least 10/1 Mbps
broadband service to 40 percent of the
requisite number of high-cost locations
in a state by the end of the fourth year,
an additional 10 percent in subsequent
years, with 100 percent by the end of
the 10-year term. The Commission does
not set interim milestones for the
deployment of broadband speeds of 25/
3 Mbps; the Commission requires
carriers receiving model-based support
to offer to at least 25/3 Mbps broadband
service carriers to 25 percent or 75
percent of the requisite locations by the
end of the 10-year term, depending
upon the state-level density discussed
above.
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DEPLOYMENT MILESTONES FOR RATE- variety of reasons, which in some
OF-RETURN CARRIERS RECEIVING circumstances would make it
impossible for a carrier to meet its
MODEL-BASED SUPPORT
Percent
Year
Year
Year
Year
Year
Year
Year
Year
Year
Year
1 (2017) .......................
2 (2018) .......................
3 (2019) .......................
4 (2020) .......................
5 (2021) .......................
6 (2022) .......................
7 (2023) .......................
8 (2024) .......................
9 (2025) .......................
10 (2026) .....................
**
**
**
40
50
60
70
80
90
100
25. The Commission also concludes
that rate-of-return carriers receiving
model-based support should have some
flexibility in their deployment
obligations to address unforeseeable
challenges to meeting these obligations.
When the Commission adopted
flexibility in deployment obligations for
price cap carriers accepting modelbased support, they recognized that the
‘‘facts on the ground’’ when they are
deploying facilities may necessitate
some flexibility regarding the number of
required locations. Because rate-ofreturn carriers electing model-based
support may face similar circumstances,
the Commission finds that providing the
same flexibility and allowing
deployment to less than 100 percent of
the requisite locations is equally
appropriate for these carriers as well.
The Commission therefore will permit
them to deploy to 95 percent of the
required number of locations by the end
of the 10-year term. To the degree an
electing carrier deploys to less than 100
percent of the requisite locations, the
remaining percentage of locations
would be subject to the deployment
obligations for the carrier’s capped
locations. The Commission does not
require rate-of-return carriers to refund
support if they deploy to at least 95%
of the required locations, but not 100%,
because they will use that support to
maintain service and deploy new
broadband to unserved customers under
the standard for capped locations
adopted above. And, as noted above, to
the extent the electing carrier does not
foresee being able to serve some fraction
of the remaining five percent of
locations in any way, not even with
alternative technologies, the
Commission encourages them to
identify such census blocks for
inclusion in an upcoming auction.
26. The Commission also notes that
the customer location data utilized in
the model reflect location data at a
particular point in time. The precise
number of locations in some funded
census blocks is likely to change for a
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deployment obligations. Carriers that
discover there is a widely divergent
number of locations in their funded
census blocks as compared to the model
should have the opportunity to seek an
adjustment to modify the deployment
obligations. Consistent with our action
for Phase II in price cap territories, the
Commission delegates authority to the
Bureau to address these discrepancies
by adjusting the number of funded
locations downward and reducing
associated funding levels.
27. The Commission is not persuaded
that they should decline to impose
intermediate deployment milestones for
small rate-of-return carriers serving
10,000 or fewer locations in a state, as
proposed by WTA. WTA argues that a
5,000 line carrier that is 60 percent built
out and needs to extend broadband to
2,000 more locations cannot
economically build out to 200 new
locations each year, and that the most
efficient way to proceed is to construct
all 2,000 locations during one or two
construction seasons. The deployment
milestones the Commission adopts do
not require evenly spaced new
deployment each year, as WTA appears
to assume. For instance, the carrier
could fully complete its deployment
obligation in years 5 and 6, if it found
it more efficient to do the whole project
over two construction seasons. The
Commission would be concerned if
such a hypothetical carrier were to wait
until years 8 and 9 to begin extending
broadband to its unserved customers;
they would expect to see some progress
toward deploying new broadband after
receiving eight years of model-based
support. Moreover, carriers that feel
uncomfortable with intermediate
deadlines may prefer to stay on legacy
mechanisms.
28. A–CAM. The Commission makes
the following decisions regarding the
final version A–CAM that will be used
to calculate support for carriers that
voluntarily elect to receive model-based
support. The Commission adopts the
model platform and current input
values in version 2.1 for purposes of
calculating the cost of serving census
blocks in rate-of-return areas, with a
modification regarding updates to the
broadband coverage data. Consistent
with the rate represcription decision
below, the Commission adopts an input
value of 9.75 percent for the cost of
money in the model for rate-of-return
carriers, which is higher than the input
value used for price cap carriers.
29. The Commission also makes all
necessary decisions to calculate support
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amounts for rate-of-return carriers
electing to receive model-based support.
The model will utilize a $200 perlocation funding cap to provide support
for all locations above a funding
benchmark of $52.50, which is subject
to reduction if necessary to meet
demand for model-based support. In
addition, the Commission will exclude
from support calculations those census
blocks where the incumbent or any
affiliated entity is providing 10/1 Mbps
or better broadband using either FTTP
or cable technologies. The Commission
concludes that they will update the
broadband coverage for unsubsidized
competitors in the model to reflect the
recently released June 2015 FCC Form
477 data, which will be subject to a
streamlined challenge process. The
Commission directs the Bureau to take
all necessary steps to release the
adopted version of the model for
purposes calculating support amounts
for rate-of-return carriers electing to
receive model support.
30. As noted above, over the past year,
the Bureau has been continually
working on refining the model so that it
would be more suitable for use in rateof-return areas. During this time, rate-ofreturn carriers and their associations
have actively participated in this
process, providing input on ways
further to improve the model. For
instance, the Bureau received and
included certain data from nearly half of
the approximately 1,100 study areas to
better reflect their costs. As a result of
this feedback and the resulting
adjustments detailed below, the
Commission believes that the final
version of A–CAM will sufficiently
estimate the costs of serving rate-ofreturn areas and that further
adjustments are not necessary.
31. The first version of A–CAM,
released in December 2014, was
fundamentally the same as CAM 4.2 to
provide a baseline for subsequent
modifications. Although the cost model
was originally developed for use in
price cap areas, it always has included
a size adjustment factor—based on rateof-return company data—to scale
operating expenses for ‘‘small, x-small,
and xx-small’’ companies, and has
reflected cost differences based on
density. Thus, even though the model
estimates the forward-looking costs of
an efficient provider, it takes into
account the higher operating expenses
of small rate-of-return carriers operating
in rural areas.
32. The Commission recognized the
importance of accurate study area
boundaries in using a model to calculate
support for rate-of-return carriers.
Whereas CAM used a commercial data
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source, GeoResults, to determine study
area boundaries for the price cap
carriers, the Commission directed the
Bureau to incorporate the results of the
Bureau’s study area boundary data
collection into A–CAM. From November
2014 to April 2015, the Bureau
undertook a four-step process for
adapting the study area boundary data
for use in the model. The first step
determined study area boundaries for
purposes of the A–CAM by addressing
overlaps that remained after the Bureau
provided an opportunity to resolve
overlaps and voids in the data originally
submitted. The second step aligned the
exchanges submitted by rate-of-return
carriers (or state commissions on behalf
of the incumbent) in the study area data
collection with the study area
boundaries to be used in the model and
modified the exchanges to match the
edges of the study area boundary where
the submitted boundary of the
exchanges differed from the modified
study area boundary. The third step
determined the potential locations to be
used in the model for the placement of
the central office (‘‘Node0’’ in A–CAM)
within each exchange. The final step
ensured that each exchange was
associated with a single Node0 location.
In April 2015, the Bureau posted on the
Commission’s Web site the A–CAM map
based on the study area boundary and
exchange data that had been certified by
the carriers and submitted to the
Bureau.
33. Proposed corrections to study area
and service area boundaries and Node0
locations were submitted by parties to
the proceeding over the next several
months. Recognizing that it would take
several months to evaluate and
incorporate study area boundary and
Node0 locations submitted by interested
parties in A–CAM, the Bureau
continued to work on updating the
model in other ways. In addition, with
subsequent versions of the model the
Bureau released illustrative results so
that interested parties could better
understand and evaluate how different
assumptions used in calculating support
impact the potential support calculated
for a particular study area.
34. A–CAM contains two modules: A
cost module that calculates costs for all
areas of the country, and a support
module, which calculates the support
for each area based on those costs. The
support module allows users to ‘‘filter’’
the cost data to focus on specific
geographic areas, such as census blocks
that are not served by an unsubsidized
competitor. Support amounts depend on
the funding benchmark that determines
which areas are funded: Areas with an
average cost below the funding
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benchmark are not funded because it is
assumed that end user revenues are
sufficient to cover the cost of serving
such areas. Support amounts also
depend on the mechanism utilized to
keep total support calculated under the
model within a given budget.
35. In March 2015, the Bureau
released A–CAM version 1.0.1, which
incorporated changes to broadband
coverage using a minimum speed
standard of 10/1 Mbps to determine the
presence of a cable or fixed wireless
competitor. The Bureau also released
illustrative results under seven
scenarios illustrating how different
assumptions used in calculating support
impact the potential support calculated
for a particular study area. Five of the
seven scenarios used a funding
benchmark of $52.50, the same
benchmark used to calculate support for
price cap carriers. Two of these
scenarios used an extremely high-cost
threshold as the mechanism to keep
total calculated support with the total
budget for rate-of-return carriers. A third
scenario utilized a different approach to
keep total calculated support within the
total budget for rate-of-return carriers: A
per-location funding cap. Two scenarios
used a $60 funding benchmark, which
was suggested by parties to the
proceeding as a mechanism to keep total
support within the budget. This
approach presumed that areas with an
average cost per location less than $60
are competitively served by cable
operators and therefore should be
ineligible for support, which reduced
support evenly across all locations in
order to meet the budget. These two
scenarios and two additional scenarios
all exceeded the rate-of-return budget,
however, but were published by the
Bureau so that parties could consider
alternative measures to maintain overall
support within the budget, such as a
dollar amount reduction in support per
location, a percentage reduction in
support per location, or a cap on
support per location.
36. In May 2015, the Bureau
published a revised A–CAM study area
boundary map that updated the data
used to identify a small number of
Node0 locations, which improved the
default locations if carriers did not
propose any corrections, and provided
additional time for carriers to submit
Node0 locations. In July 2015, the
Bureau announced upcoming
modifications to A–CAM, including a
code change to enable the use of
company-specific plant mix (aerial,
buried, and conduit) input values,
instead of the state-wide default values,
and invited parties to submit plant mix
values for individual study areas. The
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plant mix values (aerial, buried, and
conduit) are broken out separately for
urban, suburban, and rural areas, for
feeder, distribution, and interoffice
facilities. In response to parties filing
study area specific plant mix values, the
Bureau posted a table showing the
classification of census block groups as
rural, suburban, and urban used in A–
CAM.
37. On August 31, 2015, the Bureau
released A–CAM version 1.1, which
updated the model to reflect FCC Form
477 broadband deployment data as of
December 31, 2014. The prior version of
A–CAM (v1.0.1) used SBI/NBM data as
of June 30, 2013. FCC Form 477 data
offers several advantages over the SBI/
NBM data. The Form 477 data collection
is mandatory, and Form 477 filers must
certify to the accuracy of their data. The
Bureau also released illustrative results
produced using A–CAM v1.1 under
three scenarios that illustrate how
different per-location funding caps used
in calculating support impact the
potential support calculated for each
rate-of-return study area in the country.
38. On October 8, 2015, the Bureau
released A–CAM version 2.0, which
incorporated the results of the Bureau’s
study area boundary data collection and
further updated the model for use in
rate-of-return areas. After months of
review by the Bureau, A–CAM v2.0
incorporated updated exterior study
area boundaries, interior service area
boundaries, and/or Node0 locations for
approximately 400 study areas. The
network topology was updated to reflect
these changes, and to address the fact
that American Samoa and some coastal
islands are served by a rate-of-return
carriers. The middle mile network
topology was updated to include an
undersea route for American Samoa and
submarine routes for service areas not
connected by roads within the
continental United States. To reflect the
fact that rate-of-return carriers may have
higher middle mile costs, A–CAM v2.0
added two connections from each
regional access tandem ring to an
Internet access point to account for the
cost of connecting to the public Internet.
39. Previous versions of A–CAM
included five size categories for
investments related to land and
buildings associated with central
offices, and the smallest size central
office was for those with fewer than
1,000 lines. Because some service areas
in A–CAM have fewer than 250
locations, the updated capital
expenditures input table created a new
size category for central offices serving
fewer than 250 locations, with lower
land and building investment for these
very small areas than exchanges with
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250 to 1,000 locations. A–CAM v2.0 also
was modified to incorporate study-area
specific plant mix values, but because
the Bureau was still reviewing these
carrier submissions at that time, they
were not reflected in this version of the
model.
40. The Bureau also released A–CAM
version 2.0 results that illustrate how
three different per-location funding caps
impact potential support. Although
illustrative results for previous versions
of A–CAM showed support using a perlocation funding cap, A–CAM users
could only approximate the Bureau’s
estimates. In A–CAM v2.0 and
subsequent versions of the model,
support can be calculated and reported
using either an extremely high-cost
threshold or a per-location funding cap.
Support in A–CAM v2.0 is calculated
using the average cost at the census
block level for each study area (i.e.,
costs are averaged at the census block
level), meaning all locations in a census
block within a carrier’s study area are
either funded or not funded. This
version of the model calculates cost at
the sub-block level only in cases where
a census block crosses a study area
boundary.
41. On December 17, 2015, the Bureau
released A–CAM v2.1, which
incorporated study area-specific plant
mix values submitted by rate-of-return
carriers, updated broadband coverage
data to address issues raised by rate-ofreturn commenters regarding reported
competitive coverage, and provided an
alternative coverage option that
excludes from support calculations
census blocks served with either FTTP
or cable, as requested by one industry
association. The Bureau also released
results that illustrate how the two
different coverage assumptions used in
calculating support impact the potential
support calculated for a particular study
area; both sets of results are calculated
using a $200 per-location funding cap.
On February 17, 2016, the Bureau
released additional illustrative results
utilizing input values reflecting a 9.75
percent cost of money. Raising the cost
of money increased costs for all study
areas.
42. As directed, the Bureau
incorporated the study area data and
made other appropriate adjustments to
A–CAM over the past year. The
Commission finds that these
modifications are sufficient for purposes
of calculating support amounts for rateof-return carriers electing to receive
model support. A forward-looking cost
model is designed to capture the costs
of an efficient provider and does not
generally use company-specific inputs
values. As noted above, however, the A–
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CAM model takes into account the
higher operating expenses of small, rateof-return carriers operating in rural
areas with a company size adjustment
factor for operating expenses and cost
differences based on density. The most
significant modification is the
incorporation of the study area
boundary data. Although the
commercial data set was an appropriate
source for price cap carriers, the
Commission recognizes that they serve
significantly larger study areas than any
of the more than 1,100 rate-of-return
study areas. Because rate-of-return
carriers serve smaller areas, it also was
appropriate to provide for companyspecific plant mix values if carriers
found that the state-specific default
values did not reflect their outside
plant. The Commission notes that the
average calculated A–CAM loop cost is
greater than the largest embedded loop
cost reported to NECA over the last
fifteen years for the more than 500 study
areas that submitted plant mix values.
43. As discussed in detail below, as
part of our modernization of the
framework for rate-of-return carriers for
both high-cost support and special
access ratemaking, the Commission
represcribes the currently authorized
rate of return from 11.25 percent to 9.75
percent. The Commission primarily
relies on the methodology and data
contained in the Wireline Competition
Bureau’s Staff Report, with some minor
corrections and adjustments, identifies a
more robust zone of reasonableness
between 7.12 percent and 9.75 percent,
and adopts a new rate of return at the
upper end of this range. A–CAM
currently uses an input value for the
cost of money of 8.5 percent. The
Bureau relied on the same methodology
when it adopted that value for use in
CAM, but focused solely on data from
price cap carriers to select the input
value for the price-cap carrier model.
Consistent with the Commission’s
decision below regarding the authorized
rate of return for rate-of-return carriers,
now adopt an input value of 9.75
percent for the cost of money in A–
CAM, thereby reflecting our
consideration of the circumstances
affecting rate-of-return carriers.
44. The Commission directs the
Bureau to calculate support using a
$200 per-location funding cap, rather
than an extremely high-cost threshold.
The Commission concludes that this
methodology is preferable because it
provides some support to all locations
above the funding threshold. Even
though the locations at or above the
funding cap are not ‘‘fully funded’’ with
model support, carriers will receive a
significant amount of funding—
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specifically, $200 per month for each of
the capped locations—which will
permit them to maintain existing voice
service and expand broadband in these
highest-cost areas to a defined number
of locations depending on density, or
upon reasonable request, using
alternative, less costly technologies
where appropriate. This will allow
significantly more high-cost locations to
be served than if the Commission were
to use a lower funding cap. The
Commission notes that a $200 perlocation funding cap is significantly
higher than what was adopted for
purposes of the offer of support to price
cap carriers: Price cap carriers only
receive a maximum amount of $146.10
in support per location ($198.60 minus
the $52.50 funding benchmark), while
the approach the Commission adopts for
rate-of-return areas will provide full
support for locations where the average
cost is $252.50 per location.
45. The Commission adopts a funding
benchmark of $52.50, which is the same
benchmark the Bureau adopted in its
final version of CAM for purposes of
making the offer of model-based support
to price cap carriers. Based on the
extensive record in the Connect
America Phase II proceeding, the
Bureau adopted a methodology for
establishing a funding benchmark based
on reasonable end user revenues. The
Bureau adopted a blended average
revenue per user (ARPU) of $75 that
reflected revenues a carrier could
reasonably expect to receive from each
subscriber for providing voice,
broadband, or a combination of those
services. At the time, the speed standard
was 4/1 Mbps, and the Bureau relied on
information in the record regarding
service offerings at or close to that
speed. Now, the carriers electing modelbased support will be required to offer
10/1 Mbps service, and 25/3 Mbps
service to some subset of their
customers, and therefore may earn
higher revenues from their broadband
services. The Bureau also adopted an
expected subscription rate of 70 percent
for purposes of estimating the amount of
revenues a carrier may reasonably
recover from end-users, and by
extension, the funding benchmark.
Applying an assumed ARPU of $75 and
the 70 percent expected subscription
rate, the funding benchmark is $52.50
per location. The record before the
Bureau for CAM contained varying
estimates and the Bureau acknowledged
that forecasting potential ARPU for
recipients of model-based support and
the expected subscription rate
necessarily requires making a number of
predictive judgments. Nothing in the
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record before us now persuades us that
consumers in rate-of-return carriers are
less likely to subscribe to broadband
where it is available than consumers
served by price cap carriers.
46. The Commission is not persuaded
that they should establish a different
funding benchmark for purposes of
making the offer of model-based support
to rate-of-return carriers. During the A–
CAM development process, the Bureau
has released 15 versions of illustrative
results and all but two used a funding
benchmark of $52.50. Two versions
used a $60 benchmark because
commenters had suggested that a higher
benchmark may be an alternative
method for excluding areas served by an
unsubsidized competitor. These and
other commenters now support using a
per-location funding cap rather than a
higher benchmark.
47. One commenter argues that a
subscription rate of 70 percent is too
high and that the Commission should
use 50 percent, because the adoption
rate for the 10 Mbps speed tier in rural
areas was only 47 percent in the 2015
Broadband Progress Report. Given the
increasing demand for higher broadband
speeds, the Commission does not find
that a 47 percent adoption rate is a
realistic prediction of adoption rates in
rural areas over the 10-year term. One
reason that subscription rates are lower,
on average, in rural areas today is the
fact that 10/1 Mbps broadband service is
not available to the same extent as urban
areas. As broadband service is deployed
more widely in high-cost areas with
assistance from the federal high-cost
program, as well as additional funding
from state programs, the Commission
would expect subscription rates in rural
areas to become more similar to rates in
urban areas. In addition, carriers will be
required to provide broadband to some
locations receiving capped funding, so
the Commission expects carriers will be
receiving broadband revenue from these
customers, as well as any voice
revenues. A 50 percent subscription rate
would result in a funding benchmark of
only $35, a much lower per-location
funding cap, and would reduce the
amount of support going to the highestcost areas given that the amount of
money across carriers electing the
model will be finite. The Commission
declines to adopt a measure that would
have the effect of skewing support so
drastically to the companies that are,
relatively speaking, lower cost
compared to other rate-of-return
carriers.
48. The Commission also concludes
that it should prioritize model support
to those areas that currently are
unserved and direct the Bureau to
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exclude from the support calculations
those census blocks where the
incumbent rate-of-return carrier (or its
affiliate) is offering voice and broadband
service that meets the Commission’s
minimum standards for the high-cost
program using FTTP or cable
technology. For purposes of
implementing this directive, the Bureau
shall utilize June 2015 FCC Form 477
data that has been submitted and
certified to the Commission prior to the
date of release of this order; carriers may
not resubmit their previously filed data
to reduce their reported FTTP or cable
coverage. While the Commission
recognizes that these deployed census
blocks require ongoing funding both to
maintain existing service and in some
cases to repay loans incurred to
complete network deployments, it
concludes that it is appropriate to make
this adjustment to the model in order to
advance our policy objective of
advancing broadband deployment to
unserved customers. Our decision to
exclude from support calculations this
subset of census blocks in no way
indicates a belief that once networks are
deployed, they no longer require
support; rather, the Commission
assumes that the carriers that have
already deployed FTTP or cable
broadband have done so within the
existing legacy support framework.
They will continue to receive HCLS and
support through the reformed ICLS
mechanism, and thus there is no need
for a new mechanism to support their
existing deployment. Those carriers are
not required to elect model-based
support and therefore this decision does
not drastically reduce their support, as
some allege.
49. When the Commission directed
the Bureau ‘‘to undertake further work
to update the Connect America Cost
Model to incorporate the study area
boundary data, and such other
adjustments as may be appropriate,’’ the
Commission did not envision revisiting
the fundamental decisions made by the
Bureau in developing CAM, such as the
decision to develop a FTTP model.
Adopting a significantly different
model, such as a digital subscriber line
(DSL) model for use in rate-of-return
areas, would have significantly delayed
this process and would have been
backwards looking. The Commission
concludes the changes adopted above
should provide sufficient support for
carriers interested in the model and
account for most of the unique
circumstances of different rate-of-return
carriers. Therefore, the Commission
declines to make further changes to data
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sources or model design as requested by
some commenters.
50. Finally, the Commission rejects
arguments in the record that the model
should not be adopted because it
produces support amounts that vary, in
some cases significantly, from the
amounts that particular carriers are
currently receiving under the legacy
mechanisms or that vary from actual
costs of fiber-to-the-home construction.
Some commenters cite a study
conducted by Vantage Point comparing
A–CAM results to FTTP engineering
estimates and actual outside plant costs
from 144 wire-center-wide projects to
support their arguments that the model
is not accurate. The Commission does
not find that the Vantage Point analysis
of variability between model results and
its proprietary engineering data to be a
useful comparison for several reasons.
In particular, the Commission is not
persuaded by the case study, node-bynode comparisons because the
engineering data reflect a different
network architecture than the network
modeled in A–CAM. A–CAM assumes a
Gigabit-Capable Passive Optical
Network (GPON), with splitters in the
field. Vantage Point’s examples place
the splitters in the central office, with
one dedicated fiber for each end-user
location. Instead of sharing one highcapacity fiber for up to 32 locations for
some distance from the central office,
the Vantage Point approach includes the
cost for up to 32 fibers along the entire
distance covered by outside plant. The
Commission recognizes that placing
splitters in the central office can lead to
higher utilization and lower cost per
location for splitters; however, they
generally expect the higher cost for fiber
materials and installation (including, for
example, much greater splicing
expense) greatly to outweigh any
savings gained from better splitter
utilization. Vantage Point did not
provide enough information in its
filings to quantify the impact of
dedicated fibers in the feeder plant. In
addition, Vantage Point’s claim that the
model shows consistent deviation based
on cost per subscriber is misleading
because Vantage Point uses cost per
actual subscriber, whereas A–CAM uses
cost per location passed. Even if there
were no variation in cost, areas that
would be more expensive on a persubscriber basis would have lower A–
CAM calculated costs unless the take
rate were 100 percent.
51. As discussed above, A–CAM
estimates the average monthly forwardlooking economic cost of operating and
maintaining an efficient, modern
network, and is not intended to
replicate the actual costs of a specific
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company at any particular point in time.
Although one might expect forwardlooking costs to capture greater
efficiencies and, therefore, be lower
than embedded costs, in fact, the
forward-looking loop costs from A–
CAM for most study areas are higher
than embedded loop costs reported by
rate-of-return carriers to NECA. In many
cases, model-based support is less than
legacy support, not because A–CAM
calculates lower costs for a particular
study area, but because the model
excludes from support calculations
those census blocks that are presumed
to be served by an unsubsidized
competitor offering voice and 10/1
Mbps service. This is consistent with
the Commission’s policy adopted in the
2011 USF/ICC Transformation Order to
condition Connect America Fund
broadband obligations for fixed
broadband on not spending the funds in
areas already served by an unsubsidized
a competitor. In other cases, modelbased support is more than legacy
support, not because the model
overestimates the cost of serving an
area, but because some companies
serving high-cost areas previously have
‘‘fallen off the cliff’’ and lost HCLS due
to the past operation of the indexed cap.
Other companies may have
underinvested in their networks.
Providing model-based support to these
carriers would not provide a ‘‘windfall,’’
as some have suggested, but rather
would further the Commission’s policy
goal of providing appropriate incentives
to extend broadband to unserved and
underserved areas.
52. Budget. Given the benefits and
certainty of the model, the Commission
believes it is appropriate to use
additional high-cost funding from the
high-cost reserve account to encourage
companies to elect model support. The
Commission notes that the Commission
previously instructed USAC that if
contributions to support the high-cost
support mechanisms exceed high-cost
demand, excess contributions were to be
credited to a Connect America Fund
reserve account. USF/ICC
Transformation Order. The Commission
concludes there is no need to maintain
a separate reserve account. To simplify
the accounting treatment of high-cost
reforms going forward, the Commission
now directs USAC to eliminate the
Connect America Fund reserve account
and transfer the funds to the high-cost
account. Going forward, USAC shall
credit excess contributions to support
the high-cost mechanism to the highcost account and shall use funds from
the high-cost account to reduce highcost demand to $1.125 billion in any
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quarter that would otherwise exceed
$1.125 billion. USF/ICC Transformation
Order, 26 FCC Rcd at 17847, para. 562.
The Commission therefore adopts a
budget of up to an additional $150
million annually, or up to $1.5 billion
over the 10-year term, utilizing existing
high-cost funds to facilitate the
voluntary path to the model. By making
this funding available to those carriers
that are willing to meet concrete and
defined broadband deployment
obligations, including those who will
see reductions in their support, the
Commission will advance our objective
of extending broadband to currently
unserved consumers.
53. At this point it is difficult to
predict the extent to which companies
may be interested in the voluntary path
to the model and what the overall
budgetary impact might be of such
carrier elections. Even so, the
Commission predicts that such
additional funding will be sufficient to
cover significant deployment and
support elections to the model,
including for those who will receive
transition payments for a limited time in
addition to model-based support. The
Commission recognizes that carriers
may have a variety of reasons for
electing model support. In general,
those carriers for whom A–CAM
produces a significant increase in
support over legacy support are more
likely to elect model support than those
who see little increase or a decrease,
assuming that they view the increase in
support as sufficient to meet the
associated deployment obligations. At
the same time, the Commission does not
expect that all carriers for whom modelbased support is significantly greater
than legacy support will make the
election: Some companies may not be
prepared to meet the specific defined
broadband build-out obligations that
come with such support, while others
may not be ready at this time to move
to incentive regulation for their common
line offering. The Commission describes
below how they will adjust the offer of
support and obligations to meet the
defined CAF–ACAM budget.
54. The first step in determining the
budgetary impact is to identify the
universe of carriers that will potentially
elect model-based support. After the
final A–CAM results implementing the
decisions the Commission adopts today
are released, carriers will indicate
within 90 days whether they are
interested in electing model-based
support. The final released results for
the adopted model effectively will
create a ceiling—the maximum amount
of CAF–ACAM support a carrier may
receive with the maximum number of
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associated locations. Once the carriers
indicate their interest, the Bureau will
total the amount of model-based support
for electing carriers and determine the
extent to which, in the aggregate, their
model-based support plus transition
payments exceed the total legacy
support received for 2015 by that subset
of rate-of-return carriers. For purposes
of this calculation, the Bureau will sum
the model-based support amounts and
transition payments, if any, for carriers
for whom model-based support is less
than 2015 legacy HCLS and ICLS
support. If that increase is $150 million
or less, no adjustment to the offered
support amounts or deployment
obligations will be necessary, the
Commission will not lower the $200 per
location funding cap, and those carriers
that indicated their interest will be
deemed to have elected the voluntary
path to the model. If demand can be met
with the amounts adopted today,
unused funding will remain in the highcost account. The Commission at that
time may consider whether
circumstances warrant allocation of an
additional $50 million in order to
maintain the $200 per location funding
cap. In either of these situations, the
initial indication of interest is
irrevocable. Absent an additional
allocation, the Bureau will lower the
per-location funding cap to a figure
below $200 per location to ensure that
total support for carriers electing the
model remains within the budget for
this path.
55. Reducing the funding cap per
location would have the effect of
reducing the number of fully funded
locations that will be subject to defined
broadband deployment obligations.
Recognizing that these electing carriers
may require more time to consider a
revised offer, the Commission will
require them to confirm their
acceptance of the revised offer within 30
days.
56. Election Process. The Bureau will
release a Public Notice showing the
offer of model-based support for each
carrier in a state, predicated upon a
monthly funding cap per location of
$200. In addition to support amounts for
these carriers, the Bureau will identify
their deployments obligations,
including the number of locations that
are ‘‘fully funded’’ and the number that
would receive capped support. Carriers
then will be required to make their
elections.
57. The Commission adopts our
proposal to require participating carriers
to make a state-level election,
comparable to what the Commission
required of price cap carriers. Our
approach prevents rate-of-return carriers
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from cherry-picking the study areas in a
state where model support is greater
than legacy support, and retaining
legacy support in those study areas
where legacy support is greater.
Requiring carriers with multiple study
areas in a state to make a state-level
election will allow them to make
business decisions about managing
different operating companies on a more
consolidated basis. Carriers considering
this voluntary path to the model will
need to evaluate on a state-level basis
whether the support received for
multiple study areas, on balance, is
sufficient to meet the state-level number
of locations that must be served.
58. Because the Commission intends
that the model-based path spur
additional broadband deployment in
those areas lacking service, they
conclude that they will not make the
offer of model-based support to any
carrier that has deployed 10/1
broadband to 90 percent or more of its
eligible locations in a state, based on
June 2015 FCC Form 477 data that has
been submitted as of the date of release
of this Order. This will preserve the
benefits of the model for those
companies that have more significant
work to do to extend broadband to
unserved consumers in high-cost areas,
and will prevent companies from
electing model-based support merely to
lock in existing support amounts. The
Commission recognizes that carriers that
are fully deployed in some cases have
taken out loans to finance such
expansion and therefore may have
significant loan repayment obligations
for years to come. Carriers that have
heavily invested in recent years are
likely to be receiving significant
amounts of HCLS, however, and will
continue to receive HCLS as well as
CAF BLS, which is essentially
equivalent to ICLS. Therefore, they are
not prejudiced by their inability to elect
the voluntary path to the model.
59. Carriers should submit their
acceptance letters to the Bureau at
ConnectAmerica@fcc.gov. To accept the
support amount for a state or states, a
carrier must submit a letter signed by an
officer of the company confirming that
the carrier elects model-based support
amount as specified in the Public Notice
and commits to satisfy the specific
service obligations associated with that
amount of model support. A carrier may
elect to decline funding for a given state
by submitting a letter signed by an
officer of the company noting it does not
accept model-based support for that
state. Alternatively, if a carrier fails to
submit any final election letter by the
close of the 90-day election period, it
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will be deemed to have declined modelbased support.
60. As noted above, after receipt of the
acceptances, the Bureau then will
determine whether the model support of
electing carriers exceeds the overall 10year budget for the model path set by
the Commission. If necessary, the
Bureau will publish revised modelbased support amounts and revised
deployment obligations, available only
to those carriers that initially indicated
they would take the voluntary election
of model-based support. Carriers will be
required to confirm within 30 days of
release of this Public Notice that they
are willing to accept the revised final
offer; if they fail to do so, they will be
deemed to have declined the revised
offer.
61. If the Commission proceeds to the
second step of the election process,
those carriers that initially accepted but
subsequently decline to accept the
revised offer will continue to receive
support through the legacy mechanisms,
as otherwise modified by this Order. If
the carrier received more support from
the legacy mechanisms in 2015 than it
was offered by the final model run, the
overall budget for all carriers that
receive support through the rate-ofreturn mechanisms (HCLS and reformed
ICLS) will be reduced by the difference
between the carrier’s 2015 legacy
support amount and the final amount of
model support offered to that carrier.
That difference will already have been
redistributed amongst the remaining
model carriers.
62. Broadband Coverage. The current
version of the model contains December
2014 Form 477 broadband deployment
data and voice subscription data. The
Commission recognizes that FCC Form
477 filers certifying that they offer
broadband at the requisite speeds to a
particular census block may not fully
cover all locations in a census block.
The Commission finds, however, that
targeting the model-based support to the
census blocks where no competitor has
certified that it is offering service is a
reasonable way to ensure that they do
not provide support to census blocks
that have some competitive coverage.
Like our decision to exclude from
model-support calculations those blocks
where the incumbent already has
deployed FTTP, the Commission seek to
target support to areas of greater need.
63. The current version of A–CAM
utilizes FCC Form 477 broadband
deployment data as of December 31,
2014. While it is unlikely there has been
a significant increase in broadband
coverage in the intervening year by
unsubsidized competitors in the specific
blocks eligible for support in rate-of-
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return areas, i.e. those that are higher
cost, the Commission does want to take
steps to ensure that support is not
provided to overbuild areas where
another provider already is providing
voice and broadband service meeting
the Commission’s requirements. The
Commission therefore adopts a
streamlined challenge process. The
Commission directs the Bureau to
incorporate into the model the recently
released June 2015 FCC Form 477 data,
and to provide a final opportunity for
commenters to challenge the
competitive coverage contained in the
updated version of the model.
Comments to challenge the coverage
data or provide other relevant
information will be due 21 days from
public notice of the updated version of
the model. The Commission notes that
Form 477 filers are under a continuing
obligation to make corrections to their
filings. Indeed, in the wake of releasing
version 2.1 of the A–CAM, a number of
carriers have submitted letters noting
corrections in Form 477 filings. The
Commission directs the Bureau to
review and incorporate as appropriate
any Form 477 corrections to June 2015
data that are received in this challenge
process, so that these updates are
reflected in the final version of the
model that is released for purposes of
the offer of support.
64. Tiered Transitions. The
Commission adopts a three-tiered
transition for electing carriers for whom
model-based support is less than legacy
support, based on the ITTA/USTelecom
proposed glide path. In addition to
model-based support, these carriers will
receive a transition amount based on the
difference between model support and
legacy support. Based on our review of
the record received in response to the
concurrently adopted FNPRM, they now
conclude that a tiered transition is
preferable because it recognizes the
magnitude of the difference in support
for particular carriers. At the same time,
the transition is structured in a way that
prevents carriers for whom legacy
support is greater than CAF–ACAM
support from locking in higher amounts
of support for an extended period of
time.
65. Tier 1. If the difference between a
carrier’s model support and its 2015
legacy support is 10 percent or less, in
addition to model-based support, it will
receive 50 percent of that difference in
year one, and then will receive model
support in years two through ten.
66. Tier 2. If the difference between a
carrier’s model support and its 2015
legacy support is 25 percent or less, but
more than 10 percent, in addition to
model-based support, it will receive an
additional transition payment for up to
four years, and then will receive model
support in years five through ten. The
transition payments will be phaseddown twenty percent per year, provided
that each phase-down amount is at least
five percent of the total legacy amount.
If twenty percent of the difference
between model support and legacy
support is less than five percent of the
total legacy amount, the carrier would
transition to model support in less than
five years.
67. Tier 3. If the difference between a
carrier’s model support and its 2015
legacy support is more than 25 percent,
in addition to model-based support, it
will receive an additional transition
payment for up to nine years, and then
will receive model support in year ten.
The transition payments will be phaseddown ten percent per year, provided
that each phase-down amount is at least
five percent of the total legacy amount.
If ten percent of the difference between
model support and legacy support is
less than five percent of the total legacy
amount, the carrier would transition to
model support in less than ten years.
68. The Commission declines to adopt
one commenter’s proposed ‘‘safety net’’
that would limit a carrier’s decrease in
support in any year to five percent. The
Commission concludes that a maximum
of 10 years is sufficient time for electing
carriers to transition down fully to their
model-based support amount. By
specifying in advance how this
transition will occur, carriers will have
all the information necessary to evaluate
the possibility of electing model
support. Carriers that find ten years
insufficient time to transition to a lower
amount remain free to remain on the
reformed legacy mechanisms. The
Commission requires rate-of-return
carriers receiving transition payments in
addition to model-based support to use
the additional support to extend
broadband service to locations that are
fully-funded or that receive capped
support.
69. Oversight and Non-Compliance.
The Commission has previously
adopted for ‘‘ETCs that must meet
specific build-out milestones . . . a
framework for support reductions that
are calibrated to the extent of an ETC’s
non-compliance with these deployment
milestones.’’ Today, the Commission
adopts specific defined deployment
milestones for rate-of-return carriers
electing model-based support and
therefore the previously adopted noncompliance measures will apply.
70. As established in the general
oversight and compliance framework in
the December 2014 Connect America
Order, 80 FR 4446, January 27, 2015, a
default will occur if an ETC is receiving
support to meet defined obligations and
then fails to meet its high-cost support
obligations. In section 54.320(d), the
Commission has already set forth in
detail the support reductions for ETCs
that fail to meet their defined build-out
milestones. The table below summarizes
the regime previously adopted by the
Commission for non-compliance with
build-out milestones.
NON-COMPLIANCE MEASURES
Non-compliance measure
5% to less than 15% .......................
15% to less than 25% .....................
25% to less than 50% .....................
50% or more ...................................
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Compliance gap
Quarterly reporting.
Quarterly reporting + withhold 15% of monthly support.
Quarterly reporting + withhold 25% of monthly support.
Quarterly reporting + withhold 50% of monthly support for six months; after six months withhold 100% of
monthly support and recover percentage of support equal to compliance gap plus 10% of support disbursed to date.
71. Reporting Requirements. As
discussed below, the Commission
requires all rate-of-return carriers to
submit the geocoded locations to which
they have newly deployed facilities
capable of delivering broadband
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meeting or exceeding defined speed
tiers. The Commission directs the
Bureau to work with USAC to develop
an online portal that will enable electing
carriers to submit the requisite
information on a rolling basis
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throughout the year as construction is
completed and service becomes
commercially available, with any final
submission no later than March 1st in
the following year.
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B. Reforms of Existing Rate of Return
Carrier Support Mechanism
72. For rate-of-return carriers that do
not elect to receive high-cost universal
service support based on the A–CAM
model, the Commission modernizes its
embedded cost support mechanisms to
encourage broadband deployment and
support standalone broadband.
Specifically, the Commission makes
technical rule changes to our existing
ICLS rules to support the provision of
broadband service to consumers in areas
with high loop-related costs, without
regard to whether the loops are also
used for traditional voice services. The
Commission renames ICLS ‘‘Broadband
Loop Support’’ as a component within
the Connect America Fund (CAF BLS).
Further, building on proposals in the
record from the carriers, the
Commission adopts operating expense
limits, capital expenditure allowances,
and budgetary controls that will be
applicable to the HCLS and CAF BLS
mechanisms to ensure efficient use of
our finite federal universal service
resources. These reforms together will
better target support to advance the
Commission’s longstanding objective of
closing the rural-rural divide in which
some rural areas of the country have
state-of-the-art broadband, while other
parts of rural America have no
broadband at all. The Commission
expects that the combined effect of these
measures will be to distribute support
equitably and efficiently, and that all
rate-of-return carriers will benefit from
the opportunity to extend broadband
service where it is cost-effective to do
so.
1. Support for Broadband-Only Loop
Costs for Rate-of-Return Carriers
73. The Commission now adopts
technical changes to our existing ICLS
rule to provide support for rate-of-return
carriers’ broadband-capable network
loop costs, without regard to whether
the loops are used to provide voice or
broadband-only services. As explained
above, although our existing HCLS and
ICLS rules both support the loop costs
associated with broadband-capable
networks, they were developed
specifically to support the costs of voice
networks and do not provide cost
recovery for loop costs associated with
broadband-only services. After careful
consideration of the various alternatives
presented in the record, the Commission
concludes that the simplest, most
effective and administratively feasible
means to address this concern is to
expand the ICLS mechanism to permit
recovery of consumer broadband loop
costs. In a pending Petition for
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Reconsideration and Clarification of the
USF/ICC Transformation Order, NECA,
OPASTCO, and WTA argued, among
other claims, that the Commission
should adopt a Connect America Fund
mechanism prior to imposing
broadband obligations on rate-of-return
carriers. Petition for Reconsideration
and Clarification of the National
Exchange Carrier Association, Inc.;
Organization for the Promotion and
Advancement of Small
Telecommunications Companies; and
Western Telecommunications Alliance,
WC Docket 10–90, et al. at 2–6 (filed
Dec. 29, 2011) (NECA et al. Petition).
Our existing mechanisms have provided
support for broadband-capable networks
for more than a decade, and the
Commission are now adopting changes
to our rules to provide support
explicitly for broadband-only lines. The
Commission therefore denies the
Petition as moot. As noted above, to
recognize the scope of the expanded
mechanism and fulfillment of our
commitment to create a Connect
America Fund for rate-of-return carriers,
the Commission changes the name of
ICLS to CAF BLS.
74. By providing support for the costs
of broadband-only loops, while
continuing to provide cost recovery for
voice-only and voice-broadband loops,
the expanded CAF–BLS mechanism will
create appropriate incentives for carriers
to deploy modern broadband-capable
networks and to encourage consumer
adoption of broadband services. The
difference in loop-related expenses
between broadband-only and traditional
voice service over broadband-capable
loops tends to be quite small, but the
cost recovery varies significantly.
Indeed, different treatment of loop cost
recovery can be triggered by a
customer’s decision to drop the voice
component of a voice-data bundle,
without any other changes in service by
the carrier. Similar changes to loop cost
recovery occur if a carrier offers an IPbased voice service rather than a
traditional voice service: only loops
used to provide regulated local
exchange voice service (including voicedata bundles) are eligible for high-cost
universal service under our current
rules. Supporting all consumer loops
will minimize the discrepancies in
treatment between those service
offerings, while removing potential
regulatory barriers to taking steps to
offer new IP-based services in
innovative ways. Thus, this step
advances the statutory goal of providing
access to advanced telecommunications
and information services in all regions
of the Nation, particularly in rural and
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high-cost areas, and the principle
adopted in the USF/ICC Transformation
Order that universal service support
should be directed where possible to
networks that provide advanced
services, as well as voice services.
75. Implementing this expansion of
the traditional ICLS mechanism requires
several actions. As noted above, the
current ICLS mechanism operates by
providing each carrier with the
difference between its interstate
common line revenue requirement and
its interstate common line revenues.
Going forward, CAF–BLS also will
provide cost recovery for the difference
between a carrier’s loop costs associated
with providing broadband-only service,
called the ‘‘consumer broadband-only
loop revenue requirement’’ and its
consumer broadband-only loop
revenues. In this Order, the Commission
adopts rules that define the consumer
broadband-only loop costs as the same,
on a per-line basis, as the costs that are
currently recoverable for a voice-only or
voice/broadband line in ICLS. To avoid
double-recovery, an amount equal to the
consumer broadband-only revenue
requirement will also be removed from
the special access cost category. Carriers
will be required to certify to USAC, as
part of their CAF–BLS data filings, that
they have complied with our cost
allocation rules and are not recovering
any of the consumer broadband-only
loop cost through the special access cost
category. For consumer broadband-only
loop revenue, CAF–BLS will initially
impute the lesser of $42 per loop per
month or its total consumer broadband
loop revenue requirement. For true-up
purposes, CAF BLS will impute the
consumer broadband rate the carrier
was permitted charge, if it is higher than
the amount that would be imputed
otherwise. As described below, the
Commission also adopts today a
budgetary constraint on the total
aggregate amount of HCLS and CAF–
BLS support provided for rate-of-return
carriers to ensure that support remains
within the established budget for rateof-return territories. To the extent that
budgetary constraint reduces CAF–BLS
support in any given year, any CAF BLS
provided will be first applied to ensure
that each carrier’s interstate common
line revenue requirement is met. If, due
to the application of the budgetary
constraint, additional revenue is
required to meet its consumer
broadband loop revenue requirement,
that revenue may be recovered through
consumer broadband loop rates, even if
that results in a carrier charging a
broadband loop amount greater than $42
per loop per month.
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76. This approach meets the four
principles of reform that the
Commission previously articulated in
the April 2014 Connect America Further
Notice, while also being simple and
easy for affected carriers to understand
and implement. The budget constraint
ensures that the support amounts will
remain within the existing rate-of-return
budget. The CAF–BLS mechanism
distributes support fairly and equitably
among carriers. Consistent with our
authority to encourage the deployment
of the types of facilities that will best
achieve the principles set forth in
section 254(b), it will allow carriers to
receive federal high-cost universal
service support for their network
investment regardless of what services
are ultimately purchased by the
customer. When combined with the
capital expense and operational expense
limitations adopted below, CAF BLS
will help ensure that no carrier collects
support for excessive expenditures. The
CAF–BLS mechanism is forwardlooking because it completes the
Commission’s modernization of the
high-cost program to focus on
broadband, consistent with the
evolution of technology toward IP
networks.
77. And finally, the reforms the
Commission adopts today avoid doublerecovery of costs by removing from
special access the costs associated with
broadband-only loops and then ensuring
that the carriers’ regulated revenues
match their revenue requirements. The
Commission finds this approach
administratively preferable to
alternative approaches. For example,
one possibility would be to expand both
ICLS and HCLS to include broadbandonly loops. However, HCLS was
designed to support local (i.e.,
intrastate) voice rates and does not take
into account the costs or revenues from
broadband-only services. In addition,
the schedule for developing HCLS
amounts is incompatible with the
schedule for developing wholesale
transmission tariffs for broadband
services. As a result, the Commission’s
principle of avoiding double recovery
could not be met without making
significant changes to either the HCLS
rules or the tariff process. Alternatively,
the Commission could adopt a separate
mechanism to support broadband-only
loops, as proposed by NTCA. In
practice, the expanded CAF–BLS
mechanism will be operationally similar
to NTCA’s proposed DCS mechanism.
Both essentially provide support for
broadband-only costs to the extent that
they exceed an imputed revenue
amount, but allow the carrier to recover
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additional revenues through tariffs to
the extent that the budgetary constraint
prevents them from meeting their
revenue requirement. The Commission
finds, however, that expanding the
CAF–BLS mechanism to include
broadband-only loops will further
reduce unnecessary distinctions
between the two categories of loops,
which will advance our objective to
move the existing program to
broadband. Finally, the Commission
considered the ‘‘bifurcated’’ approach
developed in the record by USTelecom
with significant input from other
parties.
78. The latter approach would create
a wholly new mechanism and bifurcate
investment and associated expenses
between old and new mechanisms. The
Commission appreciates the good faith
efforts of numerous parties to determine
how such a mechanism might be
implemented and to estimate its
potential impact. While it had a number
of merits, the Commission has come to
the conclusion that the approach they
adopt today is simpler and sufficient to
accomplish our goals for reform. The
Commission therefore chooses to build
upon the framework of an existing rule
that carriers are familiar with, which
will not require significant changes to
their internal existing accounting
systems and other processes for the
development of cost studies. Carriers
should be able readily to estimate their
future support flows under this revision
to the existing rule.
79. Consumer broadband loop
revenue benchmark. For the purpose of
calculating CAF BLS, the Commission
adopts a revenue imputation of $42 per
loop per month, or $504 per loop per
year for consumer broadband-only
loops, except as described below. This
amount is consistent with other recent
estimates of reasonable end-user
revenues, when adjusted for context.
For example, in adopting a cost model
to be used for the Phase II offer of
support to price cap carriers, the Bureau
based its support threshold for modelbased support on an average revenue
per user (ARPU) of $75. That ARPU,
however, was an all-inclusive estimate
of end-user revenues for broadband and
voice services, while the benchmark the
Commission adopts here presumes that
carriers would still need additional enduser revenues to cover non-loop related
costs, such as middle-mile costs.
Similarly, for a broadband service of 10/
1 Mbps and unlimited usage, the
Commission’s 2015 reasonable
comparability benchmark was $77.81.
NECA estimated a median non-loop cost
of $34.95 per month to provide 10/1
Mbps for its member carriers that
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participate in its ‘‘DSL voice-data’’ tariff.
Subtracting the monthly revenue
associated with those non-loop revenues
from the ARPU used for the model
support threshold or the reasonable
comparability benchmark for retail
broadband Internet access suggests that
$42 is an appropriate estimate for
monthly end-user revenue for the
consumer broadband loop costs, the
remainder of which will be recovered
through CAF BLS, subject to the
budgetary constraint discussed below.
80. There are two cases in which the
Commission will impute a different
consumer broadband loop revenue
amount than $42 per loop per month.
First, when a carrier’s consumer
broadband loop revenue requirement is
less than $42 per loop per month, CAF
BLS will only impute the actual
consumer broadband loop revenue
requirement. For example, if a carrier
has 1,000 consumer broadband-only
loops with an average cost of $41 per
month, its imputed annual revenue
would be $492,000 ($41 * 1,000 * 12),
rather than $504,000 ($42 * 1,000 * 12).
Without this exception, consumer
broadband loops could create
‘‘negative’’ CAF–BLS amounts for some
carriers in its initial calculation. The
effect of the negative CAF–BLS amounts
would be to reduce overall CAF BLS
and require above-cost consumer
broadband rates to replace lost CAF BLS
that would otherwise subsidize voice
loops. This exception will prevent a
cross-subsidy of voice service by
consumer broadband-only service that
may not otherwise be necessary.
81. The second exception is that,
solely for the purpose of calculating
true-ups, CAF BLS will impute the
consumer broadband rate the carrier
was permitted to charge, if it is higher
than the amount that would be imputed
otherwise. For example, if a carrier had
1,000 loops and, as a result of the
operation of the budgetary constraint, its
consumer broadband loop rate was $43
per month, the annual revenue
imputation would be $516,000 ($43 *
1,000 * 12), rather than $504,000. Using
actual revenues for true-ups in this way
will recognize additional revenue that
the carrier would have received and
prevent duplication of cost recovery
between CAF BLS and special access
rates. This will result in a carrier having
imputed consumer broadband-only
revenue that exceeds its consumer
broadband-only revenue requirement,
but that is necessary to ensure that both
its interstate common line revenue
requirement and its consumer
broadband loop revenue requirement
are met even when the budgetary
constraint is applied.
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2. Operating Expense Limitation
82. Discussion. The Commission
adopts the regression methodology
submitted by industry representatives
with a few modifications to conform the
limits better to the nature of the data.
The Commission defers implementation
of this rule change for Alaska carriers
pending Commission consideration of
the unified plan for incentive regulation
submitted by the Alaska Telephone
Association on behalf of Alaska rate-ofreturn carriers and mobile wireless
providers. The Commission finds that a
mechanism to limit operating costs
eligible for support under rate-of-return
mechanisms, both HCLS and CAF BLS,
will encourage efficient spending by
rate-of-return carriers and will increase
the amount of universal service support
available for investment in broadbandcapable facilities. These opex limits will
apply to cost recovery under HCLS and
CAF BLS and will be applied
proportionately to the accounts used to
determine a carrier’s eligible operating
expense for HCLS and CAF BLS. The
Commission notes that a small number
of carriers have not provided this
information in the past. Carriers that do
not provide study area level cost studies
to NECA will have to provide USAC
with data from the following four
accounts: (1) Account 6310: Information
origination/termination expenses; (2)
Account 6510: Other property plant and
equipment expenses; (3) Account 6610:
Customer operations expense:
Marketing; and (4) Account 6620:
Customer operations expense: Services.
For example, if the regression
methodology determines that a carrier’s
eligible operating expense should be
reduced by 10 percent, then each
account used to determine that carrier’s
eligible operating expense shall be
reduced by 10 percent.
83. Consistent with the general
approach submitted by the industry
associations, operating expense costs
will be limited by comparing each study
area’s opex cost per location to the
regression model-generated opex per
location plus 1.5 standard deviations.
The regression formula to be used is as
follows:
Y = a + b1X1 + b2X2 + b3X3,
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Y is the natural log of opex cost per housing
unit,
a is the coefficient on the constant (i.e.,
1) in the regression,
X1 is the natural log of the number of
housing units in the study area,
with a regression coefficient b1,
X2 is the natural log of density (number
of housing units per square mile),
with a regression coefficient b2, and
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X3 is the square of the natural log of
density, with a regression
coefficient b3.
84. The Commission does not agree
with commenters who argue that they
should only limit operating expenses for
carriers with costs above the two
standard deviations. Indeed, the
Commission notes that using two
standard deviations would subject only
an estimated 17 study areas to an opex
limit. The Commission concludes that
using 1.5 standard deviations—which
they estimate, based on last year’s data,
would have impacted roughly 50
carriers—more appropriately advances
the Commission’s goal of providing
better incentives for carriers to invest
prudently and operate more efficiently.
Because any support reductions
associated with this limit will then be
available to other rate-of-return carriers,
our budget for high-cost support should
enable more broadband deployment
than if the Commission continued
funding excessive operating expenses
for certain companies at current levels.
85. The Commission declines to set
different limits based on the separate
density categories initially proposed by
the industry because density is already
taken into account as a variable in the
regression analysis. The Commission
sees no legal or economic justification
for modifying the allowable opex
expense a second time. Using density
again in this fashion has the effect of
arbitrarily raising the allowable opex
expense limit for some rural carriers at
the direct expense of the other carriers
serving high-cost areas that are nearly as
sparsely populated. Moreover, even if
the Commission were inclined to do so,
the proponents of this approach have
failed to explain in the record why it
would be appropriate to draw the line
at 1.5 locations per square mile, as
opposed to 2 locations per square mile,
4 locations per square mile, or some
other figure. Therefore, the Commission
adopts a uniform standard deviation
formula for purposes of setting a limit
based on the regression results.
86. In addition, unlike the industry’s
original proposal, the Commission
includes corporate expenses (calculated
according to the current limitation)
within the regression. These expenses
are a significant portion of carrier
operating expenses, and the
Commission concludes that they should
be subject to limitation as well. Indeed,
corporate expenses alone account for
approximately 15 percent of the total
costs assigned to the loop for rate-ofreturn cost companies. Moreover, the
Commission is concerned that leaving
corporate expenses outside of this
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overall limitation will provide an
opportunity for inappropriate cost
shifting from an account where they are
above the limit to an account where
they are below the limit.
87. NTCA has argued that ‘‘reasonable
transitions’’ are necessary when
implementing limitations on support.
The Commission concludes that a
transition is appropriate to allow
carriers time to adjust their operating
expenditures. Therefore, the
Commission concludes that for the first
year in which the opex cap is
implemented, the eligible operating
expense of those carriers subject to the
cap will be reduced by only one-half of
the percentage amount determined by
the regression methodology. For
example, if the regression methodology
determines that a carrier’s eligible
operating expense should be reduced by
10 percent for the first year in which the
opex cap is implemented, then each
account used to determine that carrier’s
eligible operating expense shall be
reduced by only 5 percent. However, in
all subsequent years, the carrier’s
eligible operating expense shall be
reduced by the full percentage amount
determined by the regression
methodology.
88. Within 30 days of the effective
date of this Report and Order, the
Commission directs NECA to submit to
USAC a schedule of companies subject
to limits under the adopted formula.
The Commission directs NECA to
exclude data for Alaska carriers when
making these calculations. The
Commission also directs NECA to
provide USAC with the dollar amount
of reductions in HCLS and CAF–BLS to
which each carrier subject to limits
under the adopted formula will be
subject. USAC shall validate all
calculations received from NECA before
making disbursements subject to any
such support reductions.
3. Capital Investment Allowances
89. Discussion. The Commission
adopts the revised capex allowance
proposed by the rate-of-return industry
associations with minor modifications.
The Commission defers implementation
of this rule change for Alaska carriers
pending Commission consideration of
the unified plan for incentive regulation
submitted by the Alaska Telephone
Association on behalf of Alaska rate-ofreturn carriers and mobile wireless
providers. The Commission believes
that this mechanism will help target
support to those areas with less
broadband deployment so that carriers
serving those areas have the opportunity
to catch up to the average level of
broadband deployment in areas served
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by rate-of-return carriers. The
Commission directs the Bureau to
announce the updated weighted average
broadband deployment for all rate-ofreturn carriers, and the relevant
deployment figure for each individual
carrier, based on the more recent June
2015 FCC Form 477 data for the initial
implementation of this rule, and to
publish similar figures reflecting current
FCC Form 477 data on an annual basis.
Although it is the Commission’s goal to
ensure broadband deployment
throughout all areas, finite universal
service resources must be used where
they are most needed. Therefore, the
Commission finds that on a going
forward basis, directing increased
support to those areas lagging behind
the national average in broadband
availability will ensure a more equitable
distribution of deployment, thereby
achieving one of the goals for reform
articulated by the Commission in the
April 2014 Connect America FNPRM.
The Commission does, however, make
several adjustments to the industry’s
proposal. Vantage Point Solutions
argues that an inflation factor with a
higher labor component would be more
appropriate than the GDP–CPI because
Vantage Point’s experience shows that
approximately 70% of construction
costs in rural LEC areas are associated
with labor. Letter from Larry D.
Thompson, Vantage Point Solutions, to
Marlene H. Dortch, Secretary, FCC, WC
Docket No. 10–90, et al. at 2 (filed Jan.
28, 2016). However, the Commission
has used the GDP–CPI, which includes
both capital and labor costs, in its HCLS
calculations since 2001, and Vantage
Point presents no compelling reason as
to why an alternative inflation measure
should be used here. To the extent any
individual carrier has unique
circumstances that might warrant an
adjustment in its capex allowance, it is
free to seek a waiver pursuant to section
1.3 of the Commission’s rules.
90. First, the Commission uses the
TALPI as the basis for calculating loop
plant investment limitations for both
HCLS and CAF–BLS, not just for HCLS.
To ensure the most efficient use of
limited universal service resources, the
capital budget limitation must apply to
HCLS, which supports the intrastate
portion of the exchange loop, and CAF–
BLS, which supports the interstate
portion. Second, the Commission
modifies the investment categories
proposed by the associations to
determine a carrier’s TALPI so that they
correspond to those used to determine
a carrier’s HCLS and CAF BLS. The
Commission notes that a small number
of carriers have not provided this
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information in the past. Carriers that do
not provide study area level cost studies
to NECA will have to provide USAC
with data from the relevant categories
and accounts. Amounts in excess of a
carrier’s AALPI will be removed from
the relevant categories or accounts
either on a direct basis when the
amounts of the new loop plant
investment can be directly assigned to a
category or account, or on a pro-rata
basis according to each category or
account’s proportion to the total amount
in each of the above categories and
accounts when the new loop plant
cannot be directly assigned.
91. Third, the Commission refines the
AALPI adjustment for areas covered by
a pre-existing loan. The Commission
concludes that the AALPI should only
be adjusted for areas covered by a preexisting loan for which a previously
planned loan disbursement has been
made and that loan disbursement was
used to increase the annual loop
expenditure for the year, or years, in
which the AALPI adjustment is taken.
The Commission makes this
modification because an outstanding
loan does not per se warrant an increase
in a carrier’s AALPI unless a previously
planned disbursement of that loan leads
to an increase in the carrier’s loop plant
investment.
92. Fourth, rather than adjusting the
AALPI by only one half of a percentage
point for every percentage point that a
carrier’s deployment differs from the
target availability, the Commission
adjusts the AALPI by one percentage
point. The Commission finds that an
adjustment of only one half of a
percentage point will not have a
sufficient impact to moderate
expenditures by companies that are
above average, and also will not provide
a sufficient opportunity to catch up to
those carriers that must increase their
deployment. An increase of one
percentage point will allow those
carriers that must catch up to the target
availability more funds with which to
do so.
93. Within 30 days of the effective
date of this Report and Order, and for
each subsequent quarterly or annual
data reporting period, the Commission
directs NECA to submit to USAC the
following information for each study
area:
• Total Allowed Loop Plant
Infrastructure
• AALPI for the Current Reporting
Period (Current AALPI)
• Current AALPI Adjustment for
Percent of Broadband Deployment
• Current AALPI Adjustment for Loan
Disbursements
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• Current AALPI Adjustment for
Broadband Deployment Obligations
• AALPI Amounts Carried Forward
from Previous Reporting Periods
• Total AALPI (Equals Current AALPI
plus All Adjustments plus Carry
Forward)
• Dollar amount of the reduction, if any,
in capital expense eligible for HCLS
and/or CAF–BLS due to the Total
AALPI for the relevant reporting
period
• Dollar amount of the reductions, if
any, in HCLS and/or CAF BLS due to
the carrier’s capital expense reduction
caused by the Total AALPI for the
relevant reporting period
94. USAC shall validate all
calculations received from NECA before
making disbursements subject to any
support reductions due to the Capital
Investment Allowance.
4. Eliminating Subsidies in Areas
Served by an Qualifying Competitor
95. In this section, the Commission
takes further steps to target high-cost
support efficiently to those areas that
will not be served by private sector
investment alone. First, the Commission
prohibits rate-of-return carriers from
receiving CAF BLS in areas that are
served by a qualifying unsubsidized
competitor. Second, the Commission
adopts a challenge process to determine
which areas are served by unsubsidized
competitors building on proposals
submitted in the record. Third, as
proposed by several commenters, the
Commission adopts several options to
disaggregate support in areas
determined to be served by qualifying
competitors: Carriers will be free to elect
one of several mechanisms to
disaggregate their support. Fourth, the
Commission adopts a phased reduction
in disaggregated support for competitive
areas, as suggested by USTelecom and
NTCA. The net result of these changes
will be to more effectively target CAF
BLS to areas where support is needed to
ensure consumers are served with voice
and broadband services.
96. Discussion. In order to meet our
objective of utilizing universal service
funds to extend broadband to high-cost
and rural areas where the marketplace
alone does not currently provide a
minimum level of broadband
connectivity, the Commission has
emphasized its desire to ‘‘distribute
universal service funds as efficiently
and effectively as possible.’’ Support
should be used to further the goal of
universal voice and broadband, and not
to subsidize competition in areas where
an unsubsidized competitor is providing
service. Universal service is ultimately
paid for by consumers and businesses
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across the country. Providing support to
a rate-of-return carrier to compete
against an unsubsidized provider
distorts the marketplace, is not
necessary to advance the principles in
section 254(b), and is not the best use
of our finite resources.
97. To ensure that high-cost universal
service support is used efficiently,
consistent with the intent of providing
universal service where it otherwise
would be lacking, the Commission now
adopts a rule to eliminate CAF BLS in
competitive areas. Building on
proposals submitted in the record by
NTCA and USTelecom, and taking into
account our experience implementing
similar requirements in price cap areas
and the 100 percent overlap rule in rateof-return areas, a census block will be
deemed to be ‘‘served by a qualifying
competitor’’ for this purpose if the
competitor holds itself out to the public
as offering ‘‘qualifying voice and
broadband service’’ to at least 85
percent of the residential locations in a
given census block. For purposes of
meeting the requirement to ‘‘offer’’
service, the competitor must be willing
and able to provide qualifying voice and
broadband service to a requesting
customer within ten business days.
98. The first step in implementing
such a rule is to conduct a process to
determine which census blocks are
competitively served. The Commission
now adopts a challenge process building
on lessons learned from both the
challenge process utilized to finalize the
offer of Phase II model-based support to
price cap carriers and the process used
to implement the 100 percent overlap
rule for rate-of-return carriers. Under
this process, the Bureau will publish a
Public Notice with a link to a
preliminary list of competitors serving
specific census blocks according to FCC
Form 477 data. As suggested by NTCA
and USTelecom, in order for a challenge
for a particular census block to go
forward, those competitors will be
required to certify that they are offering
service to at least 85 percent of the
locations in the census block, and must
provide evidence sufficient to show the
specific geographic area in which they
are offering service. If they fail to submit
such information in response to the
Bureau’s Public Notice, the block will
not be deemed competitively served. To
the extent the competitor provides the
required filing in response to the
Bureau’s Public Notice, incumbents and
any other interested parties such as state
public utility commissions and Tribal
governments will have the opportunity
to contest those assertions. The ultimate
burden of persuasion will rest on the
competitor to establish that it offers
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service to at least 85 percent of the
locations in the census block, based on
all the evidence in the record. The
challenge process will be conducted by
the Bureau as set forth more fully below.
99. The Bureau will rely on Form 477
broadband deployment data to make the
preliminary determination of which
census blocks are served by providers
offering broadband service. The Form
477 data collection is mandatory, and
Form 477 filers must certify to the
accuracy of their data. The Commission
directs the Bureau to utilize the most
recent publicly available data at the
time it releases the initial Public Notice.
100. To be considered an
unsubsidized competitor in a given
census block, a fixed broadband
provider must offer service in
accordance with the Commission’s
current service obligations on speed,
latency, and usage allowances. In
December 2014, the Commission
adopted a new minimum speed
standard for carriers receiving high-cost
support: They must offer actual speeds
of at least 10/1 Mbps. Therefore, the
Commission directs the Bureau to use
10/1 Mbps as the threshold for
determining competitors when
developing the preliminary list for the
initial implementation of this rule.
101. The Commission is not
persuaded by NTCA’s proposal that the
Commission utilize the current section
706 speed benchmark, at least 25 Mbps
downstream and 3 Mbps upstream (25/
3 Mbps), as the basis to identify
locations where a competitor is present.
Although the Commission has
determined that 25/3 Mbps reflects
‘‘advanced’’ capabilities, the
Commission has explained that ‘‘[b]y
setting a lower baseline for Connect
America funding, they establish a
framework to ensure a basic level of
service to be available for all Americans,
while at the same time working to
provide access to advanced services.
The areas served by rate-of-return
carriers encompass ‘‘many rural and
remote areas of the country.’’ Similarly,
the Commission is not persuaded by
WTA’s proposal that a competitor must
be offering service with speeds at least
as high as the highest speed service
offering of the incumbent in order to be
deemed a qualifying competitor. The
Commission finds that using a 10/1
Mbps threshold at the present time for
identification of competitors is
consistent with the Commission’s
section 254 goal of ensuring that
universal service funding is used in the
most efficient and effective manner to
provide consumers in rural and highcost areas of the country with voice and
broadband service.
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102. The Commission currently does
not collect comprehensive, block-level
data on broadband latency or monthly
usage allowances, as it does for
broadband speed. However, data
collected by the Commission through
the Measuring Broadband America
program suggest that the latencies
associated with most fixed broadband
services are low enough to allow for real
time applications, including Voice over
Internet Protocol. In addition, data from
the Commission’s urban rate survey
indicate that many fixed broadband
providers offer unlimited data usage or
usage allowances well in excess of the
150 GBs per month that they now
establish as our baseline requirement for
purposes of implementing the
competitive overlap rule. Therefore, the
Commission concludes it is reasonable
to presume that providers meeting the
speed criteria also meet the latency and
usage-allowance criteria, for purposes of
preparing the preliminary list.
103. This is similar to the approach
taken by the Bureau in the Connect
America Fund Phase II challenge
process. One of the lessons learned from
the Phase II challenge process was that
no party was able to demonstrate high
latency by competitors, and very few
providers prevailed in a challenge
exclusively focused on a competitor’s
usage/price. This provides us with
confidence that, as a general matter, it
is reasonable to assume, for purposes of
preparing the preliminary list, that a
provider that in fact is in the area
providing the requisite speed is also
meeting the latency and usage
requirements.
104. Under our existing rule, to be
considered an unsubsidized competitor,
a provider must be a facilities-based
provider of residential fixed voice
service, as well as fixed broadband.
Form 477 provides the best data
available on whether broadband
providers also offer fixed voice service,
but the data are not reported at the
census block level. Therefore, to
determine whether a broadband
provider also offers voice service, for
purposes of preparing the preliminary
list, the Bureau will assume if a
broadband provider reported any fixed
voice connections in a state in its Form
477 filing, then it offers voice service
throughout its entire broadband service
area in that state. The Commission notes
that in order to file Form 477, a VoIP
provider must be offering
interconnected VoIP, which means that
the provider is required to provide E911
and comply with CALEA, among other
things.
105. The Commission will exclude
competitive Eligible
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Telecommunications Carriers (CETCs)
receiving universal service support, as
well as affiliates of incumbent LECs,
from the analysis undertaken to develop
the preliminary list. CETCs that receive
universal service support will be
excluded from the preliminary
determination because these providers
are not ‘‘unsubsidized.’’ The
Commission also concludes, for
purposes of preparing the preliminary
list that an affiliate that an incumbent
LEC is using to meet its broadband
public interest obligation in a given
census block shall not be treated as an
unsubsidized competitor. If the
Commission were to conclude
otherwise, a rate-of-return carrier would
automatically be precluded from
receiving support for new investment in
census blocks wherever its affiliate is
offering broadband and voice service as
a condition of receiving high-cost
support. To the extent the Form 477
data indicate that a particular rate-ofreturn carrier has deployed more than
one technology in a given census block,
the Commission will presume, for
purposes of preparing the preliminary
list, that the carrier is utilizing different
technologies within a given census
block to serve its customers.
106. Once the preliminary list is
published, the next step in the process
will be for identified competitors to
confirm that they are in fact offering
voice and broadband service within the
specific census block where they report
broadband deployment on FCC Form
477. Based on the Phase II challenge
experience, the Commission has learned
that it is extremely difficult for an
incumbent provider to prove a
negative—that a competitor is not
serving an area. Rather, the purported
competitor is in a much better position
to confirm that it is offering service in
a given area.
107. Upon publication of the
preliminary list, there will a comment
period in which competitors must
certify that they offer both voice and
broadband meeting the requisite
requirements in a particular census
block in order for that block potentially
to be subject to a competitive overlap
determination. Specifically, as
suggested by several parties, they must
offer: (1) Fixed voice service at rates
under the then applicable reasonable
comparability benchmark, and (2) fixed
terrestrial broadband service with actual
downstream speed of at least 10 Mbps
and actual upload speed of at least 1
Mbps; with latency suitable for real time
applications, including Voice over
Internet Protocol; with usage capacity
that is reasonably comparable to
offerings in urban areas; and at rates that
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are reasonably comparable to those in
urban areas. To the extent the
competitor is meeting the voice service
obligation through interconnected VoIP,
it will already be subject to
requirements for E911 and CALEA, as
noted above. The Commission also
requires that the competitor be able to
port telephone numbers in that census
block, as suggested by several
commenters. In order to make this
certification, a competitor must have
hold itself out to the public as offering
service to at least 85 percent of the
locations in the census block, and be
willing and able to provide service to a
requesting customer within ten business
days. For purposes of this certification,
the number of locations shall be based
on the most recently available U.S.
Census data regarding the number of
housing units in a given census block.
The Commission notes that our existing
rule defines an unsubsidized competitor
as a provider of fixed residential voice
and broadband service. 47 CFR 54.5
(emphasis added). The Commission is
mindful of the burden on the competitor
but also need to ensure that information
is sufficient for the Commission to
evaluate any potential challenges. The
Commission clarifies that a mere officer
certification is insufficient to establish
the presence of qualifying service. As
noted above, competitors will be
required to submit additional evidence
in support of that certification clearly to
establish where they are providing
service. Even so, because the
Commission is cognizant of the
potential burden, they do not require
competitors to submit geocoded
locations but encourage competitors to
submit as much information as possible,
including neighborhoods served and, for
cable companies, boundaries of their
franchising agreement.
108. If the competitor fails to submit
such a certification and any evidence,
the block will be deemed noncompetitive, and there will be no need
for the incumbent to respond. If,
however, the competitor submits the
requisite certification that it is offering
both qualifying voice and qualifying
broadband service in the census block,
with supporting information identifying
with specificity the geographic areas
served, the Commission will then accept
submissions from the incumbent or
other interested parties seeking to
contest the showing made by the
competitor. Examples of information
that may be persuasive to establish that
service is not being offered includes
evidence that a provider’s online service
availability tool shows ‘‘no service
available’’ for customers in the
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geographic area that the carrier certifies
it serves or filings from consumers
residing in the geographic area that the
competitor has certified is served that
they were unable to obtain service
meeting the specified requirements from
the purported competitor within the
relevant time frame.
109. Consistent with the approach
taken in the Phase II challenge process,
the Commission will not consider any
additional evidence or submissions filed
by any party after the deadline for reply
comments, absent extraordinary
circumstances. The Commission thus
adopts a procedural requirement that
competitive overlap submissions for
both purported competitors and
incumbents must be complete as filed.
After the conclusion of the comment
cycle, the Bureau will make a final
determination of which census blocks
are competitively served, weighing all of
the evidence in the record. The
Commission delegates authority to the
Bureau to take all necessary steps to
implement the challenge process they
adopts today.
110. The Commission is not
persuaded by arguments that it may be
premature for the Commission to
implement a competitive overlap rule
prior to full implementation of the 100
percent overlap rule. The Commission
has learned a great deal through
developing and implementing both the
Phase II challenge process for price cap
areas and the 100 percent overlap
process. The Commission is adopting a
challenge process that builds on lessons
learned from both experiences. The
Commission concludes that utilizing the
procedural requirements adopted for the
Phase II challenge process, coupled with
putting the burden of proof on the
competitor to establish that it serves a
census block, will best meet the
Commission’s objectives for ensuring
that support is not provided in areas
where other providers are providing
service without subsidies.
111. The Commission is not
persuaded that it should require
competitors to certify they serve 100
percent of the locations in a given
census block in order for that census
block to be considered ‘‘served.’’ Our
experience with the implementation of
the 100 percent overlap rule shows that
such a standard will rarely, if ever be
met, even though there may be a
significant degree of competitive
overlap. The Commission concludes
that adopting an evidentiary showing
that the competitor must certify that it
serves 85 percent or more—a substantial
majority—of residential locations in a
census block are served strikes the right
balance between the approach used in
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the Phase II context (where a block was
deemed served if the competitor only
served as single location) and the 100
percent overlap rule (which required
100 percent coverage for all residential
and business locations in all census
blocks in the study area) and will serve
our overarching policy objectives.
Moreover, to the extent the competitor
today only serves 85 percent of the
requisite number of residential locations
in a given census block, it may expand
its footprint to serve the entire census
block once it no longer is facing a
subsidized competitor.
112. The Commission also declines to
impose other requirements suggested in
the record by WTA, such as requiring a
competitor to have an interconnection
agreement with the incumbent, be
subject to section 251, offer Lifeline,
own or lease all of the facilities needed
to deliver service, not receive any other
forms of federal or state support,
including universal service support
other than Lifeline, not charge any fees
for site visits to determine if service can
be provided, even if that fee is credited
upon service installation, and comply
with state service quality and other
regulatory requirements applicable to
the incumbent for voice service. WTA
fails to provide any explanation of the
policy rationale for each of these
proposals, many of which seem
intended to subject the competitor to the
same regulatory requirements as the
incumbent. In any event, the net result
of these proposals would be to ensure
that no entity ever could qualify as an
unsubsidized competitor. Nor is the
Commission persuaded by WTA’s
argument that only future new
investment should be subject to a
competitive overlap rule, and that no
support should be reduced for existing
investments. The Commission notes that
they only are disaggregating and
reducing CAF BLS in areas found to be
served by unsubsidized competitors,
rather than both HCLS and CAF BLS,
which will lessen the impact of this rule
on affected carriers.
113. As suggested by NTCA and
USTelecom, the Commission will
conduct the competitive overlap
challenge process outlined above every
seven years. This will ensure that the
Commission periodically revisits the
competitive overlap analysis, but not
impose excessive burden on
incumbents, potential competitors, or
Commission staff. Re-examining the
extent of competitive overlap in this
time frame will provide stability and
consistency for all interested
stakeholders.
114. Upon the completion of the
competitive overlap determination, the
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Commission concludes that carriers
should be able to select one of several
methods to disaggregate support
between competitive and noncompetitive areas, as suggested by
several commenters. The Commission
notes that the Commission took a
similar approach when it allowed
incumbents to disaggregate ICLS in
2001, allowing carriers to select one of
several disaggregation paths subject to
general parameters established by the
Commission. The Commission agrees
with commenters that they should
utilize a disaggregation mechanism that
ensures that sufficient support is
provided to those areas where the
incumbent is the sole provider of voice
and broadband, and the Commission
recognizes that competitive areas are
likely to be lower cost and noncompetitive areas are likely to be
relatively higher cost. The Commission
therefore adopts a rule to permit
carriers, on their own election, to utilize
one of the following methods suggested
by commenters to disaggregate their
CAF BLS between competitive and noncompetitive areas. Providing carriers
options will enable each carrier the
flexibility to determine which approach
best reflects the unique characteristics
of their service territory. First, carriers
may choose to disaggregate their CAF
BLS based on the relative density of
competitive and non-competitive areas.
Second, carriers may choose to
disaggregate their CAF BLS based on the
ratio of competitive to non-competitive
square miles in a study area, as
proposed by Hargray. Third, carriers
may choose to disaggregate their CAF
BLS based on the ratio of A–CAM
calculated for competitive areas
compared to A–CAM support for the
study area. The Commission outlines
each of these disaggregation
mechanisms below.
115. Consistent with the approach
previously taken by the Commission for
disaggregation of support, total support
in a study area shall not exceed the
support that otherwise would be
available in the study area absent
disaggregation. Similar to the former
disaggregation rule, the Commission
may, on its own motion, or in response
to a petition from an interested party,
examine the results of any one of the
adopted disaggregation methods to
ensure that it fulfills the Commission’s
intended objectives.
116. Carriers may choose to
disaggregate their CAF BLS based on a
methodology using the density of
competitive and non-competitive areas,
as proposed by NTCA/USTelecom. In
particular, this method allocates the
revenue requirement between
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24299
competitive and non-competitive areas,
based on the relative density of
competitive and non-competitive areas.
As explained by NTCA/USTelecom,
‘‘[t]he ratio of the calculated noncompetitive area’s revenue requirement
to the sum of the calculated competitive
and non-competitive revenue
requirements is applied to the study
area’s actual revenue requirements to
ensure the total actual revenue
requirement is equal to the sum of the
competitive and non-competitive areas’
revenue requirements.’’
117. The allocation between
competitive and non-competitive areas
is achieved by calculating a separate
cost per loop for competitive and noncompetitive areas based on the differing
densities of the competitive and noncompetitive areas. To calculate the
disaggregated revenue requirements
using these costs per loop, each cost per
loop is multiplied by the number of
loops in the corresponding (i.e.
competitive or non-competitive) area.
The number of loops in each area is
calculated by multiplying the total
number of loops by the density ratio for
the study area. Although NTCA/
USTelecom proposed that density for
each area be calculated based on the
sum of residential and business
locations, the Commission is unaware of
a publicly available source for business
location data. Therefore, consistent with
the approach taken for other rule
changes adopted in this order that rely
on density calculations, the Commission
will use U.S. Census housing unit data
for the density calculations required for
this disaggregation method.
118. Carriers may also may choose to
disaggregate their CAF BLS using a ratio
of competitive to non-competitive
square miles in a study area, as
proposed by Hargray. Lower-cost areas
are generally lower cost because of the
presence of a dense cluster of
consumers, which causes the cost per
loop to be lower. Hargray submitted
analysis into the record showing how
support is reduced in a non-linear
manner based on the rate of decline that
would be expected if it were possible to
specifically capture the loops and costs
associated with non-competitive areas.
As competitive overlap in a study area
increases, utilizing this method CAF
BLS would be reduced in a non-linear
manner that accelerates as competitive
overlap reaches 100 percent. In
particular, under this disaggregation
method, support would be reduced
using the following schedule:
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associated with competitive areas
should be phased in. As suggested by
USTelecom and NTCA, the Commission
0–20 ......................................
3.3 adopts the following transition for
30 ..........................................
6.7 reductions in CAF BLS in areas that are
35 ..........................................
10.0
deemed to be competitively served:
40 ..........................................
13.3
45 ..........................................
16.7 Where the reduction of CAF BLS from
50 ..........................................
20.0 competitive census block(s) represents
55 ..........................................
25.0 less than 25 percent of the total CAF
60 ..........................................
30.0 BLS support the carrier would have
65 ..........................................
35.0 received in the study area in the absence
70 ..........................................
40.0 of this rule, disaggregated support
75 ..........................................
45.0 associated with the competitive census
80 ..........................................
50.0 blocks will be reduced 33 percent in the
85 ..........................................
62.5 first year, 66 percent in the second year,
90 ..........................................
75.0
with that support associated with the
95 ..........................................
87.5
100 ........................................
100 competitive census blocks fully phasedout by the beginning of the third year.
Where the reduction of CAF BLS from
119. By utilizing this mechanism,
competitive census blocks represents
carriers would not be required to
more than 25 percent of the total CAF
undertake steps to ensure the accuracy
BLS support the carrier would have
of location data or undertake a census
received in the study area in the absence
block by census block determination of
of this rule, disaggregated support
density. Therefore, by selecting this
associated with the competitive census
mechanism, carriers will enjoy relative
blocks will be reduced 17 percent in the
ease of administration.
first year, 34 percent in the second year,
120. As a third option, the
Commission will permit carriers subject 51 percent in the third year, 68 percent
in the fourth year, 85 percent in the fifth
to a reduction in support for
year, and fully phased-out by the
competitive overlap to elect to utilize an
beginning of the sixth year. The
allocation derived from the A–CAM, as
Commission also emphasizes that
suggested by NTCA. In this Order, the
carriers affected by implementation of
Commission adopts a forward-looking
this rule are free to seek a waiver of
cost model that has been modified for
support reductions under our existing
use to determine support amounts for
precedent.
rate-of-return carriers that voluntarily
5. Budgetary Controls
elect to receive universal service
support. As the Commission explained,
122. The Commission previously
the A–CAM contains a support module, adopted an overall budget of $4.5 billion
which calculates support on a perfor the high-cost program, and a budget
location basis based on its calculation of within that amount of $2 billion per
the costs to serve the locations in every
year for high-cost support for rate-ofcensus block. For purposes of the
return carriers. It did not, however,
voluntary offer of model-based support, adopt a method for enforcing the budget
support is only calculated for blocks
for rate-of-return carriers. The
that are not served by an unsubsidized
Commission now adopts a selfcompetitor. The support module can be
effectuating mechanism for controlling
adjusted, however, to calculate support
total support distributed pursuant to
for the blocks that are competitively
HCLS and CAF BLS to stay within the
served, as well. Thus, support can be
budget for rate-of-return carriers.
divided at the study area level between
123. The components of the high-cost
competitive and non-competitive census program other than those for rate-ofblocks. This ratio can be applied to
return carriers are structured in a
CAF–BLS support to disaggregate
fashion that ensures each stays within
support for competitive areas. The
its respective portion of the $4.5 billion
Commission notes that competitively
budget. Because ICLS and CAF ICC are
served census blocks are likely to be the not capped, there is no mechanism
lower cost, more densely populated
today to keep disbursements of highportions of the study area, in many
cost funds to rate-of-return carriers
instances where the model calculates
within that $2 billion budget. Indeed,
little or even no support. In such cases,
NECA forecasts that over the next
a carrier electing this method would see several years, absent any further
little to no support reduction using the
reforms, total high-cost support (that is,
A–CAM allocator, because the model
the sum of HCLS, ICLS, and CAF ICC)
provides support only for the higher
for the rate-of-return industry will
cost areas.
exceed the $2 billion budget. It therefore
121. The Commission agrees with
is imperative that the Commission takes
commenters that support reductions
further steps now to ensure the budget
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is not exceeded, in the event growth in
CAF BLS were to cause total rate-ofreturn support to exceed the defined
budget. Adopting an overall budget
control mechanism will provide a
predictable and reliable method in the
event that demand exceeds the available
budget. The Commission notes, of
course, that the budget control will only
be implemented in the event total
support is forecasted to exceed the
budget in a given year.
124. In implementing measures to
stay with the previously adopted
budget, the Commission notes that the
Tenth Circuit has affirmed the
Commission’s decision to set the rate-ofreturn budget at $2.0 billion. The court
found reasonable the Commission’s
determination ‘‘that budgetary
sufficiency for . . . rate-of-return
carriers could be achieved through a
combination of measures, including but
not limited to: (1) Maintaining current
USF funding levels while reducing or
eliminating waste and inefficiencies that
existed in the prior USF funding
scheme; (2) affording carriers the
authority to determine which requests
for broadband service are reasonable; (3)
allowing carriers, when necessary, to
use the waiver process; and (4)
conducting a budgetary review by the
end of six years.’’ In this Order, the
Commission retains each of these
measures to safeguard the sufficiency of
the budget. Though some parties have
suggested in general terms that the
budget should be increased, they have
not provided the type of detailed
information about why the overall
budget is insufficient for the
Commission to meet its goal of
achieving universal service, nor have
they presented individualized
circumstances necessary to evaluate
their claims. As discussed below, any
carrier may seek waiver if it is necessary
and in the public interest to ensure that
consumers in the area continue to
receive service.
125. Budget Amount. As noted above,
the Commission has set a budget for
rate-of-return support of $2 billion per
year, but only one of the existing legacy
high-cost mechanisms is subject to a
defined cap. To calculate the amount of
support that will be available for
disbursement under HCLS and CAF
BLS, the Universal Service
Administrator will first determine total
demand from rate-of-return carriers
(both those that elected model-based
support and those that remain on the
reformed legacy support mechanisms).
Then, USAC will deduct CAF–ICC
support for rate-of-return carriers (not
including affiliates of price cap carriers)
as specified under Commission’s rules.
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Then, during the ten-year term of CAF–
ACAM support, the Administrator will
further deduct the amount of modelbased support disbursements to those
rate-of-return carriers choosing modelbased support and transition payments,
as applicable. The additional support
provided to facilitate the voluntary path
to the model is temporary, and after the
end of the ten-year term, the budget
control mechanism will apply to all
rate-of-return carriers. The amount
remaining will be the total support
available to be disbursed under HCLS
and CAF BLS. This amount will first be
calculated as of July 2016, and will be
recalculated on an annual basis to
reflect changes in the CAF–ICC amounts
paid to carriers.
126. Budget Control Mechanism. The
budget control mechanism the
Commission adopts is a variation on the
NTCA budget control proposal that
NTCA suggested should be applied
solely to its DCS broadband-only
mechanism. In essence, this proposal
represents a compromise between
carriers with relatively small numbers of
lines but with very high costs and
carriers with relatively more lines but
with only moderately high costs. The
Commission finds that it strikes a fair
balance among differently-situated
carriers.
127. Our budget control mechanism,
as described in detail below, will be
applied to forecasted disbursements
each quarter. For this purpose,
forecasted disbursements include
payments made for HCLS, payments for
CAF BLS based on forecasted data for
current period, and true-ups associated
with prior years but being disbursed
during the current period. There will be
no retroactive application of the budget
control mechanism.
128. First, a target amount is
identified for each mechanism—HCLS
and CAF BLS—so that in the aggregate
disbursements for the mechanisms
equal the budgeted amount for rate-ofreturn carriers. This targeted amount is
calculated by multiplying the forecasted
disbursements for each mechanism by
the ratio of the budgeted amount to the
total calculated support for the
mechanisms. In this case, disbursements
include CAF BLS provided on a
projected basis, as well as true ups of
that mechanism that apply to prior
periods. This target amount will be
calculated for each mechanism once per
year prior to the annual filing of the
tariffs.
129. The reduction of support under
each mechanism will be split between a
per-line reduction and a pro rata
reduction applied to each study area.
The per-line reduction will be
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calculated by dividing one half the
difference between the calculated
support and the target amount for each
mechanism by the total number of
eligible loops in the mechanism.
Because some study areas may have perline support amounts that are less than
the per-line reduction, the per-line
reductions as applied may not precisely
equal one-half the difference between
the calculated support and the target
amount. In that case, the remaining
reductions will be achieved through the
pro-rata reduction. The pro rata
reduction will then be applied as
necessary to achieve the target amount.
For CAF–BLS, the per-line and pro rata
reductions will calculated once per
year, prior to the annual filing of tariffs.
For HCLS, the per-line and pro rata
reductions will be calculated quarterly,
using the most recently announced
target amount.
130. HCLS Cap. As the Commission
has done previously when carriers have
lost their eligibility for HCLS due to
their status as affiliates of price-cap
carriers, the Commission directs NECA
to rebase the cap on HCLS to reflect the
election of model-based support by
HCLS-eligible rate-of-return carriers. In
the first annual HCLS filing following
the election of model-based support,
NECA shall calculate the amount of
HCLS that those carriers would have
received in the absence of their election,
subtract that amount from the HCLS
cap, then recalculate HCLS for the
remaining carriers using the rebased
amount.
131. Attribution of CAF BLS to
Common Line and Consumer
Broadband Loop Categories. To permit
carriers to submit tariffs that provide a
reasonable opportunity to meet their
revenue requirements, it is necessary to
attribute the CAF BLS that a carrier
receives, after any reductions due to the
budgetary constraint, to various cost
categories. Accordingly, a carrier will
first apply the CAF BLS it receives to
ensure that its interstate common line
and consumer broadband revenue
requirements are being met for the
periods currently being trued up. For
example, from July 1, 2019, to June 30,
2020, true-ups will be made with
respect to the 2017 calendar year, and
CAF BLS disbursements will first be
attributed to the extent necessary to
ensure their revenues meet their
revenue requirements for 2017. Next,
CAF BLS will be applied to meet the
carrier’s forecasted interstate common
line revenue requirement for the current
tariff year. This assignment of support
plus the revenues from end-user charges
will meet the carrier’s interstate
common line revenue requirement. A
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24301
carrier will then apply the remainder of
its CAF BLS to the forecasted revenue
requirement for the new consumer
broadband-only loop category during
the current tariff year. Any remaining
unmet consumer broadband loop
revenue requirement will be met
through the consumer broadband loop
rate. This process will permit, in some
cases, consumer broadband-only loop
rates to rise above $42. The Commission
notes that $42 is well below the
reasonably comparable rate for retail
broadband service of $77.81. FCC,
Reasonable Comparability Benchmark
Calculator, https://www.fcc.gov/
encyclopedia/reasonable-comparabilitybenchmark-calculator (last visited
Mar.4, 2016). On the whole, our actions
in this Order will significantly reduce
the retail rates paid by broadband-only
subscribers, improving the reasonable
comparability of rates. The Commission
will, however, continue to monitor
consumer broadband-only rates to
ensure that our policies support
reasonable comparability. On the whole,
this process targets the budgetary
constraint to the broadband-only
component of the CAF–BLS mechanism,
similar to NTCA’s proposal to target the
budgetary constraint to its broadbandonly DCS mechanism.
6. Broadband Deployment Obligations
132. In this section, the Commission
takes steps to promote ‘‘accountability
from companies receiving support to
ensure that public investments are used
wisely to deliver intended results.’’
Specifically, the Commission adopts
specific, defined deployment
obligations that are a condition of the
receipt of high-cost funding for those
carriers continuing to receive support
based on embedded costs. These
measures will help ensure that
‘‘[c]onsumers in all regions of the
Nation . . . have access to
telecommunications and information
services . . . that are reasonably
comparable to those services provided
in urban areas.’’ The Commission notes
that USTelecom and NTCA recognize
that defined buildout obligations are
‘‘essential to a broadband reform effort.’’
133. Discussion. In this section, to
ensure that the Commission makes
progress towards achievement of
universal service, consistent with the
statute, they adopt defined performance
and deployment obligations for rate-ofreturn carriers. The Commission’s goal
is to utilize universal service funds to
extend broadband to high-cost and rural
areas where the marketplace alone does
not currently provide a minimum level
of broadband connectivity, and ‘‘to
distribute universal service funds as
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efficiently and effectively as possible.’’
As noted above, in the USF/ICC
Transformation Order, the Commission
built upon the existing reasonable
request standard, adopted a requirement
to report unfulfilled service requests,
and required carriers to develop a fiveyear plan to ensure that consumers in
hard-to-serve areas have sufficient
access to broadband, while also
ensuring universal service support is
utilized as effectively as possible.
Through the adoption of rules to
transform ICLS into the CAF–BLS
mechanism, the Commission now
builds on the foundation the
Commission established in the USF/ICC
Transformation Order to distribute
support equitably and efficiently and
advance the Commission’s longstanding
objective of closing the rural-rural
divide.
134. The Commission concludes that
it now is time to establish defined
deployment obligations for every carrier
to ensure it has a framework to achieve
our goal of universal service. As noted
above, ETCs are currently required to
‘‘describe with specificity proposed
improvements or upgrades’’ to their
network throughout their service area in
their five-year plans.’’ The Commission
did not specify specific numerical
targets for those five-year plans,
however, which has hampered our
ability to judge whether carriers are in
fact taking reasonable steps to extend
broadband service. The Commission
notes that although many rate-of-return
carriers have aggressively deployed
broadband service within their study
areas, that progress has not been evenly
distributed. Indeed, while some carriers
have deployed 10/1 Mbps service to 99–
100 percent of the census blocks within
their study areas, other carriers have not
deployed to any.
135. Given the lack of any
deployment by some providers and
extremely low levels of deployment by
others, the Commission concludes that
some concrete standards for deployment
are necessary to achieve the
Commission’s goal of extending
broadband to those areas of the country
where it is lacking. Indeed, the
Commission has seen little to no
progress in deployment since the USF/
ICC Transformation Order for some
areas, and there is no evidence that
consumers in those areas will receive
access to broadband absent a more
objective, measurable requirement to do
so.
136. To ensure that universal service
support is utilized as effectively as
possible in furtherance of the
Commission’s goal to achieve universal
service, the five-year plan must operate
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as a meaningful tool for Commission
oversight and possess quantifiable
objective goals that can be easily
measured and monitored. In this Order,
the Commission has replaced ICLS with
Broadband Loop Support so that all
rate-of-return carriers can receive
support for broadband-only lines. The
Commission is eager to see that this
support results in more widespread
deployment. Moreover, in this Order,
the Commission sets allowances for
capital expenses, which will result in a
larger budget for carriers whose
deployment is less than the national
average. However, that reform, by itself,
does not guarantee that a carrier will
make the investments needed to connect
unserved consumers. Accordingly, in
conjunction with our adoption of the
updated CAF–BLS mechanism and
capital expense allowances, the
Commission adopts refinements to the
current five-year plan requirements
designed to increase accountability and
ensure the extension of broadband to
those areas of the country where it is
lacking. In particular, the Commission
adopts a specific methodology to
determine each carrier’s deployment
obligation over a defined five-year
period, which will be used to monitor
carrier performance.
137. Methodology for Establishing
Deployment Obligations. In this section
the Commission describes the specific
methodology used to determine each
carrier’s deployment location obligation
over a defined five-year period. The
deployment obligation will be based on
the carrier’s forecasted CAF BLS, and a
cost per location metric, using one of
two methods, as suggested by
commenters. To enable each carrier the
flexibility to determine which approach
best reflects the unique characteristics
of their service territory, a carrier may
choose to either have its deployment
obligation determined based on (1) the
average cost of providing 10/1 Mbps
service, based on the actual costs of
carriers with similar density that have
widely deployed 10/1 service, or (2) the
A–CAM’s calculation of the cost of
providing 10/1 Mbps service in the
unserved census blocks in the carrier’s
study area. Carriers will be required to
notify USAC which method they elect.
USAC will perform the mathematical
calculations and provide to the Bureau
a schedule of broadband obligations for
each carrier, which then will be
published in a public notice. The
Commission describes more fully each
of these methods below.
138. Under the first step in this
methodology, the Commission will
develop a five-year forecast of the total
CAF–BLS support for each rate-of-return
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carrier, which will include support for
stand-alone broadband loops. The
Commission directs NECA to prepare
forecasts utilizing these assumptions in
consultation with the Bureau and
submit them to USAC within 60 days of
the effective date of this Order. USAC is
directed to validate any calculations
submitted by NECA to ensure they are
accurate and reflect the specified
assumptions. The Commission agrees
with commenters that knowing the level
of anticipated support is helpful when
developing any associated deployment
obligations. Therefore, the Commission
is confident that basing the new
deployment obligation on a support
forecast will give carriers the relative
certainty they desire in their support
going forward, allowing them to plan
new investment. The Commission notes
that if a carrier’s CAF BLS is
subsequently reduced based on the
implementation of competitive overlap
rule adopted above, USAC will then
recalculate that carrier’s deployment
obligation based on a revised forecast of
that carrier’s CAF BLS. Carriers cannot
use locations in areas determined to be
competitive based on the competitive
overlap determination to meet their
deployment obligation.
139. Each rate-of-return carrier that
continues to receive support based on
the reformed legacy mechanisms will be
required to target a defined percentage
of its five-year forecasted CAF–BLS
support to the deployment of broadband
service where it is currently lacking.
The percentage of support will be
determined on a carrier-by-carrier basis
for a five-year period. Specifically,
consistent with the framework
suggested by the rural associations, rateof-return carriers with less than 20
percent deployment of 10/1 Mbps
broadband service in their entire study
area, based on June 2015 FCC Form 477
data, will be required to utilize 35
percent of their five-year forecasted
CAF–BLS support specifically for the
deployment of 10/1 Mbps broadband
service where it is currently lacking.
Rate-of-return carriers with more than
20 percent or greater but less than 40
percent deployment of 10/1 Mbps
broadband service in their entire study
areas, will be required to utilize 25
percent of their five-year forecasted
CAF–BLS support specifically for the
deployment of broadband service where
it is currently lacking. Rate-of-return
carriers with 40 percent or greater but
less than 80 percent deployment of 10/
1 Mbps broadband service in their entire
study areas, will be required to utilize
20 percent of their five-year forecasted
CAF–BLS support specifically for the
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deployment of broadband service where
it is currently lacking.
140. Deployment obligations will then
be determined by dividing the dollar
amount of the targeted CAF BLS by a
cost-per-location figure. First, the
Bureau will prepare a list of all rate-ofreturn carriers with at least 95 percent
deployment of 10/1 Mbps broadband
service within their study areas, based
on the most recent publicly available
FCC Form 477 data. The Commission
believes it is reasonable to assume that
if a rate-of-return carrier is nearly fully
deployed with 10/1 Mbps broadband
service, the carrier has recently
upgraded its network and its current
cost per loop is a reasonably good proxy
for the cost per line associated with
extending 10/1 Mbps broadband. The
Bureau will sort the carriers into a
number of groups based on the density
of housing units per square mile,
utilizing publicly available U.S. Census
data. Any carriers subject to the current
$250 per line per month cap and the
newly adopted opex limits will be
excluded from the analysis. The Bureau
also may exclude any carrier whose
costs appear to be an outlier within a
given density grouping. Then, USAC
will determine the weighted average
cost per loop for the carriers that are 95
percent or greater deployed for each
density grouping, based on NECA cost
data. Carriers with 95 percent or greater
deployment of 10/1 Mbps broadband are
likely to have deployed broadband
relatively recently, so the average
should be generally reflective of the cost
that carriers have incurred to upgrade
their networks. The Commission finds
that this process is reasonable because
a carrier’s weighted average cost per
loop is based on its particular density
grouping, thus taking into account costs
for similarly-situated carriers. USAC
also will determine the weighted
average of the cost per loop for carriers
in the same density band with a similar
level of deployment, and then will
increase that figure by 150 percent. This
is similar to the approach advocated by
NTCA and USTelecom, who suggested
that the Commission use a figure that is
‘‘at least 150 percent of the average cost
per loop’’ of those carriers with
comparable density and deployment. It
is reasonable to assume that many of the
locations left unserved will have costs
higher than the current average cost per
loop, which by definition averages the
lowest cost and the higher cost
locations. Given that the carriers subject
to the defined deployment are those that
have deployed 10/1 Mbps broadband to
less than 80% of their locations, it also
is reasonable to assume that they would
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choose to meet their deployment
obligations by extending service to their
least costly unserved locations, and not
the most expensive unserved locations.
Therefore, the Commission concludes
that a 150 percent increase above the
weighted average cost per loop of
companies with similar density and
deployment levels is a reasonable
approach that takes into account that
costs will likely higher when carriers
extend broadband into unserved areas.
141. If the 150 percent of the weighted
average of companies with similar
density and deployment is greater than
the figure derived from companies of
similar density that have deployed to 95
percent or more of locations, that larger
figure will be the cost per location
metric used to size the obligation to
deploy 10/1 Mbps broadband service.
USAC then will divide each carrier’s
specific five-year forecasted CAF–BLS
support amount by the specific
embedded cost per location figure. The
quotient of this calculation will result in
the exact number of locations a carrier
electing this option is required to
deploy 10/1 Mbps broadband service to
pursuant to its five-year plan.
142. As an alternative to the approach
outlined above, carriers may elect to
have their deployment obligations
determined based on the cost per loop
for that carrier as reflected in the
adopted version of the A–CAM, as
suggested by NTCA and USTelecom.
For this purpose, the relevant figure will
be the calculated cost for those census
blocks that are unserved with 10/1
Mbps, using the cost module. USAC
will divide each carrier’s specific fiveyear forecasted CAF–BLS support
amount by the A–CAM calculated,
carrier specific, average cost per loop for
unserved areas. The quotient of this
calculation will result in the exact
number of locations a carrier electing
this option is required to deploy 10/1
Mbps broadband service to pursuant to
its five-year plan.
143. Deployment Requirements. In
this section, the Commission discusses
in more detail the specific obligations of
rate-of-return carriers subject to the
refined five-year plan requirements. The
Commission recognizes that certain
locations in rate-of-return areas may be
very costly to serve, and requiring
buildout to these locations could place
high demands on both rate-of-return
carriers and consumers across the
United States who ultimately pay for
USF. That is why the Commission
concludes—much like the Commission
did in the April 2014 Connect America
Order, 79 FR 39164, July 9, 2014—that
it will not require deployment using
terrestrial wireline technology for any
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rate-of-return carrier in any census
block if doing so would result in total
support per line in the study area to
exceed the $250 per-line per-month cap.
The Commission also notes that,
pursuant to the capital budget
allowance they adopt, rate-of-return
carriers may not exceed $10,000 per
location/per project when deploying
broadband service utilizing terrestrial
wireline technology.
144. The Commission concludes that
rate-of-return carriers with 80 percent or
greater deployment of 10/1 Mbps
broadband service in their entire study
areas, as determined by the Bureau
based on June 2015 FCC Form 477 data,
will not have specific buildout
obligations as a condition of receiving
CAF–BLS support. However, those
carriers must continue to deploy 10/1
Mbps or better broadband service where
cost-effective and utilize alternative
technologies where terrestrial wireline
infrastructure is too costly, and report,
as part of their annual Form 481 filing,
progress on the number of locations
where 10/1 Mbps or better broadband
service have been deployed within their
study area in the prior calendar year.
The Commission emphasizes that any
CAF–BLS funding earmarked for the
purpose of extending 10/1 Mbps service
to census blocks lacking such service
may not be used to improve speeds for
those locations to which 10/1 Mbps
service has already been deployed. The
Commission will continue to monitor
the deployment progress of these
carriers: They may revisit this
framework in the future if such carriers
do not continue to make reasonable
progress on extending broadband.
145. The Commission concludes that
carriers subject to a defined five-year
deployment obligation may choose to
meet their obligation at any time during
the five-year period. For example, a
carrier can evenly space out
construction to targeted locations on an
annual basis or complete all of its
required deployment within a single
year. However, should any carrier
subject to a defined five-year
deployment obligation fail to complete
the deployment within the stipulated
five-year period, the carrier is
potentially subject to reductions in
support pursuant to section 54.320(c) of
the Commission’s rules, to be
determined on a case-by-case basis. In
situations where the carrier makes no
progress towards meeting its defined
five-year deployment obligation, and
fails to establish extenuating
circumstances, the Commission reserves
the right to include such census blocks
in an upcoming auction.
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146. The Commission recognizes that
even after the conclusion of the initial
five-year period, additional efforts will
be necessary ‘‘to encourage continued
investment in broadband networks
throughout rural American to ensure
that all consumers have access to
reasonably comparable services at
reasonably comparable rates.’’
Therefore, the Commission concludes
that carriers with less than 80 percent
deployment of broadband service
meeting then-current standards in their
study areas will be required to utilize a
specified percentage of their five-year
forecasted CAF BLS to deploy
broadband service meeting the
Commission’s standards where it is
lacking in subsequent five-year periods.
The same methodology will be used,
with USAC updating the average cost
per loop amounts, based on the thencurrent NECA cost data, and the Bureau
updating the density groupings and
percentage of deployment figures, as
appropriate.
147. The Commission concludes that
the approach outlined above improves
on the proposal initially submitted by
NTCA, USTelecom, and WTA that rateof-return carriers in receipt of BUSS
support utilize at least 10 percent of
their support ‘‘toward the goal of
delivering broadband at the then-current
706 broadband speed to ‘4/1[Mbps]
Unserved Locations.’ ’’ The associations’
earlier proposal failed to include any
quantifiable deployment objectives,
making it an ineffective tool for
Commission oversight. Moreover, the
Associations’ proposal placed too much
emphasis on achieving the deployment
of advanced telecommunications
capability, rather than the standards that
the Commission has established as its
minimum expectation for universal
service. The Commission notes that
USTelecom and NTCA more recently
indicated their support for the
framework adopted in this Order. To
ensure that universal service support is
used as effectively as possible to close
the rural-rural divide, the Commission
must be able to measure and monitor
the deployment objectives outlined in a
carrier’s five-year plan. As noted above,
deployment has not been consistent
across all rural areas. Therefore, it is
critical that the Commission have a
method to evaluate progress towards
meeting the established minimum 10/1
Mbps standard for high-cost support in
each study area and determine if
remedial action is warranted.
148. On an ongoing basis, the
Commission will assess broadband
deployment progress for all rate-ofreturn carriers based on carriers’ annual
reporting on the progress of their
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broadband deployment, and make
adjustments, where warranted.
149. Reasonable Request Standard. In
addition to defined obligations to
extend service to a subset of locations
within a five-year period, rate-of-return
carriers remain subject to the reasonable
request standard for their remaining
locations. Rate-of-return carriers are
required to demonstrate in an audit or
other inquiry that they have a
documented process for evaluating
requests for service under the
reasonable request standard and
produce the methodology for
determining where upgrades are
reasonable. Carriers that make no
progress in extending broadband to
locations unserved with 10/1 Mbps
broadband over an extended period of
time should be prepared to explain why
that is the case.
150. The Commission also takes
further action to implement the existing
reasonable request standard to ensure
that consumers in remote areas are
served. The Commission previously
sought detailed comment on
implementation of the Remote Areas
Fund, including the option of using a
competitive process to award support
for such areas. Carriers will be invited
later this year to identify those census
blocks where they do not anticipate
being able to deploy service under the
existing reasonable request standard (i.e.
where it is unreasonable to extend
broadband meeting the Commission’s
current requirements) for inclusion in
the next Commission auction. The
Commission directs the Bureau to issue
a public notice setting a deadline for
identifying such census blocks in
advance of the timeframe for finalizing
the list of eligible areas that will be
subject to auction.
151. The Commission notes that
should a carrier choose to place census
blocks in the next Commission auction
and another entity is authorized to
receive support for those census blocks
to provide voice and broadband service
subsequent to the auction, the
incumbent will not be subject to the
reasonable request standard and no
longer will receive support for those
areas.
7. Impact of These Reforms
152. The adoption of the voluntary
path to the model, coupled with our
update to the existing ICLS mechanism
to provide support for broadband-only
loops, should be beneficial to carriers
that are high-cost, but no longer receive
HCLS support due to the so-called ‘‘cliff
effect.’’ The Commission notes that the
revenue benchmark they set for
broadband-only loops is lower than the
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effective benchmark for HCLS, which
only provides support for carriers with
an average loop cost of at least 115
percent of the frozen NACPL. Because
the NACPL is frozen at $647.42, a
carrier only receives HCLS if its average
cost per loop on an annual basis is
higher than $744.53, or $62.04 per
month. Thus, our reformed CAF–BLS
mechanism will provide cost recovery
for broadband-only loops for many
carriers that no longer are eligible for
HCLS support. This is one of the
reasons why the Commission concludes
that over the long run, CAF BLS will be
more sustainable and equitable than
HCLS and the former ICLS, supporting
new broadband deployment to areas
where providers have been unable to
build absent some subsidy.
153. The Commission will monitor
the progress in broadband deployment
under the strengthened requirements for
broadband deployment and may take
further action in the future should it
appear that despite these reforms, some
high-cost areas remain unserved. The
Commission solicits input from all
interested parties in the concurrently
adopted FNPRM as to whether there are
other changes they could make to our
high-cost program, working within the
defined budget, that would create
additional incentives to deploy
broadband for companies in areas where
end user revenues alone are insufficient
to make a business case to deploy
broadband.
154. In our predictive judgment, the
mechanisms that the Commission
adopts today to keep disbursements
within the previously adopted budget
will provide rate-of-return carriers with
support that is sufficient to meet the
Commission’s universal service goals. If
any carrier believes that the support it
receives is insufficient, it may seek a
waiver of our rules. As the Commission
noted in the USF/ICC Transformation
Order, ‘‘any carrier negatively affected
by the universal service reforms . . .
[may] file a petition for waiver that
clearly demonstrates that good cause
exists for exempting the carrier from
some or all of those reforms, and that
waiver is necessary and in the public
interest to ensure that consumers in the
area continue to receive voice service.’’
The Commission stated that ‘‘[w]e
envision granting relief only in those
circumstances in which the petitioner
can demonstrate that the reduction in
existing high-cost support would put
consumers at risk of losing voice
services, with no alternative terrestrial
providers available to provide voice
telephony service.’’ It expressly noted
that parties requesting such a waiver
would be subject to ‘‘a process
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comparable to a total earnings review.’’
The Commission indicated that it did
not anticipate granting waiver requests
routinely or for ‘‘undefined duration[s]’’
and provided guidance on the types of
information that would be relevant for
such requests. In the Fifth Order on
Reconsideration, 78 FR 3837, January
17, 2013, the Commission further
clarified that ‘‘the Commission
envisions granting relief to incumbent
telephone companies only in those
circumstances in which the petitioner
can demonstrate that consumers served
by such carriers face a significant risk of
losing access to a broadband-capable
network that provides both voice as well
as broadband today, at reasonably
comparable rates, in areas where there
are no alternative providers of voice or
broadband.’’ The Commission notes that
the Tenth Circuit upheld the
Commission’s decision to set the highcost universal service budget for rate-ofreturn carriers at $2.0 billion, and
endorsed the use of the waiver process
as a means to address any special
circumstances when the application of
the budget may result support that is
insufficient for a carrier to meet its
universal service obligations. The
Commission further notes that to the
extent parties seek a waiver on the
ground that support is insufficient, it
may request additional documentation
pursuant to section 220(c) of the Act, to
ensure that it has a full and complete
basis for decision.
March 31 .................
May 1 ......................
June 16 ...................
July 1 to June 30 ....
December 31 ..........
July 1 to June 30 ....
155. Finally, the Commission notes
that the promotion of universal service
remains a federal-state partnership. The
Commission expects and encourage
states to maintain their own universal
service funds, or to establish them if
they have not done so. The expansion
of the existing ICLS mechanism to
support broadband-only loops and the
voluntary path to model-based support
should not be viewed as eliminating the
role of the states in advancing universal
service; far from it. The deployment and
maintenance of a modern voice and
broadband-capable network in rural and
high-cost areas across this nation is a
massive undertaking, and the continued
efforts of the states to help advance that
objective is necessary to advance our
shared goals.
8. Administrative Issues
156. It is our desire to implement
these revisions to our rules as soon as
possible. The Commission recognizes,
however, that implementing some of
these changes will require new or
revised information collections
requiring approval from the Office of
Management and Budget pursuant to the
Paperwork Reduction Act. Further,
some of the changes the Commission
adopts must be coordinated with the
Commission’s existing cost accounting
and tariffing rules. Given the
administrative requirements the
Commission has noted, it does not
anticipate that full implementation of
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Broadband Loop Support and related
changes will occur prior to October 1,
2016. The Commission delegates
authority to the Bureau to take all
necessary administrative steps to
implement the reforms adopted in this
Order.
157. USAC Oversight. USAC, working
with the Bureau, will take all actions
necessary to implement these rule
changes adopted in this Order. The
Commission notes that USAC has a right
to obtain—at any time and in unaltered
format—all cost and revenue
submissions and related information
provided by carriers to NECA that is
used to calculate payments under any
high-cost support mechanism. The
Commission expects USAC to
implement processes to validate any
calculations performed by NECA to
ensure that accurate amounts are
disbursed, consistent with our
decisions.
158. Administrative Schedule—In
general. The administration of the CAF–
BLS mechanism will, as much as
possible, follow the existing precedent
of the ICLS mechanism. In order to
facilitate the operation of the CAF–BLS
mechanism, the Commission eliminates
the June 30 updates and revisions that
had been permitted pursuant to ICLS.
Accordingly, the Commission specifies
the following schedule:
Carriers file with USAC projected cost and revenue data, including projected voice and broadband-only loops, necessary
to calculate a provisional CAF–BLS amount for each carrier for the following July 1 to June 30 tariff year (ex. on March
31, 2017, carriers will file projected data for July 1, 2017, to June 30, 2018).
USAC files with the Commission in Docket No. xx–xxx provisional CAF–BLS amounts, having applied the budgetary control based on CAF BLS data filed on March 31, as well previously known HCLS data and CAF–BLS true-up information.
Tariffs filed by this date may be deemed lawful for the following July 1 to June 30 tariff year (ex. on June 16, 2017, NECA
files tariffs for July 1, 2017, to June 30, 2018, relying on May 1 CAF–BLS amounts).
USAC disburses provisional CAF–BLS amounts to carriers (July 1, 2017 to June 30, 2018, in this example).
Carriers file actual cost and revenue data and line count data necessary to calculate final CAF–BLS for prior calendar
year (ex. on December 31, 2018, carriers file data for January 1, 2017, to December 31, 2017).
USAC disburses true-ups for final CAF–BLS amounts to carriers (ex. true-ups associated with calendar year 2017 disbursed from July 1, 2019, to June 30, 2020). To ensure a consistent effect on the budgetary constraint through the
year, the Commission modifies the true-up process conducted under ICLS so that under CAF BLS such that true-ups
are spread between July 1 to June 30 of each tariff year, rather than applying the true-ups to the third and fourth quarters of the calendar year, as is currently done.
C. Pricing Considerations
1. Cost Allocation Issues
159. In the following subsections, the
Commission addresses cost allocation
and tariff-related issues raised by
adoption of the new CAF–ACAM and
CAF–BLS mechanisms discussed above.
The implementation of those support
programs and the cost allocation and
pricing issues addressed below will be
coordinated so that the appropriate cost
allocation and tariff revisions will occur
when the new mechanisms become
effective.
160. Today, broadband-only loops are
generally offered through interstate
special access tariffs. The costs
associated with those loops are
allocated 100 percent to the interstate
jurisdiction by the separations
procedures in Part 36 and then to the
special access category by subparts D
and E of Part 69. Under this process, the
interstate broadband-only loop costs are
included in the special access revenue
requirement upon which cost-based
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special access rates are determined.
When the new high-cost support rules
take effect, a carrier may receive support
for a portion of its broadband-only loop
costs. Unless an adjustment is made, a
carrier could recover the costs
associated with the broadband-only
loop twice—once through the CAF–BLS
mechanism and a second time through
special access rates based on the
existing special access revenue
requirement.
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161. To avoid this situation, the
Commission amends Part 69 in two
ways to implement the goal articulated
in the April 2014 Connect America
Fund FNPRM of ensuring that no double
recovery occurs. First, the Commission
creates a new service category known as
the ‘‘Consumer Broadband-Only Loop’’
category for the broadband-only loop
costs that are the subject of this Order.
This new category in Part 69 will
encompass the costs of the consumer
broadband-only loop facilities that
today are recovered through special
access rates for the transmission
associated with wireline broadband
Internet access service. For purposes of
this discussion, wireline broadband
Internet access service refers to a massmarket retail service by wire that
provides the capability to transmit data
to and receive data from all or
substantially all Internet endpoints,
including any capabilities that are
incidental to and enable the operation of
the communications service, but
excluding dial-up Internet access
service. This retail service offered by
rate-of-return carriers or their affiliates
is subject to the reasonable
comparability benchmark. The
wholesale input discussed in this
Order—the transmission component
used to provide the retail service—is
subject to the Commission’s rate-ofreturn regulation, including the changes
adopted herein, unless a carrier seeks to
convert to price cap regulation. A carrier
electing price cap regulation becomes
subject to the rules governing price cap
carrier rates and obligations, including
the transition path and recovery rules
applicable to price cap carrier switched
access charges. See 47 CFR 51.907,
51.905. This category will be included
along with the common line category in
the new CAF–BLS mechanism.
162. Second, the Commission revises
part 69 of our rules to reallocate costs
to avoid double recovery. These
revisions require a carrier to move the
costs of consumer broadband-only loops
from the special access category to the
new Consumer Broadband-Only Loop
category. Today, the facilities associated
with the common line and the consumer
broadband loop run between the enduser premises and the central office, and
are often the same technology or share
some common transmission capacity.
Thus, it is reasonable to conclude that
the costs associated with these two
types of lines are very similar. The
interstate Common Line revenue
requirement includes 25 percent of the
total unseparated loop costs, while the
consumer broadband-only loops will
include 100 percent of the total
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unseparated loop costs. For purposes of
deriving the amount of consumer
broadband loop expenses to be removed
from the Special Access category. This
does not revise any rule associated with
calculating the actual common line
investment and expenses. It is solely for
the purpose of establishing the amount
of consumer broadband-only loop
investment and expenses to remove
from the special access category, carriers
will calculate common line investment
and expenses using an interstate
allocation of 100, rather than 25. The
common line expenses produced by this
calculation will then be divided by the
number of voice and voice/data lines in
the study area to derive the interstate
common line expenses per line. The
interstate common line expenses per
line will be multiplied by the number of
consumer broadband-only loops to
derive the consumer broadband-only
loop expenses to be removed from the
special access category. The
Commission takes this approach
because it includes the broadest
definition of loop costs feasible based
on our current cost accounting rules.
These actions will segregate the
broadband-only loop investment and
expenses from other special access costs
currently included in the special access
category, and also preclude crosssubsidization. The Commission will
oversee NECA’s actions to ensure that
these changes are implemented
consistent with the Commission’s
intent.
2. Tariffing Issues
163. Assessment of end-user charges.
Today, rate-of-return carriers assess
SLCs on voice and voice/broadband
lines. The SLCs are capped at the lower
of cost or $6.50 for residential and
single-line business lines and $9.20 for
multiline business lines. Rate-of-return
carriers will continue to offer voice and
voice/broadband lines under the revised
support mechanisms. Carriers will
continue to be eligible to assess SLCs on
end-user customers of voice and voice/
broadband lines subject to the current
rules. Carriers will also be permitted to
assess an Access Recovery Charge (ARC)
on any line that can be assessed a SLC,
the same as today. Consistent with the
existing rules, SLCs and ARCs may not
be assessed on lines eligible to receive
Lifeline support.
164. Currently, a rate-of-return carrier
may offer broadband-only loops through
its interstate special access tariff. The
consumer broadband-only loop service
is the telecommunications input to a
wireline broadband Internet access
service. When the revised rules adopted
herein become effective, a rate-of-return
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carrier may tariff a consumer
broadband-only loop charge for the
consumer broadband-only loop service.
Alternatively, a carrier may detariff such
a charge. If the rate-of-return carrier
chooses to detariff its wholesale
consumer broadband-only loop offering,
it no longer will be voluntarily offering
the transmission as a service that is
assessable for contributions purposes.
As such, it would not have a
contributions obligation for that service,
similar to other carriers that previously
chose not to offer a separate tariffed
broadband transmission service. The
carrier may not, however, tariff the
charge to some customers, while
detariffing it for others. Because that
service is not rate regulated, no carrier
should in any way represent or create
the impression that the broadband-only
loop charge is mandated by the
Commission. This limitation is designed
to preclude a carrier from using this
flexibility to discriminate among
customers taking broadband-only
services.
165. Consumer broadband-only loop
charge for a carrier electing modelbased support. A portion of the support
a rate-of-return carrier electing modelbased support receives will be to cover
a portion of the costs of the consumer
broadband-only loop. The broadband
loop provides a connection between the
end user’s premises and the ISP—either
an affiliated or nonaffiliated entity. The
broadband-only loop is a wholesale
input into the retail broadband service
offered by the ISP. The cost of that loop
is currently included in the Special
Access category, but will be shifted to
the new Consumer Broadband-Only
Loop category by this Order. Support
received under the model will not
replace all the carrier’s consumer
broadband-only loop costs. Thus, the
carrier may choose (but is not required)
to develop a rate to recover the
remainder of its costs to assess on either
the end user or the ISP, depending on
the pricing relationship established
between the ISP and the consumer.
Above, the Commission found that $42
per month per line represented a
reasonable revenue amount that could
be expected to be recovered through
such a charge for a broadband-only
loop. The Commission will allow—but
does not require—a rate-of-return carrier
electing model-based support to assess a
wholesale consumer broadband-only
loop charge that does not exceed $42
per line per month. If a carrier chooses
to assess a tariffed wholesale consumer
broadband-only loop charge, the
revenues for that transmission service
are subject to a contribution obligation.
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This rate cap allows a carrier the
opportunity to recover its costs not
covered by the model, while limiting
the ability of a carrier to engage in a
price squeeze against a non-affiliated
ISP offering retail broadband service.
Although the retail service provided to
the end user customer is not constrained
by this limitation such service is subject
to the reasonable comparability
benchmark.
166. Participation in the NECA
common line pool and tariff by carriers
electing model-based support. Some
carriers that elect model-based support
may currently participate in the NECA
pooling and tariffing process for their
common line offerings. Model-based
support replaces the high-cost support
(i.e. HCLS, ICLS) amounts a carrier
would receive, as well as any CAF–BLS
associated with consumer broadbandonly loops it would have been eligible
to receive if it had not elected modelbased support. Carriers electing modelbased support will be treated as if they
had received their full support amounts
under traditional ratemaking
procedures. As a result, the only
revenue requirement remaining for the
Common Line and Consumer
Broadband-Only Loop categories are
those amounts associated with end-user
charges. For carriers electing modelbased support, the Commission sees
little benefit from pooling their common
line or consumer broadband-only loop
costs. In fact, it would likely increase
the costs of administering the pooling
process with no concurrent benefit for
carriers. The Commission accordingly
concludes that carriers electing modelbased support will not be eligible to
participate in the NECA common line
pooling mechanism.
167. The Commission does find,
however, that rate-of-return carriers
electing model-based support could
benefit from continued participation in
the NECA tariffs. The Commission
accordingly decides to preserve the
option for carriers to use NECA to tariff
these charges. The charges shall be
capped at current levels for existing
charges, and at $42 for the consumer
broadband-only loop charge. This
approach allows the carriers electing
model-based support to benefit from the
administrative efficiencies associated
with participating in the NECA tariff.
168. Ratemaking for carriers not
electing model-based support. Each
carrier that does not elect model-based
support will have an interstate revenue
requirement for its Consumer
Broadband-Only Loop category, as
determined pursuant to the procedures
set forth in Part 69. The projected
Consumer Broadband-Only Loop
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revenue requirement is then reduced by
the projected amount of CAF–BLS
attributed to that category in accordance
with the procedures in Part 54 defining
such amounts. The remaining projected
revenue requirement is the basis for
developing the rates the carrier may
assess, based on projected loops, A
carrier may not deaverage this rate
within a study area. NECA shall employ
comparable procedures in its pooling
process.
169. A carrier may tariff different
pricing models for the loop service, but
it must select one model for a study
area. A carrier in the NECA pool that
elects to detariff its consumer
broadband-only loop service must
remove all of its Consumer BroadbandOnly Loop category revenue
requirement from the pooling process. It
will retain the support that would have
been applied to the Consumer
Broadband-Only Loop category revenue
requirement if it had not detariffed its
consumer broadband-only loop rates,
plus any revenue resulting from its
detariffed rates.
D. CAF–ICC Considerations
170. Discussion. The Eligible
Recovery mechanism adopted in the
USF/ICC Transformation Order was a
carefully balanced approach. The plan
to provide support for certain
broadband lines adopted here will alter
the balance struck in the USF/ICC
Transformation Order in two significant
ways, and CAF–ICC support could
increase in a manner not contemplated.
As discussed below, the Commission
revises our recovery rules to account for
the support changes adopted in this
Order.
171. The first effect from providing
support to consumer broadband-only
loops is a likely migration of some end
users from their current voice/
broadband offerings to supported
broadband-only lines due to increased
affordability of these services. Although
the Commission cannot predict the
extent of this migration, such changes
will reduce the number of ARC-eligible
lines under the current rules and thus
the amount of Eligible Recovery that the
carrier can recover via ARC charges. As
explained above, recovery from CAF–
ICC will be provided to the extent
carriers Eligible Recovery exceeds their
permitted ARCs. Thus, under the
existing recovery rules, a migration of
end users to consumer broadband-only
loop service would upset the careful
balancing of burdens as between enduser ARC charges and universal service
support, i.e., CAF–ICC. It is not our
intent to alter significantly the balance
struck in the USF/ICC Transformation
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Order. To insure that our actions today
do not unintentionally increase CAF–
ICC support, the Commission requires
that rate-of-return carriers impute an
amount equal to the ARC charge they
assess on voice/broadband lines to their
supported consumer broadband-only
lines. The projected demand for this
imputation will be subject to the same
type of true-up as are the ARCs assessed
on voice/broadband lines.
172. The second effect that will occur
from the adoption of support for
consumer broadband-only loops is that,
as voice/broadband lines are lost, a
carrier’s switched access revenue will
go down. Absent Commission action,
the recovery mechanism would produce
a higher Eligible Recovery for the carrier
and a higher CAF–ICC amount.
Nevertheless, the likelihood exists that
some of the facilities used to support the
lost switched access services will be
reused to provide a portion of the
broadband-only service. This is
especially true with respect to transport
and circuit equipment, although it could
include other facilities as well. Thus, in
some cases, the carrier would be
receiving some special access revenue
recovering the costs of facilities
formerly used to provide switched
access services. Such circumstances
would result in double recovery under
the rules adopted in the USF/ICC
Transformation Order because the
carrier would receive CAF–ICC as well
as special access revenues for the
service being offered—either tariffed or
detariffed. The Commission accordingly
clarifies that a carrier must reflect any
revenues recovered for use of the
facilities previously used to provide the
supported service as double recovery in
its Tariff Review Plans filed with the
Commission, which will reduce the
amount of CAF–ICC it will receive. This
minimizes the effect today’s decision
will have on the level of CAF–ICC
support. The reporting of any double
recovery will be covered by the
certifications carriers must file with the
Commission, state commissions, and
USAC as part of their Tariff Review
Plans.
E. ETC Reporting Requirements
173. In light of our experience in
implementing our high-cost reporting
requirements to date and our desire to
respond to the recommendation of the
Government Accountability Office to
improve the accountability and
transparency of high-cost funding, the
Commission now makes several changes
to our reporting rules. In this section,
the Commission streamlines and revises
rate-of-return ETCs’ annual reporting
requirements to better align those
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requirements with our statutory and
regulatory objectives. First, the
Commission amends our rules to require
rate-of-return ETCs to provide
additional detail regarding their
broadband deployment during each
year, as suggested by several parties.
Specifically, the Commission now
requires all rate-of-return ETCs to
provide location and speed information
of newly served locations. The
Commission also requires rate-of-return
ETCs electing model-based support to
provide information for the locations
already served at the time of election. In
conjunction with these changes, the
Commission eliminates the requirement
that rate-of-return ETCs file a five-year
plan and annual progress reports on that
plan. The net result of these two
changes will be more targeted, useful
information for the Commission, states,
Tribal governments and the general
public. Second, given the reporting
rules the Commission adopts today for
rate-of-return carriers, for administrative
efficiency, they make conforming
changes to the reporting rules for
carriers that elected Phase II modelbased support (hereinafter ‘‘price cap
carriers’’). Third, the Commission
directs USAC to publish in open,
electronic formats all non-confidential
information submitted by recipients of
high-cost support. The Commissions
concludes that these changes ensure
that our reporting requirements
continue to be tailored appropriately to
meet our statutory and regulatory
objectives.
1. Discussion
174. Broadband Reporting
Requirements. The Commission now
updates our annual reporting
requirements for rate-of-return ETCs as
a necessary component of our ongoing
efforts to update the support
mechanisms for such ETCs to reflect our
dual objectives of supporting existing
voice and broadband service, while
extending broadband to those areas of
the country where it is lacking. The
Commission concludes that the public
interest will be served by adopting
broadband location reporting
requirements for rate-of-return carriers
similar to those they adopted for price
cap carriers and authorized bidders in
the rural broadband experiments. This
targeted rule change is critical for the
Commission to determine if universal
service funds are being used for their
intended purposes. As recommended by
the Government Accountability Office,
such data will enable the Commission
and USAC to analyze the data provided
by carriers and determine how high-cost
support is being used to ‘‘improve
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broadband availability, service quality,
and capacity at the smallest geographic
area possible.’’
175. Specifically, similar to the
current requirements for price cap ETCs,
the Commission adopts a rule requiring
all rate-of-return ETCs, starting in 2017,
and on a recurring basis thereafter, to
submit to USAC the geocoded locations
to which they have newly deployed
broadband. These data will provide an
objective metric showing the extent to
which rate-of-return ETCs are using
funds to advance as well as preserve
universal service in rural areas,
demonstrating the extent to which they
are upgrading existing networks to
connect rural consumers to broadband.
USTelecom, NTCA, WTA and ITTA
propose that rate-of-return carriers
submit the number of locations that are
newly served in the prior year, with
both USTelecom and ITTA explicitly
proposing that ETCs electing CAF–
ACAM support submit geocodes for
such locations. Rate-of-return ETCs will
also be required to report the number of
locations at the minimum speeds
required by our rules. The location and
speed data will be used to determine
compliance with the associated
deployment obligations the Commission
adopts today. The geocoded location
information should reflect those
locations that are broadband-enabled
where the company is prepared to offer
service meeting the Commission’s
minimum requirements for high-cost
recipients subject to broadband public
interest obligations, within ten business
days.
176. The Commission expects ETCs to
report the information on a rolling basis.
A best practice would be to submit the
information no later than 30 days after
service is initially offered to locations in
satisfaction of their deployment
obligations, to avoid any potential
issues with submitting large amounts of
information at year end. The
Commission concludes that the
submission of information in near realtime as construction is completed will
be beneficial to all carriers and
particularly useful to smaller carriers.
For instance, ETC technicians will be
able to upload the location information
as part of the routine process of
updating its customer service
availability database upon completion
of construction or in conjunction with
initiation of marketing efforts for the
newly available service, instead of
having to record the location and
transferring all of that information to an
annual report six to 18 months later. It
should also minimize the strain on
USAC’s information technology systems
to avoid a massive amount of bulk
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uploads centered on a single, annual
deadline. The Commission notes that
the amount of information to be
uploaded at the end of the calendar year
is likely to relatively low, as December
is not construction season in many
locales. While rate-of-return ETCs will
have until March 1 to file their location
data for the prior calendar year,
reporting on a rolling basis before then
will allow filers to receive real-time
validation from USAC’s system prior to
the deadline and thereby provide the
opportunity to timely correct any errors
or avoid delays due to system overload.
177. The Commission finds that the
benefits in collecting this locationspecific broadband deployment
information outweigh any potential
burdens from reporting this data,
particularly because rate-of-return ETCs
already collect location information for
other purposes. Rate-of-return carriers
presumably maintain records of
addresses that are newly enabled with
service, so that they can begin to market
such service to those customers.
Moreover, rate-of-return carriers already
are required under our existing rules to
maintain records for assets placed in
service indicating the description,
location, date of placement, and the
essential details of construction. Thus,
both for marketing and regulatory
purposes, rate-of-return carriers already
are tracking where they extend fiber and
install other facilities, and should be
able to determine through commonly
accepted engineering standards which
locations should be able to receive
service at specified speeds. The
Commission directs the Bureau to work
with USAC to develop a means of
accepting alternative information in
those instances where a postal code or
other standardized means of geocoding
is not readily available. Furthermore,
the Commission delegates authority to
the Bureau to act on individual requests
for waiver of this requirement in those
cases where the parties can demonstrate
other unique circumstances that make
compliance with the geocoding
requirement for a subset of locations
impracticable.
178. Similar to the regime adopted for
the price cap carriers that elected Phase
II model-based support, companies that
elect model-based support will include
in their total location count any
locations that already have broadband
meeting the Commission’s minimum
standards. While the Commission
encourages carriers to submit geocoded
location information for their existing
broadband locations no later than the
deadline for the 2017 reporting, they
recognize the possibility that some
smaller companies may not already
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have complete lists of geocoded
locations for their existing broadband
infrastructure that was deployed under
the legacy rules. Accordingly, while
carriers electing the A–CAM model
support are strongly urged to report new
construction on a rolling basis starting
in 2017, the Commission will provide
an additional year for them to file
geocodes for pre-existing broadbandcapable locations, with such
information required to be submitted to
USAC no later than March 1, 2019. Two
years should be enough time for carriers
to collect the necessary data on any preexisting deployment, while providing
the Commission and USAC the specific
locations well in advance of the first
interim deployment obligation with a
defined target.
179. The Commission concludes that
it is necessary to establish a
standardized and automated system to
collect the volume of location level data
on carrier progress in meeting
deployment obligations. Below, the
Commission directs the Bureau to work
with USAC to develop an online portal
that will be available for rate-of-return
carriers to submit location information
on a rolling basis throughout the year.
The Commission directs USAC, working
with the Bureau, to prepare a plan for
the efficient collection, analysis and
access to this location data. The plan
should be provided to the Bureau
within two months of release of this
Order and address the use of automated
reminders for year-end submission due
dates, standardized data elements to the
extent possible, and the time frame
necessary to implement an online
portal.
180. The Commission also establishes
certifications to be filed with ETCs’
location submission, to ensure ETCs’
compliance with their public interest
obligations. Each rate-of-return ETC
electing CAF–ACAM support must
certify that it met its 40 percent interim
deployment obligation at the time it
files its final location report for 2020,
due no later than March 1, 2021, and
file similar certifications annually
thereafter. Rate-of-return ETCs
remaining on embedded cost
mechanisms must file a similar
certification within 60 days of the
deadline for meeting their defined
deployment obligations, i.e. March 1,
2022 and March 1, 2027. The Bureau
has delegated authority to adjust these
deadlines as necessary to align the
timing of the implementation of the
various reforms. To ensure the uniform
enforcement of ETCs’ reporting
requirements, rate-of-return ETCs that
fail to file their geolocation data and
associated deployment certifications
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due by March 1 of each year in a timely
manner will be subject to the same
penalties that currently apply to ETCs
for failure to file the information
required by section 54.313 on July 1 of
each year.
181. In conjunction with adopting the
location reporting requirements above to
track rate-of-return ETCs’ build-out
progress, the Commission now
eliminates the requirement for rate-ofreturn ETCs to file a service quality
improvement plan. The purpose of the
five-year plan and annual updates was
to ensure that ‘‘ETCs [ ] use their
support in a manner consistent with
achieving the universal availability of
voice and broadband.’’ With the reforms
adopted in this order, rate-of-return
ETCs are now subject to detailed
broadband buildout obligations, which
provide a more defined yardstick by
which to measure their progress towards
the universal availability of voice and
broadband service in their areas. The
Commission therefore finds that it is
unnecessary for rate-of-return ETCs to
file a five-year service quality
improvement plan. Moreover, the
Commission concludes that because
there is no longer a requirement to file
a service quality improvement plan,
they also should eliminate the
obligation in our rules for rate of return
ETCs to file updates on that plan under
our authority to eliminate rules that are
no longer applicable. The Commission
also modifies, on the same basis, other
rules to remove references to the service
quality improvement plan.
182. Once the Commission receives
Paperwork Reduction Act approval for
the revised requirement to report
geocoded locations and the elimination
of our progress reporting requirement,
rate-of-return ETCs will no longer be
required to file a progress report
containing maps and a narrative
explanation of ‘‘how much universal
service support was received, and how
it was used to improve service quality,
coverage or capacity and an explanation
regarding any network improvement
targets that have not been met . . . at
the wire center level or census block as
appropriate.’’ The Commission
concludes that the geocoded location
lists that each recipient will be required
to submit on an annual basis will
provide the Commission with more
precisely targeted information to
monitor the recipients’ progress towards
meeting their public interest obligations,
and at that point there will no longer be
a need for recipients to file annual
progress reports.
183. Connect America Phase II
Reporting Requirements. Because USAC
will develop a unified reporting portal
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for geocoded location information, the
Commission finds good cause to make
conforming changes to the relevant
reporting requirements for those price
cap ETCs that accepted Phase II modelbased support. The Commission finds
good cause to change the timing of the
submission of geocoded location
information without notice and
comment to promote administrative
efficiency for both carriers and USAC.
Instead of reporting such information in
their annual report, due July 1 for the
prior calendar year, the Commission
concludes that it will serve the public
interest for price cap carriers to report
on deployment by a deadline that is
close to the end of the calendar year,
rather than six months later. This will
enable USAC to perform validations of
compliance with the interim and final
deployment milestones more quickly
than otherwise would be the case, and
impose remedial measures as necessary.
Moreover, this change will unify
location reporting for all ETCs providing
service to fixed locations, minimizing
administrative costs to USAC and
simplifying monitoring of progress by
the Commission, USAC, states, other
stakeholders, and the public.
184. Specifically, upon the relevant
Paperwork Reduction Act approvals,
price cap ETCs will be required to
submit the requisite information to
USAC no later than March 1 of each
year, for locations newly enabled in the
prior year. Because these changes will
not go into effect by the time the 2015
Form 481 is due on July 1, 2016, the
form and content of that filing will
remain unaffected. They will be free—
and indeed, encouraged—to submit
information on a rolling basis
throughout the year, as soon as service
is offered, so as to avoid filing all of
their locations at the deadline. By filing
locations in batches as construction is
completed and service is offered, they
will avoid any last minute problems
with submitting large quantities of
information and be able to receive
confirmation prior to the deadline that
information was received by USAC. As
they do now, price cap carriers will
continue to make annual certifications
that they are meeting their public
interest obligations, but will do so when
submitting the information to USAC by
this deadline, rather than in their
annual reports. The Commission makes
conforming edits to our rules by moving
the certifications in section
54.313(e)(3)–(e)(6) to new section
54.316. In light of our unification of
reporting obligations, the Commission
deletes the section of our rules regarding
price cap ETCs’ deployment obligations
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and certification of compliance (47 CFR
54.313(e)(2)(i)), (e)(2)(iii), (e)(3)–(e)(6)),
and the Commission moves price cap
ETCs’ existing geocoding and
certification obligations to the new
section 54.316, which now contains all
ETCs’ deployment and the majority of
ETCs’ public interest certification
obligations. Additionally, price cap
ETCs’ geolocation data and associated
deployment certifications will no longer
be provided pursuant to the schedule in
section 54.313. The penalties in section
54.313(j) for failure to timely file that
information would not apply absent
additional conforming modifications to
our rules. Therefore, as is the case for
rate-of-return ETCs, the penalties for
price cap ETCs to fail to timely file
geolocation data and associated
deployment certifications will be
located in new section 54.316(c).
185. Finally, for the reasons explained
above for rate-of-return ETCs, the
Commission eliminates the requirement
for price cap ETCs to file a service
quality improvement plan and to file
annual updates, as well as make
conforming changes to our rules.
186. Improving Access to High-Cost
Program Data. The Commission directs
USAC to timely publish through
electronic means all non-confidential
high-cost data in open, standardized,
electronic formats, consistent with the
principles of the Office of Management
and Budget’s Open Data Policy. In 2014,
the Commission directed USAC to
publish non-confidential program
information for the schools and libraries
mechanism in an open and accessible
format, and today’s action extends that
same directive to the high-cost program,
which represented roughly 50 percent of
the entire USF in 2015. USAC must
provide the public with the ability to
easily view and download nonconfidential high-cost information,
including non-confidential information
collected on the Form 481 and the
geocoded location information adopted
above, for both individual carriers and
in aggregated form. The Commission
directs USAC to develop a map that will
enable the public to visualize service
availability as it expands over time.
187. The Commission directs the
Bureau to work with USAC to put
appropriate protections in place for
ETCs to seek confidential treatment of
limited subset of the information.
Entities, such as states and Tribal
governments, which already have access
to confidentially filed information for
ETCs’ within their jurisdiction, will
continue to have access to such
information through the online
database. The Commission finds that
making such data publicly available will
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increase transparency and enable ETCs,
the Commission and other stakeholders
to assess ETCs’ progress in deploying
broadband throughout their networks as
well as compliance with our rules. Once
these updated systems are operational,
the Commission anticipates that it
would no longer require ETCs to submit
duplicative information with the
Commission through ECFS and with
state commissions. Rather, all such
information will be submitted to the
Administrator, with federal and state
regulators, and Tribal governments
where applicable, having full access to
such information. The Commission
seeks comment on this proposal in the
concurrently adopted FNPRM.
188. As ETCs comply with the new
public interest and reporting
requirements and broadband public
interest obligations in this Order, the
Commission will continue to monitor
their behavior and performance. Based
on that experience, the Commission
may make additional modifications as
necessary to our reporting requirements.
F. Rule Amendments
189. The Commission takes this
opportunity to make several nonsubstantive rule amendments. The
Commission finds that notice and
comment is unnecessary for rule
changes that reflect prior Commission
decisions to eliminate several support
mechanisms that inadvertently were not
reflected in the Code of Federal
Regulations (CFR). Similarly, the
Commission finds notice and comment
is not necessary for rule amendments to
ensure consistency in terminology and
cross references across various rules, to
correct inadvertent failures to make
conforming changes when prior rule
amendments occurred, and to delete
references to rules governing past time
periods that no longer are applicable.
190. First, the Commission removes
section 54.301, Local switching support,
from the CFR. The Commission
eliminated local switching support
(LSS) as a support mechanism in the
USF/ICC Transformation Order, but did
not remove the LSS rule at that time.
Second, the Commission removes the
first sentence of section 54.305(a), Sale
or transfer of exchanges, as it pertains to
prior time periods and refers to a rule,
section 54.311, which no longer exists
in the CFR. Third, the Commission
modifies two provisions of section
54.313(a) requiring ETCs to submit a
letter certifying that its pricing is in
compliance with our rules. The
Commission concludes that a
requirement for an ETC to certify its
compliance with a rule is substantially
similar to the requirement to provide a
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certification letter and the current letter
requirements may impose a burden
without a material benefit. Fourth, the
Commission corrects the language
regarding the existing certification
requirement in section 54.313(f)(1) to
reflect the Commission’s decision in the
December 2014 Connect America Order
to require rate-of-return carriers to offer
at least 10/1 Mbps upon reasonable
request. Fifth, the Commission deletes
paragraph 54.313(e)(2)(i) and modify
language in paragraph 54.313(f)(1)(iii) of
our rules because the language in
duplicative of language in other parts of
section 54.313. Sixth, as discussed
above, in light of our changes to our
location reporting rules and our
decision to no longer require ETCs to
file service quality improvement plans,
the Commission deletes references in
our rules to the filing of progress reports
for those plans, delete our existing rule
regarding price cap ETCs’ obligation to
report geocoded locations and the rule
requiring certification of compliance
with such ETCs’ deployment obligations
and moves those requirements to new
section 54.316. Seventh, the
Commission deletes subpart J of Part 54;
the Commission eliminated the
Interstate Access Support (IAS) support
mechanism for price cap carriers in the
USF/ICC Transformation Order, but did
not at that time delete the associated
IAS rules from the CFR. Eighth, the
Commission eliminates section 54.904,
the ICLS certification requirement, to
reflect the Commission’s decision in the
USF/ICC Transformation Order to
eliminate that rule and instead impose
annual reporting requirements in
section 54.313. Ninth, the Commission
amends section 54.707 Audit controls so
that it reflects accurate cross references
to rules that currently are in existence
and applicable. The Commission
renames the existing rule, section
54.707, as paragraph (a) and add new
paragraphs (b) and (c) to reflect rules
that were adopted by the Commission in
the USF/ICC Transformation Order, but
inadvertently not codified. Tenth, the
Commission amends sections
69.104(n)(ii) and 69.415(a)–(c) to
remove language that is no longer
applicable. Eleventh, the Commission
amends section 69.603(g), Association
functions, to remove references to
support mechanisms that no longer exist
or functions that NECA no longer
performs, and to update terminology to
reflect terms now used in Part 54.
III. Order and Order on
Reconsideration
191. As part of our modernization of
the framework for rate-of-return
support, the Commission also
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represcribes the currently authorized
rate of return from 11.25 percent to 9.75
percent in all situations where a
Commission-prescribed rate of return is
used for incumbent LECs. The rate of
return is a key input in a rate-of-return
incumbent LEC’s revenue requirement
calculation, which is the basis for both
its common line and special access rates
and its universal service support. This
action is a critical piece of our reform
of the rate-of-return support
mechanisms. A rate of return higher
than necessary to attract capital to
investment results in excessive profit for
rate-of-return carriers and unreasonably
high prices for consumers. It also
inefficiently distorts carrier operations,
resulting in waste in the sense that, but
for these distortions, more services,
including broadband services, would be
provided at the same cost.
192. It is important that the
Commission takes such comprehensive
action to ensure the prescribed rate of
return is commensurate with the
investment risks incumbent LECs are
undertaking today, such as broadband
network investments, and at the same
time reflects current market conditions.
Our adoption today of self-effectuating
measures to ensure that high-cost
support remains within the budget
established by the Commission in no
way lessens the rationale for
represcribing the authorized rate of
return. Our adopted rate of return will
provide rate-of-return carriers with
economically efficient incentives to
deploy broadband to meet the needs of
their customers. An unnecessarily high
rate of return inefficiently allocates
funds away from carriers with relatively
low capital to other expense ratios
toward those with higher ratios.
Moreover, an excessive rate of return
inefficiently distorts individual rate-ofreturn carriers’ investment and other
decisions, reducing what can be
achieved with available universal
service resources. While an excessive
rate of return might provide a minimally
stronger incentive for rate-of-return
carriers to extend broadband network
deployment, this would only be so for
marginal projects, which would likely
be a minority of all potential projects.
As a general matter, deployment
decisions are not sensitive to small
changes in profitability. In any case, the
Commission concludes that it is
preferable to achieve our deployment
objectives directly and transparently
through the adoption of defined
mandates and appropriate targeting of
subsidies, rather than in a concealed
manner by maintaining an inefficiently
high rate of return, which creates
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distortions and also creates other
unintended and difficult to predict
consequences. In addition to ensuring
responsible stewardship of finite
universal service funds, our action here
will also reduce certain rates for
customers in rural areas.
193. As described in detail below, the
represcribed rate of return will apply in
all situations where a Commissionprescribed rate of return is used. The
rate of return is used to calculate
interstate common line rates, consumer
broadband-only loop rates, as discussed
elsewhere in this Order, and business
data service (i.e., special access) rates
and some forms of universal service
support. Accordingly, the new 9.75
percent rate of return will be used to
calculate common line rates, special
access rates and universal service
support for rate-of-return incumbent
LECs where applicable. In represcribing
the rate of return here, the Commission
does not intend to affect the calculation
of and recovery amounts associated
with switched access rates that are
currently capped or transitioning
pursuant to the USF/ICC
Transformation Order. Relying
primarily on the methodology and data
contained in the Wireline Competition
Bureau’s Staff Report—with some minor
corrections and adjustments in part to
respond to issues raised in the record—
the Commission now identifies a more
robust zone of reasonableness between
7.12 to 9.75 percent. The Commission
then adopts a new rate of return at the
top end of this range at 9.75 percent and
a transition to this authorized rate of
return.
A. Discussion
1. Procedural Issues
194. Section 205(a) of the
Communications Act requires the
Commission to give ‘‘full opportunity
for hearing’’ before prescribing a rate
including the authorized rate of return
for rate-of-return carriers. However, as
the Commission explained in the USF/
ICC Transformation Order, a formal
evidentiary hearing is not required
under section 205, and the Commission
has on multiple occasions prescribed
individual rates in notice and comment
rulemaking proceedings. In the USF/ICC
Transformation Order, the Commission
specified the process for a new rate of
return prescription proceeding using
notice and comment procedures, and on
the Commission’s own motion, waived
certain procedural rules to facilitate a
more efficient process, including
specific paper filing requirements. The
Commission also sought comment in the
USF/ICC Transformation FNPRM, 76 FR
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78384, December 16, 2011, on the rate
of return calculation and the related
data and methodology to so calculate. In
addition, as noted above, the Bureau
issued a Staff Report recommending a
zone of reasonableness for the rate of
return and sought comment on its
approach in a public notice.
195. On December 29, 2011, NECA,
the Organization for the Promotion and
Advancement of Small
Telecommunications Companies, and
the Western Telecommunications
Alliance (collectively, Petitioners) filed
a joint petition for reconsideration of the
USF/ICC Transformation Order that
remained pending at the time the Staff
Report was released. Petitioners
challenge, among other things, the
procedures adopted in the USF/ICC
Transformation Order as ‘‘insufficient to
meet the hearing requirement of section
205(a)’’ and relevant provisions of the
Administrative Procedure Act (APA).
Specifically, Petitioners argue that the
Commission must first address
‘‘identified flaws’’ in its rules governing
represcription before conducting a
hearing based on those rules, using
procedures that are ‘‘sufficiently
rigorous for the adjudicative, adversarial
fact-finding process required under
section 205(a) of the Act and the APA.’’
The Rural Associations raised similar
issues in their comments on the Staff
Report, which the Commission also
addresses.
a. Whether Commission Should Revise
Prescription Rules Before Represcribing
Rate of Return
196. Petitioners argue that, prior to
represcribing, the Commission must
first adopt revised rules addressing
alleged ‘‘flaws’’ in the prescription
rules. According to Petitioners, the
Commission ‘‘admitted its methodology
for determining ‘comparable firms’ was
deficient’’ in that it did not know how
to account for the fact that many rateof-return incumbent LECs are locally
owned and not publicly traded.
Petitioners argue that the Commission
should correct these alleged ‘‘flaws’’ in
the rules before represcribing the rate of
return. Similarly, the Rural Associations
and GVNW argue that having waived
Part 65 procedural rules governing
prescription, the Commission must
establish clear replacement rules to
govern the process under section 205.
The Rural Associations note that in the
2001 MAG Order, 66 FR 59719,
November 30, 2001, the Commission
stayed the effectiveness of section
65.101 to allow the Commission
comprehensively to review the Part 65
rules to ensure that decisions they make
are consonant with current conditions
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in the marketplace but assert that
‘‘complete review’’ has yet to occur.
197. The Commission disagrees with
Petitioners and hereby deny their
Petition with respect to these claims.
Petitioners mischaracterize the
Commission’s prescription process as
rigid adherence to set methodologies.
The rules provide a framework, but
leave the Commission discretion to
qualitatively and quantitatively estimate
a rate of return. The Commission’s
prescription rules specify the
calculations for computing the rate of
return, i.e., the cost of capital and its
component parts, ‘‘unless the record in
that [prescription] proceeding shows
that their use would be unreasonable.’’
The orders cited by Petitioners in
support addressed deficiencies with the
record, not necessarily with the rules
themselves, and the Commission has
revised those rules since those orders
cited were released. Petitioners cite
generally the 1990 Prescription Order,
55 FR 51423, December 14, 1990, as
support for their arguments. The
Commission in the 1990 Prescription
Order, however, rejected the notion that
the rules were so flawed that the
rulemaking docket related to Part 65
methodologies for calculating the rate of
return would need to be complete before
represcribing, finding that ‘‘while some
refinements might be desirable, the Part
65 procedures had worked quite well’’
when it initiated the prescription
proceeding. Similarly, the Rural
Associations cite the 2001 MAG Order
that stayed the section 65.101 to allow
time to review the Part 65 rules. The
Commission, however, reviewed the
Part 65 rules in the 2011 USF/ICC
Transformation Order & FNRPM,
waiving certain rules to facilitate a more
efficient process. Bureau staff also
reviewed Part 65 rules in the Staff
Report subject to notice and comment
proposing waiving certain provisions
that are no longer reasonable. By this
Order, the Commission addresses
instances where strict application of our
prescription rules would be inconsistent
with a methodologically sound estimate
of the rate of return. For example, the
Commission revises the cost of debt
formula as discussed in further detail
below, and waive the rule requirement
to calculate the WACC based on the cost
of preferred stock. Where the
Commission finds that strict application
of the rules would be unreasonable,
such as relying on ARMIS data from
RHCs that is no longer collected, they
rely on reasonable alternatives. The
Commission does, however, conclude
that the prescription rules and its
calculations on the cost of capital
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continue to provide an effective starting
point by which to determine an
appropriate rate of return.
198. The Commission rejects
Petitioners’ claims that our
‘‘methodology for determining
‘comparable firms’ was deficient,’’ and
that they do not know how to account
for the fact that many rate-of-return
incumbent LECs are ‘‘locally owned and
not publicly traded.’’ As discussed in
further detail below, the most widely
used methods of calculating the cost of
equity, a key component in calculating
the rate of return, call for data from
publicly traded firms, yet the vast
majority of rate-of-return carriers are not
publicly traded. To address this
concern, the Commission selects below
an appropriate set of publicly-traded
surrogate or proxy firms, for which
financial data is available publicly to
infer the cost of equity for these carriers.
Any deficiencies in the methodology
used to calculate the rate of return and
use of a proxy group can be and have
been addressed in the Staff Report and
were subject to numerous rounds of
notice and comment, which the
Commission considers and addresses
again in this order.
b. Notice and Comment Procedures
Satisfy Section 205(a) Hearing
Requirement
199. Petitioners also argue that the
notice and comment procedures the
Commission adopted in the USF/ICC
Transformation Order do not satisfy the
section 205(a) hearing requirement. The
Rural Associations and GVNW similarly
argue that the procedural process
seeking comment on the Staff Report
did not provide parties with the ‘‘full
opportunity for hearing’’ required by
section 205(a). The Rural Associations
assert that this is because ‘‘prior rate
prescription hearings have often
involved multiple submissions from
parties, giving each side a fair chance to
address and rebut proffered facts and
arguments’’ and parties have
‘‘reasonable access to discovery (mainly
interrogatories and document requests),
either directly or as part of a required
filing.’’ Similarly, Petitioners argue that
the Commission should clarify
procedures governing presentation of
data and discovery. Petitioners assert
that the Commission did not explain
why ‘‘the need for adjudicative factfinding—which underlie the Part 65
rules—are no longer operative.’’
Petitioners assert that key to the ‘‘ability
to participate fully in a rate-of-return
prescription hearing is access to two
basic tools: (1) Disclosure of the
information and assumptions
underlying the factual submissions of
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any parties seeking lower rates of return;
and (2) the ability to probe others’
submissions for weaknesses and errors.’’
Finally, Petitioners argue that the
Commission should ‘‘reinstate the 6060-21-day time frames for adversarial
filings set forth in section 65.103 of its
rules’’ because this is ‘‘critical’’ for rateof-return incumbent LECs with ‘‘limited
resources to develop the data needed to
prepare direct cases, to obtain the
services of qualified experts to analyze
this data, and to respond fully to
adversarial filings.’’
200. The Commission rejects these
assertions because, consistent with
AT&T v. FCC, interested parties have
had an opportunity to participate in
multiple rounds of comments. The
Commission finds that interested parties
had sufficient notice and opportunity to
comment on the rate of return
prescription process consistent with the
APA and section 205 of the Act. As the
Commission observed in the USF/ICC
Transformation Order, a formal
evidentiary hearing is not required
under section 205, and the Commission
has on multiple occasions prescribed
individual rates in notice and comment
rulemaking proceedings. In fact, the
Commission expressly rejected the
proposition that it could not ‘‘lawfully
use simple notice and comment
procedures to prescribe the rate of
return authorized for LEC interstate
access services.’’ In the USF/ICC
Transformation Order, the Commission
explicitly waived outdated and onerous
procedures historically associated with
represcription to streamline and
modernize this process. Indeed, the
Commission noted that interested
parties now file documents
electronically making it less
burdensome for parties to participate in
the prescription proceeding.
Accordingly, the Commission
determined that the paper hearing
process was no longer necessary to
ensure adequate public participation.
201. Moreover, interested parties have
had no less than three different
opportunities to participate in the
represcription process. In response to
the USF/ICC Transformation NPRM, 76
FR 11632, March 2, 2011, interested
parties had the opportunity to comment
on whether to initiate a represcription
proceeding. Subsequently in response to
the USF/ICC Transformation FNPRM,
interested parties had an opportunity to
comment on the methodologies used to
calculate the WACC and rate of return.
The Commission received multiple
submissions from parties, which the
Commission’s Electronic Comment
Filing System (ECFS) generally makes
available within 24 hours. The vast
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majority of interested parties have had
access to these materials via the
Internet, giving each side a fair chance
to timely address and rebut proffered
facts and arguments. Based on these
comments, the Commission could have
gone straight to order prescribing the
rate of return, but instead took the extra
step of preparing, releasing and seeking
comment on the Staff Report.
202. In the USF/ICC Transformation
Order, the Commission waived the
onerous section 65.103(b) 60-60-21 day
filing schedule to coincide with the
pleading cycle of the USF/ICC
Transformation FNPRM. As a result,
interested parties had 50 days to file
comments and 30 days to file replies on
how the Commission should represcribe
the rate of return. Furthermore,
interested parties had an additional 40
days to file comments and 30 days to
file reply comments on the data and
methodologies proposed by staff to
calculate the rate of return in the Staff
Report. The Commission finds that
interested parties had more than
sufficient time and opportunity to
address significant arguments and
methodologies to calculate the rate of
return in the record.
203. Although the Commission
waived the section 65.101 requirement
that the Commission publish notice of
the cost of debt, cost of preferred stock,
and capital structure computed in the
section 65.101(a) notice initiating
prescription, they find that all interested
parties had adequate notice of these
calculations in the Staff Report.
Interested parties had an opportunity to
review and comment on the Staff
Report, including numerous appendices
calculating the embedded cost of debt,
betas, cost of equity, WACC, capital
structure and times-interest-earned
ratios as well as the peer review reports
on the Staff Report. Furthermore, there
was nothing to prevent parties from
filing direct cases or written
interrogatories and requests for
documents directed to any rate of return
submission as permitted under the
Commission’s rules. In sum, the
Commission finds that interested parties
had several opportunities to comment
on the actual rate of return calculations,
thereby easily satisfying the APA and
section 205 procedural requirements.
Accordingly, the Commission denies the
Petition to the extent described herein.
2. Identifying and Obtaining Data To
Compute WACC
204. The first step in the process to
represcribe the rate of return is to
identify the appropriate data and
methodologies to use in calculating the
WACC. To calculate the WACC for a
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company or group of companies,
Commission rules require the
determination of: (1) The company’s
capital structure, i.e., the proportions of
debt, equity, and preferred stock a
company uses to finance its operations;
and (2) the cost of debt, equity and
preferred stock. The rules specify the
calculations for computing components
of the WACC, including capital
structure and the cost of debt and
preferred stock, to determine a
composite for all incumbent LECs with
annual revenues equal to or above an
indexed revenue threshold, adjusted for
inflation. The rules do not, however,
require the Commission to use the
results of those calculations to
determine the rate of return ‘‘if the
record in that proceeding shows that
their use would be unreasonable.’’ The
rules also do not specify how to
calculate the cost of equity, but there are
several widely-used asset pricing
methods that the Commission should
consider in estimating the cost of equity,
including the Capital Asset Pricing
Model (CAPM) and the Discounted Cash
Flow Model (DCF). Both models
calculate the cost of equity based on an
analysis of publicly traded
representative firms’ common stock.
While a firm’s cost of debt can generally
be estimated from its accounts, or other
public reports of its borrowing costs,
direct estimates of the cost of equity for
firms that are not publicly traded are not
typically possible to make (exceptions
being if the firm was sold recently, or
the occurrence of some other event that
revealed information about the expected
income stream and market value of the
firm). In such cases, it is not uncommon
to infer equity costs from data on firms
that are publicly traded.
205. The rules specify that the WACC
be calculated using Regional Bell
Holding Companies (RHCs) data
reported to the Commission through
Automated Reporting Management
Information System (ARMIS) reports.
When the Commission last represcribed
in 1990, it could rely on ARMIS reports
to estimate the cost of debt and capital
structure, which came from incumbent
LECs with investment-grade bond
ratings—companies engaged in
substantially the same wireline
operations as the small incumbent LECs
also subject to rate-of-return regulation.
The Commission, however, has forborne
from collecting ARMIS reports from the
RHCs so this data is no longer readily
available. In the USF/ICC
Transformation FNPRM, the
Commission sought comment on what
additional data the Commission should
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require and rely upon in the absence of
ARMIS data.
206. The Commission’s rate of return
prescription rules envision calculating
the WACC based on data from a proxy
group of telephone companies that are
intended to represent the universe of
rate-of-return carriers. In the past, the
Commission used the RHCs as proxy
firms to determine capital structure and
the costs of debt, equity, and preferred
stock for all incumbent LECs. Today,
with ARMIS reports a thing of the past,
and with the largest RHCs increasingly
dissimilar from the smaller rate-ofreturn incumbent LECs, the Commission
must expand its analysis beyond the
RHCs to ensure that its analysis
reasonably reflects the nature of today’s
rate-of-return incumbent LECs. The
Commission finds that it is no longer
reasonable to rely exclusively on RHC
data based on reports no longer
collected as specified in our rules.
Accordingly, the Commission finds that
they must identify a comparable proxy
group representing the universe of rateof-return carriers from which to draw
data to calculate the WACC.
3. Identifying an Appropriate Proxy
Group for Rate-of-Return Carriers
207. The reliability of our WACC
calculation depends on the
representativeness of the proxy group
the Commission selects. The
Commission sought comment in the
USF/ICC Transformation FNPRM on the
group of companies that should be
selected as proxies. Staff considered
comments filed in response, proposing
that the Commission use data from a
proxy group of 16 companies consisting
of (1) RHCs (RHC Proxies), (2) mid-sized
price cap incumbent LECs (Mid-Size
Proxies), and (3) publicly-traded rate-ofreturn incumbent LECs (PubliclyTraded RLEC Proxies). Staff developed
its recommended proxy group based on
qualitative comparison between rate-ofreturn carriers for which the WACC is
being calculated and potential proxies,
considering whether the proposed
proxies face similar risks, which the
cost of capital is a function of, and
whether they have a similar
institutional setup. Staff used a threepart test to select its proxy group
looking at (1) whether companies’
operations consisted of significant
incumbent LEC price-regulated
interstate telecommunications services,
(2) the extent to which firms offer the
same or similar services as rate-of-return
carriers based on market and regulatory
risks, and (3) the reliability of financial
data.
208. Commenters criticize staff’s
methodology for selecting its proposed
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proxy group with which it estimated the
WACC. The Rural Associations criticize
the analysis for ‘‘ ‘streetlight effect’
bias—i.e., the tendency to use data
simply because it is available, not
because it is relevant.’’ The Commission
disagrees and find that staff reasonably
relied on available data that was both
relevant and reliable.
209. As an initial matter, there is
scant reliable publicly available data for
estimating the cost of capital specific to
rate-of-return incumbent LECs. The
most widely used methods of estimating
the cost of equity in particular call for
data only available from publicly-traded
firms, yet the vast majority of rate-ofreturn carriers are not publicly traded.
A publicly-traded company’s stock price
and dividend payments are observable,
while those of a privately held firm,
including the overwhelming majority of
rate-of-return incumbent LECs, are not.
Therefore, using the models used most
often to estimate the cost of equity, the
cost of equity for firms that are not
publicly traded is inferred based on data
from firms that are publicly traded.
Because the vast majority of rate-ofreturn carriers are not publicly traded,
the Commission must select an
appropriate proxy group of incumbent
LECs, for which financial data is
publicly available and which face
similar risks as rate-of-return carriers to
calculate the cost of capital.
210. Furthermore, staff selected the
proxy group based in part on the
reliability of financial data such as the
frequency equity is traded and overall
financial health. These factors were not,
however, the only factors. Staff also
relied on publicly-available data and
observable stock prices for a proxy
group of publicly-traded
telecommunications companies that
would enable the development of
estimates that as closely as possible
reflect the risk of the market for
regulated interstate telecommunications
services. To select this proxy group,
staff applied a qualitative analysis that
included a number of different factors,
including the extent to which a
company’s operations could be
classified as price-regulated interstate
telecommunications services and
similarity to rate-of-return operations.
The Commission finds that staff’s
qualitative approach was reasonable,
not simply relying on available data, but
data that was both reliable and relevant
to the analysis.
211. As one key criterion for
selection, staff required that a proxy
firm derive 10 percent or more of its
revenues from price-regulated interstate
telecommunications services as an
incumbent LEC. The Rural Associations
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characterize this selection criteria as
‘‘arbitrary’’ and without justification,
which it claims is lower than the rateof-return incumbent LECs as a group.
While the Commission agrees with the
Rural Associations that 10 percent is a
relatively low number, they find the
proxy group of firms selected after
applying the 10 percent threshold (along
with the other criteria used in the Staff
Report) to be reasonable. Staff looked at
earnings and revenues reported on
companies’ Securities and Exchange
Commission (SEC) Form 10–Ks to
identify its proxy group. SEC Form 10–
Ks for the proxy group reveal that
notwithstanding diversification, most, if
not all, of the firms in the proxy group
derive a substantial, and in many cases,
the largest, portion of their revenues
from facilities-based wireline
telecommunications services provided
over networks that they own, finance,
build, operate, and maintain, which is
exactly what rate-of-return incumbent
LECs do. Staff excluded from the proxy
group telecommunications companies
that provide a different core or set of
core services, and/or different assets,
scale, scope, customer base, marketing
strategy, market or market niche, and/or
competitive position than facilitiesbased wireline telecommunications
services.
212. The WACC estimates the cost of
capital for price-regulated interstate
special access and common line services
which are facilities-based wireline
telecommunications services. The
proposed proxy group consisted of firms
where, in addition to their priceregulated business operations, a
substantial portion of their business
operations that are not price-regulated
provide facilities-based wireline
telecommunications services. Thus, an
overall WACC estimate for the firm as
a whole should be a reasonable
approximation of the WACC for the
price-regulated interstate access service.
In fact, many of the wireline network
assets, e.g., wire centers, nodes, fiber or
copper, conduit, trenches, manholes,
telephone poles, etc., are shared among
these different wireline services.
Moreover, some of the different wireline
services are sold to the same customers.
Thus, given at least roughly similar
supply-side characteristics, and roughly
similar demand-side characteristics, the
risk of the facilities-based priceregulated interstate access services and
the risk of these companies’ other
facilities-based services would
reasonably be expected to have roughly
similar, though not precisely the same,
level of risk. There are no pure-play,
price-regulated providers of wireline
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interstate access services that issue
publicly-traded stock on which to base
WACC estimates. The Commission
therefore finds that staff’s application of
the 10 percent threshold produces a
reasonable proxy on which to base
estimates of the WACC for priceregulated interstate access services.
213. The Rural Associations criticize
staff’s proxy group for including RHCs
Proxies, Mid-Size Proxies and PubliclyTraded RLEC Proxies as
unrepresentative of the market risks that
rate-of-return incumbent LECs face
affecting their ability to attract capital.
For example, the Rural Associations
proposed estimating the cost of capital
using rate-of-return incumbent LECspecific data rather than data assembled
from staff’s proxy companies. ICORE
asserts that the RHC Proxies and MidSize Proxies have more diverse offerings
than rate-of-return incumbent LECs
which therefore face higher costs of
capital. Ad Hoc rebuts that argument,
noting that it does not necessarily
follow that less diverse operations
means higher cost of capital and
criticizes such arguments as ‘‘pure
speculation’’ lacking any evidentiary
basis. AT&T notes that critics of staff’s
proxy group did not submit data into
the record to negate the need for proxies
or proxies more representative of rateof-return incumbent LECs than staff’s
proposed proxy. The Commission finds
the staff’s selection of the proxy group
reasonable for the reasons given above
and reject the Rural Associations’
proposed proxy group for the reasons
below.
214. In addition, the Rural
Associations, the Alaska Rural Coalition
and peer reviewer Professor Bowman
question the inclusion in the proxy
group of firms that had recently
emerged from bankruptcy proceedings,
including FairPoint Communications,
Inc. (FairPoint), Hawaiian Telecom, as
well as certain ‘‘financially unhealthy’’
Mid-Size Proxies. Professor Bowman
argues in general that rate-of-return
regulation is appropriate for companies
that are financially healthy, and that an
operation that is subject to rate-of-return
regulation would not be expected to go
bankrupt. Staff acknowledged in the
Staff Report that a company’s overall
financial health makes its financial data
more reliable in determining the cost of
equity than that of a company in
financial difficulty, which was part of
staff’s three-part test in selecting the
proxy group.
215. FairPoint entered bankruptcy in
October 2009 and exited in January
2011, while Hawaiian Telecom entered
bankruptcy in December 2008 and
exited in October 2010. In the Staff
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Report, staff generally based the betas, a
variable included in the CAPM cost of
equity calculation that measures a
company’s stock volatility relative to the
market, on weekly data for the 5-year
period ending September 18, 2012.
However, staff accounted for the
FairPoint and Hawaiian Telecom
bankruptcies by basing their betas
instead on post-bankruptcy data. As a
result, none of the data on which their
betas are based reflects the business
changes FairPoint or Hawaiian Telecom
undertook during the periods prior to
and during bankruptcy. Staff’s
adjustment should minimize any
potential error in the CAPM estimates of
the cost of equity for FairPoint and
Hawaiian Telecom relating to
bankruptcy. As neither FairPoint nor
Hawaiian Telecom pays dividends, staff
did not use the DCF model to estimate
the cost of equity for these two
companies in the Staff Report. Further,
capital structure estimates are based on
post-bankruptcy data, which should
minimize errors to the WACC estimates.
In response to Bowman’s assumption
that rate-of-return companies would not
be expected to go bankrupt, the
Commission notes that there were other
rate-of-return incumbent LECs that went
bankrupt that staff excluded from its
proxy group that otherwise would have
met its three-part test. Thus, staff was
careful to calculate the rate of return
based on data from its proxy group that
it felt were representative of most rateof-return companies.
216. The Rural Associations also
criticize the financial health of the MidSize Proxies included in staff’s proxy
group. Staff acknowledged in the Staff
Report that the Mid-Size Proxies in
general have a large share of debt in
their capital structures, low timesinterest-earned ratios, and noninvestment-grade debt ratings, and thus
are less than ideal for estimating the
cost of capital. Staff also found,
however, that the Mid-Size Proxies are
less diversified than RHCs and thus
match more closely the majority of rateof-return incumbent LECs’ wireline
service offerings. Staff further found that
the Mid-Size Proxies, like the majority
of rate-of-return incumbent LECs, but in
contrast to the RHCs, have a significant
fraction of their incumbent LEC
operations in sparsely populated, high
cost, rural areas of the country. Further,
staff found that the Mid-Size Proxies
have a relatively large number of
analysts’ growth estimates compared to
the Publicly-Traded RLEC Proxies
which is reflected in the consensus
growth rate used in the DCF model to
estimate the cost of equity. Thus, in the
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Staff Report, staff recommended that the
Commission include the Mid-Size
Proxies in calculating a composite
WACC, but not rely on them
exclusively.
217. The Commission agrees with the
staff recommendation in the Staff
Report to include, but not rely
exclusively on the Mid-Size Proxies in
the overall proxy group. The Rural
Associations raised concerns with the
Mid-Size Proxies other than
Windstream, because in its view these
firms are not in good financial health.
The Rural Associations, however, did
not offer any concrete definition of good
financial health, nor any objective and
practical criteria that might be used to
measure the health of the firms and to
determine whether they should be
excluded from the process of estimating
the WACC. Although these Mid-Size
Proxies might be less than ideal proxies
for estimating the cost of capital, the
Commission is reluctant to exclude
them from the overall proxy group and
thus lose the value these proxies
contribute generally to the data and
WACC estimates. These incumbent
LECs operate in areas similar to the
sparsely populated, high cost, rural
areas in which rural rate-of-return
incumbent LECs operate, and are
publicly-traded and studied by financial
professionals, making it possible to
develop WACC estimates for these
companies using standard cost of capital
methodologies. In our judgement,
averaging WACC estimates for these
Mid-Size Proxies along with estimates
for the other companies in the overall
proxy group to develop an overall
WACC estimate for rate-of-return
incumbent LECs is more likely than not
to improve the accuracy of the overall
estimate, notwithstanding the potential
for error in the WACC estimates for the
Mid-Size Proxies. There is no perfect
WACC estimate, as a WACC estimate
made for any company always will have
some amount of error, which is why the
Commission considers a range of
possible results.
218. In sum, the Commission finds
that staff’s approach to identifying a
representative proxy group to be
reasonable, including its decision to
include RHC Proxies, Mid-Size Proxies,
and Publicly-Traded RLECs Proxies in
the proxy group. Notably, joint peer
reviewers Albon and Gibbard found that
the selections made appropriately
balanced the trade-offs of a proxy group
that is too small, which results in
measurement errors, and a proxy group
that is too large, which is
unrepresentative. The Commission
reiterates and agrees with staff’s
position that, collectively, the three
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groups represent a wide spectrum of
incumbent LEC operations, include both
price cap and rate-of-return regulated
operations, and include those
incumbent LECs with the most widely
traded equity, allowing greater
confidence in the calculations that rely
on the public trading of stock, especially
given that it is highly uncertain where
within that spectrum non-publiclytraded rate-of-return incumbent LECs
lie.
4. Data Relied on in Staff Report
219. The allowable rate of return
should reflect a reasonable estimate of
the current cost of capital. The Bureau
released the Staff Report on May 16,
2013, calculating the WACC based on
data then-available. This raises the
question whether the Commission
should continue to rely on such data to
calculate the rate of return. The
Commission finds that changes to
monthly average yields on Treasury
securities and corporate bond yields
since the Staff Report was issued are not
significant enough to warrant a
complete update of the data used by
staff to calculate the cost of capital.
Accordingly, for the reasons explained
below, the Commission continues to
rely on data in the Staff Report used to
calculate the WACC.
220. Section 65.101(a) of our rules
specifies that the Commission should
initiate the rate of return prescription
process when they determine that the
monthly average yields on 10-year
Treasury securities remain, for a
consecutive six month period, at least
150 basis points above or below the
average of the monthly average yields in
effect for the consecutive six month
period immediately prior to the effective
date of the current prescription. As the
cost of capital is constantly changing as
a result of the interactions in the
financial markets between buyers and
sellers of debt and equities, our rule
recognizes that the existing rate of
return is based on financial data that is
a snapshot in time and as such might
not reflect the prevailing cost of capital.
Likewise, the data reflected in the Staff
Report is a snapshot in time that might
not reflect the current cost of capital at
a different point in time. The rule
implicitly recognizes that the cost of
debt and equity, in general, can be
expected to move roughly together over
time, as debt and equity investors seek
to optimize their portfolios, choosing
among alternative investments by
balancing the tradeoff between the
expected risk and return of these
alternatives, and as firms seek to
optimize their capital structures,
choosing between debt and equity to
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finance their assets. The Commission
also now has the benefit of commenters’
and peer reviewers’ scrutiny of the Staff
Report, including the data relied on in
that report.
221. The Commission therefore
analyzes interest rates, similar to the
analysis contemplated under section
65.101(a), to determine whether the data
relied in the Staff Report to calculate the
WACC is appropriately current for
represcribing the rate of return in this
Order. For this analysis, the
Commission uses two different sixmonth benchmarks against which to
compare more recent interest rates.
First, the Commission calculates the
average of the monthly average yields in
effect for the consecutive six-month
period beginning October 2012 and
ending March 2013. To be thorough, the
Commission calculates this six-month
average not only for 10-year Treasury
securities, but also for 5-, 7-, 20-, and
30-year securities, as published online
by the Federal Reserve and Moody’s Aaa
and Baa corporate bond yields which
are published online by the Federal
Reserve. The Commission chooses this
six-month period because in the Staff
Report (1) the expected risk-free rate
reflected in the CAPM was the rate in
effect as of the market close on March
26, 2013, (2) the stock prices and
dividend payments reflected in the DCF
model were as of the market close on
March 26, 2013, and (3) the growth rates
used in the DCF model were as of March
27, 2013. For the second six-month
benchmark, the Commission averages
the monthly average yields in effect for
the consecutive six-month period
beginning July 2012 and ending
December 2012. The Commission
calculates six-month averages for the
same securities identified above. The
Commission chooses this six-month
period because in the Staff Report (1)
the cost of debt is based on 2012 interest
expense and debt and equity
outstanding data, and (2) the estimate of
the expected market risk premium used
in the CAPM is based on stock price and
interest rate data for the years 1928 to
2012.
222. The Commission compares the
most recent monthly yields on the
various Treasury and corporate
securities to these two benchmarks.
With respect to the October 2012–March
2013 benchmark, the monthly average
yield on 10-year Treasury securities, the
key benchmark in rule 65.101(a), in
September 2015, the most recent month
for which yield data are published by
the Federal Reserve, is 2.17 percent, as
compared to the six-month average of
the average monthly yields, 1.83
percent. This difference is only 34 basis
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points, a spread significantly less than
150 basis points, the standard reflected
in rule 65.101(a). The differences
between the September 2015 average
yields on the 5-, 7-, 20-, and 30-year
Treasury securities and on Aaa and Baa
corporate bonds, as compared to the sixmonth average of the monthly average
for each security, respectively, are as
follows: 73, 66, 34, 2, ¥5, 36, and 65
basis points. The greatest difference
between the six-month average and any
monthly average for any of these
securities is the 107 basis point
difference that existed in December
2013 and January 2014 for 7-year
Treasury securities and December 2013
for 10-year Treasury securities, but the
average of these differences for these
securities were only 76 and 57 basis
points, respectively, over the entire
period. The fact that greatest difference
between the six-month average and any
monthly average for any of these
securities is only 107 basis points
demonstrates that the difference was
never as large as 150 basis points
relative to a single month, let alone for
six consecutive months, the standard
under the Commission’s rule. The
average of the differences between the
six-month average and monthly
averages throughout the period for the
5-, 20- and 30-year Treasury securities
and Aaa and Baa corporate bonds were
only 74, 36, 24, 42, and 27 basis points,
respectively.
223. With respect to the July 2012–
December 2012 benchmark, the monthly
average yields on 5-, 7-, 10-, 20-, and 30year Treasury securities and Aaa and
Baa corporate bonds in September 2015
as compared to the six-month average of
the average monthly yields for each
security, respectively, are as follows: 81,
78, 50, 21, 15, 57, and 62 basis points.
The greatest difference between the sixmonth average and any monthly average
for any of these securities is the 123
basis point difference that existed in
December 2013 for 10-year Treasury
securities, but the average of these
differences for this security was only 68
basis points over the entire period. The
average of the differences between the
six-month average and monthly
averages throughout the period for the
5-, 7-, 20- and 30-year Treasury
securities and Aaa and Baa corporate
securities were only 75, 82, 53, 43, 61,
and 22 basis points, respectively.
224. Based on these findings, the
Commission concludes that interest rate
changes have not been sufficiently large
between release of the Staff Report and
this Order adopting the new rate of
return to warrant updating the data in
the Staff Report. The yields today on
Treasury securities and on Aaa and Baa
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corporate bonds are not significantly
different from the yields on these
securities that existed at the time of the
study—the differences in all cases are
much less than 150 basis points.
Accordingly, the Commission will rely
on the data reflected in the Staff Report,
except in those instances where the
Commission makes adjustments to
reflect valid concerns expressed by the
commenters and peer reviewers in the
record of this proceeding. In those cases,
the Commission will use data of the
same time periods as the data in the
Staff Report to ensure consistency.
5. Calculating the WACC
225. As discussed above, the WACC
estimates the rate of return that the
incumbent LECs must earn on their
investment in facilities used to provide
regulated interstate services in order to
attract sufficient capital investment. The
Commission’s rules specify that the
composite 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 of the
telephone companies:
WACC = [(Equity/(Debt + Equity +
Preferred Stock)) * Cost of Equity]
+ [(Debt/(Debt + Equity + Preferred
Stock)) * Cost of Debt] + [(Preferred
Stock/(Debt + Equity + Preferred
Stock)) * Cost of Preferred Stock]
226. The Commission’s rules
currently require that the capital
structure be calculated using the
observed book values of debt, preferred
stock, and equity. Under the
Commission’s rules, capital structure is
calculated as follows:
Capital Structure = Book Value of a
Particular Component/(Book Value
of Debt + Book Value of Preferred
Stock + Book Value of Equity)
227. In the Staff Report, staff
recommended calculating capital
structure using market values instead of
book values as a better indicator of a
firm’s target capital structure. The book
value of a firm is the book value of its
equity plus the book value of its
liabilities whereas the market value is
the amount that would have to be paid
in a competitive market to purchase the
company and fulfill all of its financial
obligations, i.e., the sum of market
values of debt and equity. Staff found
that several carriers within the proxy
group have book value capital structures
in excess of 100 percent debt plus
equity, which is nonsensical because
presumably a firm’s stock trades at a
positive price. Because a firm normally
has a positive equity value, its debt
should be less than 100 percent debt
plus equity. Accordingly, staff
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concluded that book values did not
provide reasonable data with respect to
capital structure as required by section
65.300. Instead, staff proposed using
market values as a more accurate
approximation of capital structure.
Commenters did not weigh in on staff’s
proposed approach. Professor Bowman
recommends an alternative approach be
considered for calculating capital
structure based on the capital structure
that would be appropriate to ‘‘encourage
a new entrant in a (quasi) regulated
competitive market.’’ Bowman notes,
however, that this method is
‘‘unavoidably subjective to a degree
beyond that of the standard estimations
developed in [the Staff Report].’’ Staff
noted a similar alternative approach in
the Staff Report, a hypothetical capital
structure that regulators sometimes use
to develop WACC estimates. The
Commission finds that the firms
themselves know more about their
businesses than they could, therefore it
will not substitute our judgement for
firms’ real-world decision-making as to
the choice between debt and equity
financing, as reflected in the data.
Moreover, a capital structure that would
encourage market entry is difficult to
estimate and, as Bowman asserts, is
subjective, as there is no widely
accepted theory on the debt-equity
choice. Therefore, the Commission
declines to adopt this approach. The
Commission finds that staff’s approach
using market values instead of book
values to estimate capital structure is
reasonable and adopt this approach.
a. Cost of Debt
228. The embedded cost of debt is the
cost of debt (expressed as a rate of
interest) issued by the firm in the past
and on which it paid interest over an
historical accounting period (e.g., the
most recent calendar year). The current
cost of debt is the cost of debt that the
firm would issue today and on which it
would pay interest going forward (and
thus sometimes is said to be a forwardlooking cost). In the Staff Report, staff
calculated the cost of debt based on the
embedded cost of debt formula specified
in the Commission’s rules with data
derived from staff’s proxy group SEC
Form 10–Ks. In the alternative, staff
considered calculating the cost of debt
based on the current cost of debt, which
would be based on the current yield on
bonds that have the same rating as the
proxy firms, and for a maturity period
comparable to the maturity period
typical for the debt issued by the proxy
firms. Staff found, however, that
estimating the current cost of debt
would be too imprecise because it
would have to account for the many
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characteristics of debt that affect the
yields paid in debt, including maturity,
fixed versus variable interest rates,
seniority, and callable versus
convertible debt. Staff also reasoned that
a more precise calculation might also
require knowledge of how much of each
type of debt instrument each company
uses. Ultimately, staff concluded that,
on average, the embedded cost of debt
and the current cost of debt should not
differ significantly among the proxy
group given declining interest rates and
that companies in good financial health
are able to refinance, provided there
have not been substantial changes in the
cost of debt since the last filed SEC
Form 10–K. Therefore, staff
recommended estimating the cost of
debt based on the embedded cost of debt
formula in the Commission’s rules, as
corrected. The Commission agrees with
staff’s general approach with corrections
to the embedded cost of debt formula
recommended and noted below.
229. The Commission’s rules provide
that the cost of debt is calculated as
follows:
Embedded Cost of Debt = Total Annual
Interest Expense/Average
Outstanding Debt
where ‘‘Total Annual Interest Expense’’
is equal to ‘‘the total interest expense for
the most recent two years for all local
exchange carriers with annual revenues
equal to or above the indexed revenue
threshold as defined in section 32.9000’’
and ‘‘Average Outstanding Debt’’ is
equal to ‘‘the average of the total debt
for the most recent two years for all
local exchange carriers with annual
revenues equal to or above the indexed
revenue threshold as defined in section
32.9000.’’
230. As noted in the Staff Report, this
formula overstates the cost of debt
because it uses two years’ interest
expense divided by an average of two
years’ total debt. This would
approximately double the embedded
cost of debt, resulting in an incorrect
input to the WACC. The Commission
finds that the changes the Staff Report
made to the definitions used in the
equation in the Commission’s rules for
calculating the embedded cost of debt
are correct and will use these revised
definitions to estimate the cost of debt
for purposes of represcription. The
Commission therefore adopts the
following formula from the Staff Report
for calculating the embedded cost of
debt based on the most recent year’s
interest expense:
Embedded Cost of Debt = Previous
Year’s Interest Expense/Average of
Debt Outstanding at the Beginning
and at the End of the Previous Year
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231. While the Staff Report did
correctly modify the Commission’s
existing formula, it failed to implement
the revised formula correctly, as
USTelecom and AT&T point out. In
particular, staff used 2012 total interest
expense in the numerator of the revised
formula and the average of outstanding
non-current long-term debt at the end of
2011 and 2012 in the denominator. This
calculation understates the total amount
of debt in the denominator because it
excludes the current portion of longterm debt on which the carriers
continue to pay interest. Thus, the Staff
Report overstated the cost of debt.
232. USTelecom proposes an
alternative approach that eliminates this
error and that purports to capture a
more forward-looking cost of debt. In
particular, USTelecom proposes that
company financial reports (i.e., SEC
Form 10–Ks) be used to develop the cost
of debt by dividing reported long-term
debt interest payment obligations for
2013 by total long-term debt as of
December 31, 2012. As an initial matter,
this is not a true ‘‘forward-looking’’ (i.e.,
a current cost) methodology because it
is based on the interest payment
obligations on debt that was issued in
prior years, not on interest obligations
on newly issued debt. For the reasons
given in the Staff Report, as discussed
above, the Commission will not estimate
the current cost of debt but will rely on
the embedded cost of debt formula, as
corrected, in the Commission’s rules.
233. In addition, USTelecom’s
proposed approach uses data from a
section of the SEC Form 10–K reports
that at least for some carriers does not
account for the fact that bonds often are
sold at a discount below or a premium
above the face value of the bond. Thus,
the numerator in USTelecom’s debt
calculation is based on interest
‘‘payments,’’ which does not account for
discounts and premiums, rather than
based on interest expense, which does
account for discounts and premiums,
under generally accepted accounting
principles (GAAP). Meanwhile, the debt
in the denominator is the principal or
payoff amount of the debt, which does
not account for discounts and
premiums, rather than the amount of
debt outstanding, net of discounts and
premiums, as recorded on the balance
sheet. As a result, the cost of debt under
this approach would understate the
effective rate of interest for a bond sold
at a discount or overstate this rate for a
bond sold at a premium. The
Commission therefore declines to adopt
USTelecom’s proposed approach.
234. The Commission’s rules further
specify that total interest expense be
used in the numerator of the embedded
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cost formula. The Commission
interprets the word ‘‘total’’ in the phrase
‘‘total interest expense’’ to refer to the
total of both short- and long-term
interest expense, not just long-term
expense, as was used in this formula in
the Staff Report. In the 1990
Represcription Order, 55 FR 51423,
December 14, 1990, the Commission
included in the numerator of its
embedded cost of debt calculation both
short- and long-term interest expense.
The Commission’s formula for
estimating the embedded cost of debt
includes the average of total debt in the
denominator. The Commission
interprets the word ‘‘total’’ in the phrase
‘‘total debt’’ to refer to the total of shortand long-term debt, not just long-term
debt, as is used in this formula in the
Staff Report. It necessarily also includes
the current portion of the long-term debt
because interest must be paid on the
current portion of long-term debt, and
this interest would be reflected in the
numerator as part of total interest
expense. If the interest expense related
to the current portion of long-term debt
is in the numerator, then to be logically
consistent the current portion of longterm itself would have to be included as
part of the total debt in the
denominator. In the 1990 Represcription
Order, the Commission included in the
denominator of its embedded cost of
debt calculation both short- and longterm debt and presumably the current
portion of the long-term debt.
235. The Commission includes as part
of total debt in the denominator of the
embedded cost of debt calculation,
obligations under capital leases,
including the current portion of capital
leases. It is not entirely clear whether
the Commission included capital leases
in its debt calculation in the 1990
Represcription Order. Obligations under
capital leases, however, were identified
at that time as part of total long-term
debt in FCC Form M and ARMIS
reports. Likewise, interest expense
related to capital leases was included as
part of total interest and related items in
these reports. Thus, including
obligations under capital leases and the
related interest expense in the cost of
debt calculation seemingly would have
been consistent with the accounting
reflected in the FCC Form M and
ARMIS reports. The Commission
includes capital leases here as part of
total debt because the leasee assumes
some of the ownership risks of the asset
that is being leased, while it benefits
from the productive deployment of that
asset. Moreover, an asset (e.g., the
equipment that is being leased) and a
liability (the lease payment obligations)
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are recorded on the leasee’s balance
sheet, while the depreciation of that
asset and the interest portion of the
lease payment are reflected as expenses
on the income statement. And as a
practical matter, including capital leases
in the cost of debt calculation is the
easiest way to ensure consistency
between total interest expense in the
numerator and total debt in the
denominator in the cost of debt
calculation for each company, and
consistency in this calculation among
all companies, given the complexities
and the lack of standardization among
SEC Form 10–K reports.
236. Professor Bowman states that the
Staff Report is not clear on what is
considered debt in its reported capital
structure data. While Bowman is
addressing capital structure, his point is
also relevant to our discussion of how
the cost of debt is calculated because the
Commission concludes the specific
types of debt included in the debt
portion of the capital structure should
be consistent with the types of debt for
which the cost of debt is calculated, to
the extent possible. Bowman posits that
all interest bearing debt should be used,
arguing that the fact that an interest
bearing debt is due in less than one year
does not change its characteristic of
being debt, while non-interest bearing
liabilities should not be classified as
debt. Bowman’s preferred definition of
debt is consistent with the definition
reflected in our rules for estimating the
embedded cost of debt and with the data
the Commission used for this
calculation in the 1990 represcription
proceeding. The Commmission
concludes that, consistent with
Professor Bowman’s recommendation
and our rules, the embedded cost of
debt calculation should reflect shortand long-term debt, including the
current portion of long-term debt,
capital leases, including the current
portion of long-term leases, all of the
interest expense related to such debt
and leases, and should account for
premiums and discounts on the longterm debt. Based on data from each
proxy’s SEC Form 10–K, the
Commission revises the embedded cost
of debt calculation reflected in the Staff
Report accordingly.
237. In the Staff Report, staff
estimated the cost of debt for the proxy
group of 16 carriers used in that report
to be 6.19 percent. Under the revised
calculation, the Commission now
estimates the embedded cost of debt for
the proxy group of 16 carriers used in
the Staff Report to be 5.87 percent. The
Commission also will revise the WACC
estimate to reflect this revised cost of
debt calculation for each carrier in the
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proxy group. The Commission also
concludes that the definition of debt
reflected in the estimate of capital
structure should be the same as the one
reflected in the estimate of the
embedded cost of debt. Accordingly, the
Commission revises the estimate of the
capital structure developed in the Staff
Report so that it reflects the same
definition that they adopt in this order
for estimating the embedded cost of
debt. The average of the revised estimate
of the capital structure for the proxy
group is 54.34 percent debt and 45.66
percent equity.
b. Cost of Equity
238. The Commission’s rules do not
specify how the cost of equity is to be
calculated, and there are several
methods that might be used to estimate
the cost of equity. The Capital Asset
Pricing Model (CAPM) is the most
widely used method in commerce,
while the Commission relied on the
Discounted Cash Flow Model (DCF) to
calculate the cost of capital in the 1990
Represcription Order. Both models
calculate the cost of equity based upon
an analysis of firms’ common stock,
among other inputs. Staff recommended
using both CAPM and DCF to determine
the cost of equity, and to create a zone
of reasonableness, because both models
have different advantages and
limitations.
(i) Capital Asset Pricing Model (CAPM)
239. CAPM is widely used by
financial practitioners to calculate the
cost of equity of publicly traded firms.
The required rate of return in CAPM is
the sum of the risk free interest rate and
an asset beta times a market premium.
The required rate of return in CAPM is:
Asset rate of return = Risk free interest
rate + (Asset Beta * Market
Premium)
(a) Primary Variables in CAPM
240. Risk-Free Interest Rate. The risk
free interest rate is the return that
investors expect to earn on their money
having the certainty that there will be
no default. AT&T, the Rural
Associations, Alaska Rural Coalition
and GVNW assert that the way staff in
the Staff Report calculated the risk-free
rate of return interest rate is artificially
low because staff chose a 10-year
Treasury interest rate for a single day.
Staff used the then-current 10-year
Treasury note, 1.92 percent on March
26, 2013, as the risk free interest rate.
The Alaska Rural Coalition and AT&T
assert that use of this interest rate fails
to acknowledge that interest rates were
at historic lows at this point in time. In
the alternative, AT&T proposes taking
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an average of 20-year Treasury bond
rates over the past six months. AT&T
argues that while use of the most
current day’s rate of interest might be an
unbiased predictor, it has a large
variance, and so an average rate
calculated over a period such as the past
six-months should be used instead.
Professor Bowman agrees with staff that
‘‘the WACC, and hence the costs of debt
and equity, should be a forward looking
estimates’’ and ‘‘[c]urrent rates on
Treasury bonds reflect future interest
rates.’’ However, Professor Bowman
recommends averaging over a
reasonably long period of time, perhaps
three to six months.
241. Staff used as the expected riskfree rate the then-current rate of interest
at the market’s close on March 26, 2013,
rather than an historical average of past
interest rates calculated over a period of
time, a forecast, or a rate based on some
other methodology. Staff reasoned that
the current interest rate as of a single
day was the best predictor of the future
interest rate on government securities
incorporating investors’ current
expectations about the future rate. Staff
noted that the current interest rate
frequently is a better predictor of future
interest rates than professional forecasts.
Staff relied on an efficient market
theory, taking as an assumption that
bond markets are efficient, meaning that
interest rates factor in all publiclyavailable information, and that current
interest rates adjust quickly to reflect
new public information as it becomes
available. Staff noted criticisms of the
efficient market theory in the Staff
Report. Efficient markets do not mean
perfect markets—public information
that is thought to be reflected in interest
rates is not always accurate; bond
markets are surprised by and overreact
or underreact to new events and new or
revised information. At the same time,
many practitioners recognize that
professional forecasts have value,
though these forecasts always will have
error, and commenters express a
concern that use of a single day’s rate
as the predictor of future rates ignores
the relatively low level of today’s
interest rates.
242. Accordingly, instead of relying
solely on efficient market theory and
use of the then-current, March 26, 2013
rate of interest on the 10-year Treasury
note as the expected risk-free rate, the
Commission concludes that a blended
approach taking all these factors into
account would be preferable. The
Commission therefore derives the riskfree rate of return interest rate by
weighting equally: (1) The March 2013
average 10-year rate, thus recognizing in
part the tenets of efficient market
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theory; and (2) the 3.70 percent 10-year
forecast for the 10-year Treasury rate by
produced by the Survey of Professional
Forecasters for the first quarter of 2013
published by the Research Department
of the Federal Reserve Bank of
Philadelphia, and referenced by the
Rural Associations in their comments,
thus also recognizing the value of
professional forecasts. The Commission
believes that this blended approach
reasonably reflects the acknowledged,
albeit imperfect, predictive value of
current interest rates, and the value of
the informed, though imprecise,
judgement of professional forecasters.
243. Use of the March 2013 average
10-year Treasury rate as part of this
revised approach is consistent with
AT&T’s and Professor Bowman’s
suggestions that an average interest rate
be used rather than the rate on a single
day. The Commission disagrees,
however, with their suggestions that this
average should be calculated looking
back over a period as long as three or
six months. The Commission believes
that capital markets are reasonably
efficient. The primary reason for using
a historical average, in our view, is to
ensure that any temporary aberration in
the interest rate on any given day not be
erroneously reflected in the estimate. In
other words, the purpose is to smooth
out any large, though random, variation
that might be in the interest rate on any
given day, especially during a period in
which markets might be particularly
volatile. The Commission believes that
a one-month average is long enough to
ensure that the estimate does not reflect
any such aberration. At the same time,
a one month average is short enough
that it is reasonably consistent with the
notion that bond markets are efficient,
so that it reflects reasonably fresh,
publicly-available information.
244. The March 2013 average 10-year
rate is 1.96 percent, slightly higher than
the March 26, 2013 interest rate of 1.92
percent used in the Staff Report, and
also higher than the three-month
average of 1.95 percent from January
2013 to March 2013, and the six-month
average of 1.83 percent from October
2012 to March 2013. The 3.70 percent
10-year forecast for the 10-year Treasury
rate produced by the Survey of
Professional Forecasters, the other part
of the blended approach to estimating
the risk-free rate, is the mean of the
forecasts reported by 26 professionals
surveyed by the Federal Reserve Bank of
Philadelphia. While the Commission
might be able to obtain forecasts of this
rate made by other professionals, they
rely on this forecast because it has been
subject to the scrutiny of the parties to
this proceeding, and no such party has
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24319
given any reason as to why it might be
unreliable or should not be used. The
Commission concludes that use of this
forecast further informs the estimate of
the risk-free rate, and is responsive to
criticisms that the Staff Report failed to
account for the relatively low level of
today’s interest rates. The Commission
therefore finds that a reasonable
estimate of the risk-free interest rate is
2.83 percent, the average of the March
2013 average 10-year Treasury rate and
the 10-year forecast for this rate.
245. Betas. A company’s beta is the
coefficient on market returns resulting
from a simple regression of the
security’s returns on market returns, i.e.,
it is a measurement of the volatility of
a company’s stock compared to the
volatility of the market. For purposes of
determining a point estimate, staff
choose weekly return intervals and an
adjustment for the tendency of the
regression estimate to revert to the
aggregate mean of one. Professor
Bowman raised a concern with
including the beta estimate for one of
the Publicly-Traded RLEC Proxies, New
Ulm, whose beta fluctuates dramatically
when measured as daily, weekly or
monthly, which has a significant
impact, increasing the average beta for
this proxy group. Professor Bowman
explains that as the explanatory power
of the regression equation approaches
zero, the regression coefficient (beta)
must also approach zero and posits that
betas measured with explanatory power
less than five percent, if not higher, are
biased downward, and thus he
recommends that the Commission
exclude New Ulm’s beta from the
analysis. The Commission agrees with
Professor Bowman that the beta for New
Ulm may cause a bias in the average
beta for the Publicly-Traded RLEC
Proxies. Thus, the Commission will not
use the CAPM estimate of New Ulm’s
cost of equity in developing an overall
WACC estimate. Instead, as explained
below, the Commission will use a
sensitivity analysis to account for New
Ulm’s cost of equity as part of
determining that overall WACC
estimate.
246. Flotation Costs. The Commission
also sought comment in the USF/ICC
Transformation NPRM on the
importance of flotation costs—those
costs associated with the issuance of
stocks or bonds—for our cost of equity
calculations but received little
comment. Staff did not incorporate
flotation costs into calculations of the
cost of equity and debt meant to be
representative of rate-of-return
incumbent LECs in general. Professor
Bowman notes that the flotation costs
for debt or equity can be ‘‘substantial,’’
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which must be annualized if they are to
be included in the cost of debt which in
his experience are in the order of 10 to
20 basis points. Professor Bowman notes
that there is research showing that the
‘‘cost of private debt is marginally
higher than for public debt, offsetting
the differences in issuance costs’’ but
concludes that because the life of equity
is not specified, it is likely to be much
smaller and reasonable to ignore. As
explained above, staff did not include
bond flotation costs in the cost of debt
estimate because staff used an
embedded cost of debt approach,
including the use of interest expense
obtained from the income statements
found in SEC Form 10–Ks of the proxy
group of firms. That interest expense
would have included an amount for the
expense associated with the
amortization of bond flotation costs
calculated pursuant to GAAP in effect at
the time of the study. Because flotation
costs tend to be proportionately small
and infrequent, and are primarily
relevant for public companies issuing
new securities, staff reasoned that they
are not significant for the vast majority
of rate-of-return incumbent LECs (which
are not publicly traded) and were not
incorporated into calculations meant to
be representative of rate-of-return
incumbent LECs in general. For the
reasons explained by staff, the
Commission agrees with their approach.
247. Market Risk Premiums. The
market premium is defined in the
CAPM as the difference between the
return one can expect to earn holding a
market portfolio and the risk-free
interest rate. In the Staff Report, staff
concluded that, calculating a historical
market premium would be the best
approach given the data available to the
Commission. Staff considered whether
small capitalization firms such as rural
incumbent LECs require an additional
risk premium but declined to adopt
such an additional premium because the
size effect seems to vary over time or
even disappears, with common stock
returns for smaller firms in the United
States not performing significantly
better than larger firms from 1980
onward.
248. Several commenters argue in
favor of an additional market risk
premium based on the size of the firm
because they claim small firms face
higher risks and illiquidity effects due
to not being publicly traded, among
other reasons. Ad Hoc notes, however,
that critics of the Staff Report fail to
provide any actual evidence of higher
risk premiums being required of smaller
rate-of-return rate-return incumbent
LECs than larger publicly-traded
incumbent LECs. Ad Hoc also argues
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that the regulated environment in which
rate-of-return carriers operate alters the
risks rate-of-return incumbent LECs
face, reducing the importance of
economies of scale due to targeting
prices to a specific rate of return and
guarantees of universal service funding.
249. AT&T offers a number of reasons
why a size premium should not be
considered in the CAPM WACC
calculation. AT&T argues that the
majority of rate-of-return incumbent
LECs are members of the NECA pools
and these pools allow its members not
only to pool their costs and revenues,
but also effectively pool their risks.
AT&T further argues that any risks that
the smaller rate-of-return incumbent
LECs might face are further reduced by
rate-of-return regulation that protects
them against under-earning, and the
Federal Universal Service Fund and its
true-up mechanisms. AT&T adds that
some rate-of-return incumbent LECs
have established holding company
structures and resemble larger firms in
terms of market and product
diversification. Finally, AT&T argues
that many of these rate-of-return LECs
may be subject to lesser market risks,
since they tend to serve more rural and
less densely populated areas where
competition has been slower to develop
or has yet to develop. Professor Bowman
favors making an adjustment when
appropriate, but notes that it is not clear
that firms subject to the cost of equity
resulting from represcription are as
small as firms that have been shown to
manifest the small firm effect, and
therefore staff’s analysis may not
warrant an adjustment.
250. As staff noted in the Staff Report,
the size effect seems to vary over time
or even disappears, with smaller firms
in the United States not performing
significantly better or worse than large
firms from 1980 onward. Accordingly,
the Commission concludes that there is
insufficient evidence in the record to
support a market risk premium
specifically for rate-of-return incumbent
LECs based on small firm effects. While
some of the finance literature and some
practitioners might suggest that
relatively small and privately-held
companies have a higher cost of capital
than relatively large companies this is a
general proposition based on
examinations of different types of firms
throughout the economy. As such, this
analysis fails to isolate and weigh the
specific advantages and disadvantages
of a rate-of return incumbent LEC, such
as those cited in the record and
discussed above, and thus does not
necessarily apply to such carriers.
Because the record does not
demonstrate in a quantifiable way how
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the rate-of-return incumbent LECs
compare to the typical small firm that
operates in the U.S. economy as a
whole, it is difficult to conclude that an
adjustment for firm-size effects to the
cost of capital for these carriers is
warranted. Moreover, the Commission is
aware of no state regulatory agency that
has adjusted the allowable rate of return
applicable to rate-of-return incumbent
LECs on the basis that these incumbent
LECs are relatively small, and no
commenter has cited to such an
instance. Therefore, the Commission
declines to adopt a market risk premium
based on size effects.
251. Staff estimated the cost of equity
using the CAPM with adjusted betas
that were calculated using weekly data,
along with its estimates for the risk-free
rate and market premium, the latter
based on the average historical market
premium above the 10-year risk free rate
for the period 1928–2012 developed by
Professor Aswath Damodaran. Staff’s
calculation of the average of the CAPM
cost of equity estimates for the 16 proxy
companies is 7.18 percent, which staff
determined was low compared to the
cost of debt estimates, including
estimates for six firms that are below the
cost of debt estimates. Estimates of the
cost of equity should be significantly
higher than the cost of debt because
equity is more risky than debt as
debtholders are paid before equity
holders in the event of financial
difficultly, bankruptcy or liquidation.
Staff noted that the difference between
the arithmetic averages of large
company stock returns and the longterm bond returns was 5.7 percentage
points (570 basis points) over the period
1926 to 2010, while the difference
between the average cost of debt
estimate for the 16 proxy companies of
6.19 percent, as compared to the 7.18
percent cost of equity estimate, is only
0.99 percentage points (99 basis points).
This suggests staff’s cost of debt
estimate is too high, or staff’s cost of
equity estimate is too low, or both—an
issue the Commission addresses below.
(b) Revised CAPM WACC Estimate
252. The Commission now estimates
the CAPM cost of equity using our
revised estimate for the risk-free interest
rate, 2.83 percent, along with the
adjusted betas and market premium
used in the Staff Report. Given the
concern regarding the quality of the beta
estimate for New Ulm Telephone (New
Ulm) as discussed above, the
Commission calculates the average of
these estimates based on (1) the proxy
group, including New Ulm, (2) the
proxy group, excluding New Ulm, and
(3) the CAPM estimates for the 15 firms
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and setting the cost of equity for New
Ulm equal to its cost of debt estimate
plus the average of the differences
between the cost of debt and equity
estimates of the 15 firms. This enables
us to measure the sensitivity of the
CAPM cost of equity estimates to
different cost of equity estimates for
New Ulm, and is similar to the
sensitivity analysis of estimates for
Windstream and ACS above. The
Commission does not calculate the
average based on setting the estimate of
New Ulm’s cost of equity equal to its
estimate of the cost of debt because the
revised CAPM estimate of the cost of
equity for New Ulm is greater than its
revised cost of debt estimate (as noted
above, debtholders are paid ahead of
equity holders in a bankruptcy so the
cost of equity should exceed the cost of
debt).
253. The average of the revised CAPM
cost of equity estimates for all 16 firms,
including New Ulm, is 8.09 percent.
Notably, the cost of equity estimate is
less than the cost of equity estimate for
just one of the 16 firms, Hawaiian
Telecom (7.21 percent versus 7.45
percent). Meanwhile, the difference
between the average cost of debt for the
16 proxy companies, 5.87 percent, and
this average cost of equity estimate is
2.22 percent (222 basis points), a
difference that is still relatively low, but
is more than double and is more
reasonably in line with expectations of
the relationship between debt and
equity costs found in the Staff Report,
which was 0.99 percentage points (99
basis points). The average of the revised
CAPM cost of equity estimates for 15
firms, excluding New Ulm, is 8.25
percent. The average of the revised
CAPM estimates for the 15 firms and the
estimate obtained by setting the cost of
equity for New Ulm equal to its cost of
debt estimate plus the average of the
differences between the cost of debt and
equity estimates is 8.20 percent. Thus,
the average of the cost of equity
estimates is not significantly affected by
these alternative estimates of the cost of
equity for New Ulm. Nevertheless, the
Commission will account for this
sensitivity in developing a reasonable
range for CAPM WACC estimates.
(c) CAPM WACC Range
254. The Commission also addresses
the issue of relatively low CAPM cost of
equity estimates in determining the
reasonable CAPM WACC Range, as did
staff in the Staff Report. The Staff
Report developed a range for the market
premium used in the CAPM to obtain a
reasonable range for CAPM WACC
estimates. As a starting point, staff
developed a 95 percent confidence
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interval around the arithmetic average
of the difference between the annual
return on the S&P 500, and the return
on the 10-year U.S. government bond
including capital returns, based on
statistics developed by Professor
Damodaran. This average is 5.88 percent
(and is the risk-premium used in the
CAPM in the above calculations), and a
95 percent confidence interval around
this average is 1.22–10.54 percent. Staff
noted that it is common to rely on as
long a time series as possible when
calculating the average historical market
premium, and that Professor
Damodaran’s historical average of 5.88
percent lies well within these ranges
identified in a number of different
surveys. Staff next truncated the lower
end of the confidence interval to ensure
that every carrier’s cost of equity
estimate exceeded its cost of debt
estimate, recognizing the basic
economic principle that the cost of
equity has to be higher than the cost of
debt because equity is riskier than debt.
Recognizing that it is necessary to
ensure that every carriers’ cost of equity
is not less than their cost of debt staff
found that the reasonable range for an
estimate of the WACC for the proxy
firms is between 7.39 and 8.58 percent.
255. The Rural Associations argue
that staff’s truncation of the confidence
interval renders staff’s associated cost of
capital recommendations unreliable.
The Commission disagrees. First, the
Commission views the range between
1.22–10.54 percent as an objective and
unconditional range for the market risk
premium. It reflects the variance in
statistical terms in the market premium
over many years and many different
business cycles. The Commission also
views the interval, as adjusted by staff’s
truncation, as a conditional market
premium, one that recognizes the reality
of current capital market conditions, in
particular, today’s relationship between
the cost of debt and the cost of equity,
and the basic principle that the cost of
equity always will exceed the cost of
debt. Increasing the lower bound as staff
did also is consistent, though not
necessarily in a precise quantifiable
way, with Professor Bowman’s
argument that based on his own
research and that of others, the expected
risk premium is inversely correlated
with the level of interest rates. Thus,
when interest rates are low, as they are
today, the expected risk premium is
higher. Also, use of the higher lower
bound for the risk premium should
minimize any concerns that the
approach the Commission takes in this
order to develop a risk free rate for use
in the CAPM does not adequately
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acknowledge today’s low level of
interest rates.
256. The Rural Associations observed
and staff itself acknowledged that this
adjustment to the 95 percent confidence
interval is not precise. As staff noted, to
the extent our estimates of the cost of
debt are too high, this choice would bias
upward our estimates of the return on
equity. Because the cost of equity
typically would materially exceed the
cost of debt, however, assuming a cost
of equity that equals the cost of debt
tends to bias our estimates downwards.
It is not clear which of these two
offsetting biases is likely to be larger. In
practice, this is not a significant concern
because this adjustment affects only the
lower bound, not the upper bound of
the CAPM WACC range of reasonable
estimates. As a long as the Commission
does not select an estimate that is at or
near the bottom of this range, that
estimate and the resulting allowable rate
of return should be reasonable.
Moreover, the Commission also has the
DCF WACC range of reasonable
estimates on which to rely. The WACC
and DCF have different strengths and
weaknesses, and the Commission
reduces the likelihood of error by
developing WACC estimates using both
models. As long as the Commission also
selects an estimate that is consistent
with the DCF WACC range, then that
estimate should be a reasonable
estimate.
257. The Commission now estimates
new lower and upper bounds for the
range of reasonable WACC CAPM using
our revised estimate for the risk-free
rate, 2.83 percent, along with the
adjusted betas and the staff’s approach
for establishing a range for the market
premium. The Commission develops
different lower and upper bounds based
on: (1) The proxy group, including New
Ulm, (2) the proxy group, excluding
New Ulm, and (3) the CAPM estimates
for the 15 firms and setting the cost of
equity for New Ulm equal to its cost of
debt estimate plus the average of the
differences between the cost of debt and
equity estimates of the 15 firms. Taking
this approach, the Commission now
finds that the range of reasonable WACC
CAPM estimates is 7.12–8.83 percent if
the proxy group includes New Ulm;
7.24–9.01 percent if it excludes New
Ulm; and 7.17–8.92 percent based on
setting the cost of equity for New Ulm
equal to its cost of debt estimate plus
the average of the differences between
the cost of debt and equity estimates of
the 15 firms. The highest of upper
bound values and the lowest of the
lower bound values, provide an overall
range of 7.12–9.01 percent.
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258. Professor Bowman argues that
the CAPM WACC range should be at
least three percentage points (300 basis
points), if not higher, given the
uncertainty with which CAPM input
values are estimated (our range is 1.89
percentage points or 189 basis points).
However, the Commission finds our
CAPM WACC range, 1.89 percentage
points (189 basis points), is sufficiently
large because that range reflects the
lower and upper bounds of our market
risk premium. The lower bound of the
market premium is constrained by our
estimates of the cost of debt, while the
upper bound is at the top of the ranges
used by most practitioners. Absent the
lower bound constraint, the range
would have been much larger reflecting
greater uncertainty in the market
premium estimate, but including that
lower portion and allowing that
uncertainty potentially to be reflected in
the cost of equity estimates and thus the
WACC estimates would be contrary to
economic theory. Furthermore, the
Commission has DCF WACC estimates
on which to rely, in addition to WACC
CAPM estimates, as mentioned above.
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(ii) Discounted Cash Flow (DCF) Model
259. In addition to calculating the cost
of equity using CAPM, in the Staff
Report staff also calculated the cost of
equity using the constant-growth DCF
model based upon four different data
sources used in the 1990 prescription
proceeding. This model incorporates in
its calculation of the cost of equity a
constant growth rate, which staff
calculated using generally available
earnings per share (EPS) growth
forecasts instead of dividend per share
growth forecasts, which are not
generally available. Industry analysts
routinely rely on ESP forecasts as
dividends tend to grow as earnings
grow. The most widely used modified
version of the general DCF model, the
constant growth, or standard, DCF
model, calculates the cost of equity as:
Cost of Equity = (Dividends per Share1/
Price per Share0) + g
where Cost of Equity = cost of common
stock equity; Dividends per Share1 =
annual dividends per share in period 1;
Price per Share0 = price per share in
period 0; g = constant growth rate in
dividends per share in the future; and
D1 = (1 + g) times D0, the annual
dividends per share in period 0.
(a) DCF Cost of Equity Results
260. Staff estimated the cost of equity
using the constant-growth DCF model
for each of the 11 proxy firms that pay
common stock dividends and had
readily-available, long-run growth rate
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forecasts. To do this, staff identified the
low and the high estimates among the
estimates available from four different
sources for each firm, determined the
midpoint between these two estimates,
and used this value as the growth rate
in the DCF model for each firm. Based
on this analysis, staff determined that
the average cost of equity estimate for
the 11 firms was 9.90 percent.
261. Staff found, however, that the
DCF analysis did not appear to produce
reliable estimates for Windstream and
ACS. The published growth rates for
these two firms were low, and use of
these rates in most cases resulted in cost
of equity estimates that were less than
the cost of debt estimates. Staff reasoned
that these results are questionable
because equity is more risky than debt;
no rational investor would ever
purchase any firm’s common stock if
that firm’s debt is expected to provide
a higher rate of return. Staff noted that
the Commission had applied a screen
designed to remove from consideration
those firms for which the cost of debt
exceeded the cost of equity when
developing estimates of the cost of
equity in the 1990 Represcription Order.
262. Staff therefore analyzed the
sensitivity of the average of the cost of
equity estimates to the estimates for
Windstream and ACS. First, staff
excluded Windstream and ACS from the
sample, leading to an average cost of
equity for the nine remaining firms of
11.25 percent, as compared to the
average of 9.90 percent when these two
firms were included. Second, staff set
the cost of equity estimate equal to the
cost of debt estimate for the two firms,
leading to an average cost of equity
estimate of 10.54 percent for the 11
firms. Third, staff calculated the average
difference between the cost of equity
estimates and the cost of debt estimates
for the other nine firms, and added this
increment to the cost of debt estimates
for Windstream and ACS, to obtain
equity estimates for these two firms,
leading to an average cost of equity
estimate of 11.58 percent for the 11
firms. The Commission agrees with
staff’s conclusion that where the use of
these growth rates produces cost of
equity estimates that have no economic
meaning, such estimates should be
omitted or, at the very least, the impact
of including such questionable equity
costs estimates on the overall estimate
must be taken into account.
263. No party challenges staff’s DCF
methodology. The Commission
therefore adopts the approach applied
in the Staff Report to developing
estimates for the cost equity based on
the DCF model, including the use of
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sensitivity estimates for Windstream
and ACS.
264. Given the revisions the
Commission makes above to the
estimation of total debt outstanding and
interest expense in the Staff Report, and
therefore to the estimates of the cost of
debt, the results of the above sensitivity
analysis change slightly as follows.
First, excluding Windstream and ACS
from the sample, the average cost of
equity for the nine remaining firms
remains 11.25 percent, as compared to
an estimate of 9.90 percent when these
two firms are included, as these
numbers are unaffected by the cost of
debt estimates. Second, setting the cost
of equity estimate equal to the cost of
debt estimate for the two firms now
leads to an average cost of equity
estimate of 10.47 percent for the 11
firms. Third, calculating the average
difference between the cost of equity
estimates and the cost of debt estimates
for the other nine firms, and adding this
increment to the cost of debt estimate
for Windstream and ACS, to obtain
equity estimates for these two firms,
now leads to an average cost of equity
estimate of 11.54 percent for the 11
firms.
(b) DCF WACC Range
265. Based on this DCF analysis, the
Commission finds that the lower bound
of a reasonable cost of equity estimate
is 10.47 percent, while the upper bound
is 11.54 percent. As a rough check on
the reasonableness of these upper and
lower bound cost of equity estimates,
similar to the check in the Staff Report,
the Commission notes that the
difference between the average cost of
debt for the 11 firms, 5.88 percent, and
the lower bound cost of equity estimate,
10.47 percent, is 4.59 percentage points
(or 459 basis points). Meanwhile, the
difference between the average cost of
debt for these firms and the upper
bound cost of equity estimate, 11.54
percent, is 5.66 percentage points (or
566 basis points). By comparison, these
lower and upper bound debt-equity
differences are somewhat greater than
the 4.39 percentage point (439 basis
points) difference between the cost of
debt, 8.8 percent, and the cost of equity,
13.19 percent, on which the
Commission’s current 11.25 percent
authorized rate of return is based. And
these lower and upper bound equitydebt estimate differences are somewhat
less than the average difference between
the large company stock return, i.e., S&P
500 companies, and the long-term
corporate bond return, from 1926–2010,
5.7 percent (570 basis points). Neither of
these comparisons suggests in a
compelling way that our lower and
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upper bound estimates for the cost of
equity are unreasonable.
266. Based upon these slight
modifications to DCF analysis presented
in the Staff Report, the Commission
finds that a reasonable lower and the
upper bound DCF WACC Range is 8.28
percent to 8.57 percent. As in the Staff
Report, this range is based on the three
average WACC estimates found by
using: (1) DCF estimates for the nine
firms excluding Windstream and ACS;
(2) DCF estimates for the nine firms plus
the first of the two sensitivity cost of
equity estimates described above for
these two firms (equity estimates for
each equal to debt estimates); and (3)
DCF estimates for the nine firms plus
the second sensitivity cost of equity
estimates described above for these two
firms (debt estimates for each plus the
average of the debt-equity estimate
differences found for the other nine
firms). In each case, the growth rates
used in the DCF are the mid-point
growth rates. In each case, WACC
estimates are also based on cost of debt
and capital structure estimates that
reflect the modifications discussed
above to the estimation of total debt
outstanding and interest expense.
(iii) Free Cash Flow Model
267. The Rural Associations estimate
the WACC for a rate-of-return
incumbent LEC by dividing an estimate
of free cash flow (FCF) by an estimate
of firm value, based on rate-of-return
incumbent LEC data. GVNW and TCA
supported the Rural Associations’ FCF
approach. While the Rural Associations’
approach differs from the standard
approach that the Commission uses here
to estimate the WACC, and is not set out
in our rules, they cannot say, based on
the record that this is an unacceptable
approach, at least in concept. The
Commission is reluctant to dismiss too
quickly any approach that could
potentially aid the Commission now or
in the future to produce better WACC
estimates, especially given the difficulty
to estimate the WACC for privately-held
rate-of-return incumbent LECs. While
the Commission does not find this
approach to be unacceptable in concept,
they do find flaws in the way that it is
implemented by the Rural Associations.
Thus, the Commission rejects the Rural
Associations’ estimates.
268. The Rural Associations base firm
value, as reflected in the denominator of
its WACC formula, on per connection
sales prices for rate-of-return and price
cap incumbent LEC exchanges for the
period from 2008–2012. The Rural
Associations develop a range of WACC
estimates by varying its estimates of
firm value. The Commission finds that
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this sample of prices is too small, and
too many of its prices are for sales that
occurred too long ago to provide a
reliable basis for estimating firm value
for a typical rate-of-return incumbent
LEC. In particular, the sample included
only one sale price for each year from
2010 to 2012. One observation per year,
for the most recent three years, is far too
few to obtain reliable firm valuations for
these years, especially given the large
variation in sale prices since 2008
($1,053 to $3,205 per connection) and
since 2003 ($1,013 to $8,000 per
connection). As the perceived value of
different exchanges varies significantly,
as this price variation demonstrates, the
value of the information reflected in one
observation a year is of limited value for
estimating the value of these firms
today. Nor does one observation a year
provide a strong basis for concluding
that the level of these observed prices
continues a trend from prior years, or
that such a trend reliably could be used
to estimate a firm’s value today. While
the sample included five sales prices for
both 2008 and 2009, not only is this
number of observations too small to
estimate firm value with a high level of
confidence, especially given the
variation in prices, but these prices are
too old to provide reliable estimates of
firm value today.
269. The Rural Associations use the
FCF WACC formula to develop a range
of WACC estimates based on a sample
of 633 rate-of-return incumbent LECs.
Staff took issue with NECA et al.’s use
of the median value of the WACC
estimates for these rate-of-return
incumbent LECs to establish a range for
the WACC. In response, the Rural
Associations, including NECA,
recalculated its analysis using the
average value weighted by access
connections. This resulted in a large
decrease in the range of WACC
estimates (11.75 to 23.49 percent versus
8.69 percent to 17.39 percent).
270. Given that large decrease, the
Commission now takes a closer look at
the details of the Rural Associations’
analysis. Based on our review, there is
an enormous variance among the 633
rate-of-return incumbent LEC WACC
estimates that the Rural Associations
developed. There are many very high
and very low WACC estimates. For
example, focusing on the estimates
based on the Rural Associations’
midpoint valuation number, $1,800 per
line, the values of the ten lowest
estimates are: ¥271, ¥277, ¥305,
¥308, ¥320, ¥372, ¥429, ¥489,
¥631, and ¥862 percent. The values of
the ten highest estimates, given this
midpoint valuation, are: 121, 123, 124,
147, 155, 187, 201, 296, 393, and 838
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24323
percent. These high and low numbers,
and there are more than just these 20,
are implausibly high and low. The
Commission is unaware of any wave of
bankruptcies among the rate-of-return
incumbent LECs, for as long as the
Commission’s allowable rate of return of
11.25 percent has been effect, and none
of the commenters has suggested that
the allowable rate of return for these
carriers should be as high as the Rural
Associations’ estimates. Similarly, a
negative expected rate of return, i.e.,
cost of capital, makes no economic
sense.
271. Statistically speaking, and again
focusing on the estimates based on the
Rural Associations’ midpoint valuation
number, the median value WACC is
15.66 percent, the weighted average is
11.59 percent, the simple average is 8.64
percent, and the standard deviation
relative to the simple average is 83.18
percent, a figure that is approximately
10 times greater than the simple
average. Given this dispersion and the
implausibly high and low WACC
estimates, none of the typical measures
of central tendency, i.e., the median,
weighted average, or simple average,
would provide an overall estimate, or
even a range of overall estimates, on
which the Commission could rely.
There would seem to be too strong of
likelihood of large error in many of the
individual estimates, and the
Commission cannot simply assume that
these errors would offset each other by
averaging the WACC estimates, or rely
on the use of the middle-value estimate
(i.e., the median) to remove the impact
of these errors. Thus, the Commission
rejects the Rural Associations’ WACC
estimates.
c. Cost of Preferred Stock
272. The Commission’s rules specify
that the WACC calculations incorporate
the cost of preferred stock which is
stock that entitles its holders to receive
a share of corporate assets before
common stockholders do, in the event
of liquidation of the firm, and offers
other benefits, such as priority when
dividends are paid. Staff recommended
in the Staff Report that the Commission
waive or eliminate the requirement to
include the cost of preferred stock in the
WACC calculation because the cost of
preferred stock is either not available to
us or not publicly reported. This
approach is consistent with the
Commission’s 1990 represcription
which did not factor in the cost of
preferred stock. In the Staff Report, staff
explained that including the cost of
preferred stock would not significantly
alter the WACC calculation because the
proxy firms do not typically raise
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capital through the issuance of preferred
stock and that preferred stock is only a
small share of the capital structure for
the proxies that have such stock. The
Commission agrees for the reasons
articulated by staff explained above.
Further, no commenters filed in
opposition to staff’s approach.
Accordingly, the Commission finds
good cause exists to waive the
requirement to calculate the WACC
based on the cost of preferred stock.
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d. WACC Results
273. Appendices J & K to this Order
shows the WACCs resulting from using
both CAPM and DCF, together with the
component values of each model and
the estimates of the cost of debt and
capital structure.
e. Establishing the WACC Zone of
Reasonableness
274. In determining the authorized
rate of return, the Commission’s starting
point is to establish a zone of reasonable
financial model-based estimates of the
overall WACC. After identifying this
WACC zone of reasonableness, the
Commission may determine, based on
policy considerations, where to
prescribe the unitary rate of return. To
determine a WACC zone of
reasonableness, staff recommended
comparing the range of WACCs
produced when the cost of equity is
determined using CAPM with varying
market premiums, and the range
produced when the cost of equity is
determined using DCF.
275. The Commission finds above that
a reasonable range for CAPM WACC
estimates is 7.12 to 9.01 percent, while
a reasonable range for DCF WACC
estimates is 8.28 percent to 8.57 percent.
Taken together, the overall range for
reasonable WACC estimates is 7.12 to
9.01 percent, if there is no reason to
believe that either model provides better
estimates. The record is critical of the
CAPM analysis in the Staff Report,
while the DCF analysis is largely
unchallenged. In response to these
criticisms, the Commission adjusted the
CAPM analysis to produce more reliable
estimates. In particular, the Commission
revises the estimate of the risk-free rate,
and account for what might be an
unreliable beta estimate for the proxy
New Ulm. Nevertheless, given the
record, the Commission would be
reluctant to select a rate of return that
is below the DCF WACC range. The
bottom of the WACC range relies on a
truncated confidence interval that might
not reflect a precise accounting of the
premium in terms of the rate of return
that equity holders require in
comparison to debtholders. Even
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without this concern and that record, it
would be difficult to prescribe a rate of
return below the WACC DCF range
given that both the DCF and the CAPM
have different strengths and weaknesses
and the value of performing both
analyses is that these models have the
potential to provide corroborating
evidence.
f. Prescribing a New Authorized Rate of
Return
276. The reasonable range of WACC
estimates discussed above are based on
the cost of capital which serves as a
useful and reliable starting point in rate
of return represcription. The
Commission, however, may consider
other relevant factors as well. It is well
established that rate of return
prescription under the Act’s ‘‘just and
reasonable’’ standard requires a
balancing of ratepayer and shareholder
interests. A rate-of-return carrier must
be allowed the opportunity to earn a
return that is high enough to maintain
the financial integrity of the company
and to attract new capital. At the same
time, to be reasonable, the rate of return
must not produce excessive rates at the
expense of the ratepayer. Courts have
recognized that there is a zone of
reasonableness within which reasonable
rates may fall, and that the regulatory
agencies are entitled to exercise
judgment in selecting a rate of return
within that zone. In general, the zone of
reasonableness balances financial
interests of the regulated company and
relevant public interests. The
Commission has substantial discretion
when setting the authorized rate of
return, and may consider a broad array
of evidence and methodologies in
prescribing the authorized rate of return.
The Commission may also consider
non-cost policy considerations in setting
the rate of return.
277. The Commission is particularly
mindful of the economic impact
represcription will have on rate-ofreturn incumbent LECs. As Professor
Bowman notes, companies subject to
regulation face regulatory risk which
increases the cost of capital. In this
regard, the Commission agrees with
Professor Bowman’s argument that as a
consequence of the asymmetry of social
costs and benefits, and the uncertainties
in the estimates of the true cost of
capital, they should err on the high side
when establishing the rate of return
zone of reasonableness to minimize
expected losses in social welfare
through investment effects.
Accordingly, expanding the zone of
reasonableness above the top of the
reasonable WACC estimates is
supported in the record.
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278. The Commission concludes that
they should expand the upper end of
the rate of return zone of reasonableness
beyond the WACC estimates based on
policy considerations and adopt the rate
of return from the upper end of this
zone. First, by expanding the zone of
reasonableness, the Commission
provides an additional cushion for rateof-return incumbent LECs that may have
a relatively high cost of capital
compared to our proxies. There are
hundreds of rate-of-return incumbent
LECs. Some will have a relatively high
and some a relatively low cost of
capital. At the same time, the
Commission adopts an authorized rate
of return that applies to all of these
carriers. To maximize the likelihood
that the unitary rate of return is fully
compensatory, even for firms with a
relatively high cost of capital, the
Commission expands the zone of
reasonableness above the top of the
range of WACC estimates developed
above. Second, the Commission adds
this cushion to the zone to account for
regulatory lag—the time between
recognition of the need for regulatory
change in light of changing
circumstances, in this case the need to
prescribe a different rate of return, as
capital markets change significantly,
and regulatory action, in this case
actually prescribing a new rate of return.
The Commission therefore adds about
three-quarters of a percentage point to
the top of the WACC range developed
above to account for these two factors,
expanding the overall zone of
reasonableness for the rate of return
estimates to 7.12 to 9.75 percent.
279. The Commission notes that the
WACC is supposed to compensate
equity holders and debtholders who
provide the funds used to finance the
firm’s assets. Given a rate of return set
equal to 9.75 percent, an average capital
structure based on our estimates of
54.34 percent debt, and a cost of debt
based on our estimates of 5.87 percent,
the implied cost of equity is 14.37
percent. The Commission finds that not
only is the WACC of 9.75 percent high
enough adequately to compensate the
firm’s debtholders, but the implied rate
of return on equity also provides equity
holders with the opportunity to earn a
reasonable rate of return on their
investment. As support for our finding
that a 9.75 percent rate of return is
reasonable, the Commission examines
some benchmarks.
280. The difference between the
implied cost of equity and the cost of
debt estimate is 8.5 percentage points
(850 basis points). By comparison, this
850 basis point difference exceeds the
439 basis point difference between the
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estimates of the cost of debt, 8.8 percent,
and the cost of equity, 13.19 percent, on
which the Commission’s current 11.25
percent authorized rate of return is
based. That rate of return was developed
in 1990 based on estimates of the cost
of debt and equity that would have
reflected investors’ perception of
incumbent LEC risks and the conditions
in the financial market at the time. So
this benchmark provides a useful rough
check on our estimates. The 850 basis
point difference also exceeds the
average difference between the large
company stock return, i.e., Standard &
Poor’s 500 (S&P 500) index companies,
and the long-term corporate bond
return, from 1926–2010, 570 basis
points. The 850 basis point difference is
not as large as the difference between
small company stock returns and the
long-term corporate bond returns, from
1926–2010, 10.5 percent (1005 basis
points). However, the difference
between the average cost of debt
estimate for the six Publicly-Traded
RLEC Proxies that have access to loans
made through rural-company programs
(such as those administered by the Rural
Utilities Service and CoBank), 4.38
percent, and the implied cost of equity
for this smaller group, which is 14.15
percent, given this group’s capital
structure estimate of 45.02 percent debt,
is 977 basis points, which is reasonably
close to the 1005 historical basis points
difference for small companies. The
Commission uses this small company
benchmark while pointing out that it
might be true that, as other analysis
suggests, returns to small companies are
no longer statistically different from
those of larger companies. If so, then
this small company benchmark does not
provide any insights beyond the
benchmark for larger firms, which then
suggests in an even more compelling
way that the WACC of 9.75 percent will
provide reasonable compensation to
owners of these smaller rate-of-return
incumbent LECs. Collectively, these
benchmarks provide evidence that a
WACC and thus an allowable rate of
return of 9.75 percent provides a
reasonable level of compensation.
g. Specific Rates of Return
281. Tribally-Owned Carrier Specific
Rate of Return. In the USF/ICC
Transformation FNPRM, the
Commission sought comment on how to
account for Tribally-owned carriers in
this prescription, and whether a
different rate of return is warranted for
these carriers. Gila River, NTTA and
MATI argue in favor a separate, higher,
rate of return for Tribally-owned carriers
operating in Tribal areas due to
illiquidity of Tribal assets and inability
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Jkt 238001
to access credit and capital. Gila River
further argues that low income
population on Tribal lands, reliance on
Rural Utilities Service loans and
universal service support, lack of
infrastructure on Tribal lands, and
unique ‘‘environmental and cultural
preservation review processes’’ warrant
a separate rate of return for Triballyowned carriers. The purpose of the
unitary rate of return is to reflect the
industry-wide rate of return. Section
65.102(b) provides a process for carriers
such as Gila River to apply for exclusion
from unitary treatment and receive
individual treatment in determining the
authorized rate of return. A petition for
exclusion from unitary treatment must
plead with particularity the exceptional
facts and circumstances that justify
individual treatment. The showing shall
include a demonstration that the
exceptional facts and circumstances are
not of transitory effect, such that
exclusion for a period of at least two
years is justified. To the extent a
Tribally-owned carrier or any other rateof-return regulated carrier contends that
a specific, non-unitary, rate of return is
justified, it can seek an exclusion via the
process outlined in section 65.102(b).
As stated above, such applications must
be plead with particularity and no rateof-return incumbent LEC has petitioned
for exclusion or otherwise met this
burden. Accordingly, at this time, the
Commission declines to grant an
exception to the authorized unitary rate
of return for Tribally-owned carriers as
the specific circumstances surrounding
each carrier may vary substantially.
6. Implementing the New Rate of Return
282. The Commission has authority
under section 205 to prescribe a 9.75
percent unitary rate of return effective
immediately. The Commission
recognizes, however, that for almost 25
years rate-of-return carriers have made
significant infrastructure investments on
which they have had the opportunity to
earn a rate of return of 11.25 percent
until now, and that represcribing the
rate of return will have a financial
impact on these carriers. ICORE
proposes that if the Commission lowers
the rate of return, it should do so ‘‘in the
most gradual and least disruptive
manner possible.’’ The Moss Adams
companies propose that ‘‘any changes
that the FCC makes should be measured
and spread over time.’’ USTelecom and
NTCA recognize that rate represcription
is ‘‘essential to a broadband reform
effort’’ and suggest a multi-year
transition to 9.75 percent. The
Commission agrees. The Commission
recognizes that rate-of-return incumbent
LECs have been subject to significant
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24325
regulatory changes in recent years, and
that such changes are occurring at a
time when these carriers are attempting
to transition their networks and service
offerings to a broadband world. At the
same time, the Commission finds that
they must represcribe the almost 25-year
old rate of return to meet our statutory
obligations. To minimize the immediate
financial impacts that represcription
may impose on carriers, the
Commission adopts, for the first time, a
transitional approach to represcription.
283. Under this transitional approach,
as proposed by USTelecom and NTCA,
the 11.25 percent rate of return will be
reduced by 25 basis points per year
until the Commission reach the
represcribed 9.75 percent rate of return.
For administrative simplicity, the
Commission choose July 1, 2016 as the
effective date for the initial transitional
rate of return of 11.0 percent followed
by subsequent annual 25 basis point
reductions consistent with the table
below until July 1, 2021 when the 9.75
percent rate of return the Commission
represcribes today shall be effective.
Effective date of rate of return
July
July
July
July
July
July
1,
1,
1,
1,
1,
1,
2016
2017
2018
2019
2020
2021
............................
............................
............................
............................
............................
............................
Authorized
rate of return
(%)
11.0
10.75
10.5
10.25
10.0
9.75
IV. Procedural Matters
A. Paperwork Reduction Act Analysis
284. This document contains new
information collection requirements
subject to the PRA. It 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. In addition, the
Commission notes that pursuant to the
Small Business Paperwork Relief Act of
2002, they previously sought specific
comment on how the Commission might
further reduce the information
collection burden for small business
concerns with fewer than 25 employees.
The Commission describes impacts that
might affect small businesses, which
includes most businesses with fewer
than 25 employees, in the Final
Regulatory Flexibility Analysis (FRFA)
in Appendix B, infra.
B. Final Regulatory Flexibility Analysis
285. As required by the Regulatory
Flexibility Act of 1980 (RFA), as
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amended, Initial Regulatory Flexibility
Analyses (IRFAs) were incorporated in
the Notice of Proposed Rulemaking and
Further Notice of Proposed Rulemaking
(USF/ICC Transformation NPRM), in the
Notice of Inquiry and Notice of
Proposed Rulemaking (USF Reform
NOI/NPRM), in the Notice of Proposed
Rulemaking (Mobility Fund NPRM),
Order and Further Notice of Proposed
Rulemaking (USF/ICC Transformation
Order or FNPRM), and in the Report and
Order, Declaratory Ruling, Order,
Memorandum Opinion and Order,
Seventh Order on Reconsideration, and
Further Notice of Proposed Rulemaking
(April 2014 Connect America FNPRM)
for this proceeding. The Commission
sought written public comment on the
proposals in the USF/ICC
Transformation FNPRM and April 2014
Connect America FNPRM, including
comment on the IRFA. The Commission
did not receive comments on the USF/
ICC Transformation FNPRM IRFA or
April 2014 Connect America FNPRM
IRFA. This present Final Regulatory
Flexibility Analysis (FRFA) conforms to
the RFA.
1. Need for, and Objective of, the Order
286. In the Report and Order, the
Commission establishes a new forwardlooking, efficient mechanism for the
distribution of support in rate-of-return
areas. Specifically, the Commission
adopts a voluntary path under which
rate-of-return carriers may elect modelbased support for a term of 10 years in
exchange for meeting defined build-out
obligations. The Commission
emphasizes the voluntary nature of this
mechanism; no carrier will be required
to take model-based support, and the
cost model has been adjusted in
multiple ways over more than a year to
take into account the circumstances of
rate-of-return carriers. The Commission
will make available up to an additional
$150 million annually from existing
high-cost reserves to facilitate this
voluntary path to the model over the
next decade.
287. The Commission also reforms the
existing mechanisms for the distribution
of support in rate-of-return areas for
those carriers that do not elect to receive
model-based support. The Commission
makes technical corrections to
modernize our existing interstate
common line support (ICLS) rules to
provide support in situations where the
customer no longer subscribes to
traditional regulated local exchange
voice service, i.e., stand-alone
broadband. Going forward, this
reformed mechanism will be known as
Connect America Fund Broadband Loop
Support (CAF BLS). This simple,
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forward-looking change to the existing
mechanism will provide support for
broadband-capable loops in an equitable
and stable manner, regardless of
whether the customer chooses to
purchase traditional voice service, a
bundle of voice and broadband, or only
broadband. The Commission expects
this approach will provide carriers,
including those that no longer receive
high cost loop support (HCLS), with
appropriate support going forward to
invest in broadband networks, while not
disrupting past investment decisions.
288. One of the core principles of
reform since 2011 has been to ensure
that support is provided in the most
efficient manner possible, recognizing
that ultimately American consumers
and businesses pay for the universal
service fund (USF). The Commission
continues to move forward with our
efforts to ensure that companies do not
receive more support than is necessary
and that rate of return carriers have
sufficient incentive to be prudent and
efficient in their expenditures, and in
particular operating expenses.
Therefore, the Commission adopts a
method to limit operating costs eligible
for support under rate-of-return
mechanisms, based on a proposal
submitted by the carriers. The
Commission also adopts measures that
will limit the extent to which USF
support is used to support capital
investment by those rate-of-return
carriers that are above the national
average in broadband deployment in
order to help target support to those
areas with less broadband deployment.
Lastly, to ensure disbursed high-cost
support stays within the established
budget for rate-of-return carriers, the
Commission adopts a self-effectuating
mechanism to control total support
distributed pursuant to the HCLS and
CAF–BLS mechanisms.
289. In 2011, the Commission also
stressed the need to ‘‘require
accountability from companies
receiving support to ensure that public
investments are used wisely to deliver
intended results.’’ To this end, the
Commission adopts deployment
obligations that can be measured and
monitored for all rate-of-return carriers,
while tailoring those obligations to the
unique circumstances of individual
carriers. Those obligations will be
individually sized for each carrier not
electing model support, based on the
extent to which it has already deployed
broadband and its forecasted CAF BLS,
taking into account the relative amount
of depreciated plant and the density
characteristics of individual carriers.
290. Another core tenet of reform
adopted by the Commission in 2011,
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and unanimously reaffirmed in 2014,
was to target support to areas that the
market will not serve absent subsidy. To
direct universal service support to those
areas where it is most needed, the
Commission adopts a rule prohibiting
rate-of-return carriers from receiving
CAF–BLS support in those census
blocks that are served by a qualifying
unsubsidized competitor. The
Commission adopts a robust challenge
process to determine which areas are in
fact served by a qualifying unsubsidized
competitor. Carriers may elect one of
several options for disaggregating
support for those areas found to be
competitive. Any support reductions
resulting from implementation of this
rule will be more effectively targeted to
support existing and new broadband
infrastructure in areas lacking a
competitor.
291. The Commission also addresses
cost allocation and tariff-related issues
raised by adoption of the reforms to
high-cost support adopted in this Order
for the provision of broadband-only
loops. The Commission first creates a
new service category known as the
‘‘Consumer Broadband-Only Loop’’
category, which will include the costs of
the consumer broadband-only loop
facilities that today are recovered
through special access rates. Second, the
Commission requires a carrier to move
the costs of consumer broadband-only
loops from the special access category to
the new Consumer Broadband-Only
Loop category. These actions will
segregate the broadband-only loop
investment and expenses from other
special access costs currently included
in the special access category and
preclude double recovery of any costs
assigned to the Consumer BroadbandOnly Loop category.
292. The Commission will allow a
rate-of-return carrier electing modelbased support to assess a wholesale
Consumer Broadband-Only Loop charge
that does not exceed $42 per line per
month. This rate cap allows a carrier the
opportunity to recover its costs not
covered by the model, while limiting
the ability of a carrier to engage in a
price squeeze against a non-affiliated
ISP offering retail broadband service.
The retail service provided to the enduser customer is not constrained by this
limitation. Carriers electing modelbased support that participate in the
NECA common line tariff will be
allowed to use the NECA tariff to offer
their Consumer Broadband-Only Loop
service to obtain the administrative
benefits of a single tariff filing. They
will not be eligible to participate in the
NECA common line pooling
mechanism, however, because the
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model-based support mechanism is
inconsistent with cost pooling.
293. A carrier that does not elect
model-based support will have an
interstate revenue requirement for its
Consumer Broadband-Only Loop
category. The projected Consumer
Broadband-Only Loop revenue
requirement will be reduced by the
projected amount of CAF BLS attributed
to that category in accordance with the
procedures in Part 54. The remaining
projected revenue requirement is the
basis for developing the rates the carrier
may assess, based on projected loops.
Finally, providing support to consumer
broadband-only loops likely will result
in the migration of some end users from
their current voice/broadband offerings
thereby affecting the careful balancing
of the recovery mechanism adopted in
the USF/ICC Transformation Order. To
insure that our actions today do not
unintentionally increase CAF–ICC
support, the Commission requires that
rate-of-return carriers impute an amount
equal to the ARC charge they would
assess on voice/broadband lines to their
supported consumer broadband-only
lines. Second, the Commission clarifies
that a carrier must reflect any revenues
recovered for use of the facilities
previously used to provide the
supported service as double recovery in
its Tariff Review Plans, which will
reduce the amount of CAF ICC it will
receive.
294. Finally, the Commission takes
action to modify our existing reporting
requirements in light of lessons learned
from their implementation. The
Commission revises eligible
telecommunications carriers’ (ETC)
annual reporting requirements to align
better those requirements with our
statutory and regulatory objectives. The
Commission concludes that the public
interest will be served by eliminating
the requirement to file a narrative
update to the five-year plan. Instead, the
Commission adopts narrowly-tailored
reporting requirements regarding the
location of new deployment offering
service at various speeds, which will
better enable the Commission to
determine on an annual basis how highcost support is being used to ‘‘improve
broadband availability, service quality,
and capacity at the smallest geographic
area possible.’’
295. In the Order and Order on
Reconsideration, the Commission
represcribes the currently authorized
rate of return from 11.25 percent to 9.75.
The Commission explains that a rate of
return higher than necessary to attract
capital to investment results in
excessive profit for rate-of-return
carriers and unreasonably high prices
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for consumers. It also inefficiently
distorts carrier operations, resulting in
waste in the sense that, but for these
distortions, more services, including
broadband services, would be provided
at the same cost. Relying primarily on
the methodology and data contained in
a Commission staff report and public
comments, the Commission identifies a
more robust zone of reasonableness and
adopt a new rate of return at the upper
end of this range at 9.75 percent. As part
of its estimation of the rate of return, the
Commission revises its rule for
calculating the cost of debt, an input in
the cost of capital formula used to
estimate the rate of return, to account
for an overstatement of the interest
expense contained in the rules. The new
rate of return of 9.75 percent will be
phased-in gradually over a six-year
period.
2. Summary of Significant Issues Raised
by Public Comments in Response to the
IRFA
296. There were no comments raised
that specifically addressed the proposed
rules and policies presented in the USF/
ICC Transformation FNRPM IRFA or
April 2014 Connect America FNPRM
IRFA. Nonetheless, the Commission
considered the potential impact of the
rules proposed in the IRFA on small
entities and reduced the compliance
burden for all small entities in order to
reduce the economic impact of the rules
enacted herein on such entities.
3. Response to Comments by the Chief
Counsel for Advocacy of the Small
Business Administration
297. Pursuant to the Small Business
Jobs Act of 2010, which amended the
RFA, the Commission is required to
respond to any comments filed by the
Chief Counsel of the Small Business
Administration (SBA), and to provide a
detailed statement of any change made
to the proposed rule(s) as a result of
those comments.
298. The Chief Counsel did not file
any comments in response to the
proposed rule(s) in this proceeding.
4. Description and Estimate of the
Number of Small Entities to Which the
Rules Would Apply
299. The RFA directs agencies to
provide a description of, and where
feasible, an estimate of the number of
small entities that may be affected by
the proposed rules, if adopted. The RFA
generally defines the term ‘‘small
entity’’ as having the same meaning as
the terms ‘‘small business,’’ ‘‘small
organization,’’ and ‘‘small governmental
jurisdiction.’’ In addition, the term
‘‘small business’’ has the same meaning
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as the term ‘‘small-business concern’’
under the Small Business Act. A smallbusiness concern’’ is one which: (1) Is
independently owned and operated; (2)
is not dominant in its field of operation;
and (3) satisfies any additional criteria
established by the Small Business
Administration (SBA).
5. Total Small Entities
300. Our proposed action, if
implemented, may, over time, affect
small entities that are not easily
categorized at present. The Commission
therefore describes here, at the outset,
three comprehensive, statutory small
entity size standards. First, nationwide,
there are a total of approximately 28.2
million small businesses, according to
the SBA, which represents 99.7% of all
businesses in the United States. In
addition, a ‘‘small organization’’ is
generally ‘‘any not-for-profit enterprise
which is independently owned and
operated and is not dominant in its
field.’’ Nationwide, as of 2007, there
were approximately 1,621,215 small
organizations. Finally, the term ‘‘small
governmental jurisdiction’’ is defined
generally as ‘‘governments of cities,
towns, townships, villages, school
districts, or special districts, with a
population of less than fifty thousand.’’
Census Bureau data for 2011 indicate
that there were 90,056 local
governmental jurisdictions in the
United States. The Commission
estimates that, of this total, as many as
89,327 entities may qualify as ‘‘small
governmental jurisdictions.’’ Thus, the
Commission estimates that most
governmental jurisdictions are small.
6. Broadband Internet Access Service
Providers
301. The rules adopted in the Order
apply to broadband Internet access
service providers. The Economic Census
places these firms, whose services might
include Voice over Internet Protocol
(VoIP), in either of two categories,
depending on whether the service is
provided over the provider’s own
telecommunications facilities (e.g., cable
and DSL ISPs), or over client-supplied
telecommunications connections (e.g.,
dial-up ISPs). The former are within the
category of Wired Telecommunications
Carriers, which has an SBA small
business size standard of 1,500 or fewer
employees. These are also labeled
‘‘broadband.’’ The latter are within the
category of All Other
Telecommunications, which has a size
standard of annual receipts of $32.5
million or less. These are labeled nonbroadband. According to Census Bureau
data for 2007, there were 3,188 firms in
the first category, total, that operated for
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the entire year. Of this total, 3144 firms
had employment of 999 or fewer
employees, and 44 firms had
employment of 1,000 employees or
more. For the second category, the data
show that 2,383 firms operated for the
entire year. Of those, 2,346 had annual
receipts below $32.5 million per year.
Consequently, the Commission
estimates that the majority of broadband
Internet access service provider firms
are small entities.
302. The broadband Internet access
service provider industry has changed
since this definition was introduced in
2007. The data cited above may
therefore include entities that no longer
provide broadband Internet access
service, and may exclude entities that
now provide such service. To ensure
that this FRFA describes the universe of
small entities that our action might
affect, the Commission discusses in turn
several different types of entities that
might be providing broadband Internet
access service. The Commission notes
that, although the Commission has no
specific information on the number of
small entities that provide broadband
Internet access service over unlicensed
spectrum, the Commission includes
these entities in our Final Regulatory
Flexibility Analysis.
7. Wireline Providers
303. Incumbent Local Exchange
Carriers (Incumbent LECs). Neither the
Commission nor the SBA has developed
a small business size standard
specifically for incumbent LEC services.
The closest applicable size standard
under SBA rules is for the category
Wired Telecommunications Carriers.
Under that size standard, such a
business is small if it has 1,500 or fewer
employees. According to Commission
data, 1,307 carriers reported that they
were incumbent LEC providers. Of these
1,307 carriers, an estimated 1,006 have
1,500 or fewer employees and 301 have
more than 1,500 employees.
Consequently, the Commission
estimates that most providers of
incumbent LEC service are small
businesses that may be affected by rules
adopted pursuant to the Order.
304. Competitive Local Exchange
Carriers (Competitive LECs),
Competitive Access Providers (CAPs),
Shared-Tenant Service Providers, and
Other Local Service Providers. Neither
the Commission nor the SBA has
developed a small business size
standard specifically for these service
providers. The appropriate size standard
under SBA rules is for the category
Wired Telecommunications Carriers.
Under that size standard, such a
business is small if it has 1,500 or fewer
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employees. According to Commission
data, 1,442 carriers reported that they
were engaged in the provision of either
competitive local exchange services or
competitive access provider services. Of
these 1,442 carriers, an estimated 1,256
have 1,500 or fewer employees and 186
have more than 1,500 employees. In
addition, 17 carriers have reported that
they are Shared-Tenant Service
Providers, and all 17 are estimated to
have 1,500 or fewer employees. In
addition, 72 carriers have reported that
they are Other Local Service Providers.
Of the 72, seventy have 1,500 or fewer
employees and two have more than
1,500 employees. Consequently, the
Commission estimates that most
providers of competitive local exchange
service, competitive access providers,
Shared-Tenant Service Providers, and
other local service providers are small
entities that may be affected by rules
adopted pursuant to the Order.
305. The Commission has included
small incumbent LECs in this present
RFA analysis. As noted above, a ‘‘small
business’’ under the RFA is one that,
inter alia, meets the pertinent small
business size standard (e.g., a telephone
communications business having 1,500
or fewer employees), and ‘‘is not
dominant in its field of operation.’’ The
SBA’s Office of Advocacy contends that,
for RFA purposes, small incumbent
LECs are not dominant in their field of
operation because any such dominance
is not ‘‘national’’ in scope. The
Commission has therefore included
small incumbent LECs in this RFA
analysis, although the Commission
emphasizes that this RFA action has no
effect on Commission analyses and
determinations in other, non-RFA
contexts.
306. Interexchange Carriers. Neither
the Commission nor the SBA has
developed a small business size
standard specifically for providers of
interexchange services. The appropriate
size standard under SBA rules is for the
category Wired Telecommunications
Carriers. Under that size standard, such
a business is small if it has 1,500 or
fewer employees. According to
Commission data, 359 carriers have
reported that they are engaged in the
provision of interexchange service. Of
these, an estimated 317 have 1,500 or
fewer employees and 42 have more than
1,500 employees. Consequently, the
Commission estimates that the majority
of IXCs are small entities that may be
affected by rules adopted pursuant to
the Order.
307. Operator Service Providers
(OSPs). Neither the Commission nor the
SBA has developed a small business
size standard specifically for operator
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service providers. The appropriate size
standard under SBA rules is for the
category Wired Telecommunications
Carriers. Under that size standard, such
a business is small if it has 1,500 or
fewer employees. According to
Commission data, 33 carriers have
reported that they are engaged in the
provision of operator services. Of these,
an estimated 31 have 1,500 or fewer
employees and two have more than
1,500 employees. Consequently, the
Commission estimates that the majority
of OSPs are small entities that may be
affected by rules adopted pursuant to
the Order.
308. Prepaid Calling Card Providers.
Neither the Commission nor the SBA
has developed a small business size
standard specifically for prepaid calling
card providers. The appropriate size
standard under SBA rules is for the
category Telecommunications Resellers.
Under that size standard, such a
business is small if it has 1,500 or fewer
employees. According to Commission
data, 193 carriers have reported that
they are engaged in the provision of
prepaid calling cards. Of these, an
estimated all 193 have 1,500 or fewer
employees and none have more than
1,500 employees. Consequently, the
Commission estimates that the majority
of prepaid calling card providers are
small entities that may be affected by
rules adopted pursuant to the Order.
309. Local Resellers. The SBA has
developed a small business size
standard for the category of
Telecommunications Resellers. Under
that size standard, such a business is
small if it has 1,500 or fewer employees.
According to Commission data, 213
carriers have reported that they are
engaged in the provision of local resale
services. Of these, an estimated 211
have 1,500 or fewer employees and two
have more than 1,500 employees.
Consequently, the Commission
estimates that the majority of local
resellers are small entities that may be
affected by rules adopted pursuant to
the Order.
310. Toll Resellers. The SBA has
developed a small business size
standard for the category of
Telecommunications Resellers. Under
that size standard, such a business is
small if it has 1,500 or fewer employees.
According to Commission data, 881
carriers have reported that they are
engaged in the provision of toll resale
services. Of these, an estimated 857
have 1,500 or fewer employees and 24
have more than 1,500 employees.
Consequently, the Commission
estimates that the majority of toll
resellers are small entities that may be
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affected by rules adopted pursuant to
the Order.
311. Other Toll Carriers. Neither the
Commission nor the SBA has developed
a size standard for small businesses
specifically applicable to Other Toll
Carriers. This category includes toll
carriers that do not fall within the
categories of interexchange carriers,
operator service providers, prepaid
calling card providers, satellite service
carriers, or toll resellers. The closest
applicable size standard under SBA
rules is for Wired Telecommunications
Carriers. Under that size standard, such
a business is small if it has 1,500 or
fewer employees. According to
Commission data, 284 companies
reported that their primary
telecommunications service activity was
the provision of other toll carriage. Of
these, an estimated 279 have 1,500 or
fewer employees and five have more
than 1,500 employees. Consequently,
the Commission estimates that most
Other Toll Carriers are small entities
that may be affected by the rules and
policies adopted pursuant to the Order.
312. 800 and 800-Like Service
Subscribers. Neither the Commission
nor the SBA has developed a small
business size standard specifically for
800 and 800-like service (toll free)
subscribers. The appropriate size
standard under SBA rules is for the
category Telecommunications Resellers.
Under that size standard, such a
business is small if it has 1,500 or fewer
employees. The most reliable source of
information regarding the number of
these service subscribers appears to be
data the Commission collects on the
800, 888, 877, and 866 numbers in use.
According to our data, as of September
2009, the number of 800 numbers
assigned was 7,860,000; the number of
888 numbers assigned was 5,588,687;
the number of 877 numbers assigned
was 4,721,866; and the number of 866
numbers assigned was 7,867,736. The
Commission does not have data
specifying the number of these
subscribers that are not independently
owned and operated or have more than
1,500 employees, and thus are unable at
this time to estimate with greater
precision the number of toll free
subscribers that would qualify as small
businesses under the SBA size standard.
Consequently, the Commission
estimates that there are 7,860,000 or
fewer small entity 800 subscribers;
5,588,687 or fewer small entity 888
subscribers; 4,721,866 or fewer small
entity 877 subscribers; and 7,867,736 or
fewer small entity 866 subscribers.
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8. Wireless Providers—Fixed and
Mobile
313. The broadband Internet access
service provider category covered by
this Order may cover multiple wireless
firms and categories of regulated
wireless services. Thus, to the extent the
wireless services listed below are used
by wireless firms for broadband Internet
access service, the proposed actions
may have an impact on those small
businesses as set forth above and further
below. In addition, for those services
subject to auctions, the Commission
notes that, as a general matter, the
number of winning bidders that claim to
qualify as small businesses at the close
of an auction does not necessarily
represent the number of small
businesses currently in service. Also,
the Commission does not generally track
subsequent business size unless, in the
context of assignments and transfers or
reportable eligibility events, unjust
enrichment issues are implicated.
314. Wireless Telecommunications
Carriers (except Satellite). Since 2007,
the Census Bureau has placed wireless
firms within this new, broad, economic
census category. Under the present and
prior categories, the SBA has deemed a
wireless business to be small if it has
1,500 or fewer employees. For the
category of Wireless
Telecommunications Carriers (except
Satellite), census data for 2007 show
that there were 1,383 firms that operated
for the entire year. Of this total, 1,368
firms had employment of 999 or fewer
employees and 15 had employment of
1,000 employees or more. Since all
firms with fewer than 1,500 employees
are considered small, given the total
employment in the sector, the
Commission estimates that the vast
majority of wireless firms are small.
315. Wireless Communications
Services. This service can be used for
fixed, mobile, radiolocation, and digital
audio broadcasting satellite uses. The
Commission defined ‘‘small business’’
for the wireless communications
services (WCS) auction as an entity with
average gross revenues of $40 million
for each of the three preceding years,
and a ‘‘very small business’’ as an entity
with average gross revenues of $15
million for each of the three preceding
years. The SBA has approved these
definitions.
316. 218–219 MHz Service. The first
auction of 218–219 MHz spectrum
resulted in 170 entities winning licenses
for 594 Metropolitan Statistical Area
(MSA) licenses. Of the 594 licenses, 557
were won by entities qualifying as a
small business. For that auction, the
small business size standard was an
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entity that, together with its affiliates,
has no more than a $6 million net worth
and, after federal income taxes
(excluding any carry over losses), has no
more than $2 million in annual profits
each year for the previous two years. In
the 218–219 MHz Report and Order and
Memorandum Opinion and Order, 64
FR 59656, November 3, 1999, the
Commission established a small
business size standard for a ‘‘small
business’’ as an entity that, together
with its affiliates and persons or entities
that hold interests in such an entity and
their affiliates, has average annual gross
revenues not to exceed $15 million for
the preceding three years. A ‘‘very small
business’’ is defined as an entity that,
together with its affiliates and persons
or entities that hold interests in such an
entity and its affiliates, has average
annual gross revenues not to exceed $3
million for the preceding three years.
These size standards will be used in
future auctions of 218–219 MHz
spectrum.
317. 2.3 GHz Wireless
Communications Services. This service
can be used for fixed, mobile,
radiolocation, and digital audio
broadcasting satellite uses. The
Commission defined ‘‘small business’’
for the wireless communications
services (‘‘WCS’’) auction as an entity
with average gross revenues of $40
million for each of the three preceding
years, and a ‘‘very small business’’ as an
entity with average gross revenues of
$15 million for each of the three
preceding years. The SBA has approved
these definitions. The Commission
auctioned geographic area licenses in
the WCS service. In the auction, which
was conducted in 1997, there were
seven bidders that won 31 licenses that
qualified as very small business entities,
and one bidder that won one license
that qualified as a small business entity.
318. 1670–1675 MHz Services. This
service can be used for fixed and mobile
uses, except aeronautical mobile. An
auction for one license in the 1670–1675
MHz band was conducted in 2003. One
license was awarded. The winning
bidder was not a small entity.
319. Wireless Telephony. Wireless
telephony includes cellular, personal
communications services, and
specialized mobile radio telephony
carriers. As noted, the SBA has
developed a small business size
standard for Wireless
Telecommunications Carriers (except
Satellite). Under the SBA small business
size standard, a business is small if it
has 1,500 or fewer employees.
According to Commission data, 413
carriers reported that they were engaged
in wireless telephony. Of these, an
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estimated 261 have 1,500 or fewer
employees and 152 have more than
1,500 employees. Therefore, a little less
than one third of these entities can be
considered small.
320. Broadband Personal
Communications Service. The
broadband personal communications
services (PCS) spectrum is divided into
six frequency blocks designated A
through F, and the Commission has held
auctions for each block. The
Commission initially defined a ‘‘small
business’’ for C- and F-Block licenses as
an entity that has average gross revenues
of $40 million or less in the three
previous calendar years. For F-Block
licenses, an additional small business
size standard for ‘‘very small business’’
was added and is defined as an entity
that, together with its affiliates, has
average gross revenues of not more than
$15 million for the preceding three
calendar years. These small business
size standards, in the context of
broadband PCS auctions, have been
approved by the SBA. No small
businesses within the SBA-approved
small business size standards bid
successfully for licenses in Blocks A
and B. There were 90 winning bidders
that claimed small business status in the
first two C-Block auctions. A total of 93
bidders that claimed small business
status won approximately 40 percent of
the 1,479 licenses in the first auction for
the D, E, and F Blocks. On April 15,
1999, the Commission completed the
reauction of 347 C-, D-, E-, and F-Block
licenses in Auction No. 22. Of the 57
winning bidders in that auction, 48
claimed small business status and won
277 licenses.
321. On January 26, 2001, the
Commission completed the auction of
422 C and F Block Broadband PCS
licenses in Auction No. 35. Of the 35
winning bidders in that auction, 29
claimed small business status.
Subsequent events concerning Auction
35, including judicial and agency
determinations, resulted in a total of 163
C and F Block licenses being available
for grant. On February 15, 2005, the
Commission completed an auction of
242 C-, D-, E-, and F-Block licenses in
Auction No. 58. Of the 24 winning
bidders in that auction, 16 claimed
small business status and won 156
licenses. On May 21, 2007, the
Commission completed an auction of 33
licenses in the A, C, and F Blocks in
Auction No. 71. Of the 12 winning
bidders in that auction, five claimed
small business status and won 18
licenses. On August 20, 2008, the
Commission completed the auction of
20 C-, D-, E-, and F-Block Broadband
PCS licenses in Auction No. 78. Of the
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eight winning bidders for Broadband
PCS licenses in that auction, six claimed
small business status and won 14
licenses.
322. Specialized Mobile Radio
Licenses. The Commission awards
‘‘small entity’’ bidding credits in
auctions for Specialized Mobile Radio
(SMR) geographic area licenses in the
800 MHz and 900 MHz bands to firms
that had revenues of no more than $15
million in each of the three previous
calendar years. The Commission awards
‘‘very small entity’’ bidding credits to
firms that had revenues of no more than
$3 million in each of the three previous
calendar years. The SBA has approved
these small business size standards for
the 900 MHz Service. The Commission
has held auctions for geographic area
licenses in the 800 MHz and 900 MHz
bands. The 900 MHz SMR auction began
on December 5, 1995, and closed on
April 15, 1996. Sixty bidders claiming
that they qualified as small businesses
under the $15 million size standard won
263 geographic area licenses in the 900
MHz SMR band. The 800 MHz SMR
auction for the upper 200 channels
began on October 28, 1997, and was
completed on December 8, 1997. Ten
bidders claiming that they qualified as
small businesses under the $15 million
size standard won 38 geographic area
licenses for the upper 200 channels in
the 800 MHz SMR band. A second
auction for the 800 MHz band was held
on January 10, 2002 and closed on
January 17, 2002 and included 23 BEA
licenses. One bidder claiming small
business status won five licenses.
323. The auction of the 1,053 800
MHz SMR geographic area licenses for
the General Category channels began on
August 16, 2000, and was completed on
September 1, 2000. Eleven bidders won
108 geographic area licenses for the
General Category channels in the 800
MHz SMR band and qualified as small
businesses under the $15 million size
standard. In an auction completed on
December 5, 2000, a total of 2,800
Economic Area licenses in the lower 80
channels of the 800 MHz SMR service
were awarded. Of the 22 winning
bidders, 19 claimed small business
status and won 129 licenses. Thus,
combining all four auctions, 41 winning
bidders for geographic licenses in the
800 MHz SMR band claimed status as
small businesses.
324. In addition, there are numerous
incumbent site-by-site SMR licenses and
licensees with extended implementation
authorizations in the 800 and 900 MHz
bands. The Commission does not know
how many firms provide 800 MHz or
900 MHz geographic area SMR service
pursuant to extended implementation
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authorizations, nor how many of these
providers have annual revenues of no
more than $15 million. One firm has
over $15 million in revenues. In
addition, the Commission does not
know how many of these firms have
1,500 or fewer employees, which is the
SBA-determined size standard. The
Commission assumes, for purposes of
this analysis, that all of the remaining
extended implementation
authorizations are held by small
entities, as defined by the SBA.
325. Lower 700 MHz Band Licenses.
The Commission previously adopted
criteria for defining three groups of
small businesses for purposes of
determining their eligibility for special
provisions such as bidding credits. The
Commission defined a ‘‘small business’’
as an entity that, together with its
affiliates and controlling principals, has
average gross revenues not exceeding
$40 million for the preceding three
years. A ‘‘very small business’’ is
defined as an entity that, together with
its affiliates and controlling principals,
has average gross revenues that are not
more than $15 million for the preceding
three years. Additionally, the lower 700
MHz Service had a third category of
small business status for Metropolitan/
Rural Service Area (MSA/RSA)
licenses—‘‘entrepreneur’’—which is
defined as an entity that, together with
its affiliates and controlling principals,
has average gross revenues that are not
more than $3 million for the preceding
three years. The SBA approved these
small size standards. An auction of 740
licenses (one license in each of the 734
MSAs/RSAs and one license in each of
the six Economic Area Groupings
(EAGs)) commenced on August 27,
2002, and closed on September 18,
2002. Of the 740 licenses available for
auction, 484 licenses were won by 102
winning bidders. Seventy-two of the
winning bidders claimed small
business, very small business or
entrepreneur status and won a total of
329 licenses. A second auction
commenced on May 28, 2003, closed on
June 13, 2003, and included 256
licenses: 5 EAG licenses and 476
Cellular Market Area licenses.
Seventeen winning bidders claimed
small or very small business status and
won 60 licenses, and nine winning
bidders claimed entrepreneur status and
won 154 licenses. On July 26, 2005, the
Commission completed an auction of 5
licenses in the Lower 700 MHz band
(Auction No. 60). There were three
winning bidders for five licenses. All
three winning bidders claimed small
business status.
326. In 2007, the Commission
reexamined its rules governing the 700
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MHz band in the 700 MHz Second
Report and Order, 72 FR 48814, August
24, 2007. An auction of 700 MHz
licenses commenced January 24, 2008
and closed on March 18, 2008, which
included, 176 Economic Area licenses
in the A Block, 734 Cellular Market
Area licenses in the B Block, and 176
EA licenses in the E Block. Twenty
winning bidders, claiming small
business status (those with attributable
average annual gross revenues that
exceed $15 million and do not exceed
$40 million for the preceding three
years) won 49 licenses. Thirty three
winning bidders claiming very small
business status (those with attributable
average annual gross revenues that do
not exceed $15 million for the preceding
three years) won 325 licenses.
327. Upper 700 MHz Band Licenses.
In the 700 MHz Second Report and
Order, the Commission revised its rules
regarding Upper 700 MHz licenses. On
January 24, 2008, the Commission
commenced Auction 73 in which
several licenses in the Upper 700 MHz
band were available for licensing: 12
Regional Economic Area Grouping
licenses in the C Block, and one
nationwide license in the D Block. The
auction concluded on March 18, 2008,
with 3 winning bidders claiming very
small business status (those with
attributable average annual gross
revenues that do not exceed $15 million
for the preceding three years) and
winning five licenses.
328. 700 MHz Guard Band Licensees.
In 2000, in the 700 MHz Guard Band
Order, 65 FR 17594, April 4, 2000, the
Commission adopted size standards for
‘‘small businesses’’ and ‘‘very small
businesses’’ for purposes of determining
their eligibility for special provisions
such as bidding credits and installment
payments. A small business in this
service is an entity that, together with
its affiliates and controlling principals,
has average gross revenues not
exceeding $40 million for the preceding
three years. Additionally, a very small
business is an entity that, together with
its affiliates and controlling principals,
has average gross revenues that are not
more than $15 million for the preceding
three years. SBA approval of these
definitions is not required. An auction
of 52 Major Economic Area licenses
commenced on September 6, 2000, and
closed on September 21, 2000. Of the
104 licenses auctioned, 96 licenses were
sold to nine bidders. Five of these
bidders were small businesses that won
a total of 26 licenses. A second auction
of 700 MHz Guard Band licenses
commenced on February 13, 2001, and
closed on February 21, 2001. All eight
of the licenses auctioned were sold to
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three bidders. One of these bidders was
a small business that won a total of two
licenses.
329. Cellular Radiotelephone Service.
Auction 77 was held to resolve one
group of mutually exclusive
applications for Cellular Radiotelephone
Service licenses for unserved areas in
New Mexico. Bidding credits for
designated entities were not available in
Auction 77. In 2008, the Commission
completed the closed auction of one
unserved service area in the Cellular
Radiotelephone Service, designated as
Auction 77. Auction 77 concluded with
one provisionally winning bid for the
unserved area totaling $25,002.
330. Private Land Mobile Radio
(‘‘PLMR’’). PLMR systems serve an
essential role in a range of industrial,
business, land transportation, and
public safety activities. These radios are
used by companies of all sizes operating
in all U.S. business categories, and are
often used in support of the licensee’s
primary (non-telecommunications)
business operations. For the purpose of
determining whether a licensee of a
PLMR system is a small business as
defined by the SBA, the Commission
uses the broad census category, Wireless
Telecommunications Carriers (except
Satellite). This definition provides that
a small entity is any such entity
employing no more than 1,500 persons.
The Commission does not require PLMR
licensees to disclose information about
number of employees, so the
Commission does not have information
that could be used to determine how
many PLMR licensees constitute small
entities under this definition. The
Commission notes that PLMR licensees
generally use the licensed facilities in
support of other business activities, and
therefore, it would also be helpful to
assess PLMR licensees under the
standards applied to the particular
industry subsector to which the licensee
belongs.
331. As of March 2010, there were
424,162 PLMR licensees operating
921,909 transmitters in the PLMR bands
below 512 MHz. The Commission notes
that any entity engaged in a commercial
activity is eligible to hold a PLMR
license, and that any revised rules in
this context could therefore potentially
impact small entities covering a great
variety of industries.
332. Rural Radiotelephone Service.
The Commission has not adopted a size
standard for small businesses specific to
the Rural Radiotelephone Service. A
significant subset of the Rural
Radiotelephone Service is the Basic
Exchange Telephone Radio System
(BETRS). In the present context, the
Commission will use the SBA’s small
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24331
business size standard applicable to
Wireless Telecommunications Carriers
(except Satellite), i.e., an entity
employing no more than 1,500 persons.
There are approximately 1,000 licensees
in the Rural Radiotelephone Service,
and the Commission estimates that there
are 1,000 or fewer small entity licensees
in the Rural Radiotelephone Service that
may be affected by the rules and
policies proposed herein.
333. Air-Ground Radiotelephone
Service. The Commission has previously
used the SBA’s small business size
standard applicable to Wireless
Telecommunications Carriers (except
Satellite), i.e., an entity employing no
more than 1,500 persons. There are
approximately 100 licensees in the AirGround Radiotelephone Service, and
under that definition, the Commission
estimates that almost all of them qualify
as small entities under the SBA
definition. For purposes of assigning
Air-Ground Radiotelephone Service
licenses through competitive bidding,
the Commission has defined ‘‘small
business’’ as an entity that, together
with controlling interests and affiliates,
has average annual gross revenues for
the preceding three years not exceeding
$40 million. A ‘‘very small business’’ is
defined as an entity that, together with
controlling interests and affiliates, has
average annual gross revenues for the
preceding three years not exceeding $15
million. These definitions were
approved by the SBA. In May 2006, the
Commission completed an auction of
nationwide commercial Air-Ground
Radiotelephone Service licenses in the
800 MHz band (Auction No. 65). On
June 2, 2006, the auction closed with
two winning bidders winning two AirGround Radiotelephone Services
licenses. Neither of the winning bidders
claimed small business status.
334. Aviation and Marine Radio
Services. Small businesses in the
aviation and marine radio services use
a very high frequency (VHF) marine or
aircraft radio and, as appropriate, an
emergency position-indicating radio
beacon (and/or radar) or an emergency
locator transmitter. The Commission has
not developed a small business size
standard specifically applicable to these
small businesses. For purposes of this
analysis, the Commission uses the SBA
small business size standard for the
category Wireless Telecommunications
Carriers (except Satellite), which is
1,500 or fewer employees. Census data
for 2007, which supersede data
contained in the 2002 Census, show that
there were 1,383 firms that operated that
year. Of those 1,383, 1,368 had fewer
than 100 employees, and 15 firms had
more than 100 employees. Most
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applicants for recreational licenses are
individuals. Approximately 581,000
ship station licensees and 131,000
aircraft station licensees operate
domestically and are not subject to the
radio carriage requirements of any
statute or treaty. For purposes of our
evaluations in this analysis, the
Commission estimates that there are up
to approximately 712,000 licensees that
are small businesses (or individuals)
under the SBA standard. In addition,
between December 3, 1998 and
December 14, 1998, the Commission
held an auction of 42 VHF Public Coast
licenses in the 157.1875–157.4500 MHz
(ship transmit) and 161.775–162.0125
MHz (coast transmit) bands. For
purposes of the auction, the
Commission defined a ‘‘small’’ business
as an entity that, together with
controlling interests and affiliates, has
average gross revenues for the preceding
three years not to exceed $15 million
dollars. In addition, a ‘‘very small’’
business is one that, together with
controlling interests and affiliates, has
average gross revenues for the preceding
three years not to exceed $3 million
dollars. There are approximately 10,672
licensees in the Marine Coast Service,
and the Commission estimates that
almost all of them qualify as ‘‘small’’
businesses under the above special
small business size standards and may
be affected by rules adopted pursuant to
the Order.
335. Advanced Wireless Services
(AWS) (1710–1755 MHz and 2110–2155
MHz bands (AWS–1); 1915–1920 MHz,
1995–2000 MHz, 2020–2025 MHz and
2175–2180 MHz bands (AWS–2); 2155–
2175 MHz band (AWS–3)). For the
AWS–1 bands, the Commission has
defined a ‘‘small business’’ as an entity
with average annual gross revenues for
the preceding three years not exceeding
$40 million, and a ‘‘very small
business’’ as an entity with average
annual gross revenues for the preceding
three years not exceeding $15 million.
For AWS–2 and AWS–3, although the
Commission does not know for certain
which entities are likely to apply for
these frequencies, they note that the
AWS–1 bands are comparable to those
used for cellular service and personal
communications service. The
Commission has not yet adopted size
standards for the AWS–2 or AWS–3
bands but proposes to treat both AWS–
2 and AWS–3 similarly to broadband
PCS service and AWS–1 service due to
the comparable capital requirements
and other factors, such as issues
involved in relocating incumbents and
developing markets, technologies, and
services.
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336. 3650–3700 MHz band. In March
2005, the Commission released a Report
and Order and Memorandum Opinion
and Order that provides for nationwide,
non-exclusive licensing of terrestrial
operations, utilizing contention-based
technologies, in the 3650 MHz band
(i.e., 3650–3700 MHz). As of April 2010,
more than 1270 licenses have been
granted and more than 7433 sites have
been registered. The Commission has
not developed a definition of small
entities applicable to 3650–3700 MHz
band nationwide, non-exclusive
licensees. However, the Commission
estimates that the majority of these
licensees are Internet Access Service
Providers (ISPs) and that most of those
licensees are small businesses.
337. Fixed Microwave Services.
Microwave services include common
carrier, private-operational fixed, and
broadcast auxiliary radio services. They
also include the Local Multipoint
Distribution Service (LMDS), the Digital
Electronic Message Service (DEMS), and
the 24 GHz Service, where licensees can
choose between common carrier and
non-common carrier status. At present,
there are approximately 36,708 common
carrier fixed licensees and 59,291
private operational-fixed licensees and
broadcast auxiliary radio licensees in
the microwave services. There are
approximately 135 LMDS licensees,
three DEMS licensees, and three 24 GHz
licensees. The Commission has not yet
defined a small business with respect to
microwave services. For purposes of the
FRFA, the Commission will use the
SBA’s definition applicable to Wireless
Telecommunications Carriers (except
satellite)—i.e., an entity with no more
than 1,500 persons. Under the present
and prior categories, the SBA has
deemed a wireless business to be small
if it has 1,500 or fewer employees. The
Commission does not have data
specifying the number of these licensees
that have more than 1,500 employees,
and thus is unable at this time to
estimate with greater precision the
number of fixed microwave service
licensees that would qualify as small
business concerns under the SBA’s
small business size standard.
Consequently, the Commission
estimates that there are up to 36,708
common carrier fixed licensees and up
to 59,291 private operational-fixed
licensees and broadcast auxiliary radio
licensees in the microwave services that
may be small and may be affected by the
rules and policies adopted herein. The
Commission notes, however, that the
common carrier microwave fixed
licensee category includes some large
entities.
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338. Offshore Radiotelephone Service.
This service operates on several UHF
television broadcast channels that are
not used for television broadcasting in
the coastal areas of states bordering the
Gulf of Mexico. There are presently
approximately 55 licensees in this
service. The Commission is unable to
estimate at this time the number of
licensees that would qualify as small
under the SBA’s small business size
standard for the category of Wireless
Telecommunications Carriers (except
Satellite). Under that SBA small
business size standard, a business is
small if it has 1,500 or fewer employees.
Census data for 2007, which supersede
data contained in the 2002 Census,
show that there were 1,383 firms that
operated that year. Of those 1,383, 1,368
had fewer than 100 employees, and 15
firms had more than 100 employees.
Thus, under this category and the
associated small business size standard,
the majority of firms can be considered
small.
339. 39 GHz Service. The Commission
created a special small business size
standard for 39 GHz licenses—an entity
that has average gross revenues of $40
million or less in the three previous
calendar years. An additional size
standard for ‘‘very small business’’ is:
An entity that, together with affiliates,
has average gross revenues of not more
than $15 million for the preceding three
calendar years. The SBA has approved
these small business size standards. The
auction of the 2,173 39 GHz licenses
began on April 12, 2000 and closed on
May 8, 2000. The 18 bidders who
claimed small business status won 849
licenses. Consequently, the Commission
estimates that 18 or fewer 39 GHz
licensees are small entities that may be
affected by rules adopted pursuant to
the Order.
340. Broadband Radio Service and
Educational Broadband Service.
Broadband Radio Service systems,
previously referred to as Multipoint
Distribution Service (MDS) and
Multichannel Multipoint Distribution
Service (MMDS) systems, and ‘‘wireless
cable,’’ transmit video programming to
subscribers and provide two-way high
speed data operations using the
microwave frequencies of the
Broadband Radio Service (BRS) and
Educational Broadband Service (EBS)
(previously referred to as the
Instructional Television Fixed Service
(ITFS)). In connection with the 1996
BRS auction, the Commission
established a small business size
standard as an entity that had annual
average gross revenues of no more than
$40 million in the previous three
calendar years. The BRS auctions
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resulted in 67 successful bidders
obtaining licensing opportunities for
493 Basic Trading Areas (BTAs). Of the
67 auction winners, 61 met the
definition of a small business. BRS also
includes licensees of stations authorized
prior to the auction. At this time, the
Commission estimates that of the 61
small business BRS auction winners, 48
remain small business licensees. In
addition to the 48 small businesses that
hold BTA authorizations, there are
approximately 392 incumbent BRS
licensees that are considered small
entities. After adding the number of
small business auction licensees to the
number of incumbent licensees not
already counted, the Commission finds
that there are currently approximately
440 BRS licensees that are defined as
small businesses under either the SBA
or the Commission’s rules.
341. In 2009, the Commission
conducted Auction 86, the sale of 78
licenses in the BRS areas. The
Commission offered three levels of
bidding credits: (i) A bidder with
attributed average annual gross revenues
that exceed $15 million and do not
exceed $40 million for the preceding
three years (small business) received a
15 percent discount on its winning bid;
(ii) a bidder with attributed average
annual gross revenues that exceed $3
million and do not exceed $15 million
for the preceding three years (very small
business) received a 25 percent discount
on its winning bid; and (iii) a bidder
with attributed average annual gross
revenues that do not exceed $3 million
for the preceding three years
(entrepreneur) received a 35 percent
discount on its winning bid. Auction 86
concluded in 2009 with the sale of 61
licenses. Of the ten winning bidders,
two bidders that claimed small business
status won 4 licenses; one bidder that
claimed very small business status won
three licenses; and two bidders that
claimed entrepreneur status won six
licenses.
342. In addition, the SBA’s Cable
Television Distribution Services small
business size standard is applicable to
EBS. There are presently 2,436 EBS
licensees. All but 100 of these licenses
are held by educational institutions.
Educational institutions are included in
this analysis as small entities. Thus, the
Commission estimates that at least 2,336
licensees are small businesses. Since
2007, Cable Television Distribution
Services have been defined within the
broad economic census category of
Wired Telecommunications Carriers;
that category is defined as follows:
‘‘This industry comprises
establishments primarily engaged in
operating and/or providing access to
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transmission facilities and infrastructure
that they own and/or lease for the
transmission of voice, data, text, sound,
and video using wired
telecommunications networks.
Transmission facilities may be based on
a single technology or a combination of
technologies.’’ The SBA has developed
a small business size standard for this
category, which is: All such firms
having 1,500 or fewer employees. To
gauge small business prevalence for
these cable services the Commission
must, however, use the most current
census data that are based on the
previous category of Cable and Other
Program Distribution and its associated
size standard; that size standard was:
All such firms having $13.5 million or
less in annual receipts. According to
Census Bureau data for 2007, there were
a total of 996 firms in this category that
operated for the entire year. Of this
total, 948 firms had annual receipts of
under $10 million, and 48 firms had
receipts of $10 million or more but less
than $25 million. Thus, the majority of
these firms can be considered small.
343. Narrowband Personal
Communications Services. In 1994, the
Commission conducted an auction for
Narrowband PCS licenses. A second
auction was also conducted later in
1994. For purposes of the first two
Narrowband PCS auctions, ‘‘small
businesses’’ were entities with average
gross revenues for the prior three
calendar years of $40 million or less.
Through these auctions, the
Commission awarded a total of 41
licenses, 11 of which were obtained by
four small businesses. To ensure
meaningful participation by small
business entities in future auctions, the
Commission adopted a two-tiered small
business size standard in the
Narrowband PCS Second Report and
Order, 65 FR 35843, June 6, 2000. A
‘‘small business’’ is an entity that,
together with affiliates and controlling
interests, has average gross revenues for
the three preceding years of not more
than $40 million. A ‘‘very small
business’’ is an entity that, together with
affiliates and controlling interests, has
average gross revenues for the three
preceding years of not more than $15
million. The SBA has approved these
small business size standards. A third
auction was conducted in 2001. Here,
five bidders won 317 (Metropolitan
Trading Areas and nationwide) licenses.
Three of these claimed status as a small
or very small entity and won 311
licenses.
344. Paging (Private and Common
Carrier). In the Paging Third Report and
Order, 64 FR 33762, June 24, 1999, the
Commission developed a small business
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24333
size standard for ‘‘small businesses’’ and
‘‘very small businesses’’ for purposes of
determining their eligibility for special
provisions such as bidding credits and
installment payments. A ‘‘small
business’’ is an entity that, together with
its affiliates and controlling principals,
has average gross revenues not
exceeding $15 million for the preceding
three years. Additionally, a ‘‘very small
business’’ is an entity that, together with
its affiliates and controlling principals,
has average gross revenues that are not
more than $3 million for the preceding
three years. The SBA has approved
these small business size standards.
According to Commission data, 291
carriers have reported that they are
engaged in Paging or Messaging Service.
Of these, an estimated 289 have 1,500 or
fewer employees, and two have more
than 1,500 employees. Consequently,
the Commission estimates that the
majority of paging providers are small
entities that may be affected by our
action. An auction of Metropolitan
Economic Area licenses commenced on
February 24, 2000, and closed on March
2, 2000. Of the 2,499 licenses auctioned,
985 were sold. Fifty-seven companies
claiming small business status won 440
licenses. A subsequent auction of MEA
and Economic Area (‘‘EA’’) licenses was
held in the year 2001. Of the 15,514
licenses auctioned, 5,323 were sold.
One hundred thirty-two companies
claiming small business status
purchased 3,724 licenses. A third
auction, consisting of 8,874 licenses in
each of 175 EAs and 1,328 licenses in
all but three of the 51 MEAs, was held
in 2003. Seventy-seven bidders claiming
small or very small business status won
2,093 licenses. A fourth auction,
consisting of 9,603 lower and upper
paging band licenses was held in the
year 2010. Twenty-nine bidders
claiming small or very small business
status won 3,016 licenses.
345. 220 MHz Radio Service—Phase I
Licensees. The 220 MHz service has
both Phase I and Phase II licenses. Phase
I licensing was conducted by lotteries in
1992 and 1993. There are approximately
1,515 such non-nationwide licensees
and four nationwide licensees currently
authorized to operate in the 220 MHz
band. The Commission has not
developed a small business size
standard for small entities specifically
applicable to such incumbent 220 MHz
Phase I licensees. To estimate the
number of such licensees that are small
businesses, the Commission applies the
small business size standard under the
SBA rules applicable to Wireless
Telecommunications Carriers (except
Satellite). Under this category, the SBA
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deems a wireless business to be small if
it has 1,500 or fewer employees. The
Commission estimates that nearly all
such licensees are small businesses
under the SBA’s small business size
standard that may be affected by rules
adopted pursuant to the Order.
346. 220 MHz Radio Service—Phase II
Licensees. The 220 MHz service has
both Phase I and Phase II licenses. The
Phase II 220 MHz service is subject to
spectrum auctions. In the 220 MHz
Third Report and Order, 62 FR 15978,
April 3, 1997, the Commission adopted
a small business size standard for
‘‘small’’ and ‘‘very small’’ businesses for
purposes of determining their eligibility
for special provisions such as bidding
credits and installment payments. This
small business size standard indicates
that a ‘‘small business’’ is an entity that,
together with its affiliates and
controlling principals, has average gross
revenues not exceeding $15 million for
the preceding three years. A ‘‘very small
business’’ is an entity that, together with
its affiliates and controlling principals,
has average gross revenues that do not
exceed $3 million for the preceding
three years. The SBA has approved
these small business size standards.
Auctions of Phase II licenses
commenced on September 15, 1998, and
closed on October 22, 1998. In the first
auction, 908 licenses were auctioned in
three different-sized geographic areas:
Three nationwide licenses, 30 Regional
Economic Area Group (EAG) Licenses,
and 875 Economic Area (EA) Licenses.
Of the 908 licenses auctioned, 693 were
sold. Thirty-nine small businesses won
licenses in the first 220 MHz auction.
The second auction included 225
licenses: 216 EA licenses and 9 EAG
licenses. Fourteen companies claiming
small business status won 158 licenses.
9. Satellite Service Providers
347. Satellite Telecommunications
Providers. Two economic census
categories address the satellite industry.
The first category has a small business
size standard of $30 million or less in
average annual receipts, under SBA
rules. The second has a size standard of
$30 million or less in annual receipts.
348. The category of Satellite
Telecommunications ‘‘comprises
establishments primarily engaged in
providing telecommunications services
to other establishments in the
telecommunications and broadcasting
industries by forwarding and receiving
communications signals via a system of
satellites or reselling satellite
telecommunications.’’ For this category,
Census Bureau data for 2007 show that
there were a total of 570 firms that
operated for the entire year. Of this
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total, 530 firms had annual receipts of
under $30 million, and 40 firms had
receipts of over $30 million.
Consequently, the Commission
estimates that the majority of Satellite
Telecommunications firms are small
entities that might be affected by our
action.
349. The second category of Other
Telecommunications comprises, inter
alia, ‘‘establishments primarily engaged
in providing specialized
telecommunications services, such as
satellite tracking, communications
telemetry, and radar station operation.
This industry also includes
establishments primarily engaged in
providing satellite terminal stations and
associated facilities connected with one
or more terrestrial systems and capable
of transmitting telecommunications to,
and receiving telecommunications from,
satellite systems.’’ For this category,
Census Bureau data for 2007 show that
there were a total of 1,274 firms that
operated for the entire year. Of this
total, 1,252 had annual receipts below
$25 million per year. Consequently, the
Commission estimates that the majority
of All Other Telecommunications firms
are small entities that might be affected
by our action.
10. Cable Service Providers
350. Because section 706 requires us
to monitor the deployment of broadband
using any technology, the Commission
anticipates that some broadband service
providers may not provide telephone
service. Accordingly, the Commission
describes below other types of firms that
may provide broadband services,
including cable companies, MDS
providers, and utilities, among others.
351. Cable and Other Program
Distributors. Since 2007, these services
have been defined within the broad
economic census category of Wired
Telecommunications Carriers; that
category is defined as follows: ‘‘This
industry comprises establishments
primarily engaged in operating and/or
providing access to transmission
facilities and infrastructure that they
own and/or lease for the transmission of
voice, data, text, sound, and video using
wired telecommunications networks.
Transmission facilities may be based on
a single technology or a combination of
technologies.’’ The SBA has developed
a small business size standard for this
category, which is: All such firms
having 1,500 or fewer employees. To
gauge small business prevalence for
these cable services the Commission
must, however, use current census data
that are based on the previous category
of Cable and Other Program Distribution
and its associated size standard; that
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size standard was: All such firms having
$13.5 million or less in annual receipts.
According to Census Bureau data for
2007, there were a total of 2,048 firms
in this category that operated for the
entire year. Of this total, 1,393 firms had
annual receipts of under $10 million,
and 655 firms had receipts of $10
million or more. Thus, the majority of
these firms can be considered small.
352. Cable Companies and Systems.
The Commission has also developed its
own small business size standards, for
the purpose of cable rate regulation.
Under the Commission’s rules, a ‘‘small
cable company’’ is one serving 400,000
or fewer subscribers, nationwide.
Industry data that there are currently
4,600 active cable systems in the United
States. Of this total, all but nine cable
operators are small under the 400,000
subscriber size standard. In addition,
under the Commission’s rules, a ‘‘small
system’’ is a cable system serving 15,000
or fewer subscribers. Current
Commission records show 4,945 cable
systems nationwide. Of this total, 4,380
cable systems have less than 20,000
subscribers, and 565 systems have
20,000 or more subscribers, based on the
same records. Thus, under this
standard, the Commission estimates that
most cable systems are small entities.
353. Cable System Operators. The
Communications Act of 1934, as
amended, also contains a size standard
for small cable system operators, which
is ‘‘a cable operator that, directly or
through an affiliate, serves in the
aggregate fewer than 1 percent of all
subscribers in the United States and is
not affiliated with any entity or entities
whose gross annual revenues in the
aggregate exceed $250,000,000.’’ The
Commission has determined that an
operator serving fewer than 677,000
subscribers shall be deemed a small
operator, if its annual revenues, when
combined with the total annual
revenues of all its affiliates, do not
exceed $250 million in the aggregate.
Based on available data, the
Commission finds that all but ten
incumbent cable operators are small
entities under this size standard. The
Commission notes that the Commission
neither requests nor collects information
on whether cable system operators are
affiliated with entities whose gross
annual revenues exceed $250 million,
and therefore they are unable to
estimate more accurately the number of
cable system operators that would
qualify as small under this size
standard.
354. The open video system (‘‘OVS’’)
framework was established in 1996, and
is one of four statutorily recognized
options for the provision of video
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programming services by local exchange
carriers. The OVS framework provides
opportunities for the distribution of
video programming other than through
cable systems. Because OVS operators
provide subscription services, OVS falls
within the SBA small business size
standard covering cable services, which
is ‘‘Wired Telecommunications
Carriers.’’ The SBA has developed a
small business size standard for this
category, which is: All such firms
having 1,500 or fewer employees.
According to Census Bureau data for
2007, there were a total of 955 firms in
this previous category that operated for
the entire year. Of this total, 939 firms
had employment of 999 or fewer
employees, and 16 firms had
employment of 1,000 employees or
more. Thus, under this second size
standard, most cable systems are small
and may be affected by rules adopted
pursuant to the Order. In addition, the
Commission notes that they have
certified some OVS operators, with
some now providing service. Broadband
service providers (‘‘BSPs’’) are currently
the only significant holders of OVS
certifications or local OVS franchises.
The Commission does not have
financial or employment information
regarding the entities authorized to
provide OVS, some of which may not
yet be operational. Thus, again, at least
some of the OVS operators may qualify
as small entities.
11. Electric Power Generators,
Transmitters, and Distributors
355. Electric Power Generators,
Transmitters, and Distributors. The
Census Bureau defines an industry
group comprised of ‘‘establishments,
primarily engaged in generating,
transmitting, and/or distributing electric
power. Establishments in this industry
group may perform one or more of the
following activities: (1) Operate
generation facilities that produce
electric energy; (2) operate transmission
systems that convey the electricity from
the generation facility to the distribution
system; and (3) operate distribution
systems that convey electric power
received from the generation facility or
the transmission system to the final
consumer.’’ The SBA has developed a
small business size standard for firms in
this category: ‘‘A firm is small if,
including its affiliates, it is primarily
engaged in the generation, transmission,
and/or distribution of electric energy for
sale and its total electric output for the
preceding fiscal year did not exceed 4
million megawatt hours.’’ Census
Bureau data for 2007 show that there
were 1,174 firms that operated for the
entire year in this category. Of these
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firms, 50 had 1,000 employees or more,
and 1,124 had fewer than 1,000
employees. Based on this data, a
majority of these firms can be
considered small.
12. Description of Projected Reporting,
Recordkeeping, and Other Compliance
Requirements for Small Entities
356. In the Report and Order, the
Commission requires all rate-of-return
ETCs to submit annually a list of the
geocoded locations to which they have
newly deployed facilities capable of
delivering broadband in lieu of annual
narrative reporting. To lessen the
burden, in the Report and Order the
Commission directs the Bureau to work
with USAC to develop an online portal
that will enable carriers to submit the
requisite information on a rolling basis
throughout the year as construction is
completed and service becomes
commercially available, with any final
submission no later than March 1 of the
following year.
13. Steps Taken To Minimize the
Significant Economic Impact on Small
Entities, and Significant Alternatives
Considered
357. The RFA requires an agency to
describe any significant alternatives that
it has considered in reaching its
proposed approach, which may include
(among others) the following four
alternatives: (1) The establishment of
differing compliance or reporting
requirements or timetables that take into
account the resources available to small
entities; (2) the clarification,
consolidation, or simplification of
compliance or reporting requirements
under the rule for small entities; (3) the
use of performance, rather than design,
standards; and (4) an exemption from
coverage of the rule, or any part thereof,
for small entities. The Commission has
considered all of these factors
subsequent to receiving substantive
comments from the public and
potentially affected entities. The
Commission has considered the
economic impact on small entities, as
identified in comments filed in response
to the USF/ICC Transformation NPRM
and FNRPM and their IRFAs, in
reaching its final conclusions and taking
action in this proceeding.
358. The rules that the Commission
adopts in the Report and Order and
Order and Order on Reconsideration
take steps to provide greater certainty
and flexibility to rate-of-return carriers,
many of which are small entities. For
example, the Commission adopts a
voluntary path for rate-of-return carriers
to elect to receive model-based support
in exchange for deploying broadband-
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24335
capable networks to a pre-determined
number of eligible locations. The
Commission recognizes that permitting
rate-of-return carriers to elect to receive
specific and predictable monthly
support amounts over the ten years will
enhance the ability of these carriers to
deploy broadband throughout the term
and free them from the administrative
burdens associated with doing cost
studies to receive high-cost support.
Additionally, to provide further
flexibility, the Commission adopts evenspaced annual interim milestones over
the 10-year term for rate-of-return
carriers electing model-based support,
and decline to set interim milestones
requiring deployment of speeds at or
above 25/3 Mbps. By doing so, the
Commission minimizes deployment
burdens by permitting flexibility in
design and deployment of broadband
networks. The Commission also
concludes that rate-of-return carriers
receiving model-based support should
have some flexibility in their
deployment obligations to address
unforeseeable challenges to meeting
these obligations. Therefore, the
Commission permitted rate-of-return
carriers to deploy to 95 percent of the
required number of locations by the end
of the 10-year term.
359. In the Report and Order, the
Commission also removes a deterrent
for rate-of-return carriers to offer
standalone broadband service by
making technical rule changes to our
existing ICLS rules to support the
provision of broadband service to
consumers in areas with high looprelated costs (including small carriers
and those that wish to transfer or
acquire parts of exchanges), without
regard to whether the loops are also
used for traditional voice services. By
supporting broadband lines, the
Commission removes potential
regulatory barriers to taking steps to
offer new IP-based services in
innovative ways, and provides rate-ofreturn carriers strategic flexibility in
their service offerings.
360. The Commission adopts a
mechanism to limit operating costs
eligible for support under HCLS and
CAF BLS to encourage efficient
spending by rate-of-return carriers and
increase the amount of universal service
support available for investment in
broadband-capable facilities. However,
to soften the impact of this expense
limitation, the Commission concludes
that a transition is appropriate to allow
carriers time to adjust their operating
expenditures. The Commission also
adopts a capex allowance proposed by
the rate-of-return industry associations
to help target support to those areas
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with less broadband deployment so that
carriers serving those areas have the
opportunity and support to catch up to
the average level of broadband
deployment in areas served by rate-ofreturn carriers. The Commission also
concludes that if any rate-of-return
carrier believes that the support it
receives is insufficient, it may seek a
waiver of the Commission’s rules to
obtain the flexibility and certainty it
needs to continue operating its business.
361. Next, in the Report and Order,
the Commission takes steps to prohibit
rate-of-return carriers from receiving
CAF BLS in areas that are served by a
qualifying unsubsidized competitor.
However, the Commission limits the
reduction in support to only those
census blocks that are overlapped in at
least 85 percent of their locations. The
Commission recognized that
competitive areas are likely to be lower
cost and non-competitive areas are
likely to be relatively higher cost, and
therefore ensured that rate-of-return
carriers subject to this rule may
disaggregate their support in areas
determined to be served by qualifying
competitors by one of several options.
The Commission provides further
flexibility to those rate-of-return carriers
affected by this rule by adopting a
phased reduction in disaggregated
support for competitive areas. By
permitting this flexibility, the
Commission provides these small
entities with the ability to make
reasoned business decisions to advance
their deployment goals.
362. To promote ‘‘accountability from
companies receiving support to ensure
that public investments are used wisely
to deliver intended results,’’ the
Commission adopts defined deployment
obligations that are a condition of the
receipt of high-cost funding for those
carriers continuing to receive support
based on embedded costs. To provide
rate-of-return carriers with the certainty
needed to invest in their networks, the
Commission adopted a specific
methodology to determine each carrier’s
deployment obligation over a defined
five-year period, which will be used to
monitor carrier performance. The
Commission recognizes that rate-ofreturn carriers subject to defined fiveyear deployment obligations may
choose different timelines to meet their
deployment obligations and therefore
allows carriers the flexibility to choose
to meet their obligation at any time
during the five-year period.
363. In modifying its pricing rules, the
Commission minimizes the burden on
small carriers by deriving the costs for
the Consumer Broadband-Only Loop
category using existing data and allows
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NECA to tariff the Consumer
Broadband-Only Loop rate for carriers
electing model-based support because of
the administrative efficiencies of
employing a single tariff. The
Commission also consolidates the
certification that consumer broadbandonly loop costs are not being double
recovered into an existing certification,
thus streamlining the process for small
carriers.
364. The Commission also takes
action to modify our existing reporting
requirements. The Commission revises
ETCs’ annual reporting requirements to
align better those requirements with the
Commission’s statutory and regulatory
objectives. To reduce the administrative
burden on rate-of-return carriers, the
Commission concludes that the public
interest would be served by eliminating
the requirement to file a narrative
update to the five-year plan. Instead, the
Commission adopts narrowly tailored
reporting requirements regarding the
location of new deployment offering
service at various speeds, which will
better enable the Commission to
determine on an annual basis how highcost support is being used to ‘‘improve
broadband availability, service quality,
and capacity at the smallest geographic
area possible.’’ Taken as a whole, these
modifications to the reporting
requirements for rate-of-return carriers
will reduce their administrative burden
and provide certainty as to what must
be filed and when.
365. In the Order and Order on
Reconsideration, the Commission is
particularly mindful of the economic
impact rate represcription will have on
rate-of-return incumbent LECs, many of
which are small entities. Accordingly,
the Commission takes a number of steps
to minimize the economic impact of the
new rate of return. As an initial matter,
the Commission expands the upper end
of the rate of return zone of
reasonableness beyond the WACC
estimates obtained using financial
models based on policy considerations
and adopt the rate of return from the
upper end of this zone. In so doing, the
Commission attempts to maximize the
likelihood that the unitary rate of return
is fully compensatory, even for small
firms with a relatively high cost of
capital. In addition, to help minimize
the immediate financial impacts that
represcription may impose on small
carriers, the Commission adopts, for the
first time, a transitional approach to
represcription. Under this approach, the
rate of return is reduced by 25 basis
points per year beginning July 1, 2016
until it reaches the represcribed 9.75
percent rate of return. Together, these
measures are intended to reduce the
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significant economic impact of the new
rate of return on small carriers.
C. Report to Congress
366. The Commission will send a
copy of the Order, including this FRFA,
in a report to be sent to Congress and
the Government Accountability Office
pursuant to the Small Business
Regulatory Enforcement Fairness Act of
1996. In addition, the Commission will
send a copy of the Order, including the
FRFA, to the Chief Counsel for
Advocacy of the Small Business
Administration. A copy of the Order
and FRFA (or summaries thereof) will
also be published in the Federal
Register.
D. Congressional Review Act
367. 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).
368. 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).
369. Additional Information. For
additional information on this
proceeding, contact Suzanne Yelen of
the Wireline Competition Bureau,
Industry Analysis and Technology
Division, Suzanne.Yelen@fcc.gov, (202)
418–7400 or Alexander Minard of the
Wireline Competition Bureau,
Technology Access Policy Division,
Alexander.Minard@fcc.gov, (202) 418–
7400.
V. Ordering Clauses
370. Accordingly, IT IS ORDERED,
pursuant to the authority contained in
sections 1, 2, 4(i), 5, 10, 201–206, 214,
218–220, 251, 252, 254, 256, 303(r), 332,
403, and 405 of the Communications
Act of 1934, as amended, and section
706 of the Telecommunications Act of
1996, 47 U.S.C. 151, 152, 154(i), 155,
201–206, 214, 218–220, 251, 252, 254,
256, 303(r), 332, 403, 405, 1302, and
sections 1.1, 1.3, 1.421, 1.427, and 1.429
of the Commission’s rules, 47 CFR 1.1,
1.3, 1.421, 1.427, and 1.429, that this
Report and Order, Order and Order on
Reconsideration, and concurrently
adopted Further Notice of Proposed
Rulemaking IS ADOPTED, effective
thirty (30) days after publication of the
text or summary thereof in the Federal
Register, except for those rules and
requirements involving Paperwork
Reduction Act burdens, which shall
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become effective immediately upon
announcement in the Federal Register
of OMB approval. It is our intention in
adopting these rules that if any of the
rules that the Commission retains,
modifies, or adopts herein, or the
application thereof to any person or
circumstance, are held to be unlawful,
the remaining portions of the rules not
deemed unlawful, and the application
of such rules to other persons or
circumstances, shall remain in effect to
the fullest extent permitted by law.
371. IT IS FURTHER ORDERED that
parts 51, 54, 65, and 69 of the
Commission’s rules, 47 CFR parts 51,
54, 65, and 69, ARE AMENDED as set
forth in Appendix B, and such rule
amendments SHALL BE EFFECTIVE
thirty (30) days after publication of the
rules amendments in the Federal
Register, except to the extent they
contain information collections subject
to PRA review. The rules that contain
information collections subject to PRA
review SHALL BECOME EFFECTIVE
immediately upon announcement in the
Federal Register of OMB approval.
372. IT IS FURTHER ORDERED that
pursuant to Section 1.3 of the
Commission’s rules, 47 CFR 1.3,
sections 65.300 and 65.303 of the
Commission’s rules, 47 CFR 65.300,
65.303, are WAIVED to the extent
provided herein.
373. IT IS FURTHER ORDERED that,
pursuant to the authority contained in
sections 1, 2, 4(i), 5, 10, 201–206, 214,
218–220, 251, 252, 254, 256, 303(r), 332,
403, and 405 of the Communications
Act of 1934, as amended, and section
706 of the Telecommunications Act of
1996, 47 U.S.C. 151, 152, 154(i), 155,
201–206, 214, 218–220, 251, 252, 254,
256, 303(r), 332, 403, 405, 1302, and
sections 1.1, 1.3, 1.421, 1.427, and 1.429
of the Commission’s rules, 47 CFR 1.1,
1.3, 1.421, 1.427, and 1.429, NOTICE IS
HEREBY GIVEN of the proposals and
tentative conclusions described in this
Further Notice of Proposed Rulemaking.
374. IT IS FURTHER ORDERED that
pursuant section 1.429(i) of the
Commission’s rules, 47 CFR 1.429(i),
that the Petition for Reconsideration and
Clarification of the National Exchange
Carrier Association, Inc., Organization
for the Promotion and Advancement of
Small Telecommunications Companies,
and Western Telecommunications
Alliance, filed December 29, 2011, is
DISMISSED and DENIED to the extent
provided herein.
375. IT IS FURTHER ORDERED that
the Commission SHALL SEND a copy of
this Report and Order, Order and Order
on Reconsideration, and concurrently
adopted Further Notice of Proposed
Rulemaking to Congress and the
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pursuant to the Congressional Review
Act, see 5 U.S.C. 801(a)(1)(A).
376. IT IS FURTHER ORDERED, that
the Commission’s Consumer and
Governmental Affairs Bureau, Reference
Information Center, SHALL SEND a
copy of this Report and Order, Order
and Order on Reconsideration, and
concurrently adopted Further Notice of
Proposed Rulemaking, including the
Initial Regulatory Flexibility Analysis
and the Final Regulatory Flexibility
Analysis, to the Chief Counsel for
Advocacy of the Small Business
Administration.
List of Subjects
Communications common carriers,
Telecommunications.
47 CFR Part 54
Communications common carriers,
Health facilities, Infants and children,
Internet, Libraries, Reporting and
recordkeeping requirements, Schools,
Telecommunications, Telephone.
47 CFR Part 65
Administrative practice and
procedure, Communications common
carriers, Reporting and recordkeeping
requirements, Telephone.
47 CFR Part 69
Communications common carriers,
Reporting and recordkeeping
requirements, Telephone.
Federal Communications Commission.
Marlene H. Dortch,
Secretary.
Final Rule
For the reasons discussed in the
preamble, the Federal Communications
Commission amends 47 CFR parts 51,
54, 65, and 69 as follows:
PART 51—INTERCONNECTION
1. The authority citation for part 51 is
revised to read as follows:
■
Authority: 47 U.S.C. 151–55, 201–05, 207–
09, 218, 220, 225–27, 251–54, 256, 271,
303(r), 332, 1302.
2. In § 51.917, add paragraph (f)(4) to
read as follows:
■
§ 51.917 Revenue recovery for Rate-ofReturn Carriers.
*
*
*
*
*
(f) * * *
(4) A Rate-of-Return Carrier must
impute an amount equal to the Access
Recovery Charge for each Consumer
Broadband-Only Loop line that receives
support pursuant to § 54.901 of this
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chapter, with the imputation applied
before CAF–ICC recovery is determined.
The per line per month imputation
amount shall be equal to the Access
Recovery Charge amount prescribed by
paragraph (e) of this section, consistent
with the residential or single-line
business or multi-line business status of
the retail customer.
PART 54—UNIVERSAL SERVICE
3. The authority citation for part 54 is
revised to read as follows:
■
Authority: 47 U.S.C. 151, 154(i), 155, 201,
205, 214, 219, 220, 254, 303(r), 403, and 1302
unless otherwise noted.
§ 54.301
47 CFR Part 51
Sfmt 4700
24337
[Removed].
4. Remove § 54.301.
5. Add § 54.303 to subpart D to read
as follows:
■
■
§ 54.303 Eligible Capital Investment and
Operating Expenses.
(a) Eligible Operating Expenses. Each
study area’s eligible operating expenses
for purposes of calculating universal
service support pursuant to subparts K
and M of this part shall be adjusted as
follows:
(1) Total eligible annual operating
expenses per location shall be limited as
follows plus one standard deviation:
Y = a + b1X1 + b2X2 + b3X3,
Where:
Y = is the natural log of the total operating
cost per housing unit,
a is the coefficient on the constant
b is the regression coefficient for each of the
regressions,
X1 is the natural log of the number of housing
units in the study area,
X2 is the natural log of the number of density
(number of housing units per square
mile), and
X3 is the square of the natural log of the
density
(2) Eligible operating expenses are the
sum of Cable and Wire Facilities
Expense, Central Office Equipment
Expense, Network Support and General
Expense, Network Operations Expense,
Limited Corporate Operations Expense,
Information Origination/Termination
Expense, Other Property Plant and
Equipment Expenses, Customer
Operations Expense: Marketing, and
Customer Operations Expense: Services.
(3) For purposes of this section, the
number of housing units will be
determined per the most recently
available U.S Census data for each
census block in that study area. If a
census block is partially within a study
area, the number of housing units in
that portion of the census block will be
determined based upon the percentage
geographic area of the census block
within the study area.
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(4) Notwithstanding the provisions of
paragraph (a) of this section, total
eligible annual operating expenses for
2016 will be limited to the total eligible
annual operating expenses as defined in
this section plus one half of the amount
of total eligible annual expense as
calculated prior to the application of
this section.
(5) For any study area subject to the
limitation described in this paragraph, a
required percentage reduction will be
calculated for that study area’s total
eligible annual operating expenses. Each
category or account used to determine
that study area’s total eligible annual
operating expenses will then be reduced
by this required percentage reduction.
(b) Loop Plant Investment allowances.
Data submitted by rate-of-return carriers
for purposes of obtaining high-cost
support under subparts K and M of this
part may include any Loop Plant
Investment as described in paragraph
(c)(1) of this section and any Excess
Loop Plant Investment as described in
paragraph (h) of this section, but may
not include amounts in excess of the
Annual Allowed Loop Plant Investment
(AALPI) as described in paragraph (d) of
this section. Amounts in excess of the
AALPI will be removed from the
categories or accounts described in
paragraph (c)(1) of this section either on
a direct basis when the amounts of the
new loop plant investment can be
directly assigned to a category or
account, or on a pro-rata basis in
accordance with each category or
account’s proportion to the total amount
in each of the categories and accounts
described in paragraph (c)(1) of this
section when the new loop plant cannot
be directly assigned. This limitation
shall apply only with respect to Loop
Plant Investment incurred after the
effective date of this rule. If a carrier’s
required Loop Plant Investment exceeds
the limitations set forth in this section
as a result of deployment obligations in
§ 54.308(a)(2), the carrier’s Total
Allowed Loop Plant Investment will be
increased to the actual Loop Plant
Investment required by the carrier’s
deployment obligations, subject to the
limitations of the Construction
Allowance Adjustment in paragraph (f)
of this section.
(c) Definitions. For purposes of
determining loop plant investment
allowances, the following definitions
apply:
(1) Loop Plant Investment includes
amounts booked to the accounts used
for subparts K and M of this part, loop
plant investment.
(2) Total Loop Plant Investment
equals amounts booked to the categories
described in paragraph (b)(1) of this
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section, adjusted for inflation using the
Department of Commerce’s Gross
Domestic Product Chain-type Price
Index (GDP–CPI), as of December 31 of
the Reference Year. Inflation
adjustments shall be based on vintages
where possible or otherwise calculated
based on the year plant was put in
service.
(3) Total Allowed Loop Plant
Investment equals Total Loop Plant
Investment multiplied by the Loop
Depreciation Factor.
(4) Loop Depreciation Factor equals
the ratio of total loop accumulated
depreciation to gross loop plant during
the Reference Year.
(5) Reference Year is the year prior to
the year the AALPI is determined.
(d) Determination of AALPI. A carrier
subject to this section shall have an
AALPI set equal to its Total Loop Plant
Investment for each study area
multiplied by an AALPI Factor equal to
(0.15 times the Loop Depreciation
Factor + 0.05). The Administrator will
calculate each rate of return carrier’s
AALPI for each Reference Year.
(e) Broadband Deployment AALPI
adjustment. The AALPI calculated in
paragraph (c) of this section shall be
adjusted by the Administrator based
upon the difference between a carrier’s
broadband availability for each study
area as reported on that carrier’s most
recent Form 477, and the weighted
national average broadband availability
for all rate-of-return carriers based on
Form 477 data, as announced annually
by the Wireline Competition Bureau in
a Public Notice. For every percentage
point that the carrier’s broadband
availability exceeds the weighted
national average broadband availability
for the Reference Year, that carrier’s
AALPI will be reduced by one
percentage point. For every percentage
point that the carrier’s broadband
availability is below the weighted
national average broadband availability
for the Reference Year, that carrier’s
AALPI will be increased by one
percentage point.
(f) Construction allowance
adjustment. Notwithstanding any other
provision of this section, a rate-of-return
carrier may not include in data
submitted for purposes of obtaining
high-cost support under subpart K or
subpart M of this part any Loop Plant
Investment associated with new
construction projects where the average
cost of such project per location passed
exceeds a Maximum Average Per
Location Construction Project
Limitation as determined by the
Administrator according to the
following formula:
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(1) Maximum Average Per Location
Construction Project Loop Plant
Investment Limitation equals the
inflation adjusted equivalent to $10,000
in the Reference Year calculated by
multiplying $10,000 times the
applicable annual GDP–CPI. This
inflation adjusted amount will be
normalized across all study areas by
multiplying the product above by (the
Loop Cap Adjustment Factor times the
Construction Limit Factor)
Where:
the Loop Cap Adjustment Factor equals the
annualized monthly per loop limit
described in § 54.302 (i.e., $3,000)
divided by the unadjusted per loop
support amount for the study area (the
annual HCLS and CAF–BLS support
amount per loop in the study not capped
by § 54.302)
and
the Construction Limitation Factor equals the
study area Total Loop Investment per
Location divided by the overall Total
Loop Investment per Location for all
rate-of-return study areas.
(2) This limitation shall apply only
with respect to Loop Plant Investment
for which invoices were received by the
carrier after the effective date of this
rule.
(3) A carrier subject to this section
will maintain documentation necessary
to demonstrate compliance with the
above limitation.
(g) Study area data. For each
Reference Year, the Administrator will
publish the following data for each
study area of each rate-of-return carrier:
(1) AALPI
(2) The Broadband Deployment
AALPI Adjustment
(3) The Maximum Average Per
Location Construction Project Loop
Plant Investment Limitation
(4) The Loop Cap Adjustment Factor
(5) The Construction Limit Factor
(h) Excess Loop Plant Investment
carry forward. Loop Plant Investment in
a Reference Year in excess of the AALPI
may be carried forward to future years
and included in AALPI for such
subsequent years, but may not cause the
AALPI to exceed the Total Allowed
Loop Plant Investment.
(i) A carrier subject to this section will
maintain subsidiary records of
accumulated Excess Loop Plant
Investment for accounts referenced in
paragraph (c)(1) of this section in
addition to the corresponding
depreciation accounts. In the event a
carrier makes Loop Plant Investment for
an account at a level below the AALPI
for the account, the carrier may reduce
accumulated Excess Loop Plant
Investment effective for the Reference
Year by an amount up to, but not in
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excess of the amount by which AALPI
for the Reference Year exceeds Loop
Plant Investment for the account during
the same year.
(j) Treatment of unused AALPI. In the
event a carrier’s Loop Plant Investment
is below its AALPI in a given Reference
Year, there will be no carry forward to
future years of unused AALPI. The
Administrator’s recalculation of AALPI
for each Reference Year will reflect the
revised AALPI, Loop Depreciation
Factor, Total Loop Plant Investment,
and Total Allowed Loop Plant
Investment for the Reference Year.
(k) Special circumstances. The AALPI
for Loop Plant Investment may be
adjusted by the Administrator by adding
the applicable adjustment below to the
amount of AALPI for the year in which
additions to plant are booked to the
accounts described in paragraph (c)(1)
of this section, associated with any of
the following:
(1) Geographic areas within the study
area where there are currently no
existing wireline loop facilities;
(2) Geographic areas within the study
area where grant funds are used for
Loop Plant Investment;
(3) Geographic areas within the study
area for which loan funds were
disbursed for the purposes of Loop Plant
Investment before the effective date of
this rule; and
(4) Construction projects for which
the carrier, prior to the effective date of
this rule, had awarded a contract to a
vendor for a loop plant construction
project within the study area.
(l) Documentation requirements. The
Administrator will not make these
adjustments without appropriate
documentation from the carrier.
(m) Minimum AALPI. If a carrier has
an AALPI that is less than $4 million in
any given year, the carrier shall be
allowed to increase its AALPI for that
year to the lesser of $4 million or its
Total Allowed Loop Plant Investment.
6. In § 54.305, revise paragraph (a) to
read as follows:
■
asabaliauskas on DSK3SPTVN1PROD with RULES
§ 54.305
Sale or transfer of exchanges.
(a) The provisions of this section shall
not be used to determine support for
any price cap incumbent local exchange
carrier or a rate-of-return carrier, as that
term is defined in § 54.5, that is
affiliated with a price cap incumbent
local exchange carrier.
*
*
*
*
*
7. In § 54.308, revise paragraph (a) to
read as follows:
■
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Jkt 238001
§ 54.308 Broadband public interest
obligations for recipients of high-cost
support.
(a) Rate-of-return carrier recipients of
high-cost support are required to offer
broadband service, at speeds described
below, with latency suitable for realtime applications, including Voice over
Internet Protocol, and usage capacity
that is reasonably comparable to
comparable offerings in urban areas, at
rates that are reasonably comparable to
rates for comparable offerings in urban
areas. For purposes of determining
reasonable comparability of rates,
recipients are presumed to meet this
requirement if they offer rates at or
below the applicable benchmark to be
announced annually by public notice
issued by the Wireline Competition
Bureau.
(1) Carriers that elect to receive
Connect America Fund-Alternative
Connect America Cost Model (CAF–
ACAM) support pursuant to § 54.311 are
required to offer broadband service at
actual speeds of at least 10 Mbps
downstream/1 Mbps upstream to a
defined number of locations as specified
by public notice, with a minimum usage
allowance of 150 GB per month, subject
to the requirement that usage
allowances remain consistent with
median usage in the United States over
the course of the ten-year term. In
addition, such carriers must offer other
speeds to subsets of locations, as
specified below:
(i) Fully funded locations. Fully
funded locations are those locations
identified by the Alternative-Connect
America Cost Model (A–CAM) where
the average cost is above the funding
benchmark and at or below the funding
cap. Carriers are required to offer
broadband speeds to locations that are
fully funded, as specified by public
notice at the time of authorization, as
follows:
(A) Carriers with a state-level density
of more than 10 housing units per
square mile, as specified by public
notice at the time of election, are
required to offer broadband speeds of at
least 25 Mbps downstream/3 Mbps
upstream to 75 percent of all fully
funded locations in the state by the end
of the ten-year period.
(B) Carriers with a state-level density
of 10 or fewer, but more than five,
housing units per square mile, as
specified by public notice at the time of
election, are required to offer broadband
speeds of at least 25 Mbps downstream/
3 Mbps upstream to 50 percent of fully
funded locations in the state by the end
of the ten-year period.
(C) Carriers with a state-level density
of five or fewer housing units per square
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24339
mile, as specified by public notice at the
time of election, are required to offer
broadband speeds of at least 25 Mbps
downstream/3 Mbps upstream to 25
percent of fully funded locations in the
state by the end of the ten-year period.
(ii) Capped locations. Capped
locations are those locations in census
blocks for which A–CAM calculates an
average cost per location above the
funding cap. Carriers are required to
offer broadband speeds to locations that
are receiving capped support, as
specified by public notice at the time of
authorization, as follows:
(A) Carriers with a state-level density
of more than 10 housing units per
square mile, as specified by public
notice at the time of election, are
required to offer broadband speeds of at
least 4 Mbps downstream/1 Mbps
upstream to 50 percent of all capped
locations in the state by the end of the
ten-year period.
(B) Carriers with a state-level density
of 10 or fewer housing units per square
mile, as specified by public notice at the
time of election, are required to offer
broadband speeds of at least 4 Mbps
downstream/1 Mbps upstream to 25
percent of capped locations in the state
by the end of the ten-year period.
(C) Carriers shall provide to all other
capped locations, upon reasonable
request, broadband at actual speeds of at
least 4 Mbps downstream/1 Mbps
upstream.
(2) Rate-of-return recipients of
Connect America Fund Broadband Loop
Support (CAF BLS) shall be required to
offer broadband service at actual speeds
of at least 10 Mbps downstream/1 Mbps
upstream, over a five-year period, to a
defined number of unserved locations as
specified by public notice, as
determined by the following
methodology:
(i) Percentage of CAF BLS. Each rateof-return carrier is required to target a
defined percentage of its five-year
forecasted CAF–BLS support to the
deployment of broadband service to
locations that are unserved with 10
Mbps downstream/1 Mbps upstream
broadband service as follows:
(A) Rate-of-return carriers with less
than 20 percent deployment of 10/1
Mbps broadband service in their study
areas, as determined by the Wireline
Competition Bureau, will be required to
utilize 35 percent of their five-year
forecasted CAF–BLS support to extend
broadband service where it is currently
lacking.
(B) Rate-of-return carriers with more
than 20 percent but less than 40 percent
deployment of 10/1 Mbps broadband
service in their study areas, as
determined by the Wireline Competition
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Bureau, will be required to utilize 25
percent of their five-year forecasted
CAF–BLS support to extend broadband
service where it is currently lacking.
(C) Rate-of-return carriers with more
than 40 percent but less than 80 percent
deployment of 10/1 Mbps broadband
service in their study areas, as
determined by the Wireline Competition
Bureau, will be required to utilize 20
percent of their five-year forecasted
CAF–BLS support to extend broadband
service where it is currently lacking.
(ii) Cost per location. The deployment
obligation shall be determined by
dividing the amount of support set forth
in paragraph (a)(2)(i) of this section by
a cost per location figure based on one
of two methodologies, at the carrier’s
election:
(A) The higher of:
(1) The weighted average unseparated
cost per loop for carriers of similar
density that offer 10/1 Mbps or better
broadband service to at least 95 percent
of locations, based on the most current
FCC Form 477 data as determined by
the Wireline Competition Bureau, but
excluding carriers subject to the current
$250 per line per month cap set forth in
§ 54.302 and carriers subject to
limitations on operating expenses set
forth in § 54.303; or
(2) 150% of the weighted average of
the cost per loop for carriers of similar
density, but excluding carriers subject to
the current $250 per line per month cap
set forth in § 54.302 and carriers subject
to limitations on operating expenses set
forth in § 54.303, with a similar level of
deployment of 10/1 Mbps or better
broadband based on the most current
FCC Form 477 data, as determined by
Wireline Competition Bureau; or
(B) The average cost per location for
census blocks lacking 10/1 Mbps
broadband service in the carrier’s study
area as determined by the A–CAM.
(iii) Restrictions on deployment
obligations. (A) No rate-of-return carrier
shall deploy terrestrial wireline
technology in any census block if doing
so would result in total support per line
in the study area to exceed the $250 perline per-month cap in § 54.302.
(B) No rate-of-return carrier shall
deploy terrestrial wireline technology to
unserved locations to meet this
obligation if that would exceed the
$10,000 per location/per project capital
investment allowance set forth in
§ 54.303.
(iv) Future deployment obligations.
Prior to publishing the deployment
obligations for subsequent five-year
periods, the Administrator shall update
the unseparated average cost per loop
amounts for carriers with 95 percent or
greater deployment of the then-current
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20:47 Apr 22, 2016
Jkt 238001
standard, based on the then-current
NECA cost data, and the Wireline
Competition Bureau shall examine the
density groupings and make any
necessary adjustments based on thencurrent U.S. Census data.
*
*
*
*
*
■ 8. Add § 54.311 to subpart D to read
as follows:
§ 54.311 Connect America Fund
Alternative-Connect America Cost Model
Support.
(a) Voluntary election of model-based
support. A rate-of-return carrier (as that
term is defined in § 54.5) receiving
support pursuant to subparts K or M of
this part shall have the opportunity to
voluntarily elect, on a state-level basis,
to receive Connect America FundAlternative Connect America Cost
Model (CAF–ACAM) support as
calculated by the Alternative-Connect
America Cost Model (A–CAM) adopted
by the Commission in lieu of support
calculated pursuant to subparts K or M
of this part. Any rate-of-return carrier
not electing support pursuant to this
section shall continue to receive support
calculated pursuant to those
mechanisms as specified in Commission
rules for high-cost support.
(b) Geographic areas eligible for
support. CAF–ACAM model-based
support will be made available for a
specific number of locations in census
blocks identified as eligible for each
carrier by public notice. The eligible
areas and number of locations for each
state identified by the public notice
shall not change during the term of
support identified in paragraph (c) of
this section.
(c) Term of support. CAF–ACAM
model-based support shall be provided
to the carriers that elect to make a statelevel commitment for a term that
extends until December 31, 2026.
(d) Interim deployment milestones.
Recipients of CAF–ACAM model-based
support must complete deployment to
40 percent of fully funded locations by
the end of 2020, to 50 percent of fully
funded locations by the end of 2021, to
60 percent of fully funded locations by
the end of 2022, to 70 percent of fully
funded locations by the end of 2023, to
80 percent of fully funded locations by
the end of 2024, to 90 percent of fully
funded locations by the end of 2025,
and to 100 percent of fully funded
locations by the end of 2026. By the end
of 2026, carriers must complete
deployment of broadband meeting a
standard of at least 25 Mbps
downstream/3 Mbps upstream to the
requisite number of locations specified
in § 54.308(a)(1)(i) through (iii).
Compliance shall be determined based
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on the total number of fully funded
locations in a state. Carriers that
complete deployment to at least 95
percent of the requisite number of
locations will be deemed to be in
compliance with their deployment
obligations. The remaining locations
that receive capped support are subject
to the standard specified in
§ 54.308(a)(1)(iv).
(e) Transition to CAF–ACAM Support.
Carriers electing CAF–ACAM modelbased support whose final model-based
support is less than the carrier’s highcost loop support and interstate
common line support disbursements for
2015, will transition to model-based
support as follows:
(1) If the difference between a carrier’s
model-based support and its 2015 highcost support, as determined in
paragraph (e)(4) of this section, is 10
percent or less, it will receive, in
addition to model-based support, 50
percent of that difference in year one,
and then will receive model support in
years two through ten.
(2) If the difference between a carrier’s
model-based support and its 2015 highcost support, as determined in
paragraph (e)(4) of this section, is 25
percent or less, but more than 10
percent, it will receive, in addition to
model-based support, an additional
transition payment for up to four years,
and then will receive model support in
years five through ten. The transition
payments will be phased-down 20
percent per year, provided that each
phase-down amount is at least five
percent of the total 2015 high-cost
support amount. If 20 percent of the
difference between a carrier’s modelbased support and its 2015 high-cost
support is less than five percent of the
total 2015 high-cost support amount, the
transition payments will be phaseddown five percent of the total 2015
high-cost support amount each year.
(3) If the difference between a carrier’s
model-based support and its 2015 highcost support, as determined in
paragraph (e)(4) of this section, is more
than 25 percent, it will receive, in
addition to model-based support, an
additional transition payment for up to
nine years, and then will receive model
support in year ten. The transition
payments will be phased-down ten
percent per year, provided that each
phase-down amount is at least five
percent of the total 2015 high-cost
support amount. If ten percent of the
difference between a carrier’s modelbased support and its 2015 high-cost
support is less than five percent of the
total 2015 high-cost support amount, the
transition payments will be phased-
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down five percent of the total 2015
high-cost support amount each year.
(4) The carrier’s 2015 support for
purposes of the calculation of transition
payments is the amount of high-cost
loop support and interstate common
line support disbursed to the carrier for
2015 without regard to prior period
adjustments related to years other than
2015, as determined by the
Administrator as of January 31, 2016
and publicly announced prior to the
election period for the voluntary path to
the model.
■ 9. Amend § 54.313 by removing and
reserving paragraph (a)(1), revising
paragraphs (a)(10), (e)(1), and paragraph
(e)(2) introductory text, removing and
reserving paragraphs (e)(2)(i) and (iii),
removing paragraphs (e)(3) through (6),
and revising paragraphs (f)(1)
introductory text, and (f)(1)(i) and (iii).
The revisions read as follows:
asabaliauskas on DSK3SPTVN1PROD with RULES
§ 54.313 Annual reporting requirements
for high-cost recipients.
(a) * * *
(10) Beginning July 1, 2013. A
certification that the pricing of the
company’s voice services is no more
than two standard deviations above the
applicable national average urban rate
for voice service, as specified in the
most recent public notice issued by the
Wireline Competition Bureau and
Wireless Telecommunications Bureau;
and
*
*
*
*
*
(e) * * *
(1) On July 1, 2016, a list of the
geocoded locations already meeting the
§ 54.309 public interest obligations at
the end of calendar year 2015, and the
total amount of Phase II support, if any,
the price cap carrier used for capital
expenditures in 2015.
(2) On July 1, 2017, and every year
thereafter ending July 1, 2021, the
following information:
*
*
*
*
*
(f) * * *
(1) Beginning July 1, 2015 and Every
Year Thereafter. The following
information:
(i) A certification that it is taking
reasonable steps to provide upon
reasonable request broadband service at
actual speeds of at least 10 Mbps
downstream/1 Mbps upstream, with
latency suitable for real-time
applications, including Voice over
Internet Protocol, and usage capacity
that is reasonably comparable to
comparable offerings in urban areas as
determined in an annual survey, and
that requests for such service are met
within a reasonable amount of time.
*
*
*
*
*
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Jkt 238001
(iii) A certification that it bid on
category one telecommunications and
Internet access services in response to
all reasonable requests in posted FCC
Form 470s seeking broadband service
that meets the connectivity targets for
the schools and libraries universal
service support program for eligible
schools and libraries (as described in
§ 54.501) within its service area, and
that such bids were at rates reasonably
comparable to rates charged to eligible
schools and libraries in urban areas for
comparable offerings.
*
*
*
*
*
■ 10. Add § 54.316 to subpart D to read
as follows:
§ 54.316 Broadband deployment reporting
and certification requirements for high-cost
recipients.
(a) Broadband deployment reporting.
Rate-of Return ETCs and ETCs that elect
to receive Connect America Phase II
model-based support shall have the
following broadband reporting
obligations:
(1) Recipients of high-cost support
with defined broadband deployment
obligations pursuant to § 54.308(a) or
§ 54.310(c) shall provide to the
Administrator on a recurring basis
information regarding the locations to
which the eligible telecommunications
carrier is offering broadband service in
satisfaction of its public interest
obligations, as defined in either § 54.308
or § 54.309.
(2) Recipients subject to the
requirements of § 54.308(a)(1) shall
report the number of locations for each
state and locational information,
including geocodes, separately
indicating whether they are offering
service providing speeds of at least 4
Mbps downstream/1 Mbps upstream, 10
Mbps downstream/1 Mbps upstream,
and 25 Mbps downstream/3 Mbps
upstream.
(3) Recipients subject to the
requirements of § 54.308(a)(2) shall
report the number of newly served
locations for each study area and
locational information, including
geocodes, separately indicating whether
they are offering service providing
speeds of at least 4 Mbps downstream/
1 Mbps upstream, 10 Mbps
downstream/1 Mbps upstream, and 25
Mbps downstream/3 Mbps upstream.
(4) Recipients subject to the
requirements of § 54.310(c) shall report
the number of locations for each state
and locational information, including
geocodes, where they are offering
service providing speeds of at least 10
Mbps downstream/1 Mbps upstream.
(b) Broadband deployment
certifications. Rate-of Return ETCs and
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24341
ETCs that elect to receive Connect
America Phase II model-based support
shall have the following broadband
deployment certification obligations:
(1) Price cap carriers that elect to
receive Connect America Phase II
model-based support shall provide: No
later than March 1, 2017, and every year
thereafter ending on no later than March
1, 2021, a certification that by the end
of the prior calendar year, it was
offering broadband meeting the requisite
public interest obligations specified in
§ 54.309 to the required percentage of its
supported locations in each state as set
forth in § 54.310(c).
(2) Rate-of-return carriers electing
CAF–ACAM support pursuant to
§ 54.311 shall provide:
(i) No later than March 1, 2021, and
every year thereafter ending on no later
than March 1, 2027, a certification that
by the end of the prior calendar year, it
was offering broadband meeting the
requisite public interest obligations
specified in § 54.308 to the required
percentage of its fully funded locations
in the state, pursuant to the interim
deployment milestones set forth in
§ 54.311(d).
(ii) No later than March 1, 2027, a
certification that as of December 31,
2026, it was offering broadband meeting
the requisite public interest obligations
specified in § 54.308 to all of its fully
funded locations in the state and to the
required percentage of its capped
locations in the state.
(3) Rate-of-return carriers receiving
support pursuant to subparts K and M
of this part shall provide:
(i) No later than March 1, 2022, a
certification that it fulfilled the
deployment obligation meeting the
requisite public interest obligations as
specified in § 54.308(a)(2) to the
required number of locations as of
December 31, 2021.
(ii) Every subsequent five-year period
thereafter, a certification that it fulfilled
the deployment obligation meeting the
requisite public interest obligations as
specified in § 54.308(a)(4).
(c) Filing deadlines. (1) In order for a
recipient of high-cost support to
continue to receive support for the
following calendar year, or retain its
eligible telecommunications carrier
designation, it must submit the annual
reporting information required by
March 1 as described in paragraphs (a)
and (b) of this section. Eligible
telecommunications carriers that file
their reports after the March 1 deadline
shall receive a reduction in support
pursuant to the following schedule:
(i) An eligible telecommunications
carrier that files after the March 1
deadline, but by February 7, will have
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its support reduced in an amount
equivalent to seven days in support;
(ii) An eligible telecommunications
carrier that files on or after February 8
will have its support reduced on a prorata daily basis equivalent to the period
of non-compliance, plus the minimum
seven-day reduction,
(2) Grace period. An eligible
telecommunications carrier that submits
the annual reporting information
required by this section after March 1
but before March 1 will not receive a
reduction in support if the eligible
telecommunications carrier and its
holding company, operating companies,
and affiliates, as reported pursuant to
§ 54.313(a)(8) in their report due July 1
of the prior year, have not missed the
March 1 deadline in any prior year.
■ 11. In § 54.319, revise paragraph (a)
and add paragraphs (d) through (h) to
read as follows:
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§ 54.319 Elimination of high-cost support
in areas with an unsubsidized competitor.
(a) High-cost loop support provided
pursuant to subparts K and M of this
part shall be eliminated in an
incumbent rate-of-return local exchange
carrier study area where an
unsubsidized competitor, or
combination of unsubsidized
competitors, as defined in § 54.5, offer(s)
to 100 percent of the residential and
business locations in the study area
voice and broadband service at speeds
of at least 10 Mbps downstream/1 Mbps
upstream, with latency suitable for realtime applications, including Voice over
Internet Protocol, and usage capacity
that is reasonably comparable to
comparable offerings in urban areas, at
rates that are reasonably comparable to
rates for comparable offerings in urban
areas.
*
*
*
*
*
(d) High-cost universal service
support pursuant to subpart K of this
part shall be eliminated for those census
blocks of an incumbent rate-of-return
local exchange carrier study area where
an unsubsidized competitor, or
combination of unsubsidized
competitors, as defined in § 54.5, offer(s)
voice and broadband service meeting
the public interest obligations in
§ 54.308(a)(2) to at least 85 percent of
residential locations in the census
block. Qualifying competitors must be
able to port telephone numbers from
consumers.
(e) After a determination that a
particular census block is served by a
competitor as defined in paragraph (d)
of this section, support provided
pursuant to subpart K of this part shall
be disaggregated pursuant to a method
elected by the incumbent local exchange
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carrier. The sum of support that is
disaggregated for competitive and noncompetitive areas shall equal the total
support available to the study area
without disaggregation.
(f) For any incumbent local exchange
carrier for which the disaggregated
support for competitive census blocks
represents less than 25 percent of the
support the carrier would have received
in the study area in the absence of this
rule, support provided pursuant to
subpart K of this part shall be reduced
according to the following schedule:
(1) In the first year, 66 percent of the
incumbent’s disaggregated support for
the competitive census block will be
provided;
(2) In the second year, 33 percent of
the incumbent’s disaggregated support
for the competitive census blocks will
be provided;
(3) In the third year and thereafter, no
support shall be provided pursuant to
subpart K of this part for any
competitive census block.
(g) For any incumbent local exchange
carrier for which the disaggregated
support for competitive census blocks
represents more than 25 percent of the
support the carrier would have received
in the study area in the absence of this
rule, support shall be reduced for each
competitive census block according to
the following schedule:
(1) In the first year, 85 percent of the
incumbent’s disaggregated support for
the competitive census blocks will be
provided;
(2) In the second year, 68 percent of
the incumbent’s disaggregated support
for the competitive census blocks will
be provided;
(3) In the third year, 51 percent of the
incumbent’s disaggregated support for
the competitive census blocks will be
provided;
(4) In the fourth year, 34 percent of
the incumbent’s disaggregated support
the competitive census block will be
provided;
(5) In the fifth year, 17 percent of the
incumbent’s disaggregated support the
competitive census blocks will be
provided;
(6) In the sixth year and thereafter, no
support shall be paid provided pursuant
to subpart K of this part for any
competitive census block.
(h) The Wireline Competition Bureau
shall update its analysis of competitive
overlap in census blocks every seven
years, utilizing the current public
interest obligations in § 54.308(a)(2) as
the standard that must be met by an
unsubsidized competitor.
■ 12. Revise § 54.707 to read as follows:
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§ 54.707
Audit controls.
(a) The Administrator shall have the
authority to audit contributors and
carriers reporting data to the
Administrator. The Administrator shall
establish procedures to verify discounts,
offsets and support amounts provided
by the universal service support
programs, and may suspend or delay
discounts, offsets, and support amounts
provided to a carrier if the carrier fails
to provide adequate verification of
discounts, offsets, or support amounts
provided upon reasonable request, or if
directed by the Commission to do so.
The Administrator shall not provide
reimbursements, offsets or support
amounts pursuant to subparts D, K, L
and M of this part to a carrier until the
carrier has provided to the
Administrator a true and correct copy of
the decision of a state commission
designating that carrier as an eligible
telecommunications carrier in
accordance with § 54.202.
(b) The Administrator has the right to
obtain all cost and revenue submissions
and related information, at any time and
in unaltered format, that carriers submit
to NECA that are used to calculate
support payments pursuant to subparts
D, K, and M of this part.
(c) The Administrator (and NECA, to
the extent the Administrator does not
directly receive information from
carriers) shall provide to the
Commission upon request all
underlying data collected from eligible
telecommunications carriers to calculate
payments pursuant to subparts D, K, L
and M of this part.
Subpart J— [Removed and Reserved]
13. Remove and reserve subpart J,
consisting of §§ 54.800 through 54.809.
■ 14. Revise § 54.901 to read as follows:
■
§ 54.901 Calculation of Connect America
Fund Broadband Loop Support.
(a) Connect America Fund Broadband
Loop Support (CAF BLS) available to a
rate-of-return carrier shall equal the
Interstate Common Line Revenue
Requirement per Study Area, plus the
Consumer Broadband-Only Revenue
Requirement per Study Area as
calculated in accordance with part 69 of
this chapter, minus:
(1) The study area revenues obtained
from end user common line charges at
their allowable maximum as determined
by § 69.104(n) and (o) of this chapter;
(2) Imputed Consumer Broadbandonly Revenues, to be calculated as:
(i) The lesser of $42 * the number of
consumer broadband-only loops * 12 or
the Consumer Broadband-Only Revenue
Requirement per Study Area; or
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(ii) For the purpose of calculating the
reconciliation pursuant to
§ 54.903(b)(3), the greater of the amount
determined pursuant to paragraph
(a)(2)(i) of this section or the carrier’s
allowable Consumer Broadband-only
rate calculated pursuant to § 69.132 of
this chapter * the number of consumer
broadband-only loops * 12;
(3) The special access surcharge
pursuant to § 69.115 of this chapter; and
(4) The line port costs in excess of
basic analog service pursuant to
§ 69.130 of this chapter.
(b) For the purpose of calculating
support pursuant to paragraph (a) of this
section, the Interstate Common Line
Revenue Requirement and Consumer
Broadband-only Revenue Requirement
shall be subject to the limits on
operating expenses and capital
investment allowances pursuant to
§ 54.303.
(c) For purposes of calculating the
amount of CAF BLS, determined
pursuant to paragraph (a) of this section,
that a non-price cap carrier may receive,
the corporate operations expense
allocated to the Common Line Revenue
Requirement or the Consumer
Broadband-only Loop Revenue
Requirement, pursuant to § 69.409 of
this chapter, shall be limited to the
lesser of:
(1) The actual average monthly perloop corporate operations expense; or
(2) The portion of the monthly perloop amount computed pursuant to
§ 54.1308(a)(4)(iii) that would be
allocated to the Interstate Common Line
Revenue Requirement or Consumer
Broadband-only Loop Revenue
Requirement pursuant to § 69.409 of this
chapter.
(d) In calculating support pursuant to
paragraph (a) of this section for periods
prior to when the tariff charge described
in § 69.132 of this chapter becomes
effective, only Interstate Common Line
Revenue Requirement and Interstate
Common line revenues shall be
included.
(e) To the extent necessary for
ratemaking purposes, each carrier’s CAF
BLS shall be attributed as follows:
(1) First, support shall be applied to
ensure that the carrier has met its
Interstate Common Line Revenue
Requirement for the prior period to
which true-up payments are currently
being applied.
(2) Second, support shall be applied
to ensure that the carrier has met its
Consumer Broadband-only Loop
Revenue Requirement for the prior
period to which true-up payments are
currently being applied.
(3) Third, support shall be applied to
ensure that the carrier will meet, on a
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forecasted basis, its Interstate Common
Line Revenue Requirement during the
current tariff year.
(4) Finally, support shall be applied
as available to the Consumer
Broadband-only Loop Revenue
Requirement during the current tariff
year.
(f) CAF BLS Support is subject to a
reduction as necessary to meet the
overall cap on support established by
the Commission for support provided
pursuant to this subpart and subpart M
of this part. Reductions shall be
implemented as follows:
(1) On May 1 of each year, the
Administrator will publish a target
amount for CAF BLS in the aggregate
and the amount of CAF BLS that each
study area will receive during the
upcoming July 1 to June 30 tariff year.
The target amount shall be the
forecasted disbursement amount times a
reduction factor. The reduction factor
shall be the budget amount divided by
the total forecasted disbursement
amount for both High Cost Loop
Support and CAF BLS for recipients in
the aggregate. The forecasted
disbursement for CAF BLS is the
forecasted total disbursements for all
recipients of CAF BLS, including both
projections and true-ups in the
upcoming July 1 to June 30 tariff year.
(2) The Administrator shall apply a
per-line reduction to each carrier’s CAF
BLS equal to one-half the difference
between the forecasted disbursement
amount and the target amount divided
by the total number of loops eligible for
support. To the extent that per-line
reduction is greater than the amount of
CAF BLS per loop for a given carrier,
that excess amount shall be subject to
reduction through the method described
in paragraph (f)(3) of this section.
(3) The Administrator shall apply an
additional pro rata reduction to CAF
BLS for each recipient of CAF BLS as
necessary to achieve the target amount.
(g) For purposes of this subpart and
consistent with § 69.132 of this chapter,
a consumer broadband-only loop is a
line provided by a rate-of-return
incumbent local exchange carrier to a
customer without regulated local
exchange voice service, for use in
connection with fixed Broadband
Internet access service, as defined in
§ 8.2 of this chapter.
■ 15. Revise § 54.902 to read as follows:
§ 54.902 Calculation of CAF BLS Support
for transferred exchanges.
(a) In the event that a rate-of-return
carrier acquires exchanges from an
entity that is also a rate-of-return carrier,
CAF BLS for the transferred exchanges
shall be distributed as follows:
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(1) Each carrier may report its
updated line counts to reflect the
transfer in the next quarterly line count
filing pursuant to § 54.903(a)(1) that
applies to the period in which the
transfer occurred. During a transition
period from the filing of the updated
line counts until the end of the funding
year, the Administrator shall adjust the
CAF BLS Support received by each
carrier based on the updated line counts
and the per-line CAF BLS, categorized
by customer class and, if applicable,
disaggregation zone, of the selling
carrier. If the acquiring carrier does not
file a quarterly update of its line counts,
it will not receive CAF BLS for those
lines during the transition period.
(2) Each carrier’s projected data for
the following funding year filed
pursuant to § 54.903(a)(3) shall reflect
the transfer of exchanges.
(3) Each carrier’s actual data filed
pursuant to § 54.903(a)(4) shall reflect
the transfer of exchanges. All posttransaction CAF BLS shall be subject to
true up by the Administrator pursuant
to § 54.903(b)(3).
(b) In the event that a rate-of-return
carrier acquires exchanges from a pricecap carrier, absent further action by the
Commission, the exchanges shall
receive the same amount of support and
be subject to the same public interest
obligations as specified in § 54.310 or
§ 54.312, as applicable.
(c) In the event that an entity other
than a rate-of-return carrier acquires
exchanges from a rate-of-return carrier,
absent further action by the
Commission, the carrier will receive
model-based support and be subject to
public interest obligations as specified
in § 54.310.
(d) This section does not alter any
Commission rule governing the sale or
transfer of exchanges, including the
definition of ‘‘study area’’ in part 36 of
this chapter.
■ 16. Revise § 54.903 to read as follows:
§ 54.903 Obligations of rate-of-return
carriers and the Administrator.
(a) To be eligible for CAF BLS, each
rate-of-return carrier shall make the
following filings with the
Administrator.
(1) Each rate-of-return carrier shall
submit to the Administrator in
accordance with the schedule in
§ 54.1306 the number of lines it serves,
within each rate-of-return carrier study
area showing residential and single-line
business line counts, multi-line
business line counts, and consumer
broadband-only line counts separately.
For purposes of this report, and for
purposes of computing support under
this subpart, the residential and single-
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line business class lines reported
include lines assessed the residential
and single-line business End User
Common Line charge pursuant to
§ 69.104 of this chapter, the multi-line
business class lines reported include
lines assessed the multi-line business
End User Common Line charge pursuant
to § 69.104 of this chapter, and
consumer broadband-only lines
reported include lines assessed the
Consumer Broadband-only Loop rate
charged pursuant to § 69.132 of this
chapter or provided on a detariffed
basis. For purposes of this report, and
for purposes of computing support
under this subpart, lines served using
resale of the rate-of-return local
exchange carrier’s service pursuant to
section 251(c)(4) of the Communications
Act of 1934, as amended, shall be
considered lines served by the rate-ofreturn carrier only and must be reported
accordingly.
(2) A rate-of-return carrier may submit
the information in paragraph (a) of this
section in accordance with the schedule
in § 54.1306, even if it is not required
to do so. If a rate-of-return carrier makes
a filing under this paragraph, it shall
separately indicate any lines that it has
acquired from another carrier that it has
not previously reported pursuant to
paragraph (a) of this section, identified
by customer class and the carrier from
which the lines were acquired.
(3) Each rate-of-return carrier shall
submit to the Administrator annually by
March 31 projected data necessary to
calculate the carrier’s prospective CAF
BLS, including common line and
consumer broadband-only loop cost and
revenue data, for each of its study areas
in the upcoming funding year. The
funding year shall be July 1 of the
current year through June 30 of the next
year. The data shall be accompanied by
a certification that the cost data is
compliant with the Commission’s cost
allocation rules and does not reflect
duplicative assignment of costs to the
consumer broadband-only loop and
special access categories.
(4) Each rate-of-return carrier shall
submit to the Administrator on
December 31 of each year the data
necessary to calculate a carrier’s
Connect America Fund CAF BLS,
including common line and consumer
broadband-only loop cost and revenue
Where:
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data, for the prior calendar year. Such
data shall be used by the Administrator
to make adjustments to monthly per-line
CAF BLS amounts to the extent of any
differences between the carrier’s CAF
BLS received based on projected
common line cost and revenue data, and
the CAF BLS for which the carrier is
ultimately eligible based on its actual
common line and consumer broadbandonly loop cost and revenue data during
the relevant period. The data shall be
accompanied by a certification that the
cost data is compliant with the
Commission’s cost allocation rules and
does not reflect duplicative assignment
of costs to the consumer broadband-only
loop and special access categories.
(b) Upon receiving the information
required to be filed in paragraph (a) of
this section, the Administrator shall:
(1) Perform the calculations described
in § 54.901 and distribute support
accordingly;
(2) [Reserved]
(3) Perform periodic reconciliation of
the CAF BLS provided to each carrier
based on projected data filed pursuant
to paragraph (a)(3) of this section and
the CAF BLS for which each carrier is
eligible based on actual data filed
pursuant to paragraph (a)(4) of this
section; and
(4) Report quarterly to the
Commission on the collection and
distribution of funds under this subpart
as described in § 54.702(h). Fund
distribution reporting will be by state
and by eligible telecommunications
carrier within the state.
§ 54.904
[Removed].
17. Remove § 54.904.
■ 18. In § 54.1308, revise paragraph (a)
introductory text to read as follows:
■
§ 54.1308 Study Area Total Unseparated
Loop Cost.
(a) For the purpose of calculating the
expense adjustment, the study area total
unseparated loop cost equals the sum of
the following, however, subject to the
limitations set forth in § 54.303:
*
*
*
*
*
■ 19. In § 54.1310, add paragraph (d) to
read as follows:
§ 54.1310
Expense adjustment.
*
*
*
*
*
(d) High Cost Loop Support is subject
to a reduction as necessary to meet the
‘‘Total Annual Interest Expense’’ is the total
interest expense for the most recent year
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overall cap on support established by
the Commission for support provided
pursuant to this subpart and subpart K
of this chapter. Reductions shall be
implemented as follows:
(1) On May 1 of each year, the
Administrator will publish an annual
target amount for High-Cost Loop
Support in the aggregate. The target
amount shall be the forecasted
disbursement amount times a reduction
factor. The reduction factor shall be the
budget amount divided by the total
forecasted disbursement amount for
both High Cost Loop Support and
Broadband Loop Support for recipients
in the aggregate. The forecasted
disbursement for High Cost Loop
Support is the High Cost Loop Support
cap determined pursuant to § 54.1302 as
reflected in the most recent annual
filing pursuant to § 54.1305.
(2) Each quarter, the Administrator
shall adjust each carrier’s High Cost
Loop Support disbursements as follows:
(i) The Administrator shall apply a
per-line reduction to each carrier’s High
Cost Loop Support equal to one-half the
difference between the forecasted
disbursement amount and the target
amount divided by the total number of
loops eligible for support. To the extent
that per-line reduction is greater than
the amount of High Cost Loop Support
per loop for a given carrier, that excess
amount will be subject to reduction
through the method described in
paragraph (d)(2)(ii) of this section.
(ii) The Administrator shall apply an
additional pro rata reduction to High
Cost Loop Support for each recipient of
High Cost Loop Support as necessary to
achieve the target amount.
PART 65—INTERSTATE RATE OF
RETURN PRESCRIPTION
PROCEDURES AND METHODOLOGIES
20. The authority citation for part 65
is revised to read as follows:
■
Authority: 47 U.S.C. 151, 154(i), 155, 201,
205, 214, 219, 220, 254, 303(r), 403, and 1302
unless otherwise noted.
■
21. Revise § 65.302 to read as follows:
§ 65.302
Cost of debt.
The formula for determining the cost
of debt is equal to:
for all local exchange carriers with
annual revenues equal to or above the
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indexed revenue threshold as defined in
§ 32.9000 of this chapter.
‘‘Average Outstanding Debt’’ is the average of
the total debt outstanding at the
beginning and at the end of the most
recent year for all local exchange carriers
with annual revenues equal to or above
the indexed revenue threshold as
defined in § 32.9000 of this chapter.
PART 69—ACCESS CHARGES
§ 69.115
22. The authority citation for part 69
is revised to read as follows:
■
23. In § 69.4, add paragraph (k) to read
as follows:
■
Charges to be filed.
*
*
*
*
*
(k) A non-price cap incumbent local
exchange carrier may include a charge
for the Consumer Broadband-Only
Loop.
■ 24. In § 69.104,revise paragraphs
(n)(1) introductory text, (n)(1)(ii), and
(o)(1) introductory text, remove
paragraphs (n)(1)(ii)(A) through (C), and
add paragraph (s).
The revisions and addition read as
follows:
§ 69.104 End user common line for nonprice cap incumbent local exchange
carriers.
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*
*
*
*
*
(n)(1) Except as provided in
paragraphs (r) and (s) of this section, the
maximum monthly charge for each
residential or single-line business local
exchange service subscriber line shall be
the lesser of:
*
*
*
*
*
(ii) $6.50.
*
*
*
*
*
(o)(1) Except as provided in
paragraphs (r) and (s) of this section, the
maximum monthly End User Common
Line Charge for multi-line business lines
will be the lesser of:
*
*
*
*
*
(s) End User Common Line Charges
for incumbent local exchange carriers
not subject to price cap regulation that
elect model-based support pursuant to
§ 54.311 of this chapter are limited as
follows:
(1) The maximum charge a non-price
cap local exchange carrier that elects
model-based support pursuant to
§ 54.311 of this chapter may assess for
each residential or single-line business
local exchange service subscriber line is
the rate in effect on the last day of the
month preceding the month for which
model-based support is first provided.
(2) The maximum charge a non-price
cap local exchange carrier that elects
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Special access surcharges.
*
Authority: 47 U.S.C. 154, 201, 202, 203,
205, 218, 220, 254, 403.
§ 69.4
model-based support pursuant to
§ 54.311 of this chapter may assess for
each multi-line business local exchange
service subscriber line is the rate in
effect on the last day of the month
preceding the month for which modelbased support is first provided.
■ 25. In § 69.115, revise paragraph (b)
and add paragraph (f) to read as follows:
*
*
*
*
(b) Except as provided in paragraph (f)
of this section, such surcharge shall be
computed to reflect a reasonable
approximation of the carrier usage
charges which, assuming non-premium
interconnection, would have been paid
for average interstate or foreign usage of
common lines, end office facilities, and
transport facilities, attributable to each
Special Access line termination which
is not exempt from assessment pursuant
to paragraph (e) of this section.
*
*
*
*
*
(f) The maximum special access
surcharge a non-price cap local
exchange carrier that elects model-based
support pursuant to § 54.311 of this
chapter may assess is the rate in effect
on the last day of the month preceding
the month for which model-based
support is first provided.
■ 26. Revise § 69.130 to read as follows:
§ 69.130 Line port costs in excess of basic
analog service.
(a) To the extent that the costs of
ISDN line ports, and line ports
associated with other services, exceed
the costs of a line port used for basic,
analog service, non-price cap local
exchange carriers may recover the
difference through a separate monthly
end-user charge, provided that no
portion of such excess cost may be
recovered through other common line
access charges, or through Connect
America Fund Broadband Loop
Support.
(b) The maximum charge a non-price
cap local exchange carrier that elects
model-based support pursuant to
§ 54.311 of this chapter may assess is
the rate in effect on the last day of the
month preceding the month for which
model-based support is first provided.
■ 27. Add § 69.132 to subpart B to read
as follows:
§ 69.132 End user Consumer BroadbandOnly Loop charge for non-price cap
incumbent local exchange carriers.
(a) This section is applicable only to
incumbent local exchange carriers that
are not subject to price cap regulation as
that term is defined in § 61.3(ee) of this
chapter.
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(b) A charge that is expressed in
dollars and cents per line per month
may be assessed upon end users that
subscribe to Consumer Broadband-Only
Loop service. Such charge shall be
assessed for each line without regulated
local exchange voice service provided
by a rate-of-return incumbent local
exchange carrier to a customer, for use
in connection with fixed Broadband
Internet access service, as defined in
§ 8.2 of this chapter.
(c) For carriers not electing modelbased support pursuant to § 54.311 of
this chapter, the single-line rate or
charge shall be computed by dividing
one-twelfth of the projected annual
revenue requirement for the Consumer
Broadband-Only Loop category by the
projected average number of consumer
broadband-only service lines in use
during such annual period.
(d) The maximum monthly per line
charge for each Consumer BroadbandOnly Loop provided by a non-price cap
local exchange carrier that elects modelbased support pursuant to § 54.311 of
this chapter shall be $42.
§ 69.306
[Amended]
28. In § 69.306, remove and reserve
paragraph (d)(2).
■ 29. Add § 69.311 to subpart D to read
as follows:
■
§ 69.311 Consumer Broadband-Only Loop
investment.
(a) Each non-price cap local exchange
carrier shall remove consumer
broadband-only loop investment
assigned to the special access category
by §§ 69.301 through 69.310 from the
special access category and assign it to
the Consumer Broadband-Only Loop
category when the tariff charge
described in § 69.132 of this part
becomes effective.
(b) The consumer broadband-only
loop investment to be removed from the
special access category shall be
determined using the following
estimation method.
(1) To determine the investment in
Common Line facilities (Category 1.3) as
if 100 percent were allocated to the
interstate jurisdiction, a carrier shall use
100 percent as the interstate allocator in
determining Category 1.3 investment
and the allocation of investment to the
common line category under part 36 of
this chapter and this part.
(2) The result of paragraph (b)(1) of
this section shall be divided by the
number of voice and voice/data lines in
the study area to produce an average
investment per line.
(3) The average investment per line
determined by paragraph (b)(2) of this
section shall be multiplied by the
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number of Consumer Broadband-only
Loops in the study area to derive the
investment to be shifted from the
Special Access category to the
Consumer Broadband-only Loop
category.
§ 69.415
[Amended].
30. In § 69.415, remove and reserve
paragraphs (a) through (c).
■ 31. Add § 69.416 to subpart E to read
as follows:
■
§ 69.416 Consumer Broadband-Only Loop
expenses.
asabaliauskas on DSK3SPTVN1PROD with RULES
(a) Each non-price cap local exchange
carrier shall remove consumer
broadband-only loop expenses assigned
to the Special Access category by
§§ 69.401 through 69.415 from the
special access category and assign them
to the Consumer Broadband-Only Loop
category when the tariff charge
described in § 69.132 of this Part
becomes effective.
(b) The consumer broadband-only
loop expenses to be removed from the
special access category shall be
determined using the following
estimation method.
(1) The expenses assigned to the
Common Line category as if the
common line expenses were 100 percent
interstate shall be determined using the
methodology employed in
§ 69.311(b)(1).
(2) The result of paragraph (b)(1) of
this section shall be divided by the
number of voice and voice/data lines in
the study area to produce an average
expense per line.
VerDate Sep<11>2014
20:47 Apr 22, 2016
Jkt 238001
(3) The average expense per line
determined by paragraph (b)(2) of this
section shall be multiplied by the
number of Consumer Broadband-only
Loops in the study area to derive the
expenses to be shifted from the Special
Access category to the Consumer
Broadband-only Loop category.
■ 32. In § 69.603, revise paragraphs (g)
and (h)(4) through (6) to read as follows:
§ 69.603
Association functions.
*
*
*
*
*
(g) The association shall divide the
expenses of its operations into two
categories. The first category (‘‘Category
I Expenses’’) shall consist of those
expenses that are associated with the
preparation, defense, and modification
of association tariffs, those expenses
that are associated with the
administration of pooled receipts and
distributions of exchange carrier
revenues resulting from association
tariffs, those expenses that are
associated with association functions
pursuant to paragraphs (c) through (g) of
this section, and those expenses that
pertain to Commission proceedings
involving this subpart. The second
category (‘‘Category II Expenses’’) shall
consist of all other association expenses.
Category I Expenses shall be subdivided into three components in
proportion to the revenues associated
with each component. The first
component (‘‘Category I.A Expenses’’)
shall be in proportion to High Cost Loop
Support revenues. The second
component (‘‘Category I.B Expenses’’)
PO 00000
Frm 00066
Fmt 4701
Sfmt 9990
shall be in proportion to the sum of the
association End User Common Line
revenues and the association Special
Access Surcharge revenues. Interstate
Common Line Support Revenues and
Connect America Fund Broadband Loop
Support revenues shall be included in
the allocation base for Category I.B
expenses. The third component
(‘‘Category I.C Expenses’’) shall be in
proportion to the revenues from all
other association interstate access
charges.
(h) * * *
(4) No distribution to an exchange
carrier of High Cost Loop Support
revenues shall include adjustments for
association expenses other than
Category I.A. Expenses.
(5) No distribution to an exchange
carrier of revenues from association End
User Common Line charges shall
include adjustments for association
expenses other than Category I.B
Expenses. Interstate Common Line
Support and Connect America Fund
Broadband Loop Support shall be
subject to this provision.
(6) No distribution to an exchange
carrier of revenues from association
interstate access charges other than End
User Common Line charges and Special
Access Surcharges shall include
adjustments for association expenses
other than Category I.C Expenses.
*
*
*
*
*
[FR Doc. 2016–08375 Filed 4–22–16; 8:45 am]
BILLING CODE 6712–01–P
E:\FR\FM\25APR2.SGM
25APR2
Agencies
[Federal Register Volume 81, Number 79 (Monday, April 25, 2016)]
[Rules and Regulations]
[Pages 24281-24346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08375]
[[Page 24281]]
Vol. 81
Monday,
No. 79
April 25, 2016
Part IV
Federal Communications Commission
-----------------------------------------------------------------------
47 CFR Parts 51, 54, 65, et al.
Connect America Fund, ETC Annual Reports and Certifications,
Developing a Unified Intercarrier Compensation Regime; Final Rule
Federal Register / Vol. 81 , No. 79 / Monday, April 25, 2016 / Rules
and Regulations
[[Page 24282]]
-----------------------------------------------------------------------
FEDERAL COMMUNICATIONS COMMISSION
47 CFR Parts 51, 54, 65, and 69
[WC Docket Nos. 10-90, 14-58; CC Docket No. 01-92; FCC 16-33]
Connect America Fund, ETC Annual Reports and Certifications,
Developing a Unified Intercarrier Compensation Regime
AGENCY: Federal Communications Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: In this document, the Federal Communications Commission
(Commission) adopts significant reforms to place the universal service
program on solid footing for the next decade to ``preserve and
advance'' voice and broadband service in areas served by rate-of-return
carriers.
DATES: Effective May 25, 2016, except for the amendments to Sec. Sec.
51.917(f)(4), 54.303(b), 54.311(a), 54.313(a)(10), (e)(1), (e)(2) and
(f)(1), 54.316(a)(b), 54.319(e), 54.903(a), 69.132, 69.311, 69.4(k),
and 69.416 which contain new or modified information collection
requirements that will not be 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: Alexander Minard, Wireline Competition
Bureau, (202) 418-0428 or TTY: (202) 418-0484.
SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report
and Order, Order and Order on Reconsideration in WC Docket Nos. 10-90,
14-58; CC Docket No. 01-92; FCC 16-33, adopted on March 23, 2016 and
released on March 30, 2016. 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://transition.fcc.gov/Daily_Releases/Daily_Business/2016/db0330/FCC-16-33A1.pdf. The Further
Notice of Proposed Rulemaking (FNPRM) that was adopted concurrently
with the Report and Order, Order and Order on Reconsideration are
published elsewhere in this issue of the Federal Register.
I. Introduction
1. With this Report and Order, Order and Order on Reconsideration,
and concurrently adopted Further Notice of Proposed Rulemaking (FNPRM),
the Commission adopts significant reforms to place the universal
service program on solid footing for the next decade to ``preserve and
advance'' voice and broadband service in areas served by rate-of-return
carriers. In 2011, the Commission unanimously adopted transformational
reforms to modernize universal service for the 21st century, creating
programs to support explicitly broadband-capable networks. In this
Report and Order, Order, Order on Reconsideration, and concurrently
adopted FNPRM, the Commission takes necessary and crucial steps to
reform our rate-of-return universal service mechanisms to fulfill our
statutory mandate of ensuring that all consumers ``have access to . . .
advanced telecommunications and information services.'' In particular,
after extensive coordination and engagement with carriers and their
associations, the Commission modernizes the rate-of-return program to
support the types of broadband offerings that consumers increasingly
demand, efficiently target support to areas that need it the most, and
establish concrete deployment obligations to ensure demonstrable
progress in connecting unserved consumers. This will provide the
certainty and stability that carriers seek in order to invest for the
future in the years to come. The Commission welcomes ongoing input and
partnership as the Commission moves forward to implementing these
reforms.
2. Rate-of-return carriers play a vital role in the high-cost
universal service program. Many of them have made great strides in
deploying 21st century networks in their service territories, in spite
of the technological and marketplace challenges to serving some of the
most rural and remote areas of the country. At the same time, millions
of rural Americans remain unserved. In 2011, the Commission unanimously
concluded that extending broadband service to those communities that
lacked any service was one of core objectives of reform. At that time,
it identified a rural-rural divide, observing that ``some parts of
rural America are connected to state-of-the art broadband, while other
parts of rural America have no broadband access.'' The Commission
focuses now on the rural divide that exists within areas served by
rate-of-return carriers. According to December 2014 Form 477 data, an
estimated 20 percent of the housing units in areas served by rate-of-
return carriers lack access to 10 Mbps downstream/1 Mbps upstream (10/1
Mbps) terrestrial fixed broadband service. It is time to close the gap,
and take action to bring service to the consumers served by rate-of-
return carriers that lack access to broadband. The Commission needs to
modernize comprehensively the rate-of-return universal service program
in order to benefit rural consumers throughout the country.
3. For years, the Commission has worked with active engagement from
a wide range of interested stakeholders to develop new rules to support
broadband-capable networks. One shortcoming of the current high-cost
rules identified by rate-of-return carriers is that support is not
provided if consumers choose to drop voice service, often referred to
as ``stand-alone broadband'' or ``broadband-only'' lines. In the April
2014 Connect America FNPRM, 79 FR 39196, July 9, 2014, the Commission
unanimously articulated four general principles for reform to address
this problem, indicating that new rules should provide support within
the established budget for areas served by rate-of-return carriers;
distribute support equitably and efficiently, so that all rate-of-
return carriers have the opportunity to extend broadband service where
it is cost-effective to do so; support broadband-capable networks in a
manner that is forward looking; and ensure no double-recovery of costs.
The package of reforms outlined below solve the stand-alone broadband
issue and update the rate-of-return program consistent with those
principles. The Commission also takes important steps to act on the
recommendation of the Governmental Accountability Office to ensure
greater accountability and transparency in the high-cost program.
4. The Report and Order establishes a new forward-looking,
efficient mechanism for the distribution of support in rate-of-return
areas. Specifically, the Commission adopts a voluntary path under which
rate-of-return carriers may elect model-based support for a term of 10
years in exchange for meeting defined build-out obligations. The
Commission emphasizes the voluntary nature of this mechanism; no
carrier will be required to take model-based support. This action will
advance the Commission's longstanding objective of adopting fiscally
responsible, accountable and incentive-based policies to replace
outdated rules and programs. The cost model, which has proven
successful in distributing support for price cap carriers, has been
adjusted in multiple ways over more than a year to take into account
the circumstances of rate-of-return carriers. The Commission makes
[[Page 24283]]
all necessary decisions to finalize the Alternative Connect America
Cost Model (A-CAM) and direct the Wireline Competition Bureau (Bureau)
to publish support amounts for this new component of the Connect
America Fund (CAF ACAM) and associated deployment obligations for
potential consideration by rate-of-return carriers. The Commission will
make available up to an additional $150 million annually from existing
high-cost reserves to facilitate this voluntary path to the model over
the next decade. This approach will spur additional broadband
deployment in unserved areas, while preserving additional funding in
the high-cost account for other high-cost reforms.
5. The Commission also makes technical corrections to modernize our
existing interstate common line support (ICLS) rules to provide support
in situations where the customer no longer subscribes to traditional
regulated local exchange voice service, i.e. stand-alone broadband.
Going forward, this reformed mechanism will be known as Connect America
Fund Broadband Loop Support (CAF BLS). This simple, forward-looking
change to the existing mechanism will provide support for broadband-
capable loops in an equitable and stable manner, regardless of whether
the customer chooses to purchase traditional voice service, a bundle of
voice and broadband, or only broadband. This will create incentives for
carriers to deploy modern networks and encourage adoption of broadband.
The Commission expects this approach will provide carriers, including
those that no longer receive high cost loop support (HCLS), with
appropriate support going forward to invest in broadband networks,
while not disrupting past investment decisions.
6. One of the core principles of reform since 2011 has been to
ensure that support is provided in the most efficient manner possible,
recognizing that ultimately American consumers and businesses pay for
the universal service fund (USF). The Commission continues to move
forward with our efforts to ensure that companies do not receive more
support than is necessary and that rate of return carriers have
sufficient incentive to be prudent and efficient in their expenditures,
and in particular operating expenses. Therefore, the Commission adopts
a method to limit operating costs eligible for support under rate-of-
return mechanisms, based on a proposal submitted by the carriers. The
Commission also adopts measures that will limit the extent to which USF
support is used to support capital investment by those rate-of-return
carriers that are above the national average in broadband deployment in
order to help target support to those areas with less broadband
deployment. Lastly, in order to ensure disbursed high-cost support
stays within the established budget for rate-of-return carriers,
building on proposals in the record, the Commission adopts a self-
effectuating mechanism to control total support distributed pursuant to
the HCLS and CAF-BLS mechanisms. The Commission recognizes that many
carriers are eager to upgrade their existing broadband networks to
provide service that exceeds the minimum standards that the Commission
has established for recipients of high-cost support. But first, the
Commission must ensure that our baseline service is truly universal.
Each dollar spent on upgrading networks that already are capable of
delivering 10/1 Mbps service is a dollar not available to extend
service to those consumers that lack such service. Taken together, the
Commission anticipates that these controls and limitations will
encourage efficient spending by rate-of-return carriers, thereby
enabling universal service support to be more effectively targeted to
support investment in broadband-capable facilities in areas that remain
unserved.
7. One of the core tenets of reform for the Commission in 2011 was
to ``require accountability from companies receiving support to ensure
that public investments are used wisely to deliver intended results.''
The Commission stated its expectation that rate-of-return carriers
would deploy scalable broadband in their communities, but it declined
at that time to adopt specific build-out milestones for rate-of-return
carriers. Instead, it concluded that it would allow carriers to extend
service upon reasonable request. Since that time, rate-of-return
carriers have continued to extend service, with a 45 percent increase
in availability of 10/1 Mbps service between 2012 and 2014. To build on
that progress, the Commission now adopts specific broadband deployment
obligations for all rate-of-return carriers, and not just for those
that elect the voluntary path to the model. The Commission adopts
deployment obligations for all rate-of-return carriers that can be
measured and monitored, while tailoring those obligations to the unique
circumstances of individual carriers. Those obligations will be
individually sized for each carrier not electing model support, based
on the extent to which it has already deployed broadband and its
forecasted CAF BLS, taking into account the relative amount of
depreciated plant and the density characteristics of individual
carriers.
8. Another core tenet of reform adopted by the Commission in 2011,
and unanimously reaffirmed in 2014, was to target support to areas that
the market will not serve absent subsidy. To direct universal service
support to those areas where it is most needed, the Commission adopts a
rule prohibiting rate-of-return carriers from receiving CAF-BLS support
in those census blocks that are served by a qualifying unsubsidized
competitor. The Commission adopts a robust challenge process to
determine which areas are in fact served by a qualifying unsubsidized
competitor. The Commission does not expect the challenge process to be
completed before the end of 2016, with support adjustments occurring no
earlier than 2017. Carriers may elect one of several options for
disaggregating support for those areas found to be competitive. Any
support reductions resulting from implementation of this rule will be
more effectively targeted to support existing and new broadband
infrastructure in areas lacking a competitor.
9. Finally, the Commission takes action to modify our existing
reporting requirements in light of lessons learned from their
implementation. The Commission revises eligible telecommunications
carriers' (ETC) annual reporting requirements to better align those
requirements with our statutory and regulatory objectives. The
Commission concludes that the public interest will be served by
eliminating the requirement to file a narrative update to the five-year
plan. Instead, the Commission adopts narrowly tailored reporting
requirements regarding the location of new deployment offering service
at various speeds, which will better enable the Commission to determine
on an annual basis how high-cost support is being used to ``improve
broadband availability, service quality, and capacity at the smallest
geographic area possible.''
10. In the Order and Order on Reconsideration, as part of our
modernization of the rules governing rate-of-return carriers, the
Commission represcribes the currently authorized rate of return from
11.25 percent to 9.75 percent. The rate of return is a key input in a
rate-of-return incumbent local exchange carrier (LEC) revenue
requirement calculation, which is the basis for both its common line
and special access rates, and high-cost support as applicable. The
current 11.25 percent rate of return is no longer consistent with the
Act and today's
[[Page 24284]]
financial conditions. Relying primarily on the methodology and data
contained in a Bureau Staff Report--with some minor corrections and
adjustments--the Commission identifies a more robust zone of
reasonableness and adopts a new rate of return at the upper end of this
range. This reform will be phased in over six years. This change not
only will improve the efficiency of the high-cost program, but also
will lower prices for rate-of-return customers in rural areas.
11. The actions the Commission takes today, combined with the rate-
of-return reforms undertaken in the past two years, will allow us to
continue to advance the goal of ensuring deployment of advanced
telecommunications and information services networks throughout ``all
regions of the nation.'' Importantly, they build on proposals from and
collaboration with the carriers and their associations. Through the
coordinated reforms the Commission takes today, they will provide rate-
of-return carriers with equitable and sustainable support for
investment in the deployment and operation of 21st century broadband
networks throughout the country, providing stability for the future.
Achieving universal access to broadband will not occur overnight, but
today marks another step on the path toward that goal.
II. Report and Order
A. Voluntary Path to the Model
1. Discussion
12. In this section, the Commission adopts a voluntary path for
rate-of-return carriers to elect to receive model-based support in
exchange for deploying broadband-capable networks to a pre-determined
number of eligible locations. By creating a voluntary pathway to model-
based support, the Commission will spur new broadband deployment in
rural areas, which will help close the digital divide among rate-of-
return carriers. As noted above, there is a wide disparity among rate-
of-return study areas regarding the extent of coverage meeting the
Commission's minimum standard of 10/1 Mbps service: Based on December
2014 FCC Form 477 data, an estimated 20 percent of housing units in
census blocks served by rate-of-return carriers lack access to 10/1
Mbps terrestrial fixed broadband service, while other rate-of-return
carriers have deployed 10/1 Mbps to nearly all of their study area. The
option of receiving model-based support will provide the opportunity
for carriers that have made less progress in their broadband deployment
than other rate-of-return carriers to ``catch up.'' By creating defined
performance and deployment obligations for specific and predictable
support amounts, the Commission is completing the framework envisioned
by the Commission in the 2011 USF/ICC Transformation Order, 76 FR
73830, November 29, 2011. The Commission also is taking additional
steps to fulfill the Commission's longstanding objective of providing
support based on forward-looking efficient costs. And finally, the
model path may well be a viable option for high-cost companies that no
longer receive HCLS due to the past operation of the indexed cap on
HCLS, often referred to as the ``cliff effect.'' The Commission took
steps to address this problem in December 2014 by modifying the
methodology used to adjust HCLS to fit within the existing cap, but
that did not restore HCLS to those companies that previously had fallen
off the cliff.
13. As discussed more fully below, the election of model-based
support places those carriers in a different regulatory paradigm. They
no longer will be subject to rate-of-return regulation for common line
offerings, and they no longer will participate in the National Exchange
Carrier Association's (NECA's) common line pool. Effectively, the
carriers that choose to take the voluntary path to the model are
electing incentive regulation for common line offerings.
14. Term of Support. The Commission adopts a 10-year term for rate-
of-return carriers electing to receive model-based support. Carriers
electing this option will have the certainty of receiving specific and
predictable monthly support amounts over the 10 years. Predictable
support will enhance the ability of these carriers to deploy broadband
throughout the term. In year eight, the Commission expects they will
conduct a rulemaking to determine how support will be determined after
the end of the 10-year period. The Commission expects that prior to the
end of the 10-year term, the Commission will have adjusted its minimum
broadband performance standards for all ETCs, and other changes may
well be necessary then to reflect marketplace realities at that time.
15. Broadband Speed Obligations. In December 2014, the Commission
adopted a minimum speed standard of 10/1 Mbps for price-cap and rate-
of-return carriers receiving high-cost support. As a result, price cap
carriers accepting model-based support are required to offer at least
10/1 Mbps broadband service to the requisite number of high-cost
locations by the end of a six-year support term. And rate-of-return
carriers were required to offer at least 10/1 Mbps broadband service
upon reasonable request. At that time, the Commission also decided that
10/1 Mbps should not be our end goal for the 10-year term for providers
awarded support through the Connect America Phase II bidding process.
16. Similarly, here, the Commission recognizes that their minimum
requirements for rate-of-return carriers will likely evolve over the
next decade. NTCA argues that a universal service program premised upon
achieving speeds of 10/1 Mbps risks locking rural America into lower
service levels. The Commission agrees that our policies should take
into account evolving standards in the future. At the same time, the
Commission recognizes that it is difficult to plan network deployment
not knowing the performance obligations that might apply by the end of
the 10-year term. The Commission finds that establishing speed and
other performance requirements now for carriers electing model-based
support is preferable to doing so at some point mid-way through the 10-
year term, as it will provide more certainty for carriers electing this
voluntary path. Rate-of-return carriers that comply with the
performance requirements the Commission establishes today for the
duration of the 10-year term will be deemed in compliance even if the
Commission subsequently establishes different standards that are
generally applicable to the high-cost support mechanisms before the end
of the 10-year term.
17. The Commission concludes that rate-of-return carriers electing
model support will be required to maintain voice and existing broadband
service and to offer at least 10/1 Mbps to all locations ``fully
funded'' by the model, and at least 25/3 Mbps to a certain percentage
of those locations, by the end of the support term. The Commission
adopts with minor modifications ITTA and USTelecom's proposal to
require carriers with a state-level density of more than ten locations
per square mile to offer at least 25/3 Mbps to at least 75 percent of
the fully funded locations in the state by the end of the 10-year term.
For administrative convenience, the Commission will determine these
density thresholds based on housing units, rather than locations in the
model, because other density measures adopted in this Order will rely
on U.S. Census data for housing units. The Commission concludes that
carriers with a state-level density of ten or fewer, but more than
five, housing units per square mile will be required to offer at least
25/3 Mbps to at least 50 percent
[[Page 24285]]
of the fully funded locations in the state by the end of the 10-year
term, and carriers with five or fewer housing units per square mile
will be required to offer at least 25/3 Mbps to at least 25 percent of
the fully funded locations, as suggested by WTA and other commenters.
The density of each carrier's study area or study areas in a state will
be determined using the final 2015 study area boundary data collection
information submitted by carriers, and the number of locations will be
determined using U.S. Census data. The Commission directs the Bureau to
publish a list showing the state-level density for each carrier prior
to issuing the public notice announcing the final version of the
adopted model, so carriers will know in advance of the timeframe for
electing model-based support which deployment obligations will be
applicable.
18. In addition, the Commission establishes defined requirements
for making progress towards extending broadband to capped locations
within their service areas. Specifically, carriers electing model
support will be required to offer at least 4/1 Mbps to a defined number
of locations that are not fully funded (i.e., with a calculated average
cost above the ``funding cap''). The Commission adopts a modified
version of ITTA's proposal, again using housing units to determine
density. The Commission will require carriers with a state-level
density of more than 10 housing units per square mile to offer at least
4/1 Mbps to 50 percent of all capped locations in the state by the end
of the 10-year term. Carriers with a state-level density of 10 or fewer
housing units per square mile will be required to offer at least 4/1
Mbps to 25 percent of all capped locations in the state by the end of
the 10-year term The remaining capped locations will be subject to the
reasonable request standard, and the Commission will monitor progress
in connecting these locations as well. The Commission encourages
carriers electing the voluntary path to the model to identify any
census blocks where they expect not to extend broadband, so that such
census blocks may be included in an upcoming auction where parties,
including the current provider, may bid for support. The Bureau will
announce a date by public notice, no sooner than 60 days after
elections are finalized, by which carriers electing model-support may
identify any such census blocks. Our goal is to ensure that all
consumers have an opportunity to receive service within a reasonable
timeframe. If carriers know that support provided through the voluntary
path to the model will be insufficient to reach certain parts of their
territories within 10 years, identifying these territories now, rather
than 10 years from now, will enable the Commission to find another,
more timely path to bring broadband to consumers in these areas.
Carriers that provide the Commission notice within the requisite time
would not be required to provide service upon reasonable request in the
identified areas.
19. Usage and Latency. In the April 2014 Connect America FNPRM, the
Commission proposed to apply the same usage allowances and latency
standards that the Bureau previously had adopted for price cap carriers
accepting model-based support to rate-of-return carriers that are
subject to broadband performance obligations. The Commission now adopts
a usage threshold for rate-of-return carriers electing model support
that should ensure that consumers in these areas have access to an
evolving level of service over the 10-year term: The Commission
requires them to offer a minimum usage allowance of 150 GB per month,
or a usage allowance that reflects the average usage of a majority of
consumers, using Measuring Broadband America data or a similar data
source, whichever is higher. The first prong of the usage requirement--
the 150 GB usage allowance--is similar to the approach adopted by the
Bureau for price cap carriers to set an evolving level of service over
the term of support: The Commission requires them to offer a usage
allowance that meets or exceeds the usage level of 80 percent of cable
or fiber-based fixed broadband subscribers, whichever is higher,
according to the most current publicly available Measuring Broadband
America usage data. According to the Commission's 2015 Measuring
Broadband America data, 80 percent of cable broadband subscribers used
156 GB or less per month. For simplicity, the Commission adopts a
monthly usage allowance of 150 GBs for rate-of-return carriers electing
to receive CAF-ACAM support. The second prong of the usage
requirement--to provide a usage allowance that will allow consumers to
use their connections in a way similar to usage of a majority of
consumers nationwide--ensures that consumers served by rate-of-return
carriers will be not be offered service that is significantly different
than what is available in urban areas over the full 10-year term. The
Commission expects that carriers accepting model-based support will
have economic incentives irrespective of these mandates to provide
consumers with an evolving array of service offerings, and adopt this
second prong as a regulatory backstop to ensure that this happens.
20. In addition, the Commission adopts our proposal to require
rate-of-return carriers accepting model-based support to certify that
95 percent or more of all peak period measurements of network round-
trip latency are at or below 100 milliseconds. No party objected to
adopting this standard for public interest obligations for rate-of-
return carriers. This latency standard will apply to all locations that
are fully funded. As discussed below, the Commission recognizes there
may be need for relaxed standards in areas that are not fully funded,
where carriers may use alternative technologies to meet their public
interest obligations.
21. Deployment Obligations. The Commission require rate-of-return
carriers accepting the offer of model-based support to offer at least
10/1 Mbps broadband service to the number of locations identified by
the model where the average cost is above the funding benchmark and
below the funding per location cap, and at least 25/3 Mbps to a subset
of those locations. These are the locations that are ``fully funded''
with model-based support. In contrast to the approach taken in price
cap areas, where the Commission did not provide support to locations
above an extremely high-cost threshold, in rate-of-return areas the
Commission will provide support to all census blocks with average costs
above the funding benchmark. However, each location within census
blocks where the average cost exceeds the funding cap will receive the
same amount of support. This funding for locations above the funding
cap should be sufficient to preserve existing service and allow
carriers to extend broadband service to a defined number of the capped
locations, and to the remaining locations upon reasonable request,
using alternative technologies where appropriate. If a carrier
identifies census blocks that it will not be able to serve by the date
specified by public notice, as discussed above, its support will be
reduced to reflect the fewer number of locations, and it will not be
subject to the reasonable request standard for those locations if
another provider wins those areas in an auction.
22. The Commission declines to adopt an approach that would base a
company's build-out obligations solely on the extent to which its
model-based support exceeds its legacy support. The Commission agrees
with proponents of such an approach that the locations to which a
company will be required to
[[Page 24286]]
deploy broadband should be based on the A-CAM modeled cost
characteristics of each company, but the Commission finds that our
approach is preferable and more consistent with the overall framework
of providing model-based support. Like CAM, A-CAM estimates ``the full
average monthly cost of operating and maintaining an efficient, modern
network,'' and includes both capital and operating costs. Although
actual costs may differ from forward-looking economic costs at any
particular point in time, allowing monthly recovery of the model's
levelized cost means, on average, all carriers will earn an amount that
would allow them to maintain the specified level of service going
forward over the longer term.
23. The Commission is not persuaded by the argument that they
should tie broadband deployment obligations only to the supplemental
support in excess of legacy support and determine the extent of new
broadband deployment obligations based on modeled capital costs. Our
methodology is based on modeled capital and operating costs for each
census block and provides the entire support amount calculated for
areas above the funding benchmark and below the per-location funding
cap; that is, these locations will be ``fully funded'' by the model
under our method.
24. Interim Deployment Milestones. The Commission adopts evenly
spaced annual interim milestones over the 10-year term for rate-of-
return carriers electing model-based support, as proposed by ITTA,
NTCA, USTelecom, and WTA with a minor modification. The Commission
adopts enforceable milestones beginning in year four, whereas the
enforceable milestones proposed by the rural associations would begin
in year five. As shown in the chart below, the Commission requires
carriers receiving model-based support to offer to at least 10/1 Mbps
broadband service to 40 percent of the requisite number of high-cost
locations in a state by the end of the fourth year, an additional 10
percent in subsequent years, with 100 percent by the end of the 10-year
term. The Commission does not set interim milestones for the deployment
of broadband speeds of 25/3 Mbps; the Commission requires carriers
receiving model-based support to offer to at least 25/3 Mbps broadband
service carriers to 25 percent or 75 percent of the requisite locations
by the end of the 10-year term, depending upon the state-level density
discussed above.
Deployment Milestones for Rate-of-Return Carriers Receiving Model-Based
Support
------------------------------------------------------------------------
Percent
------------------------------------------------------------------------
Year 1 (2017)........................................... **
Year 2 (2018)........................................... **
Year 3 (2019)........................................... **
Year 4 (2020)........................................... 40
Year 5 (2021)........................................... 50
Year 6 (2022)........................................... 60
Year 7 (2023)........................................... 70
Year 8 (2024)........................................... 80
Year 9 (2025)........................................... 90
Year 10 (2026).......................................... 100
------------------------------------------------------------------------
25. The Commission also concludes that rate-of-return carriers
receiving model-based support should have some flexibility in their
deployment obligations to address unforeseeable challenges to meeting
these obligations. When the Commission adopted flexibility in
deployment obligations for price cap carriers accepting model-based
support, they recognized that the ``facts on the ground'' when they are
deploying facilities may necessitate some flexibility regarding the
number of required locations. Because rate-of-return carriers electing
model-based support may face similar circumstances, the Commission
finds that providing the same flexibility and allowing deployment to
less than 100 percent of the requisite locations is equally appropriate
for these carriers as well. The Commission therefore will permit them
to deploy to 95 percent of the required number of locations by the end
of the 10-year term. To the degree an electing carrier deploys to less
than 100 percent of the requisite locations, the remaining percentage
of locations would be subject to the deployment obligations for the
carrier's capped locations. The Commission does not require rate-of-
return carriers to refund support if they deploy to at least 95% of the
required locations, but not 100%, because they will use that support to
maintain service and deploy new broadband to unserved customers under
the standard for capped locations adopted above. And, as noted above,
to the extent the electing carrier does not foresee being able to serve
some fraction of the remaining five percent of locations in any way,
not even with alternative technologies, the Commission encourages them
to identify such census blocks for inclusion in an upcoming auction.
26. The Commission also notes that the customer location data
utilized in the model reflect location data at a particular point in
time. The precise number of locations in some funded census blocks is
likely to change for a variety of reasons, which in some circumstances
would make it impossible for a carrier to meet its deployment
obligations. Carriers that discover there is a widely divergent number
of locations in their funded census blocks as compared to the model
should have the opportunity to seek an adjustment to modify the
deployment obligations. Consistent with our action for Phase II in
price cap territories, the Commission delegates authority to the Bureau
to address these discrepancies by adjusting the number of funded
locations downward and reducing associated funding levels.
27. The Commission is not persuaded that they should decline to
impose intermediate deployment milestones for small rate-of-return
carriers serving 10,000 or fewer locations in a state, as proposed by
WTA. WTA argues that a 5,000 line carrier that is 60 percent built out
and needs to extend broadband to 2,000 more locations cannot
economically build out to 200 new locations each year, and that the
most efficient way to proceed is to construct all 2,000 locations
during one or two construction seasons. The deployment milestones the
Commission adopts do not require evenly spaced new deployment each
year, as WTA appears to assume. For instance, the carrier could fully
complete its deployment obligation in years 5 and 6, if it found it
more efficient to do the whole project over two construction seasons.
The Commission would be concerned if such a hypothetical carrier were
to wait until years 8 and 9 to begin extending broadband to its
unserved customers; they would expect to see some progress toward
deploying new broadband after receiving eight years of model-based
support. Moreover, carriers that feel uncomfortable with intermediate
deadlines may prefer to stay on legacy mechanisms.
28. A-CAM. The Commission makes the following decisions regarding
the final version A-CAM that will be used to calculate support for
carriers that voluntarily elect to receive model-based support. The
Commission adopts the model platform and current input values in
version 2.1 for purposes of calculating the cost of serving census
blocks in rate-of-return areas, with a modification regarding updates
to the broadband coverage data. Consistent with the rate represcription
decision below, the Commission adopts an input value of 9.75 percent
for the cost of money in the model for rate-of-return carriers, which
is higher than the input value used for price cap carriers.
29. The Commission also makes all necessary decisions to calculate
support
[[Page 24287]]
amounts for rate-of-return carriers electing to receive model-based
support. The model will utilize a $200 per-location funding cap to
provide support for all locations above a funding benchmark of $52.50,
which is subject to reduction if necessary to meet demand for model-
based support. In addition, the Commission will exclude from support
calculations those census blocks where the incumbent or any affiliated
entity is providing 10/1 Mbps or better broadband using either FTTP or
cable technologies. The Commission concludes that they will update the
broadband coverage for unsubsidized competitors in the model to reflect
the recently released June 2015 FCC Form 477 data, which will be
subject to a streamlined challenge process. The Commission directs the
Bureau to take all necessary steps to release the adopted version of
the model for purposes calculating support amounts for rate-of-return
carriers electing to receive model support.
30. As noted above, over the past year, the Bureau has been
continually working on refining the model so that it would be more
suitable for use in rate-of-return areas. During this time, rate-of-
return carriers and their associations have actively participated in
this process, providing input on ways further to improve the model. For
instance, the Bureau received and included certain data from nearly
half of the approximately 1,100 study areas to better reflect their
costs. As a result of this feedback and the resulting adjustments
detailed below, the Commission believes that the final version of A-CAM
will sufficiently estimate the costs of serving rate-of-return areas
and that further adjustments are not necessary.
31. The first version of A-CAM, released in December 2014, was
fundamentally the same as CAM 4.2 to provide a baseline for subsequent
modifications. Although the cost model was originally developed for use
in price cap areas, it always has included a size adjustment factor--
based on rate-of-return company data--to scale operating expenses for
``small, x-small, and xx-small'' companies, and has reflected cost
differences based on density. Thus, even though the model estimates the
forward-looking costs of an efficient provider, it takes into account
the higher operating expenses of small rate-of-return carriers
operating in rural areas.
32. The Commission recognized the importance of accurate study area
boundaries in using a model to calculate support for rate-of-return
carriers. Whereas CAM used a commercial data source, GeoResults, to
determine study area boundaries for the price cap carriers, the
Commission directed the Bureau to incorporate the results of the
Bureau's study area boundary data collection into A-CAM. From November
2014 to April 2015, the Bureau undertook a four-step process for
adapting the study area boundary data for use in the model. The first
step determined study area boundaries for purposes of the A-CAM by
addressing overlaps that remained after the Bureau provided an
opportunity to resolve overlaps and voids in the data originally
submitted. The second step aligned the exchanges submitted by rate-of-
return carriers (or state commissions on behalf of the incumbent) in
the study area data collection with the study area boundaries to be
used in the model and modified the exchanges to match the edges of the
study area boundary where the submitted boundary of the exchanges
differed from the modified study area boundary. The third step
determined the potential locations to be used in the model for the
placement of the central office (``Node0'' in A-CAM) within each
exchange. The final step ensured that each exchange was associated with
a single Node0 location. In April 2015, the Bureau posted on the
Commission's Web site the A-CAM map based on the study area boundary
and exchange data that had been certified by the carriers and submitted
to the Bureau.
33. Proposed corrections to study area and service area boundaries
and Node0 locations were submitted by parties to the proceeding over
the next several months. Recognizing that it would take several months
to evaluate and incorporate study area boundary and Node0 locations
submitted by interested parties in A-CAM, the Bureau continued to work
on updating the model in other ways. In addition, with subsequent
versions of the model the Bureau released illustrative results so that
interested parties could better understand and evaluate how different
assumptions used in calculating support impact the potential support
calculated for a particular study area.
34. A-CAM contains two modules: A cost module that calculates costs
for all areas of the country, and a support module, which calculates
the support for each area based on those costs. The support module
allows users to ``filter'' the cost data to focus on specific
geographic areas, such as census blocks that are not served by an
unsubsidized competitor. Support amounts depend on the funding
benchmark that determines which areas are funded: Areas with an average
cost below the funding benchmark are not funded because it is assumed
that end user revenues are sufficient to cover the cost of serving such
areas. Support amounts also depend on the mechanism utilized to keep
total support calculated under the model within a given budget.
35. In March 2015, the Bureau released A-CAM version 1.0.1, which
incorporated changes to broadband coverage using a minimum speed
standard of 10/1 Mbps to determine the presence of a cable or fixed
wireless competitor. The Bureau also released illustrative results
under seven scenarios illustrating how different assumptions used in
calculating support impact the potential support calculated for a
particular study area. Five of the seven scenarios used a funding
benchmark of $52.50, the same benchmark used to calculate support for
price cap carriers. Two of these scenarios used an extremely high-cost
threshold as the mechanism to keep total calculated support with the
total budget for rate-of-return carriers. A third scenario utilized a
different approach to keep total calculated support within the total
budget for rate-of-return carriers: A per-location funding cap. Two
scenarios used a $60 funding benchmark, which was suggested by parties
to the proceeding as a mechanism to keep total support within the
budget. This approach presumed that areas with an average cost per
location less than $60 are competitively served by cable operators and
therefore should be ineligible for support, which reduced support
evenly across all locations in order to meet the budget. These two
scenarios and two additional scenarios all exceeded the rate-of-return
budget, however, but were published by the Bureau so that parties could
consider alternative measures to maintain overall support within the
budget, such as a dollar amount reduction in support per location, a
percentage reduction in support per location, or a cap on support per
location.
36. In May 2015, the Bureau published a revised A-CAM study area
boundary map that updated the data used to identify a small number of
Node0 locations, which improved the default locations if carriers did
not propose any corrections, and provided additional time for carriers
to submit Node0 locations. In July 2015, the Bureau announced upcoming
modifications to A-CAM, including a code change to enable the use of
company-specific plant mix (aerial, buried, and conduit) input values,
instead of the state-wide default values, and invited parties to submit
plant mix values for individual study areas. The
[[Page 24288]]
plant mix values (aerial, buried, and conduit) are broken out
separately for urban, suburban, and rural areas, for feeder,
distribution, and interoffice facilities. In response to parties filing
study area specific plant mix values, the Bureau posted a table showing
the classification of census block groups as rural, suburban, and urban
used in A-CAM.
37. On August 31, 2015, the Bureau released A-CAM version 1.1,
which updated the model to reflect FCC Form 477 broadband deployment
data as of December 31, 2014. The prior version of A-CAM (v1.0.1) used
SBI/NBM data as of June 30, 2013. FCC Form 477 data offers several
advantages over the SBI/NBM data. The Form 477 data collection is
mandatory, and Form 477 filers must certify to the accuracy of their
data. The Bureau also released illustrative results produced using A-
CAM v1.1 under three scenarios that illustrate how different per-
location funding caps used in calculating support impact the potential
support calculated for each rate-of-return study area in the country.
38. On October 8, 2015, the Bureau released A-CAM version 2.0,
which incorporated the results of the Bureau's study area boundary data
collection and further updated the model for use in rate-of-return
areas. After months of review by the Bureau, A-CAM v2.0 incorporated
updated exterior study area boundaries, interior service area
boundaries, and/or Node0 locations for approximately 400 study areas.
The network topology was updated to reflect these changes, and to
address the fact that American Samoa and some coastal islands are
served by a rate-of-return carriers. The middle mile network topology
was updated to include an undersea route for American Samoa and
submarine routes for service areas not connected by roads within the
continental United States. To reflect the fact that rate-of-return
carriers may have higher middle mile costs, A-CAM v2.0 added two
connections from each regional access tandem ring to an Internet access
point to account for the cost of connecting to the public Internet.
39. Previous versions of A-CAM included five size categories for
investments related to land and buildings associated with central
offices, and the smallest size central office was for those with fewer
than 1,000 lines. Because some service areas in A-CAM have fewer than
250 locations, the updated capital expenditures input table created a
new size category for central offices serving fewer than 250 locations,
with lower land and building investment for these very small areas than
exchanges with 250 to 1,000 locations. A-CAM v2.0 also was modified to
incorporate study-area specific plant mix values, but because the
Bureau was still reviewing these carrier submissions at that time, they
were not reflected in this version of the model.
40. The Bureau also released A-CAM version 2.0 results that
illustrate how three different per-location funding caps impact
potential support. Although illustrative results for previous versions
of A-CAM showed support using a per-location funding cap, A-CAM users
could only approximate the Bureau's estimates. In A-CAM v2.0 and
subsequent versions of the model, support can be calculated and
reported using either an extremely high-cost threshold or a per-
location funding cap. Support in A-CAM v2.0 is calculated using the
average cost at the census block level for each study area (i.e., costs
are averaged at the census block level), meaning all locations in a
census block within a carrier's study area are either funded or not
funded. This version of the model calculates cost at the sub-block
level only in cases where a census block crosses a study area boundary.
41. On December 17, 2015, the Bureau released A-CAM v2.1, which
incorporated study area-specific plant mix values submitted by rate-of-
return carriers, updated broadband coverage data to address issues
raised by rate-of-return commenters regarding reported competitive
coverage, and provided an alternative coverage option that excludes
from support calculations census blocks served with either FTTP or
cable, as requested by one industry association. The Bureau also
released results that illustrate how the two different coverage
assumptions used in calculating support impact the potential support
calculated for a particular study area; both sets of results are
calculated using a $200 per-location funding cap. On February 17, 2016,
the Bureau released additional illustrative results utilizing input
values reflecting a 9.75 percent cost of money. Raising the cost of
money increased costs for all study areas.
42. As directed, the Bureau incorporated the study area data and
made other appropriate adjustments to A-CAM over the past year. The
Commission finds that these modifications are sufficient for purposes
of calculating support amounts for rate-of-return carriers electing to
receive model support. A forward-looking cost model is designed to
capture the costs of an efficient provider and does not generally use
company-specific inputs values. As noted above, however, the A-CAM
model takes into account the higher operating expenses of small, rate-
of-return carriers operating in rural areas with a company size
adjustment factor for operating expenses and cost differences based on
density. The most significant modification is the incorporation of the
study area boundary data. Although the commercial data set was an
appropriate source for price cap carriers, the Commission recognizes
that they serve significantly larger study areas than any of the more
than 1,100 rate-of-return study areas. Because rate-of-return carriers
serve smaller areas, it also was appropriate to provide for company-
specific plant mix values if carriers found that the state-specific
default values did not reflect their outside plant. The Commission
notes that the average calculated A-CAM loop cost is greater than the
largest embedded loop cost reported to NECA over the last fifteen years
for the more than 500 study areas that submitted plant mix values.
43. As discussed in detail below, as part of our modernization of
the framework for rate-of-return carriers for both high-cost support
and special access ratemaking, the Commission represcribes the
currently authorized rate of return from 11.25 percent to 9.75 percent.
The Commission primarily relies on the methodology and data contained
in the Wireline Competition Bureau's Staff Report, with some minor
corrections and adjustments, identifies a more robust zone of
reasonableness between 7.12 percent and 9.75 percent, and adopts a new
rate of return at the upper end of this range. A-CAM currently uses an
input value for the cost of money of 8.5 percent. The Bureau relied on
the same methodology when it adopted that value for use in CAM, but
focused solely on data from price cap carriers to select the input
value for the price-cap carrier model. Consistent with the Commission's
decision below regarding the authorized rate of return for rate-of-
return carriers, now adopt an input value of 9.75 percent for the cost
of money in A-CAM, thereby reflecting our consideration of the
circumstances affecting rate-of-return carriers.
44. The Commission directs the Bureau to calculate support using a
$200 per-location funding cap, rather than an extremely high-cost
threshold. The Commission concludes that this methodology is preferable
because it provides some support to all locations above the funding
threshold. Even though the locations at or above the funding cap are
not ``fully funded'' with model support, carriers will receive a
significant amount of funding--
[[Page 24289]]
specifically, $200 per month for each of the capped locations--which
will permit them to maintain existing voice service and expand
broadband in these highest-cost areas to a defined number of locations
depending on density, or upon reasonable request, using alternative,
less costly technologies where appropriate. This will allow
significantly more high-cost locations to be served than if the
Commission were to use a lower funding cap. The Commission notes that a
$200 per-location funding cap is significantly higher than what was
adopted for purposes of the offer of support to price cap carriers:
Price cap carriers only receive a maximum amount of $146.10 in support
per location ($198.60 minus the $52.50 funding benchmark), while the
approach the Commission adopts for rate-of-return areas will provide
full support for locations where the average cost is $252.50 per
location.
45. The Commission adopts a funding benchmark of $52.50, which is
the same benchmark the Bureau adopted in its final version of CAM for
purposes of making the offer of model-based support to price cap
carriers. Based on the extensive record in the Connect America Phase II
proceeding, the Bureau adopted a methodology for establishing a funding
benchmark based on reasonable end user revenues. The Bureau adopted a
blended average revenue per user (ARPU) of $75 that reflected revenues
a carrier could reasonably expect to receive from each subscriber for
providing voice, broadband, or a combination of those services. At the
time, the speed standard was 4/1 Mbps, and the Bureau relied on
information in the record regarding service offerings at or close to
that speed. Now, the carriers electing model-based support will be
required to offer 10/1 Mbps service, and 25/3 Mbps service to some
subset of their customers, and therefore may earn higher revenues from
their broadband services. The Bureau also adopted an expected
subscription rate of 70 percent for purposes of estimating the amount
of revenues a carrier may reasonably recover from end-users, and by
extension, the funding benchmark. Applying an assumed ARPU of $75 and
the 70 percent expected subscription rate, the funding benchmark is
$52.50 per location. The record before the Bureau for CAM contained
varying estimates and the Bureau acknowledged that forecasting
potential ARPU for recipients of model-based support and the expected
subscription rate necessarily requires making a number of predictive
judgments. Nothing in the record before us now persuades us that
consumers in rate-of-return carriers are less likely to subscribe to
broadband where it is available than consumers served by price cap
carriers.
46. The Commission is not persuaded that they should establish a
different funding benchmark for purposes of making the offer of model-
based support to rate-of-return carriers. During the A-CAM development
process, the Bureau has released 15 versions of illustrative results
and all but two used a funding benchmark of $52.50. Two versions used a
$60 benchmark because commenters had suggested that a higher benchmark
may be an alternative method for excluding areas served by an
unsubsidized competitor. These and other commenters now support using a
per-location funding cap rather than a higher benchmark.
47. One commenter argues that a subscription rate of 70 percent is
too high and that the Commission should use 50 percent, because the
adoption rate for the 10 Mbps speed tier in rural areas was only 47
percent in the 2015 Broadband Progress Report. Given the increasing
demand for higher broadband speeds, the Commission does not find that a
47 percent adoption rate is a realistic prediction of adoption rates in
rural areas over the 10-year term. One reason that subscription rates
are lower, on average, in rural areas today is the fact that 10/1 Mbps
broadband service is not available to the same extent as urban areas.
As broadband service is deployed more widely in high-cost areas with
assistance from the federal high-cost program, as well as additional
funding from state programs, the Commission would expect subscription
rates in rural areas to become more similar to rates in urban areas. In
addition, carriers will be required to provide broadband to some
locations receiving capped funding, so the Commission expects carriers
will be receiving broadband revenue from these customers, as well as
any voice revenues. A 50 percent subscription rate would result in a
funding benchmark of only $35, a much lower per-location funding cap,
and would reduce the amount of support going to the highest-cost areas
given that the amount of money across carriers electing the model will
be finite. The Commission declines to adopt a measure that would have
the effect of skewing support so drastically to the companies that are,
relatively speaking, lower cost compared to other rate-of-return
carriers.
48. The Commission also concludes that it should prioritize model
support to those areas that currently are unserved and direct the
Bureau to exclude from the support calculations those census blocks
where the incumbent rate-of-return carrier (or its affiliate) is
offering voice and broadband service that meets the Commission's
minimum standards for the high-cost program using FTTP or cable
technology. For purposes of implementing this directive, the Bureau
shall utilize June 2015 FCC Form 477 data that has been submitted and
certified to the Commission prior to the date of release of this order;
carriers may not resubmit their previously filed data to reduce their
reported FTTP or cable coverage. While the Commission recognizes that
these deployed census blocks require ongoing funding both to maintain
existing service and in some cases to repay loans incurred to complete
network deployments, it concludes that it is appropriate to make this
adjustment to the model in order to advance our policy objective of
advancing broadband deployment to unserved customers. Our decision to
exclude from support calculations this subset of census blocks in no
way indicates a belief that once networks are deployed, they no longer
require support; rather, the Commission assumes that the carriers that
have already deployed FTTP or cable broadband have done so within the
existing legacy support framework. They will continue to receive HCLS
and support through the reformed ICLS mechanism, and thus there is no
need for a new mechanism to support their existing deployment. Those
carriers are not required to elect model-based support and therefore
this decision does not drastically reduce their support, as some
allege.
49. When the Commission directed the Bureau ``to undertake further
work to update the Connect America Cost Model to incorporate the study
area boundary data, and such other adjustments as may be appropriate,''
the Commission did not envision revisiting the fundamental decisions
made by the Bureau in developing CAM, such as the decision to develop a
FTTP model. Adopting a significantly different model, such as a digital
subscriber line (DSL) model for use in rate-of-return areas, would have
significantly delayed this process and would have been backwards
looking. The Commission concludes the changes adopted above should
provide sufficient support for carriers interested in the model and
account for most of the unique circumstances of different rate-of-
return carriers. Therefore, the Commission declines to make further
changes to data
[[Page 24290]]
sources or model design as requested by some commenters.
50. Finally, the Commission rejects arguments in the record that
the model should not be adopted because it produces support amounts
that vary, in some cases significantly, from the amounts that
particular carriers are currently receiving under the legacy mechanisms
or that vary from actual costs of fiber-to-the-home construction. Some
commenters cite a study conducted by Vantage Point comparing A-CAM
results to FTTP engineering estimates and actual outside plant costs
from 144 wire-center-wide projects to support their arguments that the
model is not accurate. The Commission does not find that the Vantage
Point analysis of variability between model results and its proprietary
engineering data to be a useful comparison for several reasons. In
particular, the Commission is not persuaded by the case study, node-by-
node comparisons because the engineering data reflect a different
network architecture than the network modeled in A-CAM. A-CAM assumes a
Gigabit-Capable Passive Optical Network (GPON), with splitters in the
field. Vantage Point's examples place the splitters in the central
office, with one dedicated fiber for each end-user location. Instead of
sharing one high-capacity fiber for up to 32 locations for some
distance from the central office, the Vantage Point approach includes
the cost for up to 32 fibers along the entire distance covered by
outside plant. The Commission recognizes that placing splitters in the
central office can lead to higher utilization and lower cost per
location for splitters; however, they generally expect the higher cost
for fiber materials and installation (including, for example, much
greater splicing expense) greatly to outweigh any savings gained from
better splitter utilization. Vantage Point did not provide enough
information in its filings to quantify the impact of dedicated fibers
in the feeder plant. In addition, Vantage Point's claim that the model
shows consistent deviation based on cost per subscriber is misleading
because Vantage Point uses cost per actual subscriber, whereas A-CAM
uses cost per location passed. Even if there were no variation in cost,
areas that would be more expensive on a per-subscriber basis would have
lower A-CAM calculated costs unless the take rate were 100 percent.
51. As discussed above, A-CAM estimates the average monthly
forward-looking economic cost of operating and maintaining an
efficient, modern network, and is not intended to replicate the actual
costs of a specific company at any particular point in time. Although
one might expect forward-looking costs to capture greater efficiencies
and, therefore, be lower than embedded costs, in fact, the forward-
looking loop costs from A-CAM for most study areas are higher than
embedded loop costs reported by rate-of-return carriers to NECA. In
many cases, model-based support is less than legacy support, not
because A-CAM calculates lower costs for a particular study area, but
because the model excludes from support calculations those census
blocks that are presumed to be served by an unsubsidized competitor
offering voice and 10/1 Mbps service. This is consistent with the
Commission's policy adopted in the 2011 USF/ICC Transformation Order to
condition Connect America Fund broadband obligations for fixed
broadband on not spending the funds in areas already served by an
unsubsidized a competitor. In other cases, model-based support is more
than legacy support, not because the model overestimates the cost of
serving an area, but because some companies serving high-cost areas
previously have ``fallen off the cliff'' and lost HCLS due to the past
operation of the indexed cap. Other companies may have underinvested in
their networks. Providing model-based support to these carriers would
not provide a ``windfall,'' as some have suggested, but rather would
further the Commission's policy goal of providing appropriate
incentives to extend broadband to unserved and underserved areas.
52. Budget. Given the benefits and certainty of the model, the
Commission believes it is appropriate to use additional high-cost
funding from the high-cost reserve account to encourage companies to
elect model support. The Commission notes that the Commission
previously instructed USAC that if contributions to support the high-
cost support mechanisms exceed high-cost demand, excess contributions
were to be credited to a Connect America Fund reserve account. USF/ICC
Transformation Order. The Commission concludes there is no need to
maintain a separate reserve account. To simplify the accounting
treatment of high-cost reforms going forward, the Commission now
directs USAC to eliminate the Connect America Fund reserve account and
transfer the funds to the high-cost account. Going forward, USAC shall
credit excess contributions to support the high-cost mechanism to the
high-cost account and shall use funds from the high-cost account to
reduce high-cost demand to $1.125 billion in any quarter that would
otherwise exceed $1.125 billion. USF/ICC Transformation Order, 26 FCC
Rcd at 17847, para. 562. The Commission therefore adopts a budget of up
to an additional $150 million annually, or up to $1.5 billion over the
10-year term, utilizing existing high-cost funds to facilitate the
voluntary path to the model. By making this funding available to those
carriers that are willing to meet concrete and defined broadband
deployment obligations, including those who will see reductions in
their support, the Commission will advance our objective of extending
broadband to currently unserved consumers.
53. At this point it is difficult to predict the extent to which
companies may be interested in the voluntary path to the model and what
the overall budgetary impact might be of such carrier elections. Even
so, the Commission predicts that such additional funding will be
sufficient to cover significant deployment and support elections to the
model, including for those who will receive transition payments for a
limited time in addition to model-based support. The Commission
recognizes that carriers may have a variety of reasons for electing
model support. In general, those carriers for whom A-CAM produces a
significant increase in support over legacy support are more likely to
elect model support than those who see little increase or a decrease,
assuming that they view the increase in support as sufficient to meet
the associated deployment obligations. At the same time, the Commission
does not expect that all carriers for whom model-based support is
significantly greater than legacy support will make the election: Some
companies may not be prepared to meet the specific defined broadband
build-out obligations that come with such support, while others may not
be ready at this time to move to incentive regulation for their common
line offering. The Commission describes below how they will adjust the
offer of support and obligations to meet the defined CAF-ACAM budget.
54. The first step in determining the budgetary impact is to
identify the universe of carriers that will potentially elect model-
based support. After the final A-CAM results implementing the decisions
the Commission adopts today are released, carriers will indicate within
90 days whether they are interested in electing model-based support.
The final released results for the adopted model effectively will
create a ceiling--the maximum amount of CAF-ACAM support a carrier may
receive with the maximum number of
[[Page 24291]]
associated locations. Once the carriers indicate their interest, the
Bureau will total the amount of model-based support for electing
carriers and determine the extent to which, in the aggregate, their
model-based support plus transition payments exceed the total legacy
support received for 2015 by that subset of rate-of-return carriers.
For purposes of this calculation, the Bureau will sum the model-based
support amounts and transition payments, if any, for carriers for whom
model-based support is less than 2015 legacy HCLS and ICLS support. If
that increase is $150 million or less, no adjustment to the offered
support amounts or deployment obligations will be necessary, the
Commission will not lower the $200 per location funding cap, and those
carriers that indicated their interest will be deemed to have elected
the voluntary path to the model. If demand can be met with the amounts
adopted today, unused funding will remain in the high-cost account. The
Commission at that time may consider whether circumstances warrant
allocation of an additional $50 million in order to maintain the $200
per location funding cap. In either of these situations, the initial
indication of interest is irrevocable. Absent an additional allocation,
the Bureau will lower the per-location funding cap to a figure below
$200 per location to ensure that total support for carriers electing
the model remains within the budget for this path.
55. Reducing the funding cap per location would have the effect of
reducing the number of fully funded locations that will be subject to
defined broadband deployment obligations. Recognizing that these
electing carriers may require more time to consider a revised offer,
the Commission will require them to confirm their acceptance of the
revised offer within 30 days.
56. Election Process. The Bureau will release a Public Notice
showing the offer of model-based support for each carrier in a state,
predicated upon a monthly funding cap per location of $200. In addition
to support amounts for these carriers, the Bureau will identify their
deployments obligations, including the number of locations that are
``fully funded'' and the number that would receive capped support.
Carriers then will be required to make their elections.
57. The Commission adopts our proposal to require participating
carriers to make a state-level election, comparable to what the
Commission required of price cap carriers. Our approach prevents rate-
of-return carriers from cherry-picking the study areas in a state where
model support is greater than legacy support, and retaining legacy
support in those study areas where legacy support is greater. Requiring
carriers with multiple study areas in a state to make a state-level
election will allow them to make business decisions about managing
different operating companies on a more consolidated basis. Carriers
considering this voluntary path to the model will need to evaluate on a
state-level basis whether the support received for multiple study
areas, on balance, is sufficient to meet the state-level number of
locations that must be served.
58. Because the Commission intends that the model-based path spur
additional broadband deployment in those areas lacking service, they
conclude that they will not make the offer of model-based support to
any carrier that has deployed 10/1 broadband to 90 percent or more of
its eligible locations in a state, based on June 2015 FCC Form 477 data
that has been submitted as of the date of release of this Order. This
will preserve the benefits of the model for those companies that have
more significant work to do to extend broadband to unserved consumers
in high-cost areas, and will prevent companies from electing model-
based support merely to lock in existing support amounts. The
Commission recognizes that carriers that are fully deployed in some
cases have taken out loans to finance such expansion and therefore may
have significant loan repayment obligations for years to come. Carriers
that have heavily invested in recent years are likely to be receiving
significant amounts of HCLS, however, and will continue to receive HCLS
as well as CAF BLS, which is essentially equivalent to ICLS. Therefore,
they are not prejudiced by their inability to elect the voluntary path
to the model.
59. Carriers should submit their acceptance letters to the Bureau
at ConnectAmerica@fcc.gov. To accept the support amount for a state or
states, a carrier must submit a letter signed by an officer of the
company confirming that the carrier elects model-based support amount
as specified in the Public Notice and commits to satisfy the specific
service obligations associated with that amount of model support. A
carrier may elect to decline funding for a given state by submitting a
letter signed by an officer of the company noting it does not accept
model-based support for that state. Alternatively, if a carrier fails
to submit any final election letter by the close of the 90-day election
period, it will be deemed to have declined model-based support.
60. As noted above, after receipt of the acceptances, the Bureau
then will determine whether the model support of electing carriers
exceeds the overall 10-year budget for the model path set by the
Commission. If necessary, the Bureau will publish revised model-based
support amounts and revised deployment obligations, available only to
those carriers that initially indicated they would take the voluntary
election of model-based support. Carriers will be required to confirm
within 30 days of release of this Public Notice that they are willing
to accept the revised final offer; if they fail to do so, they will be
deemed to have declined the revised offer.
61. If the Commission proceeds to the second step of the election
process, those carriers that initially accepted but subsequently
decline to accept the revised offer will continue to receive support
through the legacy mechanisms, as otherwise modified by this Order. If
the carrier received more support from the legacy mechanisms in 2015
than it was offered by the final model run, the overall budget for all
carriers that receive support through the rate-of-return mechanisms
(HCLS and reformed ICLS) will be reduced by the difference between the
carrier's 2015 legacy support amount and the final amount of model
support offered to that carrier. That difference will already have been
redistributed amongst the remaining model carriers.
62. Broadband Coverage. The current version of the model contains
December 2014 Form 477 broadband deployment data and voice subscription
data. The Commission recognizes that FCC Form 477 filers certifying
that they offer broadband at the requisite speeds to a particular
census block may not fully cover all locations in a census block. The
Commission finds, however, that targeting the model-based support to
the census blocks where no competitor has certified that it is offering
service is a reasonable way to ensure that they do not provide support
to census blocks that have some competitive coverage. Like our decision
to exclude from model-support calculations those blocks where the
incumbent already has deployed FTTP, the Commission seek to target
support to areas of greater need.
63. The current version of A-CAM utilizes FCC Form 477 broadband
deployment data as of December 31, 2014. While it is unlikely there has
been a significant increase in broadband coverage in the intervening
year by unsubsidized competitors in the specific blocks eligible for
support in rate-of-
[[Page 24292]]
return areas, i.e. those that are higher cost, the Commission does want
to take steps to ensure that support is not provided to overbuild areas
where another provider already is providing voice and broadband service
meeting the Commission's requirements. The Commission therefore adopts
a streamlined challenge process. The Commission directs the Bureau to
incorporate into the model the recently released June 2015 FCC Form 477
data, and to provide a final opportunity for commenters to challenge
the competitive coverage contained in the updated version of the model.
Comments to challenge the coverage data or provide other relevant
information will be due 21 days from public notice of the updated
version of the model. The Commission notes that Form 477 filers are
under a continuing obligation to make corrections to their filings.
Indeed, in the wake of releasing version 2.1 of the A-CAM, a number of
carriers have submitted letters noting corrections in Form 477 filings.
The Commission directs the Bureau to review and incorporate as
appropriate any Form 477 corrections to June 2015 data that are
received in this challenge process, so that these updates are reflected
in the final version of the model that is released for purposes of the
offer of support.
64. Tiered Transitions. The Commission adopts a three-tiered
transition for electing carriers for whom model-based support is less
than legacy support, based on the ITTA/USTelecom proposed glide path.
In addition to model-based support, these carriers will receive a
transition amount based on the difference between model support and
legacy support. Based on our review of the record received in response
to the concurrently adopted FNPRM, they now conclude that a tiered
transition is preferable because it recognizes the magnitude of the
difference in support for particular carriers. At the same time, the
transition is structured in a way that prevents carriers for whom
legacy support is greater than CAF-ACAM support from locking in higher
amounts of support for an extended period of time.
65. Tier 1. If the difference between a carrier's model support and
its 2015 legacy support is 10 percent or less, in addition to model-
based support, it will receive 50 percent of that difference in year
one, and then will receive model support in years two through ten.
66. Tier 2. If the difference between a carrier's model support and
its 2015 legacy support is 25 percent or less, but more than 10
percent, in addition to model-based support, it will receive an
additional transition payment for up to four years, and then will
receive model support in years five through ten. The transition
payments will be phased-down twenty percent per year, provided that
each phase-down amount is at least five percent of the total legacy
amount. If twenty percent of the difference between model support and
legacy support is less than five percent of the total legacy amount,
the carrier would transition to model support in less than five years.
67. Tier 3. If the difference between a carrier's model support and
its 2015 legacy support is more than 25 percent, in addition to model-
based support, it will receive an additional transition payment for up
to nine years, and then will receive model support in year ten. The
transition payments will be phased-down ten percent per year, provided
that each phase-down amount is at least five percent of the total
legacy amount. If ten percent of the difference between model support
and legacy support is less than five percent of the total legacy
amount, the carrier would transition to model support in less than ten
years.
68. The Commission declines to adopt one commenter's proposed
``safety net'' that would limit a carrier's decrease in support in any
year to five percent. The Commission concludes that a maximum of 10
years is sufficient time for electing carriers to transition down fully
to their model-based support amount. By specifying in advance how this
transition will occur, carriers will have all the information necessary
to evaluate the possibility of electing model support. Carriers that
find ten years insufficient time to transition to a lower amount remain
free to remain on the reformed legacy mechanisms. The Commission
requires rate-of-return carriers receiving transition payments in
addition to model-based support to use the additional support to extend
broadband service to locations that are fully-funded or that receive
capped support.
69. Oversight and Non-Compliance. The Commission has previously
adopted for ``ETCs that must meet specific build-out milestones . . . a
framework for support reductions that are calibrated to the extent of
an ETC's non-compliance with these deployment milestones.'' Today, the
Commission adopts specific defined deployment milestones for rate-of-
return carriers electing model-based support and therefore the
previously adopted non-compliance measures will apply.
70. As established in the general oversight and compliance
framework in the December 2014 Connect America Order, 80 FR 4446,
January 27, 2015, a default will occur if an ETC is receiving support
to meet defined obligations and then fails to meet its high-cost
support obligations. In section 54.320(d), the Commission has already
set forth in detail the support reductions for ETCs that fail to meet
their defined build-out milestones. The table below summarizes the
regime previously adopted by the Commission for non-compliance with
build-out milestones.
Non-Compliance Measures
------------------------------------------------------------------------
Compliance gap Non-compliance measure
------------------------------------------------------------------------
5% to less than 15%............... Quarterly reporting.
15% to less than 25%.............. Quarterly reporting + withhold 15%
of monthly support.
25% to less than 50%.............. Quarterly reporting + withhold 25%
of monthly support.
50% or more....................... Quarterly reporting + withhold 50%
of monthly support for six months;
after six months withhold 100% of
monthly support and recover
percentage of support equal to
compliance gap plus 10% of support
disbursed to date.
------------------------------------------------------------------------
71. Reporting Requirements. As discussed below, the Commission
requires all rate-of-return carriers to submit the geocoded locations
to which they have newly deployed facilities capable of delivering
broadband meeting or exceeding defined speed tiers. The Commission
directs the Bureau to work with USAC to develop an online portal that
will enable electing carriers to submit the requisite information on a
rolling basis throughout the year as construction is completed and
service becomes commercially available, with any final submission no
later than March 1st in the following year.
[[Page 24293]]
B. Reforms of Existing Rate of Return Carrier Support Mechanism
72. For rate-of-return carriers that do not elect to receive high-
cost universal service support based on the A-CAM model, the Commission
modernizes its embedded cost support mechanisms to encourage broadband
deployment and support standalone broadband. Specifically, the
Commission makes technical rule changes to our existing ICLS rules to
support the provision of broadband service to consumers in areas with
high loop-related costs, without regard to whether the loops are also
used for traditional voice services. The Commission renames ICLS
``Broadband Loop Support'' as a component within the Connect America
Fund (CAF BLS). Further, building on proposals in the record from the
carriers, the Commission adopts operating expense limits, capital
expenditure allowances, and budgetary controls that will be applicable
to the HCLS and CAF BLS mechanisms to ensure efficient use of our
finite federal universal service resources. These reforms together will
better target support to advance the Commission's longstanding
objective of closing the rural-rural divide in which some rural areas
of the country have state-of-the-art broadband, while other parts of
rural America have no broadband at all. The Commission expects that the
combined effect of these measures will be to distribute support
equitably and efficiently, and that all rate-of-return carriers will
benefit from the opportunity to extend broadband service where it is
cost-effective to do so.
1. Support for Broadband-Only Loop Costs for Rate-of-Return Carriers
73. The Commission now adopts technical changes to our existing
ICLS rule to provide support for rate-of-return carriers' broadband-
capable network loop costs, without regard to whether the loops are
used to provide voice or broadband-only services. As explained above,
although our existing HCLS and ICLS rules both support the loop costs
associated with broadband-capable networks, they were developed
specifically to support the costs of voice networks and do not provide
cost recovery for loop costs associated with broadband-only services.
After careful consideration of the various alternatives presented in
the record, the Commission concludes that the simplest, most effective
and administratively feasible means to address this concern is to
expand the ICLS mechanism to permit recovery of consumer broadband loop
costs. In a pending Petition for Reconsideration and Clarification of
the USF/ICC Transformation Order, NECA, OPASTCO, and WTA argued, among
other claims, that the Commission should adopt a Connect America Fund
mechanism prior to imposing broadband obligations on rate-of-return
carriers. Petition for Reconsideration and Clarification of the
National Exchange Carrier Association, Inc.; Organization for the
Promotion and Advancement of Small Telecommunications Companies; and
Western Telecommunications Alliance, WC Docket 10-90, et al. at 2-6
(filed Dec. 29, 2011) (NECA et al. Petition). Our existing mechanisms
have provided support for broadband-capable networks for more than a
decade, and the Commission are now adopting changes to our rules to
provide support explicitly for broadband-only lines. The Commission
therefore denies the Petition as moot. As noted above, to recognize the
scope of the expanded mechanism and fulfillment of our commitment to
create a Connect America Fund for rate-of-return carriers, the
Commission changes the name of ICLS to CAF BLS.
74. By providing support for the costs of broadband-only loops,
while continuing to provide cost recovery for voice-only and voice-
broadband loops, the expanded CAF-BLS mechanism will create appropriate
incentives for carriers to deploy modern broadband-capable networks and
to encourage consumer adoption of broadband services. The difference in
loop-related expenses between broadband-only and traditional voice
service over broadband-capable loops tends to be quite small, but the
cost recovery varies significantly. Indeed, different treatment of loop
cost recovery can be triggered by a customer's decision to drop the
voice component of a voice-data bundle, without any other changes in
service by the carrier. Similar changes to loop cost recovery occur if
a carrier offers an IP-based voice service rather than a traditional
voice service: only loops used to provide regulated local exchange
voice service (including voice-data bundles) are eligible for high-cost
universal service under our current rules. Supporting all consumer
loops will minimize the discrepancies in treatment between those
service offerings, while removing potential regulatory barriers to
taking steps to offer new IP-based services in innovative ways. Thus,
this step advances the statutory goal of providing access to advanced
telecommunications and information services in all regions of the
Nation, particularly in rural and high-cost areas, and the principle
adopted in the USF/ICC Transformation Order that universal service
support should be directed where possible to networks that provide
advanced services, as well as voice services.
75. Implementing this expansion of the traditional ICLS mechanism
requires several actions. As noted above, the current ICLS mechanism
operates by providing each carrier with the difference between its
interstate common line revenue requirement and its interstate common
line revenues. Going forward, CAF-BLS also will provide cost recovery
for the difference between a carrier's loop costs associated with
providing broadband-only service, called the ``consumer broadband-only
loop revenue requirement'' and its consumer broadband-only loop
revenues. In this Order, the Commission adopts rules that define the
consumer broadband-only loop costs as the same, on a per-line basis, as
the costs that are currently recoverable for a voice-only or voice/
broadband line in ICLS. To avoid double-recovery, an amount equal to
the consumer broadband-only revenue requirement will also be removed
from the special access cost category. Carriers will be required to
certify to USAC, as part of their CAF-BLS data filings, that they have
complied with our cost allocation rules and are not recovering any of
the consumer broadband-only loop cost through the special access cost
category. For consumer broadband-only loop revenue, CAF-BLS will
initially impute the lesser of $42 per loop per month or its total
consumer broadband loop revenue requirement. For true-up purposes, CAF
BLS will impute the consumer broadband rate the carrier was permitted
charge, if it is higher than the amount that would be imputed
otherwise. As described below, the Commission also adopts today a
budgetary constraint on the total aggregate amount of HCLS and CAF-BLS
support provided for rate-of-return carriers to ensure that support
remains within the established budget for rate-of-return territories.
To the extent that budgetary constraint reduces CAF-BLS support in any
given year, any CAF BLS provided will be first applied to ensure that
each carrier's interstate common line revenue requirement is met. If,
due to the application of the budgetary constraint, additional revenue
is required to meet its consumer broadband loop revenue requirement,
that revenue may be recovered through consumer broadband loop rates,
even if that results in a carrier charging a broadband loop amount
greater than $42 per loop per month.
[[Page 24294]]
76. This approach meets the four principles of reform that the
Commission previously articulated in the April 2014 Connect America
Further Notice, while also being simple and easy for affected carriers
to understand and implement. The budget constraint ensures that the
support amounts will remain within the existing rate-of-return budget.
The CAF-BLS mechanism distributes support fairly and equitably among
carriers. Consistent with our authority to encourage the deployment of
the types of facilities that will best achieve the principles set forth
in section 254(b), it will allow carriers to receive federal high-cost
universal service support for their network investment regardless of
what services are ultimately purchased by the customer. When combined
with the capital expense and operational expense limitations adopted
below, CAF BLS will help ensure that no carrier collects support for
excessive expenditures. The CAF-BLS mechanism is forward-looking
because it completes the Commission's modernization of the high-cost
program to focus on broadband, consistent with the evolution of
technology toward IP networks.
77. And finally, the reforms the Commission adopts today avoid
double-recovery of costs by removing from special access the costs
associated with broadband-only loops and then ensuring that the
carriers' regulated revenues match their revenue requirements. The
Commission finds this approach administratively preferable to
alternative approaches. For example, one possibility would be to expand
both ICLS and HCLS to include broadband-only loops. However, HCLS was
designed to support local (i.e., intrastate) voice rates and does not
take into account the costs or revenues from broadband-only services.
In addition, the schedule for developing HCLS amounts is incompatible
with the schedule for developing wholesale transmission tariffs for
broadband services. As a result, the Commission's principle of avoiding
double recovery could not be met without making significant changes to
either the HCLS rules or the tariff process. Alternatively, the
Commission could adopt a separate mechanism to support broadband-only
loops, as proposed by NTCA. In practice, the expanded CAF-BLS mechanism
will be operationally similar to NTCA's proposed DCS mechanism. Both
essentially provide support for broadband-only costs to the extent that
they exceed an imputed revenue amount, but allow the carrier to recover
additional revenues through tariffs to the extent that the budgetary
constraint prevents them from meeting their revenue requirement. The
Commission finds, however, that expanding the CAF-BLS mechanism to
include broadband-only loops will further reduce unnecessary
distinctions between the two categories of loops, which will advance
our objective to move the existing program to broadband. Finally, the
Commission considered the ``bifurcated'' approach developed in the
record by USTelecom with significant input from other parties.
78. The latter approach would create a wholly new mechanism and
bifurcate investment and associated expenses between old and new
mechanisms. The Commission appreciates the good faith efforts of
numerous parties to determine how such a mechanism might be implemented
and to estimate its potential impact. While it had a number of merits,
the Commission has come to the conclusion that the approach they adopt
today is simpler and sufficient to accomplish our goals for reform. The
Commission therefore chooses to build upon the framework of an existing
rule that carriers are familiar with, which will not require
significant changes to their internal existing accounting systems and
other processes for the development of cost studies. Carriers should be
able readily to estimate their future support flows under this revision
to the existing rule.
79. Consumer broadband loop revenue benchmark. For the purpose of
calculating CAF BLS, the Commission adopts a revenue imputation of $42
per loop per month, or $504 per loop per year for consumer broadband-
only loops, except as described below. This amount is consistent with
other recent estimates of reasonable end-user revenues, when adjusted
for context. For example, in adopting a cost model to be used for the
Phase II offer of support to price cap carriers, the Bureau based its
support threshold for model-based support on an average revenue per
user (ARPU) of $75. That ARPU, however, was an all-inclusive estimate
of end-user revenues for broadband and voice services, while the
benchmark the Commission adopts here presumes that carriers would still
need additional end-user revenues to cover non-loop related costs, such
as middle-mile costs. Similarly, for a broadband service of 10/1 Mbps
and unlimited usage, the Commission's 2015 reasonable comparability
benchmark was $77.81. NECA estimated a median non-loop cost of $34.95
per month to provide 10/1 Mbps for its member carriers that participate
in its ``DSL voice-data'' tariff. Subtracting the monthly revenue
associated with those non-loop revenues from the ARPU used for the
model support threshold or the reasonable comparability benchmark for
retail broadband Internet access suggests that $42 is an appropriate
estimate for monthly end-user revenue for the consumer broadband loop
costs, the remainder of which will be recovered through CAF BLS,
subject to the budgetary constraint discussed below.
80. There are two cases in which the Commission will impute a
different consumer broadband loop revenue amount than $42 per loop per
month. First, when a carrier's consumer broadband loop revenue
requirement is less than $42 per loop per month, CAF BLS will only
impute the actual consumer broadband loop revenue requirement. For
example, if a carrier has 1,000 consumer broadband-only loops with an
average cost of $41 per month, its imputed annual revenue would be
$492,000 ($41 * 1,000 * 12), rather than $504,000 ($42 * 1,000 * 12).
Without this exception, consumer broadband loops could create
``negative'' CAF-BLS amounts for some carriers in its initial
calculation. The effect of the negative CAF-BLS amounts would be to
reduce overall CAF BLS and require above-cost consumer broadband rates
to replace lost CAF BLS that would otherwise subsidize voice loops.
This exception will prevent a cross-subsidy of voice service by
consumer broadband-only service that may not otherwise be necessary.
81. The second exception is that, solely for the purpose of
calculating true-ups, CAF BLS will impute the consumer broadband rate
the carrier was permitted to charge, if it is higher than the amount
that would be imputed otherwise. For example, if a carrier had 1,000
loops and, as a result of the operation of the budgetary constraint,
its consumer broadband loop rate was $43 per month, the annual revenue
imputation would be $516,000 ($43 * 1,000 * 12), rather than $504,000.
Using actual revenues for true-ups in this way will recognize
additional revenue that the carrier would have received and prevent
duplication of cost recovery between CAF BLS and special access rates.
This will result in a carrier having imputed consumer broadband-only
revenue that exceeds its consumer broadband-only revenue requirement,
but that is necessary to ensure that both its interstate common line
revenue requirement and its consumer broadband loop revenue requirement
are met even when the budgetary constraint is applied.
[[Page 24295]]
2. Operating Expense Limitation
82. Discussion. The Commission adopts the regression methodology
submitted by industry representatives with a few modifications to
conform the limits better to the nature of the data. The Commission
defers implementation of this rule change for Alaska carriers pending
Commission consideration of the unified plan for incentive regulation
submitted by the Alaska Telephone Association on behalf of Alaska rate-
of-return carriers and mobile wireless providers. The Commission finds
that a mechanism to limit operating costs eligible for support under
rate-of-return mechanisms, both HCLS and CAF BLS, will encourage
efficient spending by rate-of-return carriers and will increase the
amount of universal service support available for investment in
broadband-capable facilities. These opex limits will apply to cost
recovery under HCLS and CAF BLS and will be applied proportionately to
the accounts used to determine a carrier's eligible operating expense
for HCLS and CAF BLS. The Commission notes that a small number of
carriers have not provided this information in the past. Carriers that
do not provide study area level cost studies to NECA will have to
provide USAC with data from the following four accounts: (1) Account
6310: Information origination/termination expenses; (2) Account 6510:
Other property plant and equipment expenses; (3) Account 6610: Customer
operations expense: Marketing; and (4) Account 6620: Customer
operations expense: Services. For example, if the regression
methodology determines that a carrier's eligible operating expense
should be reduced by 10 percent, then each account used to determine
that carrier's eligible operating expense shall be reduced by 10
percent.
83. Consistent with the general approach submitted by the industry
associations, operating expense costs will be limited by comparing each
study area's opex cost per location to the regression model-generated
opex per location plus 1.5 standard deviations. The regression formula
to be used is as follows:
Y = [alpha] + [beta]1X1 +
[beta]2X2 + [beta]3X3,
Y is the natural log of opex cost per housing unit,
[alpha] is the coefficient on the constant (i.e., 1) in the regression,
X1 is the natural log of the number of housing units in the
study area, with a regression coefficient [beta]1,
X2 is the natural log of density (number of housing units
per square mile), with a regression coefficient [beta]2, and
X3 is the square of the natural log of density, with a
regression coefficient [beta]3.
84. The Commission does not agree with commenters who argue that
they should only limit operating expenses for carriers with costs above
the two standard deviations. Indeed, the Commission notes that using
two standard deviations would subject only an estimated 17 study areas
to an opex limit. The Commission concludes that using 1.5 standard
deviations--which they estimate, based on last year's data, would have
impacted roughly 50 carriers--more appropriately advances the
Commission's goal of providing better incentives for carriers to invest
prudently and operate more efficiently. Because any support reductions
associated with this limit will then be available to other rate-of-
return carriers, our budget for high-cost support should enable more
broadband deployment than if the Commission continued funding excessive
operating expenses for certain companies at current levels.
85. The Commission declines to set different limits based on the
separate density categories initially proposed by the industry because
density is already taken into account as a variable in the regression
analysis. The Commission sees no legal or economic justification for
modifying the allowable opex expense a second time. Using density again
in this fashion has the effect of arbitrarily raising the allowable
opex expense limit for some rural carriers at the direct expense of the
other carriers serving high-cost areas that are nearly as sparsely
populated. Moreover, even if the Commission were inclined to do so, the
proponents of this approach have failed to explain in the record why it
would be appropriate to draw the line at 1.5 locations per square mile,
as opposed to 2 locations per square mile, 4 locations per square mile,
or some other figure. Therefore, the Commission adopts a uniform
standard deviation formula for purposes of setting a limit based on the
regression results.
86. In addition, unlike the industry's original proposal, the
Commission includes corporate expenses (calculated according to the
current limitation) within the regression. These expenses are a
significant portion of carrier operating expenses, and the Commission
concludes that they should be subject to limitation as well. Indeed,
corporate expenses alone account for approximately 15 percent of the
total costs assigned to the loop for rate-of-return cost companies.
Moreover, the Commission is concerned that leaving corporate expenses
outside of this overall limitation will provide an opportunity for
inappropriate cost shifting from an account where they are above the
limit to an account where they are below the limit.
87. NTCA has argued that ``reasonable transitions'' are necessary
when implementing limitations on support. The Commission concludes that
a transition is appropriate to allow carriers time to adjust their
operating expenditures. Therefore, the Commission concludes that for
the first year in which the opex cap is implemented, the eligible
operating expense of those carriers subject to the cap will be reduced
by only one-half of the percentage amount determined by the regression
methodology. For example, if the regression methodology determines that
a carrier's eligible operating expense should be reduced by 10 percent
for the first year in which the opex cap is implemented, then each
account used to determine that carrier's eligible operating expense
shall be reduced by only 5 percent. However, in all subsequent years,
the carrier's eligible operating expense shall be reduced by the full
percentage amount determined by the regression methodology.
88. Within 30 days of the effective date of this Report and Order,
the Commission directs NECA to submit to USAC a schedule of companies
subject to limits under the adopted formula. The Commission directs
NECA to exclude data for Alaska carriers when making these
calculations. The Commission also directs NECA to provide USAC with the
dollar amount of reductions in HCLS and CAF-BLS to which each carrier
subject to limits under the adopted formula will be subject. USAC shall
validate all calculations received from NECA before making
disbursements subject to any such support reductions.
3. Capital Investment Allowances
89. Discussion. The Commission adopts the revised capex allowance
proposed by the rate-of-return industry associations with minor
modifications. The Commission defers implementation of this rule change
for Alaska carriers pending Commission consideration of the unified
plan for incentive regulation submitted by the Alaska Telephone
Association on behalf of Alaska rate-of-return carriers and mobile
wireless providers. The Commission believes that this mechanism will
help target support to those areas with less broadband deployment so
that carriers serving those areas have the opportunity to catch up to
the average level of broadband deployment in areas served
[[Page 24296]]
by rate-of-return carriers. The Commission directs the Bureau to
announce the updated weighted average broadband deployment for all
rate-of-return carriers, and the relevant deployment figure for each
individual carrier, based on the more recent June 2015 FCC Form 477
data for the initial implementation of this rule, and to publish
similar figures reflecting current FCC Form 477 data on an annual
basis. Although it is the Commission's goal to ensure broadband
deployment throughout all areas, finite universal service resources
must be used where they are most needed. Therefore, the Commission
finds that on a going forward basis, directing increased support to
those areas lagging behind the national average in broadband
availability will ensure a more equitable distribution of deployment,
thereby achieving one of the goals for reform articulated by the
Commission in the April 2014 Connect America FNPRM. The Commission
does, however, make several adjustments to the industry's proposal.
Vantage Point Solutions argues that an inflation factor with a higher
labor component would be more appropriate than the GDP-CPI because
Vantage Point's experience shows that approximately 70% of construction
costs in rural LEC areas are associated with labor. Letter from Larry
D. Thompson, Vantage Point Solutions, to Marlene H. Dortch, Secretary,
FCC, WC Docket No. 10-90, et al. at 2 (filed Jan. 28, 2016). However,
the Commission has used the GDP-CPI, which includes both capital and
labor costs, in its HCLS calculations since 2001, and Vantage Point
presents no compelling reason as to why an alternative inflation
measure should be used here. To the extent any individual carrier has
unique circumstances that might warrant an adjustment in its capex
allowance, it is free to seek a waiver pursuant to section 1.3 of the
Commission's rules.
90. First, the Commission uses the TALPI as the basis for
calculating loop plant investment limitations for both HCLS and CAF-
BLS, not just for HCLS. To ensure the most efficient use of limited
universal service resources, the capital budget limitation must apply
to HCLS, which supports the intrastate portion of the exchange loop,
and CAF-BLS, which supports the interstate portion. Second, the
Commission modifies the investment categories proposed by the
associations to determine a carrier's TALPI so that they correspond to
those used to determine a carrier's HCLS and CAF BLS. The Commission
notes that a small number of carriers have not provided this
information in the past. Carriers that do not provide study area level
cost studies to NECA will have to provide USAC with data from the
relevant categories and accounts. Amounts in excess of a carrier's
AALPI will be removed from the relevant categories or accounts either
on a direct basis when the amounts of the new loop plant investment can
be directly assigned to a category or account, or on a pro-rata basis
according to each category or account's proportion to the total amount
in each of the above categories and accounts when the new loop plant
cannot be directly assigned.
91. Third, the Commission refines the AALPI adjustment for areas
covered by a pre-existing loan. The Commission concludes that the AALPI
should only be adjusted for areas covered by a pre-existing loan for
which a previously planned loan disbursement has been made and that
loan disbursement was used to increase the annual loop expenditure for
the year, or years, in which the AALPI adjustment is taken. The
Commission makes this modification because an outstanding loan does not
per se warrant an increase in a carrier's AALPI unless a previously
planned disbursement of that loan leads to an increase in the carrier's
loop plant investment.
92. Fourth, rather than adjusting the AALPI by only one half of a
percentage point for every percentage point that a carrier's deployment
differs from the target availability, the Commission adjusts the AALPI
by one percentage point. The Commission finds that an adjustment of
only one half of a percentage point will not have a sufficient impact
to moderate expenditures by companies that are above average, and also
will not provide a sufficient opportunity to catch up to those carriers
that must increase their deployment. An increase of one percentage
point will allow those carriers that must catch up to the target
availability more funds with which to do so.
93. Within 30 days of the effective date of this Report and Order,
and for each subsequent quarterly or annual data reporting period, the
Commission directs NECA to submit to USAC the following information for
each study area:
Total Allowed Loop Plant Infrastructure
AALPI for the Current Reporting Period (Current AALPI)
Current AALPI Adjustment for Percent of Broadband Deployment
Current AALPI Adjustment for Loan Disbursements
Current AALPI Adjustment for Broadband Deployment Obligations
AALPI Amounts Carried Forward from Previous Reporting Periods
Total AALPI (Equals Current AALPI plus All Adjustments plus
Carry Forward)
Dollar amount of the reduction, if any, in capital expense
eligible for HCLS and/or CAF-BLS due to the Total AALPI for the
relevant reporting period
Dollar amount of the reductions, if any, in HCLS and/or CAF
BLS due to the carrier's capital expense reduction caused by the Total
AALPI for the relevant reporting period
94. USAC shall validate all calculations received from NECA before
making disbursements subject to any support reductions due to the
Capital Investment Allowance.
4. Eliminating Subsidies in Areas Served by an Qualifying Competitor
95. In this section, the Commission takes further steps to target
high-cost support efficiently to those areas that will not be served by
private sector investment alone. First, the Commission prohibits rate-
of-return carriers from receiving CAF BLS in areas that are served by a
qualifying unsubsidized competitor. Second, the Commission adopts a
challenge process to determine which areas are served by unsubsidized
competitors building on proposals submitted in the record. Third, as
proposed by several commenters, the Commission adopts several options
to disaggregate support in areas determined to be served by qualifying
competitors: Carriers will be free to elect one of several mechanisms
to disaggregate their support. Fourth, the Commission adopts a phased
reduction in disaggregated support for competitive areas, as suggested
by USTelecom and NTCA. The net result of these changes will be to more
effectively target CAF BLS to areas where support is needed to ensure
consumers are served with voice and broadband services.
96. Discussion. In order to meet our objective of utilizing
universal service funds to extend broadband to high-cost and rural
areas where the marketplace alone does not currently provide a minimum
level of broadband connectivity, the Commission has emphasized its
desire to ``distribute universal service funds as efficiently and
effectively as possible.'' Support should be used to further the goal
of universal voice and broadband, and not to subsidize competition in
areas where an unsubsidized competitor is providing service. Universal
service is ultimately paid for by consumers and businesses
[[Page 24297]]
across the country. Providing support to a rate-of-return carrier to
compete against an unsubsidized provider distorts the marketplace, is
not necessary to advance the principles in section 254(b), and is not
the best use of our finite resources.
97. To ensure that high-cost universal service support is used
efficiently, consistent with the intent of providing universal service
where it otherwise would be lacking, the Commission now adopts a rule
to eliminate CAF BLS in competitive areas. Building on proposals
submitted in the record by NTCA and USTelecom, and taking into account
our experience implementing similar requirements in price cap areas and
the 100 percent overlap rule in rate-of-return areas, a census block
will be deemed to be ``served by a qualifying competitor'' for this
purpose if the competitor holds itself out to the public as offering
``qualifying voice and broadband service'' to at least 85 percent of
the residential locations in a given census block. For purposes of
meeting the requirement to ``offer'' service, the competitor must be
willing and able to provide qualifying voice and broadband service to a
requesting customer within ten business days.
98. The first step in implementing such a rule is to conduct a
process to determine which census blocks are competitively served. The
Commission now adopts a challenge process building on lessons learned
from both the challenge process utilized to finalize the offer of Phase
II model-based support to price cap carriers and the process used to
implement the 100 percent overlap rule for rate-of-return carriers.
Under this process, the Bureau will publish a Public Notice with a link
to a preliminary list of competitors serving specific census blocks
according to FCC Form 477 data. As suggested by NTCA and USTelecom, in
order for a challenge for a particular census block to go forward,
those competitors will be required to certify that they are offering
service to at least 85 percent of the locations in the census block,
and must provide evidence sufficient to show the specific geographic
area in which they are offering service. If they fail to submit such
information in response to the Bureau's Public Notice, the block will
not be deemed competitively served. To the extent the competitor
provides the required filing in response to the Bureau's Public Notice,
incumbents and any other interested parties such as state public
utility commissions and Tribal governments will have the opportunity to
contest those assertions. The ultimate burden of persuasion will rest
on the competitor to establish that it offers service to at least 85
percent of the locations in the census block, based on all the evidence
in the record. The challenge process will be conducted by the Bureau as
set forth more fully below.
99. The Bureau will rely on Form 477 broadband deployment data to
make the preliminary determination of which census blocks are served by
providers offering broadband service. The Form 477 data collection is
mandatory, and Form 477 filers must certify to the accuracy of their
data. The Commission directs the Bureau to utilize the most recent
publicly available data at the time it releases the initial Public
Notice.
100. To be considered an unsubsidized competitor in a given census
block, a fixed broadband provider must offer service in accordance with
the Commission's current service obligations on speed, latency, and
usage allowances. In December 2014, the Commission adopted a new
minimum speed standard for carriers receiving high-cost support: They
must offer actual speeds of at least 10/1 Mbps. Therefore, the
Commission directs the Bureau to use 10/1 Mbps as the threshold for
determining competitors when developing the preliminary list for the
initial implementation of this rule.
101. The Commission is not persuaded by NTCA's proposal that the
Commission utilize the current section 706 speed benchmark, at least 25
Mbps downstream and 3 Mbps upstream (25/3 Mbps), as the basis to
identify locations where a competitor is present. Although the
Commission has determined that 25/3 Mbps reflects ``advanced''
capabilities, the Commission has explained that ``[b]y setting a lower
baseline for Connect America funding, they establish a framework to
ensure a basic level of service to be available for all Americans,
while at the same time working to provide access to advanced services.
The areas served by rate-of-return carriers encompass ``many rural and
remote areas of the country.'' Similarly, the Commission is not
persuaded by WTA's proposal that a competitor must be offering service
with speeds at least as high as the highest speed service offering of
the incumbent in order to be deemed a qualifying competitor. The
Commission finds that using a 10/1 Mbps threshold at the present time
for identification of competitors is consistent with the Commission's
section 254 goal of ensuring that universal service funding is used in
the most efficient and effective manner to provide consumers in rural
and high-cost areas of the country with voice and broadband service.
102. The Commission currently does not collect comprehensive,
block-level data on broadband latency or monthly usage allowances, as
it does for broadband speed. However, data collected by the Commission
through the Measuring Broadband America program suggest that the
latencies associated with most fixed broadband services are low enough
to allow for real time applications, including Voice over Internet
Protocol. In addition, data from the Commission's urban rate survey
indicate that many fixed broadband providers offer unlimited data usage
or usage allowances well in excess of the 150 GBs per month that they
now establish as our baseline requirement for purposes of implementing
the competitive overlap rule. Therefore, the Commission concludes it is
reasonable to presume that providers meeting the speed criteria also
meet the latency and usage-allowance criteria, for purposes of
preparing the preliminary list.
103. This is similar to the approach taken by the Bureau in the
Connect America Fund Phase II challenge process. One of the lessons
learned from the Phase II challenge process was that no party was able
to demonstrate high latency by competitors, and very few providers
prevailed in a challenge exclusively focused on a competitor's usage/
price. This provides us with confidence that, as a general matter, it
is reasonable to assume, for purposes of preparing the preliminary
list, that a provider that in fact is in the area providing the
requisite speed is also meeting the latency and usage requirements.
104. Under our existing rule, to be considered an unsubsidized
competitor, a provider must be a facilities-based provider of
residential fixed voice service, as well as fixed broadband. Form 477
provides the best data available on whether broadband providers also
offer fixed voice service, but the data are not reported at the census
block level. Therefore, to determine whether a broadband provider also
offers voice service, for purposes of preparing the preliminary list,
the Bureau will assume if a broadband provider reported any fixed voice
connections in a state in its Form 477 filing, then it offers voice
service throughout its entire broadband service area in that state. The
Commission notes that in order to file Form 477, a VoIP provider must
be offering interconnected VoIP, which means that the provider is
required to provide E911 and comply with CALEA, among other things.
105. The Commission will exclude competitive Eligible
[[Page 24298]]
Telecommunications Carriers (CETCs) receiving universal service
support, as well as affiliates of incumbent LECs, from the analysis
undertaken to develop the preliminary list. CETCs that receive
universal service support will be excluded from the preliminary
determination because these providers are not ``unsubsidized.'' The
Commission also concludes, for purposes of preparing the preliminary
list that an affiliate that an incumbent LEC is using to meet its
broadband public interest obligation in a given census block shall not
be treated as an unsubsidized competitor. If the Commission were to
conclude otherwise, a rate-of-return carrier would automatically be
precluded from receiving support for new investment in census blocks
wherever its affiliate is offering broadband and voice service as a
condition of receiving high-cost support. To the extent the Form 477
data indicate that a particular rate-of-return carrier has deployed
more than one technology in a given census block, the Commission will
presume, for purposes of preparing the preliminary list, that the
carrier is utilizing different technologies within a given census block
to serve its customers.
106. Once the preliminary list is published, the next step in the
process will be for identified competitors to confirm that they are in
fact offering voice and broadband service within the specific census
block where they report broadband deployment on FCC Form 477. Based on
the Phase II challenge experience, the Commission has learned that it
is extremely difficult for an incumbent provider to prove a negative--
that a competitor is not serving an area. Rather, the purported
competitor is in a much better position to confirm that it is offering
service in a given area.
107. Upon publication of the preliminary list, there will a comment
period in which competitors must certify that they offer both voice and
broadband meeting the requisite requirements in a particular census
block in order for that block potentially to be subject to a
competitive overlap determination. Specifically, as suggested by
several parties, they must offer: (1) Fixed voice service at rates
under the then applicable reasonable comparability benchmark, and (2)
fixed terrestrial broadband service with actual downstream speed of at
least 10 Mbps and actual upload speed of at least 1 Mbps; with latency
suitable for real time applications, including Voice over Internet
Protocol; with usage capacity that is reasonably comparable to
offerings in urban areas; and at rates that are reasonably comparable
to those in urban areas. To the extent the competitor is meeting the
voice service obligation through interconnected VoIP, it will already
be subject to requirements for E911 and CALEA, as noted above. The
Commission also requires that the competitor be able to port telephone
numbers in that census block, as suggested by several commenters. In
order to make this certification, a competitor must have hold itself
out to the public as offering service to at least 85 percent of the
locations in the census block, and be willing and able to provide
service to a requesting customer within ten business days. For purposes
of this certification, the number of locations shall be based on the
most recently available U.S. Census data regarding the number of
housing units in a given census block. The Commission notes that our
existing rule defines an unsubsidized competitor as a provider of fixed
residential voice and broadband service. 47 CFR 54.5 (emphasis added).
The Commission is mindful of the burden on the competitor but also need
to ensure that information is sufficient for the Commission to evaluate
any potential challenges. The Commission clarifies that a mere officer
certification is insufficient to establish the presence of qualifying
service. As noted above, competitors will be required to submit
additional evidence in support of that certification clearly to
establish where they are providing service. Even so, because the
Commission is cognizant of the potential burden, they do not require
competitors to submit geocoded locations but encourage competitors to
submit as much information as possible, including neighborhoods served
and, for cable companies, boundaries of their franchising agreement.
108. If the competitor fails to submit such a certification and any
evidence, the block will be deemed non-competitive, and there will be
no need for the incumbent to respond. If, however, the competitor
submits the requisite certification that it is offering both qualifying
voice and qualifying broadband service in the census block, with
supporting information identifying with specificity the geographic
areas served, the Commission will then accept submissions from the
incumbent or other interested parties seeking to contest the showing
made by the competitor. Examples of information that may be persuasive
to establish that service is not being offered includes evidence that a
provider's online service availability tool shows ``no service
available'' for customers in the geographic area that the carrier
certifies it serves or filings from consumers residing in the
geographic area that the competitor has certified is served that they
were unable to obtain service meeting the specified requirements from
the purported competitor within the relevant time frame.
109. Consistent with the approach taken in the Phase II challenge
process, the Commission will not consider any additional evidence or
submissions filed by any party after the deadline for reply comments,
absent extraordinary circumstances. The Commission thus adopts a
procedural requirement that competitive overlap submissions for both
purported competitors and incumbents must be complete as filed. After
the conclusion of the comment cycle, the Bureau will make a final
determination of which census blocks are competitively served, weighing
all of the evidence in the record. The Commission delegates authority
to the Bureau to take all necessary steps to implement the challenge
process they adopts today.
110. The Commission is not persuaded by arguments that it may be
premature for the Commission to implement a competitive overlap rule
prior to full implementation of the 100 percent overlap rule. The
Commission has learned a great deal through developing and implementing
both the Phase II challenge process for price cap areas and the 100
percent overlap process. The Commission is adopting a challenge process
that builds on lessons learned from both experiences. The Commission
concludes that utilizing the procedural requirements adopted for the
Phase II challenge process, coupled with putting the burden of proof on
the competitor to establish that it serves a census block, will best
meet the Commission's objectives for ensuring that support is not
provided in areas where other providers are providing service without
subsidies.
111. The Commission is not persuaded that it should require
competitors to certify they serve 100 percent of the locations in a
given census block in order for that census block to be considered
``served.'' Our experience with the implementation of the 100 percent
overlap rule shows that such a standard will rarely, if ever be met,
even though there may be a significant degree of competitive overlap.
The Commission concludes that adopting an evidentiary showing that the
competitor must certify that it serves 85 percent or more--a
substantial majority--of residential locations in a census block are
served strikes the right balance between the approach used in
[[Page 24299]]
the Phase II context (where a block was deemed served if the competitor
only served as single location) and the 100 percent overlap rule (which
required 100 percent coverage for all residential and business
locations in all census blocks in the study area) and will serve our
overarching policy objectives. Moreover, to the extent the competitor
today only serves 85 percent of the requisite number of residential
locations in a given census block, it may expand its footprint to serve
the entire census block once it no longer is facing a subsidized
competitor.
112. The Commission also declines to impose other requirements
suggested in the record by WTA, such as requiring a competitor to have
an interconnection agreement with the incumbent, be subject to section
251, offer Lifeline, own or lease all of the facilities needed to
deliver service, not receive any other forms of federal or state
support, including universal service support other than Lifeline, not
charge any fees for site visits to determine if service can be
provided, even if that fee is credited upon service installation, and
comply with state service quality and other regulatory requirements
applicable to the incumbent for voice service. WTA fails to provide any
explanation of the policy rationale for each of these proposals, many
of which seem intended to subject the competitor to the same regulatory
requirements as the incumbent. In any event, the net result of these
proposals would be to ensure that no entity ever could qualify as an
unsubsidized competitor. Nor is the Commission persuaded by WTA's
argument that only future new investment should be subject to a
competitive overlap rule, and that no support should be reduced for
existing investments. The Commission notes that they only are
disaggregating and reducing CAF BLS in areas found to be served by
unsubsidized competitors, rather than both HCLS and CAF BLS, which will
lessen the impact of this rule on affected carriers.
113. As suggested by NTCA and USTelecom, the Commission will
conduct the competitive overlap challenge process outlined above every
seven years. This will ensure that the Commission periodically revisits
the competitive overlap analysis, but not impose excessive burden on
incumbents, potential competitors, or Commission staff. Re-examining
the extent of competitive overlap in this time frame will provide
stability and consistency for all interested stakeholders.
114. Upon the completion of the competitive overlap determination,
the Commission concludes that carriers should be able to select one of
several methods to disaggregate support between competitive and non-
competitive areas, as suggested by several commenters. The Commission
notes that the Commission took a similar approach when it allowed
incumbents to disaggregate ICLS in 2001, allowing carriers to select
one of several disaggregation paths subject to general parameters
established by the Commission. The Commission agrees with commenters
that they should utilize a disaggregation mechanism that ensures that
sufficient support is provided to those areas where the incumbent is
the sole provider of voice and broadband, and the Commission recognizes
that competitive areas are likely to be lower cost and non-competitive
areas are likely to be relatively higher cost. The Commission therefore
adopts a rule to permit carriers, on their own election, to utilize one
of the following methods suggested by commenters to disaggregate their
CAF BLS between competitive and non-competitive areas. Providing
carriers options will enable each carrier the flexibility to determine
which approach best reflects the unique characteristics of their
service territory. First, carriers may choose to disaggregate their CAF
BLS based on the relative density of competitive and non-competitive
areas. Second, carriers may choose to disaggregate their CAF BLS based
on the ratio of competitive to non-competitive square miles in a study
area, as proposed by Hargray. Third, carriers may choose to
disaggregate their CAF BLS based on the ratio of A-CAM calculated for
competitive areas compared to A-CAM support for the study area. The
Commission outlines each of these disaggregation mechanisms below.
115. Consistent with the approach previously taken by the
Commission for disaggregation of support, total support in a study area
shall not exceed the support that otherwise would be available in the
study area absent disaggregation. Similar to the former disaggregation
rule, the Commission may, on its own motion, or in response to a
petition from an interested party, examine the results of any one of
the adopted disaggregation methods to ensure that it fulfills the
Commission's intended objectives.
116. Carriers may choose to disaggregate their CAF BLS based on a
methodology using the density of competitive and non-competitive areas,
as proposed by NTCA/USTelecom. In particular, this method allocates the
revenue requirement between competitive and non-competitive areas,
based on the relative density of competitive and non-competitive areas.
As explained by NTCA/USTelecom, ``[t]he ratio of the calculated non-
competitive area's revenue requirement to the sum of the calculated
competitive and non-competitive revenue requirements is applied to the
study area's actual revenue requirements to ensure the total actual
revenue requirement is equal to the sum of the competitive and non-
competitive areas' revenue requirements.''
117. The allocation between competitive and non-competitive areas
is achieved by calculating a separate cost per loop for competitive and
non-competitive areas based on the differing densities of the
competitive and non-competitive areas. To calculate the disaggregated
revenue requirements using these costs per loop, each cost per loop is
multiplied by the number of loops in the corresponding (i.e.
competitive or non-competitive) area. The number of loops in each area
is calculated by multiplying the total number of loops by the density
ratio for the study area. Although NTCA/USTelecom proposed that density
for each area be calculated based on the sum of residential and
business locations, the Commission is unaware of a publicly available
source for business location data. Therefore, consistent with the
approach taken for other rule changes adopted in this order that rely
on density calculations, the Commission will use U.S. Census housing
unit data for the density calculations required for this disaggregation
method.
118. Carriers may also may choose to disaggregate their CAF BLS
using a ratio of competitive to non-competitive square miles in a study
area, as proposed by Hargray. Lower-cost areas are generally lower cost
because of the presence of a dense cluster of consumers, which causes
the cost per loop to be lower. Hargray submitted analysis into the
record showing how support is reduced in a non-linear manner based on
the rate of decline that would be expected if it were possible to
specifically capture the loops and costs associated with non-
competitive areas. As competitive overlap in a study area increases,
utilizing this method CAF BLS would be reduced in a non-linear manner
that accelerates as competitive overlap reaches 100 percent. In
particular, under this disaggregation method, support would be reduced
using the following schedule:
[[Page 24300]]
------------------------------------------------------------------------
Reduction
Competitive ratio % ratio %
------------------------------------------------------------------------
0-20.................................................... 3.3
30...................................................... 6.7
35...................................................... 10.0
40...................................................... 13.3
45...................................................... 16.7
50...................................................... 20.0
55...................................................... 25.0
60...................................................... 30.0
65...................................................... 35.0
70...................................................... 40.0
75...................................................... 45.0
80...................................................... 50.0
85...................................................... 62.5
90...................................................... 75.0
95...................................................... 87.5
100..................................................... 100
------------------------------------------------------------------------
119. By utilizing this mechanism, carriers would not be required to
undertake steps to ensure the accuracy of location data or undertake a
census block by census block determination of density. Therefore, by
selecting this mechanism, carriers will enjoy relative ease of
administration.
120. As a third option, the Commission will permit carriers subject
to a reduction in support for competitive overlap to elect to utilize
an allocation derived from the A-CAM, as suggested by NTCA. In this
Order, the Commission adopts a forward-looking cost model that has been
modified for use to determine support amounts for rate-of-return
carriers that voluntarily elect to receive universal service support.
As the Commission explained, the A-CAM contains a support module, which
calculates support on a per-location basis based on its calculation of
the costs to serve the locations in every census block. For purposes of
the voluntary offer of model-based support, support is only calculated
for blocks that are not served by an unsubsidized competitor. The
support module can be adjusted, however, to calculate support for the
blocks that are competitively served, as well. Thus, support can be
divided at the study area level between competitive and non-competitive
census blocks. This ratio can be applied to CAF-BLS support to
disaggregate support for competitive areas. The Commission notes that
competitively served census blocks are likely to be the lower cost,
more densely populated portions of the study area, in many instances
where the model calculates little or even no support. In such cases, a
carrier electing this method would see little to no support reduction
using the A-CAM allocator, because the model provides support only for
the higher cost areas.
121. The Commission agrees with commenters that support reductions
associated with competitive areas should be phased in. As suggested by
USTelecom and NTCA, the Commission adopts the following transition for
reductions in CAF BLS in areas that are deemed to be competitively
served: Where the reduction of CAF BLS from competitive census block(s)
represents less than 25 percent of the total CAF BLS support the
carrier would have received in the study area in the absence of this
rule, disaggregated support associated with the competitive census
blocks will be reduced 33 percent in the first year, 66 percent in the
second year, with that support associated with the competitive census
blocks fully phased-out by the beginning of the third year. Where the
reduction of CAF BLS from competitive census blocks represents more
than 25 percent of the total CAF BLS support the carrier would have
received in the study area in the absence of this rule, disaggregated
support associated with the competitive census blocks will be reduced
17 percent in the first year, 34 percent in the second year, 51 percent
in the third year, 68 percent in the fourth year, 85 percent in the
fifth year, and fully phased-out by the beginning of the sixth year.
The Commission also emphasizes that carriers affected by implementation
of this rule are free to seek a waiver of support reductions under our
existing precedent.
5. Budgetary Controls
122. The Commission previously adopted an overall budget of $4.5
billion for the high-cost program, and a budget within that amount of
$2 billion per year for high-cost support for rate-of-return carriers.
It did not, however, adopt a method for enforcing the budget for rate-
of-return carriers. The Commission now adopts a self-effectuating
mechanism for controlling total support distributed pursuant to HCLS
and CAF BLS to stay within the budget for rate-of-return carriers.
123. The components of the high-cost program other than those for
rate-of-return carriers are structured in a fashion that ensures each
stays within its respective portion of the $4.5 billion budget. Because
ICLS and CAF ICC are not capped, there is no mechanism today to keep
disbursements of high-cost funds to rate-of-return carriers within that
$2 billion budget. Indeed, NECA forecasts that over the next several
years, absent any further reforms, total high-cost support (that is,
the sum of HCLS, ICLS, and CAF ICC) for the rate-of-return industry
will exceed the $2 billion budget. It therefore is imperative that the
Commission takes further steps now to ensure the budget is not
exceeded, in the event growth in CAF BLS were to cause total rate-of-
return support to exceed the defined budget. Adopting an overall budget
control mechanism will provide a predictable and reliable method in the
event that demand exceeds the available budget. The Commission notes,
of course, that the budget control will only be implemented in the
event total support is forecasted to exceed the budget in a given year.
124. In implementing measures to stay with the previously adopted
budget, the Commission notes that the Tenth Circuit has affirmed the
Commission's decision to set the rate-of-return budget at $2.0 billion.
The court found reasonable the Commission's determination ``that
budgetary sufficiency for . . . rate-of-return carriers could be
achieved through a combination of measures, including but not limited
to: (1) Maintaining current USF funding levels while reducing or
eliminating waste and inefficiencies that existed in the prior USF
funding scheme; (2) affording carriers the authority to determine which
requests for broadband service are reasonable; (3) allowing carriers,
when necessary, to use the waiver process; and (4) conducting a
budgetary review by the end of six years.'' In this Order, the
Commission retains each of these measures to safeguard the sufficiency
of the budget. Though some parties have suggested in general terms that
the budget should be increased, they have not provided the type of
detailed information about why the overall budget is insufficient for
the Commission to meet its goal of achieving universal service, nor
have they presented individualized circumstances necessary to evaluate
their claims. As discussed below, any carrier may seek waiver if it is
necessary and in the public interest to ensure that consumers in the
area continue to receive service.
125. Budget Amount. As noted above, the Commission has set a budget
for rate-of-return support of $2 billion per year, but only one of the
existing legacy high-cost mechanisms is subject to a defined cap. To
calculate the amount of support that will be available for disbursement
under HCLS and CAF BLS, the Universal Service Administrator will first
determine total demand from rate-of-return carriers (both those that
elected model-based support and those that remain on the reformed
legacy support mechanisms). Then, USAC will deduct CAF-ICC support for
rate-of-return carriers (not including affiliates of price cap
carriers) as specified under Commission's rules.
[[Page 24301]]
Then, during the ten-year term of CAF-ACAM support, the Administrator
will further deduct the amount of model-based support disbursements to
those rate-of-return carriers choosing model-based support and
transition payments, as applicable. The additional support provided to
facilitate the voluntary path to the model is temporary, and after the
end of the ten-year term, the budget control mechanism will apply to
all rate-of-return carriers. The amount remaining will be the total
support available to be disbursed under HCLS and CAF BLS. This amount
will first be calculated as of July 2016, and will be recalculated on
an annual basis to reflect changes in the CAF-ICC amounts paid to
carriers.
126. Budget Control Mechanism. The budget control mechanism the
Commission adopts is a variation on the NTCA budget control proposal
that NTCA suggested should be applied solely to its DCS broadband-only
mechanism. In essence, this proposal represents a compromise between
carriers with relatively small numbers of lines but with very high
costs and carriers with relatively more lines but with only moderately
high costs. The Commission finds that it strikes a fair balance among
differently-situated carriers.
127. Our budget control mechanism, as described in detail below,
will be applied to forecasted disbursements each quarter. For this
purpose, forecasted disbursements include payments made for HCLS,
payments for CAF BLS based on forecasted data for current period, and
true-ups associated with prior years but being disbursed during the
current period. There will be no retroactive application of the budget
control mechanism.
128. First, a target amount is identified for each mechanism--HCLS
and CAF BLS--so that in the aggregate disbursements for the mechanisms
equal the budgeted amount for rate-of-return carriers. This targeted
amount is calculated by multiplying the forecasted disbursements for
each mechanism by the ratio of the budgeted amount to the total
calculated support for the mechanisms. In this case, disbursements
include CAF BLS provided on a projected basis, as well as true ups of
that mechanism that apply to prior periods. This target amount will be
calculated for each mechanism once per year prior to the annual filing
of the tariffs.
129. The reduction of support under each mechanism will be split
between a per-line reduction and a pro rata reduction applied to each
study area. The per-line reduction will be calculated by dividing one
half the difference between the calculated support and the target
amount for each mechanism by the total number of eligible loops in the
mechanism. Because some study areas may have per-line support amounts
that are less than the per-line reduction, the per-line reductions as
applied may not precisely equal one-half the difference between the
calculated support and the target amount. In that case, the remaining
reductions will be achieved through the pro-rata reduction. The pro
rata reduction will then be applied as necessary to achieve the target
amount. For CAF-BLS, the per-line and pro rata reductions will
calculated once per year, prior to the annual filing of tariffs. For
HCLS, the per-line and pro rata reductions will be calculated
quarterly, using the most recently announced target amount.
130. HCLS Cap. As the Commission has done previously when carriers
have lost their eligibility for HCLS due to their status as affiliates
of price-cap carriers, the Commission directs NECA to rebase the cap on
HCLS to reflect the election of model-based support by HCLS-eligible
rate-of-return carriers. In the first annual HCLS filing following the
election of model-based support, NECA shall calculate the amount of
HCLS that those carriers would have received in the absence of their
election, subtract that amount from the HCLS cap, then recalculate HCLS
for the remaining carriers using the rebased amount.
131. Attribution of CAF BLS to Common Line and Consumer Broadband
Loop Categories. To permit carriers to submit tariffs that provide a
reasonable opportunity to meet their revenue requirements, it is
necessary to attribute the CAF BLS that a carrier receives, after any
reductions due to the budgetary constraint, to various cost categories.
Accordingly, a carrier will first apply the CAF BLS it receives to
ensure that its interstate common line and consumer broadband revenue
requirements are being met for the periods currently being trued up.
For example, from July 1, 2019, to June 30, 2020, true-ups will be made
with respect to the 2017 calendar year, and CAF BLS disbursements will
first be attributed to the extent necessary to ensure their revenues
meet their revenue requirements for 2017. Next, CAF BLS will be applied
to meet the carrier's forecasted interstate common line revenue
requirement for the current tariff year. This assignment of support
plus the revenues from end-user charges will meet the carrier's
interstate common line revenue requirement. A carrier will then apply
the remainder of its CAF BLS to the forecasted revenue requirement for
the new consumer broadband-only loop category during the current tariff
year. Any remaining unmet consumer broadband loop revenue requirement
will be met through the consumer broadband loop rate. This process will
permit, in some cases, consumer broadband-only loop rates to rise above
$42. The Commission notes that $42 is well below the reasonably
comparable rate for retail broadband service of $77.81. FCC, Reasonable
Comparability Benchmark Calculator, https://www.fcc.gov/encyclopedia/reasonable-comparability-benchmark-calculator (last visited Mar.4,
2016). On the whole, our actions in this Order will significantly
reduce the retail rates paid by broadband-only subscribers, improving
the reasonable comparability of rates. The Commission will, however,
continue to monitor consumer broadband-only rates to ensure that our
policies support reasonable comparability. On the whole, this process
targets the budgetary constraint to the broadband-only component of the
CAF-BLS mechanism, similar to NTCA's proposal to target the budgetary
constraint to its broadband-only DCS mechanism.
6. Broadband Deployment Obligations
132. In this section, the Commission takes steps to promote
``accountability from companies receiving support to ensure that public
investments are used wisely to deliver intended results.''
Specifically, the Commission adopts specific, defined deployment
obligations that are a condition of the receipt of high-cost funding
for those carriers continuing to receive support based on embedded
costs. These measures will help ensure that ``[c]onsumers in all
regions of the Nation . . . have access to telecommunications and
information services . . . that are reasonably comparable to those
services provided in urban areas.'' The Commission notes that USTelecom
and NTCA recognize that defined buildout obligations are ``essential to
a broadband reform effort.''
133. Discussion. In this section, to ensure that the Commission
makes progress towards achievement of universal service, consistent
with the statute, they adopt defined performance and deployment
obligations for rate-of-return carriers. The Commission's goal is to
utilize universal service funds to extend broadband to high-cost and
rural areas where the marketplace alone does not currently provide a
minimum level of broadband connectivity, and ``to distribute universal
service funds as
[[Page 24302]]
efficiently and effectively as possible.'' As noted above, in the USF/
ICC Transformation Order, the Commission built upon the existing
reasonable request standard, adopted a requirement to report
unfulfilled service requests, and required carriers to develop a five-
year plan to ensure that consumers in hard-to-serve areas have
sufficient access to broadband, while also ensuring universal service
support is utilized as effectively as possible. Through the adoption of
rules to transform ICLS into the CAF-BLS mechanism, the Commission now
builds on the foundation the Commission established in the USF/ICC
Transformation Order to distribute support equitably and efficiently
and advance the Commission's longstanding objective of closing the
rural-rural divide.
134. The Commission concludes that it now is time to establish
defined deployment obligations for every carrier to ensure it has a
framework to achieve our goal of universal service. As noted above,
ETCs are currently required to ``describe with specificity proposed
improvements or upgrades'' to their network throughout their service
area in their five-year plans.'' The Commission did not specify
specific numerical targets for those five-year plans, however, which
has hampered our ability to judge whether carriers are in fact taking
reasonable steps to extend broadband service. The Commission notes that
although many rate-of-return carriers have aggressively deployed
broadband service within their study areas, that progress has not been
evenly distributed. Indeed, while some carriers have deployed 10/1 Mbps
service to 99-100 percent of the census blocks within their study
areas, other carriers have not deployed to any.
135. Given the lack of any deployment by some providers and
extremely low levels of deployment by others, the Commission concludes
that some concrete standards for deployment are necessary to achieve
the Commission's goal of extending broadband to those areas of the
country where it is lacking. Indeed, the Commission has seen little to
no progress in deployment since the USF/ICC Transformation Order for
some areas, and there is no evidence that consumers in those areas will
receive access to broadband absent a more objective, measurable
requirement to do so.
136. To ensure that universal service support is utilized as
effectively as possible in furtherance of the Commission's goal to
achieve universal service, the five-year plan must operate as a
meaningful tool for Commission oversight and possess quantifiable
objective goals that can be easily measured and monitored. In this
Order, the Commission has replaced ICLS with Broadband Loop Support so
that all rate-of-return carriers can receive support for broadband-only
lines. The Commission is eager to see that this support results in more
widespread deployment. Moreover, in this Order, the Commission sets
allowances for capital expenses, which will result in a larger budget
for carriers whose deployment is less than the national average.
However, that reform, by itself, does not guarantee that a carrier will
make the investments needed to connect unserved consumers. Accordingly,
in conjunction with our adoption of the updated CAF-BLS mechanism and
capital expense allowances, the Commission adopts refinements to the
current five-year plan requirements designed to increase accountability
and ensure the extension of broadband to those areas of the country
where it is lacking. In particular, the Commission adopts a specific
methodology to determine each carrier's deployment obligation over a
defined five-year period, which will be used to monitor carrier
performance.
137. Methodology for Establishing Deployment Obligations. In this
section the Commission describes the specific methodology used to
determine each carrier's deployment location obligation over a defined
five-year period. The deployment obligation will be based on the
carrier's forecasted CAF BLS, and a cost per location metric, using one
of two methods, as suggested by commenters. To enable each carrier the
flexibility to determine which approach best reflects the unique
characteristics of their service territory, a carrier may choose to
either have its deployment obligation determined based on (1) the
average cost of providing 10/1 Mbps service, based on the actual costs
of carriers with similar density that have widely deployed 10/1
service, or (2) the A-CAM's calculation of the cost of providing 10/1
Mbps service in the unserved census blocks in the carrier's study area.
Carriers will be required to notify USAC which method they elect. USAC
will perform the mathematical calculations and provide to the Bureau a
schedule of broadband obligations for each carrier, which then will be
published in a public notice. The Commission describes more fully each
of these methods below.
138. Under the first step in this methodology, the Commission will
develop a five-year forecast of the total CAF-BLS support for each
rate-of-return carrier, which will include support for stand-alone
broadband loops. The Commission directs NECA to prepare forecasts
utilizing these assumptions in consultation with the Bureau and submit
them to USAC within 60 days of the effective date of this Order. USAC
is directed to validate any calculations submitted by NECA to ensure
they are accurate and reflect the specified assumptions. The Commission
agrees with commenters that knowing the level of anticipated support is
helpful when developing any associated deployment obligations.
Therefore, the Commission is confident that basing the new deployment
obligation on a support forecast will give carriers the relative
certainty they desire in their support going forward, allowing them to
plan new investment. The Commission notes that if a carrier's CAF BLS
is subsequently reduced based on the implementation of competitive
overlap rule adopted above, USAC will then recalculate that carrier's
deployment obligation based on a revised forecast of that carrier's CAF
BLS. Carriers cannot use locations in areas determined to be
competitive based on the competitive overlap determination to meet
their deployment obligation.
139. Each rate-of-return carrier that continues to receive support
based on the reformed legacy mechanisms will be required to target a
defined percentage of its five-year forecasted CAF-BLS support to the
deployment of broadband service where it is currently lacking. The
percentage of support will be determined on a carrier-by-carrier basis
for a five-year period. Specifically, consistent with the framework
suggested by the rural associations, rate-of-return carriers with less
than 20 percent deployment of 10/1 Mbps broadband service in their
entire study area, based on June 2015 FCC Form 477 data, will be
required to utilize 35 percent of their five-year forecasted CAF-BLS
support specifically for the deployment of 10/1 Mbps broadband service
where it is currently lacking. Rate-of-return carriers with more than
20 percent or greater but less than 40 percent deployment of 10/1 Mbps
broadband service in their entire study areas, will be required to
utilize 25 percent of their five-year forecasted CAF-BLS support
specifically for the deployment of broadband service where it is
currently lacking. Rate-of-return carriers with 40 percent or greater
but less than 80 percent deployment of 10/1 Mbps broadband service in
their entire study areas, will be required to utilize 20 percent of
their five-year forecasted CAF-BLS support specifically for the
[[Page 24303]]
deployment of broadband service where it is currently lacking.
140. Deployment obligations will then be determined by dividing the
dollar amount of the targeted CAF BLS by a cost-per-location figure.
First, the Bureau will prepare a list of all rate-of-return carriers
with at least 95 percent deployment of 10/1 Mbps broadband service
within their study areas, based on the most recent publicly available
FCC Form 477 data. The Commission believes it is reasonable to assume
that if a rate-of-return carrier is nearly fully deployed with 10/1
Mbps broadband service, the carrier has recently upgraded its network
and its current cost per loop is a reasonably good proxy for the cost
per line associated with extending 10/1 Mbps broadband. The Bureau will
sort the carriers into a number of groups based on the density of
housing units per square mile, utilizing publicly available U.S. Census
data. Any carriers subject to the current $250 per line per month cap
and the newly adopted opex limits will be excluded from the analysis.
The Bureau also may exclude any carrier whose costs appear to be an
outlier within a given density grouping. Then, USAC will determine the
weighted average cost per loop for the carriers that are 95 percent or
greater deployed for each density grouping, based on NECA cost data.
Carriers with 95 percent or greater deployment of 10/1 Mbps broadband
are likely to have deployed broadband relatively recently, so the
average should be generally reflective of the cost that carriers have
incurred to upgrade their networks. The Commission finds that this
process is reasonable because a carrier's weighted average cost per
loop is based on its particular density grouping, thus taking into
account costs for similarly-situated carriers. USAC also will determine
the weighted average of the cost per loop for carriers in the same
density band with a similar level of deployment, and then will increase
that figure by 150 percent. This is similar to the approach advocated
by NTCA and USTelecom, who suggested that the Commission use a figure
that is ``at least 150 percent of the average cost per loop'' of those
carriers with comparable density and deployment. It is reasonable to
assume that many of the locations left unserved will have costs higher
than the current average cost per loop, which by definition averages
the lowest cost and the higher cost locations. Given that the carriers
subject to the defined deployment are those that have deployed 10/1
Mbps broadband to less than 80% of their locations, it also is
reasonable to assume that they would choose to meet their deployment
obligations by extending service to their least costly unserved
locations, and not the most expensive unserved locations. Therefore,
the Commission concludes that a 150 percent increase above the weighted
average cost per loop of companies with similar density and deployment
levels is a reasonable approach that takes into account that costs will
likely higher when carriers extend broadband into unserved areas.
141. If the 150 percent of the weighted average of companies with
similar density and deployment is greater than the figure derived from
companies of similar density that have deployed to 95 percent or more
of locations, that larger figure will be the cost per location metric
used to size the obligation to deploy 10/1 Mbps broadband service. USAC
then will divide each carrier's specific five-year forecasted CAF-BLS
support amount by the specific embedded cost per location figure. The
quotient of this calculation will result in the exact number of
locations a carrier electing this option is required to deploy 10/1
Mbps broadband service to pursuant to its five-year plan.
142. As an alternative to the approach outlined above, carriers may
elect to have their deployment obligations determined based on the cost
per loop for that carrier as reflected in the adopted version of the A-
CAM, as suggested by NTCA and USTelecom. For this purpose, the relevant
figure will be the calculated cost for those census blocks that are
unserved with 10/1 Mbps, using the cost module. USAC will divide each
carrier's specific five-year forecasted CAF-BLS support amount by the
A-CAM calculated, carrier specific, average cost per loop for unserved
areas. The quotient of this calculation will result in the exact number
of locations a carrier electing this option is required to deploy 10/1
Mbps broadband service to pursuant to its five-year plan.
143. Deployment Requirements. In this section, the Commission
discusses in more detail the specific obligations of rate-of-return
carriers subject to the refined five-year plan requirements. The
Commission recognizes that certain locations in rate-of-return areas
may be very costly to serve, and requiring buildout to these locations
could place high demands on both rate-of-return carriers and consumers
across the United States who ultimately pay for USF. That is why the
Commission concludes--much like the Commission did in the April 2014
Connect America Order, 79 FR 39164, July 9, 2014--that it will not
require deployment using terrestrial wireline technology for any rate-
of-return carrier in any census block if doing so would result in total
support per line in the study area to exceed the $250 per-line per-
month cap. The Commission also notes that, pursuant to the capital
budget allowance they adopt, rate-of-return carriers may not exceed
$10,000 per location/per project when deploying broadband service
utilizing terrestrial wireline technology.
144. The Commission concludes that rate-of-return carriers with 80
percent or greater deployment of 10/1 Mbps broadband service in their
entire study areas, as determined by the Bureau based on June 2015 FCC
Form 477 data, will not have specific buildout obligations as a
condition of receiving CAF-BLS support. However, those carriers must
continue to deploy 10/1 Mbps or better broadband service where cost-
effective and utilize alternative technologies where terrestrial
wireline infrastructure is too costly, and report, as part of their
annual Form 481 filing, progress on the number of locations where 10/1
Mbps or better broadband service have been deployed within their study
area in the prior calendar year. The Commission emphasizes that any
CAF-BLS funding earmarked for the purpose of extending 10/1 Mbps
service to census blocks lacking such service may not be used to
improve speeds for those locations to which 10/1 Mbps service has
already been deployed. The Commission will continue to monitor the
deployment progress of these carriers: They may revisit this framework
in the future if such carriers do not continue to make reasonable
progress on extending broadband.
145. The Commission concludes that carriers subject to a defined
five-year deployment obligation may choose to meet their obligation at
any time during the five-year period. For example, a carrier can evenly
space out construction to targeted locations on an annual basis or
complete all of its required deployment within a single year. However,
should any carrier subject to a defined five-year deployment obligation
fail to complete the deployment within the stipulated five-year period,
the carrier is potentially subject to reductions in support pursuant to
section 54.320(c) of the Commission's rules, to be determined on a
case-by-case basis. In situations where the carrier makes no progress
towards meeting its defined five-year deployment obligation, and fails
to establish extenuating circumstances, the Commission reserves the
right to include such census blocks in an upcoming auction.
[[Page 24304]]
146. The Commission recognizes that even after the conclusion of
the initial five-year period, additional efforts will be necessary ``to
encourage continued investment in broadband networks throughout rural
American to ensure that all consumers have access to reasonably
comparable services at reasonably comparable rates.'' Therefore, the
Commission concludes that carriers with less than 80 percent deployment
of broadband service meeting then-current standards in their study
areas will be required to utilize a specified percentage of their five-
year forecasted CAF BLS to deploy broadband service meeting the
Commission's standards where it is lacking in subsequent five-year
periods. The same methodology will be used, with USAC updating the
average cost per loop amounts, based on the then-current NECA cost
data, and the Bureau updating the density groupings and percentage of
deployment figures, as appropriate.
147. The Commission concludes that the approach outlined above
improves on the proposal initially submitted by NTCA, USTelecom, and
WTA that rate-of-return carriers in receipt of BUSS support utilize at
least 10 percent of their support ``toward the goal of delivering
broadband at the then-current 706 broadband speed to `4/1[Mbps]
Unserved Locations.' '' The associations' earlier proposal failed to
include any quantifiable deployment objectives, making it an
ineffective tool for Commission oversight. Moreover, the Associations'
proposal placed too much emphasis on achieving the deployment of
advanced telecommunications capability, rather than the standards that
the Commission has established as its minimum expectation for universal
service. The Commission notes that USTelecom and NTCA more recently
indicated their support for the framework adopted in this Order. To
ensure that universal service support is used as effectively as
possible to close the rural-rural divide, the Commission must be able
to measure and monitor the deployment objectives outlined in a
carrier's five-year plan. As noted above, deployment has not been
consistent across all rural areas. Therefore, it is critical that the
Commission have a method to evaluate progress towards meeting the
established minimum 10/1 Mbps standard for high-cost support in each
study area and determine if remedial action is warranted.
148. On an ongoing basis, the Commission will assess broadband
deployment progress for all rate-of-return carriers based on carriers'
annual reporting on the progress of their broadband deployment, and
make adjustments, where warranted.
149. Reasonable Request Standard. In addition to defined
obligations to extend service to a subset of locations within a five-
year period, rate-of-return carriers remain subject to the reasonable
request standard for their remaining locations. Rate-of-return carriers
are required to demonstrate in an audit or other inquiry that they have
a documented process for evaluating requests for service under the
reasonable request standard and produce the methodology for determining
where upgrades are reasonable. Carriers that make no progress in
extending broadband to locations unserved with 10/1 Mbps broadband over
an extended period of time should be prepared to explain why that is
the case.
150. The Commission also takes further action to implement the
existing reasonable request standard to ensure that consumers in remote
areas are served. The Commission previously sought detailed comment on
implementation of the Remote Areas Fund, including the option of using
a competitive process to award support for such areas. Carriers will be
invited later this year to identify those census blocks where they do
not anticipate being able to deploy service under the existing
reasonable request standard (i.e. where it is unreasonable to extend
broadband meeting the Commission's current requirements) for inclusion
in the next Commission auction. The Commission directs the Bureau to
issue a public notice setting a deadline for identifying such census
blocks in advance of the timeframe for finalizing the list of eligible
areas that will be subject to auction.
151. The Commission notes that should a carrier choose to place
census blocks in the next Commission auction and another entity is
authorized to receive support for those census blocks to provide voice
and broadband service subsequent to the auction, the incumbent will not
be subject to the reasonable request standard and no longer will
receive support for those areas.
7. Impact of These Reforms
152. The adoption of the voluntary path to the model, coupled with
our update to the existing ICLS mechanism to provide support for
broadband-only loops, should be beneficial to carriers that are high-
cost, but no longer receive HCLS support due to the so-called ``cliff
effect.'' The Commission notes that the revenue benchmark they set for
broadband-only loops is lower than the effective benchmark for HCLS,
which only provides support for carriers with an average loop cost of
at least 115 percent of the frozen NACPL. Because the NACPL is frozen
at $647.42, a carrier only receives HCLS if its average cost per loop
on an annual basis is higher than $744.53, or $62.04 per month. Thus,
our reformed CAF-BLS mechanism will provide cost recovery for
broadband-only loops for many carriers that no longer are eligible for
HCLS support. This is one of the reasons why the Commission concludes
that over the long run, CAF BLS will be more sustainable and equitable
than HCLS and the former ICLS, supporting new broadband deployment to
areas where providers have been unable to build absent some subsidy.
153. The Commission will monitor the progress in broadband
deployment under the strengthened requirements for broadband deployment
and may take further action in the future should it appear that despite
these reforms, some high-cost areas remain unserved. The Commission
solicits input from all interested parties in the concurrently adopted
FNPRM as to whether there are other changes they could make to our
high-cost program, working within the defined budget, that would create
additional incentives to deploy broadband for companies in areas where
end user revenues alone are insufficient to make a business case to
deploy broadband.
154. In our predictive judgment, the mechanisms that the Commission
adopts today to keep disbursements within the previously adopted budget
will provide rate-of-return carriers with support that is sufficient to
meet the Commission's universal service goals. If any carrier believes
that the support it receives is insufficient, it may seek a waiver of
our rules. As the Commission noted in the USF/ICC Transformation Order,
``any carrier negatively affected by the universal service reforms . .
. [may] file a petition for waiver that clearly demonstrates that good
cause exists for exempting the carrier from some or all of those
reforms, and that waiver is necessary and in the public interest to
ensure that consumers in the area continue to receive voice service.''
The Commission stated that ``[w]e envision granting relief only in
those circumstances in which the petitioner can demonstrate that the
reduction in existing high-cost support would put consumers at risk of
losing voice services, with no alternative terrestrial providers
available to provide voice telephony service.'' It expressly noted that
parties requesting such a waiver would be subject to ``a process
[[Page 24305]]
comparable to a total earnings review.'' The Commission indicated that
it did not anticipate granting waiver requests routinely or for
``undefined duration[s]'' and provided guidance on the types of
information that would be relevant for such requests. In the Fifth
Order on Reconsideration, 78 FR 3837, January 17, 2013, the Commission
further clarified that ``the Commission envisions granting relief to
incumbent telephone companies only in those circumstances in which the
petitioner can demonstrate that consumers served by such carriers face
a significant risk of losing access to a broadband-capable network that
provides both voice as well as broadband today, at reasonably
comparable rates, in areas where there are no alternative providers of
voice or broadband.'' The Commission notes that the Tenth Circuit
upheld the Commission's decision to set the high-cost universal service
budget for rate-of-return carriers at $2.0 billion, and endorsed the
use of the waiver process as a means to address any special
circumstances when the application of the budget may result support
that is insufficient for a carrier to meet its universal service
obligations. The Commission further notes that to the extent parties
seek a waiver on the ground that support is insufficient, it may
request additional documentation pursuant to section 220(c) of the Act,
to ensure that it has a full and complete basis for decision.
155. Finally, the Commission notes that the promotion of universal
service remains a federal-state partnership. The Commission expects and
encourage states to maintain their own universal service funds, or to
establish them if they have not done so. The expansion of the existing
ICLS mechanism to support broadband-only loops and the voluntary path
to model-based support should not be viewed as eliminating the role of
the states in advancing universal service; far from it. The deployment
and maintenance of a modern voice and broadband-capable network in
rural and high-cost areas across this nation is a massive undertaking,
and the continued efforts of the states to help advance that objective
is necessary to advance our shared goals.
8. Administrative Issues
156. It is our desire to implement these revisions to our rules as
soon as possible. The Commission recognizes, however, that implementing
some of these changes will require new or revised information
collections requiring approval from the Office of Management and Budget
pursuant to the Paperwork Reduction Act. Further, some of the changes
the Commission adopts must be coordinated with the Commission's
existing cost accounting and tariffing rules. Given the administrative
requirements the Commission has noted, it does not anticipate that full
implementation of the new Connect America Fund Broadband Loop Support
and related changes will occur prior to October 1, 2016. The Commission
delegates authority to the Bureau to take all necessary administrative
steps to implement the reforms adopted in this Order.
157. USAC Oversight. USAC, working with the Bureau, will take all
actions necessary to implement these rule changes adopted in this
Order. The Commission notes that USAC has a right to obtain--at any
time and in unaltered format--all cost and revenue submissions and
related information provided by carriers to NECA that is used to
calculate payments under any high-cost support mechanism. The
Commission expects USAC to implement processes to validate any
calculations performed by NECA to ensure that accurate amounts are
disbursed, consistent with our decisions.
158. Administrative Schedule--In general. The administration of the
CAF-BLS mechanism will, as much as possible, follow the existing
precedent of the ICLS mechanism. In order to facilitate the operation
of the CAF-BLS mechanism, the Commission eliminates the June 30 updates
and revisions that had been permitted pursuant to ICLS. Accordingly,
the Commission specifies the following schedule:
------------------------------------------------------------------------
------------------------------------------------------------------------
March 31.......................... Carriers file with USAC projected
cost and revenue data, including
projected voice and broadband-only
loops, necessary to calculate a
provisional CAF-BLS amount for each
carrier for the following July 1 to
June 30 tariff year (ex. on March
31, 2017, carriers will file
projected data for July 1, 2017, to
June 30, 2018).
May 1............................. USAC files with the Commission in
Docket No. xx-xxx provisional CAF-
BLS amounts, having applied the
budgetary control based on CAF BLS
data filed on March 31, as well
previously known HCLS data and CAF-
BLS true-up information.
June 16........................... Tariffs filed by this date may be
deemed lawful for the following
July 1 to June 30 tariff year (ex.
on June 16, 2017, NECA files
tariffs for July 1, 2017, to June
30, 2018, relying on May 1 CAF-BLS
amounts).
July 1 to June 30................. USAC disburses provisional CAF-BLS
amounts to carriers (July 1, 2017
to June 30, 2018, in this example).
December 31....................... Carriers file actual cost and
revenue data and line count data
necessary to calculate final CAF-
BLS for prior calendar year (ex. on
December 31, 2018, carriers file
data for January 1, 2017, to
December 31, 2017).
July 1 to June 30................. USAC disburses true-ups for final
CAF-BLS amounts to carriers (ex.
true-ups associated with calendar
year 2017 disbursed from July 1,
2019, to June 30, 2020). To ensure
a consistent effect on the
budgetary constraint through the
year, the Commission modifies the
true-up process conducted under
ICLS so that under CAF BLS such
that true-ups are spread between
July 1 to June 30 of each tariff
year, rather than applying the true-
ups to the third and fourth
quarters of the calendar year, as
is currently done.
------------------------------------------------------------------------
C. Pricing Considerations
159. In the following subsections, the Commission addresses cost
allocation and tariff-related issues raised by adoption of the new CAF-
ACAM and CAF-BLS mechanisms discussed above. The implementation of
those support programs and the cost allocation and pricing issues
addressed below will be coordinated so that the appropriate cost
allocation and tariff revisions will occur when the new mechanisms
become effective.
1. Cost Allocation Issues
160. Today, broadband-only loops are generally offered through
interstate special access tariffs. The costs associated with those
loops are allocated 100 percent to the interstate jurisdiction by the
separations procedures in Part 36 and then to the special access
category by subparts D and E of Part 69. Under this process, the
interstate broadband-only loop costs are included in the special access
revenue requirement upon which cost-based special access rates are
determined. When the new high-cost support rules take effect, a carrier
may receive support for a portion of its broadband-only loop costs.
Unless an adjustment is made, a carrier could recover the costs
associated with the broadband-only loop twice--once through the CAF-BLS
mechanism and a second time through special access rates based on the
existing special access revenue requirement.
[[Page 24306]]
161. To avoid this situation, the Commission amends Part 69 in two
ways to implement the goal articulated in the April 2014 Connect
America Fund FNPRM of ensuring that no double recovery occurs. First,
the Commission creates a new service category known as the ``Consumer
Broadband-Only Loop'' category for the broadband-only loop costs that
are the subject of this Order. This new category in Part 69 will
encompass the costs of the consumer broadband-only loop facilities that
today are recovered through special access rates for the transmission
associated with wireline broadband Internet access service. For
purposes of this discussion, wireline broadband Internet access service
refers to a mass-market retail service by wire that provides the
capability to transmit data to and receive data from all or
substantially all Internet endpoints, including any capabilities that
are incidental to and enable the operation of the communications
service, but excluding dial-up Internet access service. This retail
service offered by rate-of-return carriers or their affiliates is
subject to the reasonable comparability benchmark. The wholesale input
discussed in this Order--the transmission component used to provide the
retail service--is subject to the Commission's rate-of-return
regulation, including the changes adopted herein, unless a carrier
seeks to convert to price cap regulation. A carrier electing price cap
regulation becomes subject to the rules governing price cap carrier
rates and obligations, including the transition path and recovery rules
applicable to price cap carrier switched access charges. See 47 CFR
51.907, 51.905. This category will be included along with the common
line category in the new CAF-BLS mechanism.
162. Second, the Commission revises part 69 of our rules to
reallocate costs to avoid double recovery. These revisions require a
carrier to move the costs of consumer broadband-only loops from the
special access category to the new Consumer Broadband-Only Loop
category. Today, the facilities associated with the common line and the
consumer broadband loop run between the end-user premises and the
central office, and are often the same technology or share some common
transmission capacity. Thus, it is reasonable to conclude that the
costs associated with these two types of lines are very similar. The
interstate Common Line revenue requirement includes 25 percent of the
total unseparated loop costs, while the consumer broadband-only loops
will include 100 percent of the total unseparated loop costs. For
purposes of deriving the amount of consumer broadband loop expenses to
be removed from the Special Access category. This does not revise any
rule associated with calculating the actual common line investment and
expenses. It is solely for the purpose of establishing the amount of
consumer broadband-only loop investment and expenses to remove from the
special access category, carriers will calculate common line investment
and expenses using an interstate allocation of 100, rather than 25. The
common line expenses produced by this calculation will then be divided
by the number of voice and voice/data lines in the study area to derive
the interstate common line expenses per line. The interstate common
line expenses per line will be multiplied by the number of consumer
broadband-only loops to derive the consumer broadband-only loop
expenses to be removed from the special access category. The Commission
takes this approach because it includes the broadest definition of loop
costs feasible based on our current cost accounting rules. These
actions will segregate the broadband-only loop investment and expenses
from other special access costs currently included in the special
access category, and also preclude cross-subsidization. The Commission
will oversee NECA's actions to ensure that these changes are
implemented consistent with the Commission's intent.
2. Tariffing Issues
163. Assessment of end-user charges. Today, rate-of-return carriers
assess SLCs on voice and voice/broadband lines. The SLCs are capped at
the lower of cost or $6.50 for residential and single-line business
lines and $9.20 for multiline business lines. Rate-of-return carriers
will continue to offer voice and voice/broadband lines under the
revised support mechanisms. Carriers will continue to be eligible to
assess SLCs on end-user customers of voice and voice/broadband lines
subject to the current rules. Carriers will also be permitted to assess
an Access Recovery Charge (ARC) on any line that can be assessed a SLC,
the same as today. Consistent with the existing rules, SLCs and ARCs
may not be assessed on lines eligible to receive Lifeline support.
164. Currently, a rate-of-return carrier may offer broadband-only
loops through its interstate special access tariff. The consumer
broadband-only loop service is the telecommunications input to a
wireline broadband Internet access service. When the revised rules
adopted herein become effective, a rate-of-return carrier may tariff a
consumer broadband-only loop charge for the consumer broadband-only
loop service. Alternatively, a carrier may detariff such a charge. If
the rate-of-return carrier chooses to detariff its wholesale consumer
broadband-only loop offering, it no longer will be voluntarily offering
the transmission as a service that is assessable for contributions
purposes. As such, it would not have a contributions obligation for
that service, similar to other carriers that previously chose not to
offer a separate tariffed broadband transmission service. The carrier
may not, however, tariff the charge to some customers, while
detariffing it for others. Because that service is not rate regulated,
no carrier should in any way represent or create the impression that
the broadband-only loop charge is mandated by the Commission. This
limitation is designed to preclude a carrier from using this
flexibility to discriminate among customers taking broadband-only
services.
165. Consumer broadband-only loop charge for a carrier electing
model-based support. A portion of the support a rate-of-return carrier
electing model-based support receives will be to cover a portion of the
costs of the consumer broadband-only loop. The broadband loop provides
a connection between the end user's premises and the ISP--either an
affiliated or nonaffiliated entity. The broadband-only loop is a
wholesale input into the retail broadband service offered by the ISP.
The cost of that loop is currently included in the Special Access
category, but will be shifted to the new Consumer Broadband-Only Loop
category by this Order. Support received under the model will not
replace all the carrier's consumer broadband-only loop costs. Thus, the
carrier may choose (but is not required) to develop a rate to recover
the remainder of its costs to assess on either the end user or the ISP,
depending on the pricing relationship established between the ISP and
the consumer. Above, the Commission found that $42 per month per line
represented a reasonable revenue amount that could be expected to be
recovered through such a charge for a broadband-only loop. The
Commission will allow--but does not require--a rate-of-return carrier
electing model-based support to assess a wholesale consumer broadband-
only loop charge that does not exceed $42 per line per month. If a
carrier chooses to assess a tariffed wholesale consumer broadband-only
loop charge, the revenues for that transmission service are subject to
a contribution obligation.
[[Page 24307]]
This rate cap allows a carrier the opportunity to recover its costs not
covered by the model, while limiting the ability of a carrier to engage
in a price squeeze against a non-affiliated ISP offering retail
broadband service. Although the retail service provided to the end user
customer is not constrained by this limitation such service is subject
to the reasonable comparability benchmark.
166. Participation in the NECA common line pool and tariff by
carriers electing model-based support. Some carriers that elect model-
based support may currently participate in the NECA pooling and
tariffing process for their common line offerings. Model-based support
replaces the high-cost support (i.e. HCLS, ICLS) amounts a carrier
would receive, as well as any CAF-BLS associated with consumer
broadband-only loops it would have been eligible to receive if it had
not elected model-based support. Carriers electing model-based support
will be treated as if they had received their full support amounts
under traditional ratemaking procedures. As a result, the only revenue
requirement remaining for the Common Line and Consumer Broadband-Only
Loop categories are those amounts associated with end-user charges. For
carriers electing model-based support, the Commission sees little
benefit from pooling their common line or consumer broadband-only loop
costs. In fact, it would likely increase the costs of administering the
pooling process with no concurrent benefit for carriers. The Commission
accordingly concludes that carriers electing model-based support will
not be eligible to participate in the NECA common line pooling
mechanism.
167. The Commission does find, however, that rate-of-return
carriers electing model-based support could benefit from continued
participation in the NECA tariffs. The Commission accordingly decides
to preserve the option for carriers to use NECA to tariff these
charges. The charges shall be capped at current levels for existing
charges, and at $42 for the consumer broadband-only loop charge. This
approach allows the carriers electing model-based support to benefit
from the administrative efficiencies associated with participating in
the NECA tariff.
168. Ratemaking for carriers not electing model-based support. Each
carrier that does not elect model-based support will have an interstate
revenue requirement for its Consumer Broadband-Only Loop category, as
determined pursuant to the procedures set forth in Part 69. The
projected Consumer Broadband-Only Loop revenue requirement is then
reduced by the projected amount of CAF-BLS attributed to that category
in accordance with the procedures in Part 54 defining such amounts. The
remaining projected revenue requirement is the basis for developing the
rates the carrier may assess, based on projected loops, A carrier may
not deaverage this rate within a study area. NECA shall employ
comparable procedures in its pooling process.
169. A carrier may tariff different pricing models for the loop
service, but it must select one model for a study area. A carrier in
the NECA pool that elects to detariff its consumer broadband-only loop
service must remove all of its Consumer Broadband-Only Loop category
revenue requirement from the pooling process. It will retain the
support that would have been applied to the Consumer Broadband-Only
Loop category revenue requirement if it had not detariffed its consumer
broadband-only loop rates, plus any revenue resulting from its
detariffed rates.
D. CAF-ICC Considerations
170. Discussion. The Eligible Recovery mechanism adopted in the
USF/ICC Transformation Order was a carefully balanced approach. The
plan to provide support for certain broadband lines adopted here will
alter the balance struck in the USF/ICC Transformation Order in two
significant ways, and CAF-ICC support could increase in a manner not
contemplated. As discussed below, the Commission revises our recovery
rules to account for the support changes adopted in this Order.
171. The first effect from providing support to consumer broadband-
only loops is a likely migration of some end users from their current
voice/broadband offerings to supported broadband-only lines due to
increased affordability of these services. Although the Commission
cannot predict the extent of this migration, such changes will reduce
the number of ARC-eligible lines under the current rules and thus the
amount of Eligible Recovery that the carrier can recover via ARC
charges. As explained above, recovery from CAF-ICC will be provided to
the extent carriers Eligible Recovery exceeds their permitted ARCs.
Thus, under the existing recovery rules, a migration of end users to
consumer broadband-only loop service would upset the careful balancing
of burdens as between end-user ARC charges and universal service
support, i.e., CAF-ICC. It is not our intent to alter significantly the
balance struck in the USF/ICC Transformation Order. To insure that our
actions today do not unintentionally increase CAF-ICC support, the
Commission requires that rate-of-return carriers impute an amount equal
to the ARC charge they assess on voice/broadband lines to their
supported consumer broadband-only lines. The projected demand for this
imputation will be subject to the same type of true-up as are the ARCs
assessed on voice/broadband lines.
172. The second effect that will occur from the adoption of support
for consumer broadband-only loops is that, as voice/broadband lines are
lost, a carrier's switched access revenue will go down. Absent
Commission action, the recovery mechanism would produce a higher
Eligible Recovery for the carrier and a higher CAF-ICC amount.
Nevertheless, the likelihood exists that some of the facilities used to
support the lost switched access services will be reused to provide a
portion of the broadband-only service. This is especially true with
respect to transport and circuit equipment, although it could include
other facilities as well. Thus, in some cases, the carrier would be
receiving some special access revenue recovering the costs of
facilities formerly used to provide switched access services. Such
circumstances would result in double recovery under the rules adopted
in the USF/ICC Transformation Order because the carrier would receive
CAF-ICC as well as special access revenues for the service being
offered--either tariffed or detariffed. The Commission accordingly
clarifies that a carrier must reflect any revenues recovered for use of
the facilities previously used to provide the supported service as
double recovery in its Tariff Review Plans filed with the Commission,
which will reduce the amount of CAF-ICC it will receive. This minimizes
the effect today's decision will have on the level of CAF-ICC support.
The reporting of any double recovery will be covered by the
certifications carriers must file with the Commission, state
commissions, and USAC as part of their Tariff Review Plans.
E. ETC Reporting Requirements
173. In light of our experience in implementing our high-cost
reporting requirements to date and our desire to respond to the
recommendation of the Government Accountability Office to improve the
accountability and transparency of high-cost funding, the Commission
now makes several changes to our reporting rules. In this section, the
Commission streamlines and revises rate-of-return ETCs' annual
reporting requirements to better align those
[[Page 24308]]
requirements with our statutory and regulatory objectives. First, the
Commission amends our rules to require rate-of-return ETCs to provide
additional detail regarding their broadband deployment during each
year, as suggested by several parties. Specifically, the Commission now
requires all rate-of-return ETCs to provide location and speed
information of newly served locations. The Commission also requires
rate-of-return ETCs electing model-based support to provide information
for the locations already served at the time of election. In
conjunction with these changes, the Commission eliminates the
requirement that rate-of-return ETCs file a five-year plan and annual
progress reports on that plan. The net result of these two changes will
be more targeted, useful information for the Commission, states, Tribal
governments and the general public. Second, given the reporting rules
the Commission adopts today for rate-of-return carriers, for
administrative efficiency, they make conforming changes to the
reporting rules for carriers that elected Phase II model-based support
(hereinafter ``price cap carriers''). Third, the Commission directs
USAC to publish in open, electronic formats all non-confidential
information submitted by recipients of high-cost support. The
Commissions concludes that these changes ensure that our reporting
requirements continue to be tailored appropriately to meet our
statutory and regulatory objectives.
1. Discussion
174. Broadband Reporting Requirements. The Commission now updates
our annual reporting requirements for rate-of-return ETCs as a
necessary component of our ongoing efforts to update the support
mechanisms for such ETCs to reflect our dual objectives of supporting
existing voice and broadband service, while extending broadband to
those areas of the country where it is lacking. The Commission
concludes that the public interest will be served by adopting broadband
location reporting requirements for rate-of-return carriers similar to
those they adopted for price cap carriers and authorized bidders in the
rural broadband experiments. This targeted rule change is critical for
the Commission to determine if universal service funds are being used
for their intended purposes. As recommended by the Government
Accountability Office, such data will enable the Commission and USAC to
analyze the data provided by carriers and determine how high-cost
support is being used to ``improve broadband availability, service
quality, and capacity at the smallest geographic area possible.''
175. Specifically, similar to the current requirements for price
cap ETCs, the Commission adopts a rule requiring all rate-of-return
ETCs, starting in 2017, and on a recurring basis thereafter, to submit
to USAC the geocoded locations to which they have newly deployed
broadband. These data will provide an objective metric showing the
extent to which rate-of-return ETCs are using funds to advance as well
as preserve universal service in rural areas, demonstrating the extent
to which they are upgrading existing networks to connect rural
consumers to broadband. USTelecom, NTCA, WTA and ITTA propose that
rate-of-return carriers submit the number of locations that are newly
served in the prior year, with both USTelecom and ITTA explicitly
proposing that ETCs electing CAF-ACAM support submit geocodes for such
locations. Rate-of-return ETCs will also be required to report the
number of locations at the minimum speeds required by our rules. The
location and speed data will be used to determine compliance with the
associated deployment obligations the Commission adopts today. The
geocoded location information should reflect those locations that are
broadband-enabled where the company is prepared to offer service
meeting the Commission's minimum requirements for high-cost recipients
subject to broadband public interest obligations, within ten business
days.
176. The Commission expects ETCs to report the information on a
rolling basis. A best practice would be to submit the information no
later than 30 days after service is initially offered to locations in
satisfaction of their deployment obligations, to avoid any potential
issues with submitting large amounts of information at year end. The
Commission concludes that the submission of information in near real-
time as construction is completed will be beneficial to all carriers
and particularly useful to smaller carriers. For instance, ETC
technicians will be able to upload the location information as part of
the routine process of updating its customer service availability
database upon completion of construction or in conjunction with
initiation of marketing efforts for the newly available service,
instead of having to record the location and transferring all of that
information to an annual report six to 18 months later. It should also
minimize the strain on USAC's information technology systems to avoid a
massive amount of bulk uploads centered on a single, annual deadline.
The Commission notes that the amount of information to be uploaded at
the end of the calendar year is likely to relatively low, as December
is not construction season in many locales. While rate-of-return ETCs
will have until March 1 to file their location data for the prior
calendar year, reporting on a rolling basis before then will allow
filers to receive real-time validation from USAC's system prior to the
deadline and thereby provide the opportunity to timely correct any
errors or avoid delays due to system overload.
177. The Commission finds that the benefits in collecting this
location-specific broadband deployment information outweigh any
potential burdens from reporting this data, particularly because rate-
of-return ETCs already collect location information for other purposes.
Rate-of-return carriers presumably maintain records of addresses that
are newly enabled with service, so that they can begin to market such
service to those customers. Moreover, rate-of-return carriers already
are required under our existing rules to maintain records for assets
placed in service indicating the description, location, date of
placement, and the essential details of construction. Thus, both for
marketing and regulatory purposes, rate-of-return carriers already are
tracking where they extend fiber and install other facilities, and
should be able to determine through commonly accepted engineering
standards which locations should be able to receive service at
specified speeds. The Commission directs the Bureau to work with USAC
to develop a means of accepting alternative information in those
instances where a postal code or other standardized means of geocoding
is not readily available. Furthermore, the Commission delegates
authority to the Bureau to act on individual requests for waiver of
this requirement in those cases where the parties can demonstrate other
unique circumstances that make compliance with the geocoding
requirement for a subset of locations impracticable.
178. Similar to the regime adopted for the price cap carriers that
elected Phase II model-based support, companies that elect model-based
support will include in their total location count any locations that
already have broadband meeting the Commission's minimum standards.
While the Commission encourages carriers to submit geocoded location
information for their existing broadband locations no later than the
deadline for the 2017 reporting, they recognize the possibility that
some smaller companies may not already
[[Page 24309]]
have complete lists of geocoded locations for their existing broadband
infrastructure that was deployed under the legacy rules. Accordingly,
while carriers electing the A-CAM model support are strongly urged to
report new construction on a rolling basis starting in 2017, the
Commission will provide an additional year for them to file geocodes
for pre-existing broadband-capable locations, with such information
required to be submitted to USAC no later than March 1, 2019. Two years
should be enough time for carriers to collect the necessary data on any
pre-existing deployment, while providing the Commission and USAC the
specific locations well in advance of the first interim deployment
obligation with a defined target.
179. The Commission concludes that it is necessary to establish a
standardized and automated system to collect the volume of location
level data on carrier progress in meeting deployment obligations.
Below, the Commission directs the Bureau to work with USAC to develop
an online portal that will be available for rate-of-return carriers to
submit location information on a rolling basis throughout the year. The
Commission directs USAC, working with the Bureau, to prepare a plan for
the efficient collection, analysis and access to this location data.
The plan should be provided to the Bureau within two months of release
of this Order and address the use of automated reminders for year-end
submission due dates, standardized data elements to the extent
possible, and the time frame necessary to implement an online portal.
180. The Commission also establishes certifications to be filed
with ETCs' location submission, to ensure ETCs' compliance with their
public interest obligations. Each rate-of-return ETC electing CAF-ACAM
support must certify that it met its 40 percent interim deployment
obligation at the time it files its final location report for 2020, due
no later than March 1, 2021, and file similar certifications annually
thereafter. Rate-of-return ETCs remaining on embedded cost mechanisms
must file a similar certification within 60 days of the deadline for
meeting their defined deployment obligations, i.e. March 1, 2022 and
March 1, 2027. The Bureau has delegated authority to adjust these
deadlines as necessary to align the timing of the implementation of the
various reforms. To ensure the uniform enforcement of ETCs' reporting
requirements, rate-of-return ETCs that fail to file their geolocation
data and associated deployment certifications due by March 1 of each
year in a timely manner will be subject to the same penalties that
currently apply to ETCs for failure to file the information required by
section 54.313 on July 1 of each year.
181. In conjunction with adopting the location reporting
requirements above to track rate-of-return ETCs' build-out progress,
the Commission now eliminates the requirement for rate-of-return ETCs
to file a service quality improvement plan. The purpose of the five-
year plan and annual updates was to ensure that ``ETCs [ ] use their
support in a manner consistent with achieving the universal
availability of voice and broadband.'' With the reforms adopted in this
order, rate-of-return ETCs are now subject to detailed broadband
buildout obligations, which provide a more defined yardstick by which
to measure their progress towards the universal availability of voice
and broadband service in their areas. The Commission therefore finds
that it is unnecessary for rate-of-return ETCs to file a five-year
service quality improvement plan. Moreover, the Commission concludes
that because there is no longer a requirement to file a service quality
improvement plan, they also should eliminate the obligation in our
rules for rate of return ETCs to file updates on that plan under our
authority to eliminate rules that are no longer applicable. The
Commission also modifies, on the same basis, other rules to remove
references to the service quality improvement plan.
182. Once the Commission receives Paperwork Reduction Act approval
for the revised requirement to report geocoded locations and the
elimination of our progress reporting requirement, rate-of-return ETCs
will no longer be required to file a progress report containing maps
and a narrative explanation of ``how much universal service support was
received, and how it was used to improve service quality, coverage or
capacity and an explanation regarding any network improvement targets
that have not been met . . . at the wire center level or census block
as appropriate.'' The Commission concludes that the geocoded location
lists that each recipient will be required to submit on an annual basis
will provide the Commission with more precisely targeted information to
monitor the recipients' progress towards meeting their public interest
obligations, and at that point there will no longer be a need for
recipients to file annual progress reports.
183. Connect America Phase II Reporting Requirements. Because USAC
will develop a unified reporting portal for geocoded location
information, the Commission finds good cause to make conforming changes
to the relevant reporting requirements for those price cap ETCs that
accepted Phase II model-based support. The Commission finds good cause
to change the timing of the submission of geocoded location information
without notice and comment to promote administrative efficiency for
both carriers and USAC. Instead of reporting such information in their
annual report, due July 1 for the prior calendar year, the Commission
concludes that it will serve the public interest for price cap carriers
to report on deployment by a deadline that is close to the end of the
calendar year, rather than six months later. This will enable USAC to
perform validations of compliance with the interim and final deployment
milestones more quickly than otherwise would be the case, and impose
remedial measures as necessary. Moreover, this change will unify
location reporting for all ETCs providing service to fixed locations,
minimizing administrative costs to USAC and simplifying monitoring of
progress by the Commission, USAC, states, other stakeholders, and the
public.
184. Specifically, upon the relevant Paperwork Reduction Act
approvals, price cap ETCs will be required to submit the requisite
information to USAC no later than March 1 of each year, for locations
newly enabled in the prior year. Because these changes will not go into
effect by the time the 2015 Form 481 is due on July 1, 2016, the form
and content of that filing will remain unaffected. They will be free--
and indeed, encouraged--to submit information on a rolling basis
throughout the year, as soon as service is offered, so as to avoid
filing all of their locations at the deadline. By filing locations in
batches as construction is completed and service is offered, they will
avoid any last minute problems with submitting large quantities of
information and be able to receive confirmation prior to the deadline
that information was received by USAC. As they do now, price cap
carriers will continue to make annual certifications that they are
meeting their public interest obligations, but will do so when
submitting the information to USAC by this deadline, rather than in
their annual reports. The Commission makes conforming edits to our
rules by moving the certifications in section 54.313(e)(3)-(e)(6) to
new section 54.316. In light of our unification of reporting
obligations, the Commission deletes the section of our rules regarding
price cap ETCs' deployment obligations
[[Page 24310]]
and certification of compliance (47 CFR 54.313(e)(2)(i)), (e)(2)(iii),
(e)(3)-(e)(6)), and the Commission moves price cap ETCs' existing
geocoding and certification obligations to the new section 54.316,
which now contains all ETCs' deployment and the majority of ETCs'
public interest certification obligations. Additionally, price cap
ETCs' geolocation data and associated deployment certifications will no
longer be provided pursuant to the schedule in section 54.313. The
penalties in section 54.313(j) for failure to timely file that
information would not apply absent additional conforming modifications
to our rules. Therefore, as is the case for rate-of-return ETCs, the
penalties for price cap ETCs to fail to timely file geolocation data
and associated deployment certifications will be located in new section
54.316(c).
185. Finally, for the reasons explained above for rate-of-return
ETCs, the Commission eliminates the requirement for price cap ETCs to
file a service quality improvement plan and to file annual updates, as
well as make conforming changes to our rules.
186. Improving Access to High-Cost Program Data. The Commission
directs USAC to timely publish through electronic means all non-
confidential high-cost data in open, standardized, electronic formats,
consistent with the principles of the Office of Management and Budget's
Open Data Policy. In 2014, the Commission directed USAC to publish non-
confidential program information for the schools and libraries
mechanism in an open and accessible format, and today's action extends
that same directive to the high-cost program, which represented roughly
50 percent of the entire USF in 2015. USAC must provide the public with
the ability to easily view and download non-confidential high-cost
information, including non-confidential information collected on the
Form 481 and the geocoded location information adopted above, for both
individual carriers and in aggregated form. The Commission directs USAC
to develop a map that will enable the public to visualize service
availability as it expands over time.
187. The Commission directs the Bureau to work with USAC to put
appropriate protections in place for ETCs to seek confidential
treatment of limited subset of the information. Entities, such as
states and Tribal governments, which already have access to
confidentially filed information for ETCs' within their jurisdiction,
will continue to have access to such information through the online
database. The Commission finds that making such data publicly available
will increase transparency and enable ETCs, the Commission and other
stakeholders to assess ETCs' progress in deploying broadband throughout
their networks as well as compliance with our rules. Once these updated
systems are operational, the Commission anticipates that it would no
longer require ETCs to submit duplicative information with the
Commission through ECFS and with state commissions. Rather, all such
information will be submitted to the Administrator, with federal and
state regulators, and Tribal governments where applicable, having full
access to such information. The Commission seeks comment on this
proposal in the concurrently adopted FNPRM.
188. As ETCs comply with the new public interest and reporting
requirements and broadband public interest obligations in this Order,
the Commission will continue to monitor their behavior and performance.
Based on that experience, the Commission may make additional
modifications as necessary to our reporting requirements.
F. Rule Amendments
189. The Commission takes this opportunity to make several non-
substantive rule amendments. The Commission finds that notice and
comment is unnecessary for rule changes that reflect prior Commission
decisions to eliminate several support mechanisms that inadvertently
were not reflected in the Code of Federal Regulations (CFR). Similarly,
the Commission finds notice and comment is not necessary for rule
amendments to ensure consistency in terminology and cross references
across various rules, to correct inadvertent failures to make
conforming changes when prior rule amendments occurred, and to delete
references to rules governing past time periods that no longer are
applicable.
190. First, the Commission removes section 54.301, Local switching
support, from the CFR. The Commission eliminated local switching
support (LSS) as a support mechanism in the USF/ICC Transformation
Order, but did not remove the LSS rule at that time. Second, the
Commission removes the first sentence of section 54.305(a), Sale or
transfer of exchanges, as it pertains to prior time periods and refers
to a rule, section 54.311, which no longer exists in the CFR. Third,
the Commission modifies two provisions of section 54.313(a) requiring
ETCs to submit a letter certifying that its pricing is in compliance
with our rules. The Commission concludes that a requirement for an ETC
to certify its compliance with a rule is substantially similar to the
requirement to provide a certification letter and the current letter
requirements may impose a burden without a material benefit. Fourth,
the Commission corrects the language regarding the existing
certification requirement in section 54.313(f)(1) to reflect the
Commission's decision in the December 2014 Connect America Order to
require rate-of-return carriers to offer at least 10/1 Mbps upon
reasonable request. Fifth, the Commission deletes paragraph
54.313(e)(2)(i) and modify language in paragraph 54.313(f)(1)(iii) of
our rules because the language in duplicative of language in other
parts of section 54.313. Sixth, as discussed above, in light of our
changes to our location reporting rules and our decision to no longer
require ETCs to file service quality improvement plans, the Commission
deletes references in our rules to the filing of progress reports for
those plans, delete our existing rule regarding price cap ETCs'
obligation to report geocoded locations and the rule requiring
certification of compliance with such ETCs' deployment obligations and
moves those requirements to new section 54.316. Seventh, the Commission
deletes subpart J of Part 54; the Commission eliminated the Interstate
Access Support (IAS) support mechanism for price cap carriers in the
USF/ICC Transformation Order, but did not at that time delete the
associated IAS rules from the CFR. Eighth, the Commission eliminates
section 54.904, the ICLS certification requirement, to reflect the
Commission's decision in the USF/ICC Transformation Order to eliminate
that rule and instead impose annual reporting requirements in section
54.313. Ninth, the Commission amends section 54.707 Audit controls so
that it reflects accurate cross references to rules that currently are
in existence and applicable. The Commission renames the existing rule,
section 54.707, as paragraph (a) and add new paragraphs (b) and (c) to
reflect rules that were adopted by the Commission in the USF/ICC
Transformation Order, but inadvertently not codified. Tenth, the
Commission amends sections 69.104(n)(ii) and 69.415(a)-(c) to remove
language that is no longer applicable. Eleventh, the Commission amends
section 69.603(g), Association functions, to remove references to
support mechanisms that no longer exist or functions that NECA no
longer performs, and to update terminology to reflect terms now used in
Part 54.
III. Order and Order on Reconsideration
191. As part of our modernization of the framework for rate-of-
return support, the Commission also
[[Page 24311]]
represcribes the currently authorized rate of return from 11.25 percent
to 9.75 percent in all situations where a Commission-prescribed rate of
return is used for incumbent LECs. The rate of return is a key input in
a rate-of-return incumbent LEC's revenue requirement calculation, which
is the basis for both its common line and special access rates and its
universal service support. This action is a critical piece of our
reform of the rate-of-return support mechanisms. A rate of return
higher than necessary to attract capital to investment results in
excessive profit for rate-of-return carriers and unreasonably high
prices for consumers. It also inefficiently distorts carrier
operations, resulting in waste in the sense that, but for these
distortions, more services, including broadband services, would be
provided at the same cost.
192. It is important that the Commission takes such comprehensive
action to ensure the prescribed rate of return is commensurate with the
investment risks incumbent LECs are undertaking today, such as
broadband network investments, and at the same time reflects current
market conditions. Our adoption today of self-effectuating measures to
ensure that high-cost support remains within the budget established by
the Commission in no way lessens the rationale for represcribing the
authorized rate of return. Our adopted rate of return will provide
rate-of-return carriers with economically efficient incentives to
deploy broadband to meet the needs of their customers. An unnecessarily
high rate of return inefficiently allocates funds away from carriers
with relatively low capital to other expense ratios toward those with
higher ratios. Moreover, an excessive rate of return inefficiently
distorts individual rate-of-return carriers' investment and other
decisions, reducing what can be achieved with available universal
service resources. While an excessive rate of return might provide a
minimally stronger incentive for rate-of-return carriers to extend
broadband network deployment, this would only be so for marginal
projects, which would likely be a minority of all potential projects.
As a general matter, deployment decisions are not sensitive to small
changes in profitability. In any case, the Commission concludes that it
is preferable to achieve our deployment objectives directly and
transparently through the adoption of defined mandates and appropriate
targeting of subsidies, rather than in a concealed manner by
maintaining an inefficiently high rate of return, which creates
distortions and also creates other unintended and difficult to predict
consequences. In addition to ensuring responsible stewardship of finite
universal service funds, our action here will also reduce certain rates
for customers in rural areas.
193. As described in detail below, the represcribed rate of return
will apply in all situations where a Commission-prescribed rate of
return is used. The rate of return is used to calculate interstate
common line rates, consumer broadband-only loop rates, as discussed
elsewhere in this Order, and business data service (i.e., special
access) rates and some forms of universal service support. Accordingly,
the new 9.75 percent rate of return will be used to calculate common
line rates, special access rates and universal service support for
rate-of-return incumbent LECs where applicable. In represcribing the
rate of return here, the Commission does not intend to affect the
calculation of and recovery amounts associated with switched access
rates that are currently capped or transitioning pursuant to the USF/
ICC Transformation Order. Relying primarily on the methodology and data
contained in the Wireline Competition Bureau's Staff Report--with some
minor corrections and adjustments in part to respond to issues raised
in the record--the Commission now identifies a more robust zone of
reasonableness between 7.12 to 9.75 percent. The Commission then adopts
a new rate of return at the top end of this range at 9.75 percent and a
transition to this authorized rate of return.
A. Discussion
1. Procedural Issues
194. Section 205(a) of the Communications Act requires the
Commission to give ``full opportunity for hearing'' before prescribing
a rate including the authorized rate of return for rate-of-return
carriers. However, as the Commission explained in the USF/ICC
Transformation Order, a formal evidentiary hearing is not required
under section 205, and the Commission has on multiple occasions
prescribed individual rates in notice and comment rulemaking
proceedings. In the USF/ICC Transformation Order, the Commission
specified the process for a new rate of return prescription proceeding
using notice and comment procedures, and on the Commission's own
motion, waived certain procedural rules to facilitate a more efficient
process, including specific paper filing requirements. The Commission
also sought comment in the USF/ICC Transformation FNPRM, 76 FR 78384,
December 16, 2011, on the rate of return calculation and the related
data and methodology to so calculate. In addition, as noted above, the
Bureau issued a Staff Report recommending a zone of reasonableness for
the rate of return and sought comment on its approach in a public
notice.
195. On December 29, 2011, NECA, the Organization for the Promotion
and Advancement of Small Telecommunications Companies, and the Western
Telecommunications Alliance (collectively, Petitioners) filed a joint
petition for reconsideration of the USF/ICC Transformation Order that
remained pending at the time the Staff Report was released. Petitioners
challenge, among other things, the procedures adopted in the USF/ICC
Transformation Order as ``insufficient to meet the hearing requirement
of section 205(a)'' and relevant provisions of the Administrative
Procedure Act (APA). Specifically, Petitioners argue that the
Commission must first address ``identified flaws'' in its rules
governing represcription before conducting a hearing based on those
rules, using procedures that are ``sufficiently rigorous for the
adjudicative, adversarial fact-finding process required under section
205(a) of the Act and the APA.'' The Rural Associations raised similar
issues in their comments on the Staff Report, which the Commission also
addresses.
a. Whether Commission Should Revise Prescription Rules Before
Represcribing Rate of Return
196. Petitioners argue that, prior to represcribing, the Commission
must first adopt revised rules addressing alleged ``flaws'' in the
prescription rules. According to Petitioners, the Commission ``admitted
its methodology for determining `comparable firms' was deficient'' in
that it did not know how to account for the fact that many rate-of-
return incumbent LECs are locally owned and not publicly traded.
Petitioners argue that the Commission should correct these alleged
``flaws'' in the rules before represcribing the rate of return.
Similarly, the Rural Associations and GVNW argue that having waived
Part 65 procedural rules governing prescription, the Commission must
establish clear replacement rules to govern the process under section
205. The Rural Associations note that in the 2001 MAG Order, 66 FR
59719, November 30, 2001, the Commission stayed the effectiveness of
section 65.101 to allow the Commission comprehensively to review the
Part 65 rules to ensure that decisions they make are consonant with
current conditions
[[Page 24312]]
in the marketplace but assert that ``complete review'' has yet to
occur.
197. The Commission disagrees with Petitioners and hereby deny
their Petition with respect to these claims. Petitioners
mischaracterize the Commission's prescription process as rigid
adherence to set methodologies. The rules provide a framework, but
leave the Commission discretion to qualitatively and quantitatively
estimate a rate of return. The Commission's prescription rules specify
the calculations for computing the rate of return, i.e., the cost of
capital and its component parts, ``unless the record in that
[prescription] proceeding shows that their use would be unreasonable.''
The orders cited by Petitioners in support addressed deficiencies with
the record, not necessarily with the rules themselves, and the
Commission has revised those rules since those orders cited were
released. Petitioners cite generally the 1990 Prescription Order, 55 FR
51423, December 14, 1990, as support for their arguments. The
Commission in the 1990 Prescription Order, however, rejected the notion
that the rules were so flawed that the rulemaking docket related to
Part 65 methodologies for calculating the rate of return would need to
be complete before represcribing, finding that ``while some refinements
might be desirable, the Part 65 procedures had worked quite well'' when
it initiated the prescription proceeding. Similarly, the Rural
Associations cite the 2001 MAG Order that stayed the section 65.101 to
allow time to review the Part 65 rules. The Commission, however,
reviewed the Part 65 rules in the 2011 USF/ICC Transformation Order &
FNRPM, waiving certain rules to facilitate a more efficient process.
Bureau staff also reviewed Part 65 rules in the Staff Report subject to
notice and comment proposing waiving certain provisions that are no
longer reasonable. By this Order, the Commission addresses instances
where strict application of our prescription rules would be
inconsistent with a methodologically sound estimate of the rate of
return. For example, the Commission revises the cost of debt formula as
discussed in further detail below, and waive the rule requirement to
calculate the WACC based on the cost of preferred stock. Where the
Commission finds that strict application of the rules would be
unreasonable, such as relying on ARMIS data from RHCs that is no longer
collected, they rely on reasonable alternatives. The Commission does,
however, conclude that the prescription rules and its calculations on
the cost of capital continue to provide an effective starting point by
which to determine an appropriate rate of return.
198. The Commission rejects Petitioners' claims that our
``methodology for determining `comparable firms' was deficient,'' and
that they do not know how to account for the fact that many rate-of-
return incumbent LECs are ``locally owned and not publicly traded.'' As
discussed in further detail below, the most widely used methods of
calculating the cost of equity, a key component in calculating the rate
of return, call for data from publicly traded firms, yet the vast
majority of rate-of-return carriers are not publicly traded. To address
this concern, the Commission selects below an appropriate set of
publicly-traded surrogate or proxy firms, for which financial data is
available publicly to infer the cost of equity for these carriers. Any
deficiencies in the methodology used to calculate the rate of return
and use of a proxy group can be and have been addressed in the Staff
Report and were subject to numerous rounds of notice and comment, which
the Commission considers and addresses again in this order.
b. Notice and Comment Procedures Satisfy Section 205(a) Hearing
Requirement
199. Petitioners also argue that the notice and comment procedures
the Commission adopted in the USF/ICC Transformation Order do not
satisfy the section 205(a) hearing requirement. The Rural Associations
and GVNW similarly argue that the procedural process seeking comment on
the Staff Report did not provide parties with the ``full opportunity
for hearing'' required by section 205(a). The Rural Associations assert
that this is because ``prior rate prescription hearings have often
involved multiple submissions from parties, giving each side a fair
chance to address and rebut proffered facts and arguments'' and parties
have ``reasonable access to discovery (mainly interrogatories and
document requests), either directly or as part of a required filing.''
Similarly, Petitioners argue that the Commission should clarify
procedures governing presentation of data and discovery. Petitioners
assert that the Commission did not explain why ``the need for
adjudicative fact-finding--which underlie the Part 65 rules--are no
longer operative.'' Petitioners assert that key to the ``ability to
participate fully in a rate-of-return prescription hearing is access to
two basic tools: (1) Disclosure of the information and assumptions
underlying the factual submissions of any parties seeking lower rates
of return; and (2) the ability to probe others' submissions for
weaknesses and errors.'' Finally, Petitioners argue that the Commission
should ``reinstate the 60-60-21-day time frames for adversarial filings
set forth in section 65.103 of its rules'' because this is ``critical''
for rate-of-return incumbent LECs with ``limited resources to develop
the data needed to prepare direct cases, to obtain the services of
qualified experts to analyze this data, and to respond fully to
adversarial filings.''
200. The Commission rejects these assertions because, consistent
with AT&T v. FCC, interested parties have had an opportunity to
participate in multiple rounds of comments. The Commission finds that
interested parties had sufficient notice and opportunity to comment on
the rate of return prescription process consistent with the APA and
section 205 of the Act. As the Commission observed in the USF/ICC
Transformation Order, a formal evidentiary hearing is not required
under section 205, and the Commission has on multiple occasions
prescribed individual rates in notice and comment rulemaking
proceedings. In fact, the Commission expressly rejected the proposition
that it could not ``lawfully use simple notice and comment procedures
to prescribe the rate of return authorized for LEC interstate access
services.'' In the USF/ICC Transformation Order, the Commission
explicitly waived outdated and onerous procedures historically
associated with represcription to streamline and modernize this
process. Indeed, the Commission noted that interested parties now file
documents electronically making it less burdensome for parties to
participate in the prescription proceeding. Accordingly, the Commission
determined that the paper hearing process was no longer necessary to
ensure adequate public participation.
201. Moreover, interested parties have had no less than three
different opportunities to participate in the represcription process.
In response to the USF/ICC Transformation NPRM, 76 FR 11632, March 2,
2011, interested parties had the opportunity to comment on whether to
initiate a represcription proceeding. Subsequently in response to the
USF/ICC Transformation FNPRM, interested parties had an opportunity to
comment on the methodologies used to calculate the WACC and rate of
return. The Commission received multiple submissions from parties,
which the Commission's Electronic Comment Filing System (ECFS)
generally makes available within 24 hours. The vast
[[Page 24313]]
majority of interested parties have had access to these materials via
the Internet, giving each side a fair chance to timely address and
rebut proffered facts and arguments. Based on these comments, the
Commission could have gone straight to order prescribing the rate of
return, but instead took the extra step of preparing, releasing and
seeking comment on the Staff Report.
202. In the USF/ICC Transformation Order, the Commission waived the
onerous section 65.103(b) 60-60-21 day filing schedule to coincide with
the pleading cycle of the USF/ICC Transformation FNPRM. As a result,
interested parties had 50 days to file comments and 30 days to file
replies on how the Commission should represcribe the rate of return.
Furthermore, interested parties had an additional 40 days to file
comments and 30 days to file reply comments on the data and
methodologies proposed by staff to calculate the rate of return in the
Staff Report. The Commission finds that interested parties had more
than sufficient time and opportunity to address significant arguments
and methodologies to calculate the rate of return in the record.
203. Although the Commission waived the section 65.101 requirement
that the Commission publish notice of the cost of debt, cost of
preferred stock, and capital structure computed in the section
65.101(a) notice initiating prescription, they find that all interested
parties had adequate notice of these calculations in the Staff Report.
Interested parties had an opportunity to review and comment on the
Staff Report, including numerous appendices calculating the embedded
cost of debt, betas, cost of equity, WACC, capital structure and times-
interest-earned ratios as well as the peer review reports on the Staff
Report. Furthermore, there was nothing to prevent parties from filing
direct cases or written interrogatories and requests for documents
directed to any rate of return submission as permitted under the
Commission's rules. In sum, the Commission finds that interested
parties had several opportunities to comment on the actual rate of
return calculations, thereby easily satisfying the APA and section 205
procedural requirements. Accordingly, the Commission denies the
Petition to the extent described herein.
2. Identifying and Obtaining Data To Compute WACC
204. The first step in the process to represcribe the rate of
return is to identify the appropriate data and methodologies to use in
calculating the WACC. To calculate the WACC for a company or group of
companies, Commission rules require the determination of: (1) The
company's capital structure, i.e., the proportions of debt, equity, and
preferred stock a company uses to finance its operations; and (2) the
cost of debt, equity and preferred stock. The rules specify the
calculations for computing components of the WACC, including capital
structure and the cost of debt and preferred stock, to determine a
composite for all incumbent LECs with annual revenues equal to or above
an indexed revenue threshold, adjusted for inflation. The rules do not,
however, require the Commission to use the results of those
calculations to determine the rate of return ``if the record in that
proceeding shows that their use would be unreasonable.'' The rules also
do not specify how to calculate the cost of equity, but there are
several widely-used asset pricing methods that the Commission should
consider in estimating the cost of equity, including the Capital Asset
Pricing Model (CAPM) and the Discounted Cash Flow Model (DCF). Both
models calculate the cost of equity based on an analysis of publicly
traded representative firms' common stock. While a firm's cost of debt
can generally be estimated from its accounts, or other public reports
of its borrowing costs, direct estimates of the cost of equity for
firms that are not publicly traded are not typically possible to make
(exceptions being if the firm was sold recently, or the occurrence of
some other event that revealed information about the expected income
stream and market value of the firm). In such cases, it is not uncommon
to infer equity costs from data on firms that are publicly traded.
205. The rules specify that the WACC be calculated using Regional
Bell Holding Companies (RHCs) data reported to the Commission through
Automated Reporting Management Information System (ARMIS) reports. When
the Commission last represcribed in 1990, it could rely on ARMIS
reports to estimate the cost of debt and capital structure, which came
from incumbent LECs with investment-grade bond ratings--companies
engaged in substantially the same wireline operations as the small
incumbent LECs also subject to rate-of-return regulation. The
Commission, however, has forborne from collecting ARMIS reports from
the RHCs so this data is no longer readily available. In the USF/ICC
Transformation FNPRM, the Commission sought comment on what additional
data the Commission should require and rely upon in the absence of
ARMIS data.
206. The Commission's rate of return prescription rules envision
calculating the WACC based on data from a proxy group of telephone
companies that are intended to represent the universe of rate-of-return
carriers. In the past, the Commission used the RHCs as proxy firms to
determine capital structure and the costs of debt, equity, and
preferred stock for all incumbent LECs. Today, with ARMIS reports a
thing of the past, and with the largest RHCs increasingly dissimilar
from the smaller rate-of-return incumbent LECs, the Commission must
expand its analysis beyond the RHCs to ensure that its analysis
reasonably reflects the nature of today's rate-of-return incumbent
LECs. The Commission finds that it is no longer reasonable to rely
exclusively on RHC data based on reports no longer collected as
specified in our rules. Accordingly, the Commission finds that they
must identify a comparable proxy group representing the universe of
rate-of-return carriers from which to draw data to calculate the WACC.
3. Identifying an Appropriate Proxy Group for Rate-of-Return Carriers
207. The reliability of our WACC calculation depends on the
representativeness of the proxy group the Commission selects. The
Commission sought comment in the USF/ICC Transformation FNPRM on the
group of companies that should be selected as proxies. Staff considered
comments filed in response, proposing that the Commission use data from
a proxy group of 16 companies consisting of (1) RHCs (RHC Proxies), (2)
mid-sized price cap incumbent LECs (Mid-Size Proxies), and (3)
publicly-traded rate-of-return incumbent LECs (Publicly-Traded RLEC
Proxies). Staff developed its recommended proxy group based on
qualitative comparison between rate-of-return carriers for which the
WACC is being calculated and potential proxies, considering whether the
proposed proxies face similar risks, which the cost of capital is a
function of, and whether they have a similar institutional setup. Staff
used a three-part test to select its proxy group looking at (1) whether
companies' operations consisted of significant incumbent LEC price-
regulated interstate telecommunications services, (2) the extent to
which firms offer the same or similar services as rate-of-return
carriers based on market and regulatory risks, and (3) the reliability
of financial data.
208. Commenters criticize staff's methodology for selecting its
proposed
[[Page 24314]]
proxy group with which it estimated the WACC. The Rural Associations
criticize the analysis for `` `streetlight effect' bias--i.e., the
tendency to use data simply because it is available, not because it is
relevant.'' The Commission disagrees and find that staff reasonably
relied on available data that was both relevant and reliable.
209. As an initial matter, there is scant reliable publicly
available data for estimating the cost of capital specific to rate-of-
return incumbent LECs. The most widely used methods of estimating the
cost of equity in particular call for data only available from
publicly-traded firms, yet the vast majority of rate-of-return carriers
are not publicly traded. A publicly-traded company's stock price and
dividend payments are observable, while those of a privately held firm,
including the overwhelming majority of rate-of-return incumbent LECs,
are not. Therefore, using the models used most often to estimate the
cost of equity, the cost of equity for firms that are not publicly
traded is inferred based on data from firms that are publicly traded.
Because the vast majority of rate-of-return carriers are not publicly
traded, the Commission must select an appropriate proxy group of
incumbent LECs, for which financial data is publicly available and
which face similar risks as rate-of-return carriers to calculate the
cost of capital.
210. Furthermore, staff selected the proxy group based in part on
the reliability of financial data such as the frequency equity is
traded and overall financial health. These factors were not, however,
the only factors. Staff also relied on publicly-available data and
observable stock prices for a proxy group of publicly-traded
telecommunications companies that would enable the development of
estimates that as closely as possible reflect the risk of the market
for regulated interstate telecommunications services. To select this
proxy group, staff applied a qualitative analysis that included a
number of different factors, including the extent to which a company's
operations could be classified as price-regulated interstate
telecommunications services and similarity to rate-of-return
operations. The Commission finds that staff's qualitative approach was
reasonable, not simply relying on available data, but data that was
both reliable and relevant to the analysis.
211. As one key criterion for selection, staff required that a
proxy firm derive 10 percent or more of its revenues from price-
regulated interstate telecommunications services as an incumbent LEC.
The Rural Associations characterize this selection criteria as
``arbitrary'' and without justification, which it claims is lower than
the rate-of-return incumbent LECs as a group. While the Commission
agrees with the Rural Associations that 10 percent is a relatively low
number, they find the proxy group of firms selected after applying the
10 percent threshold (along with the other criteria used in the Staff
Report) to be reasonable. Staff looked at earnings and revenues
reported on companies' Securities and Exchange Commission (SEC) Form
10-Ks to identify its proxy group. SEC Form 10-Ks for the proxy group
reveal that notwithstanding diversification, most, if not all, of the
firms in the proxy group derive a substantial, and in many cases, the
largest, portion of their revenues from facilities-based wireline
telecommunications services provided over networks that they own,
finance, build, operate, and maintain, which is exactly what rate-of-
return incumbent LECs do. Staff excluded from the proxy group
telecommunications companies that provide a different core or set of
core services, and/or different assets, scale, scope, customer base,
marketing strategy, market or market niche, and/or competitive position
than facilities-based wireline telecommunications services.
212. The WACC estimates the cost of capital for price-regulated
interstate special access and common line services which are
facilities-based wireline telecommunications services. The proposed
proxy group consisted of firms where, in addition to their price-
regulated business operations, a substantial portion of their business
operations that are not price-regulated provide facilities-based
wireline telecommunications services. Thus, an overall WACC estimate
for the firm as a whole should be a reasonable approximation of the
WACC for the price-regulated interstate access service. In fact, many
of the wireline network assets, e.g., wire centers, nodes, fiber or
copper, conduit, trenches, manholes, telephone poles, etc., are shared
among these different wireline services. Moreover, some of the
different wireline services are sold to the same customers. Thus, given
at least roughly similar supply-side characteristics, and roughly
similar demand-side characteristics, the risk of the facilities-based
price-regulated interstate access services and the risk of these
companies' other facilities-based services would reasonably be expected
to have roughly similar, though not precisely the same, level of risk.
There are no pure-play, price-regulated providers of wireline
interstate access services that issue publicly-traded stock on which to
base WACC estimates. The Commission therefore finds that staff's
application of the 10 percent threshold produces a reasonable proxy on
which to base estimates of the WACC for price-regulated interstate
access services.
213. The Rural Associations criticize staff's proxy group for
including RHCs Proxies, Mid-Size Proxies and Publicly-Traded RLEC
Proxies as unrepresentative of the market risks that rate-of-return
incumbent LECs face affecting their ability to attract capital. For
example, the Rural Associations proposed estimating the cost of capital
using rate-of-return incumbent LEC-specific data rather than data
assembled from staff's proxy companies. ICORE asserts that the RHC
Proxies and Mid-Size Proxies have more diverse offerings than rate-of-
return incumbent LECs which therefore face higher costs of capital. Ad
Hoc rebuts that argument, noting that it does not necessarily follow
that less diverse operations means higher cost of capital and
criticizes such arguments as ``pure speculation'' lacking any
evidentiary basis. AT&T notes that critics of staff's proxy group did
not submit data into the record to negate the need for proxies or
proxies more representative of rate-of-return incumbent LECs than
staff's proposed proxy. The Commission finds the staff's selection of
the proxy group reasonable for the reasons given above and reject the
Rural Associations' proposed proxy group for the reasons below.
214. In addition, the Rural Associations, the Alaska Rural
Coalition and peer reviewer Professor Bowman question the inclusion in
the proxy group of firms that had recently emerged from bankruptcy
proceedings, including FairPoint Communications, Inc. (FairPoint),
Hawaiian Telecom, as well as certain ``financially unhealthy'' Mid-Size
Proxies. Professor Bowman argues in general that rate-of-return
regulation is appropriate for companies that are financially healthy,
and that an operation that is subject to rate-of-return regulation
would not be expected to go bankrupt. Staff acknowledged in the Staff
Report that a company's overall financial health makes its financial
data more reliable in determining the cost of equity than that of a
company in financial difficulty, which was part of staff's three-part
test in selecting the proxy group.
215. FairPoint entered bankruptcy in October 2009 and exited in
January 2011, while Hawaiian Telecom entered bankruptcy in December
2008 and exited in October 2010. In the Staff
[[Page 24315]]
Report, staff generally based the betas, a variable included in the
CAPM cost of equity calculation that measures a company's stock
volatility relative to the market, on weekly data for the 5-year period
ending September 18, 2012. However, staff accounted for the FairPoint
and Hawaiian Telecom bankruptcies by basing their betas instead on
post-bankruptcy data. As a result, none of the data on which their
betas are based reflects the business changes FairPoint or Hawaiian
Telecom undertook during the periods prior to and during bankruptcy.
Staff's adjustment should minimize any potential error in the CAPM
estimates of the cost of equity for FairPoint and Hawaiian Telecom
relating to bankruptcy. As neither FairPoint nor Hawaiian Telecom pays
dividends, staff did not use the DCF model to estimate the cost of
equity for these two companies in the Staff Report. Further, capital
structure estimates are based on post-bankruptcy data, which should
minimize errors to the WACC estimates. In response to Bowman's
assumption that rate-of-return companies would not be expected to go
bankrupt, the Commission notes that there were other rate-of-return
incumbent LECs that went bankrupt that staff excluded from its proxy
group that otherwise would have met its three-part test. Thus, staff
was careful to calculate the rate of return based on data from its
proxy group that it felt were representative of most rate-of-return
companies.
216. The Rural Associations also criticize the financial health of
the Mid-Size Proxies included in staff's proxy group. Staff
acknowledged in the Staff Report that the Mid-Size Proxies in general
have a large share of debt in their capital structures, low times-
interest-earned ratios, and non-investment-grade debt ratings, and thus
are less than ideal for estimating the cost of capital. Staff also
found, however, that the Mid-Size Proxies are less diversified than
RHCs and thus match more closely the majority of rate-of-return
incumbent LECs' wireline service offerings. Staff further found that
the Mid-Size Proxies, like the majority of rate-of-return incumbent
LECs, but in contrast to the RHCs, have a significant fraction of their
incumbent LEC operations in sparsely populated, high cost, rural areas
of the country. Further, staff found that the Mid-Size Proxies have a
relatively large number of analysts' growth estimates compared to the
Publicly-Traded RLEC Proxies which is reflected in the consensus growth
rate used in the DCF model to estimate the cost of equity. Thus, in the
Staff Report, staff recommended that the Commission include the Mid-
Size Proxies in calculating a composite WACC, but not rely on them
exclusively.
217. The Commission agrees with the staff recommendation in the
Staff Report to include, but not rely exclusively on the Mid-Size
Proxies in the overall proxy group. The Rural Associations raised
concerns with the Mid-Size Proxies other than Windstream, because in
its view these firms are not in good financial health. The Rural
Associations, however, did not offer any concrete definition of good
financial health, nor any objective and practical criteria that might
be used to measure the health of the firms and to determine whether
they should be excluded from the process of estimating the WACC.
Although these Mid-Size Proxies might be less than ideal proxies for
estimating the cost of capital, the Commission is reluctant to exclude
them from the overall proxy group and thus lose the value these proxies
contribute generally to the data and WACC estimates. These incumbent
LECs operate in areas similar to the sparsely populated, high cost,
rural areas in which rural rate-of-return incumbent LECs operate, and
are publicly-traded and studied by financial professionals, making it
possible to develop WACC estimates for these companies using standard
cost of capital methodologies. In our judgement, averaging WACC
estimates for these Mid-Size Proxies along with estimates for the other
companies in the overall proxy group to develop an overall WACC
estimate for rate-of-return incumbent LECs is more likely than not to
improve the accuracy of the overall estimate, notwithstanding the
potential for error in the WACC estimates for the Mid-Size Proxies.
There is no perfect WACC estimate, as a WACC estimate made for any
company always will have some amount of error, which is why the
Commission considers a range of possible results.
218. In sum, the Commission finds that staff's approach to
identifying a representative proxy group to be reasonable, including
its decision to include RHC Proxies, Mid-Size Proxies, and Publicly-
Traded RLECs Proxies in the proxy group. Notably, joint peer reviewers
Albon and Gibbard found that the selections made appropriately balanced
the trade-offs of a proxy group that is too small, which results in
measurement errors, and a proxy group that is too large, which is
unrepresentative. The Commission reiterates and agrees with staff's
position that, collectively, the three groups represent a wide spectrum
of incumbent LEC operations, include both price cap and rate-of-return
regulated operations, and include those incumbent LECs with the most
widely traded equity, allowing greater confidence in the calculations
that rely on the public trading of stock, especially given that it is
highly uncertain where within that spectrum non-publicly-traded rate-
of-return incumbent LECs lie.
4. Data Relied on in Staff Report
219. The allowable rate of return should reflect a reasonable
estimate of the current cost of capital. The Bureau released the Staff
Report on May 16, 2013, calculating the WACC based on data then-
available. This raises the question whether the Commission should
continue to rely on such data to calculate the rate of return. The
Commission finds that changes to monthly average yields on Treasury
securities and corporate bond yields since the Staff Report was issued
are not significant enough to warrant a complete update of the data
used by staff to calculate the cost of capital. Accordingly, for the
reasons explained below, the Commission continues to rely on data in
the Staff Report used to calculate the WACC.
220. Section 65.101(a) of our rules specifies that the Commission
should initiate the rate of return prescription process when they
determine that the monthly average yields on 10-year Treasury
securities remain, for a consecutive six month period, at least 150
basis points above or below the average of the monthly average yields
in effect for the consecutive six month period immediately prior to the
effective date of the current prescription. As the cost of capital is
constantly changing as a result of the interactions in the financial
markets between buyers and sellers of debt and equities, our rule
recognizes that the existing rate of return is based on financial data
that is a snapshot in time and as such might not reflect the prevailing
cost of capital. Likewise, the data reflected in the Staff Report is a
snapshot in time that might not reflect the current cost of capital at
a different point in time. The rule implicitly recognizes that the cost
of debt and equity, in general, can be expected to move roughly
together over time, as debt and equity investors seek to optimize their
portfolios, choosing among alternative investments by balancing the
tradeoff between the expected risk and return of these alternatives,
and as firms seek to optimize their capital structures, choosing
between debt and equity to
[[Page 24316]]
finance their assets. The Commission also now has the benefit of
commenters' and peer reviewers' scrutiny of the Staff Report, including
the data relied on in that report.
221. The Commission therefore analyzes interest rates, similar to
the analysis contemplated under section 65.101(a), to determine whether
the data relied in the Staff Report to calculate the WACC is
appropriately current for represcribing the rate of return in this
Order. For this analysis, the Commission uses two different six-month
benchmarks against which to compare more recent interest rates. First,
the Commission calculates the average of the monthly average yields in
effect for the consecutive six-month period beginning October 2012 and
ending March 2013. To be thorough, the Commission calculates this six-
month average not only for 10-year Treasury securities, but also for 5-
, 7-, 20-, and 30-year securities, as published online by the Federal
Reserve and Moody's Aaa and Baa corporate bond yields which are
published online by the Federal Reserve. The Commission chooses this
six-month period because in the Staff Report (1) the expected risk-free
rate reflected in the CAPM was the rate in effect as of the market
close on March 26, 2013, (2) the stock prices and dividend payments
reflected in the DCF model were as of the market close on March 26,
2013, and (3) the growth rates used in the DCF model were as of March
27, 2013. For the second six-month benchmark, the Commission averages
the monthly average yields in effect for the consecutive six-month
period beginning July 2012 and ending December 2012. The Commission
calculates six-month averages for the same securities identified above.
The Commission chooses this six-month period because in the Staff
Report (1) the cost of debt is based on 2012 interest expense and debt
and equity outstanding data, and (2) the estimate of the expected
market risk premium used in the CAPM is based on stock price and
interest rate data for the years 1928 to 2012.
222. The Commission compares the most recent monthly yields on the
various Treasury and corporate securities to these two benchmarks. With
respect to the October 2012-March 2013 benchmark, the monthly average
yield on 10-year Treasury securities, the key benchmark in rule
65.101(a), in September 2015, the most recent month for which yield
data are published by the Federal Reserve, is 2.17 percent, as compared
to the six-month average of the average monthly yields, 1.83 percent.
This difference is only 34 basis points, a spread significantly less
than 150 basis points, the standard reflected in rule 65.101(a). The
differences between the September 2015 average yields on the 5-, 7-,
20-, and 30-year Treasury securities and on Aaa and Baa corporate
bonds, as compared to the six-month average of the monthly average for
each security, respectively, are as follows: 73, 66, 34, 2, -5, 36, and
65 basis points. The greatest difference between the six-month average
and any monthly average for any of these securities is the 107 basis
point difference that existed in December 2013 and January 2014 for 7-
year Treasury securities and December 2013 for 10-year Treasury
securities, but the average of these differences for these securities
were only 76 and 57 basis points, respectively, over the entire period.
The fact that greatest difference between the six-month average and any
monthly average for any of these securities is only 107 basis points
demonstrates that the difference was never as large as 150 basis points
relative to a single month, let alone for six consecutive months, the
standard under the Commission's rule. The average of the differences
between the six-month average and monthly averages throughout the
period for the 5-, 20- and 30-year Treasury securities and Aaa and Baa
corporate bonds were only 74, 36, 24, 42, and 27 basis points,
respectively.
223. With respect to the July 2012-December 2012 benchmark, the
monthly average yields on 5-, 7-, 10-, 20-, and 30-year Treasury
securities and Aaa and Baa corporate bonds in September 2015 as
compared to the six-month average of the average monthly yields for
each security, respectively, are as follows: 81, 78, 50, 21, 15, 57,
and 62 basis points. The greatest difference between the six-month
average and any monthly average for any of these securities is the 123
basis point difference that existed in December 2013 for 10-year
Treasury securities, but the average of these differences for this
security was only 68 basis points over the entire period. The average
of the differences between the six-month average and monthly averages
throughout the period for the 5-, 7-, 20- and 30-year Treasury
securities and Aaa and Baa corporate securities were only 75, 82, 53,
43, 61, and 22 basis points, respectively.
224. Based on these findings, the Commission concludes that
interest rate changes have not been sufficiently large between release
of the Staff Report and this Order adopting the new rate of return to
warrant updating the data in the Staff Report. The yields today on
Treasury securities and on Aaa and Baa corporate bonds are not
significantly different from the yields on these securities that
existed at the time of the study--the differences in all cases are much
less than 150 basis points. Accordingly, the Commission will rely on
the data reflected in the Staff Report, except in those instances where
the Commission makes adjustments to reflect valid concerns expressed by
the commenters and peer reviewers in the record of this proceeding. In
those cases, the Commission will use data of the same time periods as
the data in the Staff Report to ensure consistency.
5. Calculating the WACC
225. As discussed above, the WACC estimates the rate of return that
the incumbent LECs must earn on their investment in facilities used to
provide regulated interstate services in order to attract sufficient
capital investment. The Commission's rules specify that the composite
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 of the telephone companies:
WACC = [(Equity/(Debt + Equity + Preferred Stock)) * Cost of Equity] +
[(Debt/(Debt + Equity + Preferred Stock)) * Cost of Debt] + [(Preferred
Stock/(Debt + Equity + Preferred Stock)) * Cost of Preferred Stock]
226. The Commission's rules currently require that the capital
structure be calculated using the observed book values of debt,
preferred stock, and equity. Under the Commission's rules, capital
structure is calculated as follows:
Capital Structure = Book Value of a Particular Component/(Book Value of
Debt + Book Value of Preferred Stock + Book Value of Equity)
227. In the Staff Report, staff recommended calculating capital
structure using market values instead of book values as a better
indicator of a firm's target capital structure. The book value of a
firm is the book value of its equity plus the book value of its
liabilities whereas the market value is the amount that would have to
be paid in a competitive market to purchase the company and fulfill all
of its financial obligations, i.e., the sum of market values of debt
and equity. Staff found that several carriers within the proxy group
have book value capital structures in excess of 100 percent debt plus
equity, which is nonsensical because presumably a firm's stock trades
at a positive price. Because a firm normally has a positive equity
value, its debt should be less than 100 percent debt plus equity.
Accordingly, staff
[[Page 24317]]
concluded that book values did not provide reasonable data with respect
to capital structure as required by section 65.300. Instead, staff
proposed using market values as a more accurate approximation of
capital structure. Commenters did not weigh in on staff's proposed
approach. Professor Bowman recommends an alternative approach be
considered for calculating capital structure based on the capital
structure that would be appropriate to ``encourage a new entrant in a
(quasi) regulated competitive market.'' Bowman notes, however, that
this method is ``unavoidably subjective to a degree beyond that of the
standard estimations developed in [the Staff Report].'' Staff noted a
similar alternative approach in the Staff Report, a hypothetical
capital structure that regulators sometimes use to develop WACC
estimates. The Commission finds that the firms themselves know more
about their businesses than they could, therefore it will not
substitute our judgement for firms' real-world decision-making as to
the choice between debt and equity financing, as reflected in the data.
Moreover, a capital structure that would encourage market entry is
difficult to estimate and, as Bowman asserts, is subjective, as there
is no widely accepted theory on the debt-equity choice. Therefore, the
Commission declines to adopt this approach. The Commission finds that
staff's approach using market values instead of book values to estimate
capital structure is reasonable and adopt this approach.
a. Cost of Debt
228. The embedded cost of debt is the cost of debt (expressed as a
rate of interest) issued by the firm in the past and on which it paid
interest over an historical accounting period (e.g., the most recent
calendar year). The current cost of debt is the cost of debt that the
firm would issue today and on which it would pay interest going forward
(and thus sometimes is said to be a forward-looking cost). In the Staff
Report, staff calculated the cost of debt based on the embedded cost of
debt formula specified in the Commission's rules with data derived from
staff's proxy group SEC Form 10-Ks. In the alternative, staff
considered calculating the cost of debt based on the current cost of
debt, which would be based on the current yield on bonds that have the
same rating as the proxy firms, and for a maturity period comparable to
the maturity period typical for the debt issued by the proxy firms.
Staff found, however, that estimating the current cost of debt would be
too imprecise because it would have to account for the many
characteristics of debt that affect the yields paid in debt, including
maturity, fixed versus variable interest rates, seniority, and callable
versus convertible debt. Staff also reasoned that a more precise
calculation might also require knowledge of how much of each type of
debt instrument each company uses. Ultimately, staff concluded that, on
average, the embedded cost of debt and the current cost of debt should
not differ significantly among the proxy group given declining interest
rates and that companies in good financial health are able to
refinance, provided there have not been substantial changes in the cost
of debt since the last filed SEC Form 10-K. Therefore, staff
recommended estimating the cost of debt based on the embedded cost of
debt formula in the Commission's rules, as corrected. The Commission
agrees with staff's general approach with corrections to the embedded
cost of debt formula recommended and noted below.
229. The Commission's rules provide that the cost of debt is
calculated as follows:
Embedded Cost of Debt = Total Annual Interest Expense/Average
Outstanding Debt
where ``Total Annual Interest Expense'' is equal to ``the total
interest expense for the most recent two years for all local exchange
carriers with annual revenues equal to or above the indexed revenue
threshold as defined in section 32.9000'' and ``Average Outstanding
Debt'' is equal to ``the average of the total debt for the most recent
two years for all local exchange carriers with annual revenues equal to
or above the indexed revenue threshold as defined in section 32.9000.''
230. As noted in the Staff Report, this formula overstates the cost
of debt because it uses two years' interest expense divided by an
average of two years' total debt. This would approximately double the
embedded cost of debt, resulting in an incorrect input to the WACC. The
Commission finds that the changes the Staff Report made to the
definitions used in the equation in the Commission's rules for
calculating the embedded cost of debt are correct and will use these
revised definitions to estimate the cost of debt for purposes of
represcription. The Commission therefore adopts the following formula
from the Staff Report for calculating the embedded cost of debt based
on the most recent year's interest expense:
Embedded Cost of Debt = Previous Year's Interest Expense/Average of
Debt Outstanding at the Beginning and at the End of the Previous Year
231. While the Staff Report did correctly modify the Commission's
existing formula, it failed to implement the revised formula correctly,
as USTelecom and AT&T point out. In particular, staff used 2012 total
interest expense in the numerator of the revised formula and the
average of outstanding non-current long-term debt at the end of 2011
and 2012 in the denominator. This calculation understates the total
amount of debt in the denominator because it excludes the current
portion of long-term debt on which the carriers continue to pay
interest. Thus, the Staff Report overstated the cost of debt.
232. USTelecom proposes an alternative approach that eliminates
this error and that purports to capture a more forward-looking cost of
debt. In particular, USTelecom proposes that company financial reports
(i.e., SEC Form 10-Ks) be used to develop the cost of debt by dividing
reported long-term debt interest payment obligations for 2013 by total
long-term debt as of December 31, 2012. As an initial matter, this is
not a true ``forward-looking'' (i.e., a current cost) methodology
because it is based on the interest payment obligations on debt that
was issued in prior years, not on interest obligations on newly issued
debt. For the reasons given in the Staff Report, as discussed above,
the Commission will not estimate the current cost of debt but will rely
on the embedded cost of debt formula, as corrected, in the Commission's
rules.
233. In addition, USTelecom's proposed approach uses data from a
section of the SEC Form 10-K reports that at least for some carriers
does not account for the fact that bonds often are sold at a discount
below or a premium above the face value of the bond. Thus, the
numerator in USTelecom's debt calculation is based on interest
``payments,'' which does not account for discounts and premiums, rather
than based on interest expense, which does account for discounts and
premiums, under generally accepted accounting principles (GAAP).
Meanwhile, the debt in the denominator is the principal or payoff
amount of the debt, which does not account for discounts and premiums,
rather than the amount of debt outstanding, net of discounts and
premiums, as recorded on the balance sheet. As a result, the cost of
debt under this approach would understate the effective rate of
interest for a bond sold at a discount or overstate this rate for a
bond sold at a premium. The Commission therefore declines to adopt
USTelecom's proposed approach.
234. The Commission's rules further specify that total interest
expense be used in the numerator of the embedded
[[Page 24318]]
cost formula. The Commission interprets the word ``total'' in the
phrase ``total interest expense'' to refer to the total of both short-
and long-term interest expense, not just long-term expense, as was used
in this formula in the Staff Report. In the 1990 Represcription Order,
55 FR 51423, December 14, 1990, the Commission included in the
numerator of its embedded cost of debt calculation both short- and
long-term interest expense. The Commission's formula for estimating the
embedded cost of debt includes the average of total debt in the
denominator. The Commission interprets the word ``total'' in the phrase
``total debt'' to refer to the total of short- and long-term debt, not
just long-term debt, as is used in this formula in the Staff Report. It
necessarily also includes the current portion of the long-term debt
because interest must be paid on the current portion of long-term debt,
and this interest would be reflected in the numerator as part of total
interest expense. If the interest expense related to the current
portion of long-term debt is in the numerator, then to be logically
consistent the current portion of long-term itself would have to be
included as part of the total debt in the denominator. In the 1990
Represcription Order, the Commission included in the denominator of its
embedded cost of debt calculation both short- and long-term debt and
presumably the current portion of the long-term debt.
235. The Commission includes as part of total debt in the
denominator of the embedded cost of debt calculation, obligations under
capital leases, including the current portion of capital leases. It is
not entirely clear whether the Commission included capital leases in
its debt calculation in the 1990 Represcription Order. Obligations
under capital leases, however, were identified at that time as part of
total long-term debt in FCC Form M and ARMIS reports. Likewise,
interest expense related to capital leases was included as part of
total interest and related items in these reports. Thus, including
obligations under capital leases and the related interest expense in
the cost of debt calculation seemingly would have been consistent with
the accounting reflected in the FCC Form M and ARMIS reports. The
Commission includes capital leases here as part of total debt because
the leasee assumes some of the ownership risks of the asset that is
being leased, while it benefits from the productive deployment of that
asset. Moreover, an asset (e.g., the equipment that is being leased)
and a liability (the lease payment obligations) are recorded on the
leasee's balance sheet, while the depreciation of that asset and the
interest portion of the lease payment are reflected as expenses on the
income statement. And as a practical matter, including capital leases
in the cost of debt calculation is the easiest way to ensure
consistency between total interest expense in the numerator and total
debt in the denominator in the cost of debt calculation for each
company, and consistency in this calculation among all companies, given
the complexities and the lack of standardization among SEC Form 10-K
reports.
236. Professor Bowman states that the Staff Report is not clear on
what is considered debt in its reported capital structure data. While
Bowman is addressing capital structure, his point is also relevant to
our discussion of how the cost of debt is calculated because the
Commission concludes the specific types of debt included in the debt
portion of the capital structure should be consistent with the types of
debt for which the cost of debt is calculated, to the extent possible.
Bowman posits that all interest bearing debt should be used, arguing
that the fact that an interest bearing debt is due in less than one
year does not change its characteristic of being debt, while non-
interest bearing liabilities should not be classified as debt. Bowman's
preferred definition of debt is consistent with the definition
reflected in our rules for estimating the embedded cost of debt and
with the data the Commission used for this calculation in the 1990
represcription proceeding. The Commmission concludes that, consistent
with Professor Bowman's recommendation and our rules, the embedded cost
of debt calculation should reflect short- and long-term debt, including
the current portion of long-term debt, capital leases, including the
current portion of long-term leases, all of the interest expense
related to such debt and leases, and should account for premiums and
discounts on the long-term debt. Based on data from each proxy's SEC
Form 10-K, the Commission revises the embedded cost of debt calculation
reflected in the Staff Report accordingly.
237. In the Staff Report, staff estimated the cost of debt for the
proxy group of 16 carriers used in that report to be 6.19 percent.
Under the revised calculation, the Commission now estimates the
embedded cost of debt for the proxy group of 16 carriers used in the
Staff Report to be 5.87 percent. The Commission also will revise the
WACC estimate to reflect this revised cost of debt calculation for each
carrier in the proxy group. The Commission also concludes that the
definition of debt reflected in the estimate of capital structure
should be the same as the one reflected in the estimate of the embedded
cost of debt. Accordingly, the Commission revises the estimate of the
capital structure developed in the Staff Report so that it reflects the
same definition that they adopt in this order for estimating the
embedded cost of debt. The average of the revised estimate of the
capital structure for the proxy group is 54.34 percent debt and 45.66
percent equity.
b. Cost of Equity
238. The Commission's rules do not specify how the cost of equity
is to be calculated, and there are several methods that might be used
to estimate the cost of equity. The Capital Asset Pricing Model (CAPM)
is the most widely used method in commerce, while the Commission relied
on the Discounted Cash Flow Model (DCF) to calculate the cost of
capital in the 1990 Represcription Order. Both models calculate the
cost of equity based upon an analysis of firms' common stock, among
other inputs. Staff recommended using both CAPM and DCF to determine
the cost of equity, and to create a zone of reasonableness, because
both models have different advantages and limitations.
(i) Capital Asset Pricing Model (CAPM)
239. CAPM is widely used by financial practitioners to calculate
the cost of equity of publicly traded firms. The required rate of
return in CAPM is the sum of the risk free interest rate and an asset
beta times a market premium. The required rate of return in CAPM is:
Asset rate of return = Risk free interest rate + (Asset Beta * Market
Premium)
(a) Primary Variables in CAPM
240. Risk-Free Interest Rate. The risk free interest rate is the
return that investors expect to earn on their money having the
certainty that there will be no default. AT&T, the Rural Associations,
Alaska Rural Coalition and GVNW assert that the way staff in the Staff
Report calculated the risk-free rate of return interest rate is
artificially low because staff chose a 10-year Treasury interest rate
for a single day. Staff used the then-current 10-year Treasury note,
1.92 percent on March 26, 2013, as the risk free interest rate. The
Alaska Rural Coalition and AT&T assert that use of this interest rate
fails to acknowledge that interest rates were at historic lows at this
point in time. In the alternative, AT&T proposes taking
[[Page 24319]]
an average of 20-year Treasury bond rates over the past six months.
AT&T argues that while use of the most current day's rate of interest
might be an unbiased predictor, it has a large variance, and so an
average rate calculated over a period such as the past six-months
should be used instead. Professor Bowman agrees with staff that ``the
WACC, and hence the costs of debt and equity, should be a forward
looking estimates'' and ``[c]urrent rates on Treasury bonds reflect
future interest rates.'' However, Professor Bowman recommends averaging
over a reasonably long period of time, perhaps three to six months.
241. Staff used as the expected risk-free rate the then-current
rate of interest at the market's close on March 26, 2013, rather than
an historical average of past interest rates calculated over a period
of time, a forecast, or a rate based on some other methodology. Staff
reasoned that the current interest rate as of a single day was the best
predictor of the future interest rate on government securities
incorporating investors' current expectations about the future rate.
Staff noted that the current interest rate frequently is a better
predictor of future interest rates than professional forecasts. Staff
relied on an efficient market theory, taking as an assumption that bond
markets are efficient, meaning that interest rates factor in all
publicly-available information, and that current interest rates adjust
quickly to reflect new public information as it becomes available.
Staff noted criticisms of the efficient market theory in the Staff
Report. Efficient markets do not mean perfect markets--public
information that is thought to be reflected in interest rates is not
always accurate; bond markets are surprised by and overreact or
underreact to new events and new or revised information. At the same
time, many practitioners recognize that professional forecasts have
value, though these forecasts always will have error, and commenters
express a concern that use of a single day's rate as the predictor of
future rates ignores the relatively low level of today's interest
rates.
242. Accordingly, instead of relying solely on efficient market
theory and use of the then-current, March 26, 2013 rate of interest on
the 10-year Treasury note as the expected risk-free rate, the
Commission concludes that a blended approach taking all these factors
into account would be preferable. The Commission therefore derives the
risk-free rate of return interest rate by weighting equally: (1) The
March 2013 average 10-year rate, thus recognizing in part the tenets of
efficient market theory; and (2) the 3.70 percent 10-year forecast for
the 10-year Treasury rate by produced by the Survey of Professional
Forecasters for the first quarter of 2013 published by the Research
Department of the Federal Reserve Bank of Philadelphia, and referenced
by the Rural Associations in their comments, thus also recognizing the
value of professional forecasts. The Commission believes that this
blended approach reasonably reflects the acknowledged, albeit
imperfect, predictive value of current interest rates, and the value of
the informed, though imprecise, judgement of professional forecasters.
243. Use of the March 2013 average 10-year Treasury rate as part of
this revised approach is consistent with AT&T's and Professor Bowman's
suggestions that an average interest rate be used rather than the rate
on a single day. The Commission disagrees, however, with their
suggestions that this average should be calculated looking back over a
period as long as three or six months. The Commission believes that
capital markets are reasonably efficient. The primary reason for using
a historical average, in our view, is to ensure that any temporary
aberration in the interest rate on any given day not be erroneously
reflected in the estimate. In other words, the purpose is to smooth out
any large, though random, variation that might be in the interest rate
on any given day, especially during a period in which markets might be
particularly volatile. The Commission believes that a one-month average
is long enough to ensure that the estimate does not reflect any such
aberration. At the same time, a one month average is short enough that
it is reasonably consistent with the notion that bond markets are
efficient, so that it reflects reasonably fresh, publicly-available
information.
244. The March 2013 average 10-year rate is 1.96 percent, slightly
higher than the March 26, 2013 interest rate of 1.92 percent used in
the Staff Report, and also higher than the three-month average of 1.95
percent from January 2013 to March 2013, and the six-month average of
1.83 percent from October 2012 to March 2013. The 3.70 percent 10-year
forecast for the 10-year Treasury rate produced by the Survey of
Professional Forecasters, the other part of the blended approach to
estimating the risk-free rate, is the mean of the forecasts reported by
26 professionals surveyed by the Federal Reserve Bank of Philadelphia.
While the Commission might be able to obtain forecasts of this rate
made by other professionals, they rely on this forecast because it has
been subject to the scrutiny of the parties to this proceeding, and no
such party has given any reason as to why it might be unreliable or
should not be used. The Commission concludes that use of this forecast
further informs the estimate of the risk-free rate, and is responsive
to criticisms that the Staff Report failed to account for the
relatively low level of today's interest rates. The Commission
therefore finds that a reasonable estimate of the risk-free interest
rate is 2.83 percent, the average of the March 2013 average 10-year
Treasury rate and the 10-year forecast for this rate.
245. Betas. A company's beta is the coefficient on market returns
resulting from a simple regression of the security's returns on market
returns, i.e., it is a measurement of the volatility of a company's
stock compared to the volatility of the market. For purposes of
determining a point estimate, staff choose weekly return intervals and
an adjustment for the tendency of the regression estimate to revert to
the aggregate mean of one. Professor Bowman raised a concern with
including the beta estimate for one of the Publicly-Traded RLEC
Proxies, New Ulm, whose beta fluctuates dramatically when measured as
daily, weekly or monthly, which has a significant impact, increasing
the average beta for this proxy group. Professor Bowman explains that
as the explanatory power of the regression equation approaches zero,
the regression coefficient (beta) must also approach zero and posits
that betas measured with explanatory power less than five percent, if
not higher, are biased downward, and thus he recommends that the
Commission exclude New Ulm's beta from the analysis. The Commission
agrees with Professor Bowman that the beta for New Ulm may cause a bias
in the average beta for the Publicly-Traded RLEC Proxies. Thus, the
Commission will not use the CAPM estimate of New Ulm's cost of equity
in developing an overall WACC estimate. Instead, as explained below,
the Commission will use a sensitivity analysis to account for New Ulm's
cost of equity as part of determining that overall WACC estimate.
246. Flotation Costs. The Commission also sought comment in the
USF/ICC Transformation NPRM on the importance of flotation costs--those
costs associated with the issuance of stocks or bonds--for our cost of
equity calculations but received little comment. Staff did not
incorporate flotation costs into calculations of the cost of equity and
debt meant to be representative of rate-of-return incumbent LECs in
general. Professor Bowman notes that the flotation costs for debt or
equity can be ``substantial,''
[[Page 24320]]
which must be annualized if they are to be included in the cost of debt
which in his experience are in the order of 10 to 20 basis points.
Professor Bowman notes that there is research showing that the ``cost
of private debt is marginally higher than for public debt, offsetting
the differences in issuance costs'' but concludes that because the life
of equity is not specified, it is likely to be much smaller and
reasonable to ignore. As explained above, staff did not include bond
flotation costs in the cost of debt estimate because staff used an
embedded cost of debt approach, including the use of interest expense
obtained from the income statements found in SEC Form 10-Ks of the
proxy group of firms. That interest expense would have included an
amount for the expense associated with the amortization of bond
flotation costs calculated pursuant to GAAP in effect at the time of
the study. Because flotation costs tend to be proportionately small and
infrequent, and are primarily relevant for public companies issuing new
securities, staff reasoned that they are not significant for the vast
majority of rate-of-return incumbent LECs (which are not publicly
traded) and were not incorporated into calculations meant to be
representative of rate-of-return incumbent LECs in general. For the
reasons explained by staff, the Commission agrees with their approach.
247. Market Risk Premiums. The market premium is defined in the
CAPM as the difference between the return one can expect to earn
holding a market portfolio and the risk-free interest rate. In the
Staff Report, staff concluded that, calculating a historical market
premium would be the best approach given the data available to the
Commission. Staff considered whether small capitalization firms such as
rural incumbent LECs require an additional risk premium but declined to
adopt such an additional premium because the size effect seems to vary
over time or even disappears, with common stock returns for smaller
firms in the United States not performing significantly better than
larger firms from 1980 onward.
248. Several commenters argue in favor of an additional market risk
premium based on the size of the firm because they claim small firms
face higher risks and illiquidity effects due to not being publicly
traded, among other reasons. Ad Hoc notes, however, that critics of the
Staff Report fail to provide any actual evidence of higher risk
premiums being required of smaller rate-of-return rate-return incumbent
LECs than larger publicly-traded incumbent LECs. Ad Hoc also argues
that the regulated environment in which rate-of-return carriers operate
alters the risks rate-of-return incumbent LECs face, reducing the
importance of economies of scale due to targeting prices to a specific
rate of return and guarantees of universal service funding.
249. AT&T offers a number of reasons why a size premium should not
be considered in the CAPM WACC calculation. AT&T argues that the
majority of rate-of-return incumbent LECs are members of the NECA pools
and these pools allow its members not only to pool their costs and
revenues, but also effectively pool their risks. AT&T further argues
that any risks that the smaller rate-of-return incumbent LECs might
face are further reduced by rate-of-return regulation that protects
them against under-earning, and the Federal Universal Service Fund and
its true-up mechanisms. AT&T adds that some rate-of-return incumbent
LECs have established holding company structures and resemble larger
firms in terms of market and product diversification. Finally, AT&T
argues that many of these rate-of-return LECs may be subject to lesser
market risks, since they tend to serve more rural and less densely
populated areas where competition has been slower to develop or has yet
to develop. Professor Bowman favors making an adjustment when
appropriate, but notes that it is not clear that firms subject to the
cost of equity resulting from represcription are as small as firms that
have been shown to manifest the small firm effect, and therefore
staff's analysis may not warrant an adjustment.
250. As staff noted in the Staff Report, the size effect seems to
vary over time or even disappears, with smaller firms in the United
States not performing significantly better or worse than large firms
from 1980 onward. Accordingly, the Commission concludes that there is
insufficient evidence in the record to support a market risk premium
specifically for rate-of-return incumbent LECs based on small firm
effects. While some of the finance literature and some practitioners
might suggest that relatively small and privately-held companies have a
higher cost of capital than relatively large companies this is a
general proposition based on examinations of different types of firms
throughout the economy. As such, this analysis fails to isolate and
weigh the specific advantages and disadvantages of a rate-of return
incumbent LEC, such as those cited in the record and discussed above,
and thus does not necessarily apply to such carriers. Because the
record does not demonstrate in a quantifiable way how the rate-of-
return incumbent LECs compare to the typical small firm that operates
in the U.S. economy as a whole, it is difficult to conclude that an
adjustment for firm-size effects to the cost of capital for these
carriers is warranted. Moreover, the Commission is aware of no state
regulatory agency that has adjusted the allowable rate of return
applicable to rate-of-return incumbent LECs on the basis that these
incumbent LECs are relatively small, and no commenter has cited to such
an instance. Therefore, the Commission declines to adopt a market risk
premium based on size effects.
251. Staff estimated the cost of equity using the CAPM with
adjusted betas that were calculated using weekly data, along with its
estimates for the risk-free rate and market premium, the latter based
on the average historical market premium above the 10-year risk free
rate for the period 1928-2012 developed by Professor Aswath Damodaran.
Staff's calculation of the average of the CAPM cost of equity estimates
for the 16 proxy companies is 7.18 percent, which staff determined was
low compared to the cost of debt estimates, including estimates for six
firms that are below the cost of debt estimates. Estimates of the cost
of equity should be significantly higher than the cost of debt because
equity is more risky than debt as debtholders are paid before equity
holders in the event of financial difficultly, bankruptcy or
liquidation. Staff noted that the difference between the arithmetic
averages of large company stock returns and the long-term bond returns
was 5.7 percentage points (570 basis points) over the period 1926 to
2010, while the difference between the average cost of debt estimate
for the 16 proxy companies of 6.19 percent, as compared to the 7.18
percent cost of equity estimate, is only 0.99 percentage points (99
basis points). This suggests staff's cost of debt estimate is too high,
or staff's cost of equity estimate is too low, or both--an issue the
Commission addresses below.
(b) Revised CAPM WACC Estimate
252. The Commission now estimates the CAPM cost of equity using our
revised estimate for the risk-free interest rate, 2.83 percent, along
with the adjusted betas and market premium used in the Staff Report.
Given the concern regarding the quality of the beta estimate for New
Ulm Telephone (New Ulm) as discussed above, the Commission calculates
the average of these estimates based on (1) the proxy group, including
New Ulm, (2) the proxy group, excluding New Ulm, and (3) the CAPM
estimates for the 15 firms
[[Page 24321]]
and setting the cost of equity for New Ulm equal to its cost of debt
estimate plus the average of the differences between the cost of debt
and equity estimates of the 15 firms. This enables us to measure the
sensitivity of the CAPM cost of equity estimates to different cost of
equity estimates for New Ulm, and is similar to the sensitivity
analysis of estimates for Windstream and ACS above. The Commission does
not calculate the average based on setting the estimate of New Ulm's
cost of equity equal to its estimate of the cost of debt because the
revised CAPM estimate of the cost of equity for New Ulm is greater than
its revised cost of debt estimate (as noted above, debtholders are paid
ahead of equity holders in a bankruptcy so the cost of equity should
exceed the cost of debt).
253. The average of the revised CAPM cost of equity estimates for
all 16 firms, including New Ulm, is 8.09 percent. Notably, the cost of
equity estimate is less than the cost of equity estimate for just one
of the 16 firms, Hawaiian Telecom (7.21 percent versus 7.45 percent).
Meanwhile, the difference between the average cost of debt for the 16
proxy companies, 5.87 percent, and this average cost of equity estimate
is 2.22 percent (222 basis points), a difference that is still
relatively low, but is more than double and is more reasonably in line
with expectations of the relationship between debt and equity costs
found in the Staff Report, which was 0.99 percentage points (99 basis
points). The average of the revised CAPM cost of equity estimates for
15 firms, excluding New Ulm, is 8.25 percent. The average of the
revised CAPM estimates for the 15 firms and the estimate obtained by
setting the cost of equity for New Ulm equal to its cost of debt
estimate plus the average of the differences between the cost of debt
and equity estimates is 8.20 percent. Thus, the average of the cost of
equity estimates is not significantly affected by these alternative
estimates of the cost of equity for New Ulm. Nevertheless, the
Commission will account for this sensitivity in developing a reasonable
range for CAPM WACC estimates.
(c) CAPM WACC Range
254. The Commission also addresses the issue of relatively low CAPM
cost of equity estimates in determining the reasonable CAPM WACC Range,
as did staff in the Staff Report. The Staff Report developed a range
for the market premium used in the CAPM to obtain a reasonable range
for CAPM WACC estimates. As a starting point, staff developed a 95
percent confidence interval around the arithmetic average of the
difference between the annual return on the S&P 500, and the return on
the 10-year U.S. government bond including capital returns, based on
statistics developed by Professor Damodaran. This average is 5.88
percent (and is the risk-premium used in the CAPM in the above
calculations), and a 95 percent confidence interval around this average
is 1.22-10.54 percent. Staff noted that it is common to rely on as long
a time series as possible when calculating the average historical
market premium, and that Professor Damodaran's historical average of
5.88 percent lies well within these ranges identified in a number of
different surveys. Staff next truncated the lower end of the confidence
interval to ensure that every carrier's cost of equity estimate
exceeded its cost of debt estimate, recognizing the basic economic
principle that the cost of equity has to be higher than the cost of
debt because equity is riskier than debt. Recognizing that it is
necessary to ensure that every carriers' cost of equity is not less
than their cost of debt staff found that the reasonable range for an
estimate of the WACC for the proxy firms is between 7.39 and 8.58
percent.
255. The Rural Associations argue that staff's truncation of the
confidence interval renders staff's associated cost of capital
recommendations unreliable. The Commission disagrees. First, the
Commission views the range between 1.22-10.54 percent as an objective
and unconditional range for the market risk premium. It reflects the
variance in statistical terms in the market premium over many years and
many different business cycles. The Commission also views the interval,
as adjusted by staff's truncation, as a conditional market premium, one
that recognizes the reality of current capital market conditions, in
particular, today's relationship between the cost of debt and the cost
of equity, and the basic principle that the cost of equity always will
exceed the cost of debt. Increasing the lower bound as staff did also
is consistent, though not necessarily in a precise quantifiable way,
with Professor Bowman's argument that based on his own research and
that of others, the expected risk premium is inversely correlated with
the level of interest rates. Thus, when interest rates are low, as they
are today, the expected risk premium is higher. Also, use of the higher
lower bound for the risk premium should minimize any concerns that the
approach the Commission takes in this order to develop a risk free rate
for use in the CAPM does not adequately acknowledge today's low level
of interest rates.
256. The Rural Associations observed and staff itself acknowledged
that this adjustment to the 95 percent confidence interval is not
precise. As staff noted, to the extent our estimates of the cost of
debt are too high, this choice would bias upward our estimates of the
return on equity. Because the cost of equity typically would materially
exceed the cost of debt, however, assuming a cost of equity that equals
the cost of debt tends to bias our estimates downwards. It is not clear
which of these two offsetting biases is likely to be larger. In
practice, this is not a significant concern because this adjustment
affects only the lower bound, not the upper bound of the CAPM WACC
range of reasonable estimates. As a long as the Commission does not
select an estimate that is at or near the bottom of this range, that
estimate and the resulting allowable rate of return should be
reasonable. Moreover, the Commission also has the DCF WACC range of
reasonable estimates on which to rely. The WACC and DCF have different
strengths and weaknesses, and the Commission reduces the likelihood of
error by developing WACC estimates using both models. As long as the
Commission also selects an estimate that is consistent with the DCF
WACC range, then that estimate should be a reasonable estimate.
257. The Commission now estimates new lower and upper bounds for
the range of reasonable WACC CAPM using our revised estimate for the
risk-free rate, 2.83 percent, along with the adjusted betas and the
staff's approach for establishing a range for the market premium. The
Commission develops different lower and upper bounds based on: (1) The
proxy group, including New Ulm, (2) the proxy group, excluding New Ulm,
and (3) the CAPM estimates for the 15 firms and setting the cost of
equity for New Ulm equal to its cost of debt estimate plus the average
of the differences between the cost of debt and equity estimates of the
15 firms. Taking this approach, the Commission now finds that the range
of reasonable WACC CAPM estimates is 7.12-8.83 percent if the proxy
group includes New Ulm; 7.24-9.01 percent if it excludes New Ulm; and
7.17-8.92 percent based on setting the cost of equity for New Ulm equal
to its cost of debt estimate plus the average of the differences
between the cost of debt and equity estimates of the 15 firms. The
highest of upper bound values and the lowest of the lower bound values,
provide an overall range of 7.12-9.01 percent.
[[Page 24322]]
258. Professor Bowman argues that the CAPM WACC range should be at
least three percentage points (300 basis points), if not higher, given
the uncertainty with which CAPM input values are estimated (our range
is 1.89 percentage points or 189 basis points). However, the Commission
finds our CAPM WACC range, 1.89 percentage points (189 basis points),
is sufficiently large because that range reflects the lower and upper
bounds of our market risk premium. The lower bound of the market
premium is constrained by our estimates of the cost of debt, while the
upper bound is at the top of the ranges used by most practitioners.
Absent the lower bound constraint, the range would have been much
larger reflecting greater uncertainty in the market premium estimate,
but including that lower portion and allowing that uncertainty
potentially to be reflected in the cost of equity estimates and thus
the WACC estimates would be contrary to economic theory. Furthermore,
the Commission has DCF WACC estimates on which to rely, in addition to
WACC CAPM estimates, as mentioned above.
(ii) Discounted Cash Flow (DCF) Model
259. In addition to calculating the cost of equity using CAPM, in
the Staff Report staff also calculated the cost of equity using the
constant-growth DCF model based upon four different data sources used
in the 1990 prescription proceeding. This model incorporates in its
calculation of the cost of equity a constant growth rate, which staff
calculated using generally available earnings per share (EPS) growth
forecasts instead of dividend per share growth forecasts, which are not
generally available. Industry analysts routinely rely on ESP forecasts
as dividends tend to grow as earnings grow. The most widely used
modified version of the general DCF model, the constant growth, or
standard, DCF model, calculates the cost of equity as:
Cost of Equity = (Dividends per Share1/Price per
Share0) + g
where Cost of Equity = cost of common stock equity; Dividends per
Share1 = annual dividends per share in period 1; Price per
Share0 = price per share in period 0; g = constant growth
rate in dividends per share in the future; and D1 = (1 + g)
times D0, the annual dividends per share in period 0.
(a) DCF Cost of Equity Results
260. Staff estimated the cost of equity using the constant-growth
DCF model for each of the 11 proxy firms that pay common stock
dividends and had readily-available, long-run growth rate forecasts. To
do this, staff identified the low and the high estimates among the
estimates available from four different sources for each firm,
determined the midpoint between these two estimates, and used this
value as the growth rate in the DCF model for each firm. Based on this
analysis, staff determined that the average cost of equity estimate for
the 11 firms was 9.90 percent.
261. Staff found, however, that the DCF analysis did not appear to
produce reliable estimates for Windstream and ACS. The published growth
rates for these two firms were low, and use of these rates in most
cases resulted in cost of equity estimates that were less than the cost
of debt estimates. Staff reasoned that these results are questionable
because equity is more risky than debt; no rational investor would ever
purchase any firm's common stock if that firm's debt is expected to
provide a higher rate of return. Staff noted that the Commission had
applied a screen designed to remove from consideration those firms for
which the cost of debt exceeded the cost of equity when developing
estimates of the cost of equity in the 1990 Represcription Order.
262. Staff therefore analyzed the sensitivity of the average of the
cost of equity estimates to the estimates for Windstream and ACS.
First, staff excluded Windstream and ACS from the sample, leading to an
average cost of equity for the nine remaining firms of 11.25 percent,
as compared to the average of 9.90 percent when these two firms were
included. Second, staff set the cost of equity estimate equal to the
cost of debt estimate for the two firms, leading to an average cost of
equity estimate of 10.54 percent for the 11 firms. Third, staff
calculated the average difference between the cost of equity estimates
and the cost of debt estimates for the other nine firms, and added this
increment to the cost of debt estimates for Windstream and ACS, to
obtain equity estimates for these two firms, leading to an average cost
of equity estimate of 11.58 percent for the 11 firms. The Commission
agrees with staff's conclusion that where the use of these growth rates
produces cost of equity estimates that have no economic meaning, such
estimates should be omitted or, at the very least, the impact of
including such questionable equity costs estimates on the overall
estimate must be taken into account.
263. No party challenges staff's DCF methodology. The Commission
therefore adopts the approach applied in the Staff Report to developing
estimates for the cost equity based on the DCF model, including the use
of sensitivity estimates for Windstream and ACS.
264. Given the revisions the Commission makes above to the
estimation of total debt outstanding and interest expense in the Staff
Report, and therefore to the estimates of the cost of debt, the results
of the above sensitivity analysis change slightly as follows. First,
excluding Windstream and ACS from the sample, the average cost of
equity for the nine remaining firms remains 11.25 percent, as compared
to an estimate of 9.90 percent when these two firms are included, as
these numbers are unaffected by the cost of debt estimates. Second,
setting the cost of equity estimate equal to the cost of debt estimate
for the two firms now leads to an average cost of equity estimate of
10.47 percent for the 11 firms. Third, calculating the average
difference between the cost of equity estimates and the cost of debt
estimates for the other nine firms, and adding this increment to the
cost of debt estimate for Windstream and ACS, to obtain equity
estimates for these two firms, now leads to an average cost of equity
estimate of 11.54 percent for the 11 firms.
(b) DCF WACC Range
265. Based on this DCF analysis, the Commission finds that the
lower bound of a reasonable cost of equity estimate is 10.47 percent,
while the upper bound is 11.54 percent. As a rough check on the
reasonableness of these upper and lower bound cost of equity estimates,
similar to the check in the Staff Report, the Commission notes that the
difference between the average cost of debt for the 11 firms, 5.88
percent, and the lower bound cost of equity estimate, 10.47 percent, is
4.59 percentage points (or 459 basis points). Meanwhile, the difference
between the average cost of debt for these firms and the upper bound
cost of equity estimate, 11.54 percent, is 5.66 percentage points (or
566 basis points). By comparison, these lower and upper bound debt-
equity differences are somewhat greater than the 4.39 percentage point
(439 basis points) difference between the cost of debt, 8.8 percent,
and the cost of equity, 13.19 percent, on which the Commission's
current 11.25 percent authorized rate of return is based. And these
lower and upper bound equity-debt estimate differences are somewhat
less than the average difference between the large company stock
return, i.e., S&P 500 companies, and the long-term corporate bond
return, from 1926-2010, 5.7 percent (570 basis points). Neither of
these comparisons suggests in a compelling way that our lower and
[[Page 24323]]
upper bound estimates for the cost of equity are unreasonable.
266. Based upon these slight modifications to DCF analysis
presented in the Staff Report, the Commission finds that a reasonable
lower and the upper bound DCF WACC Range is 8.28 percent to 8.57
percent. As in the Staff Report, this range is based on the three
average WACC estimates found by using: (1) DCF estimates for the nine
firms excluding Windstream and ACS; (2) DCF estimates for the nine
firms plus the first of the two sensitivity cost of equity estimates
described above for these two firms (equity estimates for each equal to
debt estimates); and (3) DCF estimates for the nine firms plus the
second sensitivity cost of equity estimates described above for these
two firms (debt estimates for each plus the average of the debt-equity
estimate differences found for the other nine firms). In each case, the
growth rates used in the DCF are the mid-point growth rates. In each
case, WACC estimates are also based on cost of debt and capital
structure estimates that reflect the modifications discussed above to
the estimation of total debt outstanding and interest expense.
(iii) Free Cash Flow Model
267. The Rural Associations estimate the WACC for a rate-of-return
incumbent LEC by dividing an estimate of free cash flow (FCF) by an
estimate of firm value, based on rate-of-return incumbent LEC data.
GVNW and TCA supported the Rural Associations' FCF approach. While the
Rural Associations' approach differs from the standard approach that
the Commission uses here to estimate the WACC, and is not set out in
our rules, they cannot say, based on the record that this is an
unacceptable approach, at least in concept. The Commission is reluctant
to dismiss too quickly any approach that could potentially aid the
Commission now or in the future to produce better WACC estimates,
especially given the difficulty to estimate the WACC for privately-held
rate-of-return incumbent LECs. While the Commission does not find this
approach to be unacceptable in concept, they do find flaws in the way
that it is implemented by the Rural Associations. Thus, the Commission
rejects the Rural Associations' estimates.
268. The Rural Associations base firm value, as reflected in the
denominator of its WACC formula, on per connection sales prices for
rate-of-return and price cap incumbent LEC exchanges for the period
from 2008-2012. The Rural Associations develop a range of WACC
estimates by varying its estimates of firm value. The Commission finds
that this sample of prices is too small, and too many of its prices are
for sales that occurred too long ago to provide a reliable basis for
estimating firm value for a typical rate-of-return incumbent LEC. In
particular, the sample included only one sale price for each year from
2010 to 2012. One observation per year, for the most recent three
years, is far too few to obtain reliable firm valuations for these
years, especially given the large variation in sale prices since 2008
($1,053 to $3,205 per connection) and since 2003 ($1,013 to $8,000 per
connection). As the perceived value of different exchanges varies
significantly, as this price variation demonstrates, the value of the
information reflected in one observation a year is of limited value for
estimating the value of these firms today. Nor does one observation a
year provide a strong basis for concluding that the level of these
observed prices continues a trend from prior years, or that such a
trend reliably could be used to estimate a firm's value today. While
the sample included five sales prices for both 2008 and 2009, not only
is this number of observations too small to estimate firm value with a
high level of confidence, especially given the variation in prices, but
these prices are too old to provide reliable estimates of firm value
today.
269. The Rural Associations use the FCF WACC formula to develop a
range of WACC estimates based on a sample of 633 rate-of-return
incumbent LECs. Staff took issue with NECA et al.'s use of the median
value of the WACC estimates for these rate-of-return incumbent LECs to
establish a range for the WACC. In response, the Rural Associations,
including NECA, recalculated its analysis using the average value
weighted by access connections. This resulted in a large decrease in
the range of WACC estimates (11.75 to 23.49 percent versus 8.69 percent
to 17.39 percent).
270. Given that large decrease, the Commission now takes a closer
look at the details of the Rural Associations' analysis. Based on our
review, there is an enormous variance among the 633 rate-of-return
incumbent LEC WACC estimates that the Rural Associations developed.
There are many very high and very low WACC estimates. For example,
focusing on the estimates based on the Rural Associations' midpoint
valuation number, $1,800 per line, the values of the ten lowest
estimates are: -271, -277, -305, -308, -320, -372, -429, -489, -631,
and -862 percent. The values of the ten highest estimates, given this
midpoint valuation, are: 121, 123, 124, 147, 155, 187, 201, 296, 393,
and 838 percent. These high and low numbers, and there are more than
just these 20, are implausibly high and low. The Commission is unaware
of any wave of bankruptcies among the rate-of-return incumbent LECs,
for as long as the Commission's allowable rate of return of 11.25
percent has been effect, and none of the commenters has suggested that
the allowable rate of return for these carriers should be as high as
the Rural Associations' estimates. Similarly, a negative expected rate
of return, i.e., cost of capital, makes no economic sense.
271. Statistically speaking, and again focusing on the estimates
based on the Rural Associations' midpoint valuation number, the median
value WACC is 15.66 percent, the weighted average is 11.59 percent, the
simple average is 8.64 percent, and the standard deviation relative to
the simple average is 83.18 percent, a figure that is approximately 10
times greater than the simple average. Given this dispersion and the
implausibly high and low WACC estimates, none of the typical measures
of central tendency, i.e., the median, weighted average, or simple
average, would provide an overall estimate, or even a range of overall
estimates, on which the Commission could rely. There would seem to be
too strong of likelihood of large error in many of the individual
estimates, and the Commission cannot simply assume that these errors
would offset each other by averaging the WACC estimates, or rely on the
use of the middle-value estimate (i.e., the median) to remove the
impact of these errors. Thus, the Commission rejects the Rural
Associations' WACC estimates.
c. Cost of Preferred Stock
272. The Commission's rules specify that the WACC calculations
incorporate the cost of preferred stock which is stock that entitles
its holders to receive a share of corporate assets before common
stockholders do, in the event of liquidation of the firm, and offers
other benefits, such as priority when dividends are paid. Staff
recommended in the Staff Report that the Commission waive or eliminate
the requirement to include the cost of preferred stock in the WACC
calculation because the cost of preferred stock is either not available
to us or not publicly reported. This approach is consistent with the
Commission's 1990 represcription which did not factor in the cost of
preferred stock. In the Staff Report, staff explained that including
the cost of preferred stock would not significantly alter the WACC
calculation because the proxy firms do not typically raise
[[Page 24324]]
capital through the issuance of preferred stock and that preferred
stock is only a small share of the capital structure for the proxies
that have such stock. The Commission agrees for the reasons articulated
by staff explained above. Further, no commenters filed in opposition to
staff's approach. Accordingly, the Commission finds good cause exists
to waive the requirement to calculate the WACC based on the cost of
preferred stock.
d. WACC Results
273. Appendices J & K to this Order shows the WACCs resulting from
using both CAPM and DCF, together with the component values of each
model and the estimates of the cost of debt and capital structure.
e. Establishing the WACC Zone of Reasonableness
274. In determining the authorized rate of return, the Commission's
starting point is to establish a zone of reasonable financial model-
based estimates of the overall WACC. After identifying this WACC zone
of reasonableness, the Commission may determine, based on policy
considerations, where to prescribe the unitary rate of return. To
determine a WACC zone of reasonableness, staff recommended comparing
the range of WACCs produced when the cost of equity is determined using
CAPM with varying market premiums, and the range produced when the cost
of equity is determined using DCF.
275. The Commission finds above that a reasonable range for CAPM
WACC estimates is 7.12 to 9.01 percent, while a reasonable range for
DCF WACC estimates is 8.28 percent to 8.57 percent. Taken together, the
overall range for reasonable WACC estimates is 7.12 to 9.01 percent, if
there is no reason to believe that either model provides better
estimates. The record is critical of the CAPM analysis in the Staff
Report, while the DCF analysis is largely unchallenged. In response to
these criticisms, the Commission adjusted the CAPM analysis to produce
more reliable estimates. In particular, the Commission revises the
estimate of the risk-free rate, and account for what might be an
unreliable beta estimate for the proxy New Ulm. Nevertheless, given the
record, the Commission would be reluctant to select a rate of return
that is below the DCF WACC range. The bottom of the WACC range relies
on a truncated confidence interval that might not reflect a precise
accounting of the premium in terms of the rate of return that equity
holders require in comparison to debtholders. Even without this concern
and that record, it would be difficult to prescribe a rate of return
below the WACC DCF range given that both the DCF and the CAPM have
different strengths and weaknesses and the value of performing both
analyses is that these models have the potential to provide
corroborating evidence.
f. Prescribing a New Authorized Rate of Return
276. The reasonable range of WACC estimates discussed above are
based on the cost of capital which serves as a useful and reliable
starting point in rate of return represcription. The Commission,
however, may consider other relevant factors as well. It is well
established that rate of return prescription under the Act's ``just and
reasonable'' standard requires a balancing of ratepayer and shareholder
interests. A rate-of-return carrier must be allowed the opportunity to
earn a return that is high enough to maintain the financial integrity
of the company and to attract new capital. At the same time, to be
reasonable, the rate of return must not produce excessive rates at the
expense of the ratepayer. Courts have recognized that there is a zone
of reasonableness within which reasonable rates may fall, and that the
regulatory agencies are entitled to exercise judgment in selecting a
rate of return within that zone. In general, the zone of reasonableness
balances financial interests of the regulated company and relevant
public interests. The Commission has substantial discretion when
setting the authorized rate of return, and may consider a broad array
of evidence and methodologies in prescribing the authorized rate of
return. The Commission may also consider non-cost policy considerations
in setting the rate of return.
277. The Commission is particularly mindful of the economic impact
represcription will have on rate-of-return incumbent LECs. As Professor
Bowman notes, companies subject to regulation face regulatory risk
which increases the cost of capital. In this regard, the Commission
agrees with Professor Bowman's argument that as a consequence of the
asymmetry of social costs and benefits, and the uncertainties in the
estimates of the true cost of capital, they should err on the high side
when establishing the rate of return zone of reasonableness to minimize
expected losses in social welfare through investment effects.
Accordingly, expanding the zone of reasonableness above the top of the
reasonable WACC estimates is supported in the record.
278. The Commission concludes that they should expand the upper end
of the rate of return zone of reasonableness beyond the WACC estimates
based on policy considerations and adopt the rate of return from the
upper end of this zone. First, by expanding the zone of reasonableness,
the Commission provides an additional cushion for rate-of-return
incumbent LECs that may have a relatively high cost of capital compared
to our proxies. There are hundreds of rate-of-return incumbent LECs.
Some will have a relatively high and some a relatively low cost of
capital. At the same time, the Commission adopts an authorized rate of
return that applies to all of these carriers. To maximize the
likelihood that the unitary rate of return is fully compensatory, even
for firms with a relatively high cost of capital, the Commission
expands the zone of reasonableness above the top of the range of WACC
estimates developed above. Second, the Commission adds this cushion to
the zone to account for regulatory lag--the time between recognition of
the need for regulatory change in light of changing circumstances, in
this case the need to prescribe a different rate of return, as capital
markets change significantly, and regulatory action, in this case
actually prescribing a new rate of return. The Commission therefore
adds about three-quarters of a percentage point to the top of the WACC
range developed above to account for these two factors, expanding the
overall zone of reasonableness for the rate of return estimates to 7.12
to 9.75 percent.
279. The Commission notes that the WACC is supposed to compensate
equity holders and debtholders who provide the funds used to finance
the firm's assets. Given a rate of return set equal to 9.75 percent, an
average capital structure based on our estimates of 54.34 percent debt,
and a cost of debt based on our estimates of 5.87 percent, the implied
cost of equity is 14.37 percent. The Commission finds that not only is
the WACC of 9.75 percent high enough adequately to compensate the
firm's debtholders, but the implied rate of return on equity also
provides equity holders with the opportunity to earn a reasonable rate
of return on their investment. As support for our finding that a 9.75
percent rate of return is reasonable, the Commission examines some
benchmarks.
280. The difference between the implied cost of equity and the cost
of debt estimate is 8.5 percentage points (850 basis points). By
comparison, this 850 basis point difference exceeds the 439 basis point
difference between the
[[Page 24325]]
estimates of the cost of debt, 8.8 percent, and the cost of equity,
13.19 percent, on which the Commission's current 11.25 percent
authorized rate of return is based. That rate of return was developed
in 1990 based on estimates of the cost of debt and equity that would
have reflected investors' perception of incumbent LEC risks and the
conditions in the financial market at the time. So this benchmark
provides a useful rough check on our estimates. The 850 basis point
difference also exceeds the average difference between the large
company stock return, i.e., Standard & Poor's 500 (S&P 500) index
companies, and the long-term corporate bond return, from 1926-2010, 570
basis points. The 850 basis point difference is not as large as the
difference between small company stock returns and the long-term
corporate bond returns, from 1926-2010, 10.5 percent (1005 basis
points). However, the difference between the average cost of debt
estimate for the six Publicly-Traded RLEC Proxies that have access to
loans made through rural-company programs (such as those administered
by the Rural Utilities Service and CoBank), 4.38 percent, and the
implied cost of equity for this smaller group, which is 14.15 percent,
given this group's capital structure estimate of 45.02 percent debt, is
977 basis points, which is reasonably close to the 1005 historical
basis points difference for small companies. The Commission uses this
small company benchmark while pointing out that it might be true that,
as other analysis suggests, returns to small companies are no longer
statistically different from those of larger companies. If so, then
this small company benchmark does not provide any insights beyond the
benchmark for larger firms, which then suggests in an even more
compelling way that the WACC of 9.75 percent will provide reasonable
compensation to owners of these smaller rate-of-return incumbent LECs.
Collectively, these benchmarks provide evidence that a WACC and thus an
allowable rate of return of 9.75 percent provides a reasonable level of
compensation.
g. Specific Rates of Return
281. Tribally-Owned Carrier Specific Rate of Return. In the USF/ICC
Transformation FNPRM, the Commission sought comment on how to account
for Tribally-owned carriers in this prescription, and whether a
different rate of return is warranted for these carriers. Gila River,
NTTA and MATI argue in favor a separate, higher, rate of return for
Tribally-owned carriers operating in Tribal areas due to illiquidity of
Tribal assets and inability to access credit and capital. Gila River
further argues that low income population on Tribal lands, reliance on
Rural Utilities Service loans and universal service support, lack of
infrastructure on Tribal lands, and unique ``environmental and cultural
preservation review processes'' warrant a separate rate of return for
Tribally-owned carriers. The purpose of the unitary rate of return is
to reflect the industry-wide rate of return. Section 65.102(b) provides
a process for carriers such as Gila River to apply for exclusion from
unitary treatment and receive individual treatment in determining the
authorized rate of return. A petition for exclusion from unitary
treatment must plead with particularity the exceptional facts and
circumstances that justify individual treatment. The showing shall
include a demonstration that the exceptional facts and circumstances
are not of transitory effect, such that exclusion for a period of at
least two years is justified. To the extent a Tribally-owned carrier or
any other rate-of-return regulated carrier contends that a specific,
non-unitary, rate of return is justified, it can seek an exclusion via
the process outlined in section 65.102(b). As stated above, such
applications must be plead with particularity and no rate-of-return
incumbent LEC has petitioned for exclusion or otherwise met this
burden. Accordingly, at this time, the Commission declines to grant an
exception to the authorized unitary rate of return for Tribally-owned
carriers as the specific circumstances surrounding each carrier may
vary substantially.
6. Implementing the New Rate of Return
282. The Commission has authority under section 205 to prescribe a
9.75 percent unitary rate of return effective immediately. The
Commission recognizes, however, that for almost 25 years rate-of-return
carriers have made significant infrastructure investments on which they
have had the opportunity to earn a rate of return of 11.25 percent
until now, and that represcribing the rate of return will have a
financial impact on these carriers. ICORE proposes that if the
Commission lowers the rate of return, it should do so ``in the most
gradual and least disruptive manner possible.'' The Moss Adams
companies propose that ``any changes that the FCC makes should be
measured and spread over time.'' USTelecom and NTCA recognize that rate
represcription is ``essential to a broadband reform effort'' and
suggest a multi-year transition to 9.75 percent. The Commission agrees.
The Commission recognizes that rate-of-return incumbent LECs have been
subject to significant regulatory changes in recent years, and that
such changes are occurring at a time when these carriers are attempting
to transition their networks and service offerings to a broadband
world. At the same time, the Commission finds that they must
represcribe the almost 25-year old rate of return to meet our statutory
obligations. To minimize the immediate financial impacts that
represcription may impose on carriers, the Commission adopts, for the
first time, a transitional approach to represcription.
283. Under this transitional approach, as proposed by USTelecom and
NTCA, the 11.25 percent rate of return will be reduced by 25 basis
points per year until the Commission reach the represcribed 9.75
percent rate of return. For administrative simplicity, the Commission
choose July 1, 2016 as the effective date for the initial transitional
rate of return of 11.0 percent followed by subsequent annual 25 basis
point reductions consistent with the table below until July 1, 2021
when the 9.75 percent rate of return the Commission represcribes today
shall be effective.
------------------------------------------------------------------------
Authorized
Effective date of rate of return rate of
return (%)
------------------------------------------------------------------------
July 1, 2016.............................................. 11.0
July 1, 2017.............................................. 10.75
July 1, 2018.............................................. 10.5
July 1, 2019.............................................. 10.25
July 1, 2020.............................................. 10.0
July 1, 2021.............................................. 9.75
------------------------------------------------------------------------
IV. Procedural Matters
A. Paperwork Reduction Act Analysis
284. This document contains new information collection requirements
subject to the PRA. It 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. In addition, the Commission notes that pursuant to the
Small Business Paperwork Relief Act of 2002, they previously sought
specific comment on how the Commission might further reduce the
information collection burden for small business concerns with fewer
than 25 employees. The Commission describes impacts that might affect
small businesses, which includes most businesses with fewer than 25
employees, in the Final Regulatory Flexibility Analysis (FRFA) in
Appendix B, infra.
B. Final Regulatory Flexibility Analysis
285. As required by the Regulatory Flexibility Act of 1980 (RFA),
as
[[Page 24326]]
amended, Initial Regulatory Flexibility Analyses (IRFAs) were
incorporated in the Notice of Proposed Rulemaking and Further Notice of
Proposed Rulemaking (USF/ICC Transformation NPRM), in the Notice of
Inquiry and Notice of Proposed Rulemaking (USF Reform NOI/NPRM), in the
Notice of Proposed Rulemaking (Mobility Fund NPRM), Order and Further
Notice of Proposed Rulemaking (USF/ICC Transformation Order or FNPRM),
and in the Report and Order, Declaratory Ruling, Order, Memorandum
Opinion and Order, Seventh Order on Reconsideration, and Further Notice
of Proposed Rulemaking (April 2014 Connect America FNPRM) for this
proceeding. The Commission sought written public comment on the
proposals in the USF/ICC Transformation FNPRM and April 2014 Connect
America FNPRM, including comment on the IRFA. The Commission did not
receive comments on the USF/ICC Transformation FNPRM IRFA or April 2014
Connect America FNPRM IRFA. This present Final Regulatory Flexibility
Analysis (FRFA) conforms to the RFA.
1. Need for, and Objective of, the Order
286. In the Report and Order, the Commission establishes a new
forward-looking, efficient mechanism for the distribution of support in
rate-of-return areas. Specifically, the Commission adopts a voluntary
path under which rate-of-return carriers may elect model-based support
for a term of 10 years in exchange for meeting defined build-out
obligations. The Commission emphasizes the voluntary nature of this
mechanism; no carrier will be required to take model-based support, and
the cost model has been adjusted in multiple ways over more than a year
to take into account the circumstances of rate-of-return carriers. The
Commission will make available up to an additional $150 million
annually from existing high-cost reserves to facilitate this voluntary
path to the model over the next decade.
287. The Commission also reforms the existing mechanisms for the
distribution of support in rate-of-return areas for those carriers that
do not elect to receive model-based support. The Commission makes
technical corrections to modernize our existing interstate common line
support (ICLS) rules to provide support in situations where the
customer no longer subscribes to traditional regulated local exchange
voice service, i.e., stand-alone broadband. Going forward, this
reformed mechanism will be known as Connect America Fund Broadband Loop
Support (CAF BLS). This simple, forward-looking change to the existing
mechanism will provide support for broadband-capable loops in an
equitable and stable manner, regardless of whether the customer chooses
to purchase traditional voice service, a bundle of voice and broadband,
or only broadband. The Commission expects this approach will provide
carriers, including those that no longer receive high cost loop support
(HCLS), with appropriate support going forward to invest in broadband
networks, while not disrupting past investment decisions.
288. One of the core principles of reform since 2011 has been to
ensure that support is provided in the most efficient manner possible,
recognizing that ultimately American consumers and businesses pay for
the universal service fund (USF). The Commission continues to move
forward with our efforts to ensure that companies do not receive more
support than is necessary and that rate of return carriers have
sufficient incentive to be prudent and efficient in their expenditures,
and in particular operating expenses. Therefore, the Commission adopts
a method to limit operating costs eligible for support under rate-of-
return mechanisms, based on a proposal submitted by the carriers. The
Commission also adopts measures that will limit the extent to which USF
support is used to support capital investment by those rate-of-return
carriers that are above the national average in broadband deployment in
order to help target support to those areas with less broadband
deployment. Lastly, to ensure disbursed high-cost support stays within
the established budget for rate-of-return carriers, the Commission
adopts a self-effectuating mechanism to control total support
distributed pursuant to the HCLS and CAF-BLS mechanisms.
289. In 2011, the Commission also stressed the need to ``require
accountability from companies receiving support to ensure that public
investments are used wisely to deliver intended results.'' To this end,
the Commission adopts deployment obligations that can be measured and
monitored for all rate-of-return carriers, while tailoring those
obligations to the unique circumstances of individual carriers. Those
obligations will be individually sized for each carrier not electing
model support, based on the extent to which it has already deployed
broadband and its forecasted CAF BLS, taking into account the relative
amount of depreciated plant and the density characteristics of
individual carriers.
290. Another core tenet of reform adopted by the Commission in
2011, and unanimously reaffirmed in 2014, was to target support to
areas that the market will not serve absent subsidy. To direct
universal service support to those areas where it is most needed, the
Commission adopts a rule prohibiting rate-of-return carriers from
receiving CAF-BLS support in those census blocks that are served by a
qualifying unsubsidized competitor. The Commission adopts a robust
challenge process to determine which areas are in fact served by a
qualifying unsubsidized competitor. Carriers may elect one of several
options for disaggregating support for those areas found to be
competitive. Any support reductions resulting from implementation of
this rule will be more effectively targeted to support existing and new
broadband infrastructure in areas lacking a competitor.
291. The Commission also addresses cost allocation and tariff-
related issues raised by adoption of the reforms to high-cost support
adopted in this Order for the provision of broadband-only loops. The
Commission first creates a new service category known as the ``Consumer
Broadband-Only Loop'' category, which will include the costs of the
consumer broadband-only loop facilities that today are recovered
through special access rates. Second, the Commission requires a carrier
to move the costs of consumer broadband-only loops from the special
access category to the new Consumer Broadband-Only Loop category. These
actions will segregate the broadband-only loop investment and expenses
from other special access costs currently included in the special
access category and preclude double recovery of any costs assigned to
the Consumer Broadband-Only Loop category.
292. The Commission will allow a rate-of-return carrier electing
model-based support to assess a wholesale Consumer Broadband-Only Loop
charge that does not exceed $42 per line per month. This rate cap
allows a carrier the opportunity to recover its costs not covered by
the model, while limiting the ability of a carrier to engage in a price
squeeze against a non-affiliated ISP offering retail broadband service.
The retail service provided to the end-user customer is not constrained
by this limitation. Carriers electing model-based support that
participate in the NECA common line tariff will be allowed to use the
NECA tariff to offer their Consumer Broadband-Only Loop service to
obtain the administrative benefits of a single tariff filing. They will
not be eligible to participate in the NECA common line pooling
mechanism, however, because the
[[Page 24327]]
model-based support mechanism is inconsistent with cost pooling.
293. A carrier that does not elect model-based support will have an
interstate revenue requirement for its Consumer Broadband-Only Loop
category. The projected Consumer Broadband-Only Loop revenue
requirement will be reduced by the projected amount of CAF BLS
attributed to that category in accordance with the procedures in Part
54. The remaining projected revenue requirement is the basis for
developing the rates the carrier may assess, based on projected loops.
Finally, providing support to consumer broadband-only loops likely will
result in the migration of some end users from their current voice/
broadband offerings thereby affecting the careful balancing of the
recovery mechanism adopted in the USF/ICC Transformation Order. To
insure that our actions today do not unintentionally increase CAF-ICC
support, the Commission requires that rate-of-return carriers impute an
amount equal to the ARC charge they would assess on voice/broadband
lines to their supported consumer broadband-only lines. Second, the
Commission clarifies that a carrier must reflect any revenues recovered
for use of the facilities previously used to provide the supported
service as double recovery in its Tariff Review Plans, which will
reduce the amount of CAF ICC it will receive.
294. Finally, the Commission takes action to modify our existing
reporting requirements in light of lessons learned from their
implementation. The Commission revises eligible telecommunications
carriers' (ETC) annual reporting requirements to align better those
requirements with our statutory and regulatory objectives. The
Commission concludes that the public interest will be served by
eliminating the requirement to file a narrative update to the five-year
plan. Instead, the Commission adopts narrowly-tailored reporting
requirements regarding the location of new deployment offering service
at various speeds, which will better enable the Commission to determine
on an annual basis how high-cost support is being used to ``improve
broadband availability, service quality, and capacity at the smallest
geographic area possible.''
295. In the Order and Order on Reconsideration, the Commission
represcribes the currently authorized rate of return from 11.25 percent
to 9.75. The Commission explains that a rate of return higher than
necessary to attract capital to investment results in excessive profit
for rate-of-return carriers and unreasonably high prices for consumers.
It also inefficiently distorts carrier operations, resulting in waste
in the sense that, but for these distortions, more services, including
broadband services, would be provided at the same cost. Relying
primarily on the methodology and data contained in a Commission staff
report and public comments, the Commission identifies a more robust
zone of reasonableness and adopt a new rate of return at the upper end
of this range at 9.75 percent. As part of its estimation of the rate of
return, the Commission revises its rule for calculating the cost of
debt, an input in the cost of capital formula used to estimate the rate
of return, to account for an overstatement of the interest expense
contained in the rules. The new rate of return of 9.75 percent will be
phased-in gradually over a six-year period.
2. Summary of Significant Issues Raised by Public Comments in Response
to the IRFA
296. There were no comments raised that specifically addressed the
proposed rules and policies presented in the USF/ICC Transformation
FNRPM IRFA or April 2014 Connect America FNPRM IRFA. Nonetheless, the
Commission considered the potential impact of the rules proposed in the
IRFA on small entities and reduced the compliance burden for all small
entities in order to reduce the economic impact of the rules enacted
herein on such entities.
3. Response to Comments by the Chief Counsel for Advocacy of the Small
Business Administration
297. Pursuant to the Small Business Jobs Act of 2010, which amended
the RFA, the Commission is required to respond to any comments filed by
the Chief Counsel of the Small Business Administration (SBA), and to
provide a detailed statement of any change made to the proposed rule(s)
as a result of those comments.
298. The Chief Counsel did not file any comments in response to the
proposed rule(s) in this proceeding.
4. Description and Estimate of the Number of Small Entities to Which
the Rules Would Apply
299. The RFA directs agencies to provide a description of, and
where feasible, an estimate of the number of small entities that may be
affected by the proposed rules, if adopted. The RFA generally defines
the term ``small entity'' as having the same meaning as the terms
``small business,'' ``small organization,'' and ``small governmental
jurisdiction.'' In addition, the term ``small business'' has the same
meaning as the term ``small-business concern'' under the Small Business
Act. A small-business concern'' is one which: (1) Is independently
owned and operated; (2) is not dominant in its field of operation; and
(3) satisfies any additional criteria established by the Small Business
Administration (SBA).
5. Total Small Entities
300. Our proposed action, if implemented, may, over time, affect
small entities that are not easily categorized at present. The
Commission therefore describes here, at the outset, three
comprehensive, statutory small entity size standards. First,
nationwide, there are a total of approximately 28.2 million small
businesses, according to the SBA, which represents 99.7% of all
businesses in the United States. In addition, a ``small organization''
is generally ``any not-for-profit enterprise which is independently
owned and operated and is not dominant in its field.'' Nationwide, as
of 2007, there were approximately 1,621,215 small organizations.
Finally, the term ``small governmental jurisdiction'' is defined
generally as ``governments of cities, towns, townships, villages,
school districts, or special districts, with a population of less than
fifty thousand.'' Census Bureau data for 2011 indicate that there were
90,056 local governmental jurisdictions in the United States. The
Commission estimates that, of this total, as many as 89,327 entities
may qualify as ``small governmental jurisdictions.'' Thus, the
Commission estimates that most governmental jurisdictions are small.
6. Broadband Internet Access Service Providers
301. The rules adopted in the Order apply to broadband Internet
access service providers. The Economic Census places these firms, whose
services might include Voice over Internet Protocol (VoIP), in either
of two categories, depending on whether the service is provided over
the provider's own telecommunications facilities (e.g., cable and DSL
ISPs), or over client-supplied telecommunications connections (e.g.,
dial-up ISPs). The former are within the category of Wired
Telecommunications Carriers, which has an SBA small business size
standard of 1,500 or fewer employees. These are also labeled
``broadband.'' The latter are within the category of All Other
Telecommunications, which has a size standard of annual receipts of
$32.5 million or less. These are labeled non-broadband. According to
Census Bureau data for 2007, there were 3,188 firms in the first
category, total, that operated for
[[Page 24328]]
the entire year. Of this total, 3144 firms had employment of 999 or
fewer employees, and 44 firms had employment of 1,000 employees or
more. For the second category, the data show that 2,383 firms operated
for the entire year. Of those, 2,346 had annual receipts below $32.5
million per year. Consequently, the Commission estimates that the
majority of broadband Internet access service provider firms are small
entities.
302. The broadband Internet access service provider industry has
changed since this definition was introduced in 2007. The data cited
above may therefore include entities that no longer provide broadband
Internet access service, and may exclude entities that now provide such
service. To ensure that this FRFA describes the universe of small
entities that our action might affect, the Commission discusses in turn
several different types of entities that might be providing broadband
Internet access service. The Commission notes that, although the
Commission has no specific information on the number of small entities
that provide broadband Internet access service over unlicensed
spectrum, the Commission includes these entities in our Final
Regulatory Flexibility Analysis.
7. Wireline Providers
303. Incumbent Local Exchange Carriers (Incumbent LECs). Neither
the Commission nor the SBA has developed a small business size standard
specifically for incumbent LEC services. The closest applicable size
standard under SBA rules is for the category Wired Telecommunications
Carriers. Under that size standard, such a business is small if it has
1,500 or fewer employees. According to Commission data, 1,307 carriers
reported that they were incumbent LEC providers. Of these 1,307
carriers, an estimated 1,006 have 1,500 or fewer employees and 301 have
more than 1,500 employees. Consequently, the Commission estimates that
most providers of incumbent LEC service are small businesses that may
be affected by rules adopted pursuant to the Order.
304. Competitive Local Exchange Carriers (Competitive LECs),
Competitive Access Providers (CAPs), Shared-Tenant Service Providers,
and Other Local Service Providers. Neither the Commission nor the SBA
has developed a small business size standard specifically for these
service providers. The appropriate size standard under SBA rules is for
the category Wired Telecommunications Carriers. Under that size
standard, such a business is small if it has 1,500 or fewer employees.
According to Commission data, 1,442 carriers reported that they were
engaged in the provision of either competitive local exchange services
or competitive access provider services. Of these 1,442 carriers, an
estimated 1,256 have 1,500 or fewer employees and 186 have more than
1,500 employees. In addition, 17 carriers have reported that they are
Shared-Tenant Service Providers, and all 17 are estimated to have 1,500
or fewer employees. In addition, 72 carriers have reported that they
are Other Local Service Providers. Of the 72, seventy have 1,500 or
fewer employees and two have more than 1,500 employees. Consequently,
the Commission estimates that most providers of competitive local
exchange service, competitive access providers, Shared-Tenant Service
Providers, and other local service providers are small entities that
may be affected by rules adopted pursuant to the Order.
305. The Commission has included small incumbent LECs in this
present RFA analysis. As noted above, a ``small business'' under the
RFA is one that, inter alia, meets the pertinent small business size
standard (e.g., a telephone communications business having 1,500 or
fewer employees), and ``is not dominant in its field of operation.''
The SBA's Office of Advocacy contends that, for RFA purposes, small
incumbent LECs are not dominant in their field of operation because any
such dominance is not ``national'' in scope. The Commission has
therefore included small incumbent LECs in this RFA analysis, although
the Commission emphasizes that this RFA action has no effect on
Commission analyses and determinations in other, non-RFA contexts.
306. Interexchange Carriers. Neither the Commission nor the SBA has
developed a small business size standard specifically for providers of
interexchange services. The appropriate size standard under SBA rules
is for the category Wired Telecommunications Carriers. Under that size
standard, such a business is small if it has 1,500 or fewer employees.
According to Commission data, 359 carriers have reported that they are
engaged in the provision of interexchange service. Of these, an
estimated 317 have 1,500 or fewer employees and 42 have more than 1,500
employees. Consequently, the Commission estimates that the majority of
IXCs are small entities that may be affected by rules adopted pursuant
to the Order.
307. Operator Service Providers (OSPs). Neither the Commission nor
the SBA has developed a small business size standard specifically for
operator service providers. The appropriate size standard under SBA
rules is for the category Wired Telecommunications Carriers. Under that
size standard, such a business is small if it has 1,500 or fewer
employees. According to Commission data, 33 carriers have reported that
they are engaged in the provision of operator services. Of these, an
estimated 31 have 1,500 or fewer employees and two have more than 1,500
employees. Consequently, the Commission estimates that the majority of
OSPs are small entities that may be affected by rules adopted pursuant
to the Order.
308. Prepaid Calling Card Providers. Neither the Commission nor the
SBA has developed a small business size standard specifically for
prepaid calling card providers. The appropriate size standard under SBA
rules is for the category Telecommunications Resellers. Under that size
standard, such a business is small if it has 1,500 or fewer employees.
According to Commission data, 193 carriers have reported that they are
engaged in the provision of prepaid calling cards. Of these, an
estimated all 193 have 1,500 or fewer employees and none have more than
1,500 employees. Consequently, the Commission estimates that the
majority of prepaid calling card providers are small entities that may
be affected by rules adopted pursuant to the Order.
309. Local Resellers. The SBA has developed a small business size
standard for the category of Telecommunications Resellers. Under that
size standard, such a business is small if it has 1,500 or fewer
employees. According to Commission data, 213 carriers have reported
that they are engaged in the provision of local resale services. Of
these, an estimated 211 have 1,500 or fewer employees and two have more
than 1,500 employees. Consequently, the Commission estimates that the
majority of local resellers are small entities that may be affected by
rules adopted pursuant to the Order.
310. Toll Resellers. The SBA has developed a small business size
standard for the category of Telecommunications Resellers. Under that
size standard, such a business is small if it has 1,500 or fewer
employees. According to Commission data, 881 carriers have reported
that they are engaged in the provision of toll resale services. Of
these, an estimated 857 have 1,500 or fewer employees and 24 have more
than 1,500 employees. Consequently, the Commission estimates that the
majority of toll resellers are small entities that may be
[[Page 24329]]
affected by rules adopted pursuant to the Order.
311. Other Toll Carriers. Neither the Commission nor the SBA has
developed a size standard for small businesses specifically applicable
to Other Toll Carriers. This category includes toll carriers that do
not fall within the categories of interexchange carriers, operator
service providers, prepaid calling card providers, satellite service
carriers, or toll resellers. The closest applicable size standard under
SBA rules is for Wired Telecommunications Carriers. Under that size
standard, such a business is small if it has 1,500 or fewer employees.
According to Commission data, 284 companies reported that their primary
telecommunications service activity was the provision of other toll
carriage. Of these, an estimated 279 have 1,500 or fewer employees and
five have more than 1,500 employees. Consequently, the Commission
estimates that most Other Toll Carriers are small entities that may be
affected by the rules and policies adopted pursuant to the Order.
312. 800 and 800-Like Service Subscribers. Neither the Commission
nor the SBA has developed a small business size standard specifically
for 800 and 800-like service (toll free) subscribers. The appropriate
size standard under SBA rules is for the category Telecommunications
Resellers. Under that size standard, such a business is small if it has
1,500 or fewer employees. The most reliable source of information
regarding the number of these service subscribers appears to be data
the Commission collects on the 800, 888, 877, and 866 numbers in use.
According to our data, as of September 2009, the number of 800 numbers
assigned was 7,860,000; the number of 888 numbers assigned was
5,588,687; the number of 877 numbers assigned was 4,721,866; and the
number of 866 numbers assigned was 7,867,736. The Commission does not
have data specifying the number of these subscribers that are not
independently owned and operated or have more than 1,500 employees, and
thus are unable at this time to estimate with greater precision the
number of toll free subscribers that would qualify as small businesses
under the SBA size standard. Consequently, the Commission estimates
that there are 7,860,000 or fewer small entity 800 subscribers;
5,588,687 or fewer small entity 888 subscribers; 4,721,866 or fewer
small entity 877 subscribers; and 7,867,736 or fewer small entity 866
subscribers.
8. Wireless Providers--Fixed and Mobile
313. The broadband Internet access service provider category
covered by this Order may cover multiple wireless firms and categories
of regulated wireless services. Thus, to the extent the wireless
services listed below are used by wireless firms for broadband Internet
access service, the proposed actions may have an impact on those small
businesses as set forth above and further below. In addition, for those
services subject to auctions, the Commission notes that, as a general
matter, the number of winning bidders that claim to qualify as small
businesses at the close of an auction does not necessarily represent
the number of small businesses currently in service. Also, the
Commission does not generally track subsequent business size unless, in
the context of assignments and transfers or reportable eligibility
events, unjust enrichment issues are implicated.
314. Wireless Telecommunications Carriers (except Satellite). Since
2007, the Census Bureau has placed wireless firms within this new,
broad, economic census category. Under the present and prior
categories, the SBA has deemed a wireless business to be small if it
has 1,500 or fewer employees. For the category of Wireless
Telecommunications Carriers (except Satellite), census data for 2007
show that there were 1,383 firms that operated for the entire year. Of
this total, 1,368 firms had employment of 999 or fewer employees and 15
had employment of 1,000 employees or more. Since all firms with fewer
than 1,500 employees are considered small, given the total employment
in the sector, the Commission estimates that the vast majority of
wireless firms are small.
315. Wireless Communications Services. This service can be used for
fixed, mobile, radiolocation, and digital audio broadcasting satellite
uses. The Commission defined ``small business'' for the wireless
communications services (WCS) auction as an entity with average gross
revenues of $40 million for each of the three preceding years, and a
``very small business'' as an entity with average gross revenues of $15
million for each of the three preceding years. The SBA has approved
these definitions.
316. 218-219 MHz Service. The first auction of 218-219 MHz spectrum
resulted in 170 entities winning licenses for 594 Metropolitan
Statistical Area (MSA) licenses. Of the 594 licenses, 557 were won by
entities qualifying as a small business. For that auction, the small
business size standard was an entity that, together with its
affiliates, has no more than a $6 million net worth and, after federal
income taxes (excluding any carry over losses), has no more than $2
million in annual profits each year for the previous two years. In the
218-219 MHz Report and Order and Memorandum Opinion and Order, 64 FR
59656, November 3, 1999, the Commission established a small business
size standard for a ``small business'' as an entity that, together with
its affiliates and persons or entities that hold interests in such an
entity and their affiliates, has average annual gross revenues not to
exceed $15 million for the preceding three years. A ``very small
business'' is defined as an entity that, together with its affiliates
and persons or entities that hold interests in such an entity and its
affiliates, has average annual gross revenues not to exceed $3 million
for the preceding three years. These size standards will be used in
future auctions of 218-219 MHz spectrum.
317. 2.3 GHz Wireless Communications Services. This service can be
used for fixed, mobile, radiolocation, and digital audio broadcasting
satellite uses. The Commission defined ``small business'' for the
wireless communications services (``WCS'') auction as an entity with
average gross revenues of $40 million for each of the three preceding
years, and a ``very small business'' as an entity with average gross
revenues of $15 million for each of the three preceding years. The SBA
has approved these definitions. The Commission auctioned geographic
area licenses in the WCS service. In the auction, which was conducted
in 1997, there were seven bidders that won 31 licenses that qualified
as very small business entities, and one bidder that won one license
that qualified as a small business entity.
318. 1670-1675 MHz Services. This service can be used for fixed and
mobile uses, except aeronautical mobile. An auction for one license in
the 1670-1675 MHz band was conducted in 2003. One license was awarded.
The winning bidder was not a small entity.
319. Wireless Telephony. Wireless telephony includes cellular,
personal communications services, and specialized mobile radio
telephony carriers. As noted, the SBA has developed a small business
size standard for Wireless Telecommunications Carriers (except
Satellite). Under the SBA small business size standard, a business is
small if it has 1,500 or fewer employees. According to Commission data,
413 carriers reported that they were engaged in wireless telephony. Of
these, an
[[Page 24330]]
estimated 261 have 1,500 or fewer employees and 152 have more than
1,500 employees. Therefore, a little less than one third of these
entities can be considered small.
320. Broadband Personal Communications Service. The broadband
personal communications services (PCS) spectrum is divided into six
frequency blocks designated A through F, and the Commission has held
auctions for each block. The Commission initially defined a ``small
business'' for C- and F-Block licenses as an entity that has average
gross revenues of $40 million or less in the three previous calendar
years. For F-Block licenses, an additional small business size standard
for ``very small business'' was added and is defined as an entity that,
together with its affiliates, has average gross revenues of not more
than $15 million for the preceding three calendar years. These small
business size standards, in the context of broadband PCS auctions, have
been approved by the SBA. No small businesses within the SBA-approved
small business size standards bid successfully for licenses in Blocks A
and B. There were 90 winning bidders that claimed small business status
in the first two C-Block auctions. A total of 93 bidders that claimed
small business status won approximately 40 percent of the 1,479
licenses in the first auction for the D, E, and F Blocks. On April 15,
1999, the Commission completed the reauction of 347 C-, D-, E-, and F-
Block licenses in Auction No. 22. Of the 57 winning bidders in that
auction, 48 claimed small business status and won 277 licenses.
321. On January 26, 2001, the Commission completed the auction of
422 C and F Block Broadband PCS licenses in Auction No. 35. Of the 35
winning bidders in that auction, 29 claimed small business status.
Subsequent events concerning Auction 35, including judicial and agency
determinations, resulted in a total of 163 C and F Block licenses being
available for grant. On February 15, 2005, the Commission completed an
auction of 242 C-, D-, E-, and F-Block licenses in Auction No. 58. Of
the 24 winning bidders in that auction, 16 claimed small business
status and won 156 licenses. On May 21, 2007, the Commission completed
an auction of 33 licenses in the A, C, and F Blocks in Auction No. 71.
Of the 12 winning bidders in that auction, five claimed small business
status and won 18 licenses. On August 20, 2008, the Commission
completed the auction of 20 C-, D-, E-, and F-Block Broadband PCS
licenses in Auction No. 78. Of the eight winning bidders for Broadband
PCS licenses in that auction, six claimed small business status and won
14 licenses.
322. Specialized Mobile Radio Licenses. The Commission awards
``small entity'' bidding credits in auctions for Specialized Mobile
Radio (SMR) geographic area licenses in the 800 MHz and 900 MHz bands
to firms that had revenues of no more than $15 million in each of the
three previous calendar years. The Commission awards ``very small
entity'' bidding credits to firms that had revenues of no more than $3
million in each of the three previous calendar years. The SBA has
approved these small business size standards for the 900 MHz Service.
The Commission has held auctions for geographic area licenses in the
800 MHz and 900 MHz bands. The 900 MHz SMR auction began on December 5,
1995, and closed on April 15, 1996. Sixty bidders claiming that they
qualified as small businesses under the $15 million size standard won
263 geographic area licenses in the 900 MHz SMR band. The 800 MHz SMR
auction for the upper 200 channels began on October 28, 1997, and was
completed on December 8, 1997. Ten bidders claiming that they qualified
as small businesses under the $15 million size standard won 38
geographic area licenses for the upper 200 channels in the 800 MHz SMR
band. A second auction for the 800 MHz band was held on January 10,
2002 and closed on January 17, 2002 and included 23 BEA licenses. One
bidder claiming small business status won five licenses.
323. The auction of the 1,053 800 MHz SMR geographic area licenses
for the General Category channels began on August 16, 2000, and was
completed on September 1, 2000. Eleven bidders won 108 geographic area
licenses for the General Category channels in the 800 MHz SMR band and
qualified as small businesses under the $15 million size standard. In
an auction completed on December 5, 2000, a total of 2,800 Economic
Area licenses in the lower 80 channels of the 800 MHz SMR service were
awarded. Of the 22 winning bidders, 19 claimed small business status
and won 129 licenses. Thus, combining all four auctions, 41 winning
bidders for geographic licenses in the 800 MHz SMR band claimed status
as small businesses.
324. In addition, there are numerous incumbent site-by-site SMR
licenses and licensees with extended implementation authorizations in
the 800 and 900 MHz bands. The Commission does not know how many firms
provide 800 MHz or 900 MHz geographic area SMR service pursuant to
extended implementation authorizations, nor how many of these providers
have annual revenues of no more than $15 million. One firm has over $15
million in revenues. In addition, the Commission does not know how many
of these firms have 1,500 or fewer employees, which is the SBA-
determined size standard. The Commission assumes, for purposes of this
analysis, that all of the remaining extended implementation
authorizations are held by small entities, as defined by the SBA.
325. Lower 700 MHz Band Licenses. The Commission previously adopted
criteria for defining three groups of small businesses for purposes of
determining their eligibility for special provisions such as bidding
credits. The Commission defined a ``small business'' as an entity that,
together with its affiliates and controlling principals, has average
gross revenues not exceeding $40 million for the preceding three years.
A ``very small business'' is defined as an entity that, together with
its affiliates and controlling principals, has average gross revenues
that are not more than $15 million for the preceding three years.
Additionally, the lower 700 MHz Service had a third category of small
business status for Metropolitan/Rural Service Area (MSA/RSA)
licenses--``entrepreneur''--which is defined as an entity that,
together with its affiliates and controlling principals, has average
gross revenues that are not more than $3 million for the preceding
three years. The SBA approved these small size standards. An auction of
740 licenses (one license in each of the 734 MSAs/RSAs and one license
in each of the six Economic Area Groupings (EAGs)) commenced on August
27, 2002, and closed on September 18, 2002. Of the 740 licenses
available for auction, 484 licenses were won by 102 winning bidders.
Seventy-two of the winning bidders claimed small business, very small
business or entrepreneur status and won a total of 329 licenses. A
second auction commenced on May 28, 2003, closed on June 13, 2003, and
included 256 licenses: 5 EAG licenses and 476 Cellular Market Area
licenses. Seventeen winning bidders claimed small or very small
business status and won 60 licenses, and nine winning bidders claimed
entrepreneur status and won 154 licenses. On July 26, 2005, the
Commission completed an auction of 5 licenses in the Lower 700 MHz band
(Auction No. 60). There were three winning bidders for five licenses.
All three winning bidders claimed small business status.
326. In 2007, the Commission reexamined its rules governing the 700
[[Page 24331]]
MHz band in the 700 MHz Second Report and Order, 72 FR 48814, August
24, 2007. An auction of 700 MHz licenses commenced January 24, 2008 and
closed on March 18, 2008, which included, 176 Economic Area licenses in
the A Block, 734 Cellular Market Area licenses in the B Block, and 176
EA licenses in the E Block. Twenty winning bidders, claiming small
business status (those with attributable average annual gross revenues
that exceed $15 million and do not exceed $40 million for the preceding
three years) won 49 licenses. Thirty three winning bidders claiming
very small business status (those with attributable average annual
gross revenues that do not exceed $15 million for the preceding three
years) won 325 licenses.
327. Upper 700 MHz Band Licenses. In the 700 MHz Second Report and
Order, the Commission revised its rules regarding Upper 700 MHz
licenses. On January 24, 2008, the Commission commenced Auction 73 in
which several licenses in the Upper 700 MHz band were available for
licensing: 12 Regional Economic Area Grouping licenses in the C Block,
and one nationwide license in the D Block. The auction concluded on
March 18, 2008, with 3 winning bidders claiming very small business
status (those with attributable average annual gross revenues that do
not exceed $15 million for the preceding three years) and winning five
licenses.
328. 700 MHz Guard Band Licensees. In 2000, in the 700 MHz Guard
Band Order, 65 FR 17594, April 4, 2000, the Commission adopted size
standards for ``small businesses'' and ``very small businesses'' for
purposes of determining their eligibility for special provisions such
as bidding credits and installment payments. A small business in this
service is an entity that, together with its affiliates and controlling
principals, has average gross revenues not exceeding $40 million for
the preceding three years. Additionally, a very small business is an
entity that, together with its affiliates and controlling principals,
has average gross revenues that are not more than $15 million for the
preceding three years. SBA approval of these definitions is not
required. An auction of 52 Major Economic Area licenses commenced on
September 6, 2000, and closed on September 21, 2000. Of the 104
licenses auctioned, 96 licenses were sold to nine bidders. Five of
these bidders were small businesses that won a total of 26 licenses. A
second auction of 700 MHz Guard Band licenses commenced on February 13,
2001, and closed on February 21, 2001. All eight of the licenses
auctioned were sold to three bidders. One of these bidders was a small
business that won a total of two licenses.
329. Cellular Radiotelephone Service. Auction 77 was held to
resolve one group of mutually exclusive applications for Cellular
Radiotelephone Service licenses for unserved areas in New Mexico.
Bidding credits for designated entities were not available in Auction
77. In 2008, the Commission completed the closed auction of one
unserved service area in the Cellular Radiotelephone Service,
designated as Auction 77. Auction 77 concluded with one provisionally
winning bid for the unserved area totaling $25,002.
330. Private Land Mobile Radio (``PLMR''). PLMR systems serve an
essential role in a range of industrial, business, land transportation,
and public safety activities. These radios are used by companies of all
sizes operating in all U.S. business categories, and are often used in
support of the licensee's primary (non-telecommunications) business
operations. For the purpose of determining whether a licensee of a PLMR
system is a small business as defined by the SBA, the Commission uses
the broad census category, Wireless Telecommunications Carriers (except
Satellite). This definition provides that a small entity is any such
entity employing no more than 1,500 persons. The Commission does not
require PLMR licensees to disclose information about number of
employees, so the Commission does not have information that could be
used to determine how many PLMR licensees constitute small entities
under this definition. The Commission notes that PLMR licensees
generally use the licensed facilities in support of other business
activities, and therefore, it would also be helpful to assess PLMR
licensees under the standards applied to the particular industry
subsector to which the licensee belongs.
331. As of March 2010, there were 424,162 PLMR licensees operating
921,909 transmitters in the PLMR bands below 512 MHz. The Commission
notes that any entity engaged in a commercial activity is eligible to
hold a PLMR license, and that any revised rules in this context could
therefore potentially impact small entities covering a great variety of
industries.
332. Rural Radiotelephone Service. The Commission has not adopted a
size standard for small businesses specific to the Rural Radiotelephone
Service. A significant subset of the Rural Radiotelephone Service is
the Basic Exchange Telephone Radio System (BETRS). In the present
context, the Commission will use the SBA's small business size standard
applicable to Wireless Telecommunications Carriers (except Satellite),
i.e., an entity employing no more than 1,500 persons. There are
approximately 1,000 licensees in the Rural Radiotelephone Service, and
the Commission estimates that there are 1,000 or fewer small entity
licensees in the Rural Radiotelephone Service that may be affected by
the rules and policies proposed herein.
333. Air-Ground Radiotelephone Service. The Commission has
previously used the SBA's small business size standard applicable to
Wireless Telecommunications Carriers (except Satellite), i.e., an
entity employing no more than 1,500 persons. There are approximately
100 licensees in the Air-Ground Radiotelephone Service, and under that
definition, the Commission estimates that almost all of them qualify as
small entities under the SBA definition. For purposes of assigning Air-
Ground Radiotelephone Service licenses through competitive bidding, the
Commission has defined ``small business'' as an entity that, together
with controlling interests and affiliates, has average annual gross
revenues for the preceding three years not exceeding $40 million. A
``very small business'' is defined as an entity that, together with
controlling interests and affiliates, has average annual gross revenues
for the preceding three years not exceeding $15 million. These
definitions were approved by the SBA. In May 2006, the Commission
completed an auction of nationwide commercial Air-Ground Radiotelephone
Service licenses in the 800 MHz band (Auction No. 65). On June 2, 2006,
the auction closed with two winning bidders winning two Air-Ground
Radiotelephone Services licenses. Neither of the winning bidders
claimed small business status.
334. Aviation and Marine Radio Services. Small businesses in the
aviation and marine radio services use a very high frequency (VHF)
marine or aircraft radio and, as appropriate, an emergency position-
indicating radio beacon (and/or radar) or an emergency locator
transmitter. The Commission has not developed a small business size
standard specifically applicable to these small businesses. For
purposes of this analysis, the Commission uses the SBA small business
size standard for the category Wireless Telecommunications Carriers
(except Satellite), which is 1,500 or fewer employees. Census data for
2007, which supersede data contained in the 2002 Census, show that
there were 1,383 firms that operated that year. Of those 1,383, 1,368
had fewer than 100 employees, and 15 firms had more than 100 employees.
Most
[[Page 24332]]
applicants for recreational licenses are individuals. Approximately
581,000 ship station licensees and 131,000 aircraft station licensees
operate domestically and are not subject to the radio carriage
requirements of any statute or treaty. For purposes of our evaluations
in this analysis, the Commission estimates that there are up to
approximately 712,000 licensees that are small businesses (or
individuals) under the SBA standard. In addition, between December 3,
1998 and December 14, 1998, the Commission held an auction of 42 VHF
Public Coast licenses in the 157.1875-157.4500 MHz (ship transmit) and
161.775-162.0125 MHz (coast transmit) bands. For purposes of the
auction, the Commission defined a ``small'' business as an entity that,
together with controlling interests and affiliates, has average gross
revenues for the preceding three years not to exceed $15 million
dollars. In addition, a ``very small'' business is one that, together
with controlling interests and affiliates, has average gross revenues
for the preceding three years not to exceed $3 million dollars. There
are approximately 10,672 licensees in the Marine Coast Service, and the
Commission estimates that almost all of them qualify as ``small''
businesses under the above special small business size standards and
may be affected by rules adopted pursuant to the Order.
335. Advanced Wireless Services (AWS) (1710-1755 MHz and 2110-2155
MHz bands (AWS-1); 1915-1920 MHz, 1995-2000 MHz, 2020-2025 MHz and
2175-2180 MHz bands (AWS-2); 2155-2175 MHz band (AWS-3)). For the AWS-1
bands, the Commission has defined a ``small business'' as an entity
with average annual gross revenues for the preceding three years not
exceeding $40 million, and a ``very small business'' as an entity with
average annual gross revenues for the preceding three years not
exceeding $15 million. For AWS-2 and AWS-3, although the Commission
does not know for certain which entities are likely to apply for these
frequencies, they note that the AWS-1 bands are comparable to those
used for cellular service and personal communications service. The
Commission has not yet adopted size standards for the AWS-2 or AWS-3
bands but proposes to treat both AWS-2 and AWS-3 similarly to broadband
PCS service and AWS-1 service due to the comparable capital
requirements and other factors, such as issues involved in relocating
incumbents and developing markets, technologies, and services.
336. 3650-3700 MHz band. In March 2005, the Commission released a
Report and Order and Memorandum Opinion and Order that provides for
nationwide, non-exclusive licensing of terrestrial operations,
utilizing contention-based technologies, in the 3650 MHz band (i.e.,
3650-3700 MHz). As of April 2010, more than 1270 licenses have been
granted and more than 7433 sites have been registered. The Commission
has not developed a definition of small entities applicable to 3650-
3700 MHz band nationwide, non-exclusive licensees. However, the
Commission estimates that the majority of these licensees are Internet
Access Service Providers (ISPs) and that most of those licensees are
small businesses.
337. Fixed Microwave Services. Microwave services include common
carrier, private-operational fixed, and broadcast auxiliary radio
services. They also include the Local Multipoint Distribution Service
(LMDS), the Digital Electronic Message Service (DEMS), and the 24 GHz
Service, where licensees can choose between common carrier and non-
common carrier status. At present, there are approximately 36,708
common carrier fixed licensees and 59,291 private operational-fixed
licensees and broadcast auxiliary radio licensees in the microwave
services. There are approximately 135 LMDS licensees, three DEMS
licensees, and three 24 GHz licensees. The Commission has not yet
defined a small business with respect to microwave services. For
purposes of the FRFA, the Commission will use the SBA's definition
applicable to Wireless Telecommunications Carriers (except satellite)--
i.e., an entity with no more than 1,500 persons. Under the present and
prior categories, the SBA has deemed a wireless business to be small if
it has 1,500 or fewer employees. The Commission does not have data
specifying the number of these licensees that have more than 1,500
employees, and thus is unable at this time to estimate with greater
precision the number of fixed microwave service licensees that would
qualify as small business concerns under the SBA's small business size
standard. Consequently, the Commission estimates that there are up to
36,708 common carrier fixed licensees and up to 59,291 private
operational-fixed licensees and broadcast auxiliary radio licensees in
the microwave services that may be small and may be affected by the
rules and policies adopted herein. The Commission notes, however, that
the common carrier microwave fixed licensee category includes some
large entities.
338. Offshore Radiotelephone Service. This service operates on
several UHF television broadcast channels that are not used for
television broadcasting in the coastal areas of states bordering the
Gulf of Mexico. There are presently approximately 55 licensees in this
service. The Commission is unable to estimate at this time the number
of licensees that would qualify as small under the SBA's small business
size standard for the category of Wireless Telecommunications Carriers
(except Satellite). Under that SBA small business size standard, a
business is small if it has 1,500 or fewer employees. Census data for
2007, which supersede data contained in the 2002 Census, show that
there were 1,383 firms that operated that year. Of those 1,383, 1,368
had fewer than 100 employees, and 15 firms had more than 100 employees.
Thus, under this category and the associated small business size
standard, the majority of firms can be considered small.
339. 39 GHz Service. The Commission created a special small
business size standard for 39 GHz licenses--an entity that has average
gross revenues of $40 million or less in the three previous calendar
years. An additional size standard for ``very small business'' is: An
entity that, together with affiliates, has average gross revenues of
not more than $15 million for the preceding three calendar years. The
SBA has approved these small business size standards. The auction of
the 2,173 39 GHz licenses began on April 12, 2000 and closed on May 8,
2000. The 18 bidders who claimed small business status won 849
licenses. Consequently, the Commission estimates that 18 or fewer 39
GHz licensees are small entities that may be affected by rules adopted
pursuant to the Order.
340. Broadband Radio Service and Educational Broadband Service.
Broadband Radio Service systems, previously referred to as Multipoint
Distribution Service (MDS) and Multichannel Multipoint Distribution
Service (MMDS) systems, and ``wireless cable,'' transmit video
programming to subscribers and provide two-way high speed data
operations using the microwave frequencies of the Broadband Radio
Service (BRS) and Educational Broadband Service (EBS) (previously
referred to as the Instructional Television Fixed Service (ITFS)). In
connection with the 1996 BRS auction, the Commission established a
small business size standard as an entity that had annual average gross
revenues of no more than $40 million in the previous three calendar
years. The BRS auctions
[[Page 24333]]
resulted in 67 successful bidders obtaining licensing opportunities for
493 Basic Trading Areas (BTAs). Of the 67 auction winners, 61 met the
definition of a small business. BRS also includes licensees of stations
authorized prior to the auction. At this time, the Commission estimates
that of the 61 small business BRS auction winners, 48 remain small
business licensees. In addition to the 48 small businesses that hold
BTA authorizations, there are approximately 392 incumbent BRS licensees
that are considered small entities. After adding the number of small
business auction licensees to the number of incumbent licensees not
already counted, the Commission finds that there are currently
approximately 440 BRS licensees that are defined as small businesses
under either the SBA or the Commission's rules.
341. In 2009, the Commission conducted Auction 86, the sale of 78
licenses in the BRS areas. The Commission offered three levels of
bidding credits: (i) A bidder with attributed average annual gross
revenues that exceed $15 million and do not exceed $40 million for the
preceding three years (small business) received a 15 percent discount
on its winning bid; (ii) a bidder with attributed average annual gross
revenues that exceed $3 million and do not exceed $15 million for the
preceding three years (very small business) received a 25 percent
discount on its winning bid; and (iii) a bidder with attributed average
annual gross revenues that do not exceed $3 million for the preceding
three years (entrepreneur) received a 35 percent discount on its
winning bid. Auction 86 concluded in 2009 with the sale of 61 licenses.
Of the ten winning bidders, two bidders that claimed small business
status won 4 licenses; one bidder that claimed very small business
status won three licenses; and two bidders that claimed entrepreneur
status won six licenses.
342. In addition, the SBA's Cable Television Distribution Services
small business size standard is applicable to EBS. There are presently
2,436 EBS licensees. All but 100 of these licenses are held by
educational institutions. Educational institutions are included in this
analysis as small entities. Thus, the Commission estimates that at
least 2,336 licensees are small businesses. Since 2007, Cable
Television Distribution Services have been defined within the broad
economic census category of Wired Telecommunications Carriers; that
category is defined as follows: ``This industry comprises
establishments primarily engaged in operating and/or providing access
to transmission facilities and infrastructure that they own and/or
lease for the transmission of voice, data, text, sound, and video using
wired telecommunications networks. Transmission facilities may be based
on a single technology or a combination of technologies.'' The SBA has
developed a small business size standard for this category, which is:
All such firms having 1,500 or fewer employees. To gauge small business
prevalence for these cable services the Commission must, however, use
the most current census data that are based on the previous category of
Cable and Other Program Distribution and its associated size standard;
that size standard was: All such firms having $13.5 million or less in
annual receipts. According to Census Bureau data for 2007, there were a
total of 996 firms in this category that operated for the entire year.
Of this total, 948 firms had annual receipts of under $10 million, and
48 firms had receipts of $10 million or more but less than $25 million.
Thus, the majority of these firms can be considered small.
343. Narrowband Personal Communications Services. In 1994, the
Commission conducted an auction for Narrowband PCS licenses. A second
auction was also conducted later in 1994. For purposes of the first two
Narrowband PCS auctions, ``small businesses'' were entities with
average gross revenues for the prior three calendar years of $40
million or less. Through these auctions, the Commission awarded a total
of 41 licenses, 11 of which were obtained by four small businesses. To
ensure meaningful participation by small business entities in future
auctions, the Commission adopted a two-tiered small business size
standard in the Narrowband PCS Second Report and Order, 65 FR 35843,
June 6, 2000. A ``small business'' is an entity that, together with
affiliates and controlling interests, has average gross revenues for
the three preceding years of not more than $40 million. A ``very small
business'' is an entity that, together with affiliates and controlling
interests, has average gross revenues for the three preceding years of
not more than $15 million. The SBA has approved these small business
size standards. A third auction was conducted in 2001. Here, five
bidders won 317 (Metropolitan Trading Areas and nationwide) licenses.
Three of these claimed status as a small or very small entity and won
311 licenses.
344. Paging (Private and Common Carrier). In the Paging Third
Report and Order, 64 FR 33762, June 24, 1999, the Commission developed
a small business size standard for ``small businesses'' and ``very
small businesses'' for purposes of determining their eligibility for
special provisions such as bidding credits and installment payments. A
``small business'' is an entity that, together with its affiliates and
controlling principals, has average gross revenues not exceeding $15
million for the preceding three years. Additionally, a ``very small
business'' is an entity that, together with its affiliates and
controlling principals, has average gross revenues that are not more
than $3 million for the preceding three years. The SBA has approved
these small business size standards. According to Commission data, 291
carriers have reported that they are engaged in Paging or Messaging
Service. Of these, an estimated 289 have 1,500 or fewer employees, and
two have more than 1,500 employees. Consequently, the Commission
estimates that the majority of paging providers are small entities that
may be affected by our action. An auction of Metropolitan Economic Area
licenses commenced on February 24, 2000, and closed on March 2, 2000.
Of the 2,499 licenses auctioned, 985 were sold. Fifty-seven companies
claiming small business status won 440 licenses. A subsequent auction
of MEA and Economic Area (``EA'') licenses was held in the year 2001.
Of the 15,514 licenses auctioned, 5,323 were sold. One hundred thirty-
two companies claiming small business status purchased 3,724 licenses.
A third auction, consisting of 8,874 licenses in each of 175 EAs and
1,328 licenses in all but three of the 51 MEAs, was held in 2003.
Seventy-seven bidders claiming small or very small business status won
2,093 licenses. A fourth auction, consisting of 9,603 lower and upper
paging band licenses was held in the year 2010. Twenty-nine bidders
claiming small or very small business status won 3,016 licenses.
345. 220 MHz Radio Service--Phase I Licensees. The 220 MHz service
has both Phase I and Phase II licenses. Phase I licensing was conducted
by lotteries in 1992 and 1993. There are approximately 1,515 such non-
nationwide licensees and four nationwide licensees currently authorized
to operate in the 220 MHz band. The Commission has not developed a
small business size standard for small entities specifically applicable
to such incumbent 220 MHz Phase I licensees. To estimate the number of
such licensees that are small businesses, the Commission applies the
small business size standard under the SBA rules applicable to Wireless
Telecommunications Carriers (except Satellite). Under this category,
the SBA
[[Page 24334]]
deems a wireless business to be small if it has 1,500 or fewer
employees. The Commission estimates that nearly all such licensees are
small businesses under the SBA's small business size standard that may
be affected by rules adopted pursuant to the Order.
346. 220 MHz Radio Service--Phase II Licensees. The 220 MHz service
has both Phase I and Phase II licenses. The Phase II 220 MHz service is
subject to spectrum auctions. In the 220 MHz Third Report and Order, 62
FR 15978, April 3, 1997, the Commission adopted a small business size
standard for ``small'' and ``very small'' businesses for purposes of
determining their eligibility for special provisions such as bidding
credits and installment payments. This small business size standard
indicates that a ``small business'' is an entity that, together with
its affiliates and controlling principals, has average gross revenues
not exceeding $15 million for the preceding three years. A ``very small
business'' is an entity that, together with its affiliates and
controlling principals, has average gross revenues that do not exceed
$3 million for the preceding three years. The SBA has approved these
small business size standards. Auctions of Phase II licenses commenced
on September 15, 1998, and closed on October 22, 1998. In the first
auction, 908 licenses were auctioned in three different-sized
geographic areas: Three nationwide licenses, 30 Regional Economic Area
Group (EAG) Licenses, and 875 Economic Area (EA) Licenses. Of the 908
licenses auctioned, 693 were sold. Thirty-nine small businesses won
licenses in the first 220 MHz auction. The second auction included 225
licenses: 216 EA licenses and 9 EAG licenses. Fourteen companies
claiming small business status won 158 licenses.
9. Satellite Service Providers
347. Satellite Telecommunications Providers. Two economic census
categories address the satellite industry. The first category has a
small business size standard of $30 million or less in average annual
receipts, under SBA rules. The second has a size standard of $30
million or less in annual receipts.
348. The category of Satellite Telecommunications ``comprises
establishments primarily engaged in providing telecommunications
services to other establishments in the telecommunications and
broadcasting industries by forwarding and receiving communications
signals via a system of satellites or reselling satellite
telecommunications.'' For this category, Census Bureau data for 2007
show that there were a total of 570 firms that operated for the entire
year. Of this total, 530 firms had annual receipts of under $30
million, and 40 firms had receipts of over $30 million. Consequently,
the Commission estimates that the majority of Satellite
Telecommunications firms are small entities that might be affected by
our action.
349. The second category of Other Telecommunications comprises,
inter alia, ``establishments primarily engaged in providing specialized
telecommunications services, such as satellite tracking, communications
telemetry, and radar station operation. This industry also includes
establishments primarily engaged in providing satellite terminal
stations and associated facilities connected with one or more
terrestrial systems and capable of transmitting telecommunications to,
and receiving telecommunications from, satellite systems.'' For this
category, Census Bureau data for 2007 show that there were a total of
1,274 firms that operated for the entire year. Of this total, 1,252 had
annual receipts below $25 million per year. Consequently, the
Commission estimates that the majority of All Other Telecommunications
firms are small entities that might be affected by our action.
10. Cable Service Providers
350. Because section 706 requires us to monitor the deployment of
broadband using any technology, the Commission anticipates that some
broadband service providers may not provide telephone service.
Accordingly, the Commission describes below other types of firms that
may provide broadband services, including cable companies, MDS
providers, and utilities, among others.
351. Cable and Other Program Distributors. Since 2007, these
services have been defined within the broad economic census category of
Wired Telecommunications Carriers; that category is defined as follows:
``This industry comprises establishments primarily engaged in operating
and/or providing access to transmission facilities and infrastructure
that they own and/or lease for the transmission of voice, data, text,
sound, and video using wired telecommunications networks. Transmission
facilities may be based on a single technology or a combination of
technologies.'' The SBA has developed a small business size standard
for this category, which is: All such firms having 1,500 or fewer
employees. To gauge small business prevalence for these cable services
the Commission must, however, use current census data that are based on
the previous category of Cable and Other Program Distribution and its
associated size standard; that size standard was: All such firms having
$13.5 million or less in annual receipts. According to Census Bureau
data for 2007, there were a total of 2,048 firms in this category that
operated for the entire year. Of this total, 1,393 firms had annual
receipts of under $10 million, and 655 firms had receipts of $10
million or more. Thus, the majority of these firms can be considered
small.
352. Cable Companies and Systems. The Commission has also developed
its own small business size standards, for the purpose of cable rate
regulation. Under the Commission's rules, a ``small cable company'' is
one serving 400,000 or fewer subscribers, nationwide. Industry data
that there are currently 4,600 active cable systems in the United
States. Of this total, all but nine cable operators are small under the
400,000 subscriber size standard. In addition, under the Commission's
rules, a ``small system'' is a cable system serving 15,000 or fewer
subscribers. Current Commission records show 4,945 cable systems
nationwide. Of this total, 4,380 cable systems have less than 20,000
subscribers, and 565 systems have 20,000 or more subscribers, based on
the same records. Thus, under this standard, the Commission estimates
that most cable systems are small entities.
353. Cable System Operators. The Communications Act of 1934, as
amended, also contains a size standard for small cable system
operators, which is ``a cable operator that, directly or through an
affiliate, serves in the aggregate fewer than 1 percent of all
subscribers in the United States and is not affiliated with any entity
or entities whose gross annual revenues in the aggregate exceed
$250,000,000.'' The Commission has determined that an operator serving
fewer than 677,000 subscribers shall be deemed a small operator, if its
annual revenues, when combined with the total annual revenues of all
its affiliates, do not exceed $250 million in the aggregate. Based on
available data, the Commission finds that all but ten incumbent cable
operators are small entities under this size standard. The Commission
notes that the Commission neither requests nor collects information on
whether cable system operators are affiliated with entities whose gross
annual revenues exceed $250 million, and therefore they are unable to
estimate more accurately the number of cable system operators that
would qualify as small under this size standard.
354. The open video system (``OVS'') framework was established in
1996, and is one of four statutorily recognized options for the
provision of video
[[Page 24335]]
programming services by local exchange carriers. The OVS framework
provides opportunities for the distribution of video programming other
than through cable systems. Because OVS operators provide subscription
services, OVS falls within the SBA small business size standard
covering cable services, which is ``Wired Telecommunications
Carriers.'' The SBA has developed a small business size standard for
this category, which is: All such firms having 1,500 or fewer
employees. According to Census Bureau data for 2007, there were a total
of 955 firms in this previous category that operated for the entire
year. Of this total, 939 firms had employment of 999 or fewer
employees, and 16 firms had employment of 1,000 employees or more.
Thus, under this second size standard, most cable systems are small and
may be affected by rules adopted pursuant to the Order. In addition,
the Commission notes that they have certified some OVS operators, with
some now providing service. Broadband service providers (``BSPs'') are
currently the only significant holders of OVS certifications or local
OVS franchises. The Commission does not have financial or employment
information regarding the entities authorized to provide OVS, some of
which may not yet be operational. Thus, again, at least some of the OVS
operators may qualify as small entities.
11. Electric Power Generators, Transmitters, and Distributors
355. Electric Power Generators, Transmitters, and Distributors. The
Census Bureau defines an industry group comprised of ``establishments,
primarily engaged in generating, transmitting, and/or distributing
electric power. Establishments in this industry group may perform one
or more of the following activities: (1) Operate generation facilities
that produce electric energy; (2) operate transmission systems that
convey the electricity from the generation facility to the distribution
system; and (3) operate distribution systems that convey electric power
received from the generation facility or the transmission system to the
final consumer.'' The SBA has developed a small business size standard
for firms in this category: ``A firm is small if, including its
affiliates, it is primarily engaged in the generation, transmission,
and/or distribution of electric energy for sale and its total electric
output for the preceding fiscal year did not exceed 4 million megawatt
hours.'' Census Bureau data for 2007 show that there were 1,174 firms
that operated for the entire year in this category. Of these firms, 50
had 1,000 employees or more, and 1,124 had fewer than 1,000 employees.
Based on this data, a majority of these firms can be considered small.
12. Description of Projected Reporting, Recordkeeping, and Other
Compliance Requirements for Small Entities
356. In the Report and Order, the Commission requires all rate-of-
return ETCs to submit annually a list of the geocoded locations to
which they have newly deployed facilities capable of delivering
broadband in lieu of annual narrative reporting. To lessen the burden,
in the Report and Order the Commission directs the Bureau to work with
USAC to develop an online portal that will enable carriers to submit
the requisite information on a rolling basis throughout the year as
construction is completed and service becomes commercially available,
with any final submission no later than March 1 of the following year.
13. Steps Taken To Minimize the Significant Economic Impact on Small
Entities, and Significant Alternatives Considered
357. The RFA requires an agency to describe any significant
alternatives that it has considered in reaching its proposed approach,
which may include (among others) the following four alternatives: (1)
The establishment of differing compliance or reporting requirements or
timetables that take into account the resources available to small
entities; (2) the clarification, consolidation, or simplification of
compliance or reporting requirements under the rule for small entities;
(3) the use of performance, rather than design, standards; and (4) an
exemption from coverage of the rule, or any part thereof, for small
entities. The Commission has considered all of these factors subsequent
to receiving substantive comments from the public and potentially
affected entities. The Commission has considered the economic impact on
small entities, as identified in comments filed in response to the USF/
ICC Transformation NPRM and FNRPM and their IRFAs, in reaching its
final conclusions and taking action in this proceeding.
358. The rules that the Commission adopts in the Report and Order
and Order and Order on Reconsideration take steps to provide greater
certainty and flexibility to rate-of-return carriers, many of which are
small entities. For example, the Commission adopts a voluntary path for
rate-of-return carriers to elect to receive model-based support in
exchange for deploying broadband-capable networks to a pre-determined
number of eligible locations. The Commission recognizes that permitting
rate-of-return carriers to elect to receive specific and predictable
monthly support amounts over the ten years will enhance the ability of
these carriers to deploy broadband throughout the term and free them
from the administrative burdens associated with doing cost studies to
receive high-cost support. Additionally, to provide further
flexibility, the Commission adopts even-spaced annual interim
milestones over the 10-year term for rate-of-return carriers electing
model-based support, and decline to set interim milestones requiring
deployment of speeds at or above 25/3 Mbps. By doing so, the Commission
minimizes deployment burdens by permitting flexibility in design and
deployment of broadband networks. The Commission also concludes that
rate-of-return carriers receiving model-based support should have some
flexibility in their deployment obligations to address unforeseeable
challenges to meeting these obligations. Therefore, the Commission
permitted rate-of-return carriers to deploy to 95 percent of the
required number of locations by the end of the 10-year term.
359. In the Report and Order, the Commission also removes a
deterrent for rate-of-return carriers to offer standalone broadband
service by making technical rule changes to our existing ICLS rules to
support the provision of broadband service to consumers in areas with
high loop-related costs (including small carriers and those that wish
to transfer or acquire parts of exchanges), without regard to whether
the loops are also used for traditional voice services. By supporting
broadband lines, the Commission removes potential regulatory barriers
to taking steps to offer new IP-based services in innovative ways, and
provides rate-of-return carriers strategic flexibility in their service
offerings.
360. The Commission adopts a mechanism to limit operating costs
eligible for support under HCLS and CAF BLS to encourage efficient
spending by rate-of-return carriers and increase the amount of
universal service support available for investment in broadband-capable
facilities. However, to soften the impact of this expense limitation,
the Commission concludes that a transition is appropriate to allow
carriers time to adjust their operating expenditures. The Commission
also adopts a capex allowance proposed by the rate-of-return industry
associations to help target support to those areas
[[Page 24336]]
with less broadband deployment so that carriers serving those areas
have the opportunity and support to catch up to the average level of
broadband deployment in areas served by rate-of-return carriers. The
Commission also concludes that if any rate-of-return carrier believes
that the support it receives is insufficient, it may seek a waiver of
the Commission's rules to obtain the flexibility and certainty it needs
to continue operating its business.
361. Next, in the Report and Order, the Commission takes steps to
prohibit rate-of-return carriers from receiving CAF BLS in areas that
are served by a qualifying unsubsidized competitor. However, the
Commission limits the reduction in support to only those census blocks
that are overlapped in at least 85 percent of their locations. The
Commission recognized that competitive areas are likely to be lower
cost and non-competitive areas are likely to be relatively higher cost,
and therefore ensured that rate-of-return carriers subject to this rule
may disaggregate their support in areas determined to be served by
qualifying competitors by one of several options. The Commission
provides further flexibility to those rate-of-return carriers affected
by this rule by adopting a phased reduction in disaggregated support
for competitive areas. By permitting this flexibility, the Commission
provides these small entities with the ability to make reasoned
business decisions to advance their deployment goals.
362. To promote ``accountability from companies receiving support
to ensure that public investments are used wisely to deliver intended
results,'' the Commission adopts defined deployment obligations that
are a condition of the receipt of high-cost funding for those carriers
continuing to receive support based on embedded costs. To provide rate-
of-return carriers with the certainty needed to invest in their
networks, the Commission adopted a specific methodology to determine
each carrier's deployment obligation over a defined five-year period,
which will be used to monitor carrier performance. The Commission
recognizes that rate-of-return carriers subject to defined five-year
deployment obligations may choose different timelines to meet their
deployment obligations and therefore allows carriers the flexibility to
choose to meet their obligation at any time during the five-year
period.
363. In modifying its pricing rules, the Commission minimizes the
burden on small carriers by deriving the costs for the Consumer
Broadband-Only Loop category using existing data and allows NECA to
tariff the Consumer Broadband-Only Loop rate for carriers electing
model-based support because of the administrative efficiencies of
employing a single tariff. The Commission also consolidates the
certification that consumer broadband-only loop costs are not being
double recovered into an existing certification, thus streamlining the
process for small carriers.
364. The Commission also takes action to modify our existing
reporting requirements. The Commission revises ETCs' annual reporting
requirements to align better those requirements with the Commission's
statutory and regulatory objectives. To reduce the administrative
burden on rate-of-return carriers, the Commission concludes that the
public interest would be served by eliminating the requirement to file
a narrative update to the five-year plan. Instead, the Commission
adopts narrowly tailored reporting requirements regarding the location
of new deployment offering service at various speeds, which will better
enable the Commission to determine on an annual basis how high-cost
support is being used to ``improve broadband availability, service
quality, and capacity at the smallest geographic area possible.'' Taken
as a whole, these modifications to the reporting requirements for rate-
of-return carriers will reduce their administrative burden and provide
certainty as to what must be filed and when.
365. In the Order and Order on Reconsideration, the Commission is
particularly mindful of the economic impact rate represcription will
have on rate-of-return incumbent LECs, many of which are small
entities. Accordingly, the Commission takes a number of steps to
minimize the economic impact of the new rate of return. As an initial
matter, the Commission expands the upper end of the rate of return zone
of reasonableness beyond the WACC estimates obtained using financial
models based on policy considerations and adopt the rate of return from
the upper end of this zone. In so doing, the Commission attempts to
maximize the likelihood that the unitary rate of return is fully
compensatory, even for small firms with a relatively high cost of
capital. In addition, to help minimize the immediate financial impacts
that represcription may impose on small carriers, the Commission
adopts, for the first time, a transitional approach to represcription.
Under this approach, the rate of return is reduced by 25 basis points
per year beginning July 1, 2016 until it reaches the represcribed 9.75
percent rate of return. Together, these measures are intended to reduce
the significant economic impact of the new rate of return on small
carriers.
C. Report to Congress
366. The Commission will send a copy of the Order, including this
FRFA, in a report to be sent to Congress and the Government
Accountability Office pursuant to the Small Business Regulatory
Enforcement Fairness Act of 1996. In addition, the Commission will send
a copy of the Order, including the FRFA, to the Chief Counsel for
Advocacy of the Small Business Administration. A copy of the Order and
FRFA (or summaries thereof) will also be published in the Federal
Register.
D. Congressional Review Act
367. 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).
368. 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).
369. Additional Information. For additional information on this
proceeding, contact Suzanne Yelen of the Wireline Competition Bureau,
Industry Analysis and Technology Division, Suzanne.Yelen@fcc.gov, (202)
418-7400 or Alexander Minard of the Wireline Competition Bureau,
Technology Access Policy Division, Alexander.Minard@fcc.gov, (202) 418-
7400.
V. Ordering Clauses
370. Accordingly, IT IS ORDERED, pursuant to the authority
contained in sections 1, 2, 4(i), 5, 10, 201-206, 214, 218-220, 251,
252, 254, 256, 303(r), 332, 403, and 405 of the Communications Act of
1934, as amended, and section 706 of the Telecommunications Act of
1996, 47 U.S.C. 151, 152, 154(i), 155, 201-206, 214, 218-220, 251, 252,
254, 256, 303(r), 332, 403, 405, 1302, and sections 1.1, 1.3, 1.421,
1.427, and 1.429 of the Commission's rules, 47 CFR 1.1, 1.3, 1.421,
1.427, and 1.429, that this Report and Order, Order and Order on
Reconsideration, and concurrently adopted Further Notice of Proposed
Rulemaking IS ADOPTED, effective thirty (30) days after publication of
the text or summary thereof in the Federal Register, except for those
rules and requirements involving Paperwork Reduction Act burdens, which
shall
[[Page 24337]]
become effective immediately upon announcement in the Federal Register
of OMB approval. It is our intention in adopting these rules that if
any of the rules that the Commission retains, modifies, or adopts
herein, or the application thereof to any person or circumstance, are
held to be unlawful, the remaining portions of the rules not deemed
unlawful, and the application of such rules to other persons or
circumstances, shall remain in effect to the fullest extent permitted
by law.
371. IT IS FURTHER ORDERED that parts 51, 54, 65, and 69 of the
Commission's rules, 47 CFR parts 51, 54, 65, and 69, ARE AMENDED as set
forth in Appendix B, and such rule amendments SHALL BE EFFECTIVE thirty
(30) days after publication of the rules amendments in the Federal
Register, except to the extent they contain information collections
subject to PRA review. The rules that contain information collections
subject to PRA review SHALL BECOME EFFECTIVE immediately upon
announcement in the Federal Register of OMB approval.
372. IT IS FURTHER ORDERED that pursuant to Section 1.3 of the
Commission's rules, 47 CFR 1.3, sections 65.300 and 65.303 of the
Commission's rules, 47 CFR 65.300, 65.303, are WAIVED to the extent
provided herein.
373. IT IS FURTHER ORDERED that, pursuant to the authority
contained in sections 1, 2, 4(i), 5, 10, 201-206, 214, 218-220, 251,
252, 254, 256, 303(r), 332, 403, and 405 of the Communications Act of
1934, as amended, and section 706 of the Telecommunications Act of
1996, 47 U.S.C. 151, 152, 154(i), 155, 201-206, 214, 218-220, 251, 252,
254, 256, 303(r), 332, 403, 405, 1302, and sections 1.1, 1.3, 1.421,
1.427, and 1.429 of the Commission's rules, 47 CFR 1.1, 1.3, 1.421,
1.427, and 1.429, NOTICE IS HEREBY GIVEN of the proposals and tentative
conclusions described in this Further Notice of Proposed Rulemaking.
374. IT IS FURTHER ORDERED that pursuant section 1.429(i) of the
Commission's rules, 47 CFR 1.429(i), that the Petition for
Reconsideration and Clarification of the National Exchange Carrier
Association, Inc., Organization for the Promotion and Advancement of
Small Telecommunications Companies, and Western Telecommunications
Alliance, filed December 29, 2011, is DISMISSED and DENIED to the
extent provided herein.
375. IT IS FURTHER ORDERED that the Commission SHALL SEND a copy of
this Report and Order, Order and Order on Reconsideration, and
concurrently adopted Further Notice of Proposed Rulemaking to Congress
and the Government Accountability Office pursuant to the Congressional
Review Act, see 5 U.S.C. 801(a)(1)(A).
376. IT IS FURTHER ORDERED, that the Commission's Consumer and
Governmental Affairs Bureau, Reference Information Center, SHALL SEND a
copy of this Report and Order, Order and Order on Reconsideration, and
concurrently adopted Further Notice of Proposed Rulemaking, including
the Initial Regulatory Flexibility Analysis and the Final Regulatory
Flexibility Analysis, to the Chief Counsel for Advocacy of the Small
Business Administration.
List of Subjects
47 CFR Part 51
Communications common carriers, Telecommunications.
47 CFR Part 54
Communications common carriers, Health facilities, Infants and
children, Internet, Libraries, Reporting and recordkeeping
requirements, Schools, Telecommunications, Telephone.
47 CFR Part 65
Administrative practice and procedure, Communications common
carriers, Reporting and recordkeeping requirements, Telephone.
47 CFR Part 69
Communications common carriers, Reporting and recordkeeping
requirements, Telephone.
Federal Communications Commission.
Marlene H. Dortch,
Secretary.
Final Rule
For the reasons discussed in the preamble, the Federal
Communications Commission amends 47 CFR parts 51, 54, 65, and 69 as
follows:
PART 51--INTERCONNECTION
0
1. The authority citation for part 51 is revised to read as follows:
Authority: 47 U.S.C. 151-55, 201-05, 207-09, 218, 220, 225-27,
251-54, 256, 271, 303(r), 332, 1302.
0
2. In Sec. 51.917, add paragraph (f)(4) to read as follows:
Sec. 51.917 Revenue recovery for Rate-of-Return Carriers.
* * * * *
(f) * * *
(4) A Rate-of-Return Carrier must impute an amount equal to the
Access Recovery Charge for each Consumer Broadband-Only Loop line that
receives support pursuant to Sec. 54.901 of this chapter, with the
imputation applied before CAF-ICC recovery is determined. The per line
per month imputation amount shall be equal to the Access Recovery
Charge amount prescribed by paragraph (e) of this section, consistent
with the residential or single-line business or multi-line business
status of the retail customer.
PART 54--UNIVERSAL SERVICE
0
3. The authority citation for part 54 is revised to read as follows:
Authority: 47 U.S.C. 151, 154(i), 155, 201, 205, 214, 219, 220,
254, 303(r), 403, and 1302 unless otherwise noted.
Sec. 54.301 [Removed].
0
4. Remove Sec. 54.301.
0
5. Add Sec. 54.303 to subpart D to read as follows:
Sec. 54.303 Eligible Capital Investment and Operating Expenses.
(a) Eligible Operating Expenses. Each study area's eligible
operating expenses for purposes of calculating universal service
support pursuant to subparts K and M of this part shall be adjusted as
follows:
(1) Total eligible annual operating expenses per location shall be
limited as follows plus one standard deviation:
Y = [alpha] + [beta]1X1 +
[beta]2X2 + [beta]3X3,
Where:
Y = is the natural log of the total operating cost per housing unit,
[alpha] is the coefficient on the constant
[beta] is the regression coefficient for each of the regressions,
X1 is the natural log of the number of housing units in
the study area,
X2 is the natural log of the number of density (number of
housing units per square mile), and
X3 is the square of the natural log of the density
(2) Eligible operating expenses are the sum of Cable and Wire
Facilities Expense, Central Office Equipment Expense, Network Support
and General Expense, Network Operations Expense, Limited Corporate
Operations Expense, Information Origination/Termination Expense, Other
Property Plant and Equipment Expenses, Customer Operations Expense:
Marketing, and Customer Operations Expense: Services.
(3) For purposes of this section, the number of housing units will
be determined per the most recently available U.S Census data for each
census block in that study area. If a census block is partially within
a study area, the number of housing units in that portion of the census
block will be determined based upon the percentage geographic area of
the census block within the study area.
[[Page 24338]]
(4) Notwithstanding the provisions of paragraph (a) of this
section, total eligible annual operating expenses for 2016 will be
limited to the total eligible annual operating expenses as defined in
this section plus one half of the amount of total eligible annual
expense as calculated prior to the application of this section.
(5) For any study area subject to the limitation described in this
paragraph, a required percentage reduction will be calculated for that
study area's total eligible annual operating expenses. Each category or
account used to determine that study area's total eligible annual
operating expenses will then be reduced by this required percentage
reduction.
(b) Loop Plant Investment allowances. Data submitted by rate-of-
return carriers for purposes of obtaining high-cost support under
subparts K and M of this part may include any Loop Plant Investment as
described in paragraph (c)(1) of this section and any Excess Loop Plant
Investment as described in paragraph (h) of this section, but may not
include amounts in excess of the Annual Allowed Loop Plant Investment
(AALPI) as described in paragraph (d) of this section. Amounts in
excess of the AALPI will be removed from the categories or accounts
described in paragraph (c)(1) of this section either on a direct basis
when the amounts of the new loop plant investment can be directly
assigned to a category or account, or on a pro-rata basis in accordance
with each category or account's proportion to the total amount in each
of the categories and accounts described in paragraph (c)(1) of this
section when the new loop plant cannot be directly assigned. This
limitation shall apply only with respect to Loop Plant Investment
incurred after the effective date of this rule. If a carrier's required
Loop Plant Investment exceeds the limitations set forth in this section
as a result of deployment obligations in Sec. 54.308(a)(2), the
carrier's Total Allowed Loop Plant Investment will be increased to the
actual Loop Plant Investment required by the carrier's deployment
obligations, subject to the limitations of the Construction Allowance
Adjustment in paragraph (f) of this section.
(c) Definitions. For purposes of determining loop plant investment
allowances, the following definitions apply:
(1) Loop Plant Investment includes amounts booked to the accounts
used for subparts K and M of this part, loop plant investment.
(2) Total Loop Plant Investment equals amounts booked to the
categories described in paragraph (b)(1) of this section, adjusted for
inflation using the Department of Commerce's Gross Domestic Product
Chain-type Price Index (GDP-CPI), as of December 31 of the Reference
Year. Inflation adjustments shall be based on vintages where possible
or otherwise calculated based on the year plant was put in service.
(3) Total Allowed Loop Plant Investment equals Total Loop Plant
Investment multiplied by the Loop Depreciation Factor.
(4) Loop Depreciation Factor equals the ratio of total loop
accumulated depreciation to gross loop plant during the Reference Year.
(5) Reference Year is the year prior to the year the AALPI is
determined.
(d) Determination of AALPI. A carrier subject to this section shall
have an AALPI set equal to its Total Loop Plant Investment for each
study area multiplied by an AALPI Factor equal to (0.15 times the Loop
Depreciation Factor + 0.05). The Administrator will calculate each rate
of return carrier's AALPI for each Reference Year.
(e) Broadband Deployment AALPI adjustment. The AALPI calculated in
paragraph (c) of this section shall be adjusted by the Administrator
based upon the difference between a carrier's broadband availability
for each study area as reported on that carrier's most recent Form 477,
and the weighted national average broadband availability for all rate-
of-return carriers based on Form 477 data, as announced annually by the
Wireline Competition Bureau in a Public Notice. For every percentage
point that the carrier's broadband availability exceeds the weighted
national average broadband availability for the Reference Year, that
carrier's AALPI will be reduced by one percentage point. For every
percentage point that the carrier's broadband availability is below the
weighted national average broadband availability for the Reference
Year, that carrier's AALPI will be increased by one percentage point.
(f) Construction allowance adjustment. Notwithstanding any other
provision of this section, a rate-of-return carrier may not include in
data submitted for purposes of obtaining high-cost support under
subpart K or subpart M of this part any Loop Plant Investment
associated with new construction projects where the average cost of
such project per location passed exceeds a Maximum Average Per Location
Construction Project Limitation as determined by the Administrator
according to the following formula:
(1) Maximum Average Per Location Construction Project Loop Plant
Investment Limitation equals the inflation adjusted equivalent to
$10,000 in the Reference Year calculated by multiplying $10,000 times
the applicable annual GDP-CPI. This inflation adjusted amount will be
normalized across all study areas by multiplying the product above by
(the Loop Cap Adjustment Factor times the Construction Limit Factor)
Where:
the Loop Cap Adjustment Factor equals the annualized monthly per
loop limit described in Sec. 54.302 (i.e., $3,000) divided by the
unadjusted per loop support amount for the study area (the annual
HCLS and CAF-BLS support amount per loop in the study not capped by
Sec. 54.302)
and
the Construction Limitation Factor equals the study area Total Loop
Investment per Location divided by the overall Total Loop Investment
per Location for all rate-of-return study areas.
(2) This limitation shall apply only with respect to Loop Plant
Investment for which invoices were received by the carrier after the
effective date of this rule.
(3) A carrier subject to this section will maintain documentation
necessary to demonstrate compliance with the above limitation.
(g) Study area data. For each Reference Year, the Administrator
will publish the following data for each study area of each rate-of-
return carrier:
(1) AALPI
(2) The Broadband Deployment AALPI Adjustment
(3) The Maximum Average Per Location Construction Project Loop
Plant Investment Limitation
(4) The Loop Cap Adjustment Factor
(5) The Construction Limit Factor
(h) Excess Loop Plant Investment carry forward. Loop Plant
Investment in a Reference Year in excess of the AALPI may be carried
forward to future years and included in AALPI for such subsequent
years, but may not cause the AALPI to exceed the Total Allowed Loop
Plant Investment.
(i) A carrier subject to this section will maintain subsidiary
records of accumulated Excess Loop Plant Investment for accounts
referenced in paragraph (c)(1) of this section in addition to the
corresponding depreciation accounts. In the event a carrier makes Loop
Plant Investment for an account at a level below the AALPI for the
account, the carrier may reduce accumulated Excess Loop Plant
Investment effective for the Reference Year by an amount up to, but not
in
[[Page 24339]]
excess of the amount by which AALPI for the Reference Year exceeds Loop
Plant Investment for the account during the same year.
(j) Treatment of unused AALPI. In the event a carrier's Loop Plant
Investment is below its AALPI in a given Reference Year, there will be
no carry forward to future years of unused AALPI. The Administrator's
recalculation of AALPI for each Reference Year will reflect the revised
AALPI, Loop Depreciation Factor, Total Loop Plant Investment, and Total
Allowed Loop Plant Investment for the Reference Year.
(k) Special circumstances. The AALPI for Loop Plant Investment may
be adjusted by the Administrator by adding the applicable adjustment
below to the amount of AALPI for the year in which additions to plant
are booked to the accounts described in paragraph (c)(1) of this
section, associated with any of the following:
(1) Geographic areas within the study area where there are
currently no existing wireline loop facilities;
(2) Geographic areas within the study area where grant funds are
used for Loop Plant Investment;
(3) Geographic areas within the study area for which loan funds
were disbursed for the purposes of Loop Plant Investment before the
effective date of this rule; and
(4) Construction projects for which the carrier, prior to the
effective date of this rule, had awarded a contract to a vendor for a
loop plant construction project within the study area.
(l) Documentation requirements. The Administrator will not make
these adjustments without appropriate documentation from the carrier.
(m) Minimum AALPI. If a carrier has an AALPI that is less than $4
million in any given year, the carrier shall be allowed to increase its
AALPI for that year to the lesser of $4 million or its Total Allowed
Loop Plant Investment.
0
6. In Sec. 54.305, revise paragraph (a) to read as follows:
Sec. 54.305 Sale or transfer of exchanges.
(a) The provisions of this section shall not be used to determine
support for any price cap incumbent local exchange carrier or a rate-
of-return carrier, as that term is defined in Sec. 54.5, that is
affiliated with a price cap incumbent local exchange carrier.
* * * * *
0
7. In Sec. 54.308, revise paragraph (a) to read as follows:
Sec. 54.308 Broadband public interest obligations for recipients of
high-cost support.
(a) Rate-of-return carrier recipients of high-cost support are
required to offer broadband service, at speeds described below, with
latency suitable for real-time applications, including Voice over
Internet Protocol, and usage capacity that is reasonably comparable to
comparable offerings in urban areas, at rates that are reasonably
comparable to rates for comparable offerings in urban areas. For
purposes of determining reasonable comparability of rates, recipients
are presumed to meet this requirement if they offer rates at or below
the applicable benchmark to be announced annually by public notice
issued by the Wireline Competition Bureau.
(1) Carriers that elect to receive Connect America Fund-Alternative
Connect America Cost Model (CAF-ACAM) support pursuant to Sec. 54.311
are required to offer broadband service at actual speeds of at least 10
Mbps downstream/1 Mbps upstream to a defined number of locations as
specified by public notice, with a minimum usage allowance of 150 GB
per month, subject to the requirement that usage allowances remain
consistent with median usage in the United States over the course of
the ten-year term. In addition, such carriers must offer other speeds
to subsets of locations, as specified below:
(i) Fully funded locations. Fully funded locations are those
locations identified by the Alternative-Connect America Cost Model (A-
CAM) where the average cost is above the funding benchmark and at or
below the funding cap. Carriers are required to offer broadband speeds
to locations that are fully funded, as specified by public notice at
the time of authorization, as follows:
(A) Carriers with a state-level density of more than 10 housing
units per square mile, as specified by public notice at the time of
election, are required to offer broadband speeds of at least 25 Mbps
downstream/3 Mbps upstream to 75 percent of all fully funded locations
in the state by the end of the ten-year period.
(B) Carriers with a state-level density of 10 or fewer, but more
than five, housing units per square mile, as specified by public notice
at the time of election, are required to offer broadband speeds of at
least 25 Mbps downstream/3 Mbps upstream to 50 percent of fully funded
locations in the state by the end of the ten-year period.
(C) Carriers with a state-level density of five or fewer housing
units per square mile, as specified by public notice at the time of
election, are required to offer broadband speeds of at least 25 Mbps
downstream/3 Mbps upstream to 25 percent of fully funded locations in
the state by the end of the ten-year period.
(ii) Capped locations. Capped locations are those locations in
census blocks for which A-CAM calculates an average cost per location
above the funding cap. Carriers are required to offer broadband speeds
to locations that are receiving capped support, as specified by public
notice at the time of authorization, as follows:
(A) Carriers with a state-level density of more than 10 housing
units per square mile, as specified by public notice at the time of
election, are required to offer broadband speeds of at least 4 Mbps
downstream/1 Mbps upstream to 50 percent of all capped locations in the
state by the end of the ten-year period.
(B) Carriers with a state-level density of 10 or fewer housing
units per square mile, as specified by public notice at the time of
election, are required to offer broadband speeds of at least 4 Mbps
downstream/1 Mbps upstream to 25 percent of capped locations in the
state by the end of the ten-year period.
(C) Carriers shall provide to all other capped locations, upon
reasonable request, broadband at actual speeds of at least 4 Mbps
downstream/1 Mbps upstream.
(2) Rate-of-return recipients of Connect America Fund Broadband
Loop Support (CAF BLS) shall be required to offer broadband service at
actual speeds of at least 10 Mbps downstream/1 Mbps upstream, over a
five-year period, to a defined number of unserved locations as
specified by public notice, as determined by the following methodology:
(i) Percentage of CAF BLS. Each rate-of-return carrier is required
to target a defined percentage of its five-year forecasted CAF-BLS
support to the deployment of broadband service to locations that are
unserved with 10 Mbps downstream/1 Mbps upstream broadband service as
follows:
(A) Rate-of-return carriers with less than 20 percent deployment of
10/1 Mbps broadband service in their study areas, as determined by the
Wireline Competition Bureau, will be required to utilize 35 percent of
their five-year forecasted CAF-BLS support to extend broadband service
where it is currently lacking.
(B) Rate-of-return carriers with more than 20 percent but less than
40 percent deployment of 10/1 Mbps broadband service in their study
areas, as determined by the Wireline Competition
[[Page 24340]]
Bureau, will be required to utilize 25 percent of their five-year
forecasted CAF-BLS support to extend broadband service where it is
currently lacking.
(C) Rate-of-return carriers with more than 40 percent but less than
80 percent deployment of 10/1 Mbps broadband service in their study
areas, as determined by the Wireline Competition Bureau, will be
required to utilize 20 percent of their five-year forecasted CAF-BLS
support to extend broadband service where it is currently lacking.
(ii) Cost per location. The deployment obligation shall be
determined by dividing the amount of support set forth in paragraph
(a)(2)(i) of this section by a cost per location figure based on one of
two methodologies, at the carrier's election:
(A) The higher of:
(1) The weighted average unseparated cost per loop for carriers of
similar density that offer 10/1 Mbps or better broadband service to at
least 95 percent of locations, based on the most current FCC Form 477
data as determined by the Wireline Competition Bureau, but excluding
carriers subject to the current $250 per line per month cap set forth
in Sec. 54.302 and carriers subject to limitations on operating
expenses set forth in Sec. 54.303; or
(2) 150% of the weighted average of the cost per loop for carriers
of similar density, but excluding carriers subject to the current $250
per line per month cap set forth in Sec. 54.302 and carriers subject
to limitations on operating expenses set forth in Sec. 54.303, with a
similar level of deployment of 10/1 Mbps or better broadband based on
the most current FCC Form 477 data, as determined by Wireline
Competition Bureau; or
(B) The average cost per location for census blocks lacking 10/1
Mbps broadband service in the carrier's study area as determined by the
A-CAM.
(iii) Restrictions on deployment obligations. (A) No rate-of-return
carrier shall deploy terrestrial wireline technology in any census
block if doing so would result in total support per line in the study
area to exceed the $250 per-line per-month cap in Sec. 54.302.
(B) No rate-of-return carrier shall deploy terrestrial wireline
technology to unserved locations to meet this obligation if that would
exceed the $10,000 per location/per project capital investment
allowance set forth in Sec. 54.303.
(iv) Future deployment obligations. Prior to publishing the
deployment obligations for subsequent five-year periods, the
Administrator shall update the unseparated average cost per loop
amounts for carriers with 95 percent or greater deployment of the then-
current standard, based on the then-current NECA cost data, and the
Wireline Competition Bureau shall examine the density groupings and
make any necessary adjustments based on then-current U.S. Census data.
* * * * *
0
8. Add Sec. 54.311 to subpart D to read as follows:
Sec. 54.311 Connect America Fund Alternative-Connect America Cost
Model Support.
(a) Voluntary election of model-based support. A rate-of-return
carrier (as that term is defined in Sec. 54.5) receiving support
pursuant to subparts K or M of this part shall have the opportunity to
voluntarily elect, on a state-level basis, to receive Connect America
Fund-Alternative Connect America Cost Model (CAF-ACAM) support as
calculated by the Alternative-Connect America Cost Model (A-CAM)
adopted by the Commission in lieu of support calculated pursuant to
subparts K or M of this part. Any rate-of-return carrier not electing
support pursuant to this section shall continue to receive support
calculated pursuant to those mechanisms as specified in Commission
rules for high-cost support.
(b) Geographic areas eligible for support. CAF-ACAM model-based
support will be made available for a specific number of locations in
census blocks identified as eligible for each carrier by public notice.
The eligible areas and number of locations for each state identified by
the public notice shall not change during the term of support
identified in paragraph (c) of this section.
(c) Term of support. CAF-ACAM model-based support shall be provided
to the carriers that elect to make a state-level commitment for a term
that extends until December 31, 2026.
(d) Interim deployment milestones. Recipients of CAF-ACAM model-
based support must complete deployment to 40 percent of fully funded
locations by the end of 2020, to 50 percent of fully funded locations
by the end of 2021, to 60 percent of fully funded locations by the end
of 2022, to 70 percent of fully funded locations by the end of 2023, to
80 percent of fully funded locations by the end of 2024, to 90 percent
of fully funded locations by the end of 2025, and to 100 percent of
fully funded locations by the end of 2026. By the end of 2026, carriers
must complete deployment of broadband meeting a standard of at least 25
Mbps downstream/3 Mbps upstream to the requisite number of locations
specified in Sec. 54.308(a)(1)(i) through (iii). Compliance shall be
determined based on the total number of fully funded locations in a
state. Carriers that complete deployment to at least 95 percent of the
requisite number of locations will be deemed to be in compliance with
their deployment obligations. The remaining locations that receive
capped support are subject to the standard specified in Sec.
54.308(a)(1)(iv).
(e) Transition to CAF-ACAM Support. Carriers electing CAF-ACAM
model-based support whose final model-based support is less than the
carrier's high-cost loop support and interstate common line support
disbursements for 2015, will transition to model-based support as
follows:
(1) If the difference between a carrier's model-based support and
its 2015 high-cost support, as determined in paragraph (e)(4) of this
section, is 10 percent or less, it will receive, in addition to model-
based support, 50 percent of that difference in year one, and then will
receive model support in years two through ten.
(2) If the difference between a carrier's model-based support and
its 2015 high-cost support, as determined in paragraph (e)(4) of this
section, is 25 percent or less, but more than 10 percent, it will
receive, in addition to model-based support, an additional transition
payment for up to four years, and then will receive model support in
years five through ten. The transition payments will be phased-down 20
percent per year, provided that each phase-down amount is at least five
percent of the total 2015 high-cost support amount. If 20 percent of
the difference between a carrier's model-based support and its 2015
high-cost support is less than five percent of the total 2015 high-cost
support amount, the transition payments will be phased-down five
percent of the total 2015 high-cost support amount each year.
(3) If the difference between a carrier's model-based support and
its 2015 high-cost support, as determined in paragraph (e)(4) of this
section, is more than 25 percent, it will receive, in addition to
model-based support, an additional transition payment for up to nine
years, and then will receive model support in year ten. The transition
payments will be phased-down ten percent per year, provided that each
phase-down amount is at least five percent of the total 2015 high-cost
support amount. If ten percent of the difference between a carrier's
model-based support and its 2015 high-cost support is less than five
percent of the total 2015 high-cost support amount, the transition
payments will be phased-
[[Page 24341]]
down five percent of the total 2015 high-cost support amount each year.
(4) The carrier's 2015 support for purposes of the calculation of
transition payments is the amount of high-cost loop support and
interstate common line support disbursed to the carrier for 2015
without regard to prior period adjustments related to years other than
2015, as determined by the Administrator as of January 31, 2016 and
publicly announced prior to the election period for the voluntary path
to the model.
0
9. Amend Sec. 54.313 by removing and reserving paragraph (a)(1),
revising paragraphs (a)(10), (e)(1), and paragraph (e)(2) introductory
text, removing and reserving paragraphs (e)(2)(i) and (iii), removing
paragraphs (e)(3) through (6), and revising paragraphs (f)(1)
introductory text, and (f)(1)(i) and (iii).
The revisions read as follows:
Sec. 54.313 Annual reporting requirements for high-cost recipients.
(a) * * *
(10) Beginning July 1, 2013. A certification that the pricing of
the company's voice services is no more than two standard deviations
above the applicable national average urban rate for voice service, as
specified in the most recent public notice issued by the Wireline
Competition Bureau and Wireless Telecommunications Bureau; and
* * * * *
(e) * * *
(1) On July 1, 2016, a list of the geocoded locations already
meeting the Sec. 54.309 public interest obligations at the end of
calendar year 2015, and the total amount of Phase II support, if any,
the price cap carrier used for capital expenditures in 2015.
(2) On July 1, 2017, and every year thereafter ending July 1, 2021,
the following information:
* * * * *
(f) * * *
(1) Beginning July 1, 2015 and Every Year Thereafter. The following
information:
(i) A certification that it is taking reasonable steps to provide
upon reasonable request broadband service at actual speeds of at least
10 Mbps downstream/1 Mbps upstream, with latency suitable for real-time
applications, including Voice over Internet Protocol, and usage
capacity that is reasonably comparable to comparable offerings in urban
areas as determined in an annual survey, and that requests for such
service are met within a reasonable amount of time.
* * * * *
(iii) A certification that it bid on category one
telecommunications and Internet access services in response to all
reasonable requests in posted FCC Form 470s seeking broadband service
that meets the connectivity targets for the schools and libraries
universal service support program for eligible schools and libraries
(as described in Sec. 54.501) within its service area, and that such
bids were at rates reasonably comparable to rates charged to eligible
schools and libraries in urban areas for comparable offerings.
* * * * *
0
10. Add Sec. 54.316 to subpart D to read as follows:
Sec. 54.316 Broadband deployment reporting and certification
requirements for high-cost recipients.
(a) Broadband deployment reporting. Rate-of Return ETCs and ETCs
that elect to receive Connect America Phase II model-based support
shall have the following broadband reporting obligations:
(1) Recipients of high-cost support with defined broadband
deployment obligations pursuant to Sec. 54.308(a) or Sec. 54.310(c)
shall provide to the Administrator on a recurring basis information
regarding the locations to which the eligible telecommunications
carrier is offering broadband service in satisfaction of its public
interest obligations, as defined in either Sec. 54.308 or Sec.
54.309.
(2) Recipients subject to the requirements of Sec. 54.308(a)(1)
shall report the number of locations for each state and locational
information, including geocodes, separately indicating whether they are
offering service providing speeds of at least 4 Mbps downstream/1 Mbps
upstream, 10 Mbps downstream/1 Mbps upstream, and 25 Mbps downstream/3
Mbps upstream.
(3) Recipients subject to the requirements of Sec. 54.308(a)(2)
shall report the number of newly served locations for each study area
and locational information, including geocodes, separately indicating
whether they are offering service providing speeds of at least 4 Mbps
downstream/1 Mbps upstream, 10 Mbps downstream/1 Mbps upstream, and 25
Mbps downstream/3 Mbps upstream.
(4) Recipients subject to the requirements of Sec. 54.310(c) shall
report the number of locations for each state and locational
information, including geocodes, where they are offering service
providing speeds of at least 10 Mbps downstream/1 Mbps upstream.
(b) Broadband deployment certifications. Rate-of Return ETCs and
ETCs that elect to receive Connect America Phase II model-based support
shall have the following broadband deployment certification
obligations:
(1) Price cap carriers that elect to receive Connect America Phase
II model-based support shall provide: No later than March 1, 2017, and
every year thereafter ending on no later than March 1, 2021, a
certification that by the end of the prior calendar year, it was
offering broadband meeting the requisite public interest obligations
specified in Sec. 54.309 to the required percentage of its supported
locations in each state as set forth in Sec. 54.310(c).
(2) Rate-of-return carriers electing CAF-ACAM support pursuant to
Sec. 54.311 shall provide:
(i) No later than March 1, 2021, and every year thereafter ending
on no later than March 1, 2027, a certification that by the end of the
prior calendar year, it was offering broadband meeting the requisite
public interest obligations specified in Sec. 54.308 to the required
percentage of its fully funded locations in the state, pursuant to the
interim deployment milestones set forth in Sec. 54.311(d).
(ii) No later than March 1, 2027, a certification that as of
December 31, 2026, it was offering broadband meeting the requisite
public interest obligations specified in Sec. 54.308 to all of its
fully funded locations in the state and to the required percentage of
its capped locations in the state.
(3) Rate-of-return carriers receiving support pursuant to subparts
K and M of this part shall provide:
(i) No later than March 1, 2022, a certification that it fulfilled
the deployment obligation meeting the requisite public interest
obligations as specified in Sec. 54.308(a)(2) to the required number
of locations as of December 31, 2021.
(ii) Every subsequent five-year period thereafter, a certification
that it fulfilled the deployment obligation meeting the requisite
public interest obligations as specified in Sec. 54.308(a)(4).
(c) Filing deadlines. (1) In order for a recipient of high-cost
support to continue to receive support for the following calendar year,
or retain its eligible telecommunications carrier designation, it must
submit the annual reporting information required by March 1 as
described in paragraphs (a) and (b) of this section. Eligible
telecommunications carriers that file their reports after the March 1
deadline shall receive a reduction in support pursuant to the following
schedule:
(i) An eligible telecommunications carrier that files after the
March 1 deadline, but by February 7, will have
[[Page 24342]]
its support reduced in an amount equivalent to seven days in support;
(ii) An eligible telecommunications carrier that files on or after
February 8 will have its support reduced on a pro-rata daily basis
equivalent to the period of non-compliance, plus the minimum seven-day
reduction,
(2) Grace period. An eligible telecommunications carrier that
submits the annual reporting information required by this section after
March 1 but before March 1 will not receive a reduction in support if
the eligible telecommunications carrier and its holding company,
operating companies, and affiliates, as reported pursuant to Sec.
54.313(a)(8) in their report due July 1 of the prior year, have not
missed the March 1 deadline in any prior year.
0
11. In Sec. 54.319, revise paragraph (a) and add paragraphs (d)
through (h) to read as follows:
Sec. 54.319 Elimination of high-cost support in areas with an
unsubsidized competitor.
(a) High-cost loop support provided pursuant to subparts K and M of
this part shall be eliminated in an incumbent rate-of-return local
exchange carrier study area where an unsubsidized competitor, or
combination of unsubsidized competitors, as defined in Sec. 54.5,
offer(s) to 100 percent of the residential and business locations in
the study area voice and broadband service at speeds of at least 10
Mbps downstream/1 Mbps upstream, with latency suitable for real-time
applications, including Voice over Internet Protocol, and usage
capacity that is reasonably comparable to comparable offerings in urban
areas, at rates that are reasonably comparable to rates for comparable
offerings in urban areas.
* * * * *
(d) High-cost universal service support pursuant to subpart K of
this part shall be eliminated for those census blocks of an incumbent
rate-of-return local exchange carrier study area where an unsubsidized
competitor, or combination of unsubsidized competitors, as defined in
Sec. 54.5, offer(s) voice and broadband service meeting the public
interest obligations in Sec. 54.308(a)(2) to at least 85 percent of
residential locations in the census block. Qualifying competitors must
be able to port telephone numbers from consumers.
(e) After a determination that a particular census block is served
by a competitor as defined in paragraph (d) of this section, support
provided pursuant to subpart K of this part shall be disaggregated
pursuant to a method elected by the incumbent local exchange carrier.
The sum of support that is disaggregated for competitive and non-
competitive areas shall equal the total support available to the study
area without disaggregation.
(f) For any incumbent local exchange carrier for which the
disaggregated support for competitive census blocks represents less
than 25 percent of the support the carrier would have received in the
study area in the absence of this rule, support provided pursuant to
subpart K of this part shall be reduced according to the following
schedule:
(1) In the first year, 66 percent of the incumbent's disaggregated
support for the competitive census block will be provided;
(2) In the second year, 33 percent of the incumbent's disaggregated
support for the competitive census blocks will be provided;
(3) In the third year and thereafter, no support shall be provided
pursuant to subpart K of this part for any competitive census block.
(g) For any incumbent local exchange carrier for which the
disaggregated support for competitive census blocks represents more
than 25 percent of the support the carrier would have received in the
study area in the absence of this rule, support shall be reduced for
each competitive census block according to the following schedule:
(1) In the first year, 85 percent of the incumbent's disaggregated
support for the competitive census blocks will be provided;
(2) In the second year, 68 percent of the incumbent's disaggregated
support for the competitive census blocks will be provided;
(3) In the third year, 51 percent of the incumbent's disaggregated
support for the competitive census blocks will be provided;
(4) In the fourth year, 34 percent of the incumbent's disaggregated
support the competitive census block will be provided;
(5) In the fifth year, 17 percent of the incumbent's disaggregated
support the competitive census blocks will be provided;
(6) In the sixth year and thereafter, no support shall be paid
provided pursuant to subpart K of this part for any competitive census
block.
(h) The Wireline Competition Bureau shall update its analysis of
competitive overlap in census blocks every seven years, utilizing the
current public interest obligations in Sec. 54.308(a)(2) as the
standard that must be met by an unsubsidized competitor.
0
12. Revise Sec. 54.707 to read as follows:
Sec. 54.707 Audit controls.
(a) The Administrator shall have the authority to audit
contributors and carriers reporting data to the Administrator. The
Administrator shall establish procedures to verify discounts, offsets
and support amounts provided by the universal service support programs,
and may suspend or delay discounts, offsets, and support amounts
provided to a carrier if the carrier fails to provide adequate
verification of discounts, offsets, or support amounts provided upon
reasonable request, or if directed by the Commission to do so. The
Administrator shall not provide reimbursements, offsets or support
amounts pursuant to subparts D, K, L and M of this part to a carrier
until the carrier has provided to the Administrator a true and correct
copy of the decision of a state commission designating that carrier as
an eligible telecommunications carrier in accordance with Sec. 54.202.
(b) The Administrator has the right to obtain all cost and revenue
submissions and related information, at any time and in unaltered
format, that carriers submit to NECA that are used to calculate support
payments pursuant to subparts D, K, and M of this part.
(c) The Administrator (and NECA, to the extent the Administrator
does not directly receive information from carriers) shall provide to
the Commission upon request all underlying data collected from eligible
telecommunications carriers to calculate payments pursuant to subparts
D, K, L and M of this part.
Subpart J-- [Removed and Reserved]
0
13. Remove and reserve subpart J, consisting of Sec. Sec. 54.800
through 54.809.
0
14. Revise Sec. 54.901 to read as follows:
Sec. 54.901 Calculation of Connect America Fund Broadband Loop
Support.
(a) Connect America Fund Broadband Loop Support (CAF BLS) available
to a rate-of-return carrier shall equal the Interstate Common Line
Revenue Requirement per Study Area, plus the Consumer Broadband-Only
Revenue Requirement per Study Area as calculated in accordance with
part 69 of this chapter, minus:
(1) The study area revenues obtained from end user common line
charges at their allowable maximum as determined by Sec. 69.104(n) and
(o) of this chapter;
(2) Imputed Consumer Broadband-only Revenues, to be calculated as:
(i) The lesser of $42 * the number of consumer broadband-only loops
* 12 or the Consumer Broadband-Only Revenue Requirement per Study Area;
or
[[Page 24343]]
(ii) For the purpose of calculating the reconciliation pursuant to
Sec. 54.903(b)(3), the greater of the amount determined pursuant to
paragraph (a)(2)(i) of this section or the carrier's allowable Consumer
Broadband-only rate calculated pursuant to Sec. 69.132 of this chapter
* the number of consumer broadband-only loops * 12;
(3) The special access surcharge pursuant to Sec. 69.115 of this
chapter; and
(4) The line port costs in excess of basic analog service pursuant
to Sec. 69.130 of this chapter.
(b) For the purpose of calculating support pursuant to paragraph
(a) of this section, the Interstate Common Line Revenue Requirement and
Consumer Broadband-only Revenue Requirement shall be subject to the
limits on operating expenses and capital investment allowances pursuant
to Sec. 54.303.
(c) For purposes of calculating the amount of CAF BLS, determined
pursuant to paragraph (a) of this section, that a non-price cap carrier
may receive, the corporate operations expense allocated to the Common
Line Revenue Requirement or the Consumer Broadband-only Loop Revenue
Requirement, pursuant to Sec. 69.409 of this chapter, shall be limited
to the lesser of:
(1) The actual average monthly per-loop corporate operations
expense; or
(2) The portion of the monthly per-loop amount computed pursuant to
Sec. 54.1308(a)(4)(iii) that would be allocated to the Interstate
Common Line Revenue Requirement or Consumer Broadband-only Loop Revenue
Requirement pursuant to Sec. 69.409 of this chapter.
(d) In calculating support pursuant to paragraph (a) of this
section for periods prior to when the tariff charge described in Sec.
69.132 of this chapter becomes effective, only Interstate Common Line
Revenue Requirement and Interstate Common line revenues shall be
included.
(e) To the extent necessary for ratemaking purposes, each carrier's
CAF BLS shall be attributed as follows:
(1) First, support shall be applied to ensure that the carrier has
met its Interstate Common Line Revenue Requirement for the prior period
to which true-up payments are currently being applied.
(2) Second, support shall be applied to ensure that the carrier has
met its Consumer Broadband-only Loop Revenue Requirement for the prior
period to which true-up payments are currently being applied.
(3) Third, support shall be applied to ensure that the carrier will
meet, on a forecasted basis, its Interstate Common Line Revenue
Requirement during the current tariff year.
(4) Finally, support shall be applied as available to the Consumer
Broadband-only Loop Revenue Requirement during the current tariff year.
(f) CAF BLS Support is subject to a reduction as necessary to meet
the overall cap on support established by the Commission for support
provided pursuant to this subpart and subpart M of this part.
Reductions shall be implemented as follows:
(1) On May 1 of each year, the Administrator will publish a target
amount for CAF BLS in the aggregate and the amount of CAF BLS that each
study area will receive during the upcoming July 1 to June 30 tariff
year. The target amount shall be the forecasted disbursement amount
times a reduction factor. The reduction factor shall be the budget
amount divided by the total forecasted disbursement amount for both
High Cost Loop Support and CAF BLS for recipients in the aggregate. The
forecasted disbursement for CAF BLS is the forecasted total
disbursements for all recipients of CAF BLS, including both projections
and true-ups in the upcoming July 1 to June 30 tariff year.
(2) The Administrator shall apply a per-line reduction to each
carrier's CAF BLS equal to one-half the difference between the
forecasted disbursement amount and the target amount divided by the
total number of loops eligible for support. To the extent that per-line
reduction is greater than the amount of CAF BLS per loop for a given
carrier, that excess amount shall be subject to reduction through the
method described in paragraph (f)(3) of this section.
(3) The Administrator shall apply an additional pro rata reduction
to CAF BLS for each recipient of CAF BLS as necessary to achieve the
target amount.
(g) For purposes of this subpart and consistent with Sec. 69.132
of this chapter, a consumer broadband-only loop is a line provided by a
rate-of-return incumbent local exchange carrier to a customer without
regulated local exchange voice service, for use in connection with
fixed Broadband Internet access service, as defined in Sec. 8.2 of
this chapter.
0
15. Revise Sec. 54.902 to read as follows:
Sec. 54.902 Calculation of CAF BLS Support for transferred exchanges.
(a) In the event that a rate-of-return carrier acquires exchanges
from an entity that is also a rate-of-return carrier, CAF BLS for the
transferred exchanges shall be distributed as follows:
(1) Each carrier may report its updated line counts to reflect the
transfer in the next quarterly line count filing pursuant to Sec.
54.903(a)(1) that applies to the period in which the transfer occurred.
During a transition period from the filing of the updated line counts
until the end of the funding year, the Administrator shall adjust the
CAF BLS Support received by each carrier based on the updated line
counts and the per-line CAF BLS, categorized by customer class and, if
applicable, disaggregation zone, of the selling carrier. If the
acquiring carrier does not file a quarterly update of its line counts,
it will not receive CAF BLS for those lines during the transition
period.
(2) Each carrier's projected data for the following funding year
filed pursuant to Sec. 54.903(a)(3) shall reflect the transfer of
exchanges.
(3) Each carrier's actual data filed pursuant to Sec. 54.903(a)(4)
shall reflect the transfer of exchanges. All post-transaction CAF BLS
shall be subject to true up by the Administrator pursuant to Sec.
54.903(b)(3).
(b) In the event that a rate-of-return carrier acquires exchanges
from a price-cap carrier, absent further action by the Commission, the
exchanges shall receive the same amount of support and be subject to
the same public interest obligations as specified in Sec. 54.310 or
Sec. 54.312, as applicable.
(c) In the event that an entity other than a rate-of-return carrier
acquires exchanges from a rate-of-return carrier, absent further action
by the Commission, the carrier will receive model-based support and be
subject to public interest obligations as specified in Sec. 54.310.
(d) This section does not alter any Commission rule governing the
sale or transfer of exchanges, including the definition of ``study
area'' in part 36 of this chapter.
0
16. Revise Sec. 54.903 to read as follows:
Sec. 54.903 Obligations of rate-of-return carriers and the
Administrator.
(a) To be eligible for CAF BLS, each rate-of-return carrier shall
make the following filings with the Administrator.
(1) Each rate-of-return carrier shall submit to the Administrator
in accordance with the schedule in Sec. 54.1306 the number of lines it
serves, within each rate-of-return carrier study area showing
residential and single-line business line counts, multi-line business
line counts, and consumer broadband-only line counts separately. For
purposes of this report, and for purposes of computing support under
this subpart, the residential and single-
[[Page 24344]]
line business class lines reported include lines assessed the
residential and single-line business End User Common Line charge
pursuant to Sec. 69.104 of this chapter, the multi-line business class
lines reported include lines assessed the multi-line business End User
Common Line charge pursuant to Sec. 69.104 of this chapter, and
consumer broadband-only lines reported include lines assessed the
Consumer Broadband-only Loop rate charged pursuant to Sec. 69.132 of
this chapter or provided on a detariffed basis. For purposes of this
report, and for purposes of computing support under this subpart, lines
served using resale of the rate-of-return local exchange carrier's
service pursuant to section 251(c)(4) of the Communications Act of
1934, as amended, shall be considered lines served by the rate-of-
return carrier only and must be reported accordingly.
(2) A rate-of-return carrier may submit the information in
paragraph (a) of this section in accordance with the schedule in Sec.
54.1306, even if it is not required to do so. If a rate-of-return
carrier makes a filing under this paragraph, it shall separately
indicate any lines that it has acquired from another carrier that it
has not previously reported pursuant to paragraph (a) of this section,
identified by customer class and the carrier from which the lines were
acquired.
(3) Each rate-of-return carrier shall submit to the Administrator
annually by March 31 projected data necessary to calculate the
carrier's prospective CAF BLS, including common line and consumer
broadband-only loop cost and revenue data, for each of its study areas
in the upcoming funding year. The funding year shall be July 1 of the
current year through June 30 of the next year. The data shall be
accompanied by a certification that the cost data is compliant with the
Commission's cost allocation rules and does not reflect duplicative
assignment of costs to the consumer broadband-only loop and special
access categories.
(4) Each rate-of-return carrier shall submit to the Administrator
on December 31 of each year the data necessary to calculate a carrier's
Connect America Fund CAF BLS, including common line and consumer
broadband-only loop cost and revenue data, for the prior calendar year.
Such data shall be used by the Administrator to make adjustments to
monthly per-line CAF BLS amounts to the extent of any differences
between the carrier's CAF BLS received based on projected common line
cost and revenue data, and the CAF BLS for which the carrier is
ultimately eligible based on its actual common line and consumer
broadband-only loop cost and revenue data during the relevant period.
The data shall be accompanied by a certification that the cost data is
compliant with the Commission's cost allocation rules and does not
reflect duplicative assignment of costs to the consumer broadband-only
loop and special access categories.
(b) Upon receiving the information required to be filed in
paragraph (a) of this section, the Administrator shall:
(1) Perform the calculations described in Sec. 54.901 and
distribute support accordingly;
(2) [Reserved]
(3) Perform periodic reconciliation of the CAF BLS provided to each
carrier based on projected data filed pursuant to paragraph (a)(3) of
this section and the CAF BLS for which each carrier is eligible based
on actual data filed pursuant to paragraph (a)(4) of this section; and
(4) Report quarterly to the Commission on the collection and
distribution of funds under this subpart as described in Sec.
54.702(h). Fund distribution reporting will be by state and by eligible
telecommunications carrier within the state.
Sec. 54.904 [Removed].
0
17. Remove Sec. 54.904.
0
18. In Sec. 54.1308, revise paragraph (a) introductory text to read as
follows:
Sec. 54.1308 Study Area Total Unseparated Loop Cost.
(a) For the purpose of calculating the expense adjustment, the
study area total unseparated loop cost equals the sum of the following,
however, subject to the limitations set forth in Sec. 54.303:
* * * * *
0
19. In Sec. 54.1310, add paragraph (d) to read as follows:
Sec. 54.1310 Expense adjustment.
* * * * *
(d) High Cost Loop Support is subject to a reduction as necessary
to meet the overall cap on support established by the Commission for
support provided pursuant to this subpart and subpart K of this
chapter. Reductions shall be implemented as follows:
(1) On May 1 of each year, the Administrator will publish an annual
target amount for High-Cost Loop Support in the aggregate. The target
amount shall be the forecasted disbursement amount times a reduction
factor. The reduction factor shall be the budget amount divided by the
total forecasted disbursement amount for both High Cost Loop Support
and Broadband Loop Support for recipients in the aggregate. The
forecasted disbursement for High Cost Loop Support is the High Cost
Loop Support cap determined pursuant to Sec. 54.1302 as reflected in
the most recent annual filing pursuant to Sec. 54.1305.
(2) Each quarter, the Administrator shall adjust each carrier's
High Cost Loop Support disbursements as follows:
(i) The Administrator shall apply a per-line reduction to each
carrier's High Cost Loop Support equal to one-half the difference
between the forecasted disbursement amount and the target amount
divided by the total number of loops eligible for support. To the
extent that per-line reduction is greater than the amount of High Cost
Loop Support per loop for a given carrier, that excess amount will be
subject to reduction through the method described in paragraph
(d)(2)(ii) of this section.
(ii) The Administrator shall apply an additional pro rata reduction
to High Cost Loop Support for each recipient of High Cost Loop Support
as necessary to achieve the target amount.
PART 65--INTERSTATE RATE OF RETURN PRESCRIPTION PROCEDURES AND
METHODOLOGIES
0
20. The authority citation for part 65 is revised to read as follows:
Authority: 47 U.S.C. 151, 154(i), 155, 201, 205, 214, 219, 220,
254, 303(r), 403, and 1302 unless otherwise noted.
0
21. Revise Sec. 65.302 to read as follows:
Sec. 65.302 Cost of debt.
The formula for determining the cost of debt is equal to:
[GRAPHIC] [TIFF OMITTED] TR25AP16.010
Where:
``Total Annual Interest Expense'' is the total interest expense for
the most recent year for all local exchange carriers with annual
revenues equal to or above the
[[Page 24345]]
indexed revenue threshold as defined in Sec. 32.9000 of this
chapter.
``Average Outstanding Debt'' is the average of the total debt
outstanding at the beginning and at the end of the most recent year
for all local exchange carriers with annual revenues equal to or
above the indexed revenue threshold as defined in Sec. 32.9000 of
this chapter.
PART 69--ACCESS CHARGES
0
22. The authority citation for part 69 is revised to read as follows:
Authority: 47 U.S.C. 154, 201, 202, 203, 205, 218, 220, 254,
403.
0
23. In Sec. 69.4, add paragraph (k) to read as follows:
Sec. 69.4 Charges to be filed.
* * * * *
(k) A non-price cap incumbent local exchange carrier may include a
charge for the Consumer Broadband-Only Loop.
0
24. In Sec. 69.104,revise paragraphs (n)(1) introductory text,
(n)(1)(ii), and (o)(1) introductory text, remove paragraphs
(n)(1)(ii)(A) through (C), and add paragraph (s).
The revisions and addition read as follows:
Sec. 69.104 End user common line for non-price cap incumbent local
exchange carriers.
* * * * *
(n)(1) Except as provided in paragraphs (r) and (s) of this
section, the maximum monthly charge for each residential or single-line
business local exchange service subscriber line shall be the lesser of:
* * * * *
(ii) $6.50.
* * * * *
(o)(1) Except as provided in paragraphs (r) and (s) of this
section, the maximum monthly End User Common Line Charge for multi-line
business lines will be the lesser of:
* * * * *
(s) End User Common Line Charges for incumbent local exchange
carriers not subject to price cap regulation that elect model-based
support pursuant to Sec. 54.311 of this chapter are limited as
follows:
(1) The maximum charge a non-price cap local exchange carrier that
elects model-based support pursuant to Sec. 54.311 of this chapter may
assess for each residential or single-line business local exchange
service subscriber line is the rate in effect on the last day of the
month preceding the month for which model-based support is first
provided.
(2) The maximum charge a non-price cap local exchange carrier that
elects model-based support pursuant to Sec. 54.311 of this chapter may
assess for each multi-line business local exchange service subscriber
line is the rate in effect on the last day of the month preceding the
month for which model-based support is first provided.
0
25. In Sec. 69.115, revise paragraph (b) and add paragraph (f) to read
as follows:
Sec. 69.115 Special access surcharges.
* * * * *
(b) Except as provided in paragraph (f) of this section, such
surcharge shall be computed to reflect a reasonable approximation of
the carrier usage charges which, assuming non-premium interconnection,
would have been paid for average interstate or foreign usage of common
lines, end office facilities, and transport facilities, attributable to
each Special Access line termination which is not exempt from
assessment pursuant to paragraph (e) of this section.
* * * * *
(f) The maximum special access surcharge a non-price cap local
exchange carrier that elects model-based support pursuant to Sec.
54.311 of this chapter may assess is the rate in effect on the last day
of the month preceding the month for which model-based support is first
provided.
0
26. Revise Sec. 69.130 to read as follows:
Sec. 69.130 Line port costs in excess of basic analog service.
(a) To the extent that the costs of ISDN line ports, and line ports
associated with other services, exceed the costs of a line port used
for basic, analog service, non-price cap local exchange carriers may
recover the difference through a separate monthly end-user charge,
provided that no portion of such excess cost may be recovered through
other common line access charges, or through Connect America Fund
Broadband Loop Support.
(b) The maximum charge a non-price cap local exchange carrier that
elects model-based support pursuant to Sec. 54.311 of this chapter may
assess is the rate in effect on the last day of the month preceding the
month for which model-based support is first provided.
0
27. Add Sec. 69.132 to subpart B to read as follows:
Sec. 69.132 End user Consumer Broadband-Only Loop charge for non-
price cap incumbent local exchange carriers.
(a) This section is applicable only to incumbent local exchange
carriers that are not subject to price cap regulation as that term is
defined in Sec. 61.3(ee) of this chapter.
(b) A charge that is expressed in dollars and cents per line per
month may be assessed upon end users that subscribe to Consumer
Broadband-Only Loop service. Such charge shall be assessed for each
line without regulated local exchange voice service provided by a rate-
of-return incumbent local exchange carrier to a customer, for use in
connection with fixed Broadband Internet access service, as defined in
Sec. 8.2 of this chapter.
(c) For carriers not electing model-based support pursuant to Sec.
54.311 of this chapter, the single-line rate or charge shall be
computed by dividing one-twelfth of the projected annual revenue
requirement for the Consumer Broadband-Only Loop category by the
projected average number of consumer broadband-only service lines in
use during such annual period.
(d) The maximum monthly per line charge for each Consumer
Broadband-Only Loop provided by a non-price cap local exchange carrier
that elects model-based support pursuant to Sec. 54.311 of this
chapter shall be $42.
Sec. 69.306 [Amended]
0
28. In Sec. 69.306, remove and reserve paragraph (d)(2).
0
29. Add Sec. 69.311 to subpart D to read as follows:
Sec. 69.311 Consumer Broadband-Only Loop investment.
(a) Each non-price cap local exchange carrier shall remove consumer
broadband-only loop investment assigned to the special access category
by Sec. Sec. 69.301 through 69.310 from the special access category
and assign it to the Consumer Broadband-Only Loop category when the
tariff charge described in Sec. 69.132 of this part becomes effective.
(b) The consumer broadband-only loop investment to be removed from
the special access category shall be determined using the following
estimation method.
(1) To determine the investment in Common Line facilities (Category
1.3) as if 100 percent were allocated to the interstate jurisdiction, a
carrier shall use 100 percent as the interstate allocator in
determining Category 1.3 investment and the allocation of investment to
the common line category under part 36 of this chapter and this part.
(2) The result of paragraph (b)(1) of this section shall be divided
by the number of voice and voice/data lines in the study area to
produce an average investment per line.
(3) The average investment per line determined by paragraph (b)(2)
of this section shall be multiplied by the
[[Page 24346]]
number of Consumer Broadband-only Loops in the study area to derive the
investment to be shifted from the Special Access category to the
Consumer Broadband-only Loop category.
Sec. 69.415 [Amended].
0
30. In Sec. 69.415, remove and reserve paragraphs (a) through (c).
0
31. Add Sec. 69.416 to subpart E to read as follows:
Sec. 69.416 Consumer Broadband-Only Loop expenses.
(a) Each non-price cap local exchange carrier shall remove consumer
broadband-only loop expenses assigned to the Special Access category by
Sec. Sec. 69.401 through 69.415 from the special access category and
assign them to the Consumer Broadband-Only Loop category when the
tariff charge described in Sec. 69.132 of this Part becomes effective.
(b) The consumer broadband-only loop expenses to be removed from
the special access category shall be determined using the following
estimation method.
(1) The expenses assigned to the Common Line category as if the
common line expenses were 100 percent interstate shall be determined
using the methodology employed in Sec. 69.311(b)(1).
(2) The result of paragraph (b)(1) of this section shall be divided
by the number of voice and voice/data lines in the study area to
produce an average expense per line.
(3) The average expense per line determined by paragraph (b)(2) of
this section shall be multiplied by the number of Consumer Broadband-
only Loops in the study area to derive the expenses to be shifted from
the Special Access category to the Consumer Broadband-only Loop
category.
0
32. In Sec. 69.603, revise paragraphs (g) and (h)(4) through (6) to
read as follows:
Sec. 69.603 Association functions.
* * * * *
(g) The association shall divide the expenses of its operations
into two categories. The first category (``Category I Expenses'') shall
consist of those expenses that are associated with the preparation,
defense, and modification of association tariffs, those expenses that
are associated with the administration of pooled receipts and
distributions of exchange carrier revenues resulting from association
tariffs, those expenses that are associated with association functions
pursuant to paragraphs (c) through (g) of this section, and those
expenses that pertain to Commission proceedings involving this subpart.
The second category (``Category II Expenses'') shall consist of all
other association expenses. Category I Expenses shall be sub-divided
into three components in proportion to the revenues associated with
each component. The first component (``Category I.A Expenses'') shall
be in proportion to High Cost Loop Support revenues. The second
component (``Category I.B Expenses'') shall be in proportion to the sum
of the association End User Common Line revenues and the association
Special Access Surcharge revenues. Interstate Common Line Support
Revenues and Connect America Fund Broadband Loop Support revenues shall
be included in the allocation base for Category I.B expenses. The third
component (``Category I.C Expenses'') shall be in proportion to the
revenues from all other association interstate access charges.
(h) * * *
(4) No distribution to an exchange carrier of High Cost Loop
Support revenues shall include adjustments for association expenses
other than Category I.A. Expenses.
(5) No distribution to an exchange carrier of revenues from
association End User Common Line charges shall include adjustments for
association expenses other than Category I.B Expenses. Interstate
Common Line Support and Connect America Fund Broadband Loop Support
shall be subject to this provision.
(6) No distribution to an exchange carrier of revenues from
association interstate access charges other than End User Common Line
charges and Special Access Surcharges shall include adjustments for
association expenses other than Category I.C Expenses.
* * * * *
[FR Doc. 2016-08375 Filed 4-22-16; 8:45 am]
BILLING CODE 6712-01-P