Fcc 16-33

Federal Communications Commission

FCC 16-33

Before the
Federal Communications Commission
Washington, D.C. 20554
In the Matter of
Connect America Fund
ETC Annual Reports and Certifications
Developing a Unified Intercarrier Compensation
Regime

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WC Docket No. 10-90
WC Docket No. 14-58
CC Docket No. 01-92

REPORT AND ORDER, ORDER AND ORDER ON RECONSIDERATION, AND
FURTHER NOTICE OF PROPOSED RULEMAKING
Adopted: March 23, 2016

Released: March 30, 2016

Comment Date: (30 days after date of publication in the Federal Register)
Reply Comment Date: (60 days after date of publication in the Federal Register)
By the Commission: Chairman Wheeler and Commissioners Clyburn, Rosenworcel, and O’Rielly issuing
separate statements; Commissioner Pai concurring in part, dissenting in part and
issuing a statement.
TABLE OF CONTENTS
Paragraph #
I. INTRODUCTION.................................................................................................................................. 1
II. REPORT AND ORDER ...................................................................................................................... 17
A. Voluntary Path to the Model.......................................................................................................... 17
1. Background ............................................................................................................................. 17
2. Discussion ............................................................................................................................... 20
B. Reforms of Existing Rate of Return Carrier Support Mechanism ................................................. 80
1. Background ............................................................................................................................. 81
2. Support for Broadband-Only Loop Costs for Rate-of-Return Carriers ................................... 86
3. Operating Expense Limitation................................................................................................. 95
4. Capital Investment Allowances............................................................................................. 105
5. Eliminating Subsidies in Areas Served by an Qualifying Competitor .................................. 116
6. Budgetary Controls................................................................................................................ 146
7. Broadband Deployment Obligations ..................................................................................... 156
8. Impact of These Reforms ...................................................................................................... 181
9. Administrative Issues ............................................................................................................ 185
C. Pricing considerations.................................................................................................................. 188
1. Cost allocation issues ............................................................................................................ 189
2. Tariffing issues...................................................................................................................... 192
D. CAF-ICC Considerations............................................................................................................. 199
E. ETC Reporting Requirements...................................................................................................... 205
1. Background ........................................................................................................................... 206
2. Discussion ............................................................................................................................. 209

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F. Rule Amendments........................................................................................................................ 224
III. ORDER AND ORDER ON RECONSIDERATION ......................................................................... 226
A. Background.................................................................................................................................. 229
B. Discussion.................................................................................................................................... 237
1. Procedural Issues................................................................................................................... 237
a. Whether Commission Should Revise Prescription Rules Before Represcribing
Rate of Return................................................................................................................. 239
b. Notice and Comment Procedures Satisfy Section 205(a) Hearing Requirement............ 242
2. Identifying and Obtaining Data to Compute WACC ............................................................ 247
3. Identifying an Appropriate Proxy Group for Rate-of-Return Carriers.................................. 250
4. Data Relied on in Staff Report............................................................................................... 262
5. Calculating the WACC.......................................................................................................... 268
a. Cost of Debt .................................................................................................................... 271
b. Cost of Equity ................................................................................................................. 281
c. Cost of Preferred Stock................................................................................................... 315
d. WACC Results................................................................................................................ 316
e. Establishing the WACC Zone of Reasonableness .......................................................... 317
f. Prescribing a New Authorized Rate of Return................................................................ 319
g. Specific Rates of Return ................................................................................................. 324
6. Implementing the New Rate of Return.................................................................................. 325
IV. FURTHER NOTICE OF PROPOSED RULEMAKING................................................................... 327
A. Permitted Expenses, Cost Allocation and Affiliate Transactions ................................................ 327
1. Background ........................................................................................................................... 331
2. Discussion ............................................................................................................................. 339
a. Review of permitted expenses ........................................................................................ 339
b. Issues related to cost allocation and affiliate transactions .............................................. 353
c. Compliance Issues .......................................................................................................... 360
B. Reducing Support in Competitive Areas ..................................................................................... 364
C. Tribal Support .............................................................................................................................. 368
D. Other Measures to Improve the Operation of the Current Rate-of-Return System ..................... 383
E. Streamlining ETC Annual Reporting Requirements ................................................................... 387
V. SEVERABILITY ............................................................................................................................... 394
VI. PROCEDURAL MATTERS.............................................................................................................. 395
A. Paperwork Reduction Act Analysis ............................................................................................. 395
B. Congressional Review Act........................................................................................................... 396
C. Final Regulatory Flexibility Analysis.......................................................................................... 397
D. Initial Paperwork Reduction Act Analysis................................................................................... 398
E. Ex Parte Presentations.................................................................................................................. 399
F. Comment Filing Procedures ........................................................................................................ 400
VII. ORDERING CLAUSES.................................................................................................................... 404
APPENDIX A – Proposed Rules
APPENDIX B – Final Rules
APPENDIX C – Initial Regulatory Flexibility Analysis
APPENDIX D – Final Regulatory Flexibility Analysis
APPENDIX E – CAF-BLS Assumptions
APPENDIX F – List of Staff Report Commenters and Reply Commenters
APPENDIX G – Interest Rate Changes Between March 2013 and September 2015
APPENDIX H – Interest Rate Changes Between December 2012 and September 2015
APPENDIX I – Embedded Cost of Debt and Capital Structure Estimates
APPENDIX J – CAPM Cost of Equity and WACC Estimates
APPENDIX K – DCF Model Cost of Equity and WACC Estimates
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INTRODUCTION

1.
With this Report and Order, Order, Order on Reconsideration, and 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.1 In 2011, the Commission unanimously adopted
transformational reforms to modernize universal service for the 21st century,2 creating programs to
support explicitly broadband-capable networks. In this Report and Order, Order, Order on
Reconsideration, and FNPRM, we take 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.”3 In particular, after extensive coordination and
engagement with carriers and their associations, we modernize 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. We welcome ongoing input and partnership as we move
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.4 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.”5 We focus now on the rural divide that exists within areas served by rate-of-return
carriers. According to December 2014 Form 477 data,6 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)
1

47 U.S.C. § 254(b)(3).

2

See Connect America Fund; A National Broadband Plan for Our Future; Establishing Just and Reasonable Rates
for Local Exchange Carriers; High-Cost Universal Service Support; Developing a Unified Intercarrier
Compensation Regime; Federal-State Joint Board on Universal Service; Lifeline and Link-Up; Universal Service
Reform – Mobility Fund; WC Docket Nos. 10-90, 07-135, 05-337, 03-109, CC Docket Nos. 01-92, 96-45, GN
Docket No. 09-51, WT Docket No. 10-208, Report and Order and Further Notice of Proposed Rulemaking, 26 FCC
Rcd 17663 (2011) (USF/ICC Transformation Order and/or FNPRM); aff’d sub nom., In re: FCC 11-161, 753 F.3d
1015 (10th Cir. 2014).
3

47 U.S.C. § 254(b)(3).

4

USF/ICC Transformation Order, 26 FCC Rcd at 17668-69, paras. 4-5 (noting the number of Americans lacking
access to terrestrial fixed service providing speeds of at least 3 Mbps downstream and 768 Mbps upstream). See
also id. at 17681, para. 51 (adopting as a performance goal ensuring universal availability of voice and broadband).
5

Id. at 17669, para. 7. While the Commission was particularly focused at that time on the impact of differing
support mechanisms for price cap carriers and rate-of-return carriers, it remains equally true that there is a disparity
in deployment among rate-of-return carriers.
6

FCC Form 477 collects information about broadband connections, wired and wireless local telephone services, and
interconnected Voice over Internet Protocol (VoIP) services in the 50 states, the District of Columbia, and the
Territories and possessions. See 47 U.S.C. § 153(40); Federal Communications Commission, FCC Form 477, Local
Telephone Competition and Broadband Reporting, Instructions at 3 (June 30, 2015),
https://transition.fcc.gov/form477/477inst.pdf. The December 2014 FCC Form 477 data are available at
https://www.fcc.gov/general/broadband-deployment-data-fcc-form-477. FCC Releases Data on Broadband
Deployment as of December 31, 2014 Collected Through FCC Form 477, Public Notice, WC Docket No. 11-10, DA
15-1285 (WCB Nov. 10, 2015).

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terrestrial fixed broadband service.7 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. We need 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, 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 broadband-capable networks in a manner that is forward looking; and ensure
no double-recovery of costs.8 The package of reforms outlined below solve the stand-alone broadband
issue and update the rate-of-return program consistent with those principles. We also take important steps
to act on the recommendation of the Governmental Accountability Office to ensure greater accountability
and transparency in the high-cost program.9
4.
The Report and Order establishes a new forward-looking, efficient mechanism for the
distribution of support in rate-of-return areas.10 Specifically, we adopt a voluntary path under which rateof-return carriers may elect model-based support for a term of 10 years in exchange for meeting defined
build-out obligations. We emphasize 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
7

Rate-of-return carriers report the census blocks to which they offer broadband service. The number of housing
units without access to broadband service is based on total housing units reported by the U.S. Census. See Federal
Communications Commission, Broadband Deployment Data from FCC Form 477,
https://www.fcc.gov/general/broadband-deployment-data-fcc-form-477 (published December 2014 FCC Form 477
data). Roughly 220,000 census blocks out of slightly over 700,000 census blocks served by incumbent rate-ofreturn carriers lack 10/1 fixed broadband. Incumbent carriers serving 64 study areas are not offering 10/1 anywhere
in their service territory. At the same time, other rate-of-return carriers serving 54 study areas are offering 10/1 to
all of their census blocks with housing units.
8

Connect America Fund et al., WC Docket No. 10-90 et al., Report and Order et al., 29 FCC Rcd 7051, 7137, para.
269 (2014) (April 2014 Connect America Order and/or FNPRM).
9

Government Accountability Office, FCC Should Improve the Accountability and Transparency of High-Cost
Program Funding GAO 14-587 (July 2014), http://www.gao.gov/assets/670/664939.pdf (July 2014 GAO High-Cost
Report).
10

We note that the Alaska Telephone Association has proposed an integrated incentive regulation plan for Alaska’s
rate-of-return and mobile competitive eligible telecommunications carriers that would, among other things, allow
Alaska rate-of-return carriers voluntarily to elect to receive a frozen amount of high-cost support with defined
performance obligations to extend and support fixed and mobile broadband service. As proposed, rate-of return
carriers that do not elect to participate in this plan would remain subject to all existing regulations for rate-of-return
carriers. See Letter from Christine O’Connor, Alaska Telephone Association, to Marlene Dortch, FCC Secretary,
WC Docket No. 10-90, Proposed Rule Changes To Implement the Alaska Plan (filed Nov. 17, 2015); Letter from
Christine O’Connor, Alaska Telephone Association, to Marlene Dortch, FCC Secretary, WC Docket No. 10-90, Att.
(filed Feb. 20, 2015). We believe that a framework tailored to the unique circumstances that exist in Alaska merits
serious consideration and plan to review the comprehensive Alaska proposal in the months ahead. Our action today
in no way prejudices any Alaska rate-of-return carrier. They will remain free to elect the voluntary path to the
model if they so choose. We defer implementation of the operating expense limits and capital investment allowance
for Alaska carriers, pending our consideration of the full Alaska plan. We anticipate other rule changes adopted
today will not be implemented until after we take action on the Alaska plan.

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programs.11 The cost model, which has proven successful in distributing support for price cap carriers,12
has been adjusted in multiple ways over more than a year to take into account the circumstances of rateof-return carriers. We make 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. We 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.
We also make 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 broadbandcapable 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. We expect 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).13 We continue 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, we adopt a method to limit operating costs eligible for support under rate-of-return
mechanisms, based on a proposal submitted by the carriers.14 We also adopt 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.15 Lastly, in order to ensure disbursed high-cost support stays within the
established budget for rate-of-return carriers,16 building on proposals in the record,17 we adopt a self11

USF/ICC Transformation Order, 26 FCC Rcd at 17763, para. 1.

12

Last year, the Commission implemented Phase II of the Connect America Fund, which will enable rural
consumers served by price cap carriers to be connected to modern broadband networks. See Connect America Fund
et al., WC Docket No. 10-90 et al., Report and Order, 29 FCC Rcd 15644 (2014) (December 2014 Connect America
Order); Press Release, FCC, Carriers Accept Over $1.5 Billion in Annual Support from Connect America Fund to
Expand and Support Broadband for Nearly 7.3 Million Rural Consumers in 45 States and One Territory (Aug. 27,
2015), https://apps.fcc.gov/edocs_public/attachmatch/DOC-335082A1.pdf.
13

USF/ICC Transformation Order, 26 FCC Rcd 17663, 17670-71, paras. 1, 11. See also id. at 17682-83, para. 57
(adopting performance goal of minimizing universal service contribution burden on consumers and businesses).
14

Letter from Gerard J. Duffy, Regulatory Counsel, WTA – Advocates for Rural Broadband, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90, at 2 (filed May 29, 2015) (RoR Representatives May 29, 2015 Ex Parte
Letter).
15

Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC,
WC Docket No. 10-90, at 2 (filed Sept. 12, 2013); Letter from Michael R. Romano, Senior Vice President – Policy,
NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Oct. 31, 2014); Letter from Michael R.
Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90
(filed May 1, 2015).
16

USF/ICC Transformation Order, 26 FCC Rcd at 17674, 17768, paras. 27, 286.

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effectuating mechanism to control total support distributed pursuant to the HCLS and CAF-BLS
mechanisms. We recognize 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, we 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, we anticipate 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.”18 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.19 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, we now adopt specific broadband deployment obligations for all rate-of-return carriers, and not
just for those that elect the voluntary path to the model. We adopt 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 the relative amount of depreciated plant and the density characteristics of
individual carriers.
8.
Another core tenet of reform adopted by the Commission in 2011,20 and unanimously
reaffirmed in 2014,21 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, we adopt a rule prohibiting rate-ofreturn carriers from receiving CAF-BLS support in those census blocks that are served by a qualifying
unsubsidized competitor. We adopt a robust challenge process to determine which areas are in fact
served by a qualifying unsubsidized competitor. We do 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.

(Continued from previous page)
17
Letter from Michael Romano, Senior Vice President – Policy, NTCA—The Rural Broadband Association, to
Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Apr. 21, 2015) (on behalf of NTCA, WTA, and
NECA) (NTCA/WTA/NECA April 21, 2015 Ex Parte Letter).
18

Id. at 17670-71, para. 11; see also id. at 17681, para. 51 (adopting for the goal of ensuring universal availability of
broadband an outcome measure based on the number of residential, business, and community anchor institutions that
newly gain access to broadband and adopting as an efficiency measure the change in the number of homes,
businesses and community anchor institutions passed or covered per million USF dollars spent).
19

Id. at 17740-41, para. 206.

20

Id. at 17767, para. 281 (concluding that support should not be provided to areas where unsubsidized facilitiesbased providers already are competing for customers).
21

April 2014 Connect America Order at 17688-89, para. 68 (stating the Commission’s general policy – and noting
this is not limited to price cap territories – is that “‘all broadband build out obligations for fixed broadband are
conditioned on not spending the funds to serve customers in areas already served by an unsubsidized competitor.’”
(citing USF/ICC Transformation Order, 26 FCC Rcd at 17701, para. 103)).

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9.
Finally, we take action to modify our existing reporting requirements in light of lessons
learned from their implementation. We revise eligible telecommunications carriers’ (ETC) annual
reporting requirements to better align those requirements with our statutory and regulatory objectives.
We conclude that the public interest will be served by eliminating the requirement to file a narrative
update to the five-year plan. Instead, we adopt 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.” 22
10.
In the Order and Order on Reconsideration, as part of our modernization of the rules
governing rate-of-return carriers, we represcribe 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 financial conditions. Relying primarily on the methodology and data contained
in a Bureau Staff Report23 – 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.
In the FNPRM, we propose targeted rule changes to our existing accounting and affiliate
transaction rules to eliminate inefficiencies and provide guidance to rate-of-return carriers regarding our
expectations for appropriate expenditures. Consumers are harmed when “universal service provides more
support than necessary to achieve our goals.”24 The statute requires that universal service funds be used
for their intended purposes – maintaining and upgrading supported facilities and services.25 We propose
to eliminate a number of expenses from inclusion in a rate-of-return carrier’s revenue requirement and
calculations of high-cost support. We also seek comment on establishing measures governing prudent or
reasonable expense levels for certain expense categories. The FNPRM further seeks comment on ways in
which the cost allocation procedures between regulated and non-regulated activities and the affiliate
transaction rules can be improved to reduce the potential for a carrier to shift costs from non-regulated to
regulated services or to the regulated affiliate.
12.
Second, we seek comment in the FNPRM on additional options for disaggregating
support for those discrete areas that are served by an unsubsidized competitor and other issues associated
with implementation of the competitive overlap rule.
13.
Third, the FNPRM seeks comment on proposals to adopt a mechanism to provide
additional support to unserved Tribal lands. The Commission has long recognized the distinct challenges
in bringing communications service to Tribal lands.
14.
Fourth, the FNPRM seeks comment on other measures that the Commission could take
within the existing budget to encourage further broadband deployment by rate-of-return carriers.
15.
Lastly, the FNPRM seeks comment on additional proposals to modify or potentially
eliminate certain ETC certifications and reporting obligations so as to streamline ETC reporting
requirements.
22

See July 2014 GAO High-Cost Report at 31.

23

Prescribing the Authorized Rate of Return: Analysis of Methods for Establishing Just and Reasonable Rates for
Local Exchange Carriers, Wireline Competition Bureau Staff Report, WC Docket No. 10-90, 28 FCC Rcd 7123
(WCB 2013) (Staff Report).
24

USF/ICC Transformation Order, 26 FCC Rcd at 17766-67, para. 280.

25

47 U.S.C. § 254(e).

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16.
The actions we take 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.”26
Importantly, they build on proposals from and collaboration with the carriers and their associations.
Through the coordinated reforms we take today, we 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.

Background

17.
In April 2014, the Commission proposed a transition framework for a voluntary election
by rate-of-return carriers to receive model-based support and tentatively concluded that such a framework
could achieve important universal service benefits by creating incentives for deployment of voice and
broadband-capable infrastructure.27 We sought comment on numerous aspects of such a plan, including a
timeframe for implementation, the election process, the transition to model-based support, the impact on
the overall budget for rate-of-return areas, and how to adjust the existing cost model for use in such a
voluntary election of model-based support.28 In addition to proposing a framework for voluntary election
of model-based support, the Commission directed the Bureau to incorporate the results of the study area
boundary data collection in the Connect America Cost Model (CAM), which was developed for price cap
carriers, and to make such other adjustments as appropriate for use of that model in areas served by rateof-return carriers.29
18.
As directed by the Commission, the Bureau has been refining the Alternative Connect
America Cost Model (A-CAM) since the first version was released in December 2014.30 The Bureau
released v.1.0.1 on March 16, 2015 updating the competitive coverage in light of the Commission’s
decision to adopt 10/1 Mbps as the minimum standard for competitors.31 On April 10, 2015, the Bureau
published an online, publicly accessible map based on the study area boundary and exchange data that
were submitted to the Bureau by rate-of-return carriers and certain state utility commissions, summarized
the process used to develop service areas for use in the model, and invited commenters to submit any
proposed corrections to interior service area boundaries and central office (Node0) locations.32 On July
26

47 U.S.C. § 254(b)(3).

27

April 2014 Connect America FNPRM, 29 FCC Rcd at 7139-43, paras. 276, 283-91. The FNPRM sought
comment on the proposal previously submitted by ITTA for a voluntary, two-phase transition plan to model-based
support for rate-of-return carriers. Letter from Genevieve Morelli, President, ITTA, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90, (filed Feb. 27, 2014) (ITTA Feb. 27, 2014 Ex Parte Letter) (attaching ITTA
Plan).
28

April 2014 Connect America FNPRM, 29 FCC Rcd at 7142-45, paras. 283-299.

29

April 2014 Connect America Order, 29 FCC Rcd at 7074, para. 70.

30

Wireline Competition Bureau Announces Availability of Version 4.2 of the Connect America Phase II Cost Model
and the First Version of an Alternative Cost Model Being Developed for Potential Use in Rate-of-Return Areas, WC
Docket No. 10-90, Public Notice, 29 FCC Rcd 16157, 16158 (WCB 2014) (A-CAM v1.0 Public Notice).
31

Wireline Competition Bureau Releases Alternative Connect America Cost Model Version 1.01 and Illustrative
Results for Potential Use in Rate-Of-Return Areas, WC Docket No. 10-90, Public Notice, 30 FCC Rcd 2067 (WCB
2015) (A-CAM v1.0.1 Public Notice) (updating broadband coverage to use minimum speed standard of 10/1 Mbps in
determining the presence of a cable or fixed wireless competitor).
32

Wireline Competition Bureau Publishes Map of Study Areas for Use in Alternative Connect America Cost Model,
WC Docket No. 10-90, Public Notice, 30 FCC Rcd 2944 (WCB 2015) (A-CAM Map Public Notice). A-CAM
(continued….)

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27, 2015, the Bureau invited parties to submit proposed corrections to plant mix input values for
individual study areas.33 The Bureau released version 1.1 on August 31, 2015, updating competitive
coverage using FCC Form 477 data.34 On October 8, 2015, the Bureau released A-CAM v2.0, which
incorporates updated exterior study area boundaries, interior service area boundaries, and Node0 locations
based on extensive input from rate-of-return carriers, and further updated the model in several respects.35
The Bureau also released results that illustrate how different per-location funding caps used in calculating
support impact the potential support calculated for a particular study area.36 On December 17, 2015, the
Bureau released A-CAM v2.1, which incorporates study area-specific plant mix input values submitted by
the carriers and updated broadband coverage data to address concerns raised by rate-of-return carriers that
prior versions of the model treated alternative technologies utilized by incumbents or their affiliates as
“unsubsidized competitors.” 37 With that version, the Bureau also released illustrative results, as
requested by ITTA, which excluded from support calculations those census blocks that are served with
either fiber to the premises (FTTP) or cable delivering service that meets the Commission’s minimum
standards.38 On February 17, 2016, the Bureau released additional illustrative results for A-CAM v2.1
utilizing input values reflecting a 9.75 percent cost of money.39

(Continued from previous page)
Service Area Development Process, at https://www.fcc.gov/general/rate-return-resources (A-CAM Service Area
Documentation); see also Wireline Competition Bureau Revises A-CAM Study Area Map, WC Docket No. 10-90, 30
FCC Rcd 4610 (WCB 2015) (updating a small number of potential Node0 locations); Wireline Competition Bureau
Announces Upcoming Modifications to the Alternative Connect America Cost Model, WC Docket No. 10-90, Public
Notice, 30 FCC Rcd 8191 (WCB 2015).
33

Wireline Competition Bureau Announces Upcoming Modifications to the Alternative Connect America Cost
Model, WC Docket No. 10-90, Public Notice, 30 FCC Rcd 8191 (WCB 2015) (announcing upcoming modifications
to A-CAM and inviting commenters to submit proposed corrections to plant mix values for individual study areas).
In response to the Public Notice, rate-of-return carriers or their consultants submitted proposed plant mix input
values for 528 study areas.
34

Wireline Competition Bureau Releases Alternative Connect America Cost Model Version 1.1 and Illustrative
Results for Potential Use in Rate-Of-Return Areas, WC Docket No. 10-90, Public Notice, 30 FCC Rcd 9777 (WCB
2015) (A-CAM v1.1 Public Notice) (updating coverage to reflect preliminary FCC Form 477 broadband deployment
data as of December 31, 2014).
35

Wireline Competition Bureau Releases Alternative Connect America Cost Model Version 2.0 and Illustrative
Results for Potential Use in Rate-Of-Return Areas, WC Docket No. 10-90, Public Notice, 30 FCC Rcd 10928 (WCB
2015) (updating, among other things, middle mile, and averaging costs at census block level) (A-CAM v2.0 Public
Notice).
36

The illustrative results for A-CAM version 2.0 are available at
https://transition.fcc.gov/wcb/ACAM_20_ILL_Rpt_Version3_0_FINAL_100615_Public.xlsx. The Bureau also
released illustrative results for A-CAM v1.0.1 and A-CAM v1.1 illustrating how different assumptions and funding
caps used in calculating support impact the potential support calculated for a particular study area. See A-CAM
v1.0.1 Public Notice, 30 FCC Rcd 2067; A-CAM v1.1 Public Notice, 30 FCC Rcd 9777.
37

Wireline Competition Bureau Releases Alternative Connect America Cost Model Version 2.1 and Illustrative
Results for Potential Use in Rate-Of-Return Areas, WC Docket No. 10-90, Public Notice, 30 FCC Rcd 14217 (WCB
2015) (A-CAM v2.1 Public Notice).
38

The illustrative results for A-CAM version 2.1 are available at
https://transition.fcc.gov/wcb/ACAM_21_ILL_Rpt_Version4_0_FINAL_121515.xlsx. See also Letter from
Genevieve Morelli, President, ITTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, at 3 (filed Nov.
19, 2015) (ITTA Nov. 19, 2015 Ex Parte Letter).
39

Wireline Competition Bureau Releases Additional Illustrative Results for Alternative Connect America Cost
Model Version 2.1 for Potential Use in Rate-Of-Return Areas, WC Docket No. 10-90, Public Notice, 31 FCC Rcd
1139 (WCB 2016) (A-CAM v2.1 Additional Illustrative Results Public Notice).

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19.
Meanwhile, in response to the FNPRM and further development of the record, ITTA,
USTelecom and others continued to refine proposals for a voluntary path to model-based support.40 On
December 4, ITTA and USTelecom jointly submitted draft rules regarding the voluntary path to the
model.41
2.

Discussion

20.
In this section, we adopt 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, we 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-ofreturn 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.42 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, we are completing the framework
envisioned by the Commission in the 2011 USF/ICC Transformation Order. We also are taking
additional steps to fulfill the Commission’s longstanding objective of providing support based on
forward-looking efficient costs.43 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
40

See Letter from Genevieve Morelli, President, ITTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 1090, Attach. A & B (filed Oct. 2, 2015) ) (on behalf of ITTA, NTCA, USTelecom, and WTA)
(ITTA/NTCA/USTelecom/WTA Oct. 2, 2015 Ex Parte Letter) (describing allocation of model support, revising
proposed build-out milestones and proposing non-compliance measures); Letter from Genevieve Morelli, President,
ITTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, Attach. A (filed Oct. 2, 2015) (on behalf of
ITTA, USTelecom, and WTA) (ITTA/USTelecom/WTA Oct. 2, 2015 Ex Parte Letter) (updating build-out
requirement methodology); Letter from Micah M. Caldwell, Vice President, Regulatory Affairs, ITTA, to Marlene
H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed July 14, 2015) (ITTA July 14, 2015 Ex Parte Letter) (filing
unredacted version of buildout obligation methodology presentation); Letter from Genevieve Morelli, President,
ITTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, (filed June 29, 2015) (ITTA June 29, 2015 Ex
Parte Letter) (proposing three-track transition mechanism, interim broadband deployment milestones, and carrierspecific build-out requirements); Letter from Genevieve Morelli, President, ITTA, to Marlene H. Dortch, Secretary,
FCC, WC Docket No. 10-90 (filed June 3, 2015) (ITTA June 3, 2015 Ex Parte Letter).
41

See Letter from Genevieve Morelli, President, ITTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 1090, Attach. (filed Dec. 4, 2015) (on behalf of ITTA and USTelecom) (ITTA/USTelecom Dec. 4, 2015 Ex Parte
Letter). See also Letter from Derrick B. Owens, Vice President of Government Affairs, and Gerald J. Duffy,
Regulatory Counsel, WTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Dec. 17, 2015)
(WTA Dec. 17, 2015 Ex Parte Letter); Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to
Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Dec. 15, 2015) (NTCA Dec. 15, 2015 Ex Parte
Letter).
42

According to the December 2014 data, an estimated 13% of housing units in census blocks served by rate-ofreturn carriers lacked access even to 4/1 Mbps terrestrial fixed Internet access service. In the 2011 USF/ICC
Transformation Order, the Commission adopted an initial minimum broadband speed standard of at least 4/1 Mbps.
USF/ICC Transformation Order, 26 FCC Rcd at 17697, para. 94.
43

Almost 20 years ago, the Commission concluded that forward-looking economic costs—not actual costs—are the
proper framework for determining universal service support. In the Universal Service First Report and Order, the
Commission determined that high-cost universal service support should be based on forward-looking economic cost,
but concluded that rural carriers’ high-cost support would not be based on forward-looking economic cost until
further review. See Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report and Order, 12
FCC Rcd 8776, 8888-89, paras. 199, 203 (1997) (Universal Service First Report and Order) (history omitted).

10

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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.44
21.
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.
22.
Term of Support. We adopt 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, we expect the Commission will
conduct a rulemaking to determine how support will be determined after the end of the 10-year period.
We expect 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.
23.
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.45 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.46
And rate-of-return carriers were required to offer at least 10/1 Mbps broadband service upon reasonable
request.47 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.48
24.
Similarly, here, we recognize that our minimum requirements for rate-of-return carriers
will likely evolve over the next decade.49 NTCA argues that a universal service program premised upon
achieving speeds of 10/1 Mbps risks locking rural America into lower service levels.50 We agree that our
policies should take into account evolving standards in the future. At the same time, we recognize that it
is difficult to plan network deployment not knowing the performance obligations that might apply by the
end of the 10-year term. We find 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 we establish 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.
25.
We conclude 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
44

December 2014 Connect America Order, 29 FCC Rcd 15682-84, paras. 106-14.

45

Id. at 15649, para. 15.

46

Id. at 15651, para. 20.

47

Id.

48

Id. at 15655, para. 29.

49

The statute defines universal service as “an evolving level of telecommunications services.” 47 U.S.C.
§254(c)(1).
50

Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC,
WC Docket No. 10-90 (filed Oct. 26, 2015) (NTCA Oct. 26, 2015 Ex Parte Letter).

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support term. We adopt 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.51 For administrative
convenience, we 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. We conclude 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 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.52 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. We direct 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.
26.
In addition, we establish 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”). We adopt a modified version of ITTA’s
proposal, again using housing units to determine density. We 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 53 The remaining capped locations will be subject to
the reasonable request standard, and the Commission will monitor progress in connecting these locations
as well. We encourage 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

51

See ITTA/USTelecom Dec. 4, 2015 Ex Parte Letter, Attach. at 14; ITTA Nov. 19, 2015 Ex Parte Letter at 3. See
also Letter from Yaron Dori, Counsel for TDS Telecom, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 1090, at 2 (filed Nov. 23, 2015) (TDS Nov. 23, 2015 Ex Parte Letter); Letter from Yaron Dori, Counsel for TDS
Telecom, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, at 2 (filed Nov. 12, 2015) (TDS Nov. 12,
2015 Ex Parte Letter). No party objected to this proposal submitted in the record, and we modified the requirements
in very low density areas to address the concerns expressed by WTA. See also Letter from Jason B. Williams, Vice
President –General Counsel, Blackfoot Telecommunications Group, to Marlene H. Dortch, Secretary, FCC, WC
Docket No. 10-90, at 1-2 (Blackfoot Feb. 5, 2016 Ex Parte) (supporting buildout standard proposed by
ITTA/USTelecom with WTA modification).
52

See WTA Dec. 17, 2015 Ex Parte Letter at 2; Letter from Yaron Dori, Counsel for TDS Telecom, to Marlene H.
Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Dec. 21, 2015) (TDS Dec. 21, 2015 Ex Parte Letter);
Blackfoot Feb. 5, 2016 Ex Parte Letter.
53

See Letter from Genevieve Morelli, President, ITTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 1090, at 2 (filed Jan. 19, 2016) (ITTA Jan. 19, 2016 Ex Parte Letter).

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Commission notice within the requisite time would not be required to provide service upon reasonable
request in the identified areas.
27.
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.54 We now adopt 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: we require 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: we require 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.55
According to the Commission’s 2015 Measuring Broadband America data, 80 percent of cable broadband
subscribers used 156 GB or less per month.56 For simplicity, we adopt 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. We expect 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.
28.
In addition, we adopt our proposal to require rate-of-return carriers accepting modelbased support to certify that 95 percent or more of all peak period measurements of network round-trip
latency are at or below 100 milliseconds.57 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, we recognize 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.
54

April 2014 Connect America FNPRM, 29 FCC Rcd at 7103-04, paras. 149-52. The Commission also proposed to
apply the same usage allowances and latency standards to recipients of Connect America Phase II support awarded
through a competitive bidding process. Id. Several commenters addressed what usage allowances and latency
standards should apply in these price cap territories but did not specifically address what usage allowances and
latency standards should apply in rate-of-return areas. See, e.g., Independent Telephone & Telecommunications
Alliance Comments, WC Docket No. 10-90 et al., at 16-17 (filed Aug. 8, 2014) (ITTA Aug. 2014 Comments)
(arguing that less robust requirements for providers that are authorized to receive support pursuant to competitive
bidding would contradict Commission’s statutory duty to ensure that consumers in hard-to-serve areas have access
to reasonably comparable services at reasonably comparable prices); Rural Associations Comments, WC Docket
No. 10-90 et al., at 38 (filed Aug. 8, 2014) (Rural Associations Aug. 2014 Comments) (arguing there is no valid
reason to relax the standards expected of support recipients in the context of competitive bidding or any other
context).
55

See Connect America Fund, WC Docket No. 10-90, Report and Order, 28 FCC Rcd 15060, 15065-68, paras. 1418 (WCB 2013) (Phase II Service Obligations Order). See also April 2014 Connect America FNPRM, 29 FCC Rcd
at 7103-04, paras. 149-52.
56

See Validated Data Sets – Measuring Broadband America 2015 – Statistical Averages, at
http://data.fcc.gov/download/measuring-broadband-america/2015/statistical-averages-2014%20v20151117.xlsx.
We note that the median figure for cable subscribers in 2015 was 67 GB per month. Id.
57

See April 2014 Connect America FNPRM, 29 FCC Rcd at 7103-04, paras. 149, 152. See also Phase II Service
Obligations Order, 28 FCC Rcd at 15068-72, paras. 19-25.

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29.
Deployment Obligations. We 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.58 These are the locations that are “fully funded”
with model-based support. In contrast to the approach taken in price cap areas, where we did not provide
support to locations above an extremely high-cost threshold, in rate-of-return areas we 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.59 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.
30.
We decline 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.60 We agree with
proponents of such an approach that the locations to which a company will be required to deploy
broadband should be based on the A-CAM modeled cost characteristics of each company, but we find
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.61 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.62
31.
We are not persuaded by the argument that we 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.63 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.
32.
Interim Deployment Milestones. We adopt 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.64 We adopt enforceable milestones beginning in year
58

As discussed below, we adopt a funding threshold of $52.50. See infra para. 53.

59

Low-cost locations are subject to the reasonable request standard because the model calculates carriers will be
able to recover the cost of serving those locations through end-user revenues alone. Carriers should be prepared to
demonstrate in an audit or other context how they evaluate requests under the reasonable request standard. We
expect all carriers to be able to produce documents describing the standards they use to process such requests.
60

ITTA/USTelecom/WTA Oct. 2, 2015 Ex Parte Letter, Attach. A (updating broadband build-out requirement
methodology filed by ITTA on June 29, 2015).
61

Connect America Fund; High-Cost Universal Service Support, WC Docket Nos. 10-90, 05-337, Report and
Order, 28 FCC Rcd 5301, 5307-08, paras. 11, 15 (WCB 2013) (CAM Platform Order).
62

Id. at 5311, para. 23.

63

ITTA/USTelecom/WTA Oct. 2, 2015 Ex Parte, Attach. A at 1-3.

64

For administrative efficiency, we will align the deployment milestones and funding term to the calendar year,
although we expect to authorize electing carriers to receive CAF-ACAM support before the end of this year.

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FCC 16-33

four, whereas the enforceable milestones proposed by the rural associations would begin in year five.65
As shown in the chart below, we require 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 10year term. We do not set interim milestones for the deployment of broadband speeds of 25/3 Mbps; we
require carriers receiving model-based support to offer at least 25/3 Mbps broadband service to 25
percent, 50 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
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%

33.
We also conclude 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.66 When the Commission adopted flexibility in deployment obligations for price cap carriers
accepting model-based support, we recognized that the “facts on the ground” when they are deploying
facilities may necessitate some flexibility regarding the number of required locations.67 Because rate-ofreturn carriers electing model-based support may face similar circumstances, we find 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. We 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.68 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, we encourage them to identify such census
blocks for inclusion in an upcoming auction.
65

See ITTA/NTCA/USTelecom/WTA Oct. 2, 2015 Ex Parte Letter, Attach. B, Table 1; see also ITTA/USTelecom
Dec. 4, 2015 Ex Parte Letter, Attach. at 15.
66

See TDS Nov. 12, 2015 Ex Parte Letter at 1-2 (arguing that the same type of flexibility granted to price cap
companies should be afforded to rate-of-return companies electing model support).
67

December 2014 Connect America Order, 29 FCC Rcd at 15659, paras. 38-39 (requiring deployment to at least
95% of the funded locations).
68

The Commission required price cap carriers taking advantage of the flexibility to refund an amount of support
based on the number of locations left unserved at the end of the term. Id. at 15660-61, para. 42. We do 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.

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FCC 16-33

34.
We also note 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, we
delegate authority to the Bureau to address these discrepancies by adjusting the number of funded
locations downward and reducing associated funding levels.
35.
We are not persuaded that we 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.69 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.70 The
deployment milestones we adopt 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. We would be
concerned if such a hypothetical carrier were to wait until years 8 and 9 to begin extending broadband to
its unserved customers; we 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.
36.
A-CAM. We make the following decisions regarding the final version of A-CAM that
will be used to calculate support for carriers that voluntarily elect to receive model-based support. We
adopt 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, we adopt 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.
37.
We also make all necessary decisions to calculate support 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, we will exclude from support
calculations those census blocks where an incumbent or any affiliated entity is providing 10/1 Mbps or
better broadband using either FTTP or cable technologies. We conclude that we will update the
broadband coverage for unsubsidized competitors in the model to reflect the recently released June 2015
FCC Form 477 data,71 which will be subject to a streamlined challenge process. We direct 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.
38.
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, we believe 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.
69

See WTA Dec. 17, 2015 Ex Parte Letter, at 3-4.

70

See id.

71

FCC Releases Form 477 Data On Fixed Broadband Deployment as of June 30, 2015, WC Docket No. 11-10,
Public Notice, DA 16-279 (WCB 2016) (June 2015 FCC Form 477 Data).

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39.
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.72 Although the cost model was originally
developed for use in price cap areas, it always has included a size adjustment factor—based on rate-ofreturn 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.
40.
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.73
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.74 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.75 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.76 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.77 In April 2015, the Bureau
posted on the Commission’s website 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.78
41.
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

72

A-CAM v1.0 Public Notice, 29 FCC Rcd at 16158.

73

April 2014 Connect America Order, 29 FCC Rcd at 7074, para. 70. The Bureau had considered using the study
area boundary data collection in CAM, but determined that using those data would require additional time and
would delay Connect America Phase II implementation without any clear indication that it would materially
improve the accuracy of results for price cap carriers. Indeed, in response to the Bureau’s data request, AT&T
submitted GeoResults data for some of its study areas, and Verizon submitted data from another commercial vendor.
See Connect America Fund et al., WC Docket No. 10-90 et al., Report and Order, 29 FCC Rcd 3964, 3996-97,
paras. 65-66 (WCB 2014) (CAM Inputs Order).
74

See A-CAM Map Public Notice, 30 FCC Rcd 2944; A-CAM Service Area Development Documentation, available
at https://www.fcc.gov/wcb/ServiceAreaDevelopmentProcess.docx.
75

For modeling purposes, overlapped areas containing roads have to be attributed to a single study area because ACAM utilizes the road network to route outside plant; the model cannot calculate support for more than one rate-ofreturn carrier to serve the same area. In addition, some of the study areas had interior “holes,” which were filled in
because they may contain roads used in A-CAM to route plant efficiently.
76

The exchange boundaries submitted to the Bureau by interested parties in the data collection are not necessarily
the same as a particular carrier’s wire center boundaries.
77

If exchanges had more than one Node0 location greater than 10 airline miles apart, the Bureau split the exchanges
into smaller areas. See A-CAM Service Area Documentation at 9-10.
78

A-CAM Map Public Notice, 30 FCC Rcd 2944.

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parties could better understand and evaluate how different assumptions used in calculating support impact
the potential support calculated for a particular study area.
42.
A-CAM contains two modules: a cost module that calculates costs for all areas of the
country,79 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.80
43.
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.81 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.82 Five of the seven scenarios used a funding benchmark of $52.50, the same
benchmark used to calculate support for price cap carriers.83 Two of these scenarios used an extremely
high-cost threshold as the mechanism to keep total calculated support with the total budget for rate-ofreturn 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.84 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.85

79

The cost module itself has two parts—one part that figures out an efficient routing to ensure each location is
“passed” by a network, namely a network topology, and a second part that calculates the costs associated with that
network topology.
80

For the price cap carrier model, the Commission directed that the Bureau set an “extremely high-cost threshold”
above which the model would not calculate support amounts. As discussed below, we take a different approach for
the voluntary path to a model in rate-of-return territories and adopt a per-location funding cap to keep support within
the budget for model-based support. See infra para. 52.
81

A-CAM v1.0.1 Public Notice, 30 FCC Rcd 2067. See also Wireline Competition Bureau Releases Updated Report
for Alternative Connect America Cost Model Version 1.01, WC Docket No. 10-90, Public Notice, 30 FCC Rcd 2304
(WCB 2015) (updating comparison to 2014 support amounts). As noted above, in December 2014, the Commission
adopted a new minimum speed standard of 10/1 Mbps for recipients of high-cost support that are subject to
broadband public interest obligations. December 2014 Connect America Order, 29 FCC Rcd at 15649, para. 15.
The Bureau used 10 Mbps/768 kbps, as a proxy for 10/1 Mbps, to determine areas served by an unsubsidized
competitor until it began using the FCC Form 477 data, instead of the State Broadband Initiative/National
Broadband Map (SBI/NBM) data, in A-CAM v1.1.
82

The illustrative results are available at
https://www.fcc.gov/wcb/ACAM_101_ILL_Rpt_Version1_1_FINAL_031415.xlsx.
83

Two scenarios used a $60 funding cap, suggested by parties to the proceeding.

84

A-CAM v1.0.1 Public Notice, 30 FCC Rcd at 2069 & n.11.

85

Id. at 2069-70.

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44.
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.86 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 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.87
45.
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, 2014.88 The prior version of ACAM (v1.0.1) used SBI/NBM data as of June 30, 2013.89 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.90
46.
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 rateof-return areas.91 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.92 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 rateof-return carriers may have higher middle mile costs, A-CAM v2.0 added two connections from each

86

A-CAM Updated Study Area Map Public Notice, WC Docket No. 10-90, Public Notice, 30 FCC Rcd 4610 (2015).

87

Wireline Competition Bureau Publishes Table of Rural, Suburban, and Urban Census Block Groups in the
Alternative Connect America Cost Model, WC Docket No. 10-90, Public Notice, 30 FCC Rcd 8473 (2015).
88

A-CAM v1.1 Public Notice, 30 FCC Rcd 9777.

89

The Bureau previously used 10 Mbps/768 kbps as a proxy for 10/1 Mbps in A-CAM v1.0.1 because this speed tier
was used in the SBI/NBM data. Form 477 does not collect bandwidth data in pre-determined tiers as the SBI/NBM
data collection did, but instead requires providers to report the maximum advertised upload and download speeds
they offer in a census block; therefore, the Bureau no longer needs to use 768 kbps as a proxy for 1 Mbps in ACAM. Id. at 9778 n.8.
90

After the Bureau released results produced using the prior version of A-CAM to illustrate seven different
scenarios, parties expressed the most interest in the scenarios that utilized a per-location funding cap to keep total
calculated support within the total budget for rate-of-return carriers. The Bureau used $52.50 as the funding
benchmark in all three ACAM v1.1 scenarios.
91

A-CAM v2.0 Public Notice, 30 FCC Rcd 10928.

92

A table showing by study area code whether there were changes to exterior or interior boundaries and/or Node0
locations was posted at https://transition.fcc.gov/wcb/A-CAM_v2_Boundary_Node0_Modifications_version_2.zip.
In addition, a table showing for each study area the percentage change from A-CAM v1.1 to A-CAM v2.0 in
locations, service areas, and investment was made available at https://www.fcc.gov/encyclopedia/rate-returnresources shortly after A-CAM v2.0 was publicly released.

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regional access tandem ring to an Internet access point to account for the cost of connecting to the public
Internet.93
47.
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.
48.
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.94
49.
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,95 updated broadband coverage data to
address issues raised by rate-of-return commenters regarding reported competitive coverage,96 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. 97 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.98 On February 17, 2016, the Bureau released additional illustrative results utilizing input
values reflecting a 9.75 percent cost of money.99 Raising the cost of money increased costs for all study
areas.
50.
As directed, the Bureau incorporated the study area data and made other appropriate
adjustments to A-CAM over the past year. We find that these modifications are sufficient for purposes of

93

CAM and previous versions of A-CAM had assumed that Internet peering occurred at the regional tandem ring;
however more rural areas may in fact be a significant distance from Internet access points, leading to significant
costs to physically connect to the Internet.
94

Previous versions of A-CAM calculated different costs within a block in some circumstances based on the splitter
(Node2) serving that area. This version of the model calculates cost at the sub-block level only in cases where a
census block crosses a study area boundary.
95

A-CAM v2.1 Public Notice, 30 FCC Rcd 14217. Notably, plant mix values were submitted for more than 500
study areas – nearly half of the total study areas – reflecting robust input from carriers regarding the model.
96

See, e.g., Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90 (filed Oct. 29, 2015) (NTCA Oct. 29, 2015 Ex Parte Letter); Letter from
Anthony K. Veach, Counsel for Panhandle Telephone Cooperative, Inc., to Marlene H. Dortch, Secretary, FCC, WC
Docket No. 10-90 (filed June 17, 2015) (Panhandle June 17, 2015 Ex Parte Letter).
97

See ITTA Nov. 19, 2015 Ex Parte Letter, at 3-4.

98

These illustrative results are available at
https://transition.fcc.gov/wcb/ACAM_21_ILL_Rpt_Version4_0_FINAL_121515.xlsx.
99

A-CAM v2.1 Additional Illustrative Results Public Notice, DA 16-164.

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calculating support amounts for rate-of-return carriers electing to receive model support.100 A forwardlooking 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, we recognize 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. We note that the average calculated ACAM 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.101
51.
As discussed in detail below, as part of our modernization of the framework for rate-ofreturn carriers for both high-cost support and special access ratemaking, we represcribe the currently
authorized rate of return from 11.25 percent to 9.75 percent.102 The Commission primarily relies on the
methodology and data contained in the Wireline Competition Bureau’s Staff Report,103 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, we 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-ofreturn carriers.
52.
We direct the Bureau to calculate support using a $200 per-location funding cap, rather
than an extremely high-cost threshold. We conclude that this methodology is preferable because it
provides some support to all locations above the funding threshold.104 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 – 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 we were to use a lower funding cap. We note 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 we adopt for rate-of-return areas will provide full support for locations
where the average cost is $252.50 per location.
100

We thus reject NTCA’s argument that further changes to the model should be made. NTCA fails to identify any
specific changes that the Commission should make to either the model platform or the input values. See NTCA Dec.
15, 2015 Ex Parte Letter at 5.
101

Specifically, the Bureau calculated that the mean ratio of A-CAM loop cost to embedded loop cost was 1.63, the
median was 1.42, and the weighted (by locations) average was 1.38. See A-CAM v2.1 Public Notice, 30 FCC Rcd at
14218 n.8.
102

See infra Section III.B.

103

Staff Report, 28 FCC Rcd 7123.

104

When the Bureau first released A-CAM illustrative results, one of the seven scenarios used a per-location funding
cap. This was the methodology that generated the most interest and support among interested parties, and all
subsequent illustrative results used this approach.

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53.
We adopt 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.105 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.106
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.107 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.108 Applying an assumed ARPU of $75 and the 70 percent expected subscription rate,
the funding benchmark is $52.50 per location.109 The record before the Bureau for CAM contained
varying estimates and the Bureau acknowledged that forecasting potential ARPU for recipients of modelbased support and the expected subscription rate necessarily requires making a number of predictive
judgments.110 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.
54.
We are not persuaded that we 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.111 These and other commenters now support using a per-location funding cap rather than a
higher benchmark.112
55.
One commenter argues that a subscription rate of 70 percent is too high and that we
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.113 Given the increasing demand for higher broadband
105

Wireline Competition Bureau Announces Connect America Phase II Support Amounts Offered to Price Cap
Carriers to Expand Rural Broadband, WC Docket No. 10-90, Public Notice, 30 FCC Rcd 3905 (WCB 2015).
Support is provided in areas where costs are above a specified benchmark, referred to as the “funding benchmark.”
See, e.g., CAM Inputs Order, 29 FCC Rcd at 3966, para. 8 & n.8.
106

CAM Inputs Order, 29 FCC Rcd 3964, 4035, para. 170; Connect America Fund et al., WC Docket No. 10-90 et
al., Memorandum Opinion and Order, 29 FCC Rcd 14092 (2014) (ACA AFR Order) (denying application for review
challenging use of 70% subscription rate).
107

CAM Inputs Order, 29 FCC Rcd at 4035-39, paras. 171-76. 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.
108

Id. at 4039-40, paras. 177-79.

109

Id. at 4040, para. 180.

110

Id. at 4036, 4040, paras. 173, 179.

111

See A-CAM v1.0.1 Public Notice, 30 FCC Rcd at 2069 n.11 (citing Letter from Thomas J. Moorman, Counsel to
the Nebraska Companies, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, (filed Feb. 2, 2015)
(attaching: “A Blueprint for Reforming Rate-of-Return USF” and “Nebraska Companies’ Proposed Rate-of-Return
USF Framework, Options and Transitions”)); see also Letter from Mark Walker, Legal Counsel, FCC, to Marlene
Dortch, Secretary, FCC, WC Docket No. 10-90, (filed Feb. 26, 2015) (submitting into the record an unredacted
version of the “A Blueprint for Reforming Rate-of-Return USF”).
112

ITTA Oct. 2, 2015 Ex Parte Letter 1, at Attach. A.

113

Letter from H. Keith Oliver, Senior Vice President-Corporate Operations, Home Telecom, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90, at 2, 4-5 (filed Dec. 4, 2015) (Home Telecom Dec. 4, 2015 Ex Parte Letter)
(citing Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a
(continued….)

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speeds, we do 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, we 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 we expect 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. We decline 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.
56.
We also conclude that we 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.114 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.115 While we
recognize 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,116 we conclude 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.117 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, we assume 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

(Continued from previous page)
Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the
Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act, 2015 Broadband Progress
Report and Notice of Inquiry on Immediate Action to Accelerate Deployment, GN Docket No. 14-126, 30 FCC Rcd
1375, 1429, Table 12 (2015)).
114

This approach is supported by the Nebraska Companies. See Nebraska Companies Jan. 14, 2016 Ex Parte Letter
1, Attach. at 7-8; Nebraska Companies Jan. 14, 2016 Ex Parte Letter 2, Attach. at 2-4.
115

We note that Form 477 filers must certify to the accuracy of their data.

116

See, e.g., Letter from Michael Romano, Senior Vice President – Policy, NTCA, to Marlene Dortch, Secretary,
FCC, WC Docket No. 10-90, at 5 (filed Dec. 22, 2015) (NTCA Dec. 22, 2015 Ex Parte Letter); Letter from Gerard
J. Duffy, WTA Regulatory Counsel, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Dec. 11,
2015) (WTA Dec. 11, 2015 Ex Parte Letter).
117

See Nebraska Companies Jan. 14, 2016 Ex Parte Letter 1, Attach. at 2, 7-8; ITTA Nov. 19, 2015 Ex Parte Letter
at 3 (arguing this approach is consistent with the Commission’s goal to use limited USF support dollars to bring
broadband to the greatest number of currently unserved consumers in rate-of-return areas).

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their existing deployment.118 Those carriers are not required to elect model-based support and therefore
this decision does not drastically reduce their support, as some allege.119
57.
When we 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,”120 we 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.121 We conclude 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, we decline to make further
changes to data sources or model design as requested by some commenters.122
58.
Finally, we reject 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.123 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.124 We do 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, we are not persuaded by the case study, node-by-node comparisons
because the engineering data reflect a different network architecture than the network modeled in ACAM. 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 enduser 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.125 In addition, Vantage Point’s claim that the model shows consistent deviation
118

By excluding support for areas served with FTTP and cable, we ensure that we are not inadvertently providing
funding for carriers that received BIP/BTOP grants to build FTTP networks. See NTCA Dec. 15, 2015 Ex Parte
Letter, at 5 n.11 (noting that existing USF programs do not support capital investments associated with networks
constructed using grant funding).
119

See, e.g., Letter from Matt Johnson, Shawnee Telephone Company, to Marlene H. Dortch, WC Docket No. 10-90
(filed Feb. 4, 2016).
120

April 2014 Connect America Order, 29 FCC Rcd at 7074, para. 70.

121

See Letter from David Armistead, General Counsel & Secretary, Hargray Communications Group, Inc. WC
Docket Nos. 10-90, 06-122, Attach. A at 5 (filed July 1, 2015) (Hargray July 1, 2015 Ex Parte Letter).
122

See, e.g., id.; Letter from Vincent H. Wiemer, Principal, Alexicon, to Marlene H. Dortch, Secretary, FCC, WC
Docket No. 10-90 (filed June 18, 2015) (Alexicon June 18, 2015 Ex Parte Letter).
123

See, e.g., Letter from, Dustin “Dusty” Johnson, Vice President Consulting, Vantage Point, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90 (filed Jan. 6, 2016) (updating analysis by comparing engineering data to
results of A-CAM v2.1); NTCA Dec. 15, 2015 Ex Parte Letter at 5 (arguing that A-CAM produces significant
increases and decreases in support and that cost deviations between the model and either engineered or actual
construction costs undermine the utility of the model); Letter from Gerard J. Duffy, Regulatory Counsel, WTA, et
al., to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed July 15, 2015); Letter from Larry
Thompson, Vantage Point, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed July 13, 2015)
(presenting analysis of cost model compared to cost of actual FTTP construction); Letter from Michael Romano,
Senior Vice President – Policy, NTCA, et. al., to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, at 5
(filed June 24, 2015); Alexicon June 18, 2015 Ex Parte Letter.
124

Id.

125

We recognize that placing splitters in the central office can lead to higher utilization and lower cost per location
for splitters; however, we generally expect the higher cost for fiber materials and installation (including, for
(continued….)

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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.
59.
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.126 Although one might expect forward-looking
costs to capture greater efficiencies and, therefore, be lower than embedded costs, in fact, the forwardlooking loop costs from A-CAM for most study areas are higher than embedded loop costs reported by
rate-of-return carriers to NECA.127 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.128 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,129 but rather would further the Commission’s policy goal of
providing appropriate incentives to extend broadband to unserved and underserved areas.
60.
Budget. Given the benefits and certainty of the model, we believe it is appropriate to use
additional high-cost funding from the high-cost reserve account to encourage companies to elect model
support.130 We therefore adopt 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.131 By making this funding available to those carriers that are willing to meet concrete and defined
(Continued from previous page)
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.
126

See supra para. 30.

127

The Bureau compared A-CAM calculated loop cost to embedded loop costs as filed with NECA over the last 15
years. To make the comparison, the Bureau adjusted A-CAM costs to account for differences between the costs
calculated by the model and those filed by carriers: staff subtracted middle-mile (including submarine and undersea)
and land and building costs; and estimated the impact of the higher rate of return in NECA filings.
128

See, e.g., USF/ICC Transformation Order, 26 FCC Rcd 17701, para. 103.

129

See, e.g., Alexicon June 18, 2015 Ex Parte Letter, Attach. at 7.

130

We note 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, 26 FCC Rcd at 17847, para. 561; see also 47 CFR 54.709(b). We
conclude there is no need to maintain a separate reserve account. To simplify the accounting treatment of high-cost
reforms going forward, we now direct 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.
131

The Commission sought comment in the April 2014 Connect America FNPRM on the impact of adopting a
voluntary path to the model on the overall budget for rate-of-return areas and whether adoption of such a plan would
have the effect of squeezing the budget available for carriers that do not opt into the plan. April 2014 Connect
America FNPRM, 29 FCC Rcd at 7143, para. 289.

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broadband deployment obligations, including those who will see reductions in their support, we will
advance our objective of extending broadband to currently unserved consumers.
61.
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.132 Even so, we predict 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.133 We recognize 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, we do 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. We
describe below how we will adjust the offer of support and obligations to meet the defined CAF-ACAM
budget.
62.
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 we adopt 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 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.134 If that increase is $150 million or less, no adjustment to the offered
support amounts or deployment obligations will be necessary, we 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.135 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

132

The Nebraska Companies estimate that $200 million would result in nearly an eight-fold increase in the number
of locations being built as compared to $100 million. See Letter from Cheryl L. Parrino, Parrino Strategic
Consulting, on behalf of the Nebraska Companies, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90,
Attach. at 2-3 (filed Jan. 14, 2016) (Nebraska Companies Jan. 14, 2016 Ex Parte Letter 1) (including a graph
showing number of fully-funded locations with various levels of additional funding). See also Letter from Cheryl L.
Parrino, Parrino Strategic Consulting, on behalf of the Nebraska Companies, to Marlene H. Dortch, Secretary, FCC,
WC Docket No. 10-90, Attach. at 4 (filed Jan. 14, 2016) (Nebraska Companies Jan. 14, 2016 Ex Parte Letter 2)
(including a chart showing build-out requirements increase with additional funding); Blackfoot Feb. 5, 2016 Ex
Parte Letter at 2 (supporting use of at least $200 million to fund carriers electing model support).
133

Transition payments will decline after the initial year; we do not expect many carriers would be receiving
transition payments for an extended period of years.
134

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. To illustrate
with an example, assume that carriers that collectively received $400 million in legacy support in 2015 elect the
voluntary path to the model, and the model-determined support plus transition payments for that subset of carriers is
$540 million. In that instance, no further adjustments would be necessary.
135

If demand can be met with the amounts adopted today, unused funding will remain in the high-cost account.

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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.136
63.
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.137 Recognizing
that these electing carriers may require more time to consider a revised offer, we will require them to
confirm their acceptance of the revised offer within 30 days.
64.
Election Process. The Bureau will release a Public Notice showing the offer of modelbased 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.
65.
We adopt our proposal to require participating carriers to make a state-level election,
comparable to what the Commission required of price cap carriers.138 Our approach prevents rate-ofreturn 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.
66.
Because we intend that the model-based path spur additional broadband deployment in
those areas lacking service, we conclude that we 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 modelbased support merely to lock in existing support amounts.139 We recognize 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.
67.
Carriers should submit their acceptance letters to the Bureau at
[email protected]. 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
136

For instance, it may be the case that lowering the funding cap to $160 per location would be sufficient to stay
within the budget allocated to the voluntary path to the model for the 10-year term. If, on the other hand, demand
for the voluntary path to the model is so great that the funding per location cap would need to be set at a figure lower
than Connect America Phase II provides to price caps carriers, i.e. below $146.10 per location, other measures may
be necessary. It is premature to decide today how to address a situation that may not materialize.
137

See Nebraska Companies Jan. 14, 2016 Ex Parte Letter 1, Attach. at 2-3; Nebraska Companies Jan. 14, 2016 Ex
Parte Letter 2, Attach. at 4.
138

April 2014 Connect America FNPRM, 29 FCC Rcd at 7142, para. 287. In response to the FNPRM, ITTA
initially argued that elections should be made on a study area basis. See, e.g., ITTA June 3, 2015 Ex Parte Letter at
1. However, the proposed rules submitted by ITTA and USTelecom would require election on a statewide basis.
See ITTA/USTelecom Dec. 4, 2015 Ex Parte Letter, Attach. at 14.
139

See Nebraska Companies Jan. 14, 2016 Ex Parte Letter 2, Attach. at 3.

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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.
68.
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.140
69.
If we proceed 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.141 That difference will already have been redistributed amongst the
remaining model carriers.142
70.
Broadband Coverage. The current version of the model contains December 2014 Form
477 broadband deployment data and voice subscription data. 143 We recognize 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. We find, 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 we do not provide support to census blocks that have some competitive coverage.144 Like our
decision to exclude from model-support calculations those blocks where the incumbent already has
deployed FTTP, we seek to target support to areas of greater need.

140

It is premature to decide now whether the Bureau should take further steps to re-allocate support of those carriers
that decline to accept the revised offer among the remaining electing carriers. If, for instance, only one or several
carriers declined to accept the revised offer, it likely would not be worth the administrative burden to offer
additional small amounts to the remaining electing carriers. This would merely reduce the amount of additional
funding required for the voluntary path to the model and thereby lessen overall demand in the high-cost program.
The situation could be different, on the other hand, if a large number of companies that initially elected support
choose to decline a revised offer. In such a situation, the funding per location cap would be lowered unnecessarily,
to the detriment of achieving our objective of getting broadband to more consumers in high-cost areas.
141

For example, if a carrier received $1 million in high-cost support in 2015 and accepted an offer of $900,000 in
model-based support, but then in the second step of the process the offer is reduced to $700,000, and the carrier
decides not to accept the $700,000 offer, the overall budget for the non-model-based carriers will be reduced by
$300,000 going forward.
142

See Blackfoot Feb. 5 Ex Parte Letter at 2 (urging Commission to ensure that those electing model support not
have their funding undercut by carriers that initially elect but then decline to accept the refined offer).
143

The Form 477 data collection is mandatory, and Form 477 filers must certify to the accuracy of their data.

144

We are not persuaded by NTCA’s argument that there should be a more extensive challenge process to ensure
that A-CAM equitably distributes support. See, e.g., NTCA Dec. 15, 2015 Ex Parte Letter at 6. Rather, we
conclude that the streamlined challenge process we adopt today is sufficient to ensure that CAF A-CAM support is
appropriately targeted. Because election of the model is voluntary, individual carriers can make their own business
decision as to whether the model-determined amount of support is sufficient to meet the specified obligations.

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71.
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-ofreturn areas, i.e. those that are higher cost, we do 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. We therefore adopt a streamlined challenge process. We direct the Bureau
to incorporate into the model the recently released June 2015 FCC Form 477 data,145 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. 146 We note that Form 477 filers are
under a continuing obligation to make corrections to their filings.147 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.148 We direct 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.
72.
Tiered Transitions. We adopt 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.149
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
FNPRM, we 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.
73.
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.
74.
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
145

See June 2015 FCC Form 477 Data.

146

A comment that argues in conclusory fashion that the competitive coverage contained in the current version of
the model is overstated is unlikely to be persuasive.
147

Any updated or revised coverage data filed by a party as part of this challenge process should also be reflected in
a revision to that party’s Form 477 submissions. Filers should follow the established process for making corrections
to their FCC Form 477 data, https://apps2.fcc.gov/form477/login.xhtml#block-menu-block-4.
148

See, e.g, Letter from Mark Stemseth, Chief Executive Officer, West Wisconsin Telcom, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90 (filed Jan. 21, 2016); Letter from Brian Singleton, President/CEO, Chester
Telephone Co, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Jan. 11, 2016); Letter from Tony
Prather, President, Totelcom Communications, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed
Jan. 6, 2016); Letter from Matt Sparks, General Manager, Baldwin Telecom, Inc., to Marlene H. Dortch, Secretary,
FCC, WC Docket No. 10-90 (filed Jan. 4, 2016); Letter from Jerry Burmeister, Consulting Manager, Interstate
Telcom Consulting, Inc., to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Jan. 4, 2016).
149

See ITTA/USTelecom Dec. 4, 2015 Ex Parte Letter, Attach. at 16 (attaching draft rules relating to a voluntary
model-based support plan for rate-of-return carriers). See also ITTA June 29, 2015 Ex Parte Letter, Attach. A. We
initially had proposed a four-year transition for electing carriers for whom model support is less than legacy support,
whereas the original ITTA Plan had proposed a five-year transition. April 2014 Connect America FNPRM, 29 FCC
Rcd at 7142-43, para. 288.

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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.150
75.
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.
76.
We decline to adopt one commenter’s proposed “safety net” that would limit a carrier’s
decrease in support in any year to five percent.151 We conclude 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. We require 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.
77.
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.”152 Today, we adopt specific
defined deployment milestones for rate-of-return carriers electing model-based support and therefore the
previously adopted non-compliance measures will apply.
78.
As established in the general oversight and compliance framework in the December 2014
Connect America Order, 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.153
The table below summarizes the regime previously adopted by the Commission for non-compliance with
build-out milestones.154

150

For example, if legacy support were $100 and model support were $80, 20% of the difference ($20) is only $4,
which is less than 5% of legacy support ($5), so in this case the carrier would receive $95 in year one, $90 in year
two, $85 in year three and model support ($80) in year four.
151

See Home Telecom Dec. 4, 2015 Ex Parte Letter at 3-4.

152

We concluded that adopting support reductions that scale with the extent of an ETC’s noncompliance will create
incentives for ETCs to come into compliance as soon as possible, and that a support reduction scheme that is tied to
specific milestones is a clear, straightforward approach. December 2014 Connect America Order, 29 FCC Rcd at
15694, para. 142.
153

See December 2014 Connect America Order, 29 FCC Rcd at 15694-700, paras. 144-54.

154

ITTA proposes these non-compliance measures for rate-of-return carriers electing model-based support. See
ITTA Oct. 2, 2015 Ex Parte Letter 1, Attach. B.

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Non-Compliance Measures
Compliance Gap
5% to less than 15%
15% to less than 25%
25% to less than 50%
50% or more

Non-Compliance Measure
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

79.
Reporting Requirements. As discussed below, we require 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.155 We direct 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.156
B.

Reforms of Existing Rate of Return Carrier Support Mechanism

80.
For rate-of-return carriers that do not elect to receive high-cost universal service support
based on the A-CAM model, we modernize our embedded cost support mechanisms to encourage
broadband deployment and support standalone broadband. Specifically, we make 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. We
rename ICLS “Broadband Loop Support” as a component within the Connect America Fund (CAF BLS).
Further, building on proposals in the record from the carriers, we adopt 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. We expect 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.

Background

81.
Under our current rules, rate-of-return carriers recover their investment and operating
expenses associated with the provision of voice and broadband service through a variety of end-user rates,
wholesale special access rates, and universal service mechanisms. Through the Commission’s part 36
jurisdictional separations and part 69 pricing rules, the cost of providing the local loop between the
carrier’s central office and the customer’s premises is allocated to the common line (if the loop is used to
provide traditional local exchange voice service) or to special access (if the loop is used to provide
broadband-only service).157 These loop costs include the cost of the physical infrastructure between the
155

See infra section II.E.

156

We expect that the same portal, once implemented, will be used to receive geocoded information from price cap
carriers.
157

See 47 CFR §§ 32.2000 et seq., 36.151-154. “Broadband-only” loops include lines that provide voice service
that is not a traditional regulated local exchange voice service. In Reporting Guideline 8.11, NECA has concluded
(continued….)

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carrier’s central office and the customer’s premises and the maintenance expenses associated with that
infrastructure, as well as other investment and operating expenses not directly related to that
infrastructure, but attributed to the loop for the purposes of ratemaking and universal service.
82.
The common line costs are further separated between the interstate (25 percent of the
common line costs) and intrastate jurisdictions (75 percent).158 Interstate common line costs are recovered
through a combination of the federal subscriber line charge (SLC) and ICLS.159 ICLS provides carriers
with the difference between their interstate common line costs and their end-user revenues, which are
limited due to the cap on SLCs. Intrastate common line costs are recovered through local rates subject to
state regulatory authority, state universal service mechanisms where applicable, and HCLS. HCLS is a
federal high-cost universal service mechanism that reduces the amount of costs that a high-cost, rate-ofreturn carrier needs to recover through local rates.160
83.
Today, broadband-only loop costs are allocated to the interstate special access
category.161 Within the special access category, carriers allocate costs among a variety of services,
including the transmission used to provide retail wireline broadband Internet access service, through the
tariffing process and recover them from their customers. Many carriers that are members of the NECA
traffic-sensitive pool participate in its wholesale DSL tariffs.162 Frequently, the wholesale DSL services
are sold to affiliates that, in turn, offer retail broadband Internet access services to residential consumers.
Unlike the loop costs allocated to the common line, there are no universal service support mechanisms
that support high loop costs allocated to special access for broadband-only loops.
84.
Over the last five years, the Commission has sought comment multiple times on
proposals to extend high-cost universal service support to broadband-only loops. In the 2011 USF/ICC
Transformation FNPRM, the Commission sought comment on a proposal by NTCA and other
associations to create a single broadband-oriented mechanism for rate-of-return carriers to recover loop
costs that would ultimately replace the existing high-cost mechanisms.163 NTCA and the other
associations continued to refine their proposal, and in 2013, the Bureau issued a Public Notice seeking
comment on NTCA’s revised proposal to provide high-cost support for broadband-only loops.164 In April
(Continued from previous page)
that the carrier must offer a regulated basic local exchange service on a common carrier basis in order to report its
loop costs for universal service and NECA tariff and pool purposes. National Exchange Carrier Association, Inc.
Reporting Guidelines, Section 8.11 Providing Local Exchange Telephone Service Using Voice over Internet
Protocol (VoIP) Technology (issued Jan. 2008).
158

See 47 CFR § 36.154.

159

See id. §§ 54.901, 69.104. A small amount of interstate common line revenues are recovered from end users for
line port costs in excess of basic analog service and special access surcharges for loops that bypass the central office
switch. See id. § 54.901(a).
160

See id. §§ 54.1301 – 54.1310. HCLS provides support for up to 75% of a carrier’s unseparated loop costs (i.e.,
up to the full amount in the intrastate jurisdiction) above a specified threshold. Id. § 54.1310. HCLS has been
subject to an indexed cap for decades, which limits the total amount of HCLS provided to rate-of-return carriers.
161

See id. § 36.154(a).

162

See National Exchange Carrier Association, Inc., Tariff No. 5, at 8.1, 17.1. The NECA tariff offers DSL service
that includes both loop and non-loop costs associated with the provision of broadband-only service. The NECA
tariff also offers a Voice-Data service that recovers only the non-loop costs associated with a voice-broadband
bundled service because, for those customers, the loop costs are allocated to the common line. See id. at 8.1.2.(e).
163

USF/ICC Transformation Order, 26 FCC Rcd at 18048-50, paras. 1031-43. Carriers are not required to
participate in the NECA pool; indeed, they are free today to detariff their DSL transmission service.
164

Wireline Competition Bureau Seeks Comment on Options to Promote Rural Broadband in Rate-of-Return Areas,
WC Docket No. 10-90, Public Notice, 28 FCC Rcd 7201, 7202-04, paras. 2-7 (WCB 2013) (May 2013 Public
Notice).

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2014, the Commission sought comment to develop the record further on NTCA’s proposal to support
broadband-only loops and on alternative approaches, including a rule under which no new investment
would be included in cost studies used to determine HCLS and ICLS after a date certain and instead new
investment would be recovered through a new mechanism.165 At that time, the Commission articulated
four principles for a reformed system: that it calculate support amounts that remain within the existing
rate-of-return budget; that it distribute support fairly and equitably among carriers; that it be forward
looking; and that it ensure no double recovery of costs occurs.166
85.
In April 2015, NTCA filed a detailed proposal for “Data Connection Support” (DCS), a
broadband-only loop support mechanism.167 NTCA explained that DCS would operate as an “ICLS-like”
mechanism that provides carriers with the difference between their broadband-only loop costs and an
estimated amount of broadband-related loop revenues.168 In August 2015, USTelecom filed, for
discussion purposes, a proposal that would create a unified high-cost support mechanism for new
investment that would support voice and broadband-capable loops, as well as broadband-only loops,
while retaining the existing mechanisms for cost recovery for existing investment.169 USTelecom further
revised this proposal through subsequent ex parte letters.170 Meanwhile, commenters also urged the
Commission to make technical corrections to the existing rules to provide support for standalone
broadband.171 On February 5, 2016, USTelecom and NTCA filed a document that “memorializes
elements [that they] view as important to an effective overall reform.”172
2.

Support for Broadband-Only Loop Costs for Rate-of-Return Carriers

86.
We now adopt technical changes to our existing ICLS rule to provide support for rate-ofreturn carriers’ broadband-capable network loop costs, without regard to whether the loops are used to
provide voice or broadband-only services. 173 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

165

See April 2014 Connect America FNPRM, 29 FCC Rcd at 7136, para. 267.

166

Id. at 1737, para. 269.

167

NTCA/WTA/NECA April 21, 2015 Ex Parte Letter.

168

Id. at 1.

169

Letter from B. Lynn Follansbee, Vice-President – Law & Policy, USTelecom, to Marlene Dortch, Secretary,
FCC, WC Docket No. 10-90 (filed Aug. 10, 2015) (USTelecom August 10, 2015 Ex Parte Letter). USTelecom also
proposed a new mechanism for cost recovery for existing investment in loops used to provide broadband-only
service. Id.
170

See Letter from B. Lynn Follansbee, Vice-President – Law & Policy, USTelecom, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90 (filed Sept. 25, 2015) (USTelecom September 25, 2015 Ex Parte Letter);
Letter from B. Lynn Follansbee, Vice-President – Law & Policy, USTelecom, to Marlene H. Dortch, Secretary,
FCC, WC Docket No. 10-90 (filed Oct. 2, 2015) (USTelecom October 2, 2015 Ex Parte Letter).
171

See, e.g., Letter from Michael Romano, Senior Vice President – Policy, NTCA—The Rural Broadband
Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Oct. 21, 2015); Letter from Gerard
J. Duffy, Regulatory Counsel, WTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, et al. (filed Apr.
29, 2015); Letter from Glenn S. Richards, Executive Director, Voice on the Net Coalition, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90, et al. (filed July 31, 2015).
172

Letter from B. Lynn Follansbee, Vice President – Law & Policy, USTelecom, to Marlene H. Dortch, Secretary,
FCC, WC No. 10-90 (filed Feb. 5, 2016) (USTelecom/NTCA Feb. 6, 2016 Ex Parte Letter).
173

For simplicity in this discussion, we use the term voice-broadband and broadband-only to refer to services that
include a data component, even when the Internet access provided does not meet the Commission’s defined
minimum speed standard for purposes of the high-cost program of 10/1 Mbps.

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associated with broadband-only services.174 After careful consideration of the various alternatives
presented in the record, we conclude 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.175 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, we change the name of ICLS to
CAF BLS.
87.
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 broadbandonly 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.176 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.177 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 highcost 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.178
88.
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
174

Pursuant to the Commission’s longstanding “no barriers” policy, the costs of broadband-capable facilities may be
recovered through HCLS and ICLS, but only to the extent that they are allocated to the common line because they
are used to provide traditional local exchange service, i.e., voice service. Federal-State Joint Board on Universal
Service; Multi-Association Group (MAG) Plan for Regulation of Interstate Services of Non-Price Cap Incumbent
Local Exchange Carriers and Interexchange Carriers, CC Docket Nos. 96-45 and 00-256, Fourteenth Report and
Order, Twenty-second Order on Reconsideration, Further Notice of Proposed Rulemaking, and Report and Order,
16 FCC Rcd 11244, 11322, para. 200 (2001). If those facilities are used to provide broadband-only service, the
associated expenses are allocated to interstate special access. 47 CFR § 36.154(a).
175

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 broadbandcapable networks for more than a decade, and we are now adopting changes to our rules to provide support
explicitly for broadband-only lines. We therefore deny the Petition as moot.
176

Pursuant to 47 CFR § 36.154, the loop costs (“Exchange line Cable & Wire Facilities”) are assigned on an
average cost basis to common line (when the customer subscribes to traditional local exchange (voice) service) or
special access (when the customer subscribes to broadband-only service).
177

See 47 CFR §§ 54.901(a) (limiting ICLS cost recovery to the interstate common line revenue requirement),
54.1308(a) (limiting HCLS cost recovery to costs attributable to common line).
178

47 U.S.C. § 254(b)(2), (b)(3); 47 CFR § 54.7(b); see USF/ICC Transformation Order, 26 FCC Rcd at 17679,
paras. 43-45.

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associated with providing broadband-only service, called the “consumer broadband-only loop revenue
requirement” and its consumer broadband-only loop revenues. In this Order, we adopt 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.179 To avoid double-recovery, an amount
equal to the consumer broadband-only revenue requirement will also be removed from the special access
cost category.180 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.181 As described
below, we also adopt 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.182 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.183 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.184
89.
This approach meets the four principles of reform that we 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),185 it will allow carriers to receive federal highcost 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.
90.
And finally, the reforms we adopt 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. We find 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
179

See infra section II.C.

180

Id. 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.
181

Consumer broadband-only loop charges are discussed in section II.C, below. 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. Id.
182

See infra section II.B.6.

183

Id.

184

Id.

185

See 47 U.S.C. § 254(b) (declaring principles upon which the universal service program should be based,
including other principles that the Joint Board and the Commission determine are necessary); USF/ICC
Transformation Order, 26 FCC Rcd at 17685, para. 64.

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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.186 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. We find, however, that expanding the CAF-BLS mechanism to include broadbandonly 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, we considered the
“bifurcated” approach developed in the record by USTelecom with significant input from other parties.187
91.
The latter approach would create a wholly new mechanism and bifurcate investment and
associated expenses between old and new mechanisms. We appreciate the good faith efforts of numerous
parties to determine how such a mechanism might be implemented and to estimate its potential impact.188
While it had a number of merits, we have come to the conclusion that the approach we adopt today is
simpler and sufficient to accomplish our goals for reform.189 We therefore choose 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.
92.
Consumer broadband loop revenue benchmark. For the purpose of calculating CAF
BLS, we adopt 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

186

NTCA/WTA/NECA April 21, 2015 Ex Parte Letter.

187

Letter from Michael Romano, Senior Vice President – Policy, NTCA—The Rural Broadband Association, to
Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Dec. 17, 2015); NTCA Dec. 15, 2015 Ex Parte
Letter; Letter from Michael Romano, Senior Vice President – Policy, NTCA—The Rural Broadband Association, to
Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Nov. 24, 2015) (NTCA November 24, 2015 Ex
Parte Letter); Letter from Michael Romano, Senior Vice President – Policy, NTCA—The Rural Broadband
Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Nov. 6, 2015) (NTCA November
6, 2015 Ex Parte Letter); USTelecom August 10, 2015 Ex Parte Letter.
188

See, e.g., Letter from Regina McNeil, Vice President of Legal, National Exchange Carrier Association, to
Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Dec. 16, 2015); Letter from Regina McNeil, Vice
President of Legal, National Exchange Carrier Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No.
10-90 (filed Dec. 15, 2015); Letter from Regina McNeil, Vice President of Legal, National Exchange Carrier
Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Dec. 11, 2015) (NECA December
11, 2015 Ex Parte Letter); Letter from Regina McNeil, Vice President of Legal, National Exchange Carrier
Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Dec. 2, 2015); Letter from Regina
McNeil, Vice President of Legal, National Exchange Carrier Association, to Marlene H. Dortch, Secretary, FCC,
WC Docket No. 10-90 (filed Nov. 19, 2015) (NECA November 19, 2015 Ex Parte Letter); Letter from Regina
McNeil, Vice President of Legal, National Exchange Carrier Association, to Marlene H. Dortch, Secretary, FCC,
WC Docket No. 10-90 (filed Nov. 17, 2015); Letter from Regina McNeil, Vice President of Legal, National
Exchange Carrier Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Nov. 13, 2015);
Letter from Regina McNeil, Vice President of Legal, National Exchange Carrier Association, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90 (field Nov. 6, 2015); Letter from Regina McNeil, Vice President of Legal,
National Exchange Carrier Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Sept.
11, 2015).
189

USTelecom August 10, 2015 Ex Parte Letter.

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model-based support on an average revenue per user (ARPU) of $75.190 That ARPU, however, was an
all-inclusive estimate of end-user revenues for broadband and voice services, while the benchmark we
adopt 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 $77.81.191 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.192 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,193 the remainder of which will be recovered through CAF BLS,
subject to the budgetary constraint discussed below.
93.
There are two cases in which we 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.194 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.
94.
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 $504,000.195 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

190

CAM Inputs Order, 29 FCC Rcd at 4036-4039, paras. 172-76. The Commission analyzed several sources of data
in the record regarding rates for voice and data-only services in areas where 4/1 Mbps service was available, and
used its predictive judgment to forecast that $75 per subscriber per month was a reasonable expectation of revenues.
Id. We note that it may be reasonable for carriers to expect higher revenues per subscriber where they offer 10/1
Mbps service, as they are obligated to do pursuant to this Order. See supra n. 107.
191

FCC Reasonable Comparability Benchmark Calculator, https://www.fcc.gov/encyclopedia/reasonablecomparability-benchmark-calculator (last visited Mar. 29, 2016).
192

NECA November 19, 2015 Ex Parte Letter, Attach. 1, Exh. 1. We note that carriers already are collecting $6.50
in SLC revenues before they are able to receive ICLS; the revenue imputation figure we adopt today ($42) is $35.50
above that SLC amount.
193

The difference between $75 and $34.95 is $40.05. The difference between $77.81 and $34.95 is $42.86.

194

As discussed more fully in Section II.C below, carriers will be permitted – but not required – to tariff a consumer
broadband-only loop service charge.
195

Conversely, if a carrier’s consumer broadband monthly rate is lower than would otherwise be imputed (possible
due to forecasting error), then the higher number will be used. For example, if a carrier with 1,000 loops has a
consumer broadband rate of $41, but based on actual data filed for true-up purposes its consumer broadband revenue
requirement is higher than $42 per loop, then the imputed revenue amount is $504,000, not $492,000.

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requirement and its consumer broadband loop revenue requirement are met even when the budgetary
constraint is applied.
3.

Operating Expense Limitation196

95.
Background. The Commission has long been concerned that companies not receive more
support than is necessary to provide service and that carriers subject to rate-of-return regulation have
sufficient incentive to be prudent and efficient in their expenditures, and in particular operating expenses.
For example, in the 2011 USF/ICC Transformation Order, the Commission updated the corporate
operations expense limitation then applicable to HCLS and extended it to ICLS.197 Last October, the
Commission published a non-exhaustive list of expenses that may not be recovered through the high-cost
program.198
96.
As part of ongoing efforts to develop a package of targeted reforms to the existing rateof-return mechanisms, the rate-of-return associations proposed that the Commission adopt limits on
operating expenses (opex), similar to what the Commission adopted in 2011 for corporate operations
expenses.199 Specifically, these commenters proposed comparing all companies’ monthly expenses per
location to a regression-model-generated monthly expense per location plus two standard deviations.200
They suggested that maintenance, network support/network operations/general, benefits, and rent
expenses would be included in the regression, while corporate operations, depreciation, return on
investment, and taxes would be excluded.201 They calculated the standard deviations separately for two
density size groups, using 1.5 locations per square mile as the threshold.202
97.
The relationship between operating expenses per location and the variables initially
proposed by the rate-of-return representatives for the regression (e.g. number of locations in the study
area and density) was not linear, creating a statistical problem. To address this issue, following
discussion with Commission staff, industry representatives submitted calculations showing the use of a
double log regression using the same variables as originally proposed.203

196

We defer 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.
197

USF/ICC Transformation Order, 26 FCC Rcd at 17747-48, paras. 227-233.

198

See All Universal Service High-Cost Support Recipients are Reminded that Support Must be Used for its
Intended Purpose, WC Docket Nos. 10-90, 14-58, Public Notice, FCC 15-133 at 1 (2015) (High Cost Oct. 19, 2015
Public Notice).
199

Letter from Gerard J. Duffy, Regulatory Counsel, WTA – Advocates for Rural Broadband, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90, at 2 (filed May 29, 2015) (filed summarizing ex parte with WTA, ITTA,
NTCA, USTelecom, NECA, and individual companies) (RoR Representatives May 29, 2015 Ex Parte Letter). See
also Letter from B. Lynn Follansbee, Vice-President – Law & Policy, USTelecom, to Marlene H. Dortch, WC
Docket No. 10-90, Att. at 3 (filed Feb. 3, 2016) (proposing reasonable limits on operating expenses as module of
reform); (Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary,
FCC, WC Docket No. 10-90 (filed Jan. 29, 2016) (reporting discussion of potential operating expense limits); Letter
from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC, WC
Docket No. 10-90 et al. at 3 (filed Nov. 2, 2015) (noting that reasonable limits on operating expenses would in part
achieve all of the principles previously articulated by the Commission for reform).
200

RoR Representatives May 29, 2015 Ex Parte Letter, Att. A at 1.

201

Id.

202

Id. at 2.

203

NECA, FCC Requested Scenarios for Opex Limitations, WC Docket No. 10-90 (filed Sept. 11, 2015).

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98.
Discussion. We adopt the regression methodology submitted by industry representatives
with a few modifications to conform the limits better to the nature of the data. 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.204 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.
99.
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.205 The regression formula to be used is
as follows:206
Y = α + β1X1 + β2X2 + β3X3,207
Y is the natural log of opex cost per housing unit,
α 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 β1,

X2 is the natural log of density (number of housing units per square mile), with a
regression coefficient β2, and
X3 is the square of the natural log of density, with a regression coefficient β3.
100.
We do not agree with commenters who argue that we should only limit operating
expenses for carriers with costs above the two standard deviations.208 Indeed, we note that using two
standard deviations would subject only an estimated 17 study areas to an opex limit. We conclude that
using 1.5 standard deviations – which we estimate, based on last year’s data, would have impacted
roughly 50 carriers – more appropriately advances the Commission’s goal of providing better incentives
204

We note 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.
205

For purposes of this regression, we define the number of locations in the study area as the number of housing
units per the most recently available U.S. Census data in each census block in that study area. U.S. Census data is
publicly available and was used in the 100% overlap determination. Wireline Competition Bureau Publishes
Preliminary Determination of Rate-of-Return Study Areas 100 Percent Overlapped by Unsubsidized Competitors,
WC Docket No. 10-90, Public Notice, 30 FCC Rcd 8179, 8182, para. 8 (WCB 2015). If a census block is partially
within a study area, the number of housing units in that census block will be allocated based upon the percentage
area of the census block within the study area.
206

Costs that are limited pursuant to section 54.305 should be excluded from the regression analysis and from the
study area opex limit calculation.
207

βx is the regression coefficient for each of the regression variables.

208

See RoR Representatives May 29, 2015 Ex Parte Letter.

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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 we continued funding excessive operating expenses for
certain companies at current levels.
101.
We decline 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. We see 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 we 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, we adopt a uniform standard deviation formula for purposes of setting a limit based on
the regression results.
102.
In addition, unlike the industry’s original proposal, we include corporate expenses
(calculated according to the current limitation) within the regression. These expenses are a significant
portion of carrier operating expenses, and we conclude 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.209 Moreover, we are 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.
103.
NTCA has argued that “reasonable transitions” are necessary when implementing
limitations on support.210 We conclude that a transition is appropriate to allow carriers time to adjust their
operating expenditures. Therefore, we conclude 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.211
104.
Within 30 days of the effective date of this Report and Order, we direct NECA to submit
to USAC a schedule of companies subject to limits under the adopted formula.212 We also direct 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.

209

See Universal Service Fund 2014 Submission of 2013 Study Results by the National Exchange Carrier
Association, Inc., http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/Monitor/usf14af.zip; see
also RoR Representatives May 29, 2015 Ex Parte Letter, Attach. A at 1.
210

NTCA Dec. 15, 2015 Ex Parte Letter.

211

For example, if a carrier’s operating expenses exceed the cap by $1,000 in the first year of implementation of the
cap, that carrier’s support would be reduced by $500 in that year. In the second year of implementation, if the
carrier’s operating expenses still exceeded the cap by $1,000, the carrier’s support would be reduced by $1,000.
212

We direct NECA to exclude data for Alaska carriers when making these calculations.

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Federal Communications Commission
4.

FCC 16-33

Capital Investment Allowances213

105.
Background. Because federal universal service support is finite, it is the Commission’s
goal to use that support as efficiently as possible to preserve existing service and to advance deployment
of broadband services in all areas of the United States. We note that some areas served by rate-of-return
carriers have substantial deployment of broadband by both incumbent LECs and competitors, while others
have little to none. For example, according to December 2014 Form 477 data, an estimated 14 percent of
the locations in census blocks served by rate-of-return carriers lack access even to 4/1 Mbps terrestrial
fixed Internet access service, while 22 percent of the locations in census blocks served by rate-of-return
carriers lack access to 10/1 Mbps terrestrial fixed broadband service.214 We also note that disparate
deployment exists within individual states,215 as well as across the country, with carriers from New York
to California reporting no 10/1 Mbps broadband deployment to any of their census blocks.216 The
Commission is eager to target support more effectively so that those areas with less broadband are able to
catch up to those areas that already have substantial deployment.
106.
In September 2013, NTCA proposed that the Commission adopt a Capital Budget
Mechanism that “would provide, in a streamlined way, transparent carrier-specific investment budgets
(for purpose of prospective investment support eligibility) that reflect local conditions and are tied to that
carrier’s individualized need to replace aging plant.”217 Essentially, capex allowances would determine a
carrier’s universal service-supportable loop plant investment based upon that individual carrier’s
inflation-adjusted depreciated loop plant, subject to Commission adjustment if the carrier is deemed to
have inefficient levels of investment, and spread over time in coordination with the replacement of old
plant.218 The Commission sought comment on NTCA’s proposal in the April 2014 Connect America
FNPRM.219 NTCA continued to refine its proposal since then.220
107.
In April 2015, NTCA, WTA, and NECA submitted a more detailed explanation of the
original capex allowance proposal.221 The industry proposed to establish a Total Allowed Loop Plant
Investment (TALPI)222 based on each carrier’s inflation-adjusted total loop investment and accumulated
depreciation.223 Using each carrier’s TALPI, an Annual Allowable Loop Plant Investment (AALPI)224 is
213

We defer 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.
214

See Federal Communications Commission, Broadband Deployment Data from FCC Form 477,
https://www.fcc.gov/encyclopedia/broadband-deployment-data-fcc-form-477 (last visited Mar. 29, 2016).
215

See id.

216

See id.

217

Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC,
WC Docket No. 10-90, at 2 (filed Sept. 12, 2013). For purposes of this Order, we refer to the Capital Budget
Mechanism as a “capex limit.”
218

Id.

219

April 2014 Connect America FNPRM, 29 FCC Rcd at 7139, para. 275.

220

See, e.g., Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90 (filed May 1, 2015); Letter from Michael R. Romano, Senior Vice President
– Policy, NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Oct. 31, 2014).
221

NTCA/WTA/NECA April 21, 2015 Ex Parte Letter.

222

The proposal used the term “Total Allowable Loop Expense,” which we change here to “Annual Allowable Loop
Plant Investment,” a more precise description of the included expenditures.
223

Id., Proposed Rules Attach at 4-6 (“Part Two: Rules Establishing Support Limitations,” Section C: Capital
Expenditure Limitations).

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calculated using an AALPI function that annualizes the amount of TALPI for each carrier.225 The AALPI
is designed such that in any given year a carrier’s AALPI will never be less than 5 percent, nor greater
than 20 percent, of its inflation-adjusted total loop investment, prior to any of the adjustments described
below.226 For example, a carrier with all new loop plant that has no depreciation would have an AALPI
that is equal to 5 percent of its inflation-adjusted investment in that plant while a carrier with older, fully
depreciated, loop plant will have an AALPI equal to 20 percent of its inflation-adjusted investment in that
plant.
108.
The associations also proposed a number of other terms for the capex allowances. First,
there would be a Minimum Annual Loop Expenditure such that 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 Plant Investment.227 Second, there would be a Carry Forward
Adjustment such that Loop Plant Capital Investment in a year in excess of the AALPI may be carried
forward to future years and included in AALPI for such years, but may not cause the AALPI to exceed
the Total Allowed Loop Plant Investment. However, in the event a carrier’s Loop Plant Capital
Investment is below the Annual Allowed Loop Expenditure in a given year, there will be no carry forward
to future years of unused Annual Allowed Loop Plant Investment.228 Third, the associations proposed
that a carrier could adjust its AALPI for loop plant capital expenditures associated with any of the
following: (1) areas where there are currently no existing wireline local loop facilities in the study area;
(2) areas where grant funds are used for Loop Plant Investment; (3) areas covered by a pre-existing loan
that was in place before a certain date; and (4) projects where the carrier had awarded a contract to a
vendor for construction after a certain date. A carrier would add the applicable adjustment to the amount
of AALPI for the year in which the additions to plant are booked to its associated capital accounts.229
Finally, the proposal included a construction limitation adjustment to ensure that carriers could not obtain
support for excessive per-location construction investment. The associations defined Maximum Average
Per-Location Construction to be equal $10,000 times the annual GDP-GCI times (Loop Cap Adjustment
Factor times Construction Limit Factor) where the Loop Cap Adjustment Factor currently equals $3,000
divided by the unadjusted per-line support amount and the Construction Limit Factor equals the study
area total loop investment per location divided by the overall total investment per location for all rate-ofreturn study areas.230
109.
In August 2015, NTCA, USTelecom, ITTA, WTA, the Eastern Rural Telecom
Association, and NECA submitted a revised capex allowance proposal designed “to ensure that a greater
proportion of USF resources are directed not only toward areas in which network plan is depreciated, but
also toward locations where consumers are lacking access to the then-current speed thresholds established
by the Commission for universal service.”231 This proposal would adjust a carrier’s AALPI, i.e. the
carrier’s annual budget for universal service-eligible investment, based on the company’s broadband
deployment. This would involve three steps:
(Continued from previous page)
224
The proposal used the term “Annual Allowable Loop Expense,” which we change here to “Annual Allowable
Loop Plant Investment,” a more precise description of the included expenditures.
225

NTCA/WTA/NECA April 21, 2015 Ex Parte Letter, Proposed Rules Attach at 4-6.

226

Id.

227

Id.

228

Id.

229

Id.

230

Id.

231

Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC
WC Docket No. 10-90 (filed Aug. 31, 2015) (NTCA August 31, 2015 Ex Parte Letter).

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(a)
(b)
(c)

FCC 16-33

Determine a target broadband deployment level of all rate-of-return companies
based on the national average broadband availability (target availability) for all
rate-of-return carriers using Form 477 data;
Calculate the difference between each companies broadband availability and the
target availability; and
Increase or reduce a carrier’s AALPI based on this difference such that (i) for every
percentage point that a carrier’s broadband availability exceeds the target
availability, the carrier’s AALPI would be reduced by one half of a percentage
point and (ii) for every percentage point that a carrier’s broadband availability is
below the target availability, the carrier’s AALPI would be increased by one half of
a percentage point. 232

For example, if a carrier had 48 percent broadband availability (defined at then-current broadband
standards) and the national target broadband availability is 68 percent, that carrier’s AALPI would be
increased by 10 percent (68 percent minus 48 percent, divided by 2). Thus, if that company had a $1
million AALPI, its “annual budget” for eligible investment would be increased to $1.1 million.
110.
Discussion. We adopt the revised capex allowance proposed by the rate-of-return
industry associations with minor modifications.233 We believe 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 by rate-of-return
carriers. We direct 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.234 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, we find 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.235 We do, however, make several adjustments
to the industry’s proposal.236
232

Id. at 2-3.

233

For clarity, we specify that we adopt the proposal referred to by the rate-of-return industry as the revised Capital
Budget Mechanism. See NTCA August 31, 2015 Ex Parte Letter.
234

See Federal Communications Commission, Broadband Deployment Data from FCC Form 477,
https://www.fcc.gov/encyclopedia/broadband-deployment-data-fcc-form-477 (last visited Mar. 29, 2016). The
weighted average based on the December 2014 FCC Form 477 data was 68%.
235

Several commenters argue that a streamlined waiver process is needed to ensure that carriers can seek a waiver if
it needs to make investments greater than those allowed by the capital budget limitation to provide broadband to the
carrier’s customers. Letter from Larry D. Thompson, Vantage Point Solutions, to Marlene H. Dortch, Secretary,
FCC, WC Docket No. 10-90, et al. at 3 (filed Jan. 28, 2016); Letter from Michael R. Romano, Senior Vice President
– Policy, NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Feb. 18, 2016) (on behalf of
NTCA and Larry Thompson, Vantage Point Solutions) (NTCA/Vantage Point Feb. 18, 2016 Ex Parte Letter). Any
carrier can file a waiver under the Commission’s existing rules. To enable expeditious treatment of any waiver
request, a carrier should provide an explanation of why it is in the public interest for that carrier to be allowed to
recover costs above the amounts estimated for purposes of establishing that carrier’s deployment obligation,
recognizing that the purpose of the capital allowance is to provide those carriers, with deployment less than the
average level, the opportunity to catch up to those that have already deployed broadband at or above the average
level. Specific factual evidence will assist the Commission in evaluating any such requests. Those carriers who
cannot meet their deployment obligation even by expending the full amount of their TALPI allowance should
submit information regarding the costs expected to be incurred to meet the deployment obligation certified by an
engineer licensed in the state(s) in which the construction will take place. See NTCA/Vantage Point Feb. 18, 2016
(continued….)

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111.
First, we use the TALPI as the basis for calculating loop plant investment limitations for
both HCLS and CAF-BLS, not just for HCLS.237 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, we modify 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.238 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.
112.
Third, we refine the AALPI adjustment for areas covered by a pre-existing loan. We
conclude 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. We make 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.
113.
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, we adjust the AALPI by
one percentage point. We find 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.
114.
Within 30 days of the release of a Public Notice announcing that the Commission has
obtained the appropriate Paperwork Reduction Act approval, and for each subsequent quarterly or annual
data reporting period, we direct 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

(Continued from previous page)
Ex Parte Letter at 2 (stating that a carrier seeking a waiver to exceed capital budget allowances should “permitted to
submit engineering documents certified and stamped by a professional engineer showing what those actual costs
are”).
236

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.
237

NTCA/WTA/NECA April 21, 2015 Ex Parte Letter.

238

We note 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.

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FCC 16-33



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

115.
USAC shall validate all calculations received from NECA before making disbursements
subject to any support reductions due to the Capital Investment Allowance.
5.

Eliminating Subsidies in Areas Served by an Qualifying Competitor

116.
In this section, we take further steps to target high-cost support efficiently to those areas
that will not be served by private sector investment alone. First, we prohibit rate-of-return carriers from
receiving CAF BLS in areas that are served by a qualifying unsubsidized competitor. Second, we adopt a
challenge process to determine which areas are served by unsubsidized competitors building on proposals
submitted in the record.239 Third, as proposed by several commenters,240 we adopt 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, we adopt 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.
117.
Background. The Commission has long been committed to eliminating inefficiencies and
instances in which “universal service provides more support than necessary to achieve our goals.”241 In
the 2011 USF/ICC Transformation Order, the Commission adopted a rule to eliminate high-cost
universal service support in any rate-of-return carrier study area where an unsubsidized competitor or a
combination of unsubsidized competitors offers voice and broadband services that meet the
Commission’s service obligations throughout the study area, 242 commonly referred to as the 100 percent
overlap rule. It delegated to the Bureau the task of implementing the rule. The Commission also sought
comment in the 2011 USF/ICC Transformation FNPRM on adopting a rule to eliminate support for lines
in areas subject to competitive overlap and several methods for adjusting support in areas with less than

239

USTelecom/NTCA Feb. 5, 2016 Ex Parte Letter; Letter from Michael R. Romano, Senior Vice President –
Policy, NTCA, the Rural Broadband Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90
(filed July 16, 2016) (NTCA July 16, 2016 Ex Parte Letter); Letter from Michael R. Romano, Senior Vice President
– Policy, NTCA, the Rural Broadband Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90
(filed Feb. 5, 2016) (NTCA Feb. 5, 2016 Ex Parte Letter).
240

USTelecom/NTCA Feb. 5, 2016 Ex Parte Letter; Letter from Trey Judy, Director – Regulatory, Hargray, to
Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 at 4 (filed Feb. 5, 2016) (Hargray Ex Parte Letter).
241

USF/ICC Transformation Order/FNPRM, 26 FCC Rcd at 17766-67, para. 280.

242

See id. at 17766-68, paras. 280-84.The Commission defined an unsubsidized competitor as “a facilities-based
provider of residential fixed voice and broadband service that does not receive high-cost support.” Id. at 17701-02,
paras. 103-104. See also 47 CFR §54.5.

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100 percent competitive overlap.243 We subsequently codified the 100 percent overlap rule in April
2014.244
118.
In the April 2014 Connect America Order, the Commission clarified that rate-of-return
carriers have no obligation to extend broadband-capable infrastructure in any census block that is served
by an unsubsidized competitor meeting the Commission’s current standards. The Commission stated,
“[w]e cannot and will not condone new investment subsidized by universal service funds to occur in areas
that are already served by marketplace forces, and thus interpret our broadband public interest obligation
consistent with that policy.”245 In the accompanying April 2014 Connect America FNPRM, the
Commission proposed to adopt a rule that no new investment after a date certain be recovered through
universal service support mechanisms when such investment occurs in areas already served by a
qualifying competitor.246
119.
In July 2015, the Bureau adopted a methodology for determining 100 percent overlapped
areas, released a preliminary list of study areas subject to 100 percent overlap, and sought comment on
that preliminary determination.247 Last December, the Bureau released its final determination, concluding
that only one study area out of the fifteen study areas on the preliminary list was completely
overlapped.248
120.
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,249 the Commission has emphasized its desire to “distribute
universal service funds as efficiently and effectively as possible.”250 Support should be used to further the
243

See USF/ICC Transformation FNPRM, 26 FCC Rcd at 18058-59, paras. 1073-1076; see also id. at 18050, para.
1038. In particular, the Commission sought comment on adopting a rebuttable presumption that all costs are divided
on a pro rata basis among access lines and allocated to the census block in which the lines are located, with a
resulting reduction in support for the specific number of lines within such census blocks.
244

April 2014 Connect America Order, 29 FCC Rcd at 7068, para. 54; see also 47 CFR § 54.319. When codifying
the rule, the Commission failed to clarify that the elimination of high-cost support for those carriers that are
100%overlapped does not include Connect American Fund intercarrier compensation (CAF-ICC). When it
originally adopted the rule in 2011, the Commission concluded that support would be frozen at the amounts received
in the prior calendar year – when CAF-ICC support did not exist – and then phased down. Thus, carriers that are
100% overlapped will not see any reductions in their CAF-ICC support.
245

April 2014 Connect America Order, 29 FCC Rcd at 7073, para. 68.

246

See April 2014 Connect America FNPRM, 29 FCC Rcd at 7135-36, paras. 263-66. The Commission has already
prohibited price cap carriers from investing in areas served by an unsubsidized competitor. USF/ICC
Transformation Order, 26 FCC Rcd at 17722, para. 149. To ensure compliance with the requirement that price cap
carriers use support in areas without an unsubsidized competitor, the carrier must “be prepared to provide asset
records demonstrating the existence of facilities, such as a DSLAM and/or middle mile plant that service locations
in census blocks where there is no unsubsidized competitor.” See id. at 17722, para. 149, n. 238. In response to the
April 2014 Connect America FNPRM, commenters noted the inability of price cap carriers to invest in areas served
by an unsubsidized competitor and supported adoption of a similar rule for rate-of-return carriers. See NCTA Aug.
2014 Comments at 3-5.
247

See Wireline Competition Bureau Publishes Preliminary Determination of Rate-of-Return Study Areas 100
Percent Overlapped by Unsubsidized Competitors, WC Docket No. 10-90, Public Notice, 30 FCC Rcd 8179 (WCB
2015) (July 2015 Overlap Methodology PN).
248

In the Matter of Connect America Fund, WC Docket No. 10-90, Order, DA 15-1419 (WCB 2015) (100 Percent
Overlap Order).
249

See Connect America Fund et al., WC Docket No. 10-90 et al., Report and Order, 29 FCC Rcd 15644, 15649,
para. 15 (rel. Dec. 18, 2014) (December 2014 Connect America Order).
250

USF/ICC Transformation Order, 26 FCC Rcd at 17673, para. 20.

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goal of universal voice and broadband, and not to subsidize competition in areas where an unsubsidized
competitor is providing service.251 Universal service is ultimately paid for by consumers and businesses
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. 252
121.
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, we now adopt a rule to
eliminate CAF BLS in competitive areas. Building on proposals submitted in the record by NTCA and
USTelecom,253 and taking into account our experience implementing similar requirements in price cap
areas and the 100 percent overlap rule in rate-of-return areas,254 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.255 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.
122.
The first step in implementing such a rule is to conduct a process to determine which
census blocks are competitively served. We now adopt 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.256
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
251

NTCA and USTelecom recognize that targeting support to areas where no other provider is offering qualifying
voice and broadband service is “essential to a broadband reform effort.” USTelecom/NTCA Feb. 5, 2016 Ex Parte
Letter.
252

See Vermont PSB v. FCC, 661 F.3d 54, 65 (D.C. Cir. 2011) (recognizing the Commission’s “responsibility to be
a prudent guardian of the public’s resources.”).
253

USTelecom/NTCA Feb. 5, 2016 Ex Parte Letter; Letter from Michael R. Romano, Senior Vice President –
Policy, NTCA, the Rural Broadband Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90
(filed July 16, 2016); NTCA Feb. 5, 2016 Ex Parte Letter). See also Letter from Gerald J. Duffy, Regulatory
Counsel, WTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Feb. 4, 2016) (WTA Feb. 4,
2016 Ex Parte Letter).
254

See, e,g., ITTA Nov. 19 ex parte (emphasizing importance of verified evidence that unsubsidized competitor is
present in the census block and noting that the mechanics of the challenge process utilized for 100% competitive
overlap are sound).
255

In the context of other proceedings, the Commission will continue to consider issues regarding the consistent
regulatory treatment of rate-of-return carriers and their competitors.
256

In the April 2014 Connect America FNPRM, the Commission proposed creating a safe harbor that would allow
rate-of-return carriers to include new investment in cost studies used to determine HCLS or ICLS. Specifically, a
rate-of-return carrier could publicly announce the intent to deploy to a particular census block. If no competitor
responded within a specified period of time that it is served the area in question, the rate-of-return carrier could then
presume that no other provider was serving the area, and new investment in such areas would be eligible for cost
recovery, consistent with any applicable rules. See April 2014 Connect America Order and/or FNPRM, 29 FCC
Rcd at 7136, paras. 265. Commenters argued that the safe harbor proposal was unreasonable because rate-of-return
carriers do not maintain asset records to the census block level, and a requirement to do so would be unduly
burdensome. See, e,g, ITTA Aug. 2014 Comments at 7-8. Commenters also argued that a requirement to publicly
post build-out plans in advance of deployment would put rate-of-return carriers at a competitive disadvantage. See
ITTA Aug. 2014 Comments at 7-8; TCA Aug. 2014 Comments at 6. Given these expressed concerns, commenters
further developed the record on alternative on other ways to implement a competitive overlap rule. See, e.g., NTCA
Feb. 5, 2016 Ex Parte Letter.

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USTelecom,257 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.258 If they fail to submit such information in response to the Bureau’s Public Notice, the
block will not be deemed competitively served.259 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.
123.
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.260 The Form
477 data collection is mandatory, and Form 477 filers must certify to the accuracy of their data.261 We
direct the Bureau to utilize the most recent publicly available data at the time it releases the initial Public
Notice.
124.
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.262 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.263
Therefore, we direct 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.
257

USTelecom/NTCA Feb. 5, 2016 Ex Parte Letter; NTCA Feb. 5, 2016 Ex Parte Letter.

258

Documentary evidence should provide information sufficient to identify the geographic area where service is
offered, such as a map of a local franchise area, street addresses or other information that would enable interested
parties to determine the specific area allegedly served on a map.
259

One lesson learned from the Phase II challenge process was the difficulty of processing a large number of excel
files containing information for nearly 180,000 individual census blocks. We direct the Bureau to work with USAC
to develop an online portal for the submission of the requisite information to the Administrator for initial processing
in the rate-of-return competitive overlap process. The Administrator will prepare for the Bureau a list of the census
blocks where the competitor has submitted the requisite certification with evidence. We note that the process will
not be implemented until approval is obtained for the information collection under the Paperwork Reduction Act.
260

FCC Form 477 requires carriers to report deployment data on a census-block basis. Census blocks are the
smallest geography for which the Census Bureau collects population data, and the United States comprises
approximately 11 million census blocks. See U.S. Census Bureau, 2010 Census Summary File 1, Technical
Documentation, at A-10 and A-12 (Sept. 2012), available at http://www.census.gov/prod/cen2010/doc/sf1.pdf; U.S.
Census Bureau, 2010 Census Summary File 1 Urban/Rural Update (Sept. 2012). According to 2010 Census
documentation, census blocks “are statistical areas bounded by visible features, such as streets, roads, streams, and
railroad tracks, and by nonvisible boundaries, such as selected property lines and city, township, school district, and
county limits and short line-of-sight extensions of streets and roads.” There are over 700,000 rate-of-return census
blocks, with entities not affiliated with the incumbent that offer voice service in a state reporting fixed terrestrial
broadband with speeds of at least 10/1 Mbps in roughly 147,000 of those blocks in the December 2014 FCC Form
477 data collection.
261

Modernizing the FCC Form 477 Data Program, WC Docket No. 11-10, Report and Order, 28 FCC Rcd 9887,
9897-98, paras. 23-24 (2013) (Form 477 Order). Parties face criminal penalties for knowingly and willingly making
materially false, fictitious or fraudulent statements or representations in official matters before the Commission. 18
U.S.C. § 1001.
262

USF/ICC Transformation Order, 26 FCC Rcd at 17767-68, para. 283. See supra paras. 27-28 (providing
additional information on the latency and usage allowance obligations).
263

December 2014 Connect America Fund Order, 29 FCC Rcd at 15649, para. 15.

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125.
We are 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.264 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, we 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.265
The areas served by rate-of-return carriers encompass “many rural and remote areas of the country.”266
Similarly, we are 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.267 We find 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.268
126.
The Commission currently does not collect comprehensive, block-level data on
broadband latency or monthly usage allowances, as it does for broadband speed.269 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.270 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 we now establish as our baseline requirement for purposes
of implementing the competitive overlap rule.271 Therefore, we conclude 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.

264

See, e.g., Letter from Michael R. Romano, Senior Vice President – Policy, NTCA The Rural Broadband
Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Oct. 26, 2015).
265

Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a
Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the
Telecommunications Act of 1996, as amended by the Broadband Data Improvement Act, 2015 Broadband Progress
Report and Notice of Inquiry on Immediate Action To Accelerate Deployment, GN Docket No. 14-126, 30 FCC
Rcd 1375, 1403, 1407-08, paras. 45, 55 (2015).
266

See April 2014 Connect America Order and/or FNPRM, 29 FCC Rcd at 7134, para. 258.

267

See WTA Feb. 4, 2016 Ex Parte Letter at 3-4.

268

47 U.S.C. § 254. See USTelecom/NTCA Feb. 6, 2016 Ex Parte Letter, Att. At 1 (stating that for purposes of the
competitive screen “[q]ualifying broadband service must provide 10/1 Mbps”). If the Commission modifies its
requirements for the high-cost program at a future date, that new definition would be used thereafter.
269

See FCC, A Basic Guide to the Connect America Phase II Challenge Process at 2 (July 31, 2014),
http://www.fcc.gov/wcb/tapd/Challenge_Process/ChallengeProcessGuide7-31-14.docx.
270

According to the 2015 Measuring Broadband America Report, average round-trip latency ranged from 14
milliseconds to 52 milliseconds across all terrestrial technologies during peak periods. See FCC Office of
Engineering and Technology and Consumer and Governmental Affairs Bureau, 2015 Measuring Broadband
America Fixed Broadband Report at 17, http://data.fcc.gov/download/measuring-broadband-america/2015/2015Fixed-Measuring-Broadband-America-Report.pdf. In 2013, the Bureau required price cap carriers receiving Phase
II model-based support to provide broadband service with a round-trip latency of 100 milliseconds or less. Connect
America Fund, WC Docket No. 10-90, Report and Order, 28 FCC Rcd 15060, 15068-70, paras. 19-22 (WCB 2013)
(Phase II Service Obligations Order).
271

FCC, Urban Rate Survey Data, 2015 Urban Rate Broadband Survey Results,
https://www.fcc.gov/encyclopedia/urban-rate-survey-data.

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127.
This is similar to the approach taken by the Bureau in the Connect America Fund Phase II
challenge process.272 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.
128.
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.273 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.274 We note 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.275
129.
We will exclude competitive Eligible 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.” We also conclude, 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.276 If we 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, we
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.277
272

See FCC, A Basic Guide to the Connect America Phase II Challenge Process at 2 (July 31, 2014),
http://www.fcc.gov/wcb/tapd/Challenge_Process/ChallengeProcessGuide7-31-14.docx.
273

USF/ICC Transformation Order, 26 FCC Rcd at 17767-68, para. 283. See 47 CFR § 54.5.

274

The Bureau used the same approach to identifying voice providers in developing the model adopted for the offer
of Phase II support to price cap carriers and also in the Connect America Fund Phase II challenge process. Connect
America Fund, WC Docket No. 10-90, Report and Order, 28 FCC Rcd 7211, 7215-16, paras. 9-11 (WCB 2013).
During the challenge process, parties are free to present any evidence that refutes this presumption.
275

See, e.g., 47 CFR § 9.5 (E-911); 47 CFR Part 1, subpart Z.

276

In 2013, the Bureau recognized that many rate-of-return ILECs would be meeting their broadband public interest
obligations through an affiliated Internet service provider. See Connect America Fund, WC Docket No. 10-90,
Order, 28 FCC Rcd 7227, 7228-79, para. 6 (WCB 2013) (clarifying that, for purposes of rate-of-return carriers
reporting regarding their obligation to provide broadband service to customers upon reasonable request, the relevant
“customer” is the end-user customer of the retail broadband Internet access service regardless of whether the
customer purchases the service directly from the ETC or from an Internet service provider that purchases the ETC’s
wholesale broadband transmission service). See Letter from Michael R. Romano, Senior Vice President – Policy,
NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Oct. 29, 2015) (NTCA Oct. 29, 2015 Ex
Parte Letter); Letter from Anthony K. Veach, Counsel for Panhandle Telephone Cooperative, Inc., to Marlene H.
Dortch, Secretary, FCC, WC Docket No. 10-90 (filed June 17, 2015); Letter from Dustin Johnson, Vice President of
Consulting, Vantage Point, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Dec. 4, 2015).
277

We note that, according to the December 2014 Form 477 deployment data, there are instances where rate-ofreturn carriers are utilizing technologies other than copper to deploy 10/1 Mbps or faster broadband. For instance,
nationwide, cable facilities are the sole means of delivering broadband for roughly 2% of rate-of-return carrier
(continued….)

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130.
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, we have 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.
131.
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.278 Specifically, as suggested by several parties,279 they must offer: (1) fixed voice service
at rates under the then applicable reasonable comparability benchmark,280 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.281 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. We also require that the competitor be able to port telephone numbers in that census block, 282 as
suggested by several commenters.283 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,284 and
be willing and able to provide service to a requesting customer within ten business days.285 We are
(Continued from previous page)
locations. For 3% of the rate-of-return carrier locations nationwide, carriers are reporting deployment of 10/1 Mbps
or faster broadband using both copper and cable facilities. See FCC, Rate-of-Return Carrier Deployment
Percentages by Technology,
https://transition.fcc.gov/wcb/ACAM%2021%20ROR%20ILEC%20Coverage%20FINAL.XLSX (last visited Mar.
4, 2016). We will consider in the challenge process, however, any evidence that indicates an affiliate is not used by
a rate-of-return carrier to meet its broadband performance obligations.
278

For administrative efficiency, the Bureau, working with USAC, may utilize a format similar to that used in the
Phase II challenge process as the means of collecting information from competitors on the preliminary list.
279

See, e.g, NTCA Feb. 6 Ex Parte Letter.

280

We note that the applicable voice benchmark for 2015 was $47.48. Wireline Competition Bureau Announces
Results of 2015 Urban Rate Survey for Fixed Voice and Broadband Services and Posting of Survey Data and
Explanatory Notes, WC Docket No. 10-90, Public Notice, 30 FCC Rcd 3687 (WCB 2015). We expect to announce
the 2016 reasonable comparability benchmark for voice services before commencement of this challenge process.
281

47 CFR § 54.319(a). For purposes of the initial implementation of this rule, we will require the competitor to
certify that it is providing 100 milliseconds of latency and 150 GBs of monthly usage at a rate at or below the
relevant reasonable comparability benchmark. The minimum usage allowance is announced by the Bureau annually
and therefore may be adjusted when this competitive overlap determination is repeated at a future date.
282

47 CFR § 52.23. In order to port numbers, the requesting carrier must be a certificated telecommunications
carrier or a licensed commercial mobile radio service provider. See 47 CFR § 52.23(b)(2)(1). In practice, many
interconnected VoIP providers port numbers through a numbering partner.
283

See USTelecom/NTCA Feb. 6 Ex Parte Letter; WTA Feb. 4 Ex Parte Letter at 3.

284

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. We note that our existing rule defines
an unsubsidized competitor as a provider of fixed residential voice and broadband service. 47 CFR § 54.5
(emphasis added).
285

The Bureau used similar criteria in the Phase II challenge process. See Wireline Competition Bureau Provides
Guidance Regarding Phase II Challenge Process, WC Docket No. 10-90, Public Notice, 29 FCC Rcd 7505, 750708, para. 9 (WCB 2014).

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mindful of the burden on the competitor but also need to ensure that information is sufficient for the
Commission to evaluate any potential challenges. We clarify 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 we are cognizant of the potential burden, we 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.
132.
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.286 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, we 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.287
133.
Consistent with the approach taken in the Phase II challenge process, we will not
consider any additional evidence or submissions filed by any party after the deadline for reply comments,
absent extraordinary circumstances. We thus adopt 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. We delegate authority to the Bureau to
take all necessary steps to implement the challenge process we adopt today.
134.
We are 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.288 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.289 We are adopting a challenge process
that builds on lessons learned from both experiences. We conclude 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.
135.
We are not persuaded that we 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.”290 Our
286

In the Phase II challenge process in price cap areas, the Bureau required a minimum showing to establish a prima
facie case before soliciting replies to challenges. While challenges were filed to nearly 180,000 census blocks, the
Bureau concluded that challengers had established a prima facie case warranting a reply in only 95,000 census
blocks. See Connect America Fund, WC Docket No. 10-90, Report and Order, 28 FCC Rcd 7211 (WCB 2013)
(Phase II Challenge Process Order).
287

Connect America Fund et al., WC Docket No. 10-90 et al., Order, 30 FCC Rcd 2718, 2731, para. 41 & n.95
(WCB 2015); See In the Matter of Connect America Fund, WC Docket No. 10-90, Order, DA 15-1419 (WCB Dec.
14, 2015).
288

Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC,
WC Docket No. 10-90 at 2 (filed Nov. 9, 2015).
289

See 100 Percent Overlap Order.

290

See WTA Feb. 4 Ex Parte Letter (arguing that competitor should serve every location in the census block).

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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. We conclude 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 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.291
136.
We also decline 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.292 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 are we 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. We note that we 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.
137.
As suggested by NTCA and USTelecom,293 we will conduct the competitive overlap
challenge process outlined above every seven years. This will ensure that we periodically revisit 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.
138.
Upon the completion of the competitive overlap determination, we conclude that carriers
should be able to select one of several methods to disaggregate support between competitive and noncompetitive areas, as suggested by several commenters.294 We note 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.295 We agree
291

By subsidizing the incumbent in areas where competitive pressure exists, the Commission is distorting the market
and deterring the competitor from more fully serving the area. By removing the subsidy in a geographic area that an
unsubsidized provider is largely serving, we conclude that we are better targeting universal service support to those
areas that no other provider is willing to serve.
292

WTA Feb. 4 Ex Parte Letter.

293

USTelecom/NTCA Feb. 5 Ex Parte Letter.

294

Letter from Michael R. Romano, Senior Vice President – Policy, NTCA – The Rural Broadband Association, to
Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, at 1, 3 (filed Jan. 11, 2016) (NTCA Jan. 11, 2016 Ex
Parte); Hargray Ex Parte Letter at 4; USTelecom Feb. 5 Ex Parte Letter; Letter from Michael R. Romano, Senior
Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, Ex. A (filed Feb. 5,
2016) (NTCA Feb. 5 Ex Parte Letter) (submitting three disaggregation proposals).
295

See 47 CFR §54.315 (2011). This rule was initially adopted in 2001 so that incumbents could disaggregate their
ICLS for purposes of the availability of identical support for CETCs. The rule was eliminated when the Commission
eliminated the identical support rule for CETCs in the USF/ICC Transformation Order.

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with commenters that we 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 we
recognize that competitive areas are likely to be lower cost and non-competitive areas are likely to be
relatively higher cost.296 We therefore adopt 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.297 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.298 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.299 We outline each of these disaggregation mechanisms below.300
139.
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.301 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.
140.
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.302 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.303 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.”304
141.
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.305 To calculate the disaggregated revenue requirements using
296

Letter from Michael R. Romano, Senior Vice President – Policy, NTCA – The Rural Broadband Association, to
Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, at 1, 3 (filed Jan. 11, 2016) (NTCA Jan. 11, 2016 Ex
Parte Letter).
297

NTCA Feb. 5 Ex Parte Letter, Ex. A.

298

Letter from Trey Judy, Director – Regulatory, Hargray, to Marlene H. Dortch, Secretary, FCC, WC Docket No.
10-90 at 1 (filed Feb. 5, 2016) (Hargray Ex Parte Letter 2); NTCA Feb. 5 Ex Parte Letter, Ex. B.
299

NTCA Feb. 5 Ex Parte Letter, Ex. C.

300

In addition, the Commission seeks comment on whether to adopt any other disaggregation method in the FNPRM
below. We encourage parties to submit simple proposals that could be implemented with minimal burden to
impacted carriers and USAC. We are not inclined to adopt a rule that would allow carriers to submit individualized
disaggregation proposals requiring case-by-case review.
301

See 47 CFR 315(e)(1)(2011).

302

NTCA Feb. 5 Ex Parte Letter, Ex. A; Letter from Michael R. Romano, Senior Vice President – Policy, NTCA,
to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, Ex. A (filed Feb. 10, 2016) (on behalf of NTCA and
USTelecom) (amending Feb. 5 proposal and providing an example of density-based disaggregation)
(NTCA/USTelecom Feb. 10, 2016 Ex Parte Letter).
303

NTCA/USTelecom Feb. 10, 2016 Ex Parte Letter at Ex. A.

304

Id.

305

See id.

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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, we are 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, we will use U.S. Census
housing unit data for the density calculations required for this disaggregation method.
142.
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.306 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.307 Hargray submitted analysis into the record showing how support is reduced in a nonlinear 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.308 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.309 In particular, under this disaggregation method, support
would be reduced using the following schedule:
Competitive
Ratio
0%-20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%

Reduction
Ratio
N/A
3.3%
6.7%
10.0%
13.3%
16.7%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
62.5%
75%
87.5%
100%

143.
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.310
Therefore, by selecting this mechanism, carriers will enjoy relative ease of administration.
306

Hargray Ex Parte Letter 2 at 1.

307

See id. at 2.

308

See id.

309

See id.

310

Hargray Ex Parte Letter 2 at 2.

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144.
As a third option, we 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.311 In this
Order, we adopt 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.312 As we
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. We note 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.313
145.
We agree with commenters that support reductions associated with competitive areas
should be phased in.314 As suggested by USTelecom and NTCA,315 we adopt 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. We also emphasize
that carriers affected by implementation of this rule are free to seek a waiver of support reductions under
our existing precedent.316
6.
146.

Budgetary Controls

The Commission previously adopted an overall budget of $4.5 billion for the high-cost

311

NTCA Feb. 5 Ex Parte Letter, Ex. C.

312

See supra section II.A.

313

For instance, it may be the case that 90% of locations in the study area lie within the census blocks that are
deemed competitive, but only 2% of the A-CAM support for the study area is associated with those census blocks.
In such case, the A-CAM allocator would be 2% – which would be multiplied by the amount of CAF BLS. Using a
numerical example, if the study area would otherwise receive $60,000 annually in CAF BLS, $1,200 in annual
support would be associated with the competitive area (and subject to reduction), and $58,800 in CAF BLS would
be provided for the non-competitive areas. In some cases, A-CAM may calculate no support for competitively
served census blocks, as the average cost per-location is under the funding threshold of $52.50 per month. In that
situation, there would be no support reduction at all for those competitive census blocks.
314

USTelecom/NTCA Feb. 6 Ex Parte Letter; NTCA Jan. 11, 2016 Ex Parte at 1; Letter from Michael R. Romano,
Senior Vice President – Policy, NTCA – The Rural Broadband Association, to Marlene H. Dortch, Secretary, FCC,
WC Docket No. 10-90, at 6 (filed Nov. 24, 2015); Comments of NTCA, WC Docket No. 10-90, at 8 (filed Aug. 8,
2014) (NTCA Aug. 2014 Comments); Comments of USTelecom, WC Docket No. 10-90 at 9 (filed Aug. 8, 2014)
(USTelecom Aug. 2014 Comments).
315

USTelecom/NTCA Feb. 6 Ex Parte Letter.

316

See 47 CFR §1.3; see also infra n. 404.

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program, and a budget within that amount of $2 billion per year for high-cost support for rate-of-return
carriers.317 It did not, however, adopt a method for enforcing the budget for rate-of-return carriers. We
now adopt 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.318
147.
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 highcost 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.319 It therefore is
imperative that we take 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. We note, 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.
148.
In implementing measures to stay with the previously adopted budget, we note that the
Tenth Circuit has affirmed the Commission’s decision to set the rate-of-return budget at $2.0 billion.320
The court found reasonable the Commission’s determination “that budgetary sufficiency for . . . rate-ofreturn 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, we retain 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.
149.
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.321 To calculate the amount of support that will be available for disbursement under HCLS322
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. Then, during the tenyear term of CAF-ACAM support, the Administrator will further deduct the amount of model-based
317

USF/ICC Transformation Order, 26 FCC Rcd 17674, 17768, paras. 27, 286. This budget was adopted for 20122017. Id.
318

A budget control mechanism is not necessary for the CAF support provided to carriers electing the model as that
amount does not vary from year to year; we establish in this Order the amount authorized for disbursement over the
next ten years.
319

NECA December 11, 2015 Ex Parte Letter.

320

See In re: FCC 11-161, 753 F.3d at 1055-60.

321

We note that HCLS is currently capped. 47 CFR § 54.1302. The rules we adopt here are not intended to modify
the operation of that cap, except as specified herein.
322

HCLS includes safety net additive and safety valve support.

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support disbursements to those rate-of-return carriers choosing model-based support and transition
payments, as applicable.323 The amount remaining will be the total support available to be disbursed
under HCLS and CAF BLS.324 This amount will first be calculated as of July 2016,325 and will be
recalculated on an annual basis to reflect changes in the CAF-ICC amounts paid to carriers.326
150.
Budget Control Mechanism. The budget control mechanism we adopt is a variation on
the NTCA budget control proposal that NTCA suggested should be applied solely to its DCS broadbandonly mechanism.327 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. We find that it strikes a fair balance among differently-situated carriers.
151.
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.328 There will be no retroactive application of
the budget control mechanism.
152.
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.329 This target amount
will be calculated for each mechanism once per year prior to the annual filing of the tariffs.330
153.
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.331 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
323

See supra section II.A.2. 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.
324

For purposes of this rule, the budget mechanism will apply to ICLS until we implement the changes necessary to
provide support as CAF BLS.
325

The Bureau will work with NECA and USAC on the implementation details, including the need for carriers to
file mid-year loop counts in the annual cost study data they already file with NECA.
326

The budget for carriers not electing model support will rise each year over the 10-year term, as the amounts of
CAF-ICC support provided to carriers electing the voluntary path to the model decreases. This is consistent with the
approach advocated by NTCA. See NTCA Dec. 15, 2015 Ex Parte Letter at 2.
327

NTCA/WTA/NECA April 21, 2015 Ex Parte Letter, at Attach. 2.

328

See infra section II.B.9 (further discussing the schedule for filing cost and revenue data for CAF BLS and for
truing up CAF-BLS payments for prior periods).
329

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. For example, in July 2019, disbursements include HCLS payments being
made in the 2019 calendar year, CAF-BLS payments being made on a projected basis for the 2019-20 tariff year,
and CAF BLS true-ups associated with the 2017 calendar year. See below for further discussion of the timing of
data collection and disbursements.
330

See infra section II.B.9.

331

Because some study areas may have per-line support amounts that are less than the per-line reduction, the perline 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.

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reductions will be calculated quarterly, using the most recently announced target amount.
154.
HCLS Cap. As we have done previously when carriers have lost their eligibility for
HCLS due to their status as affiliates of price-cap carriers, we direct NECA to rebase the cap on HCLS to
reflect the election of model-based support by HCLS-eligible rate-of-return carriers.332 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.
155.
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.333 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.334
7.

Broadband Deployment Obligations

156.
In this section, we take steps to promote “accountability from companies receiving
support to ensure that public investments are used wisely to deliver intended results.”335 Specifically, we
adopt 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
332

See USF/ICC Transformation Order, 26 FCC Rcd at 17760, paras. 258-59; Connect America Fund et al., WC
Docket No. 10-90, Order, 29 FCC Rcd 11776, 11777, para. 5 (WCB 2014) (rebasing HCLS cap to reflect
Consolidated’s acquisition of Enventis). In the April 2014 Connect America Fund FNPRM, the Commission
proposed to rebase the HCLS cap to reflect the election of model-based support by existing recipients of HCLS.
April 2014 Connect America FNPRM, 29 FCC Rcd at 7142, para. 286.
333

This process will permit, in some cases, consumer broadband-only loop rates to rise above $42. We note 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-benchmarkcalculator (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. We will, however,
continue to monitor consumer broadband-only rates to ensure that our policies support reasonable comparability.
We note that the Commission has indicated that it will gather more information if ETCs are unable to make the
reasonable comparability certification for their broadband rates. December 2014 Connect America Order, 29 FCC
Rcd at 15701, para. 157.
334

NTCA/WTA/NECA April 21, 2015 Ex Parte Letter.

335

USF/ICC Transformation Order, 26 FCC Rcd at 17670-71, para. 11; see also id. at 17681, para. 51 (adopting for
the goal of ensuring universal availability of broadband an outcome measure based on the number of residential,
business, and community anchor institutions that newly gain access to broadband and adopting as an efficiency
measure the change in the number of homes, businesses and community anchor institutions passed or covered per
million universal service dollars spent).

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services…that are reasonably comparable to those services provided in urban areas.”336 We note that
USTelecom and NTCA recognize that defined buildout obligations are “essential to a broadband reform
effort.” 337
157.
Background. In the USF/ICC Transformation Order, the Commission recognized that
rate-of-return carriers had for a number of years deployed telecommunications and information services
networks, often financed through a combination of loans and universal service support.338 The
Commission stated its expectation that rate-of-return carriers would deploy scalable broadband networks
in their communities. While the Commission established a framework of defined performance and
deployment obligations tied to the acceptance of specific and predictable support amounts for price cap
carriers,339 it declined to adopt specific buildout milestones for rate-of-return carriers at that time. Instead,
pending further consideration of how best to spur deployment of broadband in areas served by rate-ofreturn carriers, the Commission mandated that rate-of-return-carriers must deploy broadband to the
requesting consumer upon reasonable request for service, within a reasonable amount of time.340 In doing
so, the Commission recognized that it was building upon longstanding policies regarding the extension of
voice service, including state policies for line extensions. The Commission indicated that it would
monitor the progress of rate-of-return carriers in deploying broadband to their communities through
annual reporting requirements, including the requirement to report the number of unfulfilled service
requests.
158.
The Commission subsequently clarified which requests should be deemed unreasonable.
In the April 2014 Connect America Order,341 we stated that rate-of-return carriers evaluating a request to
extend broadband service should consider a number of factors, such as whether new plant is required to
service a location in a first instance, anticipated end-user revenues, and whether the request would require
new investments that would cause total high-cost support (exclusive of CAF-ICC support) to exceed $250
per line per month in a given study area.342 We recognized that some number of locations in rate-ofreturn areas likely are extremely high-cost and for that reason, we declared that a request is not reasonable
if it would require a carrier to undertake new network upgrades merely for the purpose of newly
providing broadband service in study areas where total support is already subject to the $250 per line
monthly cap.343 The Commission also determined that a rate-of-return carrier has no obligation to extend
broadband-capable infrastructure in any census block that is served by an unsubsidized competitor that
meets the Commission’s then-current performance standards.344 Lastly, the Commission reiterated that

336

47 U.S.C. § 254(b)(3).

337

USTelecom/NTCA Feb. 6 Ex Parte Letter.

338

USF/ICC Transformation Order, 26 FCC Rcd at 17740, para. 205.

339

See id. at 17717, para. 137.

340

See id. at 17740-41, paras. 205-209. Prior to adoption of the USF/ICC Transformation Order, a federal
designated ETC was required under former section 54.202(a)(1)(i) to “commit to provide service throughout its
proposed designated service area to all customers making a reasonable request for service.”
341

See April 2014 Connect America Order, 29 FCC Rcd at 7070-75, paras. 59-72.

342

See id. at 7071-72, paras. 64-66. In the USF/ICC Transformation Order, the Commission adopted section 54.302
of the Commission’s rules, which established a presumptive per line cap of $250 per month on total high-cost
universal service support for all ETCs. 47 CFR § 54.302. The Commission concluded that support in excess of that
amount should not be provided without further justification. USF/ICC Transformation Order, 26 FCC Rcd at
17765, para. 274.
343

See April 2014 Connect America Order, 29 FCC Rcd at 7073-74, paras. 67, 71.

344

See id. at 7073, para. 68. In the Elimination of Subsidies in Competitive Areas section of this Order, we outline
the current process for determining whether an area is sufficiently served by a competitor. See supra section II.B.5.

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rate-of-return carriers are free to deploy alternative technologies in areas determined to be beyond a
reasonable request for the extension of fiber in order to meet customer demand.345
159.
To develop a “uniform national framework for accountability,”346 the Commission
required in the USF/ICC Transformation Order that all ETCs subject to broadband public interest
obligations develop five-year service quality improvement plans.347 In their five-year plans, ETCs were
required to “describe with specificity proposed improvements or upgrades” to their networks throughout
their service areas348 and “include a self-certification letter certifying that they are taking reasonable steps
to offer broadband…through their service area, and that requests for such service are met within a
reasonable amount of time.”349 The Commission concluded that the requirement to submit to the
Commission, USAC, and the relevant state regulator (or Tribal government, where applicable) five-year
plans is “critical to ensure appropriate use of high-cost support and to allow the Commission to determine
whether it is achieving its goals efficiently and effectively.”350
160.
Beginning in the USF/ICC Transformation Order, the Commission made clear that
universal service support was to be used “in a manner consistent with achieving universal availability of
voice and broadband.”351 In the April 2014 Connect America FNPRM, the Commission specifically
sought comment on “the best way to encourage continued investment in broadband networks throughout
rural America to ensure that all consumers have access to reasonably comparable services at reasonably
comparable rates.”352 It proposed the creation of a “Connect America Fund to make more efficient use of
universal service funds and encourage the deployment of broadband capable networks…for use in rate-ofreturn territories.”353 In doing so, the Commission expressly recognized the need to “wind down the
existing HCLS and ICLS mechanisms” and to foster deployment of broadband throughout rate-of-return
service areas through a new Connect America Fund.
161.
NTCA, USTelecom, and WTA submitted a proposal into the record for deployment
obligations for rate-of-return companies receiving high-cost support based on embedded costs.354 Under
this proposal, rate-of-return carriers would provision service at the then-current section 706 speed
standard upon reasonable request.355 However, if a carrier is incapable of deploying service reflective of
the then-current section 706 speed standard to a customer upon reasonable request, the carrier must
provide the level of service consistent with the reasonable request standard.356 In addition, NTCA,
345

See April 2014 Connect America Order, 29 FCC Rcd at 7075, para. 72.

346

USF/ICC Transformation Order, 26 FCC Rcd at 17850, para. 573.

347

Id. at 17854, para. 587; see 47 CFR § 54.202(a)(1)(ii). Subsequently, the Bureau waived the requirement for
price cap carriers to file five-year plans until after such carriers accept Connect America Phase II support; only those
price cap ETCs that accept Phase II funding are required to file five-year plans. See ETC Reporting Clarification
Order, 28 FCC Rcd at 2054, para. 8.
348

47 CFR § 54.202(a)(1)(ii).

349

USF/ICC Transformation Order, 26 FCC Rcd at 17855, para. 588.

350

See id. at 17850, para. 573.

351

See id. at 17740, para. 205.

352

See April 2014 Connect America FNPRM, 29 FCC Rcd at 7134, para. 258.

353

See id. at 7137, para. 268.

354

Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary, FCC,
WC Docket No. 10-90 at 2 (filed Dec. 16, 2015) (NTCA, USTelecom, & WTA Dec. 16, 2015 Ex Parte Letter).
355

See id.

356

See id. For example, under the joint association proposal, under the Commission’s current standard “advanced
telecommunications capability” as defined in section 706 of the Telecommunications Act of 1996, 47 U.S.C. § 1302,
the carrier would first required to attempt to deploy 25/3 Mbps service to the customer upon reasonable request.
(continued….)

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USTelecom, and WTA proposed that rate-of-return carriers be required to target 10 percent of support
received for that year toward a goal of delivering broadband at the then-current section 706 speed
standard to those locations lacking even 4/1 Mbps service.357 Subsequently, USTelecom and NTCA
jointly proposed that the Commission establish defined obligations to extend 10/1 Mbps service to a
specific number of locations that lack such service based on a sliding percentage of CAF BLS support
over a defined five year period.358
162.
Discussion. In this section, to ensure that we make progress towards achievement of
universal service, consistent with the statute, we 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,359 and “to distribute universal service funds as efficiently and
effectively as possible.”360 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.361 Through the adoption of rules to transform ICLS into the CAF-BLS mechanism, we now
build 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.362
163.
We conclude that it now is time to establish defined deployment obligations for every
carrier to ensure we have 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.”363 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. We note that although many rateof-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.364
(Continued from previous page)
However, if the carrier cannot deliver 25/3 Mbps, then the carrier would be required to deliver 10/1 Mbps to the
customer upon reasonable request. See id.
357

See id.

358

USTelecom/NTCA Feb. 5 Ex Parte Letter.

359

See December 2014 Connect America Order, 29 FCC Rcd at 15649, para. 15.

360

USF/ICC Transformation Order, 26 FCC Rcd at 17673, para. 20.

361

See id. at 17740-41, paras. 205-209.

362

The Commission continues to look for ways to advance deployment on Tribal lands. See Government
Accountability Office, Additional Coordination and Performance Measurement Needed for High-Speed Internet
Access Programs on Tribal Lands GAO 16-222 (January 2016), http://www.gao.gov/assets/680/674906.pdf (January
2016 GAO Tribal Report); see also infra section IV.C. We seek comment today on ways to do so, including the
proposal submitted by the National Tribal Telecommunications Association (NTTA) to make additional support
available to rate-of-return carriers serving Tribal lands. See infra section IV.C. Once the comment cycle is
complete, we will review the record and commit to take action before the end of the year to further promote
broadband deployment on Tribal lands where it is now lacking.
363

47 CFR § 54.202(a)(1)(ii).

364

See Federal Communications Commission, Broadband Deployment Data from FCC Form 477,
https://www.fcc.gov/encyclopedia/broadband-deployment-data-fcc-form-477 (last visited Mar. 4, 2016).

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164.
Given the lack of any deployment by some providers and extremely low levels of
deployment by others, we conclude 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.365
Indeed, we have 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.
165.
To ensure that universal service support is utilized as effectively as possible in
furtherance of the Commission’s goal to achieve universal service,366 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.367 We are eager to
see that this support results in more widespread deployment. Moreover, in this Order, we set allowances
for capital expenses, which will result in a larger budget for carriers whose deployment is less than the
national average.368 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, we adopt refinements to the current fiveyear plan requirements designed to increase accountability and ensure the extension of broadband to those
areas of the country where it is lacking. In particular, we adopt a specific methodology to determine each
carrier’s deployment obligation over a defined five-year period, which will be used to monitor carrier
performance.
166.
Methodology for Establishing Deployment Obligations. In this section we describe the
specific methodology used to determine each carrier’s deployment location obligation over a defined fiveyear 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.369 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,370 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.371 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. We
describe more fully each of these methods below.372
167.
Under the first step in this methodology, we 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
365

NTCA, USTelecom, & WTA Dec. 16, 2015 Ex Parte Letter at 2.

366

47 U.S.C. § 254(b).

367

See supra section II.B.2.

368

See supra section II.B.4.

369

Letter from Michael R. Romano, Senior Vice President – Policy, NTCA – The Rural Broadband Association, to
Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, at 1 (filed Feb. 8, 2016)(reflecting joint NTCA and
USTelecom ex parte) (NTCA/USTelecom Feb. 8, 2016 Ex Parte Letter).
370

See id. at 1.

371

See id.

372

If a carrier has materially higher costs than calculated under either of these methods, it is free to present those
circumstances to the Commission. We also note that carriers affected by implementation of this rule are free to seek
a waiver of support reductions under our existing precedent. See 47 CFR §1.3; see also infra n. 404.

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loops.373 We agree with commenters that knowing the level of anticipated support is helpful when
developing any associated deployment obligations.374 Therefore, we are 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.375 We note 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.376
168.
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,377 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 deployment of broadband service where it is currently lacking.
169.
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.378 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.379 Any carriers subject to the current $250 per line per month cap and the newly
373

The assumptions for the forecast are specified in Appendix E. Throughout this proceeding, NECA has modeled
and forecasted support for each rate-of-return carrier based on various hypothetical mechanisms and conditions.
See, e.g., Letter from Regina McNeil, Vice President of Legal, General Counsel & Corporate Secretary, NECA, to
Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 et al. (filed Nov. 19, 2015) (NECA November 19, 2015
Ex Parte Letter). For purposes of this rule, we adopt growth assumptions similar to “Scenario 1” in NECA’s
submission. We direct NECA to prepare forecasts utilizing these assumptions in consultation with the Bureau and
submit them to USAC within 60 days of the release of a Public Notice announcing that the Commission has
obtained the appropriate Paperwork Reduction Act approval. USAC is directed to validate any calculations
submitted by NECA to ensure they are accurate and reflect the specified assumptions. See generally 47 CFR
§54.707 (establishing authority of USAC to audit carriers’ data submissions and to obtain all carrier submissions,
and underlying information, from NECA).
374

NTCA, USTelecom, & WTA Dec. 16, 2015 Ex Parte Letter at 2.

375

See Letter from Michael R. Romano, Senior Vice President – Policy, NTCA, to Marlene H. Dortch, Secretary,
FCC, WC Docket No. 10-90, at 1 (filed Jan. 13, 2015) (NTCA January 13, 2015 Ex Parte Letter).
376

Carriers cannot use locations in areas determined to be competitive based on the competitive overlap
determination to meet their deployment obligation.
377

USTelecom/NTCA Feb. 5 Ex Parte Letter.

378

We believe 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.
379

This is similar to what NECA did when modeling the potential impact of various alternatives under consideration
in this proceeding. See NECA November 19, 2015 Ex Parte Letter. In the support forecasts that NECA submitted
(continued….)

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adopted opex limits will be excluded from the analysis.380 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.381 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.382 This is similar to the approach advocated by NTCA and
USTelecom, who suggested that we use a figure that is “at least 150 percent of the average cost per loop”
of those carriers with comparable density and deployment.383 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, we
conclude 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.
170.
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 fiveyear forecasted CAF-BLS support amount by the specific embedded cost per location figure.384 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.
(Continued from previous page)
into the record in this proceeding, NECA utilized locations per square mile to determine density. NECA calculated
square miles based on study area boundary maps. See id. at Attach. 3.
380

The Bureau also may exclude any carrier whose costs appear to be an outlier within a given density grouping,

381

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.
382

We note by way of comparison that the A-CAM model demonstrates that the average cost for the most expensive
locations is significantly higher than the lowest cost locations, when grouped into five tiers from lowest cost to
highest cost. In particular, in the current version of the A-CAM, the average cost per location for the second to
lowest cost tier of census blocks is 129.4% higher than the average cost for the lowest cost tier of census blocks; the
average cost for the middle tier of census blocks is 128.9% higher than the second lowest cost tier; the average cost
for the second highest cost tier of census blocks is 147.6% higher than the average cost of the middle tier; and the
average cost for the highest cost tier of census blocks is 345.2% higher than the cost for the second highest tier.
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 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, we believe that a 150% 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 rise as carriers extend
broadband into unserved areas.
383

NTCA/USTelecom Feb. 10 Ex Parte Letter.

384

To illustrate the procedure described above, we provide the following example. Carrier X must target $100,000
of its CAF-BLS support to locations in those census blocks lacking 10/1 Mbps broadband service within its study
area. Carrier X’s study area has a density of 8 locations per square mile. For carriers offering 10/1 Mbps broadband
to at least 95% of the locations in their study areas with a density of 3-10 locations per square mile, the average cost
per loop is $1,500. To determine the number of new locations that Carrier X must deploy 10/1 Mbps broadband
service to as part of its new five-year plan, USAC will divide $100,000 by $1,500; the result is 67 locations.

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171.
As an alternative to the approach outlined above, carriers may elect to have their
deployment obligations determined based on the cost per location for that carrier as reflected in the
adopted version of the A-CAM, as suggested by NTCA and USTelecom.385 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 amount of forecasted CAF-BLS support amount by the
A-CAM calculated, carrier specific, average cost per location 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.
172.
Deployment Requirements. In this section, we discuss in more detail the specific
obligations of rate-of-return carriers subject to the refined five-year plan requirements. We recognize 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 we conclude – much like the Commission did in the April 2014
Connect America Order386 – that we 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.387
173.
We conclude 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 costeffective and utilize alternative technologies where terrestrial wireline infrastructure is too costly,388 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.389 We will
continue to monitor the deployment progress of these carriers: we may revisit this framework in the
future if such carriers do not continue to make reasonable progress on extending broadband.
385

NTCA/USTelecom Feb. 8, 2016 Ex Parte Letter.

386

The Commission declared that a request is not reasonable if it would require a carrier to undertake new network
upgrades merely for the purpose of newly providing broadband service in study areas where total support is already
subject to the $250 per line monthly cap. See April 2014 Connect America Order, 29 FCC Rcd at 7071-72, paras.
64-66.
387

47 CFR § 54.302. We also note that, pursuant to the capital budget allowance we adopt above, rate-of-return
carriers may not exceed $10,000 per location/per project when deploying broadband service utilizing terrestrial
wireline technology. See supra section II.B.4. However, most carriers with less than 80% deployment of 10/1
Mbps broadband service in their study areas likely have lower-cost locations for which they may target for
broadband deployment, without implicating the $10,000 per location capex limit. To the extent a carrier only has
locations that exceed the $10,000 per location limit, it may bring those special circumstances to our attention.
However, if a carrier’s defined five-year deployment obligation can be fulfilled with locations within the $10,000
per location limit but doing so would cause that carrier to exceed its capital allowance, it may do so to the extent
required to meet its deployment obligation and should be prepared to provide a certification by an engineer licensed
in the state(s) in which the construction will take place that the expenditures above the capital allowance were
necessary to meet the carrier’s deployment obligation. See NTCA/Vantage Point Feb. 18, 2016 Ex Parte Letter at 2
(stating that a carrier seeking a waiver to exceed capital budget allowances should “permitted to submit engineering
documents certified and stamped by a professional engineer showing what those actual costs are”).
388

We emphasize 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. In other words, carriers should not be upgrading some customers to 25/3 Mbps service and
beyond while other customers lack 10/1 Mbps service unless further extension of 10/1 Mbps service would exceed
the cost limitations and use of alternative technologies is infeasible. We also note that carriers can and should utilize
other support (i.e. HCLS) where available to continue to extend broadband service.
389

NTCA, USTelecom, & WTA Dec. 16, 2015 Ex Parte Letter at 2.

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174.
We conclude 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.390 In situations where the carrier makes no progress towards meeting its defined fiveyear deployment obligation, and fails to establish extenuating circumstances, the Commission reserves the
right to include such census blocks in an upcoming auction.
175.
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.”391 Therefore, we conclude 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.392 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.393
176.
We conclude 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.’”394 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.395 We note that USTelecom and NTCA more recently
indicated their support for the framework adopted in this Order.396 To ensure that universal service
support is used as effectively as possible to close the rural-rural divide,397 the Commission must be able to
measure and monitor the deployment objectives outlined in a carrier’s five-year plan. As noted above,
390

47 CFR § 54.320(c). One relevant factor would be if the amount of CAF BLS received over the five-year period
was significantly lower than the forecast due to the operation of the budget control. See USTelecom/NTCA Feb. 6
Ex Parte Letter.
391

See April 2014 Connect America FNPRM, 29 FCC Rcd at 7134, para. 258.

392

As noted above, commenters suggested that each rate-of-return carrier should utilize at least 10% of their annual
BUSS support towards delivering broadband at the then-current 706 speed standard to unserved locations. See
NTCA, USTelecom, & WTA Dec. 16, 2015 Ex Parte Letter at 2.
393

At that time, the Bureau will examine the density groupings, and determine whether any adjustments should be
made based on then-current U.S. Census data.
394

NTCA, USTelecom, & WTA Dec. 16, 2015 Ex Parte Letter at 2.

395

In the December 2014 Connect America Order, the Commission stated that the “objective with high-cost support
is to extend broadband-capable infrastructure to as many high-cost locations as efficiently as possible,” which also
ensuring the best utilization of “funds that consumer and businesses pay into the universal service system.”
December 2014 Connect America Order, 29 FCC Rcd at 15649-50, para. 17. The Commission found that best way
to implement these universal service objectives and the statutory language of section 254 was to establish a speed
standard of 10/1 Mbps. See id; 47 U.S.C. § 254(b)(3).
396

USTelecom/NTCA Feb. 6 Ex Parte Letter.

397

See USF/ICC Transformation Order, 26 FCC Rcd at 17740-41, paras. 205-209.

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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.
177.
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,398 and make adjustments, where warranted.
178.
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.399 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.
179.
The Commission also takes further action to implement the existing reasonable request
standard to ensure that consumers in remote areas are served.400 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.401 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.402 We direct 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.
180.
We note 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.
8.

Impact of These Reforms

181.
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.” We note that the
revenue benchmark we 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 $647.87, a carrier only receives HCLS if its average cost per
loop on an annual basis is higher than $745.06, or $62.09 per month.403 Thus, our reformed CAF-BLS
398

See supra section II.E.

399

Carriers should be prepared to demonstrate in an audit or other context how they evaluate requests under the
reasonable request standard. We expect all carriers to be able to produce documents describing the standards they
use to process such requests.
400

See April 2014 Connect America Order, 29 FCC Rcd at 7070-75, paras. 59-72. C.f. 47 CFR § 54.202 (requiring
any carrier petitioning to be federally-designated ETCs to “[c]ommit to provide service throughout its proposed
designated service area to all customers making a reasonable request for service” and to certify that it will provide
service “on a timely basis” to customers within its existing network coverage and “within a reasonable time” to
customers outside of its existing network coverage if service can be provided at reasonable cost).
401

USF/ICC Transformation FNPRM, 26 FCC Rcd at 18092-18108, paras. 1223-1295.

402

See April 2014 Connect America Order, 29 FCC Rcd at 7070-75, paras. 59-72.

403

47 CFR § 54.1309.

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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 we conclude 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.
182.
We 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. We solicit input from all interested parties
in the FNPRM as to whether there are other changes we 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.
183.
In our predictive judgment, the mechanisms that we adopt 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.”404 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.”405 It expressly noted that parties requesting such a waiver
would be subject to “a process comparable to a total earnings review.”406 The Commission indicated that
it did not anticipate granting waiver requests routinely or for “undefined duration[s]” 407 and provided
guidance on the types of information that would be relevant for such requests.408 In the Fifth Order on
Reconsideration, the Commission further clarified that “we envision 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

404

USF/ICC Transformation Order, 26 FCC Rcd at 17839-40, paras. 539-40. The Commission’s intent in
discussing waivers relating to reductions in federal universal service fund (USF) support was not to replace the
ordinary standard for granting waivers under section 1.3 of the Commission’s rules, but rather to provide guidance
in advance to potential applicants of the circumstances that would be persuasive and compelling grounds for grant of
a waiver under that waiver standard to assist potential applicants in effectively formulating their waiver petitions.
See Connect America Fund et al., WC Docket No. 10-90 et al., Fifth Order on Reconsideration, 27 FCC Rcd 14549,
14556-57, para. 19 (2012) (Connect America Fund Fifth Order on Reconsideration). Generally, the Commission’s
rules may be waived if good cause is shown. 47 CFR § 1.3. The Commission may exercise its discretion to waive a
rule where the particular facts make strict compliance inconsistent with the public interest. Northeast Cellular
Telephone Co. v. FCC, 897 F.2d 1164, 1166 (D.C. Cir. 1990) (Northeast Cellular). In addition, the Commission
may take into account considerations of hardship, equity, or more effective implementation of overall policy on an
individual basis. WAIT Radio v. FCC, 418 F.2d 1153, 1159 (D.C. Cir. 1969); Northeast Cellular, 897 F.2d at 1166.
405

USF/ICC Transformation Order, 26 FCC Rcd at 17840, para. 540.

406

Id. at 17739, 17840, paras. 202, 540.

407

Id. at 17766, para. 278.

408

Id. at 17840-42, paras. 542, 544. As the Commission explained, petitions for waiver must “include all financial
data and other information sufficient to verify a carrier’s assertions” including detailed affiliate financial and cost
allocation data. See id. at 17840-1, para. 542. We also emphasize that the Commission may, in the context of a
waiver or otherwise, obtain access to any and all financial and operational information kept by the carrier, including
audited financial reports and statements. See 47 U.S.C. § 220(c).

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no alternative providers of voice or broadband.”409 We note 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.410 We further note that to the extent parties seek a waiver on the ground that support
is insufficient, we may request additional documentation pursuant to section 220(c) of the Act, to ensure
that we have a full and complete basis for decision.411
184.
Finally, we note that the promotion of universal service remains a federal-state
partnership.412 We expect 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.
9.

Administrative Issues

185.
It is our desire to implement these revisions to our rules as soon as possible. We
recognize, 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 we adopt must be coordinated with the Commission’s
existing cost accounting and tariffing rules. Given the administrative requirements we have noted, we do
not anticipate that full implementation of the new Connect America Fund Broadband Loop Support and
related changes will occur prior to October 1, 2016.413
186.
USAC Oversight. USAC, working with the Bureau, will take all actions necessary to
implement these rule changes adopted in this Order. We note 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.414 We
expect USAC to implement processes to validate any calculations performed by NECA to ensure that
accurate amounts are disbursed, consistent with our decisions.

409

Connect America Fund Fifth Order on Reconsideration, 27 FCC Rcd at 14557, para. 21.

410

In re FCC 11-161, 753 F.3d at 1058-60.

411

47 U.S.C. § 220(c).

412

See 47 U.S.C. § 254(b)(5) (“There should be specific, predictable and sufficient Federal and State mechanisms to
preserve and advance universal service.” (emphasis added)); Qwest Corp. v. FCC, 258 F.3d 1191, 1203 (10th Cir.
2001) (the Telecommunications Act “plainly contemplates a partnership between the federal and state governments
to support universal service”); USF/ICC Transformation Order, 26 FCC Rcd at 17705, para. 109, 17848-49, para.
568.
413

We delegate authority to the Bureau to take all necessary administrative steps to implement the reforms adopted
in this Order.
414

See USF/ICC Transformation Order, 26 FCC Rcd at 17867, para. 633. At that time, the Commission indicated
that it was modifying its rules to clarify that USAC had a right to obtain all such information from NECA, but it did
not include any such language in the Code of Federal Regulations. We now codify this requirement in our existing
rule, section 54.707 Audit controls.

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187.
Administrative Schedule – In general. The administration of the CAF-BLS mechanism
will, as much as possible, follow the existing precedent of the ICLS mechanism.415 Accordingly, we
specify 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)416

May 1

USAC files with the Commission in Docket No. 10-90 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).417

C.

Pricing considerations

188.
In the following subsections, we address 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

189.
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 36418 and then to the special access category by subparts D and E of Part
69.419 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
415

In order to facilitate the operation of the CAF-BLS mechanism, we eliminate the June 30 updates and revisions
that had been permitted pursuant to ICLS.
416

Carriers may use NECA as a filing agent for CAF BLS, much as many currently do for their ICLS filings with
USAC.
417

To ensure a consistent effect on the budgetary constraint through the year, we modify 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.
418

See generally 47 CFR pt. 36.

419

See generally 47 CFR pt. 69, subpts. D-E.

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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.
190.
To avoid this situation, we amend 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.420 First, we
create 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.421 This category
will be included along with the common line category in the new CAF BLS mechanism.
191.
Second, we revise 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,422 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. We take this approach because it includes the broadest definition of loop costs
feasible based on our current cost accounting rules.423 These actions will segregate the broadband-only
loop investment and expenses from other special access costs currently included in the Special Access

420

See April 2014 Connect America Fund FNPRM, 29 FCC Rcd at 7137, para. 269; see also Letter from Michael R.
Romano, Senior Vice President—Policy, NTCA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 et
al., at 1-2 (filed Nov. 24, 2015); Letter from Genevieve Morelli, President, ITTA, to Marlene H. Dortch, Secretary,
FCC, WC Docket No. 10-90 et al., at 1 (filed Nov. 5, 2015).
421

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. See USF/ICC Transformation Order, 26 FCC Rcd at 17695,
17708-09, paras. 86, 113-114. 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.
422

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.
423

We recognize that networks will continue to evolve, and at some future date, the Commission may wish to revisit
more broadly the technology assumptions underlying our existing accounting rules.

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category424 and also preclude cross-subsidization. We will oversee NECA’s actions to ensure that these
changes are implemented consistent with the Commission’s intent.
2.

Tariffing issues

192.
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.425 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.426 Consistent with the existing rules, SLCs and ARCs may not be
assessed on lines eligible to receive Lifeline support.427
193.
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. 428 The carrier may not, however, tariff
the charge to some customers, while detariffing it for others. 429 This limitation is designed to preclude a
carrier from using this flexibility to discriminate among customers taking broadband-only services.
194.
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 broadbandonly 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 BroadbandOnly 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, we 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.430 We will allow – but do not require – a rate-of-return carrier electing modelbased support to assess a wholesale consumer broadband-only loop charge that does not exceed $42 per
424

The costs remaining in the special access category include those related to business services, such as DS1 and
DS3 other wide-band services, and the costs for digital subscriber line (DSL) service that could be tariffed.
425

47 CFR § 69.104.

426

47 CFR § 51.917(e).

427

47 CFR §§ 69.104, 51.917.

428

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. See Protecting and Promoting the Open Internet, Report and
Order on Remand, Declaratory Ruling, and Order, GN Docket No. 14-28, 30 FCC Rcd 5601, 5837, para. 491 (2015)
(Open Internet Order), pets. for review pending sub nom USTA v. FCC, No. 15-1063 (D.C. Cir. filed May 22, 2015).
429

Whether the charge for the consumer broadband-only loop is tariffed or detariffed, the charge is only one of
many different costs recovered by the retail broadband service rate. 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.
430

See supra Section II.B.2

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line per month.431 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.432
195.
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 enduser charges.433 For carriers electing model-based support, we see 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. We accordingly conclude that
carriers electing model-based support will not be eligible to participate in the NECA common line
pooling mechanism.
196.
We do find, however, that rate-of-return carriers electing model-based support could
benefit from continued participation in the NECA tariffs. We accordingly decide 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.
197.
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.434 NECA shall employ comparable procedures in its pooling process.
198.
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 BroadbandOnly Loop category revenue requirement if it had not detariffed its consumer broadband-only loop rates,
plus any revenue resulting from its detariffed rates.

431

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. See Protecting and Promoting the Open Internet,
Report and Order on Remand, Declaratory Ruling, and Order, GN Docket No. 14-28, 30 FCC Rcd 5601, 5837, para.
491 (2015) (Open Internet Order), pets. for review pending sub nom USTA v. FCC, No. 15-1063 (D.C. Cir. filed
May 22, 2015).
432

Such retail service is, however, subject to the reasonable comparability benchmark. See USF/ICC
Transformation Order, 26 FCC Rcd at 17708, para. 113.
433

47 CFR § 54.901(a)(1), (3)-(5).

434

A carrier may not deaverage this rate within a study area. See 47 CFR § 69.3(e)(7).

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CAF-ICC Considerations

199.
Background. In the USF/ICC Transformation Order, the Commission adopted, among
other things, rules requiring rate-of-return carriers to transition many of their legacy ICC rates to a billand-keep regime.435 The Commission also adopted a recovery mechanism to mitigate the impact of
reduced ICC revenues on carriers and to facilitate continued investment in broadband infrastructure while
providing greater certainty and predictability going forward.436 The recovery mechanism allows rate-ofreturn LECs to recover each year an amount known as “Eligible Recovery.”
200.
The calculation of a rate-of-return LEC’s Eligible Recovery begins with its Base Period
Revenue (BPR).437 The BPR is the sum of certain ICC intrastate switched access revenues and net
reciprocal compensation revenues received by March 31, 2012, for services provided during FY 2011,438
and the projected revenue requirement for interstate switched access services provided during the 20112012 tariff period.439 The BPR for rate-of-return carriers was reduced by 5 percent initially and is reduced
by an additional 5 percent in each year of the transition.440 A rate-of-return LEC’s Eligible Recovery is
equal to the adjusted BPR for the year in question less the sum of (1) projected intrastate switched access
revenue; (2) projected interstate switched access revenue; and (3) projected net reciprocal compensation
revenue.441
201.
A carrier may first recover its Eligible Recovery through the Access Recovery Charge
(ARC) assessed on end users, subject to certain limits.442 If the projected ARC revenues do not recover
the entire Eligible Recovery amount, the carrier may elect to collect the remainder through universal
service support in the form of CAF ICC.443 The recovery mechanism is limited in time and carefully
balances the benefits of certainty and a gradual transition with our goal of keeping the federal universal
service fund on a budget and minimizing the overall burden on end users.444
202.
Discussion. The Eligible Recovery mechanism adopted in the USF/ICC Transformation
Order was a carefully balanced approach.445 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, we revise our
recovery rules to account for the support changes adopted in this Order.
203.
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
435

See USF/ICC Transformation Order, 26 FCC Rcd at 17934-35, para. 801 & Fig. 9.

436

See id. at 17677, para. 36.

437

See 47 CFR § 51.917(d).

438

For purposes of the recovery mechanism, Fiscal Year 2011 (FY 2011) is defined as October 1, 2010 to
September 30, 2011. See 47 CFR § 51.903(e).
439

See 47 CFR § 51.917(b)(7). The 2011-2012 tariff period was July 1, 2011, through June 30, 2012.

440

See 47 CFR § 51.917(b)(3).

441

47 CFR § 51.917(d). Beginning in 2014, the recovery mechanism also incorporates in the Eligible Recovery
calculation a true-up of the revenue difference between projected and actual demand for interstate and intrastate
switched access services, reciprocal compensation, and the ARC for the tariff period that began two years earlier.
See 47 CFR § 51.917(d)(1)(iii).
442

47 CFR § 51.917(e)-(f). If a carrier decided not to assess an ARC charge on end users, it must impute those ARC
amounts for purposes of determining any CAF ICC. Id.
443

Id. See also USF/ICC Transformation Order, 26 FCC Rcd at 17981, para. 896.

444

USF/ICC Transformation Order, 26 FCC Rcd at 17956, para. 847.

445

See id. at 17957-64, paras. 850-61.

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lines due to increased affordability of these services. Although we 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, we require 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.446
204.
The second effect that will occur from the adoption of support for consumer broadbandonly 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. We accordingly clarify 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

205.
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,447 we now make several changes to our reporting
rules. In this section, we streamline and revise rate-of-return ETCs’ annual reporting requirements to
better align those requirements with our statutory and regulatory objectives. First, we amend 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, we now require all rate-of-return ETCs to
provide location and speed information of newly served locations. We also require 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, we eliminate 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 we adopt today for rate-of-return carriers, for administrative efficiency,
we make conforming changes to the reporting rules for carriers that elected Phase II model-based support
(hereinafter “price cap carriers”). Third, we direct USAC to publish in open, electronic formats all nonconfidential information submitted by recipients of high-cost support. We conclude that these changes
ensure that our reporting requirements continue to be tailored appropriately to meet our statutory and
regulatory objectives.
446

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.
447

Government Accountability Office, FCC Should Improve the Accountability and Transparency of High-Cost
Program Funding GAO 14-587 (July 2014), http://www.gao.gov/assets/670/664939.pdf.

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Background

206.
In the USF/ICC Transformation Order, the Commission adopted several reforms to
harmonize and update annual ETC requirements by establishing a “uniform national framework for
accountability” that replaced the various data and certification filing deadlines that carriers were required
to meet previously.448 The Commission concluded that such an accountability framework is “critical to
ensure appropriate use of high-cost support and to allow the Commission to determine whether it is
achieving its goals efficiently and effectively.”449 Specifically, the Commission extended reporting
requirements for voice service to all ETCs and adopted new reporting requirements to reflect new
broadband obligations,450 including a requirement that all ETCs subject to broadband public interest
obligations file five-year service quality improvement plans and annual progress reports thereafter.451
207.
At that time, the Commission sought detailed comment on long term reform of rate-ofreturn ETCs’ obligations and associated reporting requirements. In the USF/ICC Transformation
FNPRM, the Commission sought comment on deployment obligations for rate-of-return carriers,
including “what specific metrics or build-out milestones should be established, and what reporting and
certification obligations should be imposed to improve the Commission’s ability to enforce such
commitments.”452 Subsequently, in the April 2014 Connect America FNPRM, the Commission sought
comment on revised broadband reporting requirements “for all CAF recipients that are required to offer
broadband service as a condition of receiving high-cost support,” including rate-of-return carriers.453
208.
In the December 2014 Connect America Order, the Commission adopted additional
broadband reporting obligations for price cap ETCs. The Commission required price cap carriers
accepting model-based support to report the geocoded locations to which they have deployed facilities
capable of meeting the Commission’s requirements.454
2.

Discussion

209.
Broadband Reporting Requirements. We now update 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. We conclude that
the public interest will be served by adopting broadband location reporting requirements for rate-of-return
carriers similar to those we adopted for price cap carriers and authorized bidders in the rural broadband
448

USF/ICC Transformation Order, 26 FCC Rcd at 17850, para. 573; see also 47 CFR §§ 54.313, 54.314. Some of
these reporting requirements also apply to ETCs only receiving Lifeline support. See 47 CFR § 54.422(b) (requiring
ETCs that receive low income support to report outages, complaints, certify compliance with applicable service
quality standards and service protection rules and certify to the ability to function in emergency situations).
449

USF/ICC Transformation Order, 26 FCC Rcd at 17850, para. 573.

450

Id., 26 FCC Rcd at 17852, para. 579.

451

Id. at 17854, para. 587; see 47 CFR § 54.202(a)(1)(ii). Subsequently, the Bureau waived the requirement for
price cap carriers to file five-year plans until after such carriers accept Connect America Phase II support. See ETC
Reporting Clarification Order, 28 FCC Rcd at 2054, para. 8. The Commission also has waived the five-year plan
requirement for authorized bidders in the rural broadband experiments. See Connect American Fund Annual
Reports and Certifications, Report and Order and Notice of Proposed Rulemaking, 29 FCC Rcd 8769, 8795 at para.
77 (2014).
452

USF/ICC Transformation Order, 26 FCC Rcd at 18050, para. 1043.

453

April 2014 Connect America FNPRM, 29 FCC Rcd at 7147, para. 310. Further, the Commission sought
comment on how to reform its rules to provide support to rate-of-return ETCs based on the number of locations
served. See id. at 7137, para. 269 (asking, “whether a [revised rate-of-return] mechanism should be designed [to
provide] support based on locations….”).
454

See December 2014 Connect America Order, 29 FCC Rcd at 15688-89, para. 125; 47 CFR § 54.313(e).

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experiments. This targeted rule change is critical for the Commission to determine if universal service
funds are being used for their intended purposes.455 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.”456
210.
Specifically, similar to the current requirements for price cap ETCs,457 we adopt 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.458 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.459 Rate-of-return ETCs will also be required to report the number of locations at the
minimum speeds required by our rules.460 The location and speed data will be used to determine
compliance with the associated deployment obligations we adopt today.461 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.
211.
We expect 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. We conclude 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
455

As noted above, in the April 2014 Connect America Order and FNRPM, the Commission requested comment on
transitioning all rate-of-return funding to support broadband capable networks and reporting obligations for rate-ofreturn ETC subject to deployment obligations. See supra para. 160.
456

Government Accountability Office, FCC Should Improve the Accountability and Transparency of High-Cost
Program Funding, GAO 14-587 (July 2014), http://www.gao.gov/assets/670/664939.pdf.
457

See 47 CFR § 54.313(e).

458

See Appendix B.

459

See Letter of Genevieve Morelli, President, ITTA, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90
at attach., at 25 (filed Dec. 4, 2015) (on behalf of USTelecom and ITTA) (proposing draft rules that include a
geocoding requirement for rate-of-return ETCs electing CAF-ROR support); Letter of Michael R. Romano, Senior
Vice President – Policy, NTCA to Marlene. H. Dortch, Secretary, FCC, WC Docket No. 10-90 at 2 (filed Dec. 16,
2015) (on behalf of NTCA, USTelecom and ITTA) (Joint Association Dec. 16 Letter) (proposing location reporting
requirements for ETCs receiving support under the reformed rate-of-return mechanisms).
460

See Letter of Michael R. Romano, Senior Vice President – Policy, to Marlene H. Dortch, Secretary, FCC, WC
Docket No. 10-90 at 2 (filed Oct. 26, 2015) (on behalf of NTCA and WTA) (urging Commission to require that
ETCs report the number of newly served locations with 10/1 and with 25/3 or then applicable section 706 standard);
see also Joint Association Dec. 16 Letter at 2 (discussing NTCA, USTelecom, and WTA support for tiered speed
deployment obligations upon “reasonable request” and associated reporting obligations). If the ETC is unable to
meet the current minimum requirements to a particular location upon reasonable request, it would report the
locations served at a lower level of service. See supra paras. 156-180 (discussing broadband deployment and
reasonable request standard for rate of return carriers).
461

See supra paras. 156-180.

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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. We note 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.462
212.
We find 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.463 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.464 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.465
213.
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 we encourage
carriers to submit geocoded location information for their existing broadband locations no later than the
deadline for the 2017 reporting, we recognize the possibility that some smaller companies may not
already 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, we 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
462

As we explained in a similar context, we will not find good cause to waive the March 1 deadline due to
administrative or clerical oversight. See December 2014 Connect America Order, 26 FCC Rcd at 15693, para. 138.
463

We note that tools for geocoding locations are widely available. For example, the following free tool permits
users to input a postal address and receive back exact latitude and longitude coordinates. See, e.g., GPS Visualizer,
GPS Visualizer’s Quick Geocoder, http://wwwgpsvisualizer.com/geocodehttp://www.gpsvisualizer.com/geocode
(last visited Dec. 7, 2015). Similar capabilities are available on free smartphone apps. See, e.g., Google Play,
Geocode by Address,
https://play.google.com/store/apps/details?id=addressgeocode.tsthttps://play.google.com/store/apps/details?id=addre
ssgeocode.tst (last visited Dec. 7, 2015).
464

47 CFR § 32.2000(f)(2)(iii). See also 47 CFR § 32.2000(f)(5)(requiring carriers to maintain continuing property
records with “the specific location of the property . . . in such matter that it can be readily spot-checked for proof of
physical existence.”).
465

Rate-of-return carriers already are required to report the availability of broadband in a given census block
pursuant to the FCC Form 477 data collection. We recognize that some providers have a number of customers that
do not have postal addresses that easily can be geocoded with readily available applications. See, e.g., Comments of
Smith Bagley Inc., WC Docket No. 10-90 et al., at 28-20 (filed Apr. 31, 2015) (noting that many Tribal lands
residences lack postal addresses). We direct 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, we delegate 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.

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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.
214.
We conclude 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,
we direct the Bureau to work with USAC to develop an online portal that will be available for rate-ofreturn carriers to submit location information on a rolling basis throughout the year. 466
215.
We also establish 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, 2027.467 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.468
216.
In conjunction with adopting the location reporting requirements above to track rate-ofreturn ETCs’ build-out progress, we now eliminate the requirement for rate-of-return ETCs to file a
service quality improvement plan.469 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.”470 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. We
therefore find that it is unnecessary for rate-of-return ETCs to file a five-year service quality improvement
plan.471 Moreover, we conclude that because there is no longer a requirement to file a service quality
improvement plan, we also should eliminate the obligation in our rules for rate of return ETCs to file

466

We direct 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.
467

The Bureau has delegated authority to adjust these deadlines as necessary to align the timing of the
implementation of the various reforms.
468

See 47 CFR § 54.313(j) (imposing penalties on ETCs for failure to file information required by section 54.313 in
a timely manner). The penalties for failure for rate-of-return ETCs to timely file necessary geolocation data and
associated certifications will now be located in section 54.316(c). To the extent rate of return ETCs must continue
to make certifications in their annual July 1 filing, the penalties in section 54.313(j) for failure to timely file that
information will continue to apply.
469

See USF/ICC Transformation Order, 26 FCC Rcd at 17854, para. 587; 47 CFR § 54.202(a)(1)(ii).

470

See USF/ICC Transformation Order, 26 FCC Rcd at 17854, para. 587.

471

As we explain elsewhere in this item, the Commission may modify rules without notice and comment for good
cause shown. See infra paras. 224-225. Here, the rule we eliminate is unnecessary, as rate-of-return carriers have
already filed their initial service improvement plans in 2013 and the rule was waived for price cap carriers pending
implementation of Phase II.

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updates on that plan under our authority to eliminate rules that are no longer applicable.472 We also
modify, on the same basis, other rules to remove references to the service quality improvement plan.473
217.
Once we receive 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.”474 We conclude 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.
218.
Connect America Phase II Reporting Requirements. Because USAC will develop a
unified reporting portal for geocoded location information, we find good cause to make conforming
changes to the relevant reporting requirements for those price cap ETCs that accepted Phase II modelbased support. We find 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, we conclude 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.
219.
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.475 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.476 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. We make conforming edits to our rules by moving the certifications in section 54.313(e)(3)-

472

See 47 CFR § 54.313(a)(1) (requirement to file a progress report); see also section 553(b)(3)(B) of the
Administrative Procedure Act (APA) (permitting agencies to issue rule changes without notice and comment upon a
finding that notice and associated procedures are “impracticable, unnecessary, or contrary to the public interest”).
473

See 47 CFR § 54.313(f)(2) (requiring rate of return carrier to file information as part of their service quality
improvement plan progress reports).
474

47 CFR § 54.313(a)(1).

475

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.
476

For example, CenturyLink will have to deploy to almost 500,000 locations nationwide to meet its 40%
deployment milestones in all its accepted states. See Federal and State Staff for the Federal-State Joint Board on
Universal Service, Universal Service Monitoring Report, CC Docket No. 96-45, WC Docket Nos. 02-6, 02-60, 06122, 10-90, 11-42, 13-184, 14-58 at A-10 (2015 Universal Service Monitoring Report) (rel. Dec. 22, 2015).

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(e)(6) to new section 54.316.477 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).478
220.
Finally, for the reasons explained above for rate-of-return ETCs, we eliminate 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.479
221.
Improving Access to High-Cost Program Data. We direct 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.480 In 2014,
we 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 highcost program, which represented roughly 50 percent of the entire USF in 2015.481 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.482 We direct USAC to develop a map that will
enable the public to visualize service availability as it expands over time.
222.
We direct the Bureau to work with USAC to put appropriate protections in place for
ETCs to seek confidential treatment of limited subset of the information.483 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. We find that
making such data publicly available will increase transparency and enable ETCs, the Commission and
477

47 CFR § 54.313 (e)(3)-(e)(6). In light of our unification of reporting obligations, we delete the section of our
rules regarding price cap ETCs’ deployment obligations and certification of compliance (47 CFR § 54.313(e)(2)(i)),
(e)(2)(iii), (e)(3)-(e)(6)), and we move 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.
478

To the extent price cap ETCs must continue to make certifications in their annual July 1 filing, the penalties in
section 54.313(j) for failure to file that information in a timely manner will continue to apply.
479

See 47 CFR § 54.313(e)(2) (requiring price cap carriers to file information as part of their service quality
improvement plan progress reports).
480

See Office of Management and Budget, Exec. Office of the President, M-13-13, Open Data Policy – Managing
Information as an Asset (May 9. 2013), https://www.whitehouse.gov/sites/default/files/omb/memoranda/2013/m-1313.pdf (last visited Dec. 14, 2015).
481

See 2015 Universal Service Monitoring Report, Table 1.10, https://apps.fcc.gov/edocs_public/attachmatch/DOC337019A1.pdf.
482

The system should provide filers with confirmation that data has been accepted for filing and satisfies an initial
data validation process (e.g., no missing digits, etc.).
483

Currently, ETCs may seek confidential treatment of information pursuant to section 0.459 of the Commission’s
rules. Additionally, privately held rate-of-return carriers may file the financial information required by section
54.313(f)(2) pursuant to a protective order. See Connect America Fund et al., WC Docket No. 10-90 et al.,
Protective Order, DA 16-296 (WCB 2016). We expect carriers would continue to be able to seek confidential
treatment of certain information included in their Form 481s. We note, however, that while we will evaluate any
request for confidentiality on the merits, at this time, we see no reason for geocoded lists of newly served locations
to be confidential as carriers presumably are making service availability known to the general public in their
marketing efforts.

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other stakeholders to assess ETCs’ progress in deploying broadband throughout their networks as well as
compliance with our rules.484 Once these updated systems are operational, we anticipate that we 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. We seek
comment on this proposal in the FNPRM below.
223.
As ETCs comply with the new public interest and reporting requirements and broadband
public interest obligations in this Order, we will continue to monitor their behavior and performance.
Based on that experience, we may make additional modifications as necessary to our reporting
requirements.
F.

Rule Amendments

224.
We take this opportunity to make several non-substantive rule amendments.485 We find
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, we find 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.
225.
First, we remove 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, we remove 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, we modify two provisions of section
54.313(a) requiring ETCs to submit a letter certifying that its pricing is in compliance with our rules.486
We conclude 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.487 Fourth, we correct 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.488
484

We note that the Commission has established a similar tool for E-rate data pursuant to the E-Rate Second Report
and Order. See Modernizing the E-Rate Program for Schools and Libraries, et al., WC Docket No. 13-184 et al., 29
FCC Rcd 15538, 15590 para. 128 (2014) (E-Rate Second Report and Order); USAC, Funding Request Data
Retrieval Tool, http://www.slforms.universalservice.org/DRT/Default.aspx (last visited Mar. 29, 2016).
485

Section 553(b)(3)(B) of the APA permits agencies to issue rule changes without notice and comment upon a
finding that notice and associated procedures are “impracticable, unnecessary, or contrary to the public interest.”
See 5 U.S.C. § 553(b)(3)(B). Elsewhere in this Report and Order, we have noted other non-substantive rule
amendments made under the good cause exception, in conjunction with discussions of other rule changes.
486

See 47 CFR § 54.313(a)(10) (ETC letter certifying 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); 47 CFR
§ 54.313(f)(2) (ETC letter certifying that it is taking reasonable steps to provide broadband service at Commission
standards).
487

In addition to our authority to make this change under section 553(b)(3)(B) of the APA, we also note that the
Bureau was delegated the authority to determine the “form in which [ETCs] must report” the information in the
annual reports. See USF/ICC Transformation Order, 26 FCC Rcd at 17583, para. 584.
488

See December 2014 Connect America Order, 29 FCC Rcd at 15737-38, para. 76 (“Rate-of-return carriers [are]
required to offer at least 10/1 Mbps broadband service upon reasonable request,” and “if a request for 10/1 Mbps is
not reasonable in a given circumstance, but offering 4/1 Mbps is reasonable” then the rate-of-return carrier must
offer 4/1 Mbps”); 47 CFR § 54.313(f)(1).

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Fifth, we delete 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 54.313.489 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, we delete 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 move
those requirements to new section 54.316.490 Seventh, we delete 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, we
eliminate 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 54.313.491 Ninth, we amend section 54.707 Audit controls so that it reflects accurate cross
references to rules that currently are in existence and applicable.492 We rename the existing rule, section
54.707, as subsection (a) and add new subsections (b) and (c) to reflect rules that were adopted by the
Commission in the USF/ICC Transformation Order, but inadvertently not codified.493 Tenth, we amend
sections 69.104(n)(ii) and 69.415(a)-(c) to remove language that is no longer applicable. Eleventh, we
amend section 69.603(g), Association functions, to remove references to support mechanisms that no

489

Compare 47 CFR § 54.313(e)(3)(i) (requiring a “certification that it is meeting interim deployment milestones”)
with 47 CFR § 54.313(e)(4)-(6) (each requiring a certification that each interim deployment milestone was met);
compare 47 CFR 54.313(f)(1)(iii) (requiring specific information from a “rate-of-return recipient[] of high cost
support) with 54.313(f) (requiring information from any “rate-of-return carrier.”).
490

See supra paras. 216-220. Moreover, because price cap ETCs’ deployment and associated certification
requirements have moved from section 54.313 and are now located in section 54.316, the penalties for failure to
comply with the requirement to file that information, currently in section 54.313(j), are now located in section
54.316(c). Because price cap and rate of return ETCs must still make certifications pursuant to section 54.313, the
rule in 54.313(j) imposing penalties for failure to file that information remains unchanged. See Appendix B
(preserving various requirements in section 54.313).
491

The Commission stated in the USF/ICC Transformation Order that it was maintaining the ICLS certification for
the July 2012 filing and eliminating the rule starting in July 2013, but it failed to remove the codified rule. See
USF/ICC Transformation Order, 26 FCC Rcd at 17862, para. 614.
492

The codified rule currently refers to Part 36. In the April 2014 Connect America Fund Order, the Commission
moved the rules governing the high-cost loop support mechanism from Part 36 into a new subpart M in Part 54. The
codified rule also was not updated at the time of the USF/ICC Transformation Order to reflect the addition of
subpart L to Part 54, for the Mobility Fund. The codified rule also refers to sections 69.116 through 69.117; those
rules no longer are in the Code of Federal Regulations. The codified rule also erroneously specifies that
reimbursements shall not be provided to a carrier in the rural health care mechanism until the carrier provides proof
of its ETC designation to the Administrator. A carrier is not required to obtain an ETC designation in order to
participate in or receive support under the rural health care mechanism. See 47 CFR Part 54, Subpart G; 47 CFR §
54.640.
493

In the USF/ICC Transformation Order, the Commission stated that it was modifying its rules to clarify that
USAC has a right to obtain, at any time, all cost and revenues submissions that carriers submit to NECA that are
used to calculate payments under any of the existing and any new programs; the Commission at the time failed to
codify that rule. See USF/ICC Transformation Order, 26 FCC Rcd at 17867, para. 633. The Commission also
stated that it was modifying its rules to ensure that the Commission has timely access to data; it stated that USAC
and NECA are required to provide to the Commission upon request all underlying data used to calculate payments
under the existing mechanisms and Connect America Fund payments; again, the Commission failed to codify that
requirement. See USF/ICC Transformation Order, 26 FCC Rcd at 17867, para. 634.

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longer exist or functions that NECA no longer performs, and to update terminology to reflect terms now
used in Part 54.494
III.

ORDER AND ORDER ON RECONSIDERATION

226.
As part of our modernization of the framework for rate-of-return support, we also
represcribe 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.495 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.
227.
It is important that we take 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-ofreturn 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, we conclude 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.
228.
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

494

“The Universal Service Fund” in the current section 69.603(g) of our rules refers to the support mechanism now
known as high-cost loop support. The rule refers to the Lifeline Assistance; NECA has not played a role in Lifeline
since the creation of USAC and implementation of the current Lifeline program after the 1996 Act. The codified
rule refers to Long Term Support payments and Transitional Support payments; those payments no longer exist.
The current rule also refers to Carrier Common Line revenues. The Carrier Common Line rate element was phased
out in 2003, but not removed from the rules.
495

See 47 CFR § 65.1. Our actions here do not affect the cost of money input of 8.5% in the Connect America Cost
Model (CAM v4.3) used to calculate support for price cap carriers. CAM Inputs Order, 29 FCC Rcd at 4011-12,
para. 107; ACA AFR Order, 29 FCC Rcd at 14093, para. 4 (denying ACA application for review arguing that the
Commission should select 7.72% instead of 8.5% for the cost of money in the CAM for price cap carriers).

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universal service support for rate-of-return incumbent LECs where applicable.496 Relying primarily on
the methodology and data contained in the Wireline Competition Bureau’s Staff Report497 – 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. We then adopt 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.

Background

229.
The Commission prescribes a unitary rate of return (commonly referred to as the “rate of
return” or “authorized rate of return”) for the roughly 1100 incumbent LEC study areas subject to rate-ofreturn regulation.498 Under rate-of-return regulation, a carrier’s rates are set at levels to give the carrier an
opportunity to recover its operating costs plus an authorized rate of return on the regulated rate base (plant
in service minus accumulated depreciation).499 The authorized rate of return is used to determine
interstate common line rates and special access rates for rate-of-return incumbent LECs,500 and is also
used in calculating some forms of universal service support, including HCLS501 and ICLS.502
230.
The currently authorized rate of return – 11.25 percent – was set in 1990.503 In the
USF/ICC Transformation NPRM released February 9, 2011, the Commission proposed to fundamentally

496

In represcribing the rate of return here, we do 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. See USF/ICC Transformation Order, 26 FCC Rcd at 17934, para. 801 and Fig. 9.
497

Staff Report, 28 FCC Rcd 7123.

498

The Commission is required by section 201 of the Communications Act of 1934 to ensure that rates are “just and
reasonable.” See 47 U.S.C. § 201(b). Section 205(a) of the Act authorizes the Commission, on an appropriate
record, to prescribe just and reasonable charges of common carriers. See 47 U.S.C. § 205(a). The Commission in
the past has applied the authorized rate of return to certain services offered by price cap incumbent LECs. For
example, under the Commission’s rules, incumbent LEC collocation rates are based on costs and these rates are not
subject to price cap regulation. In its order concluding its investigation of physical collocation tariffs filed by
incumbent LECs otherwise regulated under price caps, the Commission found that incumbent LECs that developed
rates based on a rate of return higher than 11.25 had failed to justify use of that higher rate of return, and ordered
those incumbent LECs to recalculate their rates based on a rate of return that did not exceed 11.25%. See Local
Exchange Carriers’ Rates, Terms, and Conditions for Expanded Interconnection Through Physical Collocation for
Special Access and Switched Transport, CC Docket No. 97-208, Second Report and Order, 12 FCC Rcd 18730,
18765-67, paras. 71-76 (1997).
499

See Connect America Fund et al., WC Docket No. 10-90 et al., Notice of Proposed Rulemaking and Further
Notice of Proposed Rulemaking, 26 FCC Rcd at 4564, para. 21 n.23 (2011) (USF/ICC Transformation NPRM).
500

In the USF/ICC Transformation Order, the Commission took rate-of-return incumbent LECs off of rate-of-return
regulation for interstate switched access services. See USF/ICC Transformation Order, 26 FCC Rcd at 17983-84,
para. 900.
501

See 47 CFR § 54.1308(a)(1).

502

See 47 CFR § 54.901.

503

USF/ICC Transformation FNPRM, 26 FCC Rcd at 17869-70, paras. 639-40. The Commission reduced the
authorized rate of return from 12% to 11.25% in 1990. See Represcribing the Authorized Rate of Return for
Interstate Services of Local Exchange Carriers, CC Docket No. 89-624, Order, 5 FCC Rcd 7507 (1990) (1990
Represcription Order). The Commission’s rules require that the Commission issue a notice inquiring whether it
should undertake a represcription if the monthly average yields on 10-year United States 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. See 47 CFR § 65.101. Subsequently in 1998, the Commission noted that the trigger was met and
initiated a represcription proceeding, but the proceeding was terminated in the MAG Order, leaving the authorized
rate of return unmodified. See Multi-Association Group (MAG) Plan for Regulation of Interstate Services of Non(continued….)

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reform and modernize the Commission’s universal service and intercarrier compensation system to ensure
that robust, affordable voice and broadband services are available to all Americans.504 As part of these
comprehensive reforms, the Commission sought comment on whether it should initiate a proceeding to
represcribe the authorized rate of return for rate-of-return carriers if it determined that such carriers
should continue to receive high-cost support under a modified rate-of-return system.505 In response to the
USF/ICC Transformation NPRM, State Members of the Federal-State Joint Board on Universal Service
proposed a rate of return of 8.5 percent while rate-of-return carrier associations proposed a rate of return
of 10 percent.506
231.
In the subsequent USF/ICC Transformation Order, the Commission found that the trigger
for a new prescription proceeding was satisfied, observing that the monthly average yields on 10-year
U.S. Treasury securities for the previous six months were over 450 basis points below the monthly
average yields in the six months immediately prior to the last prescription, satisfying the 150 basis points
trigger in our rules.507 Accordingly, the Commission concluded it should represcribe the authorized
interstate rate of return for rate-of-return carriers and initiated the represcription process. The
Commission also found good cause to waive certain procedural requirements in the rules relating to rate
represcriptions to streamline and modernize this process to align with current Commission practice.508 In
the accompanying USF/ICC Transformation FNPRM, the Commission proposed that the interstate rate of
return be adjusted to ensure that it more accurately reflects the true cost of capital and sought comment
generally on the most appropriate methodology for calculating the cost of capital.509
232.
The Commission’s rules require that the rate of return be based upon its analysis of the
cost of debt and equity, and the ratio of debt to equity, also known as the “capital structure.” Specifically,
the Commission’s rules stipulate that the rate of return be determined by calculating the Weighted
Average Cost of Capital (WACC) by summing the estimated cost of debt, cost of preferred stock, and
cost of equity, each weighted by its proportion in the capital structure of the telephone companies taken as
(Continued from previous page)
Price Cap Incumbent Local Exchange Carriers and Interexchange Carriers, CC Docket No. 00-256, Second Report
and Order and Further Notice of Proposed Rulemaking, 16 FCC Rcd 19613, 19701, para. 208 (2001) (MAG Order).
504

See USF/ICC Transformation NPRM, 26 FCC Rcd at 4557, para. 1.

505

Id. at 4692, para. 56. In response, several parties, including the state members of the Federal-State Joint Board
on Universal Service, suggested that the Commission should lower the authorized rate of return. See State Members
USF/ICC Transformation NPRM Comments at 36-37 (8.5%); Letter from Walter B. McCormick, Jr., USTelecom, to
Chairman Genachowksi, Commissioner Copps, Commissioner McDowell, and Commissioner Clyburn, WC Docket
No. 10-90, at 2 (filed Jul. 29, 2011) (10%). The Commission also sought comment more broadly on whether
proposed changes, or any other potential changes to rate-of-return regulation, would adversely affect the ability of
rate-of-return carriers to provide voice and broadband services. Id.
506

USF/ICC Transformation FNPRM, 26 FCC Rcd at 18051, para. 1046 (citing State Members USF/ICC
Transformation NPRM Comments at 36-37 and Letter from Walter B. McCormick, Jr., USTelecom, to Chairman
Genachowksi, Commissioner Copps, Commissioner McDowell, and Commissioner Clyburn, WC Docket No. 1090, at 2 (filed Jul. 29, 2011)).
507

USF/ICC Transformation Order, 26 FCC Rcd at 17870, para. 640 (citing 10-Year Treasury Constant Maturity
Rate (GS10), Federal Reserve Bank of St. Louis, http://research.stlouisfed.org/fred2/series/GS10)); see 47 CFR §
65.101 (“Whenever the Commission determines that the monthly average yields on ten (10) year United States
Treasury securities remain, for a consecutive six (6) month period, at least 150 basis points above or below the
average of the monthly average yields in effect for the consecutive six (6) month period immediately prior to the
effective date of the current prescription, the Commission shall issue a notice inquiring whether a rate of return
prescription according to this part should commence.”).
508

USF/ICC Transformation Order, 26 FCC Rcd at 17869-72, paras. 638-45.

509

USF/ICC Transformation FNPRM, 26 FCC Rcd at 18051-56, paras. 1044-60.

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a whole.510 Because there is a range of reasonable estimates for each of the elements of the WACC, in the
past the Commission has identified a zone of reasonable WACC estimates and then decided, based on
policy considerations, to prescribe the unitary rate of return within that “zone of reasonableness.”511
233.
In the USF/ICC Transformation FNPRM, the Commission sought comment generally on
the issues raised in the 1998 Prescription Notice, when the Commission last initiated a prescription
proceeding, such as the methods by which the Commission could determine the appropriate cost of
capital.512 In particular, the Commission sought comment on the WACC, appropriate data and
methodologies the Commission should use to calculate the WACC, capital structure, the surrogate or
proxy group for which financial data is publicly available as a basis for calculating the cost of capital, the
cost of debt, cost of preferred stock, cost of equity, and factors the Commission should consider in
determining the rate of return from within a “zone of reasonableness.” The Commission also sought
comment on how to account for Tribally-owned and operated carriers in this prescription, and whether a
different rate of return is warranted for these carriers.513
234.
On May 16, 2013, Bureau staff released a Staff Report designed to assist the Commission
as it considers prescribing a new authorized rate of return.514 Taking into account comments filed in
response to the USF/ICC Transformation FNPRM,515 as well as regulatory and market changes since the
Commission’s last represcription, that report analyzed various policies regarding represcription and
possible procedural and substantive changes to the represcription process.516 In the Staff Report, staff
discussed analytical approaches to calculating the rate of return, with particular emphasis on calculating
the cost of equity, and examined how best to establish a “zone of reasonableness.”517 Based upon the staff
analysis of 16 publicly-traded incumbent LECs, using various analytical methods and sources of publiclyavailable data, the Staff Report identified a zone of reasonable estimates of the WACC ranging from 7.39
percent to 8.72 percent, recommending a rate of return should be selected from upper end of this range
between 8.06 and 8.72 percent.518
235.
Concurrently with the release of the Staff Report, the Bureau released a Public Notice on
May 16, 2013 seeking comment on the data, analysis and recommendations contained in the Staff Report
and asking parties to document the methodology, assumptions, data, and calculations of any alternative
analyses. 519 The Bureau received 15 comments and 10 replies.520
510

47 CFR § 65.305(a).

511

1990 Represcription Order, 5 FCC Rcd at 7508, para. 7.

512

USF/ICC Transformation Order, 26 FCC Rcd at 18051-56, paras. 1044-60; Prescribing the Authorized Rate of
Return for Interstate Services of Local Exchange Carriers, CC Docket No. 98-166, Notice Initiating a Prescription
Proceeding and Notice of Proposed Rulemaking, 13 FCC Rcd 20561, 20563, para. 2 (1998) (1998 Prescription
Notice).
513

USF/ICC Transformation Order, 26 FCC Rcd at 18051-56, paras. 1044-60.

514

Staff Report, 28 FCC Rcd 7123.

515

See id. at 7127, para. 2; USF/ICC Transformation Order, 26 FCC Rcd at 18051-56, paras. 1044-60.

516

Staff Report, 28 FCC Rcd at 7127-28, para. 2.

517

Id. at 7146-67, paras. 51-114 (examining methodologies to calculate the cost of equity); id. at 7168-74, paras.
117-137 (establishing a zone of reasonableness).
518

Id. at 7124, Exec. Summary. Commission rules require that the final determinations of the cost of debt, cost of
equity, cost of preferred stock, and of their capital structure weights be accurate to two decimal places. 47 CFR
§ 65.306.
519

Wireline Competition Bureau Seeks Comment on Rate of Return Represcription Staff Report; Comment Cycle
Established, WC Docket No. 10-90 et al., Public Notice, 28 FCC Rcd 7120, 7121 (WCB 2013) (Staff Report Public
Notice). Comments on the Staff Report were due on July 25, 2013; reply comments were due August 26, 2013. Id.

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236.
In addition, the Bureau initiated an external peer review process for the Staff Report
pursuant to Office of Management and Budget peer review guidelines because the Staff Report provides
the Commission with “highly influential scientific, financial, or statistical information.”521 The Bureau
received two peer review reports analyzing the Staff Report, one from Professor Robert Bowman and one
from Doctors Robert Albon and Peter Gibbard who were selected based on their expertise, experience and
skills in the field of economics.522 The Bureau incorporated the results of that process into these dockets
to provide notice to interested parties and an opportunity for comment on the peer review results.523 No
comments were filed on the peer review reports.
B.

Discussion
1.

Procedural Issues

237.
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.524 However, as the Commission explained in the USF/ICC Transformation Order, a formal
evidentiary hearing is not required under section 205,525 and the Commission has on multiple occasions
prescribed individual rates in notice and comment rulemaking proceedings.526 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
(Continued from previous page)
520
See App. F.
521

Staff Report Public Notice, 28 FCC Rcd at 7121; FINAL INFORMATION QUALITY BULLETIN FOR PEER REVIEW,
OFFICE OF MANAGEMENT AND BUDGET, EXECUTIVE OFFICE OF THE PRESIDENT, 70 Fed. Reg. 2664 (Jan. 14, 2005)
(requiring that influential scientific information on which a federal agency relies in a rulemaking proceeding be
subject to peer review to enhance the quality and credibility of the government’s scientific information).
522

See Letter from Jamie Susskind, Legal Advisor to the Chief, Wireline Competition Bureau, FCC, to Marlene H.
Dortch, Secretary, FCC, WC Docket No. 10-90, Attach. (filed May 1, 2014) (incorporating into the proceeding the
peer review charge memoranda directing the peer reviewers to conduct their analysis and the peer review reports
that were received by the Bureau) (May 1, 2013 FCC Letter); see Professor Robert G. Bowman, A Peer Review of:
Prescribing the Authorized Rate of Return: Analysis of Methods for Establishing Just and Reasonable Rates for
Local Exchange Carriers Wirelines Competition Bureau Staff Report (WC Docket No. 10-90) dated May 16, 2013,
(dated Sept. 16, 2013) (Bowman Report); Robert Albon and Peter Gibbard, Peer Review of the Federal
Communications Commission Staff Report ‘Prescribing the Authorized Rate of Return: Analysis of Methods for
Establishing Just and Reasonable Rates for Local Exchange Carriers (May 16, 2013),’ (dated Sept. 18, 2013)
(Albon & Gibbard Report). Doctors Albon and Gibbard submitted peer review reports dated September 6 and 11,
2013 but subsequently revised on September 18, 2013; all versions were submitted into the record in the
represcription proceeding.
523

See May 1, 2013 FCC Letter, Attach. As part of their review, the peer reviewers were directed by the Bureau to
comments and reply comments filed by interested parties on the Staff Report. See id., Attach. at 2, 22.
524

47 U.S.C. § 205(a).

525

USF/ICC Transformation Order, 26 FCC Rcd at 17870, paras. 641. In AT&T v. FCC, for example, the Second
Circuit made clear that because section 205 does not require a hearing “on the record,” the APA does not require a
full evidentiary hearing in section 205 prescription proceedings. 572 F.2d 17, 21-23 (2d Cir. 1978). Moreover, the
court found that the language of section 205(a) itself did not impose greater hearing requirements than the APA –
concluding that AT&T “may not complain that it had anything less than a ‘full opportunity’ to be heard” after
receiving, in the context of the particular proceeding on review, three rounds of comments. 572 F.2d at 22.
526

USF/ICC Transformation Order, 26 FCC Rcd at 17870, paras. 641; see, e.g., Access Charge Reform, First Report
and Order, 12 FCC Rcd 15982, paras. 75-87 (1997), aff’d Southwestern Bell Tel. Co. v. FCC, 153 F.3d 523 (8th Cir.
1998) (prescribing new limits on subscriber line charges for non-primary residential and multi-line business lines);
Access Charge Reform, Sixth Report and Order, 15 FCC Rcd 12962, paras. 58, 70-75 (2000), aff’d in pertinent part,
Texas Office of Pub. Util. Counsel, 265 F.3d 313 (5th Cir. 2001) (prescribing revised ceilings on subscriber line
charges).

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procedural rules to facilitate a more efficient process, including specific paper filing requirements.527 The
Commission also sought comment in the USF/ICC Transformation FNPRM on the rate of return
calculation and the related data and methodology to so calculate.528 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.529
238.
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.530 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).531
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.”532 The Rural Associations raised similar issues in their comments on the Staff
Report, which we also address.533
a.

Whether Commission Should Revise Prescription Rules Before
Represcribing Rate of Return

239.
Petitioners argue that, prior to represcribing, the Commission must first adopt revised
rules addressing alleged “flaws” in the prescription rules.534 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.535 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 205.536 The Rural Associations note that in the MAG Order, the
Commission stayed the effectiveness of section 65.101 to allow the Commission comprehensively to
527

USF/ICC Transformation Order, 26 FCC Rcd at 17870-72, paras. 641-45 & n.1070 (citing 47 C.F.R. § 1.3,
WAIT Radio v. FCC, 418 F.2d 1153 (D.C. Cir. 1969), and Northeast Cellular Tel. Co. v. FCC, 897 F.2d 1164, 1166
(D.C. Cir. 1990)).
528

Id. at 17872, para. 646.

529

Staff Report, 28 FCC Rcd at 7124, Exec. Summary; Staff Report Public Notice.

530

NECA et al. Petition at 29; National Exchange Carrier Association, Inc., Organization for the Promotion and
Advancement of Small Telecommunications Companies, and Western Telecommunications Alliance Reply to
Oppositions to Petition for Reconsideration, WC Docket No. 01-90 et al., at 29 (filed Feb. 21, 2012) (NECA et al.
Reply). To the extent the Commission has not previously addressed the NECA et al. Petition, we do so in this Order
on Reconsideration. See 47 CFR § 1.429(i).
531

NECA et al. Petition at 26.

532

Id.

533

See Comments of the National Exchange Carrier Association, Inc., NTCA – The Rural Broadband Association,
US Telecom, the Eastern Rural Telecom Association and Western Telecommunications Alliance, WC Docket No.
10-90 et al., at 34-38 (filed Jul. 25, 2013) (Rural Associations Staff Report Comments).
534

NECA et al. Petition at 26-27.

535

Id..

536

Rural Associations Staff Report Comments at 6, 35-36; Reply Comments of GVNW Consulting, Inc., WC
Docket No. 10-90, at 6 (filed Aug. 26, 2013) (GVNW Staff Report Reply).

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review the Part 65 rules to ensure that decisions we make are consonant with current conditions in the
marketplace but assert that “complete review” has yet to occur.537
240.
We disagree 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.”538 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.539 Petitioners cite generally
the 1990 Prescription Order 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.540 Similarly, the Rural Associations cite the 2001 MAG
Order that stayed the section 65.101 to allow time to review the Part 65 rules.541 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, we address instances where strict application of our prescription rules would be
inconsistent with a methodologically sound estimate of the rate of return. For example, we revise the cost
of debt formula as discussed in further detail below,542 and waive the rule requirement to calculate the
WACC based on the cost of preferred stock.543 Where we find that strict application of the rules would be
unreasonable, such as relying on ARMIS data from RHCs that is no longer collected, we rely on
reasonable alternatives.544 We do, 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.
241.
We reject Petitioners’ claims that our “methodology for determining ‘comparable firms’
was deficient,” and that we do not know how to account for the fact that many rate-of-return incumbent
LECs are “locally owned and not publicly traded.”545 As discussed in further detail below, the most
537

Rural Associations Staff Report Comments at 34.

538

47 CFR § 65.300 (emphasis added).

539

NECA et al. Petition at 26 (citing 1990 Prescription Order; Refinement of Procedures and Methodologies for
Represcribing Interstate Rates of Return for AT&T Communications and Local Exchange Carriers; and
Represcribing the Authorized Rate of Return for Interstate Services of Local Exchange Carriers, Order, 5 FCC Rcd
197, para. 47 (1989); Regulatory Reform for Local Exchange Carriers Subject to Rate of Return Regulation, Notice
of Proposed Rulemaking, 7 FCC Rcd 5023, para. 6 (1992); Refinement of Procedures and Methodologies for
Represcribing Interstate Rates of Return for AT&T Communications and Local Exchange Carriers, Notice of
Proposed Rulemaking, 2 FCC Rcd 6491 (1987)); see Amendments of Parts 65 and 69 of the Commission’s Rule to
Reform the Interstate Rate of Return Represcription and Enforcement Process, CC Docket No. 92-133, Report and
Order, 10 FCC Rcd 6788 (1995).
540

1990 Prescription Order, 5 FCC Rcd 7510, para. 26.

541

Rural Associations Staff Report Comments at 34 (citing MAG Order, 11 FCC Rcd at 19701-02, para. 210).

542

See infra Section III.B.5.a.

543

See infra Section III.B.5.c.

544

See infra Section III.B.2; 47 CFR § 65.300(a) (specifying that calculations of the components and weights of the
cost of capital shall be based on data reported to the Commission in FCC Report 43–02, i.e. ARMIS data).
545

Petition at 26-25.

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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, we select 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.546 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 we consider and address again in this order.
b.

Notice and Comment Procedures Satisfy Section 205(a) Hearing
Requirement

242.
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.547 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).548 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.”549 Similarly, Petitioners argue that the
Commission should clarify procedures governing presentation of data and discovery.550 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.”551 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.”552 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.”553
243.
We reject these assertions because, consistent with AT&T v. FCC, interested parties have
had an opportunity to participate in multiple rounds of comments.554 We find 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.555 As the Commission observed in the USF/ICC Transformation Order,
546

See infra Section III.B.3.

547

Id. at 27-29.

548

See Comments of GVNW Consulting, Inc., WC Docket No. 10-90, at 5 (filed Jul. 25, 2013) (GVNW Staff Report
Comments); Rural Associations Staff Report Comments at 34-38.
549

Rural Associations Staff Report Comments at 34-38; see also GVNW Staff Report Comments at 5; GVNW Staff
Report Reply at 6 & n.7 (filed Aug. 16, 2013) (GVNW Staff Report Reply); see also Comments of Moss Adams
LLP et al., WC Docket No. 10-90, at 10 (filed Jul. 25, 2013) (Moss Adams Staff Report Comments).
550

NECA et al. Petition at 29.

551

Id. at 28.

552

Id. at 28.

553

NECA et al. Petition at 29; see Rural Associations Staff Report Comments at 38; Rural Associations Staff Report
Reply at 3.
554

AT&T v. FCC, 572 F.2d 17, 21-22 (2nd Cir. 1978); see also USF/ICC Transformation Order, 26 FCC Rcd at
17870, para. 641.
555

47 U.S.C. § 205(a).

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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.556 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.”557 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.558 Accordingly, the Commission determined that the
paper hearing process was no longer necessary to ensure adequate public participation.559
244.
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, interested
parties had the opportunity to comment on whether to initiate a represcription proceeding.560
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.561 The Commission
received multiple submissions from parties, which the Commission’s Electronic Comment Filing System
(ECFS) generally makes available within 24 hours. The vast 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.562 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.563
245.
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
556

USF/ICC Transformation Order, 26 FCC Rcd at 17870, para. 641 & n.1066 (citing AT&T v. FCC, 572 F.2d 17,
21-23 (2d Cir. 1978) (holding that the APA does not require a full evidentiary hearing in section 205 prescription
proceedings and that section 205(a) does not require greater hearing requirements than the APA); Access Charge
Reform et al., CC Docket No. 96-262 et al., First Report and Order, 12 FCC Rcd 15982, 16012-18, paras. 75-87
(1997), aff’d Southwestern Bell Tel. Co. v. FCC, 153 F.3d 523 (8th Cir. 1998) (prescribing new limits on subscriber
line charges for non-primary residential and multi-line business lines); Access Charge Reform et al., CC Docket No.
96-262 et al., Sixth Report and Order, 15 FCC Rcd 12962, 12984, 12988-91, paras. 58, 70-75 (2000), aff’d in
pertinent part, Texas Office of Pub. Util. Counsel, 265 F.3d 313 (5th Cir. 2001) (prescribing revised ceilings on
subscriber line charges)).
557

USF/ICC Transformation Order, 26 FCC Rcd at17870, para. 641 (citing Amendment of Parts 65 and 69 of the
Commission’s Rules to Reform the Interstate Rate of Return Represcription and Enforcement Processes, Report and
Order, CC Docket No. 92-133, 10 FCC Rcd 6788, 6814, para. 55 (1995) (Rate of Return Streamlined Rules R&O);
see generally Rate of Return Streamlined Rules R&O, 10 FCC Rcd at 6814-15, paras. 55-57 (citing case law
establishing that the “full opportunity for hearing” language of section 205 does not mandate “trial-type procedures
in addition to, or instead of, notice and comment procedures”).
558

USF/ICC Transformation Order, 26 FCC Rcd at 17870-72, paras. 641-45. The Commission waived paper service
copy filing requirements, 47 CFR. §§ 65.100(b), 65.103(d)-(e), the filing schedule to coincide with the rulemaking
comment and reply schedule in the USF/ICC Transformation FNPRM, see 47 CFR § 65.103(b), and the
represcription requirement to publish notice of the cost of debt, cost of preferred stock, and capital structure
computed in the section 65.101(a) notice initiating prescription, see 47 CFR § 65.101(a)(2). See USF/ICC
Transformation Order, 26 FCC Rcd at 17870-72, paras. 641-45.
559

See USF/ICC Transformation Order, 26 FCC Rcd at 17871-72, paras. 642-45.

560

USF/ICC Transformation NPRM, 26 FCC Rcd at 4692, para. 56.

561

USF/ICC Transformation Order, 26 FCC Rcd at 18051-56, paras. 1044-60.

562

See id. at 17871-72, para. 644.

563

See Staff Report Public Notice; see also Staff Report.

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Transformation FNPRM.564 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.565 We find 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.
246.
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, we find that all interested parties had adequate notice of these
calculations in the Staff Report.566 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 ratios567 as well as the peer review reports on the Staff
Report.568 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.569 In sum, we find 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. 570 Accordingly, we deny the Petition to the extent described herein.
2.

Identifying and Obtaining Data to Compute WACC

247.
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.571 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.572 The rules do not, however, require the Commission to use the
564

USF/ICC Transformation Order, 26 FCC Rcd at 17872, para. 645.

565

Staff Report Public Notice, 29 FCC Rcd at 7120. Interested parties also have the ability to participate outside the
comment period via ex parte presentations and submissions.
566

USF/ICC Transformation Order, 26 FCC Rcd at 17872, para. 645; see 47 CFR § 65.101(a). The rules provide
that the Bureau may issue the notice inquiring whether a represcription should commence, including notice of the
computed cost of debt, cost of preferred stock, and capital structure. 47 CFR § 65.101(c). Note, the USF/ICC
Transformation Order apparently contained a typographical error by mistakenly citing section 65.301, which relates
to calculating the cost of equity, as opposed to section 65.101, which requires notice when the Commission initiates
represcription. USF/ICC Transformation Order, 26 FCC Rcd at 17872, para. 645; compare 47 CFR § 65.101(a) with
47 CFR § 65.301.
567

See Staff Report, 28 FCC Rcd at 7184-98, Appendices D-M; see May 1, 2013 FCC Letter, Attach.

568

See May 1, 2013 FCC Letter, Attach.

569

See 47 CFR §§ 65.103(b), 65.105(b); see Rate of Return Streamlined Rules R&O, 10 FCC Rcd at 6813, para. 52
(Commission noted that it was retaining rule provisions that allow for the filing of “direct, responsive, and rebuttal
cases”).
570

See United States v. Florida East Coast Ry. Co., 410 U.S. 224, 236-38 (1973) (holding that, unless a statute
requires that a rulemaking be conducted “on the record,” the formal rulemaking provisions of 5 U.S.C. §§ 556-557
are not required); Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, 435 U.S. 519, 54344 (1978) (holding that, other than APA compliance, agencies with substantive responsibility in an area have
discretion to formulate applicable procedures).
571

See Staff Report, 28 FCC Rcd at 7131, para. 9.

572

See 47 CFR §§ 65.300-303; see 47 CFR § 32.9000 (defining the indexed revenue threshold).

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results of those calculations to determine the rate of return “if the record in that proceeding shows that
their use would be unreasonable.”573 The rules also do not specify how to calculate the cost of equity,574
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.575 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.576
248.
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.577 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.578 The Commission, however, has forborne from collecting
ARMIS reports from the RHCs so this data is no longer readily available.579 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.580
249.
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-ofreturn 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.581 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

573

47 CFR § 65.300(a); 1990 Represcription Order, 5 FCC Rcd 7516-19, paras. 76-102.

574

47 CFR § 65.301.

575

Staff Report, 28 FCC Rcd at 7146, para. 51.

576

See id. at 7131, para. 10.

577

47 CFR §§ 65.300(a) (specifying that calculations of the components and weights of the cost of capital shall be
based on data reported to the Commission in FCC Report 43–02, i.e. ARMIS data).
578

See Staff Report, 29 FCC Rcd at 7175, para. 141; 1990 Represcription Order, 5 FCC Rcd at 7516-19, paras. 76102. Analyst estimates of the expected growth rates of those companies were readily available, the companies’
equity was widely traded, and the data was reasonably reliable.
579

See Service Quality Customer Satisfaction, Infrastructure and Operating Data Gathering, Petition of AT&T Inc.
for Forbearance Under 47 U.S.C. § 160(c) from Enforcement of Certain of the Commission’s ARMIS Reporting
Requirements et. al., WC Docket No. 08-190 et al., Memorandum Opinion and Order and Notice of Proposed
Rulemaking, 23 FCC Rcd 13647 (2008); Petition of Qwest Corporation for Forbearance from Enforcement of the
Commission’s ARMIS and 492A Reporting Requirements Pursuant to 47 U.S.C. § 160(c) et al., WC Docket Nos.
07-204, 07- 273, Memorandum Opinion and Order, 23 FCC Rcd 18483, 18484, para. 1, 18487, para. 8 (2008);
Petition of USTelecom for Forbearance Under 47 U.S.C. § 160(c) from Enforcement of Certain Legacy
Telecommunications Regulations, WC Docket No. 12-61, Memorandum Opinion and Order, 28 FCC Rcd 7627,
7676, para. 108 (2013), pet. for rev. denied Verizon v. FCC, 770 F.3d 961 (D.C. Cir. 2014).
580

USF/ICC Transformation Order, 26 FCC Rcd at 18052-53, para. 1050.

581

See generally 1990 Represcription Order.

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reasonably reflects the nature of today’s rate-of-return incumbent LECs.582 We find that it is no longer
reasonable to rely exclusively on RHC data based on reports no longer collected as specified in our
rules.583 Accordingly, we find that we 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

250.
The reliability of our WACC calculation depends on the representativeness of the proxy
group we select. The Commission sought comment in the USF/ICC Transformation FNPRM on the
group of companies that should be selected as proxies.584 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 rateof-return incumbent LECs (Publicly-Traded RLEC Proxies).585 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.586 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.587
251.
Commenters criticize staff’s methodology for selecting its proposed proxy group with
which it estimated the WACC.588 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.”589 We
disagree and find that staff reasonably relied on available data that was both relevant and reliable.
252.
As an initial matter, there is scant reliable publicly available data for estimating the cost
of capital specific to rate-of-return incumbent LECs.590 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
582

Staff Report, 29 FCC Rcd at 7140-41, paras. 41-42. Indeed, the RHCs are no longer subject to rate-of-return
regulation. See Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87-313, Second Report
and Order, 5 FCC Rcd 6786, 6818-20, paras. 257-59 (1990), aff’d Nat’l Rural Telecom Ass’n v, FCC, 988 F2d 174
(D.C. Cir. 1993).
583

See 47 CFR §§ 65.300(a).

584

USF/ICC Transformation FNPRM, 26 FCC Rcd at 18053, para. 1052.

585

See Staff Report, 29 FCC Rcd at 7132-33, paras 13. The RHC Proxies are AT&T, Verizon, and CenturyLink.
The Mid-Size Proxies are Alaska Communications System Group (ACS), Cincinnati Bell, FairPoint
Communications, Frontier Communications, Hawaiian Telecom, Lumos Networks Corp., and Windstream
Corporation. The Publicly-Traded RLEC Proxies are Alteva Communications, Consolidated Communications,
HickoryTech Corp., New Ulm Telephone, Shenandoah Telecommunications, and Telephone and Data Systems, Inc.
Id. at 7133, para. 15 nn.36-38.
586

Staff Report, 28 FCC Rcd at 7132, para. 12 (citing Tom Copeland, Time Koller, and Jack Murrin, Valuation:
Measuring and Managing the Value of Companies, at 219 (McKinsey & Company 2000)).
587

Id. at 7132-33, paras. 11-13.

588

Rural Associations Staff Report Comments at 20-25; Comments of the Alaska Rural Coalition, WC Docket No.
10-90, at 9 (filed Jul. 25, 2013) (Alaska Rural Coalition Staff Report Comments); Comments of John Staurulakis,
Inc. on Rate of Return Staff Report, WC Docket No. 10-90, at 3-4, 9 (filed Jul. 25, 2013) (JSI Staff Report
Comments); Comments of the National Tribal Telecommunications Association , WC Docket No. 10-90, at 7-9
(filed Jul. 25, 2013) (NTTA Staff Report Reply).
589

Rural Associations Staff Report Comments at 22.

590

See Reply Comments of AT&T, WC Docket No. 10-90, at 9 (filed Aug. 26, 2013) (AT&T Staff Report Reply).

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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.591 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.592 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.593
253.
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.594 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.595 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.596 We find that staff’s qualitative approach was reasonable, not simply relying on available
data, but data that was both reliable and relevant to the analysis.
254.
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.597
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.598 While we agree with the Rural
591

The Commission sought comment on what additional data it should require and rely upon. USF/ICC
Transformation Order, 26 FCC Rcd at 18052-53, para. 1050. The Commission sought comment on what additional
data it should require and rely upon. Id. at 18052-53, para. 1050. We declined to adopt a voluntary or mandatory
data collection because the cost of equity still would have to be inferred from estimates based on a proxy group. As
the cost of equity typically is significantly greater and has a larger variance than the cost of debt, the additional value
of any improvement in the accuracy of a cost of debt estimate derived from data supplied in response to a request is
unlikely to outweigh the additional cost of that request, in our judgement. We also note that the average cost of debt
estimate in the Staff Report for the six rate-of-return incumbent LECs, excluding Consolidated, which now is
entirely a price cap incumbent LEC, is 4.38%, which is lower than the average for the entire proxy group, 5.87%,
including these six rate-of-return incumbent LECs. These six incumbent LECs, like most rate-of-return incumbent
LECs, have access to have access to loans made through rural-company programs (such as those administered by the
Rural Utilities Service and CoBank). In addition, as a firm’s capital structure affects its risk and hence its cost of
equity, these cost of equity estimates might have to be adjusted to reflect any differences between capital structure
estimates based on data supplied in response to a request and on the proxy group, further complicating the analysis
without necessarily adding precision to the overall WACC estimate. We also have a preference for publiclyavailable data, in particular, stock price data that reflect an active market in which stocks are bought and sold so that
equity values reflect recent sales prices and are up-to-date. Moreover, data on publicly-traded firms are reliable
because these data are subject to the scrutiny of analysts and the broader investment community.
592

Staff Report, 28 FCC Rcd at 7132, para. 10.

593

See USF/ICC Transformation FNPRM, 26 FCC Rcd at 18053, para. 1052.

594

Staff Report, 28 FCC Rcd at 7132, para. 12.

595

Id. GVNW argues that staff’s recommended rate of return zone of reasonableness did not reflect the risk portfolio
for rural carriers. GVNW Staff Report Comments at 6.
596

Staff Report, 28 FCC Rcd at 7132, para. 12.

597

Id.

598

Rural Associations Staff Report Comments at 22-23; see Comments of the ICORE Companies, WC Docket No.
10-90, at 5-7 (filed Jul. 25, 2013) (ICORE Staff Report Comments). The Rural Associations also criticize staff for
selecting a proxy group based on the extent firms offer similar services without defining similar services. Rural
(continued….)

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Associations that 10 percent is a relatively low number, we 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.599 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.600
255.
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 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 interstate access services that issue publicly-traded stock
on which to base WACC estimates. We therefore find 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.601
256.
The Rural Associations criticize staff’s proxy group for including RHCs Proxies, MidSize 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

(Continued from previous page)
Associations Staff Report Comments at 22-23. Staff, however, defined similar services as companies providing
service similar to price-regulated interstate special access and common line service which will face similar market
and regulatory risks that affect the cost of capital, such as companies serving rural or high-cost areas and companies
subject to rate-of-return regulation. Staff Report, 29 FCC Rcd at 7132-33, para. 12.
599

See EDGAR Company Filings, SEC, http://www.sec.gov/edgar/searchedgar/companysearch.html.

600

For example, staff excluded companies that are: (1) predominantly cable companies, such as Comcast; (2)
predominantly wireless and/or long distance phone companies, such as Sprint; (3) competitive LECs, and
telecommunications companies that primarily resell or lease other companies’ services or networks and that do not
otherwise own and operate their own wireline networks; and (4) foreign-based firms. See Staff Report, 28 FCC Rcd
at 7137-38, paras. 26-30.
601

We note that even the Rural Associations’ approach to estimating the cost of capital, which relies, among other
things, on observations on the prices that rate-of-return incumbent LECs have paid to acquire access lines, does not
isolate the cost of capital for facilities-based price-regulated interstate access services, because these lines can be
used to provide multiple wireline services. See Rural Associations Staff Report Comments at 31-34 & App. B at 4.
Thus, the purchase price necessarily would reflect the expectations of buyers and the sellers in the marketplace that
these lines would eventually if not immediately be used to provide multiple wireline services.

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assembled from staff’s proxy companies.602 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.603 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.604 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.605 We find 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.
257.
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.606 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.607 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.608
258.
FairPoint entered bankruptcy in October 2009 and exited in January 2011, while
Hawaiian Telecom entered bankruptcy in December 2008 and exited in October 2010.609 In the Staff
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
602

Rural Associations Staff Report Comments at 31-33 & Appx. B; Rural Associations Staff Report Reply at 4-5;
see also Comments of TCA, WC Docket No. 10-90, at 5 (filed Jul. 25, 2013) (TCA Staff Report Comments); Reply
Comments of TCA, WC Docket No. 10-90, at 6 (filed Aug. 26, 2013) (TCA Staff Report Reply).
603

ICORE Staff Report Comments at 5-7.

604

Reply Comments of the Ad Hoc Telecommunications Users Committee, WC Docket No. 10-90 et al., at 6 (filed
Aug. 26, 2013) (Ad Hoc Staff Report Comments).
605

See AT&T Staff Report Reply at 9-10.

606

Bowman Report at 2; Alaska Rural Coalition Staff Report Comments at 10; Rural Associations Staff Report
Comments at 24.
607

Bowman Report at 2.

608

Staff Report, 28 FCC Rcd at 7132, para. 12.

609

See FairPoint Communications, Press Release, FairPoint Reaches Agreement with Bank Lenders – Initiates
Voluntary Chapter 11 Proceeding (dated Oct. 26, 2009),
https://www.fairpoint.com/document/FairPoint%20Communications%20Balance%20Sheet%20RestructuringFINAL_tcm12-7409.pdf; FairPoint emerges from bankruptcy, debt on $1B, Business Week, Associated Press (dated
Jan. 24, 2011), http://www.businessweek.com/ap/financialnews/D9KV0PGG1.htm; see Amy Thomson, Hawaiian
Telecom Exits Bankruptcy with Reduced Debt, Bloomberg Business (Oct. 28, 2010),
http://www.bloomberg.com/news/articles/2010-10-29/carlyle-group-s-hawaiian-telcom-emerges-from-bankruptcywith-reduced-debt.

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data, which should minimize errors to the WACC estimates.610 In response to Bowman’s assumption that
rate-of-return companies would not be expected to go bankrupt, we note that there were other rate-ofreturn incumbent LECs that went bankrupt that staff excluded from its proxy group that otherwise would
have met its three-part test.611 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.
259.
The Rural Associations also criticize the financial health of the Mid-Size Proxies
included in staff’s proxy group.612 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 noninvestment-grade debt ratings, and thus are less than ideal for estimating the cost of capital.613 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.614
260.
We agree 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.615 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, we are
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.616 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
610

Capital structure data was based on debt and equity outstanding as of December 31, 2012, and their cost of debt
is based on 2012 interest expense and debt outstanding as of December 31, 2012.
611

For example, Otelco, Inc. is a publicly-traded incumbent LEC subject to rate-of-return regulation which entered
bankruptcy in March 2013 and exited in May 2013 that was excluded from the proxy group. See Business Wire,
Otelco Emerges from Bankruptcy with New Credit Facility and New Listed Security (May 24, 2013),
http://www.businesswire.com/news/home/20130524005519/en/Otelco-Emerges-Bankruptcy-Credit-Facility-ListedSecurity.
612

See Rural Associations Staff Report Comments, Appx. A, Billingsley Stmt. at 7-8. This Mid-Size Proxies
recommended by staff includes Alaska Communications Services, Inc., Cincinnati Bell, Frontier, and Windstream,
in addition to FairPoint and Hawaii Telecom. Staff Report, 29 FCC Rcd at 7135, para. 21.
613

Staff Report, 28 FCC Rcd at 7135, para. 22.

614

Id. at 7135-36, para. 22.

615

Rural Associations Staff Report Comments, Appx. A, Billingsley Stmt. at 2, 7-8.

616

See Staff Report, 28 FCC Rcd at 7135-36, paras. 21-22.

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estimates for the Mid-Size Proxies.617 There is no perfect WACC estimate, as a WACC estimate made for
any company always will have some amount of error, which is why we consider a range of possible
results.
261.
In sum, we find 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.618 We reiterate and
agree 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

262.
The allowable rate of return should reflect a reasonable estimate of the current cost of
capital.619 The Bureau released the Staff Report on May 16, 2013, calculating the WACC based on data
then-available. This raises the question whether we should continue to rely on such data to calculate the
rate of return. We find 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, we
continue to rely on data in the Staff Report used to calculate the WACC.
263.
Section 65.101(a) of our rules specifies that we should initiate the rate of return
prescription process when we 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.620 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 finance their assets.621 We also now
have the benefit of commenters’ and peer reviewers’ scrutiny of the Staff Report, including the data relied
on in that report.
264.
We therefore analyze 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
617

We conclude as we do for the Mid-Size Proxies that the value of the information reflected in the data and thus in
the WACC estimates for these companies outweighs any concerns about the potential for relatively large error in
these estimates owing to the financial health of these companies.
618

Albon & Gibbard Report at 2. Moreover, Professor Bowman agrees with the staff’s choice of proxy companies
with the exception of Frontier. Bowman Report at 3.
619

See 1990 Represcription Order, 5 FCC Rcd at 7508, para. 3.

620

See 47 CFR § 65.101(a).

621

See generally 47 CFR §§ 65.101 et seq.

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current for represcribing the rate of return in this Order.622 For this analysis, we use two different sixmonth benchmarks against which to compare more recent interest rates.623 First, we calculate 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, we calculate 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.624 We
choose 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, 2013.625 For the second six-month benchmark, we
average the monthly average yields in effect for the consecutive six-month period beginning July 2012
and ending December 2012. We calculate six-month averages for the same securities identified above.
We choose 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,626 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 2012.627
265.
We compare 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.628 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.629 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.630
622

See Appendices G & H.

623

The bond yields and calculations described in this section are set out in Appendices G & H.

624

See Board of Governors of the Federal Reserve System, Selected Interest Rates (Monthly),
http://www.federalreserve.gov/releases/h15/data.htm.
625

Staff Report, 29 FCC Rcd at 7150-51, para. 64.

626

Id. at 7186, Appx. E.

627

Id. at 7152, para. 68.

628

A minus sign means that the average of the September 2015 yields is less than the average of the monthly yields
for the period October 2012 to March 2013.
629

See Appendix G; see Board of Governors of the Federal Reserve System, Selected Interest Rates (Monthly),
http://www.federalreserve.gov/releases/h15/data.htm.
630

See Board of Governors of the Federal Reserve System, Selected Interest Rates (Monthly),
http://www.federalreserve.gov/releases/h15/data.htm.

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266.
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.631
267.
Based on these findings, we conclude 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, we will rely
on the data reflected in the Staff Report, except in those instances where we make adjustments to reflect
valid concerns expressed by the commenters and peer reviewers in the record of this proceeding. In those
cases, we will use data of the same time periods as the data in the Staff Report to ensure consistency.
5.

Calculating the WACC

268.
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:632
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]
269.
The Commission’s rules currently require that the capital structure be calculated using the
observed book values of debt, preferred stock, and equity.633 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)634
270.
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.635 The book value of a firm
631

Id.

632

47 CFR §§ 65.300-5.

633

Staff Report, 29 FCC Rcd at 7139, para. 36.

634

See 47 CFR §65.304.

635

Staff Report, 28 FCC Rcd at 7143, para. 44. As in the Staff Report, we use the book value of debt as a proxy for
its market value to estimate capital structure based on market value. We use the market value of equity for this
purpose by multiplying common stock equity shares outstanding by the common stock price. Financial analysts
frequently assume that the book value of debt is a good proxy for the market value of debt, especially for regulated
companies. Estimating the market value of debt is difficult to do in practice. See Roger A. Morin, New Regulatory
Finance, at 480 n.1 (Public Utility Reports 2006); Shannon P. Pratt & Roger J. Grabowski, Cost of Capital:
Applications and Examples, at 370 (4th Ed. 2010); see also Initial Comments of NECA et al., WC Docket No. 10-90
et al., Appx. C, Billingsley Stmt. at 5, Attach. 5 (filed Jan. 18, 2012) (NECA et al. FNPRM Comments). As old debt
that has different market and book values matures, over time a firm that has a target capital structure would add new
(continued….)

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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.636 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.637 Accordingly, staff
concluded that book values did not provide reasonable data with respect to capital structure as required by
section 65.300.638 Instead, staff proposed using market values as a more accurate approximation of capital
structure.639 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.”640 Bowman notes, however, that this method is “unavoidably subjective to a degree beyond that
of the standard estimations developed in [the Staff Report].”641 Staff noted a similar alternative approach
in the Staff Report, a hypothetical capital structure that regulators sometimes use to develop WACC
estimates.642 We find that the firms themselves know more about their businesses than we could,
therefore we 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.643 Therefore, we decline to adopt this approach. We find 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

271.
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).644 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).645 In the
Staff Report, staff calculated the cost of debt based on the embedded cost of debt formula specified in the
(Continued from previous page)
debt, and that new debt would have the same market and book values on the date that it is issued. As a result of this
debt replacement process, the market and book values of such a firm’s debt would tend not to differ significantly
over time. See Richard Malekian, Cost of Capital Tutorial, at 16 (Shareholder Value Consultants, Inc. 2009). Firms
also would have the opportunity to refinance old debt with new debt and would have the incentive to do so if interest
rates decrease, as has been the case in the recent past, and this, too, would push the market and book values of debt
toward each other.
636

See Staff Report, 28 FCC Rcd at 7180-83, Appx. C.

637

See id. at 7141, para. 41 & n.66.

638

See 47 CFR §65.304(a) (“The results of the [WACC] calculations shall be used in the represcription proceeding
to which they relate unless the record in that proceeding shows that their use would be unreasonable.”).
639

Staff Report, 29 FCC Rcd at 7141, para. 42.

640

Bowman Report at 4.

641

Id.

642

See Staff Report, 28 FCC Rcd at 7139-40, para. 37 n.61 (citing Stewart C. Myers, Capital Structure, J. Econ.
Persp. 81-102 (Spring 2001)).
643

Bowman Report at 4.

644

See 47 CFR § 65.302; Morin, supra note 635, at 26-27.

645

Morin, supra note 635, at 26-27.

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Commission’s rules with data derived from staff’s proxy group SEC Form 10-Ks.646 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.647 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.648 Staff also reasoned that a more precise
calculation might also require knowledge of how much of each type of debt instrument each company
uses.649 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.650 Therefore, staff recommended estimating the
cost of debt based on the embedded cost of debt formula in the Commission’s rules, as corrected.651 We
agree with staff’s general approach with corrections to the embedded cost of debt formula recommended
and noted below.
272.

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 § 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.”652
273.
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.653 This would approximately
double the embedded cost of debt, resulting in an incorrect input to the WACC. We find 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.654 We therefore adopt 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

646

Staff Report, 29 FCC Rcd at 7145, para. 47-48; 47 CFR § 65.302.

647

Staff Report, 29 FCC Rcd at 7145, para. 47.

648

Id.

649

Id.

650

Id.

651

Id.; see 47 CFR § 65.302.

652

47 CFR § 65.302.

653

Staff Report, 29 FCC Rcd at 7144, para. 46.

654

See Comments of Alexicon Consulting on Behalf of the Rural Broadband Alliance, the Small Company Coalition
and the Alexicon Companies, WC Docket No. 10-90, at 8 (filed Jul. 25, 2013) (Rural Company Group Staff Report
Comments)(agreeing with the revised cost of debt formula proposed in the Staff Report).

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274.
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.655 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.656 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.657 Thus, the Staff Report overstated the cost of
debt.
275.
USTelecom proposes an alternative approach that eliminates this error and that purports
to capture a more forward-looking cost of debt.658 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 longterm debt interest payment obligations for 2013 by total long-term debt as of December 31, 2012.659 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, we 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.
276.
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.660 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. We therefore decline to adopt USTelecom’s proposed
approach.
277.
The Commission’s rules further specify that total interest expense be used in the
numerator of the embedded cost formula.661 We interpret 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, the Commission included

655

Letter from Robert Mayer, Vice President, Industry and State Affairs, USTelecom, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90, at 7-8 (filed June 20, 2013) (USTelecom June 30, 2013 Ex Parte); AT&T
Staff Report Reply at 5 (citing USTelecom June 30, 2013 Ex Parte at 7).
656

Staff Report, 28 FCC Rcd at 7186, Appx. E.

657

See USTelecom June 30, 2013 Ex Parte at 7-8.

658

Id.

659

Id. Professors Albon and Gibbard suggest that the Commission consider the averaging procedure with respect to
the cost of debt noted by AT&T and USTelecom. Albon & Gibbard Report at 2 (citing USTelecom Ex Parte at 7;
AT&T Reply at 5). USTelecom notes using a weighted average for calculating the cost of debt. USTelecom Ex
Parte at 7. We will not rely on an averaging approach because the cost of debt would be too representative of the
RHC Proxies, given that the proposed average is a weighted average that uses market values as weights, and that the
market values of the RHC Proxies are so much larger than those of the other firms in the proxy group. There would
be little reason to adopt a proxy group that includes firms other than RHCs if we were to adopt that approach.
660

See USTelecom June 30, 2013 Ex Parte at 7-8.

661

47 CFR § 65.302.

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in the numerator of its embedded cost of debt calculation both short- and long-term interest expense.662
The Commission’s formula for estimating the embedded cost of debt includes the average of total debt in
the denominator. We interpret 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.663
278.
We include 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.664 Obligations under capital leases, however, were identified at that time as part of
total long-term debt in FCC Form M and ARMIS reports.665 Likewise, interest expense related to capital
leases was included as part of total interest and related items in these reports.666 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. We
include 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.667 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.668
662

See 1990 Prescription Order, 5 FCC Rcd at 7510-11, paras. 28-34, at 7545-46, Appx. C.

663

Id.

664

Id.

665

See Automated Reporting Requirements for Certain Class A and Tier 1 Telephone Companies (Parts 31, 43, 67,
and 69 of the FCC’s Rules), CC Docket No. 86-182, Order, 4 FCC Rcd 906, 906, paras. 3-5 (1989) (ARMIS Order)
(modifying the ARMIS reports so carriers may file the public version of a paper ARMIS report as a substitute for
Schedules 10 and 11 in their Form M filings); id. at 912, Appx., Account No. 4250; Revision of Annual Report Form
M, Memorandum Opinion and Order, 4 FCC Rcd 4879, DA 89-503, 1989 WL 512551, Attach. B at 35, 38 (rel. May
12, 1989) (Form M Order). FCC Form M was an annual reporting requirement for LECs, now discontinued, which
required the reporting of a series of financial reports which showed the details of various accounts. Some of these
reports were eliminated. The rest were incorporated in the ARMIS 43-02 and 43-08 reports. See 1998 Biennial
Regulatory Review – Review of ARMIS Reporting Requirements, CC Docket No. 98-117, AAD File No. 98-43,
Report and Order and Fifth Memorandum Opinion and Order, FCC 99-107, at para. 8 n.13 (rel. June 30, 1999).
666

See ARMIS Order, 4 FCC Rcd at 906; id. at 916, Appx., Account No. 7520; Form M Order, DA 89-503, Attach.
B at 35, 38.
667

See Leonardo R. Giacchino & Jonathan A. Lesser, Principles of Utility Corporate Finance, at 106 (Public
Utilities Reports, Inc. 2011).
668

1990 Prescription Order, 5 FCC Rcd at 7510-11, paras. 28-34, at 7545-46, Appx. C. It is also not entirely clear
whether, in the 1990 represcription proceeding, the Commission included the amortization of debt issuance expense
(also known as debt flotation costs) as part of interest expense in the numerator of the embedded cost of debt
calculation, and unamortized debt issuance expense in the denominator. Amortization of debt issuance expense was
(continued….)

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279.
Professor Bowman states that the Staff Report is not clear on what is considered debt in
its reported capital structure data.669 While Bowman is addressing capital structure, his point is also
relevant to our discussion of how the cost of debt is calculated because we conclude 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.670 We conclude 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 longterm 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, we revise the
embedded cost of debt calculation reflected in the Staff Report accordingly.671
280.
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, we now estimate the embedded cost of
debt for the proxy group of 16 carriers used in the Staff Report to be 5.87 percent. We also will revise the
WACC estimate to reflect this revised cost of debt calculation for each carrier in the proxy group. We
also conclude 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, we revise the estimate of the
capital structure developed in the Staff Report so that it reflects the same definition that we 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.672
b.

Cost of Equity

281.
The Commission’s rules do not specify how the cost of equity is to be calculated,673 and
there are several methods that might be used to estimate the cost of equity. The Capital Asset Pricing
(Continued from previous page)
included at that time as part of total interest and related items in the Form M and ARMIS reports. See ARMIS Order,
4 FCC Rcd at 906; id. at 916, Appx., Account No. 7530; Form M Order, DA 89-503, Attach. B at 35, 38.
Meanwhile, unamortized debt issuance expense was identified as a noncurrent asset on Form M and ARMIS reports.
See ARMIS Order, 4 FCC Rcd at 906; id. at 910, Appx. Account No. 1407; Form M Order, DA 89-503, Attach. B at
35, 38. These amounts typically are not identified separately in SEC Form 10-K. Under GAAP rules in effect in
2012, debt issuance costs should have been recorded as a deferred charge and amortized over the term of the debt, if
these costs were material. If the proxy group of carriers did this, then the amount of the amortized debt issuance
expense would be included as part of the interest expense reflected on their income statements, and thus would be
reflected in the numerator of the formula we use to estimate the embedded cost of debt in this order. Conversely, the
unamortized debt issuance expense would not be reflected in the denominator. As a result, our estimate of the
embedded cost of debt might be slightly overstated.
669

Bowman Report at 4.

670

Bowman Report at 4; 1990 Prescription Order, 5 FCC Rcd at 7510-11, 7545-46, paras. 28-34 & Appx. C.

671

We used data reflected on the balance sheet and income statements in the companies’ SEC Form 10-K reports to
estimate the embedded cost of debt. Short- and long-term debt outstanding, including the current portion of longterm debt, and capital leases, including the current portion of long-term leases, are reflected on the balance sheet.
Interest expense related to such debt and leases are reflected on the income statement. These debt and interest
expense figures should account for premiums and discounts on the long-term debt, in accordance with GAAP.
672

See Appendix I.

673

47 CFR § 65.301 (“The cost of equity shall be determined in represcription proceedings after giving full
consideration to the evidence in the record, including such evidence as the Commission may officially notice.”).

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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.674
(i)

Capital Asset Pricing Model (CAPM)

282.
CAPM is widely used by financial practitioners to calculate the cost of equity of publicly
traded firms.675 The required rate of return in CAPM is the sum of the risk free interest rate and an asset
beta times a market premium.676 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

283.
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.677 Staff used the then-current 10-year Treasury note, 1.92 percent on March 26, 2013, as the
risk free interest rate.678 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.679 In the alternative, AT&T
proposes taking an average of 20-year Treasury bond rates over the past six months.680 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.681
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.”682
However, Professor Bowman recommends averaging over a reasonably long period of time, perhaps three
to six months.683
284.
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.684 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.685 Staff noted that the current interest rate frequently
674

Staff Report, 28 FCC Rcd at 7146, para. 51.

675

Id. at 7150, para. 62.

676

Id., Id. at 7150, para. 63.

677

AT&T Staff Report Reply at 4-5; Rural Associations Staff Report Comments at 27; Alaska Rural Coalition Staff
Report Comments at 10; GVNW Staff Report Comments at 6; see USTelecom June 30, 2013 Ex Parte at 5-6.
678

Staff Report, 28 FCC Rcd at 7151, para. 65.

679

See AT&T Staff Report Reply at 5 (citing US Telecom June 30, 2013 Ex Parte at 7); Alaska Rural Coalition
Comments at 10.
680

AT&T Staff Report Reply at 5.

681

Id.

682

Bowman Report at 5.

683

Id.

684

Staff Report, 28 FCC Rcd at 7151, para. 64-65.

685

Id. at 7151, para. 65.

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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.686 Staff noted criticisms of the efficient market theory in the Staff
Report.687 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.688
285.
Accordingly, instead of relying solely on efficient market theory and use of the thencurrent, March 26, 2013 rate of interest on the 10-year Treasury note as the expected risk-free rate, we
conclude that a blended approach taking all these factors into account would be preferable. We therefore
derive 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.689 We believe 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.
286.
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.690 We disagree, however, with their suggestions that this average should be
calculated looking back over a period as long as three or six months. We believe 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. We
believe 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.691
287.
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
686

Morin, supra note 635, at 172; Giacchino & Lesser, supra note 667, at 250-251.

687

See Staff Report, 28 FCC Rcd at 7150, para. 62, fn.108 (“The efficient market hypothesis is the foundation upon
which the CAPM (and the DCF model) is based, and there are no real alternatives to estimating the cost of equity
that are not based on it.”); The efficient market hypothesis has sharp critics. See Giacchino & Lesser, supra note
667, at 250-251; see also Robert J. Shiller, From Efficient Markets Theory to Behavioral Finance, J. Econ. Persp.
83-104 (2003).
688

See AT&T Staff Report Reply at 5; Alaska Rural Coalition Staff Report Comments at 10.

689

Survey of Professional Forecasters, Federal Reserve Bank of Philadelphia, https://www.philadelphiafed.org/
research-and-data/real-time-center/survey-of-professional-forecasters. Morin states that such a blended approach to
estimating the risk-free rate is a reasonable option for a regulator to use. See Morin, supra note 635, at 173.
690

AT&T Staff Report Reply at 5; Bowman Report at 5.

691

Morin, supra note 635, at 172-74, 279-81; Giacchino & Lesser, supra note 667, 250-51,

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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.692 While we might be able to obtain forecasts of this rate made by other professionals, we
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. We conclude 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. We therefore find
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.693
288.
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.694 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.695 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.696 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.697 We agree with Professor
Bowman that the beta for New Ulm may cause a bias in the average beta for the Publicly-Traded RLEC
Proxies.698 Thus, we will not use the CAPM estimate of New Ulm’s cost of equity in developing an
overall WACC estimate. Instead, as explained below, we will use a sensitivity analysis to account for
New Ulm’s cost of equity as part of determining that overall WACC estimate.
289.
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.699 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.700 Professor Bowman notes that the flotation costs for debt or equity can be
692

Survey of Professional Forecasters, Federal Reserve Bank of Philadelphia,
https://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters.
693

We note that the average 10-year Treasury rate for September 2015, the most recent month available, is 2.17%.
See Board of Governors of the Federal Reserve System, Selected Interest Rates (Monthly),
http://www.federalreserve.gov/releases/h15/data.htm.
694

Staff Report, 28 FCC Rcd at 7154-55, para. 76

695

Staff Report, 28 FCC Rcd at 7187-88, Appx. F & G.

696

Bowman Report at 8.

697

Bowman Report at 8. Professor Bowman takes issue with Appendices F and G to the Staff Report and the “beta
estimate for New Ulm which is given as 0.50, but the R2 on that estimate is only 0.0137, and its beta fluctuates
dramatically when measured as daily, weekly or monthly.” Id. Professor Bowman notes that excluding this
observation increases the average beta for the RLECs to 0.905 and the overall average to 0.92. Id.
698

The beta explains almost none of the past variation in the rate of return on New Ulm’s common stock (the Rsquare for the simple regression equation is 0.0137).
699

USF/ICC Transformation Order, 26 FCC Rcd at 18054, para. 1055 (citing NECA et al. NPRM Comments, App.
C, Statement of Randall S. Billingsley at 7); see Staff Report, 28 FCC Rcd at 7147, para. 54 n.93.
700

Staff Report, 28 FCC Rcd at 7147, para. 54 n.93.

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“substantial,” 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.701 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.702 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.703
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.704 For the reasons explained by staff, we
agree with their approach.
290.
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.705 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.706
291.
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.707 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.708
292.
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.709 AT&T further argues that any risks that the smaller rate-of-return
701

Bowman Report at 5-6.

702

Id. at 4-5.

703

Staff Report, 28 FCC Rcd at 7145, para. 47-48.

704

Id. at 7147, para. 54 n.93.

705

Id. at 7152, para. 69.

706

Id. at 7154, para. 75.

707

See, e.g. Alaska Rural Coalition Staff Report Comments at 9; Rural Company Group Staff Report Comments at
iii-iv, 18-23; Rural Associations Staff Report Comments at 28-30; NTTA Staff Report Comments at 7-8; Moss
Adams Comments Staff Report Comments at 22. The Rural Associations argue that “smaller firms are typically less
liquid, which means that fewer of their shares trade on a given day and that they have higher bid/ask spreads” which
“implies higher equity costs.” Rural Associations Staff Report Comments at 29.
708

Ad Hoc Staff Report Comments, Gately Decl. at 7.

709

AT&T Staff Report Reply at 8 n.14.

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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.710 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.711 Finally, AT&T argues that many of these rate-ofreturn 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.712 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.713
293.
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.714 Accordingly, we conclude 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-ofreturn 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, we are 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, we decline to adopt a market risk
premium based on size effects.
294.
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 2010,715 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 we address below.

710

Id.

711

Id.

712

Id.

713

Bowman Report at 6.

714

Staff Report, 28 FCC Rcd at 7154, para. 75.

715

Roger G. Ibbotson, The Equity Risk Premium, Res. Found. CFA Inst. 19, Tbl. 1 (2011).

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Revised CAPM WACC Estimate

295.
We now estimate 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, we calculate 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 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. We do 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).
296.
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, we will account
for this sensitivity in developing a reasonable range for CAPM WACC estimates.
(c)

CAPM WACC Range

297.
We also address 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 interval716 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.717 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,718 and that
716

See Staff Report, 29 FCC Rcd at 7153, para. 72. Here we refer to the estimated standard deviation of the
estimated mean market premium. In other words, we refer to the sample standard deviation of the observed
distribution of market premiums, divided by the square root of the number of years (minus 1) for which we have
data, i.e., the square root of 84 – 1 = 83. Because the distribution of the estimated mean approaches a normal
distribution as the sample size grows, for a sample of this size, we can expect that around 95% of the time the mean
market premium will be within two standard deviations of the estimated mean of 5.88%. See id.
717

The standard deviation of the market premium was 2.33%. Staff Report, 28 FCC Rcd at 7153, para. 72 & n.131
(citing Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University, Annual
Returns on Stock, T.Bonds and T.Bills: 1928 – Current, http://pages.stern.nyu.edu/~adamodar/New_Home_
Page/datafile/histretSP.html).
718

Morin, supra note 635, at 157; Giacchino & Lesser, supra note 667, at 235-236.

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Professor Damodaran’s historical average of 5.88 percent lies well within these ranges identified in a
number of different surveys.719 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.720
298.
The Rural Associations argue that staff’s truncation of the confidence interval renders
staff’s associated cost of capital recommendations unreliable.721 We disagree. First, we view 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. We also view 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.722 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 we
take 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.723
299.
The Rural Associations observed and staff itself acknowledged that this adjustment to the
95 percent confidence interval is not precise.724 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.725 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
719

Staff Report, 28 FCC Rcd at 7153, para. 72 & n.131 (citing Aswath Damodaran, Professor of Finance at the Stern
School of Business at New York University).
720
Professor Bowman argues that the variables in the CAPM other than the risk-free rate are estimated with
imprecision. Staff, however, did not vary the estimate of beta as part of establishing a reasonable range for the cost
of equity. See Staff Report, 29 FCC Rcd at 7157, para. 86. Staff noted that the assumptions behind the various beta
estimates of its set of representative companies do not lead to substantial changes in the average WACC. Id. at
7157, para. 86 n.150. For example, staff stated that if it fixed the market premium at the average historic market rate
of 5.88% and looked at the upper and lower CAPM bounds created by using different beta estimation methods (that
is, its four versions of the betas plus betas provided by external analyst services, the resulting WACC range runs
from 6.28% to 6.82%. Id. In contrast, using its preferred betas (weekly data and adjusted towards one), and
allowing the market premium to vary across the range reported in financial textbooks of 3-10% which is narrower
than the historical range it also considered, gives a WACC range of 5.56% to 8.36%. We agree with that analysis
and the decision to focus on developing a proper upper and lower bound to develop a range for the CAPM WACC
estimates. See id.
721

Rural Associations Staff Report Comments, Appx. A, Billingsley Stmt. at 16-17; see Staff Report, 29 FCC Rcd at
7157-59, paras. 86-92.
722

Bowman Report at 7-8.

723

See AT&T Staff Report Reply at 5 (citing US Telecom June 30, 2013 Ex Parte at 7); see Alaska Rural Coalition
Staff Report Comments at 10.
724

Rural Associations Staff Report Comments, Appx. A, Billingsley Stmt. at 16-17; see Staff Report, 29 FCC Rcd
at 7157-59, paras. 86-92.
725

Staff Report, 29 FCC Rcd at 7157-59, paras. 83-92.

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affects only the lower bound, not the upper bound of the CAPM WACC range of reasonable estimates.
As a long as we do 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, we also have the DCF WACC range
of reasonable estimates on which to rely. The WACC and DCF have different strengths and weaknesses,
and we reduce the likelihood of error by developing WACC estimates using both models. As long as we
also select an estimate that is consistent with the DCF WACC range, then that estimate should be a
reasonable estimate.
300.
We now estimate 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. We develop 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, we now find that the range of reasonable WACC CAPM estimates is 7.128.83 percent if the proxy group includes New Ulm; 7.24-9.01 percent if it excludes New Ulm; and 7.178.92 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.
301.
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).726 However, we find 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.727 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, we have DCF WACC estimates on which
to rely, in addition to WACC CAPM estimates, as mentioned above.728
(ii)

Discounted Cash Flow (DCF) Model

302.
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.729 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.730 The most
726

Bowman Report at 8-9.

727

See Pratt and Grabowski, supra note 635, at 155-158; Morin, supra note 635, at 157-162.

728

Moreover, Albon and Gibbard found that the overall WACC range in the Staff Report, which is similar in size to
the overall range and was developed using a similar process to the one used here, flows easily from the data (with
the possible exception of averaging the cost of debt based on market values, which we address above). Albon &
Gibbard Report at 2; see supra section III.B.5.
729

Staff Report, 7159-60, paras. 93-94; see 1990 Represcription Order, 5 FCC Rcd at 7515, para. 67.

730

Id. at 7160-61, para. 95. Professor Bowman noted that the staff’s DCF approach is fairly common, but that the
four estimates of earnings per share (EPS) growth forecasts should be disclosed. Bowman Report at 9. However, in
response to a request from NASUCA, the Bureau submitted into the record the data used to estimate the cost of
equity using the DCF model, including EPS growth forecasts. Wireline Competition Bureau Provides Requested
(continued….)

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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 0.731
(a)

DCF Cost of Equity Results

303.
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.732 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.
304.
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.733
305.
Staff therefore analyzed the sensitivity of the average of the cost of equity estimates to
the estimates for Windstream and ACS.734 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.735 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.736 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.737 We agree 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.
(Continued from previous page)
Data Used in Rate of Return Represcription Staff Report, WC Docket No. 10-90, Public Notice, 28 FCC Rcd 8265
(WCB 2013).
731

Staff Report, 28 FCC Rcd at 7160, para. 94.

732

Id. at 7193, Appx. J.

733

Id. at 7163, para. 101 & n.178. Some parties in the 1990 prescription proceeding argued that companies whose
cost of equity estimates did not exceed their cost of debt should be excluded from the equity analysis. In response,
the Commission removed from consideration companies whose cost of equity estimates were below the yield on
single A corporate bond ratings. See 1990 Represcription Order, 5 FCC Rcd at 7513-14, paras. 55-58.
734

Staff Report, 28 FCC Rcd at 7162-63, para. 101.

735

Id. at 7165, paras. 103-4.

736

Id. at 7165, para. 105.

737

Id. at 7165, para. 106.

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306.
No party challenges staff’s DCF methodology. We therefore adopt 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.
307.
Given the revisions we make 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

308.
Based on this DCF analysis, we find 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, we note 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).738 Neither of these comparisons suggests in a compelling way
that our lower and upper bound estimates for the cost of equity are unreasonable.
309.
Based upon these slight modifications to DCF analysis presented in the Staff Report, we
find 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

310.
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.739 GVNW and TCA supported the Rural Associations’ FCF approach.740 While the
738

Ibbotson, supra note 715, at 19, Tbl. 1.

739

The Rural Associations relied on confidential data submitted to the Commission in WC Docket No. 01-92. See
Rural Associations Staff Report Comments at 5-6 & Appx. B at 4 & n.12 (citing Letter from Regina McNeil, Vice
(continued….)

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Rural Associations’ approach differs from the standard approach that we use here to estimate the WACC,
and is not set out in our rules, we cannot say, based on the record that this is an unacceptable approach, at
least in concept.741 We are 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 we do not find this
approach to be unacceptable in concept, we do find flaws in the way that it is implemented by the Rural
Associations.742 Thus, we reject the Rural Associations’ estimates.
311.
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 2008-2012.743 The Rural Associations develop a range of WACC estimates by varying its
estimates of firm value.744 We find 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 rateof-return incumbent LEC. In particular, the sample included only one sale price for each year from 2010
to 2012.745 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).746 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
(Continued from previous page)
President of Legal, General Counsel and Corporate Secretary, NECA, to Marlene H. Dortch, Secretary, FCC, CC
Docket No. 01-92 (filed Feb. 29, 2012)); see also NECA et al. NPRM Comments at 57-60.
740

GVNW Staff Report Comments at 3; GVNW Staff Report Reply at 8; TCA Staff Report Comments at 5; TCA
Staff Report Reply at 6.
741

See Ad Hoc Staff Report Reply, Appx. B at 3. Ad Hoc notes that the Rural Associations’ approach is not standard
practice as FCF is not used as a tool to estimate a firm’s WACC but rather the value of firm and, therefore, would
require an amendment to Part 65 of the Commission’s rules. Id.
742

The Rural Associations’ formula for calculating WACC is WACC = FCF/Value, which is derived from the cashflow perpetuity formula, Value = FCFt=1/(WACC-g), where g is the growth rate of FCF forever. Rural Associations
Staff Report Comments, Appx. B at 3. While we do not take issue with the Rural Associations’ approach in concept,
we do question the feasibility of this approach for developing WACC estimates for either rate-of-return or price cap
incumbent LECs. This approach relies on estimates of FCFs which include capital expenditures. Incumbent LEC
investments tend to be sporadic, occurring periodically (not in small increments continuously over time), but
requiring large capital outlays at the time these investments are made. As the full amount of the capital expenditure
for these sporadic investments is included in the FCF estimates at the time these investments are made, FCFs are
likely to vary considerably from year to year. In turn, this variation is likely to be reflected in the WACC estimates,
thereby diminishing the reliability of these estimates. Moreover, the Rural Associations omit the growth factor that
otherwise would be included in FCF WACC formula based on its unsupported observation that revenue requirement
growth over an unspecified three-year period is only .01%. Rural Associations Staff Report Comments, Appx. B at
3. The revenue requirement, however, differs significantly from FCF. FCF includes capital expenditures when they
are made, while the revenue requirement reflects these capital expenditures as a depreciation expense over time.
Also, the FCFs are supposed to be expected FCFs, and the future might differ considerably from the recent past. As
a result, we find that if the Rural Associations approach were to be adopted, it would require additionally estimating
growth (g, in the formula) which too is difficult to do in practice.
743

See Rural Associations Staff Report Comments, Appx. B at 7, Fig. 2 & Attach. 1.

744

Id.

745

Id.

746

See id.

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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.747
312.
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.748 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.749 In response, the Rural Associations, including NECA, recalculated its analysis
using the average value weighted by access connections.750 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).751
313.
Given that large decrease, we now take 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. We are 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.
314.
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
747

We also note that as part of its analysis of value, the Rural Associations calculate separate weighted average sales
prices, based on connections, for the five exchanges sold in 2008 and 2009. Rural Associations Staff Report
Comments, Appx. B, at 7, Fig. 2. The use of weighted averages for each of these two years is inappropriate given
that there were so few sales, and significant variation in the prices and the size of the transactions (measured in
terms of the number of connections). One sale accounts for about 90% of the connections in 2009, and thus has a
weight of about 90% in the weighted average for that year, and one accounts for about 99%of the connections in
2008, and thus has a weight of about 99%. See id., Attach. at 1. As a result of using weighted averages, almost
none of the information reflected in the value of the other four sales in each year is accounted for. In effect, there is
one observation for each of these two years, not five. The weighted averages are significantly lower than the simple
averages for these two years ($1,462 per connection versus $2,079 per connection in 2009, and $1,824 per
connection versus $2,114 per connection in 2008), and the lower prices support a lower valuation and a higher
WACC under the Rural Associations’ approach. We acknowledge that the Rural Associations relied on a range of
sales prices, not simply the weighted averages, but to the extent that it relied on the weighted averages to establish
the range, the range is too low, and the Rural Associations did not explain precisely how it determined the range. See
id.
748

We note that there is an apparent error in the Rural Associations’ analysis. The Rural Associations’ price
estimates are per connection estimates, but these estimates appear to be multiplied only by the number of switched
access lines, not a larger number for connections, to determine firm values. At the same time, the FCFs include all
regulated revenues, including special access revenues. As a result, the WACC estimates based on FCF divided by
firm value are understated. See Rural Associations Staff Report Comments, Appx. B, Attach. 1.
749

See Staff Report, 29 FCC Rcd at 7147-48, para. 56 n.94 (citing NECA et al. FNPRM Comments at 59).

750

See Rural Associations Staff Report Comments, Appx. B at 6-7.

751

Id.

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estimate, or even a range of overall estimates, on which we could rely. There would seem to be too
strong of likelihood of large error in many of the individual estimates, and we cannot simply assume that
these errors would offset each other by averaging the WACC estimates, or rely on the use of the middlevalue estimate (i.e., the median) to remove the impact of these errors.752 Thus, we reject the Rural
Associations’ WACC estimates.
c.

Cost of Preferred Stock

315.
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.753 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.754 This approach is consistent with
the Commission’s 1990 represcription which did not factor in the cost of preferred stock.755 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 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.756 We agree for the reasons articulated by staff explained above. Further, no commenters filed in
opposition to staff’s approach. Accordingly, we find good cause exists to waive the requirement to
calculate the WACC based on the cost of preferred stock.757
d.

WACC Results

316.
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

317.
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.758 To determine a WACC zone of reasonableness, staff
recommended comparing the range of WACCs produced when the cost of equity is determined using

752

We note that the range of WACC estimates is 11.75 to 23.49% based on the median; 8.69 to 17.38% based on the
weighted average; and 6.48 to 12.96% based on the simple average. As stated above, none of the typical measures
of central tendency is likely to produce a reliable estimate. If we were to choose from among these statistical
measures, however, we tend to agree with Ad Hoc’s observation that each rate-of-return incumbent LEC operates
independently of the others, and so the simple, not the weighted average should be used. See Ad Hoc Staff Report
Comments, Appx. A, Gately Decl. at 4. Again, we would only use this average after dealing with the errors and
uncertainties that seem to be reflected in the individual WACC estimates for the companies in the Rural
Associations’ sample.
753

47 CFR §§ 65.300, 65.303; Staff Report, 29 FCC Rcd at 7168, para. 115.

754

Staff Report, 29 FCC Rcd at 7168, para. 115 & n.186 (citing SNL Kagan, http://www.snl.com/Sectors/
Media/Default.aspx).
755

See generally 1990 Represcription Order.

756

Staff Report, 29 FCC Rcd at 7168, para. 115.

757

See 47 CFR § 65.300, 65.303; see 47 CFR § 1.3; see also WAIT Radio v. FCC, 418 F.2d 1153 (D.C. Cir. 1969);
Northeast Cellular Tel. Co. v. FCC, 897 F.2d 1164, 1166 (D.C. Cir. 1990).
758

1990 Represcription Order, 5 FCC Rcd at 7508, para. 7.

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CAPM with varying market premiums, and the range produced when the cost of equity is determined
using DCF.759
318.
We find 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.760 The record is critical of the CAPM analysis in the
Staff Report, while the DCF analysis is largely unchallenged. In response to these criticisms, we adjusted
the CAPM analysis to produce more reliable estimates. In particular, we revise the estimate of the riskfree rate, and account for what might be an unreliable beta estimate for the proxy New Ulm.
Nevertheless, given the record, we 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

319.
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.761 The
Commission, however, may consider other relevant factors as well.762 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.763 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.764 At the same
time, to be reasonable, the rate of return must not produce excessive rates at the expense of the
ratepayer.765 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
759

Staff Report, 28 FCC Rcd at 7168, para. 117. Staff found that DCF did not produce reliable estimates for Alaska
Communications Systems Group (ACS) and Windstream Corporation (Windstream), for which published growth
rates 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 for these two firms, and in one case a negative cost of equity estimate for Windstream. As the staff
explained, the latter results make no economic sense. As 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. And no
investor would ever pay a positive price for a common stock on which the expected rate of return is less than zero.
Id. at 7162-63, para. 101.
760

The Staff Report determined a zone of reasonable WACC estimates ranging from 7.39% to 8.72%. Staff Report,
28 FCC Rcd at 7124, Exec. Summary. Professor Bowman found this range to be “excessively narrow.” Bowman
Report at 9. Professor Bowman notes that given that every variable in the CAPM estimate of WACC, with the
exception of the risk free rate, has “very substantial estimation error,” Professor Bowman recommends that a
reasonable range for an estimate of WACC would span at least three%, if not higher. Id. Albon and Gibbard note
that the magnitudes of this zone are appropriate but will vary over time according to whether it is a low interest rate
or a high interest rate environment and the level of credit spreads. Albon & Gibbard Report at 3.
761

See, e.g., Mobil Oil Corp. v. FPC, 417 U.S. at 305–06, 316, 94 S. Ct. at 2344–45, 2349; FPC v. Hope Natural
Gas Co., 320 U.S. at 602–03, 64 S. Ct. at 287–88.
762

See, e.g., Pennzoil Producing, 439 U.S. at 518, 99 S. Ct. at 771; Mobil Oil, 417 U.S. at 308, 94 S. Ct. at 2345.

763

1990 Prescription Order, 5 FCC Rcd at 7532, para. 213 (citing FPC v. Hope Natural Gas Co., 320 US 591, 603
(1944)).
764

Bluefield Water Works v. PSC, 262 U.S. 679 (1923).

765

See Farmers Union Central Exchange, Inc. v. FERC, 734 F.2d 1486, 1502 (D.C.Cir.1984) (Farmers Union).

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within that zone.766 In general, the zone of reasonableness balances financial interests of the regulated
company and relevant public interests.767 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.768 The Commission may also consider non-cost policy considerations in
setting the rate of return.769
320.
We are 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.770 In this regard, we agree 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, we 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.771 Accordingly,
expanding the zone of reasonableness above the top of the reasonable WACC estimates is supported in
the record.
321.
We conclude that we 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, we provide 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, we adopt 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, we expand the zone of reasonableness above the top
of the range of WACC estimates developed above. Second, we add 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. We therefore
766

See, e.g., Farmers Union, 734 F.2d at 1502; FERC v. Pennzoil Producing Co., 439 U.S. 508, 517 (1979)
(Pennzoil Producing); The Alaska Rural Coalition argues that staff’s “recommendation to slash the [rate of return]
violates…[the Permian Basin Area Rate Cases]…legal precedent” where “the Supreme Court stressed that an
agency decision regarding the rate of return should ‘reasonably be expected to [1] maintain financial integrity, [2]
attract necessary capital, and [3] fairly compensate investors for the risks they have assumed, and [4] yet provide
appropriate protection to the relevant public interests, both existing and foreseeable.’” Alaska Rural Coalition
Comments at 3-6 (citing Bluefield Waterworks & Improvement Co. v. Public Service Comm’n of West Virginia, 262
U.S. 679 (1923); Federal Power Comm’n v. Hope Natural Gas Co., 320 U.S. 591) (1944); Permian Basin Area Rate
Cases, 390 U.S. 747 (1968); Duquesne Light Company v. Barasch, 488 U.S. 299 (1989)). However, as explained in
detail throughout this Order, the Commission balances the factors in the Permian Basin Area Rate Cases, finding
that the risks faced by rate-of-return carriers are reflected in the WACC calculations and sufficient to attract capital,
compensate investors for risks assumed, while ensuring reasonable pricing for consumers and not overburdening the
universal service system.
767

See Permian Basin Area Rate Cases, 390 U.S. at 792, 88 S.Ct. at 1373; see, e.g., Pennzoil Producing, 439 U.S. at
519, 99 S. Ct. at 772; Trans Alaska Pipeline Rate Cases, 436 U.S. 631, 653, 98 S. Ct. 2053, 2066, 56 L.Ed.2d 591
(1978).
768

Rate of Return Streamlining R&O, 10 FCC Rcd at 6788, para. 12; Illinois Bell v. FCC, 988 F.2d at 1254, 1265-66
(D.C. Cir. 1993); see Rural Associations Staff Report Comments at 13-14 (noting that the “Commission has
substantial discretion when setting an authorized rate of return, and may consider a broad array of evidence and
methodologies in prescribing the authorized rate of return.”).
769

See, e.g., Pennzoil Producing, 439 U.S. at 518, 99 S. Ct. at 771; Mobil Oil, 417 U.S. at 308, 94 S. Ct. at 2345.
See also 47 CFR § 65.101(a)(3).
770

Bowman Report at 12.

771

Id. at 12.

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add 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.
322.
We note 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 14.37percent. We find 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, we examine
some benchmarks.
323.
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 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.772 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).773 However, the
difference between the average cost of debt estimate for the six Publicly-Traded RLEC Proxies774 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.775 We use
this small company benchmark while pointing out that it might be true that, as other analysis suggests,776
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

324.
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
772

Ibbotson, supra note 715, at 19, Tbl. 1.

773

Id.

774

This would include HickoryTech Corp., Telephone and Data Services, New Ulm, Shenandoah
Telecommunications Company, Lumos and Alteva, but exclude Consolidated Communications Holdings, which is
now exclusively a price cap incumbent LEC and is more appropriately categorized as such.
775

We note that the 45.02% average capital structure for this group of rate-of-return incumbent LECs is roughly the
same as the 40% debt capital structure that the Rural Company Group recommends be used for developing WACC
estimates for rural incumbent LECs. See Rural Company Group Staff Report Comments at 9-11.
776

Michael A. Crain, A Literature Review of the Size Effect (Oct. 29, 2011), http://dx.doi.org/10.2139/ ssrn.1710076
(last visited Nov. 23, 2015).

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prescription, and whether a different rate of return is warranted for these carriers.777 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.778 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.779 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.780 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 a least two years is
justified.781 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-ofreturn incumbent LEC has petitioned for exclusion or otherwise met this burden. Accordingly, at this
time, we decline 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

325.
The Commission has authority under section 205 to prescribe a 9.75 percent unitary rate
of return effective immediately.782 We recognize, 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.”783 The Moss Adams companies propose that “any
changes that the FCC makes should be measured and spread over time.”784 USTelecom and NTCA
recognize that rate represcription is “essential to a broadband reform effort” and suggest a multi-year
transition to 9.75 percent.785 We agree. We recognize 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
777

USF/ICC Transformation Order, 26 FCC Rcd at 18055-56, para. 1059.

778

See Reply Comments of the Gila River Indian Community and Gila River Telecommunications, Inc., WC Docket
No. 10-90, at 7-19 (filed Aug. 26, 2013) (Gila River Staff Report Reply); NTTA Staff Report Comments at 7-10;
Reply Comments of Mescalero Apache Telecom, Inc., WC Docket No. 10-90, at 6 (filed Aug. 26, 2013) (MATI
Staff Report Reply). Similarly, NTTA and Gila River requested a market risk premium based on the unique risks
that Tribally-owned and operated carriers face in Tribal areas. NTTA Staff Report Comments at 8-9; Gila River
Staff Report Reply at 7-9, 13. The market risk premium is a variable in the CAPM cost of equity calculation which
ultimately affects the results of the WACC calculation. Therefore a separate market risk premium for Triballyowned carriers would create a separate rate of return for those carriers which we rejected for reasons noted above.
779

Gila River Staff Report Reply at 9-12.

780

47 CFR § 65.102(a).

781

47 CFR § 65.102(b).

782

47 U.S.C. § 205; see Rate of Return Streamlining R&O, 10 FCC Rcd at 6788, para. 12; Illinois Bell v. FCC, 988
F.2d at 1254, 1265-66 (D.C. Cir. 1993).
783

ICORE Staff Report Comments at 9.

784

Moss Adams Staff Report Comments as 27-28.

785

USTelecom/NTCA Feb. 6 Ex Parte Letter.

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world.786 At the same time, we find that we must represcribe the almost 25-year old rate of return to meet
our statutory obligations.787 To minimize the immediate financial impacts that represcription may impose
on carriers, the Commission adopts, for the first time, a transitional approach to represcription.
326.
Under this transitional approach, as proposed by USTelecom and NTCA,788 the 11.25
percent rate of return will be reduced by 25 basis points per year until we reach the represcribed 9.75
percent rate of return. For administrative simplicity, we 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 we represcribe
today shall be effective.
Effective Date of Rate of Return
July 1, 2016
July 1, 2017
July 1, 2018
July 1, 2019
July 1, 2020
July 1, 2021
IV.

Authorized Rate of Return
11.0%
10.75%
10.5%
10.25%
10.0%
9.75%

FURTHER NOTICE OF PROPOSED RULEMAKING
A.

Permitted Expenses, Cost Allocation and Affiliate Transactions

327.
With this Notice, we commence a review of the extent to which certain investments and
expenses incurred by a regulated local exchange carrier may be included in its rate base and revenue
requirement for ratemaking and USF purposes.789 The Commission’s rules provide that local exchange
carriers may not include expenses in their revenue requirement unless such expenses are “recognized by
the Commission as necessary to the provision” of interstate telecommunications services.790 Similarly,
high-cost support provided to an ETC must be used “only for the provision, maintenance, and upgrading
of facilities and services for which the support is intended.”791
328.
The Commission has not comprehensively reviewed the continued reasonableness of its
existing rules regarding permissible investments and expenses for local exchange carriers since the
passage of the Telecommunications Act of 1996. Market and regulatory conditions have changed
substantially since that time. Notably, regulated telecommunications carriers have expanded into the
provision of retail broadband services, either directly or through affiliated entities. Regulated carriers also
increasingly face competition, for both voice and broadband services, in portions of their incumbent
territory from other facilities-based providers, such as cable and wireless providers. These changing
conditions may impact the types of costs carriers attempt to include in their revenue requirement and the
ways in which carriers allocate costs between regulated and non-regulated services and affiliates.

786

See generally USF/ICC Transformation Order; see also generally Emerging Wireline Network and Services
NPRM; Technology Transitions et al., GN Docket No. 13-5 et al., Order, Report and Order and Further Notice of
Proposed Rulemaking, Report and Order, Order and Further Notice of Proposed Rulemaking, Proposal for Ongoing
Data Initiative, 29 FCC Rcd 1433 (2014).
787

See generally 47 U.S.C. § 205(a).

788

USTelecom/NTCA Feb. 6 Ex Parte Letter.

789

We note that there may be limited circumstances where our proposed reforms would impact price cap regulated
carriers’ use of high-cost USF support.
790

47 CFR § 65.450.

791

47 U.S.C. § 254(e).

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329.
Moreover, with steady demands on the high-cost program and a shrinking contribution
base, it is more important than ever that these limited funds be used solely for their intended purposes.
Likewise, amidst challenging economic conditions, it simply is not right to expect consumers across the
country, including those in rural areas, to reimburse rate-of-return carriers – through the regulated rates
for interstate service – for excessive or otherwise inappropriate expenses.
330.
While we believe that most rate-of-return carriers properly record their costs and seek
support only for the intended purposes, through audits, inquiries and other investigations, the Commission
has recently been made aware of alleged abuses by rate-of-return carriers of the used and useful principles
and its cost allocation rules. These situations involve rate-of-return carriers, for example, including
questionable expenses in their revenue requirement, using support for purposes unrelated to the provision
of services, and misallocating expenses among affiliates, or between regulated and non-regulated
activities.792 Against that backdrop, we conclude it is time to reevaluate the types of expenses that should
be permitted—both in a carrier’s revenue requirement and for recovery through high-cost support.
Looking into the expenses permitted and the allocation of those expenses will help ensure that carriers are
only recovering costs that are used and useful and prudently incurred, and in the case of high cost support,
only costs that are necessary to the provision of interstate telecommunications services.
1.

Background

331.
Rate-of-return carriers record their investments, expenses, and other financial activity in
the Part 32 uniform system of accounts (USOA).793 The USOA includes accounts referred to as regulated
accounts and non-regulated accounts. Investment and expenses entirely associated with the provision of a
regulated activity, or that are used for both regulated and non-regulated services are recorded in the
regulated accounts.794 Investment and expenses entirely associated with the provision of non-regulated
activity are assigned to the non-regulated accounts and are not included when determining a carrier’s
interstate rate base or revenue requirement.795
332.
The investment and expenses recorded in the regulated accounts of the USOA are then
allocated between regulated and non-regulated activities in accordance with procedures contained in Part
64 of the Commission’s rules.796 Those rules generally provide that costs shall be directly assigned to
either regulated or non-regulated activities where possible, and common costs are allocated according to a
hierarchy of principles.797 To the extent costs cannot be allocated based on direct or indirect cost
792

See, e.g., Adak July 15, 2013 Order, 28 FCC Rcd at 10205, para. 31 (explaining that the company’s “corporate
operations expenses appear disproportionate in relation to the expenses of its peers… Stated differently, for
companies with zero to 350 loops, AEE had over four and a half times the average corporate operations expense.”).
793

See 47 CFR part 32.

794

See id. § 32.14(c). Investment and expenses involving affiliated transactions pursuant to section 32.27 of the
Commission’s rules are recorded in accordance with this division between regulated and non-regulated accounting.
See id. § 32.27.
795

See id. § 32.14(f). A carrier’s interstate rate base is the interstate portion of its investment recorded in accounts
listed in section 65.820 of the Commission’s rules, net of depreciation and amortization, minus any deducted items
in section 65.830 (such as the interstate portion of deferred taxes and customer deposits). See id. §§ 65.800, 65.820,
65.830. The interstate rate base is the amount upon which a carrier is entitled to earn a return. A carrier’s interstate
revenue requirement is equal to its interstate operating expenses (including depreciation and amortization), taxes,
and the rate-of-return on a carrier’s interstate rate base. See id. §51.917(b)(4). The interstate revenue requirement is
used to determine the interstate rates a carrier is permitted to charge, and the total projected interstate revenues
cannot exceed the projected interstate revenue requirement.
796

See id. §§ 64.901-905. For purposes of this discussion, a “non-regulated” activity refers to an activity that is not
subject to rate regulation. Pursuant to the Open Internet order, broadband Internet access is not subject to tariffing
or rate regulation. See Open Internet Order, 30 FCC Rcd at 5612, para. 37.
797

See id. § 64.901.

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causation principles, they are allocated based on a ratio of all expenses directly assigned or attributed to
regulated and non-regulated activities.798 For example, central office equipment and outside plant
investment are allocated based on the relative regulated and non-regulated usage of the investment.799
The investment and expenses allocated to non-regulated services through this process are excluded from
the development of the regulated interstate rate base and revenue requirement.
333.
The regulated investment and expenses remaining after the application of the Part 64
process are then split between the intrastate and interstate jurisdictions in accordance with the separations
process described in Part 36.800 The separations procedures assign investment and expenses to categories
through direct assignment or by the use of some broader allocator. The investment and expenses are then
divided between the interstate and intrastate jurisdictions on the basis of direct assignment, or through
relative usage measurements or gross allocators. The interstate investment and expenses flowing from the
separations process are the inputs to the development of rates for interstate services. Subparts D and E of
Part 69 assign the interstate costs among the common line, local switching, transport, special access,
billing and collection, and interexchange service categories.801
334.
The preceding paragraphs explain the process by which a carrier uses the amounts
recorded in its USOA books of account to identify the regulated interstate costs that it is permitted to use
for purposes of calculating rates for interstate services. Separately and concurrently, the Commission for
decades has applied the “used and useful” standard in determining appropriate investment and expenses to
be included in a rate-of-return carrier’s interstate rate base and revenue requirement. The used and useful
standard provides the foundation for Commission decisions evaluating whether particular investments and
expenses are reasonable. Property is considered used and useful for regulatory ratemaking if it is
“necessary to the efficient conduct of a utility’s business, presently or within a reasonable future
period.”802
335.
Several different elements comprise the Commission’s analysis as to whether investment
and expenses are used and useful. First, the Commission considers the need to compensate the utility’s
owners for the use of their property and the expenses incurred in providing the regulated service.803
Second, the Commission looks to the equitable principle that ratepayers should not be forced to pay a
return except on investments that can be shown to benefit them, thus it considers whether the expense was
necessary to the provision of interstate telecommunications services.804 Finally, the Commission
considers whether a carrier’s investments and expenses were prudent,805 and whether the benefit from the

798

See id. § 64.901(b)(3)(iii).

799

See id. § 64.901(b)(4).

800

See id. § 36.1 et seq.

801

See generally id. § 69.301 et seq.; id. § 69.401 et seq.

802

American Tel. and Tel. Co., Phase II Final Decision and Order, 64 FCC 2d 1, 38, para. 111 (1977) (AT&T Phase
II Order).
803

See AT&T Phase II Order, 64 FCC 2d at 38, para. 111.

804

See id. at 38, para. 112 (“Equally central to the used and useful concept, however, is the equitable principle that
the ratepayers may not fairly be forced to pay a return except on investment which can be shown directly to benefit
them. Thus, imprudent or excess investment, for example, is the responsibility and coincident burden of the
investor, not the ratepayer.”). The benefit, however, does not have to be immediate and can include, for example, a
portion of equipment that is serving as a reserve for future use. See, e.g., Investigation of Special Access Tariffs of
Local Exchange Carriers, Memorandum Opinion and Order, FCC 86-52, 1986 WL 291617, para. 41 (1985) (Phase
I Special Access Tariffs Investigation Order), remanded on other grounds, MCI Telecom. Corp. v. FCC, 842 F.2d
1296 (D.C. Cir. 1988).
805

See, e.g., 1990 AT&T Tariff Revisions Order, 5 FCC Rcd at 5695, para. 17 (citations omitted).

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investment will be realized in a reasonable period of time.806 Although the Commission has identified
general principles regarding what constitutes used and useful investment to be included in a carrier’s
revenue requirement, it has recognized “that these guidelines are general and subject to modification…
The particular facts of each case must be ascertained in order to determine what part of a utility’s
investment [and expenses are] used and useful.”807 The Commission has not issued any comprehensive
decisions regarding application of the used and useful standard since the passage of the
Telecommunications Act of 1996.
336.
These revenue requirement principles are also relevant to expenses for which carriers
should be permitted to recover through high-cost support. Under the 1996 Act and the Commission’s
rules, ETCs are only permitted to use high-cost support for the provision, maintenance, and upgrading of
facilities and services for which the support is intended.808 The Commission recently released a public
notice in which it reminded ETCs of their obligation to use high-cost support only for its intended
purpose of maintaining and extending communications services to rural, high-cost areas.809 The public
notice listed a number of expenses ETCs are not permitted to recover through high-cost support.810 The
notice also reminded rate-of-return carriers that they must not include expenses in their revenue
requirements unless such expenses are “recognized by the Commission as necessary to the provision” of
interstate telecommunications services.811
337.
Rate-of-return carriers use the investment and expense amounts produced from the Part
69 allocation rules to develop rates for interstate telecommunications services.812 Rate-of-return carriers
must file interstate access tariffs with the Commission for most interstate access services. 813 A rate-ofreturn carrier may file its own interstate access tariff(s), or it may participate in the interstate common line
or traffic-sensitive access tariff filed by NECA. Most rate-of-return LECs participate in one or both of the
tariffs filed by NECA. Traditionally, the common line, switched access, and special access rates were set
based on the projected aggregate costs (or average schedule settlements) and demand of all pool members
participating in the tariff, and these rates are targeted to achieve the authorized rate of return.814 Although
common line and special access rates continue to be developed in the traditional manner, the interstate
switched access rates are now capped at rates determined by the procedures established in the USF/ICC
806

AT&T Phase II Order, 64 FCC 2d at 38, para. 113 (“The phrase ‘presently or within a reasonable future period’
in the denotation of ‘used and useful’ is included to protect ratepayers from being forced to pay a return on
investment which may not be used for a considerable length of time or is not needed to serve as a reserve for
currently used investment.”).
807

AT&T Phase II Order, 64 FCC 2d at 39, para. 115.

808

47 U.S.C. § 254(e); 47 CFR § 54.7. Connect America support includes Connect America Fund Intercarrier
Compensation replacement support received pursuant to section 54.304. 47 CFR § 54.304.
809

See All Universal Service High-Cost Support Recipients are Reminded that Support Must be Used for its
Intended Purpose, WC Docket Nos. 10-90 and 14-58, Public Notice, FCC 15-133 at 1 (2015) (High Cost Oct. 19,
2015 Public Notice).
810

See High Cost Oct. 19, 2015 Public Notice at 1.

811

Id. at 2.

812

Rate-of-return carriers may offer DSL service on a detariffed basis. See generally Appropriate Framework for
Broadband Access to the Internet Over Wireline Facilities et al., Report and Order and Notice of Proposed
Rulemaking, 20 FCC Rcd 14853, 14924-29, paras. 128-44 (2005).
813

47 CFR § 69.3(f).

814

In lieu of cost studies, average schedule carriers are compensated by formulas that establish settlements for
average schedule carriers that are comparable to the settlements received by comparable cost companies. The
average schedule settlements are added to the costs of the cost companies to form the revenue requirement for the
pool.

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Transformation Order.815 Each participating carrier settles with the pool based on Commission rules and
policies and the carrier’s contract with NECA.
338.
Accounting data from the USOA is also used to calculate the amount of high-cost support
that each ETC is eligible to receive. HCLS is developed from certain unseparated investment and costs
that form the basis for performing separations studies.816 ICLS is derived from the data flowing from the
Part 69 cost allocations.817 Calculations for determining ICC-related recovery also take cost data into
account through the use of the 2011 interstate revenue requirement. The 2011 interstate revenue
requirement is a critical input into the initial Base Period Revenues for rate-of-return carriers that is used
in deriving a carrier’s ICC-related recovery amounts.818
2.

Discussion
a.

Review of permitted expenses

339.
We begin our reevaluation of a rate-of-return carrier’s ability to include certain types of
expenses in their revenue requirement and high-cost support with consideration of the appropriate
standard to be applied. As noted above, the Commission has used different terms in different situations—
”used and useful,” “prudent expenditure,” and “necessary to the provision of.” We believe that these
terms should be read consistently to describe those expenses that a carrier may appropriately include in its
interstate rate base, interstate revenue requirement, and cost studies used to calculate high-cost support.
Thus, they should reflect a business operation that is run efficiently to provide telecommunications
services. The costs should include amounts of long-term investment and current expenditures that a
business would reasonably incur to provide telecommunications services, taking into account current and
reasonably forecasted operating conditions and business levels. We invite parties to comment on these
standards and whether they should be viewed as applying a consistent standard to regulated, tariffed
services and to expenditures that are recovered through high-cost support. To the extent that a party
believes different standards should be applied, it should specify the situations in which such differences
should apply, what the differences are, and how they should be treated within the accounting and cost
allocation processes of the Commission. As parties respond to the issues raised below, they should
consider the application of the standards in their comments.
340.
The Commission recently indicated that ETCs may not recover certain types of expenses
through high-cost support. Those expenses include the following: personal travel; entertainment;
alcohol; food, including but not limited to meals to celebrate personal events, such as weddings, births, or
retirements; political contributions; charitable donations; scholarships; penalties or fines for statutory or
regulatory violations; penalties or fees for any late payments on debt, loans, or other payments;
membership fees and dues in clubs and organizations; sponsorships of conferences or community events;
gifts to employees; and, personal expenses of employees, board members, family members of employees
and board members, contractors, or any other individuals affiliated with the ETC, including but not
limited to personal expenses for housing, such as rent or mortgages.819

815

See 47 CFR § 51.909(a).

816

See generally 47 CFR 54.901 et seq. High-cost additive support is also developed from that data.

817

See generally id.

818

See id. § 51.917(b)(7).

819

High Cost Oct. 19, 2015 Public Notice at 2. The list published on October 19, 2015 was a non-exhaustive list of
the types of expenses that may not be recovered through the high-cost program. Other examples of costs that cannot
be recovered through the high-cost program include consumer electronics such as televisions, sound systems, and
related video devices; tangible property used for entertainment purposes, such as pool tables; and kitchen appliances
such as stoves and dishwashers.

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341.
We seek comment on explicitly prohibiting the inclusion of any of these expenses in a
carrier’s interstate revenue requirement, which would supersede any existing rules or precedent that might
otherwise suggest these are legitimate expenditures.820 We tentatively conclude that these expenditures
are unnecessary to the provision of regulated interstate services and thus are not appropriately included in
a rate-of-return carrier’s interstate revenue requirement, just as they are not appropriately included in
calculating the level of high-cost support a carrier receives. Recognizing that some of these enumerated
types of expenditures are quite broad, however, we invite parties to indicate whether there is a definable
subset of expenses within any of the categories that should not be excluded from a carrier’s interstate
revenue requirement. Parties believing there are specific types of expenses that should be included in the
interstate revenue requirement should provide examples of such expenses, the reasons they are necessary,
as well as specific language that would allow the Commission to distinguish these expenses from those
that are appropriately excluded. We also seek comment on whether, if we ultimately decide some of
these expense categories, or a portion of them, should be allowed in a carrier’s interstate revenue
requirement, whether similar treatment should be accorded those expenses for purposes of high-cost
support.
342.
In addition to the expenses identified in the High Cost Oct. 19, 2015 Public Notice, we
propose to prohibit additional expenses from inclusion in a carrier’s interstate revenue requirement and
also preclude their recovery through high-cost support. The additional expenses that we propose to
disallow for these purposes include: artwork and other objects which possess aesthetic value; corporate
aircraft, watercraft, and other motor vehicles designed for off-road use, except insofar as necessary to
access inhabited portions of the study area not reachable by motor vehicles travelling on roads; any
vehicles for personal use; tangible property not logically related or necessary to the offering of voice or
broadband services; childcare; cafeterias and dining facilities; and, housing allowances or other forms of
mortgage or rent assistance for employees. Like the expenses listed above, we are concerned that some
carriers may incur additional expenses of this nature that are not necessary to the provision of the
supported service – voice telephony – and not necessary to the provision of regulated interstate services.
If adopted, such a rule would overturn any existing rule or precedent that might suggest such expenditures
are permissible.
343.
We invite parties to comment on whether there is any reason that these expense
categories should not be completely excluded from a carrier’s revenue requirement or its high-cost
support. Parties making an argument for inclusion of these expenses in a carrier’s revenue requirement
should explain clearly why such expenses are necessary to the provision of a supported service or to the
provision of a regulated interstate telecommunications service. We invite parties to indicate whether
there is a definable subset of expenses within any of the categories that should not be excluded from a
carrier’s interstate revenue requirement or high-cost support. Parties believing that to be the case should
provide examples of such expenses, the reason they are necessary, as well as specific language that would
allow the Commission to distinguish these expenses from those that are appropriately excluded.
344.
We also invite parties to identify additional expenses that should be excluded from either
a carrier’s interstate revenue requirement, from calculations of high-cost support, or both.821 Parties
identifying additional expenses to be excluded should address the reasons they are unnecessary to the
provision of telecommunications service or to the provision of supported services. Parties seeking

820

We reiterate that ETCs already may not recover these expenses through high-cost support, and our proposal is to
also prohibit the inclusion of any of these expenses in a carrier’s interstate revenue requirement.
821

As explained above, to the extent that a party believes different standards should be applied, it should specify the
situations in which such differences should apply, what the differences are, and how they should be treated within
the accounting and cost allocation processes of the Commission. See supra para. 339.

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additional exclusions should also provide language that would allow the Commission to exclude such
items if it elects to do so.822
345.
In addition to these categories, the Commission has seen instances in which “companies
maintain comparatively high compensation portfolios for their executives.”823 The Commission expressed
concern that these and other expenses were not reasonable and necessary given a number of
considerations. We seek comment on how to address potential concerns regarding such expenses for
executives, those with close relationships to those executives, and a carrier’s other employees and
contractors.
346.
We are also aware of at least one instance in which costly benefits were sought to be
provided to board members.824 Are there circumstances under which compensation for board members,
including fees per-meeting, for special duties assumed, and for travel and per diem expenses should be
deemed unreasonable? If so, on what basis? Is additional evaluation warranted where board members
have a close relationship to someone in the company?
347.
We seek comment on whether the costs that may be included in a carrier’s revenue
requirement for buildings purchased or rented by regulated telecommunications carriers should be
limited. For example, in cases where excessive square footage of office or warehouse space is purchased
by a regulated carrier in order to earn a rate of return on that space, should part of the price paid for the
building be excluded from the revenue requirement? How should “excessive” be defined for this
purpose? Are there objective metrics available on the square footage of office space per employee that is
reasonable, or on the square footage of warehouse space that a carrier should reasonably require given the
number of loops the carrier provides and the density of its service area? Are there objective metrics on
the price per square foot that should be paid for office or warehouse space in specific locations?
348.
Section 32.2002 provides that plant held for future use must be utilized within two
years.825 This plant is included in the carrier’s rate base. We are concerned that carriers may have
incentives to place excess capacity in the interstate regulated rate base that will not be used in the
foreseeable future, with ratepayers bearing the cost.826 We remind carriers that the benefit from a used
and useful investment must be realized within a reasonable amount of time. Thus, we invite parties to
comment on whether we should adopt a rule that would prohibit a regulated carrier from leasing capacity
from its unregulated affiliate that is not presently utilized in the provision of voice or broadband services.
Alternatively, could this concern be addressed by defining more precisely what constitutes reasonable
projections of use and/or requiring that such capacity be used within a shorter timeframe than two years?
Parties are invited to address the types of uses that should be considered to meet the requirement that
excess capacity be used in the foreseeable future.
349.
As explained above, carriers record their financial transactions in the USOA books of
account as they occur.827 These amounts then flow through the allocation procedures in Parts 64, 36, and
69 with the implied assumption that the recorded amounts are reasonable, and thus prudently incurred.
822

With respect to ensuring the appropriate use of high-cost funds for certain expenses, our proposals apply to both
price cap and rate-of-return carriers. Our proposals concerning permitted expenses for the revenue requirement
would primarily apply to rate-of-return carriers, but they would also apply to price cap carriers in limited
circumstances.
823

See, e.g., Adak July 15, 2013 Order, 28 FCC Rcd at 10201, para. 22.

824

See, e.g., GVNW Request for Clarification Concerning the Appropriate Accounting Treatment of Key Man
Insurance, WC Docket No. 06-11, Pleading Cycle Established, DA 06-488 (WCB Feb. 28, 2006).
825

See 47 CFR § 32.2002.

826

We note that this is separate from spare capacity, which is accounted for in Account 2001. Id. § 32.2001.

827

See supra Section IV.A.1.

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While the used and useful and prudent expenditure standards apply to all investments and expenses of the
carrier, the principles considered under this standard have been interpreted only in limited, specific
cases.828 We now seek comment on whether the Commission should adopt more precise guidance
regarding what constitutes a used and useful or otherwise prudent expenditure.
350.
We note that transactions between non-affiliated parties that are negotiated at arm’s
length are generally presumed to produce commercially reasonable prices. Affiliate transactions,
however, are not negotiated at arm’s length and thus, may result in unreasonable prices absent standards
governing how those transactions should be priced; that is why the Commission adopted rules for the
pricing of affiliate transactions decades ago.829 We now invite parties to comment on whether there are
circumstances surrounding transactions between non-affiliated parties that might raise concerns about
whether the resulting prices are reasonable. For example, would a close family relationship or crossparticipation on boards of directors be situations that warrant more scrutiny of the price? We invite
parties to discuss these examples and to identify other examples that might raise concerns. Parties are
invited to discuss whether presumptions concerning what would be a prudent expenditure could be
employed to ensure that prices are reasonable.
351.
The Commission’s rules require a carrier in specified situations to record the purchase of
a good or service from an affiliate at fair market value.830 We invite parties to comment on whether the
affiliate transaction standard should also be applied to goods and services acquired from non-affiliated
entities. If not, parties should propose an alternative standard and explain why it is a preferable
approach. We also invite parties to comment on the factors that should be considered in determining
whether a transaction is a prudent expenditure or is a reasonable market price in evaluating prices in
situations identified as warranting a closer look. Are there circumstances where a prudent expenditure
might be something other than the absolute lowest identified price? Parties are invited to identify other
metrics beside cost and reliability that are relevant in determining whether an investment or expense is
prudent for the purposes of our rules. Finally, are there specific circumstances under which a carrier
should be required to make a good faith determination of fair market value for a good or service obtained
from a non-affiliate, prior to incurring such expenses, for instance when the total aggregate annual value
of the good(s) or service(s) reaches or exceeds a specified threshold for purchases from a non-affiliate, as
is done under section 32.27(b)(3) and (c)(3) for affiliates?
352.
Finally, we invite parties to comment on the best manner of implementing any decision to
exclude the expenses identified in this section. Specifically, parties should address whether it would be
sufficient to adopt an order simply identifying and defining which costs are not allowed, as has generally
been the process in the past, or whether some rule revisions are necessary. If rule revisions are thought
necessary, parties should address where in the process they can best be implemented. Part 32 excludes
certain investments and expenses as non-regulated, while Part 64 allocates investments and expenses used
to provide both regulated and non-regulated activities that are recorded in the regulated accounts of Part
32 between regulated and non-regulated activities. In addition, for purposes of determining whether a
carrier’s realized rate-of-return exceeds the maximum allowable rate of return, Part 65 specifies the
determination of earnings and rate base.831 Parties are encouraged to address whether some cost
828

See, e.g., American Telephone and Telegraph Company, Docket No. 19129, Phase II Initial Decision, 64 FCC 2d
131 (1976); Phase II Final Decision, 64 FCC 2d 1, 76, para. 194 (1977); Amendment of Part 65 of the
Commission’s Rules to Prescribe Components of the Rate Base and Net Income of Dominant Carriers, CC Docket
No. 86-497, Report and Order, 3 FCC Rcd 269 (1988).
829

See generally Separation of Costs of Regulated Telephone Service from Costs of Nonregulated Activities, Report
and Order, CC Docket No. 86-111, 2 FCC Rcd 1298 (1987) (Joint Cost Order), recon., 2 FCC Rcd 6283 (1987),
further recon., 3 FCC Rcd 6701 (1988), aff’d sub nom. Southwestern Bell Corp. v. FCC, 896 F.2d 1378 (D.C.Cir.
1990).
830

See 47 CFR §§ 32.27(b)(2), (c)(2).

831

See id. § 65.450.

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disallowances would be better achieved through revisions to the Part 32 rules,832 while other cost
disallowances could best be addressed through revisions to other rules in Parts 64, 65, 69, or some
combination of these rules. In other words, is it better to first enumerate which expenses should be
excluded from the revenue requirement as not used and useful in the provision of regulated services and
then proceed with allocating costs, or is it better to rely on the cost allocation procedures in Part 64 to
exclude such expenses? One of the goals of the USOA at the time it was adopted was that it remain
stable over time.833 How should this be factored into the decision of where to make certain
disallowances? Parties are invited to submit proposed language to accomplish the approach they
recommend. Lastly, we invite parties to comment on whether we should require rate-of-return carriers to
identify their cost consultants, if any, in their FCC Form 481s.
b.

Issues related to cost allocation and affiliate transactions

353.
Rate-of-return carriers are subject to the Commission’s longstanding Part 64 rules
regarding the allocation of costs between regulated and non-regulated activities and to the affiliate
transaction rules in Part 32.834 Under these rules, carriers currently apply broad principles in making such
allocations, and the lack of specificity in the rules gives carriers a degree of discretion in making these
allocation decisions.835 Therefore, there is an incentive to interpret the allocation rules in order to allocate
as many costs as possible to their regulated activities, both to justify a higher interstate revenue
requirement and to receive additional high-cost support. For instance, marketing costs could be recorded
solely as regulated expenses, even though those marketing activities are designed to increase
subscribership of retail broadband, i.e., non-regulated services. Given the lack of specific guidance, the
additional costs associated with the provision of retail broadband services, and the incentive to allocate
costs to regulated activities, we conclude that it is time to revisit our allocation rules in order to provide
greater clarity to rate-of-return carriers regarding how to determine the relative allocation of costs
between regulated and non-regulated activities and affiliates.
354.
As noted, the Commission’s existing cost allocation rules relating to regulated versus
non-regulated activities generally provide that costs shall be directly assigned to either regulated or nonregulated activities where possible, and common costs are to be allocated according to a hierarchy of
principles.836 To the extent costs cannot be allocated on direct or indirect cost causation principles, they
are allocated based on a ratio of all expenses directly assigned or attributed to regulated and non-regulated
activities.837 In certain cases, the affiliate transaction rule requires fully distributed costs to be used to
determine the charge to the affiliate or the carrier.838
355.
We seek comment on adopting new rules to improve the process of allocating costs
among regulated and non-regulated services and between affiliates. We also seek a better understanding
of how to detect cases of misallocation. Our goal is to reduce the potential ability of carriers to include
expenses associated with non-regulated services in their regulated revenue requirements, and to preclude
carriers from artificially inflating their high-cost support through such actions. To this end, we seek
832

We are providing state commissions with notice of this in compliance with the requirements of section 220(i) of
the Act in the event we decide to make some revisions to Part 32. 47 U.S.C. § 220(i).
833

See Revision of the Uniform System of Accounts and Financial Reporting Requirements for Telephone
Companies (Parts 31, 33, 42, and 43 of the FCC’s Rules), CC Docket No. 78-196, Second Supplemental Notice of
Proposed Rulemaking and Order, 88 FCC 2d 83, 87, para. 13 (1981).
834

See generally 47 CFR § 64.901 (regarding cost allocation); id. § 32.27 (regarding the affiliate transaction rules).

835

See id. § 64.901; id. § 32.27.

836

See id. § 64.901.

837

See id. § 64.901(b)(3)(iii).

838

See id. § 32.27(c).

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comment on adopting a rule that would classify certain costs, such as general and administrative
expenses, as common costs for purposes of applying the Part 64 and affiliate transaction rules when an
entity provides broadband services directly, or through an affiliated entity. Are there other costs that
should be treated as common costs in applying these allocation rules? Under such an approach, carriers
would be precluded from including all of these expenses in their regulated revenue requirement, and
instead, would be required to exclude some expenses based on the prescribed manner of allocation.
Accordingly, we also seek comment on adopting rules that would prescribe the manner of allocation of
common costs in particular situations. For example, are there certain common costs that we should
specify by rule that they should be allocated on the basis of the relative number of regulated lines
compared to the total number of lines (both regulated and non-regulated) for the rate-of-return carrier and
its broadband affiliate, if any?839 Are there other instances in which relative revenues or some other
measure would be a better allocator, taking into account the ease of administering any such rule?
356.
We are concerned about the potential for carriers to provide shared operational services
to their affiliates under fully-distributed cost (FDC) allocation procedures that do not include all of the
associated costs. The affiliate transaction rules employ a higher of cost or market standard when
applicable, or a FDC standard to ensure that all costs of services provided by a regulated
telecommunications company are recovered from its affiliates. The general nature of the FDC allocation
guidelines, however, allows carriers significant discretion in performing the FDC cost study. This
discretion allows carriers to exclude expenses associated with providing shared functions to their nonregulated affiliates, especially to those affiliates that then sell retail broadband services to end users on an
unregulated basis, thus recovering these costs from rate payers. We seek comment on clarifying or
adopting new rules to ensure the proper application of the affiliate transaction rules in light of provision
of retail broadband by affiliates in certain telecommunications markets.
357.
Our accounting and high-cost universal service support rules rely on proper allocation of
costs to work as intended. We seek comment on specific instances in which additional rules or further
clarification could minimize potential misallocations and thereby protect ratepayers of regulated services.
Are there other methods that would help ensure proper allocation of costs between regulated and nonregulated services?
358.
We are also concerned that problems similar to those associated with regulated versus
non-regulated allocations may arise in the application of the FDC process in connection with affiliate
transactions. Section 32.27 of the Commission’s rules requires an incumbent LEC to record assets or
services received from its affiliated entities at the lesser of FDC or fair market value when no tariff rate,
prevailing price, or publicly filed agreement exists.840 FDC may be over-inclusive, however, if it includes
investment and expenses of the affiliate that would not properly be included in a carrier’s revenue
requirement or calculations for high-cost support.841 While the used and useful and prudent expenditure
standards apply to costs included in affiliate transactions, we seek comment on whether we should adopt a
rule that explicitly prohibits carriers from including in the FDC of an affiliate any costs that are
disallowed from the regulated rate base or revenue requirement, or considered not to be used and useful or
prudent expenditures. Without such a rule, carriers could shift costs to an affiliate and then effectively
recover those disallowed costs through payments to the affiliate. We invite parties to comment on how
such an approach could be implemented, and whether there are circumstances under which these costs of
839

Stated differently, we seek comment on whether we should require certain common costs to be allocated based
on the number of regulated lines compared to the total number of lines and the number of non-regulated lines
compared to the total number of lines.
840

See 47 CFR § 32.27.

841

For instance, if an affiliate charges the regulated carrier for expenses incurred and services rendered, the FDC
method could effectively result in the regulated entity indirectly paying for expenditures that the Commission has
expressly states are not properly included in high-cost support calculations.

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affiliates should be properly included in the regulated rate base or costs used to calculate high-cost
support.
359.
We seek comment on whether additional data would assist in enforcement of the
Commission’s accounting and cost allocation rules, while minimizing ETC reporting burden.
c.

Compliance Issues

360.
Finally, we seek comment on the most effective way to ensure compliance with the
proposed rules for universal service support and tariffing purposes.842 We invite parties to comment on
whether we should require carriers to certify that they have not included any prohibited expenses in their
cost submissions used to calculate high-cost support. If so, is there a current certification that can be
modified to encompass this aspect, or is a new rule necessary? Because audit findings can be used to
recover overpayments of high-cost support, we also invite parties to comment on how the Commission
should implement any requirements it may adopt. Are there other proposals or considerations that the
Commission should consider to ensure compliance with any revised requirements?
361.
Ensuring compliance with any revised investment, expense, or cost allocation rules in the
tariffing context raises different challenges. Rate-of-return carrier tariffs must be filed in advance of their
effective date,843 and pursuant to section 204 of the Act, the Commission, during the notice period, may
suspend the effectiveness of a tariff and initiate an investigation to determine whether the tariff is just and
reasonable.844 Section 204(a)(3) provides that local exchange carrier tariffs that take effect on 7-days
notice after filing (when rates are reduced) or 15-days notice (for any other change) after filing are
“deemed lawful” unless rejected or suspended and investigated by the Commission.845 If a tariff
investigation has not been completed within five months of the tariff’s specified effective date, the
proposed tariff goes into effect subject to the results of the investigation.846 At the conclusion of the
investigation, the Commission may prescribe rates prospectively and order refunds as necessary for any
period in which the tariff was in effect.847 With these constraints on timing and prohibition on retroactive
relief, we invite parties to comment on steps the Commission could take to ensure that carriers follow
these requirements. As a starting point, we propose to require a certification and seek comment on what it
should entail. We also invite parties to comment on what sanctions should be used to give some meaning
to the certifications.
362.
We invite parties to comment on whether, and if so, when an exception to the “deemed
lawful” provision of section 204 of the Act would apply where a carrier violated these rules. We note that
in ACS v. FCC, the D.C. Circuit indicated that although the “deemed lawful” language is unambiguous,
“[w]e do not, of course, address the case of a carrier that furtively employs improper accounting
techniques in a tariff filing, thereby concealing potential rate of return violations. The Order here makes
no claim of such misconduct.”848 The D.C. Circuit thus acknowledged that there may be extenuating
circumstances (such as using improper accounting techniques or willfully misrepresenting expenses) that
warrant an exception to the deemed lawful language. We propose to adopt a rule that would find an
842

Rate-of-return affiliates of price cap carriers would be subject to any revised rules in establishing their tariffed
rates for interstate services. In addition, if a price cap carrier is required to make a cost-based showing in the future,
any expense rules adopted in this proceeding would apply to such showings.
843

See 47 U.S.C. § 203(b).

844

47 U.S.C. § 204(a)(1).

845

See 47 U.S.C. § 204(a)(3); see also Streamlined Tariff Order, 12 FCC Rcd at 2202-03, paras. 67-68.

846

47 U.S.C. § 204(a)(1). The Commission is to issue an order concluding a tariff investigation within 5 months
after the date the tariff would have gone into effect. 47 U.S.C. § 204(a)(2)(A).
847

47 U.S.C. § 204(a)(1).

848

See ACS v. FCC, 290 F.3d 403, 413 (D.C. Cir. 2002)

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exception to the deemed lawful rule when a carrier incorrectly certifies that its revenue requirements are
compliant with the applicable standards. We invite parties to comment on this proposal. In particular,
parties should address the amount of the discrepancy in actual and projected costs that must exist before
such an exception would be invoked. We also ask parties to comment on how any cost recovery should
be returned to customers. For example, should it be used to reduce the revenue requirement for the
following tariff period? Should there be an interest component to what must be returned to the customers.
If so, what should the applicable interest rate be—the authorized rate of return, the corporate tax
underpayment rate, or something else? Are there other mechanisms we should consider to deter inclusion
of inappropriate expenses in a rate-of-return carrier’s revenue requirement?
363.
The vast majority of rate-of-return carriers are members of the NECA pool, and their
costs are combined to establish pool rates. We invite parties to comment on NECA’s role in enforcing
these rules. Should carriers be barred from pool participation if determined to be including expenses
prohibited by Commission rules? How should the magnitude of the violation be determined? What
percent level of prohibited cost inclusion should be required before immediate expulsion from pool
participation is deemed necessary? Are there any other metrics that should be considered in making this
determination? Should carrier violations for inclusion of prohibited expenses have a “repeated
occurrences” component, or should one time inclusion of a certain percentage of prohibited expenses
impact pool participation?
B.

Reducing Support in Competitive Areas

364.
In section II.B of the Report and Order above, we conclude that CAF BLS should not be
provided in areas served by a qualifying unsubsidized competitor.849 We adopt several methods of
disaggregating CAF BLS for areas found to be competitively service, and allow carriers to select which
method will be used. USTelecom and NTCA propose that in addition to the methods they specifically
presented, carriers should also have the option of disaggregating support based on a “method approved by
the Commission.”850 Here, we invite commenters to propose other methods of disaggregation of support
that can be implemented with minimal administrative burden for affected carriers and USAC. We seek to
avoid complex allocations of the cost of facilities that that serve both competitive and non-competitive
areas, which could be burdensome for rate-of-return carriers to implement.
365.
We also invite parties to comment on how the non-supported amount is to be recovered
by the carrier, assuming such expenses remain regulated expenses for ratemaking purposes. At the outset,
we note that rate-of-return carriers currently receive compensation for interstate loop costs through a
combination of end-user charges, e.g., SLCs and universal service support. The SLCs most rate-of-return
carriers assess are at the maximum levels. Thus, in many situations, carriers would be prohibited by our
current rules from increasing SLC rates to recover investment and associated expenses that will not be
supported under the high-cost program in competitive areas. We invite parties to comment on the two
approaches for recovery of those amounts.
366.
First, we could treat the non-supported expenses as being outside the tariffed regulated
revenue requirement and allow carriers to assess a detariffed regulated rate to recover those nonsupported costs. This would remove those costs from the NECA pooling process. We invite parties to
comment on whether the detariffed rates would be outside the prohibition on tariffing deaveraged rates in
a study area, or whether a new rule should be adopted. We invite parties to comment on this alternative.
Does it present any opportunities for carriers to game the tariffing process?
367.
A second option would be to raise the SLC caps for a particular study area to permit the
recovery of the amounts not supported by the high-cost program. We invite parties to comment on this
alternative, including whether any SLC increases should be allowed only in the competitive area or
849

See supra section II.B (eliminating subsidies in competitive areas).

850

USTelecom/NTCA Feb. 5 Ex Parte Letter.

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should apply to the entire study area. In the former case, a modification of the rule prohibiting
deaveraging within the study area would need to be made.851 Parties should particularly address the
effects of deaveraging on the NECA pooling and tariffing processes. We also invite parties to comment
on the effects of deaveraging on carriers’ billing and operation support systems. Are there other
alternatives that the Commission should consider for recovery of the non-supported investment and
associated expenses?
C.

Tribal Support

368.
Background. The Commission recognizes its historic relationship with federally
recognized Tribal Nations, has a longstanding policy of promoting Tribal self-sufficiency and economic
development, and has developed a record of helping ensure that Tribal Nations and their members obtain
access to communications services.852 Telecommunications deployment on Tribal lands has historically
been poor due to the distinct challenges in bringing connectivity to these areas.853
369.
The Commission has observed that communities on Tribal lands have historically had
less access to telecommunications services than any other segment of the population,854 and that greater
financial support therefore may be needed in order to ensure the availability of broadband on Tribal
lands.855 For example, the Commission utilized a tailored approach in disbursing Mobility Fund support
for Tribal lands by developing the Tribal Mobility Fund.856
370.
With the implementation of the improved FCC Form 477 data collection for data as of
December 31, 2014, we now are in a better position to assess how to take tailored measures to address the
gaps in broadband availability on Tribal lands. 857 The data indicate that there is substantial variation in
deployment among Tribally-owned carriers. For example, we note that at the end of 2014, two Triballyowned carriers had deployed no broadband meeting the Commission’s 10/1 Mbps speed benchmark
anywhere in their study areas, and another Tribally-owned carrier reports that it had deployed to census
blocks containing only 5 percent of the locations in its study area.858 However, two Tribally-owned
carriers had deployed broadband meeting the 10/1 Mbps speed benchmark to census blocks containing

851

47 CFR § 69.3(e)(7).

852

Statement of Policy on Establishing a Government-to-Government Relationship with Indian Tribes, Policy
Statement, 16 FCC Rcd 4078, 4080-81 (2000). See also Federal-State Joint Board on Universal Service et al., CC
Docket No. 96-45, Twelfth Report and Order, Memorandum Opinion and Order, and Further Notice of Proposed
Rulemaking, 15 FCC Rcd 12208, 12212-15, paras. 4-11(2000) (2000 Tribal Order); see generally Improving
Communications for Native Nations, CG Docket No. 11-41, Notice of Inquiry, 26 FCC Rcd 2672 (2011) (Native
Nations NOI) (reviewing Commission actions regarding Native Nations).
853

See USF/ICC Transformation Order, 26 FCC Rcd at 17818-19, para. 479. The Mobility Fund NPRM also noted
that Tribal lands are often in rural, high-cost areas, and present distinct obstacles to the deployment of broadband
infrastructure. See Universal Service Reform – Mobility Fund, WT Docket No. 10-208, Notice of Proposed
Rulemaking, 25 FCC Rcd 14716, 14727, para. 33 (2010) (Mobility Fund NPRM).
854

See USF/ICC Transformation Order, 26 FCC Rcd at 17818-19, para. 479

855

See id.

856

See id. at 17818-25, paras. 481-97.

857

Recently, the GAO released a report recommending that the Commission take additional steps to achieve the
strategic objective of making broadband available to households on tribal lands. Government Accountability Office,
Additional Coordination and Performance Measurement Needed for High-Speed Internet Access Programs on Tribal
Lands, GAO 16-222 at 30 (Jan. 2016), http://www.gao.gov/assets/680/674906.pdf (Jan. 2016 GAO Tribal
Broadband Report).
858

See e.g. Federal Communications Commission, Broadband Deployment Data from FCC Form 477,
https://www.fcc.gov/encyclopedia/broadband-deployment-data-fcc-form-477 (last visited Dec. 2, 2015).

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over 50 percent of the locations in their study area, while a third had deployed broadband at that
benchmark to census blocks containing 99 percent of the locations in its study area.859
371.
Noting the challenges faced on Tribal lands, the NTTA has submitted a proposal
“designed to address the broadband deployment canyon that exists on Tribal lands by targeting additional
funding to any rate-of-return carrier serving such lands.”860 NTTA requests that the Commission adopt a
Tribal Broadband Factor (TBF) such that any rate-of-return carriers serving Tribal lands would receive
1.25 times the amount of any non-model-based support the carriers receive.861 NTTA notes that the 1.25x
TBF factor is equivalent in scope to the 25 percent credit the Commission provided in the Tribal Mobility
Fund Phase I.862
372.
To minimize the impact of the TBF on the universal service fund, NTTA recommends
limiting TBF applicability to specific census blocks that include Tribal lands within the service area of a
rate-of-return carrier, and that this additional support come with specific broadband build-out and
certification obligations.863 Because build-out obligations would accompany any additional funding
received through the TBF, NTTA suggests that receipt of TBF funds be voluntary.864 NTTA estimates
that 80 rate-of-return carriers have in their service areas census blocks that include Tribal lands.865 NTTA
estimates that, if adopted, the overall impact of the TBF on the fund will be minimal, approximately $25
million annually, but does not present any analysis to support that estimate.866
373.
Discussion. Given the difficulties that some carriers have experienced in deploying basic
telecommunications services on Tribal lands, the Commission recognizes the important role of universal
service support to foster the deployment of broadband in unserved areas. Therefore, we seek comment on
adopting rules to increase support to rate-of-return carriers for census blocks that include Tribal lands and
unserved with broadband meeting the Commission’s current requirements.
374.
We recognize the distinct challenges in bringing communications services to Tribal lands
and seek comment on how best to achieve broadband deployment on Tribal lands commensurate with that
in other areas. However, the Commission has acknowledged that there are areas throughout the United
States that are expensive to serve and that face challenges in demographics, weather, and geography.867
375.
NTTA proposes that a TBF be applied to any non-model-based rate-of-return mechanism
that the Commission adopts.868 In light of the other changes adopted today, including measures to
859

Federal Communications Commission, Broadband Deployment Data from FCC Form 477,
https://www.fcc.gov/general/broadband-deployment-data-fcc-form-477 (publishing December 2014 FCC Form 477
data).
860

Letter from Godfrey Enjady, President, National Tribal Telecommunications Association,, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90, at 2 (filed June 19, 2015) (June 19, 2015 NTTA Letter).
861

See id.

862

See id.

863

See id. at 3-4. NTTA and Gila River Telecommunications, Inc. (GRIT) proposed specific build-out obligations
that attempt to “address the fact that many Tribal areas have little to no service at all today.” See Letter from
Gregory W. Guice & Patrick R. Halley, Counsel, Gila River Telecommunications, Inc. & National Tribal
Telecommunications Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, at 1 (filed Dec. 4,
2015) (Dec. 4, 2015 NTTA Letter). NTTA and GRIT propose to utilize a sliding scale to determine carrier-specific
service obligations dependent upon current levels of broadband deployment. See id. at 2-3.
864

See June 19, 2015 NTTA Letter at 3.

865

See id. at 4.

866

See id.

867

See USF/ICC Transformation Order/FNPRM, 26 FCC Rcd at 17765-66, paras. 274-79.

868

June 19, 2015 NTTA Letter at 2.

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provide a larger capital investment allowance for carriers that are below average in terms of broadband
deployment, and defined deployment obligations for all rate-of-return carriers, is there a need for a
separate mechanism for Tribal lands? We seek comment on whether a multiplier applied to the revised
ICLS (i.e. CAF BLS) mechanism would foster broadband deployment on Tribal lands and ensure
“universal service funds are used for their intended purposes.”869 Are there other approaches that would
better advance of our goals?
376.
If the Commission determines that a multiplier of support amounts under CAF BLS is an
appropriate mechanism, what factor is appropriate? NTTA provides little support of why 1.25x is the
appropriate factor to ensure broadband deployment on Tribal lands, other than pointing to the 25 percent
credit the Commission provided in the Tribal Mobility Fund Phase I.870 We seek comment on the
appropriate figure for the multiplier, if we were to adopt such an approach. When providing comment on
the appropriate multiplier, specific data and figures are encouraged. We also emphasize that high-cost
universal service support is a finite resource that must be equitably distributed in a manner that effectuates
the goals of section 254.871 Therefore, we seek comment on how implementation of Tribal-specific
additional support may affect the resources available to extend broadband deployment to non-Tribal rateof-return service areas with equally minimal broadband build out and located in geographies as equally
hard to serve as Tribal lands.
377.
We also seek comment on how best to target Tribal land-specific support to Tribal lands
most in need of broadband deployment. NTTA recommends offering TBF support to all rate-of-return
carriers serving Tribal lands and limiting the applicability of the TBF to specific census blocks that
include Tribal lands.872 As noted above, broadband deployment differs substantially among Tribal
lands.873 In light of this, should all Tribal lands be eligible for additional support, or only those with
lower levels of deployment? Above, we adopt a mechanism to allow a larger allowable loop expenditure
for carriers below the average and to limit the allowable loop expenditure for those above the average.
We note that the weighted average nationwide for rate-of-return carrier deployment of 10/1 Mbps service
is currently 68 percent. Should Tribal-specific support only be provided to those rate-of-return carriers
that are serving Tribal lands that report broadband deployment lower than the weighted average, based on
Form 477 data? If so, should eligibility for Tribal-specific support be determined annually or on a less
frequent basis? Should it be provided for a specified period of time, and if so, what is the appropriate
time period?
378.
If a rate-of-return carrier’s study area is mostly non-Tribal, should that carrier be eligible
to receive additional Tribal-specific support? Should there be some threshold percentage, for example 50
percent, of a carrier’s service area is on Tribal lands in order to qualify for additional Tribal-specific
support? We also seek comment on the appropriate data source to use to determine whether a census
block contains Tribal lands. For example, should the Commission utilize maps and data distributed by
the U.S. Census Bureau, or would maps and data provided by the Bureau of Indian Affairs be more
appropriate? What other sources of data might the Commission use? We note that the Commission is
currently engaged in consultation with the Tribal Nations of Oklahoma on the operational functionality
and use of the Oklahoma Historical Map at the local and individual Tribal Nation level as part of the

869

See USF/ICC Transformation Order, 26 FCC Rcd at 17852, para. 580.

870

June 19, 2015 NTTA Letter at 2.

871

47 U.S.C. § 254.

872

See id. at 3.

873

Federal Communications Commission, Broadband Deployment Data from FCC Form 477,
https://www.fcc.gov/encyclopedia/broadband-deployment-data-fcc-form-477 (last visited Nov. 16, 2015).

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Lifeline rulemaking proceeding.874 We seek comment on how this process may affect our determination
of which census blocks would be eligible for Tribal-specific support.
379.
In addition, we seek comment on what specific broadband deployment obligations should
be established, if we were to adopt a mechanism to provide additional support on Tribal lands that lag
behind. NTTA supports tying build-out obligations to additional support,875 and proposes specific buildout obligations tied to a sliding scale based on current broadband deployment levels to “meaningfully
improve broadband connectivity on Tribal lands … particularly in areas that are unserved today.”876 For
instance, it proposes that recipients of TBF that currently have deployed 10/1 Mbps to less than 10
percent of their locations be required to provide 4/1 Mbps service to at least 25 percent of their locations
within three years, and 10/1 Mbps to at least 10 percent of locations, within three years; for those that
already have deployed 10/1 Mbps to at least 10 percent but not 25 percent of their locations, they would
be required to offer 4/1 Mbps service to 50 percent of their locations and 10/1 Mbps service to 25 percent
of locations within three years. If we were to adopt some form of additional Tribal-specific support, how
should these proposals be harmonized with the mandatory deployment obligations we adopt above for all
rate-of-return carriers?
380.
NTTA recommends that participation in the TBF be voluntary.877 We seek comment on
whether carriers should have the option to decline Tribal-specific support if the Commission determines
that the provision of additional support to Tribal lands is necessary to close the broadband deployment
gap in such areas. NTTA suggests that if acceptance of Tribal-specific support is conditioned on buildout obligations, such support presents a “unique opportunity to promote greater deployment of broadband
to Tribal lands.”878 Should participation in such a program be mandatory?
381.
In the USF/ICC Transformation Order, the Commission required that ETCs serving
Tribal lands must meaningfully engage with Tribal governments in their supported areas.879 We seek
comment on whether the offer of additional voluntary Tribal-specific support would encourage more
robust ETC engagement by carriers with Tribal governments on whose lands they provide service.
382.
Finally, we ask whether carriers that serve Tribal lands, in whole or in part, should not be
subject to the measures to limit operating expenses and the overall budget control mechanism adopted
above in the Report and Order. Parties have noted, for instance, that Tribal lands may pose unique
challenges for obtaining permitting and other authorizations.880 If we were to exempt such providers from
874

See Lifeline and Link Up Reform and Modernization, et al., WC Docket No. 11-42, et al., Second Further Notice
of Proposed Rulemaking, Order on Reconsideration, Second Report and Order, and Memorandum Opinion and
Order, 30 FCC Rcd 7818, 7903-07, paras. 257-67 (2015) (2015 Lifeline Reform Order), pets. for review pending sub
nom. In re: FCC 15-71, No. 151322 (D.C. Cir. filed Oct. 16, 2015). See also Lifeline and Link Up Reform and
Modernization, Order, WC Docket No. 11-42, DA 16-117 (rel. Feb. 2, 2016) (extending transition period before
effective date of Commission interpretation of the term “former reservation in Oklahoma” for 120 days).
875

June 19, 2015 NTTA Letter at 3-4. Specifically, NTTA proposes that carriers accepting TBF funding deploy
specific speed thresholds to a percentage of locations on a graduated timeline. See Letter from Gregory W. Guice &
Patrick R. Halley, Counsel, Gila River Telecommunications, Inc. & National Tribal Telecommunications
Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90, at 6 (filed Nov. 18, 2015).
876

See Dec. 4, 2015 NTTA Letter at 2-3. For those carriers accepting TBF funding that have already deployed
broadband, service obligations would be more aggressive. However, the NTTA proposal does not specifically set
aside or target initial funding for those areas with the least broadband deployment or no broadband deployment at
all. See id. at 2-3.
877

See id. at 3.

878

See id.

879

See USF/ICC Transformation Order, 26 FCC Rcd at 17858, para. 604.

880

See, e.g., Letter from Martin L. Stern, Sacred Wind Communications, Inc., Counsel, to Marlene H. Dortch,
Secretary, FCC, WC Docket No. 10-90, Attach. At (filed Dec. 11, 2015).

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those opex and overall budget limitations, how should we determine the providers subject to such
limitations? For instance, to be eligible for such an exemption, should 50 percent or more of the carrier’s
study area be Tribal lands? What would the budgetary impact be on other rate-of-return carriers that
remain on legacy support mechanisms if we were to adopt such exemptions?
D.

Other Measures to Improve the Operation of the Current Rate-of-Return System

383.
Some companies have informed us they have been unable to extend broadband despite
their sincere desire to do so due to lack of access to capital.881 Some companies have seen declining
support under the existing legacy mechanisms, and others are not eligible for HCLS support due to the
prior “race to the top” that the Commission took steps to address in December 2014.882
384.
In the April 2014 Connect America Fund FNPRM, we questioned the long term viability
of HCLS and ICLS in their current form; that is why we encouraged stakeholders to focus on creating a
Connect America Fund for cost recovery that would be consistent with our core principles for reform.883
As noted in the Report and Order, we expect the voluntary path to the model to be an attractive option for
some of the carriers that no longer receive HCLS. Moreover, our reforms to the existing ICLS
mechanism will enable carriers that are, relatively speaking, lower cost than some of their peers to obtain
more high-cost support for broadband only lines from CAF BLS than they would have received for voicebroadband lines under the existing HCLS mechanism. This may provide an incentive for them to migrate
customers to broadband-only lines.
385.
We intend to monitor the impact of these reforms over time. We are optimistic that
together, these two paths will provide sufficient options for carriers to make a business case to extend
broadband service where it is lacking, while minimizing disruption for those carriers that prefer to remain
under the reformed legacy mechanisms. We invite commenters to submit into the record any other
proposals or ideas for steps the Commission should take to provide appropriate incentives for broadband
deployment to unserved areas working within the framework of the existing budget for rate-of-return
areas.
386.
As we evaluate ways to improve the overall framework governing rate-of-return carriers,
we also believe it is appropriate to ensure that the administration of the current rate-of-return system, a
function largely performed by NECA, is as efficient as possible to ensure that the costs of administration,
ultimately borne by consumers, are reasonable. The role of NECA has changed over the last few decades
due to a number of factors, including market changes, significant regulatory reforms, and the creation of
USAC as the Administrator for the federal universal service mechanisms. We ask parties to address
whether and how the Commission should amend subpart G of Part 69 to reflect these changes.884 We also
seek comment on whether we should adopt rule changes to facilitate transparency into and evaluation of
whether NECA’s functions are accomplished in an efficient, cost effective, and neutral manner.

881

See, e.g,, Letter from Michael R. Romano, Senior Vice President – Policy, NTCA – The Rural Broadband
Association, to Marlene H. Dortch, Secretary, FCC, WC Docket No. 10-90 (filed Jan. 14, 2016) (Jan. 14, 2016 Clear
Creek Ex Parte).
882

We note that HCLS claims in the aggregate for rate-of-return carriers have declined from $792 million in 2012 to
an estimated $711 million in 2015. See 2015 Universal Service Monitoring Report, Figure 9 at A-19
http://transition.fcc.gov/Daily_Releases/Daily_Business/2016/db0129/DOC-337019A1.pdf. NECA estimates that
HCLS will decline further over the next ten years, absent any rule changes, from $701 million to $568 million. See
Letter from Regina McNeil, NECA, to Rodger Woock and Suzanne Yelen, FCC, Att.
“ConfidentialOutputLegacy_support_s1version1.xlsx” (filed Dec. 15, 2015).
883

April 2014 Connect America FNPRM, 29 FCC Rcd at 7136, para. 267.

884

See 47 CFR § 69.601 et seq.

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FCC 16-33

Streamlining ETC Annual Reporting Requirements

387.
In addition to the modifications to ETC annual reporting obligations adopted above, we
seek comment on certain, narrowly-tailored reporting changes to improve the Commission’s ability to
protect against waste, fraud, and abuse. We also seek comment on additional ways to lessen regulatory
reporting burdens on ETCs, particularly those that are small businesses.
388.
Here, we seek comment on whether to modify or eliminate five sets of requirements:
specifically, the requirements by ETCs to provide outage information, unfulfilled service requests, the
number of complaints per 1,000 subscribers for both voice and broadband service, pricing for both voice
and broadband, and certification that it is complying with applicable service quality standards.885 What
are the regulatory costs associated with requiring such information to be included in the annual Form 481,
particularly for those categories of information that may be collected in some fashion through other
means (the Commission’s outage reporting system and consumer complaint system)? In the case of
outage reporting, we note that all carriers are under a separate obligation to report outages under part 4 of
our rules.886 Are the ETC-specific rules therefore duplicative, and can other means of collection be
improved?
389.
To the extent commenters believe such information should continue to be collected from
ETCs, we ask for specific suggestions on how to modify these requirements so that the information is
more useful to analyze, both on an individual ETC and aggregate basis.
390.
The underlying purpose of the unfulfilled service request reporting rule was to monitor
rate-of-return carriers’ progress in deploying broadband pursuant to the reasonable request standard. We
have concerns, however, that the rule, as implemented, is not adequately advancing that purpose.
Similarly, we have found the information regarding complaints to be of limited value, in large part
because it is not clear that ETCs are reporting such information in a consistent fashion. If we were to
retain some form of reporting requirements for complaints and unfulfilled requests, should we implement
more specific standardized instructions regarding the reporting of complaints and unfulfilled requests so
that the information can be analyzed and aggregated in a more useful fashion? For the reporting of
pricing information, would it be less burdensome if ETCs were to report only the price offering that meets
or exceeds our minimum requirements, and not the full range of service offerings?
391.
We also seek comment on whether, in light of our experience with the reporting
requirements to date, we should modify or eliminate the requirement that an ETC certify it is complying
with applicable service quality standards and consumer protection rules. Absent greater specificity,
affected ETCs may not know what standards and rules are “applicable.” Should we clarify that the
obligation applies only to legally binding rules and/or voluntary guidelines with which the ETC has
agreed to comply? If so, how should the ETC report its compliance? Are other clarifications or
modifications to the rule appropriate?
392.
Above we direct USAC to establish an online tool to permit access to all information
submitted by ETCs, including Form 481 data. USAC shall ensure that state regulators, and Tribal
governments where applicable, will have access full Form 481 data filings, including any data marked
confidential. In light of that change, we propose to eliminate ETCs’ requirement to file a duplicate copy
of Form 481 with states and/or Tribal governments. Instead, they would make a single filing with USAC,
and both the Commission and other regulators would obtain the information through online access. We
tentatively conclude that centralizing all filing requirements with USAC would be beneficial for states
and Tribal governments as it would reduce the need to sort through, in some cases, dozens of paper
885

See 47 CFR §§ 54.313(a)(2), 54.422(b)(1) (outage reporting); 47 CFR § 54.313(a)(3) (unfulfilled service
requests); 47 CFR §§ 54.313(a)(4), 54.422(b)(2) (consumer complaints); 47 CFR §§ 54.313(a)(7), 54.422(b)(2)
(pricing); 47 CFR § 54.313(a)(5) 54.422(b)(3) (service quality standards).
886

See 47 CFR § 4.1 et seq.

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documents containing the same information that would be available more readily through an online tool.
Interested parties have suggested that the Commission should reduce or eliminate duplicate filings of the
same information.887 Having one place for ETCs to file their annual reports, instead of three or more,
may reduce the filing burden on ETCs. We seek comment on this tentative conclusion.
393.
Lastly, we seek comment on modifying or eliminating any other reporting requirements
applicable to all ETCs that have broadband obligations as a condition of receiving high-cost support in
order to further improve the alignment of carriers’ obligations with our ability to monitor them through
our reporting requirements.
V.

SEVERABILITY

394.
All of the rules that are adopted in this Order are designed to work in unison to ensure the
ubiquitous deployment of voice and broadband-capable networks to all Americans. However, each of the
separate reforms we undertake in this Order serve a particular function toward the goal of ubiquitous
voice and broadband service. Therefore, it is our intent that each of the rules adopted herein shall be
severable. If any of the rules is declared invalid or unenforceable for any reason, it is our intent that the
remaining rules shall remain in full force and effect.
VI.

PROCEDURAL MATTERS
A.

Paperwork Reduction Act Analysis

395.
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, we note that pursuant to
the Small Business Paperwork Relief Act of 2002,888 we previously sought specific comment on how the
Commission might further reduce the information collection burden for small business concerns with
fewer than 25 employees. We describe impacts that might affect small businesses, which includes most
businesses with fewer than 25 employees, in the Final Regulatory Flexibility Analysis (FRFA) in
Appendix B, infra.
B.

Congressional Review Act

396.
The Commission will send a copy of this Report and Order to Congress and the
Government Accountability Office pursuant to the Congressional Review Act.889
C.

Final Regulatory Flexibility Analysis

397.
The Regulatory Flexibility Act of 1980 (RFA) requires that an agency prepare a
regulatory flexibility analysis for notice and comment rulemakings, unless the agency certifies that “the
rule will not, if promulgated, have a significant economic impact on a substantial number of small
entities.” Accordingly, we have prepared a FRFA concerning the possible impact of the rule changes
contained in the Report and Order on small entities. The FRFA is set forth in Appendix D.
D.

Initial Paperwork Reduction Act Analysis

398.
As required by the RFA, the Commission has prepared an Initial Regulatory Flexibility
Analysis (IRFA) of the possible significant economic impact on small entities of the policies and rules
proposed in the FNPRM. This analysis is found in Appendix C. The FNPRM seeks comment on a
887

See Letter of James J. Kalil, Executive Committee Member, Small Company Coalition, to Commissioner
Michael O’Rielly, WC Docket No. 10-90 (filed June 1, 2015) (urging the Commission to allow data sharing
between agencies and eliminate the requirement to send copies of filings to multiple agencies).
888

Public Law 107-198, see 44 U.S.C. § 3506(c)(4).

889

See 5 U.S.C. § 801(a)(1)(A).

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potential new or revised information collection requirement. If the Commission adopts any new or
revised information collection requirement, the Commission will publish a separate notice in the Federal
Register inviting the public to comment on the requirement, as required by the Paperwork Reduction Act
of 1995, Public Law 104-13 (44 U.S.C. §§ 3501-3520). In addition, pursuant to the Small Business
Paperwork Relief Act of 2002, Public Law 107-198, 44 U.S.C. § 3506(c)(4), the Commission seeks
specific comment on how it might “further reduce the information collection burden for small business
concerns with fewer than 25 employees.”
E.

Ex Parte Presentations

399.
Permit-But-Disclose. The proceeding this Second FNPRM initiates shall be treated as a
“permit-but-disclose” proceeding in accordance with the Commission’s ex parte rules.890 Persons making
ex parte presentations must file a copy of any written presentation or a memorandum summarizing any
oral presentation within two business days after the presentation (unless a different deadline applicable to
the Sunshine period applies). Persons making oral ex parte presentations are reminded that memoranda
summarizing the presentation must (1) list all persons attending or otherwise participating in the meeting
at which the ex parte presentation was made, and (2) summarize all data presented and arguments made
during the presentation. If the presentation consisted in whole or in part of the presentation of data or
arguments already reflected in the presenter’s written comments, memoranda, or other filings in the
proceeding, the presenter may provide citations to such data or arguments in his or her prior comments,
memoranda, or other filings (specifying the relevant page and/or paragraph numbers where such data or
arguments can be found) in lieu of summarizing them in the memorandum. Documents shown or given
to Commission staff during ex parte meetings are deemed to be written ex parte presentations and must
be filed consistent with rule 1.1206(b). In proceedings governed by rule 1.49(f) or for which the
Commission has made available a method of electronic filing, written ex parte presentations and
memoranda summarizing oral ex parte presentations, and all attachments thereto, must be filed through
the electronic comment filing system available for that proceeding, and must be filed in their native
format (e.g., .doc, .xml, .ppt, searchable .pdf). Participants in this proceeding should familiarize
themselves with the Commission’s ex parte rules.
F.

Comment Filing Procedures

400.
Comments and Replies. Pursuant to sections 1.415 and 1.419 of the Commission’s rules,
47 CFR §§ 1.415, 1.419, interested parties may file comments and reply comments on or before the dates
indicated on the first page of this document. Comments may be filed using the Commission’s Electronic
Comment Filing System (ECFS). See Electronic Filing of Documents in Rulemaking Proceedings, 63 FR
24121 (1998).


Electronic Filers: Comments may be filed electronically using the Internet by accessing the
ECFS: http://apps.fcc.gov/ecfs.



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

890

All hand-delivered or messenger-delivered paper filings for the Commission’s
Secretary must be delivered to FCC Headquarters at 445 12th St., SW, Room TW-

47 CFR §§ 1.1200 et seq.

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A325, Washington, DC 20554. The filing hours are 8:00 a.m. to 7:00 p.m. All hand
deliveries must be held together with rubber bands or fasteners. Any envelopes and
boxes must be disposed of before entering the building.


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



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

401.
People with Disabilities. To request materials in accessible formats for people with
disabilities (braille, large print, electronic files, audio format), send an e-mail to [email protected] or call
the Consumer & Governmental Affairs Bureau at 202-418-0530 (voice), 202-418-0432 (tty).
402.
Comments and reply comments must include a short and concise summary of the
substantive arguments raised in the pleading. Comments and reply comments must also comply with
section 1.49 and all other applicable sections of the Commission’s rules. We direct all interested parties
to include the name of the filing party and the date of the filing on each page of their comments and reply
comments. All parties are encouraged to utilize a table of contents, regardless of the length of their
submission. We also strongly encourage parties to track the organization set forth in the FNPRM in order
to facilitate our internal review process.
403.
Additional Information. For additional information on this proceeding, contact Suzanne
Yelen of the Wireline Competition Bureau, Industry Analysis and Technology Division,
[email protected], (202) 418-7400 or Alexander Minard of the Wireline Competition Bureau,
Technology Access Policy Division, [email protected], (202) 418-7400.
VII.

ORDERING CLAUSES

404.
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 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 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 we retain, modify, or adopt 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.
405.
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.
406.
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.
407.
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
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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.
408.
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.
409.
IT IS FURTHER ORDERED that the Commission SHALL SEND a copy of this Report
and Order, Order and Order on Reconsideration, and 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).
410.
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 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.
FEDERAL COMMUNICATIONS COMMISSION

Marlene H. Dortch
Secretary

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APPENDIX A
Proposed Rules
For the reasons discussed in the preamble, the Federal Communications Commission proposes to amend
47 CFR part 65 as follows:
PART 65—INTERSTATE RATE OF RETURN PRESCRIPTION PROCEDURES AND
METHODOLOGIES
1. The authority citation for part 65 is revised to read as follows:
AUTHORITY: 47 U.S.C. 151, 154, 201, 202, 203, 204, 205, 218, 219, 220, 403.
2. In §65.450, revise paragraph (d) and add new paragraph (e) to read as follows:
§65.450 Net income.
*****
(d) Except for the allowance for funds used during construction and interest related to customer deposits,
the amounts recorded as nonoperating income and expenses and taxes (Account 7300 and 7400) and
interest and related items (Account 7500) and extraordinary items (Account 7600) shall not be included
unless this Commission specifically determines that particular items recorded in those accounts shall be
included.
(e) For purposes of determining whether an expense is recognized by the Commission as “necessary to
the provision of these services” under paragraph (a) of this section, the expense must be used and useful
and a prudent expenditure. The Commission specifically provides that the following expenses are not
necessary to the provision of interstate telecommunications services regulated by the Commission:
(1) Personal travel; gifts to employees; childcare; housing allowances or other forms of mortgage
or rent assistance for employees; personal expenses of employees, board members, family
members of employees and board members, contractors, or any other individuals affiliated with
the incumbent LEC, including but not limited to personal expenses for housing, such as rent or
mortgages; personal use of company-owned housing, buildings, or facilities used for
entertainment purposes by employees, board members, family members of employees and board
members, contractors, or any other individuals affiliated with the incumbent local exchange
carrier;
(2) Entertainment; artwork and other objects which possess aesthetic value; tangible property not
logically related or necessary to the offering of voice or broadband services;
(3) Aircraft, watercraft, and other motor vehicles designed for off-road use, except insofar as
necessary to access inhabited portions of the study area not reachable by motor vehicles travelling
on roads; any vehicles provided to employees, board members, family members of employees
and board members, contractors, or any other individuals affiliated with the incumbent local
exchange carrier for personal use;
(4) Cafeterias and dining facilities; alcohol and food, including but not limited to meals to
celebrate personal events, such as weddings, births, or retirements, except that a reasonable
amount for food shall be allowed for work-related travel;
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(5) Political contributions; charitable donations; scholarships; membership fees and dues in clubs
and organizations; sponsorships of conferences or community events; and
(6) Penalties or fines for statutory or regulatory violations; penalties or fees for any late payments
on debt, loans, or other payments.
3. Add new paragraph (d) to §65.830 to read as follows:
§65.830 Deducted items.
*****
(d) The following assets shall also be deducted from the interstate rate base:
(1) Artwork and other objects which possess aesthetic value;
(2) Tangible property not logically related or necessary to the offering of voice or broadband
services;
(3) Personal residences and property used for entertainment purposes;
(4) Aircraft, watercraft, and other motor vehicles designed for off-road use, except insofar as
necessary to access inhabited portions of the study area not reachable by motor vehicles travelling
on roads;
(5) any vehicles provided to employees, board members, family members of employees and
board members, contractors, or any other individuals affiliated with the incumbent local exchange
carrier for personal use; and
(6) Cafeterias and dining facilities.

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APPENDIX B
Final Rules
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. Add new paragraph (f)(4) to §51.917 to read as follows:
§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 §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
1.

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.

2.

Remove §54.301.

3.

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:
Calculate Exp(Ŷ + 1.5 * mean square error of the regression), where
Ŷ = αˆ + βˆ 1 X1 + βˆ 2X2 + βˆ 3 X3,
αˆ , βˆ 1, βˆ 2 , and βˆ 3 are the coefficients from the regression,
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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.
(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 subsection (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
(c)(1) of this section, adjusted for inflation using the Department of Commerce’s Gross Domestic
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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 (d) 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-ofreturn 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 lesser of 1.0 or 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.
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(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) 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 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) 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.
4.

Revise §54.305(a) to read as follows:
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§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.
*****

5.

Revise paragraph (a) of §54.308 to read as follows:

§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 §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 tenyear 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
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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) 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 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) The deployment obligation shall be determined by dividing the amount of support set
forth in (i) 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
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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 §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 per
location/per project capital investment allowance set forth in §54.303(f)(1).
(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.
*****
6. 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 Fund-Alternative Connect America Cost Model (CAFACAM) 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 §54.308(a)(1)(i). 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 §54.308(a)(1)(ii).
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(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-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.
7. Amend §54.313 by removing and reserving paragraphs (a)(1), (e)(2)(i) and (e)(2)(iii), revising
paragraphs (a)(10), (e)(1), (e)(2) introductory text, (f)(1) introductory text, (f)(1)(i) and (f)(1)(iii), and
removing paragraphs (e)(3) through (e)(6).
§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) * * *
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(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.
(ii) * * *
(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.
*****
8. 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.
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(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 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
March 8, will have its support reduced in an amount equivalent to seven days in support;
(ii) An eligible telecommunications carrier that files on or after March 9 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 5 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.
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9. In §54.319, revise paragraph (a) and add paragraphs (d) through (h) to read as follows:
§54.319 Elimination of high-cost support in areas with an unsubsidized competitor.
(a)

High-cost universal service 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 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 §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 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, 83 percent of the incumbent’s disaggregated support for the competitive census
blocks will be provided;
(2) In the second year, 66 percent of the incumbent’s disaggregated support for the competitive
census blocks will be provided;
(3) In the third year, 49 percent of the incumbent’s disaggregated support for the competitive census
blocks will be provided;
(4) In the fourth year, 32 percent of the incumbent’s disaggregated support the competitive census
block will be provided;
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(5) In the fifth year, 15 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.
10. Revise §54.707 to read as follows:
§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.
11. Remove and reserve subpart J, consisting of §§ 54.800 through 54.809.
12. 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 paragraphs (n) and (o) of §69.104 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
(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
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(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 per-loop corporate operations expense; or
(2) The portion of the monthly per-loop 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 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 Broadbandonly 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 onehalf 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
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regulated local exchange voice service, for use in connection with fixed Broadband Internet access
service, as defined in §8.2 of this chapter.
13. 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:
(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 post-transaction 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 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 §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.
14. 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-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
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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 §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 §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.
15. Remove §54.904.
16. 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:
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*****
17. Add new paragraph (d) to §54.1310 to read as follows:
§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 §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.
18.

Revise §54.302(b) and (c) to read as follows:

§54.302 Monthly per-line limit on universal service support.
*****
(b) For purposes of this section, universal service support is defined as the sum of the amounts calculated
pursuant to §§ 54.1304 and 54.1310, and §§ 54.305, and §§ 54.901 through 54.904. Line counts for
purposes of this section shall be as of the most recent line counts reported pursuant to § 54.903(a)(1).
(c) The Administrator, in order to limit support to $250 for affected carriers, shall reduce safety net additive
support, high-cost loop support, safety valve support, and Connect America Fund Broadband Loop Support
in proportion to the relative amounts of each support the study area would receive absent such limitation.
PART 65—INTERSTATE RATE OF RETURN PRESCRIPTION PROCEDURES AND
METHODOLOGIES
1.

The authority citation for Part 65 is revised to read as follows:
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AUTHORITY: 47 U.S.C. 151, 154(i), 155, 201, 205, 214, 219, 220, 254, 303(r), 403, and 1302
unless otherwise noted.
2.

Revise §65.302 to read as follows:
§ 65.302 Cost of debt.
The formula for determining the cost of debt is equal to:

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 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
1. 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.
2. Add new paragraph (k) to §69.4 to read as follows:
§69.4 Charges to be filed.
*****
(k) A non-price cap incumbent local exchange carrier may include a charge for the Consumer BroadbandOnly Loop.
3. Amend §69.104 by revising paragraphs (n)(1), (n)(1)(ii), and (o)(1), removing paragraphs
(n)(1)(ii)(A) through (C), and adding paragraph (s) to read as follows:
§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:
(i) * * *
(ii) $6.50
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*****
(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 modelbased support is first provided.
(2) 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 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.
4. Amend §69.115 by revising paragraph (b) and adding paragraph (f) to read as follows:
§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 §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.
5. 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.
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6. Add §69.132 to subpart B to read as follows:
§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 §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
§8.2 of this chapter.
(c) For carriers not electing model-based 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 (net of the projected annual Connect America Fund
Broadband Loop Support attributable to consumer broadband-only loops) 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 nonprice cap local exchange carrier that elects model-based support pursuant to §54.311 of this chapter shall
be $42.
7. Amend §69.306 by removing and reserving paragraph (d)(2) as follows:
§69.306 Central office equipment (COE).
*****
(d) * * *
(2) [Reserved.]
*****
8. 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 as if 100 percent were allocated to the
interstate jurisdiction, a carrier shall use 100 percent as the interstate allocator in determining
investment and the allocation of investment to the common line category under part 36 of this
chapter and this part.
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(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 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.
9. Amend §69.415 by removing and reserving paragraphs (a) through (c).
10. Add §69.416 to subpart E to read as follows:
§ 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 §§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.
(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.
11. Amend §69.603 by revising paragraphs (g) and (h)(4) through (h)(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 69.603 (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)(1) * * *
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(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.
*****

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APPENDIX C
Initial Regulatory Flexibility Analysis
1.
As required by the Regulatory Flexibility Act of 1980, as amended (RFA),1 the
Commission has prepared this Initial Regulatory Flexibility Analysis (IRFA) of the possible significant
economic impact on a substantial number of small entities from the policies and rules proposed in this
Further Notice of Proposed Rulemaking (Further Notice). The Commission requests written public
comment on this IRFA. Comments must be identified as responses to the IRFA and must be filed by the
deadlines for comments on the Further Notice provided on Report and Order, Order and Order on
Reconsideration, and Further Notice of Proposed. The Commission will send a copy of the Further
Notice, including this IRFA, to the Chief Counsel for Advocacy of the Small Business Administration
(SBA).2 In addition, the Further Notice and IRFA (or summaries thereof) will be published in the Federal
Register.3
A.

Need for, and Objectives of, the Proposed Rules

2.
In the Further Notice, we commence a review of the extent to which certain investments
and expenses incurred by a rate-of-return regulated local exchange carrier may be included in its rate base
and revenue requirement for ratemaking and USF purposes.4 The Commission has not comprehensively
reviewed the continued reasonableness of its existing rules regarding permissible investments and
expenses for regulated local exchange carriers since the passage of the Telecommunications Act of 1996.
Market and regulatory conditions have changed substantially since that time. Regulated
telecommunications carriers have expanded into the provision of retail broadband services, either directly
or through affiliated entities. Regulated carriers also increasingly face competition, for both voice and
broadband services, in portions of their incumbent territory from other facilities-based providers, such as
cable and wireless providers. These changing conditions may affect the incentives regarding the types of
costs carriers attempt to include in their revenue requirement and the ways in which carriers allocate costs
between regulated and non-regulated services and affiliates.
3.
Through audits, inquiries, and other investigations, the Commission has recently become
aware of alleged abuses by rate-of-return carriers of the used and useful principles and its cost allocation
rules. The Commission therefore concluded that it is time to reevaluate the types of expenses that should
be permitted—both in a carrier’s revenue requirement and for recovery through high-cost support.
Looking into the expenses permitted and the allocation of those expenses will help ensure that carriers are
only recovering costs that are used and useful and prudently incurred, and in the case of high cost support,
only costs that are necessary to the provision of interstate telecommunications services.
4.
In the Order, the Commission determined that universal service support should be
targeted more specifically to those areas where support is most needed to ensure consumers are served
with voice and broadband service. Therefore, the Commission adopted a process for identifying those
areas served by an unsubsidized competitor and several methods of disaggregating support to those areas.
However, the Commission seeks comment on other methods for disaggregating support that would be
minimally burdensome on carriers and how the non-supported amount should be recovered.

1

See 5 U.S.C. § 603. The RFA, see 5 U.S.C. §§ 601-12, has been amended by the Small Business Regulatory
Enforcement Fairness Act of 1996 (SBREFA), Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
2

See 5 U.S.C. § 603(a).

3

Id.

4

We note that there may be very limited circumstances where our proposed reforms would impact price cap
regulated carriers’ use of high-cost USF support.

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5.
The Commission recognizes that Tribal lands may need additional financial support to
ensure the availability of broadband in these areas. Therefore, the Further Notice seeks comment on
whether a separate mechanism is needed to support broadband in Tribal lands and, if so, how such a
mechanism should be structured.
6.
Some companies have informed the Commission that they are unable to extend
broadband due to a lack of access to capital. Other carriers have seen declining support or are ineligible
for certain types of support, such as HCLS. In the Order, the Commission has adopted reforms to its
high-cost universal service support to support broadband deployment. The Further Notice seeks comment
on other proposals to expand broadband services in those areas served by rate-of-return carriers and any
changes needed to make the administration of federal universal service programs more efficient.
7.
The Commission also seeks to modify its ETC annual reporting obligations to improve
the Commission’s ability to protect against waste, fraud, and abuse. The Further Notice seeks comment
on how best to make the information collected more useful while minimizing the burdens on those
carriers subject to these reporting requirements.
1.

Review of Permitted Expenses

8.
The Further Notice begins by reevaluating a rate-of-return carrier’s ability to include
certain types of expenses in its revenue requirement and high-cost support with consideration of the
appropriate standard to be applied. The Commission believes that the terms “used and useful,” “prudent
expenditure,” and “necessary to the provision of” should be read consistently to describe those expenses
that a carrier may appropriately include in its interstate rate base, interstate revenue requirement, and cost
studies used to calculate high-cost support. The costs should include amounts of long-term investment
and current expenditures that a business would reasonably incur to provide telecommunications services,
taking into account current and reasonably forecasted operating conditions and business levels.
Accordingly, the Commission seeks comment on a variety of expenses, and whether such expenses
should be included when making these calculations.5
2.

Issues Related to Cost Allocation and Affiliate Transactions

9.
Rate-of-return carriers are subject to the Commission’s longstanding Part 64 rules
regarding the allocation of costs between regulated and non-regulated activities and to the affiliate
transaction rules in Part 32.6 Under these rules, carriers currently apply broad principles in making such
allocations, and the lack of specificity in the rules gives carriers a degree of discretion in making these
allocation decisions.7 Carriers have an incentive to interpret the allocation rules in order to allocate as
many costs as possible to their regulated activities, both to justify a higher interstate revenue requirement
and to receive additional high-cost support. Given the lack of specific guidance, the additional costs
associated with the provision of retail broadband services, and the incentive to allocate costs to regulated
activities, the Commission concludes that it is time to revisit the allocation rules to provide greater clarity
to rate-of-return carriers regarding how to determine the relative allocation of costs between regulated and
non-regulated activities and affiliates.8 The Commission seeks comment on adopting new rules to
improve the process of allocating costs among regulated and non-regulated services and among affiliates,
and also seeks comment regarding how to detect cases of misallocation.

5

See supra Section IV.A.

6

See generally 47 CFR § 64.901 (regarding cost allocation); 47 CFR § 32.27 (regarding the affiliate transaction
rules).
7

See 47 CFR § 64.901 et seq; 47 CFR § 32.27.

8

See supra Section IV.A.

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Compliance Issues

10.
Additionally, the Commission seeks comment on the most effective way to ensure
compliance with the proposed rules for universal service support and tariffing purposes. For example, the
Commission seeks comment on what, if any, certification or reporting requirements should be
implemented.9
4.

Reducing Support in Competitive Areas

11.
In the Further Notice, we seek comment on alternative methods of reducing support for
areas served by an unsubsidized competitor.10 In the Order, we adopt several methods of disaggregating
CAF BLS for areas found to be competitively served and allow carriers to select which method will be
used. However, we invite commenters to propose other methods of disaggregation of support that can be
implemented with minimal administrative burden for affected carriers and USAC.11 We seek to avoid
complex allocations of the cost of facilities that serve both competitive and non-competitive areas, which
could be burdensome for rate-of-return carriers to implement.
12.
We also invite parties to comment on how the non-supported amount is to be recovered
by the carrier, assuming such expenses remain regulated expenses for ratemaking purposes.12 We note
that rate-of-return carriers currently receive compensation for interstate loop costs through a combination
of end-user charges, e.g., SLCs, and universal service support. The SLCs most rate-of-return carriers
assess are at the maximum levels. Thus, in many situations, carriers would be prohibited by our current
rules from increasing SLC rates to recover investment and associated expenses that will not be supported
under the high-cost program in competitive areas. Therefore, we invite parties to comment on two
approaches for recovery of those amounts.13
5.

Tribal Support

13.
In the Further Notice, we seek comment on a proposal to adopt a mechanism to provide
additional support to unserved Tribal lands, and alternative approaches.14 The Commission has observed
that communities on Tribal lands have historically had less access to telecommunications services than
any other segment of the population,15 and that greater financial support therefore may be needed in order
to ensure the availability of broadband on Tribal lands.16 Therefore, we seek comment on adopting rules
to increase support to rate-of-return carriers for census blocks that include Tribal lands and are unserved
with broadband meeting the Commission’s current requirements.17 The Commission also recognizes that
broadband deployment differs substantially among Tribal lands.18 To assist small rate-of-return carriers
that serve Tribal areas with minimal infrastructure build out, we also seek comment on how best to target
Tribal land-specific support to Tribal areas most in need of broadband deployment.19
9

See supra Section IV.A.

10

See supra Section IV.B.

11

See id.

12

See id.

13

See id.

14

See supra Section IV.C.

15

See USF/ICC Transformation Order, 26 FCC Rcd at 17818-19, para. 479

16

See id.

17

See supra Section IV.C.

18

Federal Communications Commission, Broadband Deployment Data from FCC Form 477,
https://www.fcc.gov/encyclopedia/broadband-deployment-data-fcc-form-477 (last visited Nov. 16, 2015).
19

See supra Section IV.C.

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Other Measures To Improve the Operation of the Current Rate-of-Return
System

14.
Additionally, in the Further Notice, we invite commenters to submit into the record any
other proposals or ideas for steps the Commission should take to provide appropriate incentives for
broadband deployment to unserved areas working within the framework of the existing budget for rate-ofreturn areas.20 Some companies have indicated they have been unable to extend broadband despite their
sincere desire to do so due to lack of access to capital, while other companies have seen declining support
under the existing legacy mechanisms. Dome carriers are not eligible for HCLS support due to the prior
“race to the top” that the Commission took steps to address in December 2014.21 We expect our reforms
to the existing ICLS mechanism and addition of a voluntary path to the model will provide options for
carriers to extend broadband where it is lacking. While we intend to monitor the impact of these reforms
over time, we invite commenters to submit into the record any other proposals or ideas for steps the
Commission should take to provide appropriate incentives for broadband deployment to unserved areas
while minimizing disruption for those carriers that prefer to remain under the reformed legacy
mechanisms.22
7.

Streamlining ETC Annual Reporting Requirements

15.
Lastly, with respect to ETC reporting requirements, we seek comment on additional ways
to lessen regulatory reporting burdens on ETCs, particularly those that are small businesses.23 In the
Order, we update 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.24 To further lessen the regulatory burden on ETCs, many of whom are small rate-ofreturn carriers, and to improve on the Commission’s ability to protect against waste, fraud, and abuse, we
seek comment on certain, narrowly-tailored reporting changes.25 Specifically, we seek comment on
whether to modify or eliminate five sets of requirements: the requirements to provide outage information,
unfulfilled service requests, the number of complaints per 1,000 subscribers for both voice and broadband
service, pricing for both voice and broadband, and certification of compliance with applicable service
quality standards.26
B.

Legal Basis

16.
The legal basis for any action that may be taken pursuant to the Notice is 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 C.F.R. §§ 1.1, 1.3, 1.421,
1.427, and 1.429.

20

See supra Section IV.D.

21

See id.

22

See id.

23

See supra Section IV.E.

24

See supra Section II.E.

25

See supra Section IV.E.

26

See id.

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Description and Estimate of the Number of Small Entities to Which the Rules
Would Apply

17.
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.27 The RFA generally
defines the term “small entity” as having the same meaning as the terms “small business,” “small
organization,” and “small governmental jurisdiction.”28 In addition, the term “small business” has the
same meaning as the term “small-business concern” under the Small Business Act.29 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).30
1.

Total Small Entities

18.
Our proposed action, if implemented, may, over time, affect small entities that are not
easily categorized at present. We therefore describe here, at the outset, three comprehensive, statutory
small entity size standards.31 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.32 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.”33 Nationwide, as of 2007, there were approximately
1,621,215 small organizations.34 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.”35 Census Bureau data for 2011 indicate that there were 90,056
local governmental jurisdictions in the United States.36 We estimate that, of this total, as many as 89,327
entities may qualify as “small governmental jurisdictions.”37 Thus, we estimate that most governmental
jurisdictions are small.
27

See 5 U.S.C. § 603(b)(3).

28

See 5 U.S.C. § 601(6).

29

See 5 U.S.C. § 601(3) (incorporating by reference the definition of “small-business concern” in the Small
Business Act, 15 U.S.C. § 632). Pursuant to 5 U.S.C. § 601(3), the statutory definition of a small business applies
“unless an agency, after consultation with the Office of Advocacy of the Small Business Administration and after
opportunity for public comment, establishes one or more definitions of such term which are appropriate to the
activities of the agency and publishes such definition(s) in the Federal Register.”
30

See 15 U.S.C. § 632.

31

See 5 U.S.C. §§ 601(3)-(6).

32

See SBA, Office of Advocacy, Frequently Asked Questions, http://www.sba.gov/sites/default/files/FAQ_March_
2014_0.pdf.
33

5 U.S.C. § 601(4).

34

Indep. Sector, The New Nonprofit Almanac and Desk Reference (2010).

35

5 U.S.C. § 601(5).

36

See SBA, Office of Advocacy - Frequently Asked Questions,
https://www.sba.gov/sites/default/files/FAQ_March_2014_0.pdf (last visited Mar. 4, 2016). U.S. Census Bureau,
Statistical Abstract of the United States: 2012, Section 8, page 267, tbl. 429,
https://www.census.gov/compendia/statab/2012/tables/12s0429.pdf/ (data cited therein are from 2007).
37

The 2011 Census data for small governmental organizations are not presented based on the size of the population
in each organization. As stated above, there were 90,056 local governmental organizations in 2011. As a basis for
estimating how many of these 90,056 local organizations were small, in 2011 we note that there were a total of 729
cities and towns (incorporated places and minor civil divisions) with populations over 50,000. See U.S. Census
Bureau, American Fact Finder, http://factfinder.census.gov/faces/nav/jsf/pages/index.xhtml (last visited Mar. 4,
(continued….)

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Broadband Internet Access Service Providers

19.
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,38 which has an SBA small business size standard of 1,500 or fewer employees.39 These are also
labeled “broadband.” The latter are within the category of All Other Telecommunications,40 which has a
size standard of annual receipts of $32.5 million or less.41 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 the
entire year.42 Of this total, 3144 firms had employment of 999 or fewer employees, and 44 firms had
employment of 1,000 employees or more.43 For the second category, the data show that 2,383 firms
operated for the entire year.44 Of those, 2,346 had annual receipts below $32.5 million per year.
Consequently, we estimate that the majority of broadband Internet access service provider firms are small
entities.
20.
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, we discuss in turn several
different types of entities that might be providing broadband Internet access service. We note that,
although we have no specific information on the number of small entities that provide broadband Internet
access service over unlicensed spectrum, we include these entities in our Final Regulatory Flexibility
Analysis.
(Continued from previous page)
2016). If we subtract the 729 cities and towns that exceed the 50,000 population threshold, we conclude that
approximately 89,327 are small.
2007 U.S. Census data for small governmental organizations are not presented based on the size of the population in
each such organization. There were 89,476 local governmental organizations in 2007. If we assume that county,
municipal, township, and school district organizations are more likely than larger governmental organizations to
have populations of 50,000 or less, the total of these organizations is 52,095. As a basis of estimating how many of
these 89,476 local government organizations were small, in 2011, we note that there were a total of 715 cities and
towns (incorporated places and minor civil divisions) with populations over 50,000. City and Town Totals Vintage:
2011 – U.S. Census Bureau, http://www.census.gov/popest/data/cities/totals/2011/index.html. If we subtract the 715
cities and towns that meet or exceed the 50,000 population threshold, we conclude that approximately 88,761 are
small. U.S. Census Bureau, Statistical Abstract of the United States: 2012, Section 8, page 267, tbl. 429,
https://www.census.gov/compendia/statab/2012/tables/12s0429.pdf/ (data cited therein are from 2007).
38

U.S. Census Bureau, 2012 NAICS Definitions, “517110 Wired Telecommunications Carriers,”
http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517110&search=2012%20NAICS%20Search.
39

13 CFR. § 121.201, NAICS code 517110.

40

U.S. Census Bureau, 2012 NAICS Definitions, “517919 All Other Telecommunications,”,
http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517919&search=2012%20NAICS%20Search.
41

13 CFR § 121.201, NAICS code 517919.

42

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, Table 5, “Establishment and Firm Size:
Employment Size of Firms for the United States: 2007 NAICS Code 517110” (issued Nov. 2010).
43

See id.

44

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, “Establishment and Firm Size,”
NAICS code 5179191 (rel. Nov. 19, 2010) (receipts size).

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Wireline Providers

21.
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.45 According to
Commission data,46 1,307 carriers reported that they were incumbent LEC providers.47 Of these 1,307
carriers, an estimated 1,006 have 1,500 or fewer employees and 301 have more than 1,500 employees.48
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.
22.
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.49 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.50 Of these 1,442 carriers, an estimated
1,256 have 1,500 or fewer employees and 186 have more than 1,500 employees.51 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.52 In addition, 72 carriers have reported that they are Other Local Service Providers.53
Of the 72, seventy have 1,500 or fewer employees and two have more than 1,500 employees.54
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.
23.
We have 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.”55 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.56 We have therefore included small incumbent LECs in this RFA analysis, although we emphasize

45

13 CFR § 121.201, NAICS code 517110.

46

Federal Communications Commission, Wireline Competition Bureau, Industry Analysis and Technology
Division, Trends in Telephone Service, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service).
47

See Trends in Telephone Service at tbl. 5.3.

48

See id.

49

13 CFR § 121.201, NAICS code 517110.

50

See Trends in Telephone Service at tbl.5.3.

51

See id.

52

See id.

53

See id.

54

See id.

55

5 U.S.C. § 601(3).

56

Letter from Jere W. Glover, Chief Counsel for Advocacy, SBA, to William E. Kennard, Chairman, Federal
Communications Commission (filed May 27, 1999). The Small Business Act contains a definition of “small
business concern,” which the RFA incorporates into its own definition of “small business.” 15 U.S.C. § 632(a); 5
(continued….)

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that this RFA action has no effect on Commission analyses and determinations in other, non-RFA
contexts.
24.
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.57 According to Commission data,58 359 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.
25.
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.59 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.60 Consequently, the Commission
estimates that the majority of OSPs are small entities that may be affected by rules adopted pursuant to
the Order.
26.
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.61 According to Commission data, 193 carriers have
reported that they are engaged in the provision of prepaid calling cards.62 Of these, an estimated all 193
have 1,500 or fewer employees and none have more than 1,500 employees.63 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.
27.
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.64 According to Commission data, 213 carriers have reported that they are engaged in
the provision of local resale services.65 Of these, an estimated 211 have 1,500 or fewer employees and
two have more than 1,500 employees.66 Consequently, the Commission estimates that the majority of
local resellers are small entities that may be affected by rules adopted pursuant to the Order.
(Continued from previous page)
U.S.C. § 601(3). SBA regulations interpret “small business concern” to include the concept of dominance on a
national basis. 13 CFR § 121.102(b).
57

13 CFR § 121.201, NAICS code 517110.

58

Trends in Telephone Service, tbl. 5.3.

59

13 CFR § 121.201, NAICS code 517110.

60

Trends in Telephone Service, tbl. 5.3.

61

See 13 CFR § 121.201, NAICS code 517911.

62

See Trends in Telephone Service at Table 5.3.

63

See id.

64

See 13 CFR § 121.201, NAICS code 517911.

65

See Trends in Telephone Service at Table 5.3.

66

See id.

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28.
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.67 According to Commission data, 881 carriers have reported that they are engaged in the
provision of toll resale services.68 Of these, an estimated 857 have 1,500 or fewer employees and 24 have
more than 1,500 employees.69 Consequently, the Commission estimates that the majority of toll resellers
are small entities that may be affected by rules adopted pursuant to the Order.
29.
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.70 According to Commission data, 284 companies reported that their
primary telecommunications service activity was the provision of other toll carriage.71 Of these, an
estimated 279 have 1,500 or fewer employees and five have more than 1,500 employees.72 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.
30.
800 and 800-Like Service Subscribers.73 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.74 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.75 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
7,867,736.76 We do 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, we estimate 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.
4.

Wireless Providers – Fixed and Mobile

31.
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,
67

See 13 CFR § 121.201, NAICS code 517911.

68

See Trends in Telephone Service at Table 5.3.

69

See id.

70

See 13 CFR § 121.201, NAICS code 517110.

71

See Trends in Telephone Service at Table 5.3.

72

See id.

73

We include all toll-free number subscribers in this category, including those for 888 numbers.

74

See 13 CFR § 121.201, NAICS code 517911.

75

See Trends in Telephone Service at Tables 18.7-18.10.

76

See id.

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for those services subject to auctions, we note 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.
32.
Wireless Telecommunications Carriers (except Satellite). Since 2007, the Census Bureau
has placed wireless firms within this new, broad, economic census category.77 Under the present and
prior categories, the SBA has deemed a wireless business to be small if it has 1,500 or fewer employees.78
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.79 Of this total, 1,368 firms had employment
of 999 or fewer employees and 15 had employment of 1,000 employees or more.80 Since all firms with
fewer than 1,500 employees are considered small, given the total employment in the sector, we estimate
that the vast majority of wireless firms are small.
33.
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.81 The SBA has approved these
definitions.82
34.
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.83 In the 218-219 MHz Report and Order and Memorandum Opinion and
Order, we 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.84 A “very small business”
is defined as an entity that, together with its affiliates and persons or entities that hold interests in such an

77

U.S. Census Bureau, 2012 NAICS Definitions, “517210 Wireless Telecommunications Categories (Except
Satellite)”; http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517210&search=2012%20NAICS%20Search.
78

13 CFR § 121.201, NAICS code 517210 (2012 NAICS). The now-superseded, pre-2007 CFR citations were 13
CFR § 121.201, NAICS codes 517211 and 517212 (referring to the 2002 NAICS).
79

U.S. Census Bureau, Subject Series: Information, Table 5, “Establishment and Firm Size: Employment Size of
Firms for the United States: 2007 NAICS Code 517210” (issued Nov. 2010).
80

See id.

81

Amendment of the Commission’s Rules to Establish Part 27, the Wireless Communications Service (WCS), GN
Docket No. 96-228, Report and Order, 12 FCC Rcd 10785, 10879, para. 194 (1997).
82

See Letter from Aida Alvarez, Administrator, SBA, to Amy Zoslov, Chief, Auctions and Industry Analysis
Division, Wireless Telecommunications Bureau, Federal Communications Commission (filed Dec. 2, 1998)
(Alvarez Letter 1998).
83

See generally Implementation of Section 309(j) of the Communications Act – Competitive Bidding, PP Docket No.
93-253, Fourth Report and Order, 9 FCC Rcd 2330 (1994).
84

See generally Amendment of Part 95 of the Commission’s Rules to Provide Regulatory Flexibility in the 218-219
MHz Service, WT Docket No. 98-169, Report and Order and Memorandum Opinion and Order, 15 FCC Rcd 1497
(1999) (218-219 MHz Report and Order and Memorandum Opinion and Order).

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entity and its affiliates, has average annual gross revenues not to exceed $3 million for the preceding three
years.85 These size standards will be used in future auctions of 218-219 MHz spectrum.
35.
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.86 The SBA has approved these
definitions.87 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.
36.
1670–1675 MHz Services. This service can be used for fixed and mobile uses, except
aeronautical mobile.88 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.
37.
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).89 Under the SBA
small business size standard, a business is small if it has 1,500 or fewer employees.90 According to
Commission data, 413 carriers reported that they were engaged in wireless telephony.91 Of these, an
estimated 261 have 1,500 or fewer employees and 152 have more than 1,500 employees.92 Therefore, a
little less than one third of these entities can be considered small.
38.
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.93 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.94 These small business size
standards, in the context of broadband PCS auctions, have been approved by the SBA.95 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
85

See id.

86

Amendment of the Commission’s Rules to Establish Part 27, the Wireless Communications Service (WCS), GN
Docket No. 96-228, Report and Order, 12 FCC Rcd 10785, 10879 para. 194 (1997).
87

See Alvarez Letter 1998.

88

47 CFR § 2.106; see generally 47 CFR §§ 27.1-27.70.

89

13 CFR § 121.201, NAICS code 517210.

90

Id.

91

Trends in Telephone Service, tbl. 5.3.

92

Id.

93

See Amendment of Parts 20 and 24 of the Commission’s Rules – Broadband PCS Competitive Bidding and the
Commercial Mobile Radio Service Spectrum Cap; Amendment of the Commission’s Cellular/PCS Cross-Ownership
Rule; WT Docket No. 96-59, GN Docket No. 90-314, Report and Order, 11 FCC Rcd 7824, 7850-52, paras. 57-60
(1996) (PCS Report and Order); see also 47 CFR § 24.720(b).
94

See PCS Report and Order, 11 FCC Rcd at 7852, para. 60.

95

See Alvarez Letter 1998.

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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.96 On April 15, 1999, the Commission
completed the reauction of 347 C-, D-, E-, and F-Block licenses in Auction No. 22.97 Of the 57 winning
bidders in that auction, 48 claimed small business status and won 277 licenses.
39.
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.98 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.99
On May 21, 2007, the Commission completed an auction of 33 licenses in the A, C, and F Blocks in
Auction No. 71.100 Of the 12 winning bidders in that auction, five claimed small business status and won
18 licenses.101 On August 20, 2008, the Commission completed the auction of 20 C-, D-, E-, and F-Block
Broadband PCS licenses in Auction No. 78.102 Of the eight winning bidders for Broadband PCS licenses
in that auction, six claimed small business status and won 14 licenses.103
40.
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.104 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.105 The SBA has approved these small
business size standards for the 900 MHz Service.106 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
96

See Broadband PCS, D, E and F Block Auction Closes, Public Notice, Doc. No. 89838 (rel. Jan. 14, 1997).

97

See C, D, E, and F Block Broadband PCS Auction Closes, Public Notice, 14 FCC Rcd 6688 (WTB 1999). Before
Auction No. 22, the Commission established a very small standard for the C Block to match the standard used for F
Block. Amendment of the Commission’s Rules Regarding Installment Payment Financing for Personal
Communications Services (PCS) Licensees, WT Docket No. 97-82, Fourth Report and Order, 13 FCC Rcd 15743,
15768, para. 46 (1998).
98

See C and F Block Broadband PCS Auction Closes; Winning Bidders Announced, Public Notice, 16 FCC Rcd
2339 (2001).
99

See Broadband PCS Spectrum Auction Closes; Winning Bidders Announced for Auction No. 58, Public Notice, 20
FCC Rcd 3703 (2005).
100

See Auction of Broadband PCS Spectrum Licenses Closes; Winning Bidders Announced for Auction No. 71,
Public Notice, 22 FCC Rcd 9247 (2007).
101

Id.

102

See Auction of AWS-1 and Broadband PCS Licenses Closes; Winning Bidders Announced for Auction 78, Public
Notice, 23 FCC Rcd 12749 (WTB 2008).
103

Id.

104

47 CFR § 90.814(b)(1).

105

Id.

106

See Letter from Aida Alvarez, Administrator, SBA, to Thomas Sugrue, Chief, Wireless Telecommunications
Bureau, Federal Communications Commission (filed Aug. 10, 1999) (Alvarez Letter 1999).

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size standard won 38 geographic area licenses for the upper 200 channels in the 800 MHz SMR band.107
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.108
41.
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.109 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.110 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.
42.
In addition, there are numerous incumbent site-by-site SMR licenses and licensees with
extended implementation authorizations in the 800 and 900 MHz bands. We do 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, we do not know how many of these firms have 1,500
or fewer employees, which is the SBA-determined size standard.111 We assume, for purposes of this
analysis, that all of the remaining extended implementation authorizations are held by small entities, as
defined by the SBA.
43.
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.112 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.113 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.114 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.115 The SBA approved these small size
standards.116 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
107

See Correction to Public Notice DA 96-586 “FCC Announces Winning Bidders in the Auction of 1020 Licenses
to Provide 900 MHz SMR in Major Trading Areas,” Public Notice, 18 FCC Rcd 18367 (WTB 1996).
108

See Multi-Radio Service Auction Closes, Public Notice, 17 FCC Rcd 1446 (WTB 2002).

109

See 800 MHz Specialized Mobile Radio (SMR) Service General Category (851–854 MHz) and Upper Band (861–
865 MHz) Auction Closes; Winning Bidders Announced, Public Notice, 15 FCC Rcd 17162 (2000).
110

See 800 MHz SMR Service Lower 80 Channels Auction Closes; Winning Bidders Announced, Public Notice,
16 FCC Rcd 1736 (2000).
111

See generally 13 CFR § 121.201, NAICS code 517210.

112

See Reallocation and Service Rules for the 698–746 MHz Spectrum Band (Television Channels 52–59), GN
Docket No. 01-74, Report and Order, 17 FCC Rcd 1022 (2002) (Channels 52–59 Report and Order).
113

See id. at 1087-88, para. 172.

114

See id.

115

See id., at 1088, para. 173.

116

See Alvarez Letter 1999.

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bidders. Seventy-two of the winning bidders claimed small business, very small business or entrepreneur
status and won a total of 329 licenses.117 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.118
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.119 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.
44.
In 2007, the Commission reexamined its rules governing the 700 MHz band in the 700
MHz Second Report and Order.120 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.121 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.
45.
Upper 700 MHz Band Licenses. In the 700 MHz Second Report and Order, the
Commission revised its rules regarding Upper 700 MHz licenses.122 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.123 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.
46.
700 MHz Guard Band Licensees. In 2000, in the 700 MHz Guard Band Order, 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.124 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.125 Additionally, a very
117

See Lower 700 MHz Band Auction Closes, Public Notice, 17 FCC Rcd 17272 (WTB 2002).

118

See id.

119

See id.

120

Service Rules for the 698–746, 747–762 and 777–792 MHz Band; Revision of the Commission’s Rules to Ensure
Compatibility with Enhanced 911 Emergency Calling Systems; Section 68.4(a) of the Commission’s Rules
Governing Hearing Aid-Compatible Telephones; Biennial Regulatory Review—Amendment of Parts 1, 22, 24, 27,
and 90 to Streamline and Harmonize Various Rules Affecting Wireless Radio Services; Former Nextel
Communications, Inc. Upper 700 MHz Guard Band Licenses and Revisions to Part 27 of the Commission’s Rules;
Implementing a Nationwide, Broadband, Interoperable Public Safety Network in the 700 MHz Band; Development
of Operational, Technical and Spectrum Requirements for Meeting Federal, State and Local Public Safety
Communications Requirements Through the Year 2010; Declaratory Ruling on Reporting Requirement under
Commission’s Part 1 Anti-Collusion Rule, WT Docket Nos. 07-166, 06-169, 06-150, 03-264, 96-86, PS Docket No.
06-229, CC Docket No. 94-102, Second Report and Order, 22 FCC Rcd 15289, 15359 n. 434 (2007) (700 MHz
Second Report and Order).
121

See Auction of 700 MHz Band Licenses Closes, Public Notice, 23 FCC Rcd 4572 (WTB 2008).

122

700 MHz Second Report and Order, 22 FCC Rcd 15289.

123

See Auction of 700 MHz Band Licenses Closes, Public Notice, 23 FCC Rcd 4572 (WTB 2008).

124

See Service Rules for the 746–764 MHz Bands, and Revisions to Part 27 of the Commission’s Rules, WT Docket
No. 99-168, Second Report and Order, 15 FCC Rcd 5299 (2000) (746–764 MHz Band Second Report and Order).
125

See id. at 5343, para. 108.

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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.126 SBA approval of these
definitions is not required.127 An auction of 52 Major Economic Area licenses commenced on September
6, 2000, and closed on September 21, 2000.128 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.129
47.
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.130
Bidding credits for designated entities were not available in Auction 77.131 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 $25,002.132
48.
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, we use 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.133 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. We note 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.134
49.
As of March 2010, there were 424,162 PLMR licensees operating 921,909 transmitters in
the PLMR bands below 512 MHz. We note 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.
126

See id.

127

See id. at 5343, para. 108 n.246 (for the 746–764 MHz and 776–794 MHz bands, the Commission is exempt from
15 U.S.C. § 632, which requires Federal agencies to obtain SBA approval before adopting small business size
standards).
128

See 700 MHz Guard Bands Auction Closes: Winning Bidders Announced, Public Notice, 15 FCC Rcd 18026
(WTB 2000).
129

See 700 MHz Guard Bands Auction Closes: Winning Bidders Announced, Public Notice, 16 FCC Rcd 4590
(WTB 2001).
130

See Closed Auction of Licenses for Cellular Unserved Service Area Scheduled for June 17, 2008, Notice and
Filing Requirements, Minimum Opening Bids, Upfront Payments, and Other Procedures for Auction 77, Public
Notice, 23 FCC Rcd 6670 (Wireless Tel. Bur. 2008).
131

Id. at 6685.

132

See Auction of Cellular Unserved Service Area License Closes, Winning Bidder Announced for Auction 77, Down
Payment due July 2, 2008, Final Payment due July 17, 2008, Public Notice, 23 FCC Rcd 9501 (WTB 2008).
133

See 13 CFR § 121.201, NAICS code 517210.

134

See generally 13 CFR § 121.201.

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50.
Rural Radiotelephone Service. The Commission has not adopted a size standard for
small businesses specific to the Rural Radiotelephone Service.135 A significant subset of the Rural
Radiotelephone Service is the Basic Exchange Telephone Radio System (BETRS).136 In the present
context, we 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.137 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.
51.
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.138 There are approximately 100 licensees in the AirGround Radiotelephone Service, and under that definition, we estimate 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.139 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.140 These definitions were approved by the SBA.141 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.
52.
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.142 Census
data for 2007, which supersede data contained in the 2002 Census, show that there were 1,383 firms that
operated that year.143 Of those 1,383, 1,368 had fewer than 100 employees, and 15 firms had more than
135

The service is defined in 47 CFR § 22.99.

136

BETRS is defined in 47 CFR §§ 22.757 and 22.759.

137

13 CFR § 121.201, NAICS code 517210.

138

13 CFR § 121.201, NAICS codes 517210.

139

Amendment of Part 22 of the Commission’s Rules to Benefit the Consumers of Air-Ground Telecommunications
Services, Biennial Regulatory Review—Amendment of Parts 1, 22, and 90 of the Commission’s Rules, Amendment of
Parts 1 and 22 of the Commission’s Rules to Adopt Competitive Bidding Rules for Commercial and General
Aviation Air-Ground Radiotelephone Service, WT Docket Nos. 03-103, 05-42, Order on Reconsideration and Report
and Order, 20 FCC Rcd 19663, paras. 28-42 (2005).
140

Id.

141

See Letter from Hector V. Barreto, Administrator, SBA, to Gary D. Michaels, Deputy Chief, Auctions and
Spectrum Access Division, Wireless Telecommunications Bureau, Federal Communications Commission (filed
Sept. 19, 2005).
142

See 13 CFR § 121.201, NAICS code 517210.

143

U.S. Census Bureau, 2007 Economic Census, Sector 51, 2007 NAICS code 517210 (rel. Oct. 20, 2009),
http://factfinder.census.gov/servlet/IBQTable?_bm=y&-geo_id=&-fds_name=EC0700A1&-_skip=700&ds_name=EC0751SSSZ5&-_lang=en.

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100 employees. Most 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, we
estimate 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.144 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.145 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.
53.
Advanced Wireless Services (AWS) (1710–1755 MHz and 2110–2155 MHz bands (AWS1); 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,146 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 we do not know for certain which entities are
likely to apply for these frequencies, we 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.147
54.
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, we estimate that the majority of these licensees are
Internet Access Service Providers (ISPs) and that most of those licensees are small businesses.
55.
Fixed Microwave Services. Microwave services include common carrier,148 privateoperational fixed,149 and broadcast auxiliary radio services.150 They also include the Local Multipoint
144

See generally Amendment of the Commission’s Rules Concerning Maritime Communications, PR Docket No. 92257, Third Report and Order and Memorandum Opinion and Order, 13 FCC Rcd 19853, 19884–88 paras. 64–73
(1998).
145

See id.

146

The service is defined in section 90.1301 et seq. of the Commission’s Rules, 47 CFR § 90.1301 et seq.

147

See Service Rules for Advanced Wireless Services in the 1.7 GHz and 2.1 GHz Bands, WT Docket No. 02-353,
Report and Order, 18 FCC Rcd 25162, Appx. B (2003), modified by Service Rules for Advanced Wireless Services
in the 1.7 GHz and 2.1 GHz Bands, WT Docket No. 02-353, Order on Reconsideration, 20 FCC Rcd 14058, Appx.
C (2005); Service Rules for Advanced Wireless Services in the 1915–1920 MHz, 1995–2000 MHz, 2020–2025 MHz
and 2175–2180 MHz Bands; Service Rules for Advanced Wireless Services in the 1.7 GHz and 2.1 GHz Bands, WT
Docket Nos. 04-356, 02-353, Notice of Proposed Rulemaking, 19 FCC Rcd 19263, Appx. B (2005); Service Rules
for Advanced Wireless Services in the 2155–2175 MHz Band, WT Docket No. 07-195, Notice of Proposed
Rulemaking, 22 FCC Rcd 17035, Appx. (2007).
148

See 47 CFR Part 101, Subparts C and I.

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Distribution Service (LMDS),151 the Digital Electronic Message Service (DEMS),152 and the 24 GHz
Service,153 where licensees can choose between common carrier and non-common carrier status.154 At
present, there are approximately 36,708 common carrier fixed licensees and 59,291 private operationalfixed 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, we will use the SBA’s definition applicable to Wireless Telecommunications Carriers (except
satellite)—i.e., an entity with no more than 1,500 persons.155 Under the present and prior categories, the
SBA has deemed a wireless business to be small if it has 1,500 or fewer employees.156 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. We note,
however, that the common carrier microwave fixed licensee category includes some large entities.
56.
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.157 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.158
Census data for 2007, which supersede data contained in the 2002 Census, show that there were 1,383
firms that operated that year.159 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.
57.
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
(Continued from previous page)
149
See 47 CFR Part 101, Subparts C and H.
150

Auxiliary Microwave Service is governed by Part 74 of Title 47 of the Commission’s Rules. See 47 CFR Part
74. Available to licensees of broadcast stations and to broadcast and cable network entities, broadcast auxiliary
microwave stations are used for relaying broadcast television signals from the studio to the transmitter, or between
two points such as a main studio and an auxiliary studio. The service also includes mobile TV pickups, which relay
signals from a remote location back to the studio.
151

See 47 CFR Part 101, Subpart L.

152

See 47 CFR Part 101, Subpart G.

153

See id.

154

See 47 CFR §§ 101.533, 101.1017.

155

13 CFR § 121.201, NAICS code 517210.

156

13 CFR § 121.201, NAICS code 517210 (2007 NAICS). The now-superseded, pre-2007 CFR citations were 13
CFR § 121.201, NAICS codes 517211 and 517212 (referring to the 2002 NAICS).
157

This service is governed by Subpart I of Part 22 of the Commission’s Rules. See 47 CFR §§ 22.1001-22.1037.

158

Id.

159

U.S. Census Bureau, 2007 Economic Census, Sector 51, 2007 NAICS code 517210 (rel. Oct. 20, 2009),
http://factfinder.census.gov/servlet/IBQTable?_bm=y&-geo_id=&-fds_name=EC0700A1&-_skip=700&ds_name=EC0751SSSZ5&-_lang=en.

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calendar years.160 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.161 The SBA has approved these small business size standards.162 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.
58.
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)).163 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.164 The BRS auctions 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, we estimate 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.165
After adding the number of small business auction licensees to the number of incumbent licensees not
already counted, we find that there are currently approximately 440 BRS licensees that are defined as
small businesses under either the SBA or the Commission’s rules.
59.
In 2009, the Commission conducted Auction 86, the sale of 78 licenses in the BRS
areas.166 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.167 Auction 86 concluded in 2009 with
160

See Amendment of the Commission’s Rules Regarding the 37.0-38.6 GHz and 38.6-40.0 GHz Bands, ET Docket
No. 95-183, PP Docket No. 93-253, Report and Order, 12 FCC Rcd 18600, 18661–64, paras. 149–151 (1997).
161

See id.

162

See Letter to Kathleen O’Brien Ham, Chief, Auctions and Industry Analysis Division, Wireless
Telecommunications Bureau, Federal Communications Commission, from Aida Alvarez, Administrator, SBA (Feb.
4, 1998).
163

Amendment of Parts 21 and 74 of the Commission’s Rules with Regard to Filing Procedures in the Multipoint
Distribution Service and in the Instructional Television Fixed Service and Implementation of Section 309(j) of the
Communications Act—Competitive Bidding, MM Docket No. 94-131, PP Docket No. 93-253, Report and Order, 10
FCC Rcd 9589, 9593, para. 7 (1995).
164

47 CFR § 21.961(b)(1).

165

47 U.S.C. § 309(j). Hundreds of stations were licensed to incumbent MDS licensees prior to implementation of
Section 309(j) of the Communications Act of 1934, 47 U.S.C. § 309(j). For these pre-auction licenses, the
applicable standard is SBA’s small business size standard of 1500 or fewer employees.
166

Auction of Broadband Radio Service (BRS) Licenses, Scheduled for October 27, 2009, Notice and Filing
Requirements, Minimum Opening Bids, Upfront Payments, and Other Procedures for Auction 86, AU Docket No.
09-56, Public Notice, 24 FCC Rcd 8277 (2009).
167

Id. at 8296 para. 73.

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the sale of 61 licenses.168 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.
60.
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.169
Thus, we estimate 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.”170 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 we 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.171 According to Census Bureau data for 2007, there
were a total of 996 firms in this category that operated for the entire year.172 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.173 Thus, the majority of these firms can be considered small.
61.
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.174 Through these auctions, the Commission
awarded a total of 41 licenses, 11 of which were obtained by four small businesses.175 To ensure
meaningful participation by small business entities in future auctions, the Commission adopted a twotiered small business size standard in the Narrowband PCS Second Report and Order.176 A “small
168

Auction of Broadband Radio Service Licenses Closes, Winning Bidders Announced for Auction 86, Down
Payments Due November 23, 2009, Final Payments Due December 8, 2009, Ten-Day Petition to Deny Period,
Public Notice, 24 FCC Rcd 13572 (2009).
169

The term “small entity” within SBREFA applies to small organizations (nonprofits) and to small governmental
jurisdictions (cities, counties, towns, townships, villages, school districts, and special districts with populations of
less than 50,000). 5 U.S.C. §§ 601(4)-(6). We do not collect annual revenue data on EBS licensees.
170

U.S. Census Bureau, 2012 NAICS Definitions, “517110 Wired Telecommunications Carriers,” (partial
definition), http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517110&search=2012.
171

13 CFR § 121.201, NAICS code 517110.

172

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, Receipts by Enterprise Employment
Size for the United States: 2007, NAICS code 517510 (rel. Nov. 19, 2010).
173

Id.

174

Implementation of Section 309(j) of the Communications Act – Competitive Bidding Narrowband PCS, PP
Docket No. 93-253, GEN Docket No. 90-314, ET Docket No. 92-100, Third Memorandum Opinion and Order and
Further Notice of Proposed Rulemaking, 10 FCC Rcd 175, 196, para. 46 (1994).
175

See Announcing the High Bidders in the Auction of Ten Nationwide Narrowband PCS Licenses, Winning Bids
Total $617,006,674, Public Notice, PNWL 94-004 (rel. Aug. 2, 1994); Announcing the High Bidders in the Auction
of 30 Regional Narrowband PCS Licenses; Winning Bids Total $490,901,787, Public Notice, PNWL 94-27 (rel.
Nov. 9, 1994).
176

Amendment of the Commission’s Rules to Establish New Personal Communications Services, GEN Docket No.
90-314, ET Docket No. 92-100, PP Docket No. 93-253, Narrowband PCS, Second Report and Order and Second
(continued….)

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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.177 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.178 The SBA has approved these small business size standards.179 A third
auction was conducted in 2001. Here, five bidders won 317 (Metropolitan Trading Areas and
nationwide) licenses.180 Three of these claimed status as a small or very small entity and won 311
licenses.
62.
Paging (Private and Common Carrier). In the Paging Third Report and Order, we
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.181
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.182 According to Commission data, 291 carriers have reported that they are
engaged in Paging or Messaging Service.183 Of these, an estimated 289 have 1,500 or fewer employees,
and two have more than 1,500 employees.184 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.185 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.186 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.187 A fourth auction, consisting of 9,603 lower and
(Continued from previous page)
Further Notice of Proposed Rule Making, 15 FCC Rcd 10456, 10476, para. 40 (2000) (Narrowband PCS Second
Report and Order).
177

Id.

178

Id.

179

See Letter to Amy Zoslov, Chief, Auctions and Industry Analysis Division, Wireless Telecommunications
Bureau, Federal Communications Commission, from A. Alvarez, Administrator, SBA (Dec. 2, 1998) (Alvarez Letter
1998).
180

See Narrowband PCS Auction Closes, Public Notice, 16 FCC Rcd 18663 (Wireless Tel. Bur. 2001).

181

See Revision of Part 22 and Part 90 of the Commission’s Rules to Facilitate Future Development of Paging
Systems, WT Docket No. 96-18, PR Docket No. 93-253, Memorandum Opinion and Order on Reconsideration and
Third Report and Order, 14 FCC Rcd 10030, 10085–88, paras. 98–107 (1999) (Paging Third Report and Order)
182

See Alvarez Letter 1998.

183

See Trends in Telephone Service at Table 5.3.

184

See id.

185

See id.

186

See Lower and Upper Paging Band Auction Closes, Public Notice, 16 FCC Rcd 21821 (Wireless Tel. Bur. 2002).

187

See Lower and Upper Paging Bands Auction Closes, Public Notice, 18 FCC Rcd 11154 (Wireless Tel. Bur.
2003). The current number of small or very small business entities that hold wireless licenses may differ
significantly from the number of such entities that won in spectrum auctions due to assignments and transfers of
licenses in the secondary market over time. In addition, some of the same small business entities may have won
licenses in more than one auction.

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upper paging band licenses was held in the year 2010. Twenty-nine bidders claiming small or very small
business status won 3,016 licenses.188
63.
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, we apply the small business size standard under the
SBA rules applicable to Wireless Telecommunications Carriers (except Satellite). Under this category,
the SBA deems a wireless business to be small if it has 1,500 or fewer employees.189 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.
64.
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, we 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.190 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.191 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.192 The SBA has approved these small business size standards.193 Auctions of
Phase II licenses commenced on September 15, 1998, and closed on October 22, 1998.194 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.195
5.

Satellite Service Providers

65.
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

188

See Auction of Lower and Upper Paging Bands Licenses Closes, Public Notice, 25 FCC Rcd 18164 (Wireless
Tel. Bur. 2010).
189

See 13 CFR § 121.201, NAICS code 517210.

190

See Amendment of Part 90 of the Commission’s Rules to Provide for the Use of the 220-222 MHz Band by the
Private Land Mobile Radio Service, PR Docket No. 89-552, GN Docket No. 93-252, PP Docket No. 93-253, Third
Report and Order and Fifth Notice of Proposed Rulemaking, 12 FCC Rcd 10943, 11068–70, paras. 291–295 (1997)
(220 MHz Third Report and Order).
191

See id. at 11068–69, para. 291.

192

See id. at 11068–70, paras. 291–95.

193

See Letter to D. Phythyon, Chief, Wireless Telecommunications Bureau, Federal Communications Commission,
from Aida Alvarez, Administrator, SBA (Jan. 6, 1998) (Alvarez to Phythyon Letter 1998).
194

See Phase II 220 MHz Service Auction Closes, Public Notice, 14 FCC Rcd 605 (Wireless Tel. Bur. 1998).

195

See Phase II 220 MHz Service Spectrum Auction Closes, Public Notice, 14 FCC Rcd 11218 (Wireless Tel.
Bur.1999).

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annual receipts, under SBA rules.196 The second has a size standard of $30 million or less in annual
receipts.197
66.
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.”198 For this category, Census Bureau data for 2007 show that there
were a total of 570 firms that operated for the entire year.199 Of this total, 530 firms had annual receipts of
under $30 million, and 40 firms had receipts of over $30 million.200 Consequently, we estimate that the
majority of Satellite Telecommunications firms are small entities that might be affected by our action.
67.
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.”201 For this category, Census Bureau data for 2007 show that
there were a total of 1,274 firms that operated for the entire year.202 Of this total, 1,252 had annual
receipts below $25 million per year.203 Consequently, we estimate that the majority of All Other
Telecommunications firms are small entities that might be affected by our action.
6.

Cable Service Providers

68.
Because section 706 requires us to monitor the deployment of broadband using any
technology, we anticipate that some broadband service providers may not provide telephone service.
Accordingly, we describe below other types of firms that may provide broadband services, including
cable companies, MDS providers, and utilities, among others.
69.
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.”204 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 we must, however, use
196

13 CFR § 121.201, NAICS Code 517410.

197

13 CFR § 121.201, NAICS Code 517919.

198

U.S. Census Bureau, 2012 NAICS Definitions, “517410 Satellite Telecommunications,” http://www.census.gov/
cgi-bin/sssd/naics/naicsrch?code=517410&search=2012.
199

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, “Establishment and Firm Size,”
NAICS code 517410 (rel. Nov. 19, 2010).
200

Id.

201

U.S. Census Bureau, 2012 NAICS Definitions, “517919 All Other Telecommunications,”
http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517919&search=2012.
202

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, “Establishment and Firm Size,”
NAICS code 517410 (rel. Nov. 19, 2010).
203

Id.

204

U.S. Census Bureau, 2012 NAICS Definitions, “517110 Wired Telecommunications Carriers,” (partial
definition), http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517110&search=2012.

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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.205 According to Census Bureau data for 2007, there were a total of 2,048 firms in this category
that operated for the entire year.206 Of this total, 1,393 firms had annual receipts of under $10 million, and
655 firms had receipts of $10 million or more.207 Thus, the majority of these firms can be considered
small.
70.
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.208 Industry data that there are
currently 4,600 active cable systems in the United States.209 Of this total, all but nine cable operators are
small under the 400,000 subscriber size standard.210 In addition, under the Commission’s rules, a “small
system” is a cable system serving 15,000 or fewer subscribers.211 Current Commission records show
4,945 cable systems nationwide.212 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,
we estimate that most cable systems are small entities.
71.
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.”213 The Commission has determined that an operator serving fewer than 677,000
205

13 CFR § 121.201, NAICS code 517110.

206

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, “Establishment and Firm Size,”
NAICS code 517110 (rel. Nov. 19, 2010).
207

Id.

208

47 CFR § 76.901(e). The Commission determined that this size standard equates approximately to a size
standard of $100 million or less in annual revenues. Implementation of Sections of the 1992 Cable Act: Rate
Regulation, Sixth Report and Order and Eleventh Order on Reconsideration, 10 FCC Rcd 7393, 7408 (1995).
209

See Federal Communications Commission, Cable Operations and Licensing System, https://apps.fcc.gov/coals/
(last visted Mar. 4, 2016).
CTA, Industry Data, Number of Cable Operating Companies (June 2012), http://www.ncta.com/Statistics.aspx
(visited Sept. 28, 2012). Depending upon the number of homes and the size of the geographic area served, cable
operators use one or more cable systems to provide video service. See Annual Assessment of the Status of
Competition in the Market for Delivery of Video Programming, MB Docket No. 12-203, Fifteenth Report, 28 FCC
Rcd 10496, 10505-06, para. 24 (2013) (15th Annual Competition Report).
210

See SNL Kagan Interactive, Media & Communications Data – Cable MSOs,
http://www.snl.com/Sectors/Media/MediaCommunicationsOverview.aspx (last visited Mar. 3, 2016).
See SNL Kagan, “Top Cable MSOs – 12/12 Q”, http://www.snl.com/InteractiveX/TopCableMSOs.aspx?period=
2012Q4&sortcol=subscribersbasic&sortorder=desc. We note that, when applied to an MVPD operator, under this
size standard (i.e., 400,000 or fewer subscribers) all but 14 MVPD operators would be considered small. See
NCTA, Industry Data, Top 25 Multichannel Video Service Customers (2012), http://www.ncta.com/industry-data.
The Commission applied this size standard to MVPD operators in its implementation of the CALM Act. See
Implementation of the Commercial Advertisement Loudness Mitigation (CALM) Act, MB Docket No. 11-93, Report
and Order, 26 FCC Rcd 17222, 17245-46, para. 37 (2011) (CALM Act Report and Order) (defining a smaller MVPD
operator as one serving 400,000 or fewer subscribers nationwide, as of December 31, 2011).
211

47 CFR § 76.901(c).

212

The number of active, registered cable systems comes from the Commission’s Cable Operations and Licensing
System (COALS) database on Aug. 28, 2013. A cable system is a physical system integrated to a principal headend.
213

47 U.S.C. § 543(m)(2); see 47 CFR § 76.901(f) & nn.1-3.

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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.214 Based on available data, we
find that all but ten incumbent cable operators are small entities under this size standard.215 We note that
the Commission neither requests nor collects information on whether cable system operators are affiliated
with entities whose gross annual revenues exceed $250 million,216 and therefore we are unable to estimate
more accurately the number of cable system operators that would qualify as small under this size
standard.
72.
The open video system (“OVS”) framework was established in 1996, and is one of four
statutorily recognized options for the provision of video programming services by local exchange
carriers.217 The OVS framework provides opportunities for the distribution of video programming other
than through cable systems. Because OVS operators provide subscription services,218 OVS falls within
the SBA small business size standard covering cable services, which is “Wired Telecommunications
Carriers.”219 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.220 Of this total, 939 firms had
employment of 999 or fewer employees, and 16 firms had employment of 1,000 employees or more.221
Thus, under this second size standard, most cable systems are small and may be affected by rules adopted
pursuant to the Order. In addition, we note that the Commission has certified some OVS operators, with
some now providing service.222 Broadband service providers (“BSPs”) are currently the only significant
holders of OVS certifications or local OVS franchises.223 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.
7.

Electric Power Generators, Transmitters, and Distributors

73.
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
214

47 CFR § 76.901(f); see FCC Announces New Subscriber Count for the Definition of Small Cable Operator,
Public Notice, 16 FCC Rcd 2225 (Cable Services Bureau 2001).
215

See NCTA, Industry Data, Top 25 Multichannel Video Service Customers (2012), http://www.ncta.com/industrydata.
216

The Commission does receive such information on a case-by-case basis if a cable operator appeals a local
franchise authority’s finding that the operator does not qualify as a small cable operator pursuant to § 76.901(f) of
the Commission’s rules. See 47 CFR § 76.909(b).
217

47 U.S.C. § 571(a)(3)-(4). See Annual Assessment of the Status of Competition in the Market for the Delivery of
Video Programming, MB Docket No. 06-189, Thirteenth Annual Report, 24 FCC Rcd 542, 606, para. 135 (2009)
(Thirteenth Annual Cable Competition Report).
218

See 47 U.S.C. § 573.

219

U.S. Census Bureau, 2007 NAICS Definitions, “517110 Wired Telecommunications Carriers”;
http://www.census.gov/naics/2007/def/ND517110.HTM#N517110.
220

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, Table 5, Employment Size of Firms
for the United States: 2007, NAICS code 5171102 (issued Nov. 2010).
221

See id.

222

A list of OVS certifications may be found at http://www.fcc.gov/mb/ovs/csovscer.html.

223

See Thirteenth Annual Cable Competition Report, 24 FCC Rcd at 606-07 para. 135. BSPs are newer firms that
are building state-of-the-art, facilities-based networks to provide video, voice, and data services over a single
network.

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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.”224 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.”225 Census Bureau data for 2007 show
that there were 1,174 firms that operated for the entire year in this category.226 Of these firms, 50 had
1,000 employees or more, and 1,124 had fewer than 1,000 employees.227 Based on this data, a majority of
these firms can be considered small.
D.

Description of Projected Reporting, Recordkeeping, and Other Compliance
Requirements for Small Entities

74.
Permitted Expenses. In the Further Notice, when reviewing permitted expenses, the
Commission seeks comment on whether it should require rate-of-return carriers to identify their cost
consultants, if any, in their FCC Form 481s.228
75.
Cost Allocation and Affiliate Transactions. The Commission seeks comment on adopting
a rule that would classify certain costs, such as general and administrative expenses, as common costs for
purposes of applying the Part 64 and affiliate transaction rules when an entity provides broadband
services directly, or through an affiliated entity. Additionally, the Commission asks whether it should
clarify or adopt new rules to ensure the proper application of the affiliate transaction rules in light of the
provision of retail broadband by affiliates in certain telecommunications markets. More generally, the
Commission seeks comment on instances in which additional rules or further clarification could minimize
potential misallocations and thereby protect ratepayers of regulated services. While the Commission
notes that the used and useful and prudent expenditure standards apply to costs included in affiliate
transactions, it seeks comment on whether it should adopt a rule that explicitly prohibits carriers from
including in the fully distributed cost of an affiliate any costs that are disallowed from the regulated rate
base or revenue requirement, or considered not to be used and useful or prudent expenditures. Finally, the
Commission seeks comment on whether additional data would assist in enforcement of the Commission’s
accounting and cost allocation rules, while minimizing ETC reporting burden, and if so, what kind of
reporting requirements should be implemented.229
76.
Compliance. To ensure compliance with the proposed rules for universal service support
and tariffing purposes, the Commission invites parties to comment on whether carriers should be required
to certify that they have not included any prohibited expenses in their cost submissions used to calculate
high-cost support. Additionally, the Commission asked parties to comment on NECA’s role in enforcing
these rules, and whether carriers should be subject to any additional reporting requirements.230
224

U.S. Census Bureau, 2002 NAICS Definitions, “2211 Electric Power Generation, Transmission and
Distribution,” http://www.census.gov/epcd/naics02/def/NDEF221.HTM (last visited Oct. 21, 2009).
225

13 CFR § 121.201, NAICS codes 221111, 221112, 221113, 221119, 221121, 221122, n. 1.

226

See U.S. Census Bureau, American FactFinder, Utilities: Subject Series - Establishment and Firm Size: Summary
Statistics by Revenue Size of Firms for the United States: 2007, NAICS code 221122,
http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_22SSSZ5&prod
Type=table (last visited February 18, 2016).
227

See id.

228

See supra Section IV.A.

229

See id.

230

See id.

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77.
Reducing Support in Competitive Areas. In the Further Notice, the Commission also
seeks comment on methods of disaggregation of support that can be implemented with minimal
administrative burden for affected carriers and USAC.231 The Commission seeks to avoid complex
allocations of the cost of facilities that that serve both competitive and non-competitive areas, which
could be burdensome for rate-of-return carriers to implement.232
78.
Additionally, the Commission asks how the non-supported amount is to be recovered by
the carrier, assuming such expenses remain regulated expenses for ratemaking purposes.233 Specifically,
the Commission invites parties to comment on two approaches for recovery of those amounts.234 First, the
Commission could treat the non-supported expenses as being outside the tariffed regulated revenue
requirement and allow carriers to assess a detariffed regulated rate to recover those non-supported
costs.235 This would remove those costs from the NECA pooling process. We invite parties to comment
on whether the detariffed rates would be outside the prohibition on tariffing deaveraged rates in a study
area, or whether a new rule should be adopted. A second option would be to raise the SLC caps for a
particular study area to permit the recovery of the amounts not supported by the high-cost program.236 We
invite parties to comment on this alternative, including whether any SLC increases should be allowed
only in the competitive area or should apply to the entire study area. Either of these alternatives would
create new compliance requirements that could create administrative burdens for small rate-of-return
carriers.
79.
Tribal Support. The Commission seeks comment on adopting rules to increase support to
rate-of-return carriers for census blocks that include Tribal lands and unserved with broadband meeting
the Commission’s current requirements.237 As part of this line of questioning, the Commission asks how
to how best to target Tribal land-specific support to Tribal areas most in need of broadband deployment,
which may require filing on behalf of Tribal entities.238 Additionally, the Commission seeks comment on
what specific broadband deployment obligations should be established, if the Commission were to adopt a
mechanism to provide additional support on Tribal lands.239 Identification of specific areas to deploy and
the associated deployment obligations could place an administrative and resource burden on small rate-ofreturn carriers serving Tribal lands.
80.
Other Measures To Improve the Operation of the Current Rate-of-Return System. We
invite commenters to submit into the record any other proposals or ideas for steps the Commission should
take to provide appropriate incentives for broadband deployment to unserved areas working within the
framework of the existing budget for rate-of-return areas.240 This line of questioning by the Commission
is intended to gather new ideas or proposals for further consideration. Therefore, we do not foresee any
major burdens being placed on carriers as a result of this portion of the Further Notice.
81.
Streamlining ETC Annual Reporting Requirements. Lastly, the Commission seeks
comment on whether to modify or eliminate five sets of requirements for ETCS to provide: outage
231

See supra Section IV.B.

232

See id.

233

See id.

234

See id.

235

See id.

236

See id.

237

See supra Section IV.C.

238

See id.

239

See id.

240

See supra Section IV.D.

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information, unfulfilled service requests, the number of complaints per 1,000 subscribers for both voice
and broadband service, pricing for both voice and broadband, and certification that they are complying
with applicable service quality standards.241 Elimination of these ETC reporting requirements would
relieve the administrative burden on small rate-of-return carriers.
E.

Steps Taken to Minimize the Significant Economic Impact on Small Entities and
Significant Alternatives Considered

82.
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.242 We expect to consider all of these factors when we have received substantive comment from
the public and potentially affected entities.
83.
With respect to the costs of implementing the proposals to restrict permitted expenses, the
Commission seeks comment on the least costly means of implementing any revisions, which would
minimize burdens on carriers. We note that many of the proposals with respect to cost allocation would
most likely change the way cost allocation is completed, but would not necessarily be any more
burdensome.243 The proposal of identifying cost consultants would add a minimal burden on small
entities if adopted because carriers should typically utilize cost consultants to submit information to
NECA for purposes of pooling.244
84.
In discussing potential compliance procedures, the Commission asks whether there is a
current certification that can be modified to encompass a certification that only permitted expenses are
included. This methodology seeks to reduce the burden on smaller entities by making a small change
instead of creating a new, more involved compliance mechanism.245
85.
In the Order, we adopt several methods of disaggregating CAF BLS for areas found to be
competitively served and allow carriers to select which method will be used. However, in seeking
comment on other methods of disaggregation of support that can be implemented with minimal
administrative burden for affected carriers and USAC,246 the Commission takes further steps to reduce
administrative and resource burdens on small rate-of-return carriers. We seek to avoid complex
allocations of the cost of facilities that that serve both competitive and non-competitive areas, which
could be burdensome for rate-of-return carriers to implement.
86.
We also invite parties to comment on how the non-supported amount is to be recovered
by the carrier, assuming such expenses remain regulated expenses for ratemaking purposes.247 We invite
parties to comment on the two approaches for recovery of those amounts.248 We seek to minimize
administrative burden under any approach.
241

See supra Section IV.E.

242

5 U.S.C. § 603(c).

243

See supra Section IV.A.

244

See id.

245

See id.

246

See supra Section IV.B.

247

See id.

248

See id.

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87.
The Commission also invites commenters to submit into the record any other proposals
or ideas for steps the Commission should take to provide appropriate incentives for broadband
deployment to unserved areas working within the framework of the existing budget for rate-of-return
areas.249 The Commission is cognizant of the many compliance burdens small rate-of-return carriers face
and seeks to minimize these burdens overall with this line of questioning.
88.
In the Order, we update 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.250 To further lessen the regulatory burden on small rate-ofreturn carriers, and to improve on the Commission’s ability to protect against waste, fraud, and abuse we
seek comment on certain, narrowly-tailored reporting changes.251 Specifically, the sets of requirements
we seek comment on whether to modify or eliminate would reduce rate-of-returns ETCs’ compliance
burden.
89.
More generally, the Commission expects to consider the economic impact on small
entities, as identified in comments filed in response to the Notice and this IRFA, in reaching its final
conclusions and taking action in this proceeding. The proposals and questions laid out in the Further
Notice were designed to ensure the Commission has a complete understanding of the benefits and
potential burdens associated with the different actions and methods.
F.

Federal Rules that May Duplicate, Overlap, or Conflict with the Proposed Rules

90.

None.

249

See supra Section IV.D.

250

See supra Section II.E.

251

See supra Section IV.E.

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APPENDIX D
Final Regulatory Flexibility Analysis
1.
As required by the Regulatory Flexibility Act of 1980 (RFA),1 as 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.2 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.3
A.

Need for, and Objective of, the Order

2.
In the Report and Order, we establish a new forward-looking, efficient mechanism for the
distribution of support in rate-of-return areas. Specifically, we adopt a voluntary path under which rateof-return carriers may elect model-based support for a term of 10 years in exchange for meeting defined
build-out obligations.4 We emphasize 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.5 We 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.6
3.
We also reform 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.7 We make 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. standalone broadband. Going forward, this reformed mechanism will be known as Connect America Fund
1

5 U.S.C. § 603. The RFA, 5 U.S.C. §§ 601-612 has been amended by the Contract With America Advancement
Act of 1996, Public Law No. 104-121, 110 Stat. 847 (1996) (CWAAA). Title II of the CWAAA is the Small
Business Regulatory Enforcement Fairness Act of 1996 (SBREFA).
2

See Connect America Fund et al., WC Docket No. 10-90 et al., Report and Order et al., 29 FCC Rcd 7051, 721644, Appx. D (2014) (April 2014 Connect America FNPRM); Connect America Fund et al.; WC Docket No. 10-90 et
al., Report and Order and Further Notice of Proposed Rulemaking, 26 FCC Rcd 17663, 18364-95, Appx. P (2011)
(USF/ICC Transformation Order and/or FNPRM); aff’d sub nom., In re: FCC 11-161, 753 F.3d 1015 (10th Cir.
2014); Connect America Fund et al.; WC Docket No. 10-90 et al., Notice of Proposed Rulemaking, 26 FCC Rcd
4554, 4801-28, Appx. E (2011) (USF/ICC Transformation NPRM); Universal Service Reform – Mobility Fund, WT
Docket No. 10-208, Notice of Proposed Rulemaking, 25 FCC Rcd 14,716 (2010) (Mobility Fund NPRM); Connect
America Fund et al., WC Docket No. 10-90 et al., Notice of Inquiry and Notice of Proposed Rulemaking, 25 FCC
Rcd 6657 (2010) (USF Reform NOI/NPRM).
3

See 5 U.S.C. § 604.

4

See supra Section II.A.

5

See supra Section II.A.1.

6

See id.

7

See supra Section II.B.

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Broadband Loop Support (CAF BLS).8 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. We expect 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.
4.
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).9 We continue 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, we adopt a method to limit operating costs eligible for support under rate-of-return
mechanisms, based on a proposal submitted by the carriers.10 We also adopt 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.11 Lastly, to ensure disbursed high-cost support stays within the established
budget for rate-of-return carriers,12 we adopt a self-effectuating mechanism to control total support
distributed pursuant to the HCLS and CAF-BLS mechanisms.13
5.
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.”14 To this end, we adopt deployment obligations that can be measured and monitored for all rateof-return carriers, while tailoring those obligations to the unique circumstances of individual carriers.15
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.
6.
Another core tenet of reform adopted by the Commission in 2011,16 and unanimously
reaffirmed in 2014,17 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, we adopt a rule prohibiting rate-ofreturn carriers from receiving CAF-BLS support in those census blocks that are served by a qualifying

8

See supra Section II.B.2.

9

USF/ICC Transformation Order, 26 FCC Rcd 17663, 17670-71, paras. 1, 11. See also id. at 17682-83, para. 57
(adopting performance goal of minimizing universal service contribution burden on consumers and businesses).
10

See supra Section II.B.3.

11

See supra Section II.B.4.

12

USF/ICC Transformation Order, 26 FCC Rcd at 17674, 17768, paras. 27, 286.

13

See supra Section II.B.6.

14

USF/ICC Transformation Order, 26 FCC Rcd at 17670-71, para. 11; see also id. at 17681, para. 51 (adopting for
the goal of ensuring universal availability of broadband an outcome measure based on the number of residential,
business, and community anchor institutions that newly gain access to broadband and adopting as an efficiency
measure the change in the number of homes, businesses and community anchor institutions passed or covered per
million USF dollars spent).
15

See supra Section II.B.7.

16

USF/ICC Transformation Order, 26 FCC Rcd at 17767, para. 281 (concluding that support should not be
provided to areas where unsubsidized facilities-based providers already are competing for customers).
17

April 2014 Connect America Order at 17688-89, para. 68.

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unsubsidized competitor.18 We adopt 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.
7.
We also address 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. We first create 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, we 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. 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.19
8.
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 model-based support mechanism is inconsistent with cost
pooling. 20
9.
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 broadbandonly lines. Second, we clarify 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.21
10.
Finally, we take action to modify our existing reporting requirements in light of lessons
learned from their implementation.22 We revise eligible telecommunications carriers’ (ETC) annual
reporting requirements to align better those requirements with our statutory and regulatory objectives.
We conclude that the public interest will be served by eliminating the requirement to file a narrative
update to the five-year plan. Instead, we adopt narrowly-tailored reporting requirements regarding the
18

See supra Section II.B.5.

19

See supra Section II.C.1.

20

See supra Section II.C.2.

21

See supra Section II.C.3.

22

See supra Section II.E.

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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.” 23
11.
In the Order and Order on Reconsideration, the Commission represcribes the currently
authorized rate of return from 11.25 percent to 9.75.24 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.25 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.26 Relying primarily on the methodology and data contained in a Commission
staff report and public comments, we identify a more robust zone of reasonableness and adopt a new rate
of return at the upper end of this range at 9.75 percent.27 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.28
The new rate of return of 9.75 percent will be phased-in gradually over a six-year period.29
B.

Summary of Significant Issues Raised by Public Comments in Response to the IRFA

12.
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.30 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.
C.

Response to Comments by the Chief Counsel for Advocacy of the Small Business
Administration

13.
Pursuant to the Small Business Jobs Act of 2010,31 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.
14.
proceeding.
D.

The Chief Counsel did not file any comments in response to the proposed rule(s) in this
Description and Estimate of the Number of Small Entities to Which the Rules
Would Apply

15.
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.32 The RFA generally
defines the term “small entity” as having the same meaning as the terms “small business,” “small
23

See July 2014 GAO High-Cost Report at 31.

24

See supra Section III.B.5.f.

25

See id.

26

See id.

27

See supra Section III.B.5.e.

28

See supra Section III.B.5.f.

29

See supra Section III.B.6.

30

See USF/ICC Transformation FNPRM, 26 FCC Rcd at 18333-34, paras. 38-39.

31

5 U.S.C. Sec. 604(a)(3).

32

See 5 U.S.C. § 603(b)(3).

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organization,” and “small governmental jurisdiction.”33 In addition, the term “small business” has the
same meaning as the term “small-business concern” under the Small Business Act.34 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).35
1.

Total Small Entities

16.
Our proposed action, if implemented, may, over time, affect small entities that are not
easily categorized at present. We therefore describe here, at the outset, three comprehensive, statutory
small entity size standards.36 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.37 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.”38 Nationwide, as of 2007, there were approximately
1,621,215 small organizations.39 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.”40 Census Bureau data for 2011 indicate that there were 90,056
local governmental jurisdictions in the United States.41 We estimate that, of this total, as many as 89,327
entities may qualify as “small governmental jurisdictions.”42 Thus, we estimate that most governmental
jurisdictions are small.
33

See 5 U.S.C. § 601(6).

34

See 5 U.S.C. § 601(3) (incorporating by reference the definition of “small-business concern” in the Small
Business Act, 15 U.S.C. § 632). Pursuant to 5 U.S.C. § 601(3), the statutory definition of a small business applies
“unless an agency, after consultation with the Office of Advocacy of the Small Business Administration and after
opportunity for public comment, establishes one or more definitions of such term which are appropriate to the
activities of the agency and publishes such definition(s) in the Federal Register.”
35

See 15 U.S.C. § 632.

36

See 5 U.S.C. §§ 601(3)-(6).

37

See SBA, Office of Advocacy, Frequently Asked Questions, http://www.sba.gov/sites/default/files/FAQ_March_
2014_0.pdf.
38

5 U.S.C. § 601(4).

39

Indep. Sector, The New Nonprofit Almanac and Desk Reference (2010).

40

5 U.S.C. § 601(5).

41

See SBA, Office of Advocacy - Frequently Asked Questions,
https://www.sba.gov/sites/default/files/FAQ_March_2014_0.pdf (last visited Mar. 4, 2016). U.S. Census Bureau,
Statistical Abstract of the United States: 2012, Section 8, page 267, tbl. 429,
https://www.census.gov/compendia/statab/2012/tables/12s0429.pdf/ (data cited therein are from 2007).
42

The 2011 Census data for small governmental organizations are not presented based on the size of the population
in each organization. As stated above, there were 90,056 local governmental organizations in 2011. As a basis for
estimating how many of these 90,056 local organizations were small, in 2011 we note that there were a total of 729
cities and towns (incorporated places and minor civil divisions) with populations over 50,000. See U.S. Census
Bureau, American Fact Finder, http://factfinder.census.gov/faces/nav/jsf/pages/index.xhtml (last visited Mar. 4,
2016). If we subtract the 729 cities and towns that exceed the 50,000 population threshold, we conclude that
approximately 89,327 are small.
2007 U.S. Census data for small governmental organizations are not presented based on the size of the population in
each such organization. There were 89,476 local governmental organizations in 2007. If we assume that county,
municipal, township, and school district organizations are more likely than larger governmental organizations to
have populations of 50,000 or less, the total of these organizations is 52,095. As a basis of estimating how many of
these 89,476 local government organizations were small, in 2011, we note that there were a total of 715 cities and
(continued….)

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FCC 16-33

Broadband Internet Access Service Providers

17.
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,43 which has an SBA small business size standard of 1,500 or fewer employees.44 These are also
labeled “broadband.” The latter are within the category of All Other Telecommunications,45 which has a
size standard of annual receipts of $32.5 million or less.46 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 the
entire year.47 Of this total, 3144 firms had employment of 999 or fewer employees, and 44 firms had
employment of 1,000 employees or more.48 For the second category, the data show that 2,383 firms
operated for the entire year.49 Of those, 2,346 had annual receipts below $32.5 million per year.
Consequently, we estimate that the majority of broadband Internet access service provider firms are small
entities.
18.
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, we discuss in turn several
different types of entities that might be providing broadband Internet access service. We note that,
although we have no specific information on the number of small entities that provide broadband Internet
access service over unlicensed spectrum, we include these entities in our Final Regulatory Flexibility
Analysis.
3.

Wireline Providers

19.
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.50 According to
(Continued from previous page)
towns (incorporated places and minor civil divisions) with populations over 50,000. City and Town Totals Vintage:
2011 – U.S. Census Bureau, http://www.census.gov/popest/data/cities/totals/2011/index.html. If we subtract the 715
cities and towns that meet or exceed the 50,000 population threshold, we conclude that approximately 88,761 are
small. U.S. Census Bureau, Statistical Abstract of the United States: 2012, Section 8, page 267, tbl. 429,
https://www.census.gov/compendia/statab/2012/tables/12s0429.pdf/ (data cited therein are from 2007).
43

U.S. Census Bureau, 2012 NAICS Definitions, “517110 Wired Telecommunications Carriers,”
http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517110&search=2012%20NAICS%20Search.
44

13 CFR § 121.201, NAICS code 517110.

45

U.S. Census Bureau, 2012 NAICS Definitions, “517919 All Other Telecommunications,”,
http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517919&search=2012%20NAICS%20Search.
46

13 CFR § 121.201, NAICS code 517919.

47

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, Table 5, “Establishment and Firm Size:
Employment Size of Firms for the United States: 2007 NAICS Code 517110” (issued Nov. 2010).
48

See id.

49

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, “Establishment and Firm Size,”
NAICS code 5179191 (rel. Nov. 19, 2010) (receipts size).
50

13 CFR § 121.201, NAICS code 517110.

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Commission data,51 1,307 carriers reported that they were incumbent LEC providers.52 Of these 1,307
carriers, an estimated 1,006 have 1,500 or fewer employees and 301 have more than 1,500 employees.53
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.
20.
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.54 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.55 Of these 1,442 carriers, an estimated
1,256 have 1,500 or fewer employees and 186 have more than 1,500 employees.56 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.57 In addition, 72 carriers have reported that they are Other Local Service Providers.58
Of the 72, seventy have 1,500 or fewer employees and two have more than 1,500 employees.59
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.
21.
We have 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.”60 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.61 We have therefore included small incumbent LECs in this RFA analysis, although we emphasize
that this RFA action has no effect on Commission analyses and determinations in other, non-RFA
contexts.
22.
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
51

Federal Communications Commission, Wireline Competition Bureau, Industry Analysis and Technology
Division, Trends in Telephone Service, tbl. 5.3 (Sept. 2010) (Trends in Telephone Service).
52

See Trends in Telephone Service at tbl. 5.3.

53

See id.

54

13 CFR § 121.201, NAICS code 517110.

55

See Trends in Telephone Service at tbl.5.3.

56

See id.

57

See id.

58

See id.

59

See id.

60

5 U.S.C. § 601(3).

61

Letter from Jere W. Glover, Chief Counsel for Advocacy, SBA, to William E. Kennard, Chairman, Federal
Communications Commission (filed May 27, 1999). The Small Business Act contains a definition of “small
business concern,” which the RFA incorporates into its own definition of “small business.” 15 U.S.C. § 632(a); 5
U.S.C. § 601(3). SBA regulations interpret “small business concern” to include the concept of dominance on a
national basis. 13 CFR § 121.102(b).

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business is small if it has 1,500 or fewer employees.62 According to Commission data,63 359 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.
23.
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.64 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.65 Consequently, the Commission
estimates that the majority of OSPs are small entities that may be affected by rules adopted pursuant to
the Order.
24.
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.66 According to Commission data, 193 carriers have
reported that they are engaged in the provision of prepaid calling cards.67 Of these, an estimated all 193
have 1,500 or fewer employees and none have more than 1,500 employees.68 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.
25.
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.69 According to Commission data, 213 carriers have reported that they are engaged in
the provision of local resale services.70 Of these, an estimated 211 have 1,500 or fewer employees and
two have more than 1,500 employees.71 Consequently, the Commission estimates that the majority of
local resellers are small entities that may be affected by rules adopted pursuant to the Order.
26.
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.72 According to Commission data, 881 carriers have reported that they are engaged in the
provision of toll resale services.73 Of these, an estimated 857 have 1,500 or fewer employees and 24 have

62

13 CFR § 121.201, NAICS code 517110.

63

Trends in Telephone Service, tbl. 5.3.

64

13 CFR § 121.201, NAICS code 517110.

65

Trends in Telephone Service, tbl. 5.3.

66

See 13 CFR § 121.201, NAICS code 517911.

67

See Trends in Telephone Service at Table 5.3.

68

See id.

69

See 13 CFR § 121.201, NAICS code 517911.

70

See Trends in Telephone Service at Table 5.3.

71

See id.

72

See 13 CFR § 121.201, NAICS code 517911.

73

See Trends in Telephone Service at Table 5.3.

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more than 1,500 employees.74 Consequently, the Commission estimates that the majority of toll resellers
are small entities that may be affected by rules adopted pursuant to the Order.
27.
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.75 According to Commission data, 284 companies reported that their
primary telecommunications service activity was the provision of other toll carriage.76 Of these, an
estimated 279 have 1,500 or fewer employees and five have more than 1,500 employees.77 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.
28.
800 and 800-Like Service Subscribers.78 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.79 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.80 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
7,867,736.81 We do 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, we estimate 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.
4.

Wireless Providers – Fixed and Mobile

29.
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, we note 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.

74

See id.

75

See 13 CFR § 121.201, NAICS code 517110.

76

See Trends in Telephone Service at Table 5.3.

77

See id.

78

We include all toll-free number subscribers in this category, including those for 888 numbers.

79

See 13 CFR § 121.201, NAICS code 517911.

80

See Trends in Telephone Service at Tables 18.7-18.10.

81

See id.

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30.
Wireless Telecommunications Carriers (except Satellite). Since 2007, the Census Bureau
has placed wireless firms within this new, broad, economic census category.82 Under the present and
prior categories, the SBA has deemed a wireless business to be small if it has 1,500 or fewer employees.83
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.84 Of this total, 1,368 firms had employment
of 999 or fewer employees and 15 had employment of 1,000 employees or more.85 Since all firms with
fewer than 1,500 employees are considered small, given the total employment in the sector, we estimate
that the vast majority of wireless firms are small.
31.
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.86 The SBA has approved these
definitions.87
32.
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.88 In the 218-219 MHz Report and Order and Memorandum Opinion and
Order, we 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.89 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.90 These size standards will be used in future auctions of 218-219 MHz spectrum.
33.
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
82

U.S. Census Bureau, 2012 NAICS Definitions, “517210 Wireless Telecommunications Categories (Except
Satellite)”; http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517210&search=2012%20NAICS%20Search.
83

13 CFR § 121.201, NAICS code 517210 (2012 NAICS). The now-superseded, pre-2007 CFR citations were 13
CFR § 121.201, NAICS codes 517211 and 517212 (referring to the 2002 NAICS).
84

U.S. Census Bureau, Subject Series: Information, Table 5, “Establishment and Firm Size: Employment Size of
Firms for the United States: 2007 NAICS Code 517210” (issued Nov. 2010).
85

See id.

86

Amendment of the Commission’s Rules to Establish Part 27, the Wireless Communications Service (WCS), GN
Docket No. 96-228, Report and Order, 12 FCC Rcd 10785, 10879, para. 194 (1997).
87

See Letter from Aida Alvarez, Administrator, SBA, to Amy Zoslov, Chief, Auctions and Industry Analysis
Division, Wireless Telecommunications Bureau, Federal Communications Commission (filed Dec. 2, 1998)
(Alvarez Letter 1998).
88

See generally Implementation of Section 309(j) of the Communications Act – Competitive Bidding, PP Docket No.
93-253, Fourth Report and Order, 9 FCC Rcd 2330 (1994).
89

See generally Amendment of Part 95 of the Commission’s Rules to Provide Regulatory Flexibility in the 218-219
MHz Service, WT Docket No. 98-169, Report and Order and Memorandum Opinion and Order, 15 FCC Rcd 1497
(1999) (218-219 MHz Report and Order and Memorandum Opinion and Order).
90

See id.

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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.91 The SBA has approved these
definitions.92 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.
34.
1670–1675 MHz Services. This service can be used for fixed and mobile uses, except
aeronautical mobile.93 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.
35.
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).94 Under the SBA
small business size standard, a business is small if it has 1,500 or fewer employees.95 According to
Commission data, 413 carriers reported that they were engaged in wireless telephony.96 Of these, an
estimated 261 have 1,500 or fewer employees and 152 have more than 1,500 employees.97 Therefore, a
little less than one third of these entities can be considered small.
36.
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.98 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.99 These small business size
standards, in the context of broadband PCS auctions, have been approved by the SBA.100 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.101 On April 15, 1999, the Commission

91

Amendment of the Commission’s Rules to Establish Part 27, the Wireless Communications Service (WCS), GN
Docket No. 96-228, Report and Order, 12 FCC Rcd 10785, 10879 para. 194 (1997).
92

See Alvarez Letter 1998.

93

47 CFR § 2.106; see generally 47 CFR §§ 27.1-27.70.

94

13 CFR § 121.201, NAICS code 517210.

95

Id.

96

Trends in Telephone Service, tbl. 5.3.

97

Id.

98

See Amendment of Parts 20 and 24 of the Commission’s Rules – Broadband PCS Competitive Bidding and the
Commercial Mobile Radio Service Spectrum Cap; Amendment of the Commission’s Cellular/PCS Cross-Ownership
Rule; WT Docket No. 96-59, GN Docket No. 90-314, Report and Order, 11 FCC Rcd 7824, 7850-52, paras. 57-60
(1996) (PCS Report and Order); see also 47 CFR § 24.720(b).
99

See PCS Report and Order, 11 FCC Rcd at 7852, para. 60.

100

See Alvarez Letter 1998.

101

See Broadband PCS, D, E and F Block Auction Closes, Public Notice, Doc. No. 89838 (rel. Jan. 14, 1997).

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completed the reauction of 347 C-, D-, E-, and F-Block licenses in Auction No. 22.102 Of the 57 winning
bidders in that auction, 48 claimed small business status and won 277 licenses.
37.
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.103 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.104
On May 21, 2007, the Commission completed an auction of 33 licenses in the A, C, and F Blocks in
Auction No. 71.105 Of the 12 winning bidders in that auction, five claimed small business status and won
18 licenses.106 On August 20, 2008, the Commission completed the auction of 20 C-, D-, E-, and F-Block
Broadband PCS licenses in Auction No. 78.107 Of the eight winning bidders for Broadband PCS licenses
in that auction, six claimed small business status and won 14 licenses.108
38.
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.109 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.110 The SBA has approved these small
business size standards for the 900 MHz Service.111 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.112
102

See C, D, E, and F Block Broadband PCS Auction Closes, Public Notice, 14 FCC Rcd 6688 (WTB 1999).
Before Auction No. 22, the Commission established a very small standard for the C Block to match the standard
used for F Block. Amendment of the Commission’s Rules Regarding Installment Payment Financing for Personal
Communications Services (PCS) Licensees, WT Docket No. 97-82, Fourth Report and Order, 13 FCC Rcd 15743,
15768, para. 46 (1998).
103

See C and F Block Broadband PCS Auction Closes; Winning Bidders Announced, Public Notice, 16 FCC Rcd
2339 (2001).
104

See Broadband PCS Spectrum Auction Closes; Winning Bidders Announced for Auction No. 58, Public Notice,
20 FCC Rcd 3703 (2005).
105

See Auction of Broadband PCS Spectrum Licenses Closes; Winning Bidders Announced for Auction No. 71,
Public Notice, 22 FCC Rcd 9247 (2007).
106

Id.

107

See Auction of AWS-1 and Broadband PCS Licenses Closes; Winning Bidders Announced for Auction 78, Public
Notice, 23 FCC Rcd 12749 (WTB 2008).
108

Id.

109

47 CFR § 90.814(b)(1).

110

Id.

111

See Letter from Aida Alvarez, Administrator, SBA, to Thomas Sugrue, Chief, Wireless Telecommunications
Bureau, Federal Communications Commission (filed Aug. 10, 1999) (Alvarez Letter 1999).
112

See Correction to Public Notice DA 96-586 “FCC Announces Winning Bidders in the Auction of 1020 Licenses
to Provide 900 MHz SMR in Major Trading Areas,” Public Notice, 18 FCC Rcd 18367 (WTB 1996).

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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.113
39.
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.114 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.115 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.
40.
In addition, there are numerous incumbent site-by-site SMR licenses and licensees with
extended implementation authorizations in the 800 and 900 MHz bands. We do 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, we do not know how many of these firms have 1,500
or fewer employees, which is the SBA-determined size standard.116 We assume, for purposes of this
analysis, that all of the remaining extended implementation authorizations are held by small entities, as
defined by the SBA.
41.
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.117 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.118 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.119 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.120 The SBA approved these small size
standards.121 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.122 A second auction commenced on May 28, 2003, closed on June
113

See Multi-Radio Service Auction Closes, Public Notice, 17 FCC Rcd 1446 (WTB 2002).

114

See 800 MHz Specialized Mobile Radio (SMR) Service General Category (851–854 MHz) and Upper Band (861–
865 MHz) Auction Closes; Winning Bidders Announced, Public Notice, 15 FCC Rcd 17162 (2000).
115

See 800 MHz SMR Service Lower 80 Channels Auction Closes; Winning Bidders Announced, Public Notice,
16 FCC Rcd 1736 (2000).
116

See generally 13 CFR § 121.201, NAICS code 517210.

117

See Reallocation and Service Rules for the 698–746 MHz Spectrum Band (Television Channels 52–59), GN
Docket No. 01-74, Report and Order, 17 FCC Rcd 1022 (2002) (Channels 52–59 Report and Order).
118

See id. at 1087-88, para. 172.

119

See id.

120

See id., at 1088, para. 173.

121

See Alvarez Letter 1999.

122

See Lower 700 MHz Band Auction Closes, Public Notice, 17 FCC Rcd 17272 (WTB 2002).

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13, 2003, and included 256 licenses: 5 EAG licenses and 476 Cellular Market Area licenses.123
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.124 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.
42.
In 2007, the Commission reexamined its rules governing the 700 MHz band in the 700
MHz Second Report and Order.125 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.126 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.
43.
Upper 700 MHz Band Licenses. In the 700 MHz Second Report and Order, the
Commission revised its rules regarding Upper 700 MHz licenses.127 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.128 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.
44.
700 MHz Guard Band Licensees. In 2000, in the 700 MHz Guard Band Order, 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.129 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.130 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.131 SBA approval of these
123

See id.

124

See id.

125

Service Rules for the 698–746, 747–762 and 777–792 MHz Band; Revision of the Commission’s Rules to Ensure
Compatibility with Enhanced 911 Emergency Calling Systems; Section 68.4(a) of the Commission’s Rules
Governing Hearing Aid-Compatible Telephones; Biennial Regulatory Review—Amendment of Parts 1, 22, 24, 27,
and 90 to Streamline and Harmonize Various Rules Affecting Wireless Radio Services; Former Nextel
Communications, Inc. Upper 700 MHz Guard Band Licenses and Revisions to Part 27 of the Commission’s Rules;
Implementing a Nationwide, Broadband, Interoperable Public Safety Network in the 700 MHz Band; Development
of Operational, Technical and Spectrum Requirements for Meeting Federal, State and Local Public Safety
Communications Requirements Through the Year 2010; Declaratory Ruling on Reporting Requirement under
Commission’s Part 1 Anti-Collusion Rule, WT Docket Nos. 07-166, 06-169, 06-150, 03-264, 96-86, PS Docket No.
06-229, CC Docket No. 94-102, Second Report and Order, 22 FCC Rcd 15289, 15359 n. 434 (2007) (700 MHz
Second Report and Order).
126

See Auction of 700 MHz Band Licenses Closes, Public Notice, 23 FCC Rcd 4572 (WTB 2008).

127

700 MHz Second Report and Order, 22 FCC Rcd 15289.

128

See Auction of 700 MHz Band Licenses Closes, Public Notice, 23 FCC Rcd 4572 (WTB 2008).

129

See Service Rules for the 746–764 MHz Bands, and Revisions to Part 27 of the Commission’s Rules, WT Docket
No. 99-168, Second Report and Order, 15 FCC Rcd 5299 (2000) (746–764 MHz Band Second Report and Order).
130

See id. at 5343, para. 108.

131

See id.

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definitions is not required.132 An auction of 52 Major Economic Area licenses commenced on September
6, 2000, and closed on September 21, 2000.133 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.134
45.
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.135
Bidding credits for designated entities were not available in Auction 77.136 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 $25,002.137
46.
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, we use 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.138 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. We note 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.139
47.
As of March 2010, there were 424,162 PLMR licensees operating 921,909 transmitters in
the PLMR bands below 512 MHz. We note 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.
48.
Rural Radiotelephone Service. The Commission has not adopted a size standard for
small businesses specific to the Rural Radiotelephone Service.140 A significant subset of the Rural
132

See id. at 5343, para. 108 n.246 (for the 746–764 MHz and 776–794 MHz bands, the Commission is exempt from
15 U.S.C. § 632, which requires Federal agencies to obtain SBA approval before adopting small business size
standards).
133

See 700 MHz Guard Bands Auction Closes: Winning Bidders Announced, Public Notice, 15 FCC Rcd 18026
(WTB 2000).
134

See 700 MHz Guard Bands Auction Closes: Winning Bidders Announced, Public Notice, 16 FCC Rcd 4590
(WTB 2001).
135

See Closed Auction of Licenses for Cellular Unserved Service Area Scheduled for June 17, 2008, Notice and
Filing Requirements, Minimum Opening Bids, Upfront Payments, and Other Procedures for Auction 77, Public
Notice, 23 FCC Rcd 6670 (Wireless Tel. Bur. 2008).
136

Id. at 6685.

137

See Auction of Cellular Unserved Service Area License Closes, Winning Bidder Announced for Auction 77, Down
Payment due July 2, 2008, Final Payment due July 17, 2008, Public Notice, 23 FCC Rcd 9501 (WTB 2008).
138

See 13 CFR § 121.201, NAICS code 517210.

139

See generally 13 CFR § 121.201.

140

The service is defined in 47 CFR § 22.99.

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Radiotelephone Service is the Basic Exchange Telephone Radio System (BETRS).141 In the present
context, we 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.142 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.
49.
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.143 There are approximately 100 licensees in the AirGround Radiotelephone Service, and under that definition, we estimate 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.144 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.145 These definitions were approved by the SBA.146 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.
50.
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.147 Census
data for 2007, which supersede data contained in the 2002 Census, show that there were 1,383 firms that
operated that year.148 Of those 1,383, 1,368 had fewer than 100 employees, and 15 firms had more than
100 employees. Most 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, we
141

BETRS is defined in 47 CFR §§ 22.757 and 22.759.

142

13 CFR § 121.201, NAICS code 517210.

143

13 CFR § 121.201, NAICS codes 517210.

144

Amendment of Part 22 of the Commission’s Rules to Benefit the Consumers of Air-Ground Telecommunications
Services, Biennial Regulatory Review—Amendment of Parts 1, 22, and 90 of the Commission’s Rules, Amendment of
Parts 1 and 22 of the Commission’s Rules to Adopt Competitive Bidding Rules for Commercial and General
Aviation Air-Ground Radiotelephone Service, WT Docket Nos. 03-103, 05-42, Order on Reconsideration and Report
and Order, 20 FCC Rcd 19663, paras. 28-42 (2005).
145

Id.

146

See Letter from Hector V. Barreto, Administrator, SBA, to Gary D. Michaels, Deputy Chief, Auctions and
Spectrum Access Division, Wireless Telecommunications Bureau, Federal Communications Commission (filed
Sept. 19, 2005).
147

See 13 CFR § 121.201, NAICS code 517210.

148

U.S. Census Bureau, 2007 Economic Census, Sector 51, 2007 NAICS code 517210 (rel. Oct. 20, 2009),
http://factfinder.census.gov/servlet/IBQTable?_bm=y&-geo_id=&-fds_name=EC0700A1&-_skip=700&ds_name=EC0751SSSZ5&-_lang=en.

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estimate 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.149 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.150 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.
51.
Advanced Wireless Services (AWS) (1710–1755 MHz and 2110–2155 MHz bands (AWS1); 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,151 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 we do not know for certain which entities are
likely to apply for these frequencies, we 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.152
52.
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, we estimate that the majority of these licensees are
Internet Access Service Providers (ISPs) and that most of those licensees are small businesses.
53.
Fixed Microwave Services. Microwave services include common carrier,153 privateoperational fixed,154 and broadcast auxiliary radio services.155 They also include the Local Multipoint
149

See generally Amendment of the Commission’s Rules Concerning Maritime Communications, PR Docket No. 92257, Third Report and Order and Memorandum Opinion and Order, 13 FCC Rcd 19853, 19884–88 paras. 64–73
(1998).
150

See id.

151

The service is defined in section 90.1301 et seq. of the Commission’s Rules, 47 CFR § 90.1301 et seq.

152

See Service Rules for Advanced Wireless Services in the 1.7 GHz and 2.1 GHz Bands, WT Docket No. 02-353,
Report and Order, 18 FCC Rcd 25162, Appx. B (2003), modified by Service Rules for Advanced Wireless Services
in the 1.7 GHz and 2.1 GHz Bands, WT Docket No. 02-353, Order on Reconsideration, 20 FCC Rcd 14058, Appx.
C (2005); Service Rules for Advanced Wireless Services in the 1915–1920 MHz, 1995–2000 MHz, 2020–2025 MHz
and 2175–2180 MHz Bands; Service Rules for Advanced Wireless Services in the 1.7 GHz and 2.1 GHz Bands, WT
Docket Nos. 04-356, 02-353, Notice of Proposed Rulemaking, 19 FCC Rcd 19263, Appx. B (2005); Service Rules
for Advanced Wireless Services in the 2155–2175 MHz Band, WT Docket No. 07-195, Notice of Proposed
Rulemaking, 22 FCC Rcd 17035, Appx. (2007).
153

See 47 CFR Part 101, Subparts C and I.

154

See 47 CFR Part 101, Subparts C and H.

155

Auxiliary Microwave Service is governed by Part 74 of Title 47 of the Commission’s Rules. See 47 CFR Part
74. Available to licensees of broadcast stations and to broadcast and cable network entities, broadcast auxiliary
(continued….)

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Distribution Service (LMDS),156 the Digital Electronic Message Service (DEMS),157 and the 24 GHz
Service,158 where licensees can choose between common carrier and non-common carrier status.159 At
present, there are approximately 36,708 common carrier fixed licensees and 59,291 private operationalfixed 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, we will use the SBA’s definition applicable to Wireless Telecommunications Carriers (except
satellite)—i.e., an entity with no more than 1,500 persons.160 Under the present and prior categories, the
SBA has deemed a wireless business to be small if it has 1,500 or fewer employees.161 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. We note,
however, that the common carrier microwave fixed licensee category includes some large entities.
54.
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.162 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.163
Census data for 2007, which supersede data contained in the 2002 Census, show that there were 1,383
firms that operated that year.164 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.
55.
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.165 An additional size standard for “very small business” is: an entity that, together with
(Continued from previous page)
microwave stations are used for relaying broadcast television signals from the studio to the transmitter, or between
two points such as a main studio and an auxiliary studio. The service also includes mobile TV pickups, which relay
signals from a remote location back to the studio.
156

See 47 CFR Part 101, Subpart L.

157

See 47 CFR Part 101, Subpart G.

158

See id.

159

See 47 CFR §§ 101.533, 101.1017.

160

13 CFR § 121.201, NAICS code 517210.

161

13 CFR § 121.201, NAICS code 517210 (2007 NAICS). The now-superseded, pre-2007 CFR citations were 13
CFR § 121.201, NAICS codes 517211 and 517212 (referring to the 2002 NAICS).
162

This service is governed by Subpart I of Part 22 of the Commission’s Rules. See 47 CFR §§ 22.1001-22.1037.

163

Id.

164

U.S. Census Bureau, 2007 Economic Census, Sector 51, 2007 NAICS code 517210 (rel. Oct. 20, 2009),
http://factfinder.census.gov/servlet/IBQTable?_bm=y&-geo_id=&-fds_name=EC0700A1&-_skip=700&ds_name=EC0751SSSZ5&-_lang=en.
165

See Amendment of the Commission’s Rules Regarding the 37.0-38.6 GHz and 38.6-40.0 GHz Bands, ET Docket
No. 95-183, PP Docket No. 93-253, Report and Order, 12 FCC Rcd 18600, 18661–64, paras. 149–151 (1997).

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affiliates, has average gross revenues of not more than $15 million for the preceding three calendar
years.166 The SBA has approved these small business size standards.167 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.
56.
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)).168 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.169 The BRS auctions 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, we estimate 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.170
After adding the number of small business auction licensees to the number of incumbent licensees not
already counted, we find that there are currently approximately 440 BRS licensees that are defined as
small businesses under either the SBA or the Commission’s rules.
57.
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.172 Auction 86 concluded in 2009 with
171

166

See id.

167

See Letter to Kathleen O’Brien Ham, Chief, Auctions and Industry Analysis Division, Wireless
Telecommunications Bureau, Federal Communications Commission, from Aida Alvarez, Administrator, SBA (Feb.
4, 1998).
168

Amendment of Parts 21 and 74 of the Commission’s Rules with Regard to Filing Procedures in the Multipoint
Distribution Service and in the Instructional Television Fixed Service and Implementation of Section 309(j) of the
Communications Act—Competitive Bidding, MM Docket No. 94-131, PP Docket No. 93-253, Report and Order, 10
FCC Rcd 9589, 9593, para. 7 (1995).
169

47 CFR § 21.961(b)(1).

170

47 U.S.C. § 309(j). Hundreds of stations were licensed to incumbent MDS licensees prior to implementation of
Section 309(j) of the Communications Act of 1934, 47 U.S.C. § 309(j). For these pre-auction licenses, the
applicable standard is SBA’s small business size standard of 1500 or fewer employees.
171

Auction of Broadband Radio Service (BRS) Licenses, Scheduled for October 27, 2009, Notice and Filing
Requirements, Minimum Opening Bids, Upfront Payments, and Other Procedures for Auction 86, AU Docket No.
09-56, Public Notice, 24 FCC Rcd 8277 (2009).
172

Id. at 8296 para. 73.

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the sale of 61 licenses.173 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.
58.
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.174
Thus, we estimate 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.”175 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 we 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.176 According to Census Bureau data for 2007, there
were a total of 996 firms in this category that operated for the entire year.177 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.178 Thus, the majority of these firms can be considered small.
59.
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.179 Through these auctions, the Commission
awarded a total of 41 licenses, 11 of which were obtained by four small businesses.180 To ensure
meaningful participation by small business entities in future auctions, the Commission adopted a twotiered small business size standard in the Narrowband PCS Second Report and Order.181 A “small
173

Auction of Broadband Radio Service Licenses Closes, Winning Bidders Announced for Auction 86, Down
Payments Due November 23, 2009, Final Payments Due December 8, 2009, Ten-Day Petition to Deny Period,
Public Notice, 24 FCC Rcd 13572 (2009).
174

The term “small entity” within SBREFA applies to small organizations (nonprofits) and to small governmental
jurisdictions (cities, counties, towns, townships, villages, school districts, and special districts with populations of
less than 50,000). 5 U.S.C. §§ 601(4)-(6). We do not collect annual revenue data on EBS licensees.
175

U.S. Census Bureau, 2012 NAICS Definitions, “517110 Wired Telecommunications Carriers,” (partial
definition), http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517110&search=2012.
176

13 CFR § 121.201, NAICS code 517110.

177

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, Receipts by Enterprise Employment
Size for the United States: 2007, NAICS code 517510 (rel. Nov. 19, 2010).
178

Id.

179

Implementation of Section 309(j) of the Communications Act – Competitive Bidding Narrowband PCS, PP
Docket No. 93-253, GEN Docket No. 90-314, ET Docket No. 92-100, Third Memorandum Opinion and Order and
Further Notice of Proposed Rulemaking, 10 FCC Rcd 175, 196, para. 46 (1994).
180

See Announcing the High Bidders in the Auction of Ten Nationwide Narrowband PCS Licenses, Winning Bids
Total $617,006,674, Public Notice, PNWL 94-004 (rel. Aug. 2, 1994); Announcing the High Bidders in the Auction
of 30 Regional Narrowband PCS Licenses; Winning Bids Total $490,901,787, Public Notice, PNWL 94-27 (rel.
Nov. 9, 1994).
181

Amendment of the Commission’s Rules to Establish New Personal Communications Services, GEN Docket No.
90-314, ET Docket No. 92-100, PP Docket No. 93-253, Narrowband PCS, Second Report and Order and Second
(continued….)

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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.182 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.183 The SBA has approved these small business size standards.184 A third
auction was conducted in 2001. Here, five bidders won 317 (Metropolitan Trading Areas and
nationwide) licenses.185 Three of these claimed status as a small or very small entity and won 311
licenses.
60.
Paging (Private and Common Carrier). In the Paging Third Report and Order, we
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.186
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.187 According to Commission data, 291 carriers have reported that they are
engaged in Paging or Messaging Service.188 Of these, an estimated 289 have 1,500 or fewer employees,
and two have more than 1,500 employees.189 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.190 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.191 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.192 A fourth auction, consisting of 9,603 lower and
(Continued from previous page)
Further Notice of Proposed Rule Making, 15 FCC Rcd 10456, 10476, para. 40 (2000) (Narrowband PCS Second
Report and Order).
182

Id.

183

Id.

184

See Letter to Amy Zoslov, Chief, Auctions and Industry Analysis Division, Wireless Telecommunications
Bureau, Federal Communications Commission, from A. Alvarez, Administrator, SBA (Dec. 2, 1998) (Alvarez Letter
1998).
185

See Narrowband PCS Auction Closes, Public Notice, 16 FCC Rcd 18663 (Wireless Tel. Bur. 2001).

186

See Revision of Part 22 and Part 90 of the Commission’s Rules to Facilitate Future Development of Paging
Systems, WT Docket No. 96-18, PR Docket No. 93-253, Memorandum Opinion and Order on Reconsideration and
Third Report and Order, 14 FCC Rcd 10030, 10085–88, paras. 98–107 (1999) (Paging Third Report and Order)
187

See Alvarez Letter 1998.

188

See Trends in Telephone Service at Table 5.3.

189

See id.

190

See id.

191

See Lower and Upper Paging Band Auction Closes, Public Notice, 16 FCC Rcd 21821 (Wireless Tel. Bur. 2002).

192

See Lower and Upper Paging Bands Auction Closes, Public Notice, 18 FCC Rcd 11154 (Wireless Tel. Bur.
2003). The current number of small or very small business entities that hold wireless licenses may differ
significantly from the number of such entities that won in spectrum auctions due to assignments and transfers of
licenses in the secondary market over time. In addition, some of the same small business entities may have won
licenses in more than one auction.

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upper paging band licenses was held in the year 2010. Twenty-nine bidders claiming small or very small
business status won 3,016 licenses.193
61.
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, we apply the small business size standard under the
SBA rules applicable to Wireless Telecommunications Carriers (except Satellite). Under this category,
the SBA deems a wireless business to be small if it has 1,500 or fewer employees.194 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.
62.
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, we 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.195 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.196 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.197 The SBA has approved these small business size standards.198 Auctions of
Phase II licenses commenced on September 15, 1998, and closed on October 22, 1998.199 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.200
5.

Satellite Service Providers

63.
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

193

See Auction of Lower and Upper Paging Bands Licenses Closes, Public Notice, 25 FCC Rcd 18164 (Wireless
Tel. Bur. 2010).
194

See 13 CFR § 121.201, NAICS code 517210.

195

See Amendment of Part 90 of the Commission’s Rules to Provide for the Use of the 220-222 MHz Band by the
Private Land Mobile Radio Service, PR Docket No. 89-552, GN Docket No. 93-252, PP Docket No. 93-253, Third
Report and Order and Fifth Notice of Proposed Rulemaking, 12 FCC Rcd 10943, 11068–70, paras. 291–295 (1997)
(220 MHz Third Report and Order).
196

See id. at 11068–69, para. 291.

197

See id. at 11068–70, paras. 291–95.

198

See Letter to D. Phythyon, Chief, Wireless Telecommunications Bureau, Federal Communications Commission,
from Aida Alvarez, Administrator, SBA (Jan. 6, 1998) (Alvarez to Phythyon Letter 1998).
199

See Phase II 220 MHz Service Auction Closes, Public Notice, 14 FCC Rcd 605 (Wireless Tel. Bur. 1998).

200

See Phase II 220 MHz Service Spectrum Auction Closes, Public Notice, 14 FCC Rcd 11218 (Wireless Tel.
Bur.1999).

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annual receipts, under SBA rules.201 The second has a size standard of $30 million or less in annual
receipts.202
64.
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.”203 For this category, Census Bureau data for 2007 show that there
were a total of 570 firms that operated for the entire year.204 Of this total, 530 firms had annual receipts of
under $30 million, and 40 firms had receipts of over $30 million.205 Consequently, we estimate that the
majority of Satellite Telecommunications firms are small entities that might be affected by our action.
65.
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.”206 For this category, Census Bureau data for 2007 show that
there were a total of 1,274 firms that operated for the entire year.207 Of this total, 1,252 had annual
receipts below $25 million per year.208 Consequently, we estimate that the majority of All Other
Telecommunications firms are small entities that might be affected by our action.
6.

Cable Service Providers

66.
Because section 706 requires us to monitor the deployment of broadband using any
technology, we anticipate that some broadband service providers may not provide telephone service.
Accordingly, we describe below other types of firms that may provide broadband services, including
cable companies, MDS providers, and utilities, among others.
67.
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.”209 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 we must, however, use
201

13 CFR § 121.201, NAICS Code 517410.

202

13 CFR § 121.201, NAICS Code 517919.

203

U.S. Census Bureau, 2012 NAICS Definitions, “517410 Satellite Telecommunications,” http://www.census.gov/
cgi-bin/sssd/naics/naicsrch?code=517410&search=2012.
204

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, “Establishment and Firm Size,”
NAICS code 517410 (rel. Nov. 19, 2010).
205

Id.

206

U.S. Census Bureau, 2012 NAICS Definitions, “517919 All Other Telecommunications,”
http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517919&search=2012.
207

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, “Establishment and Firm Size,”
NAICS code 517410 (rel. Nov. 19, 2010).
208

Id.

209

U.S. Census Bureau, 2012 NAICS Definitions, “517110 Wired Telecommunications Carriers,” (partial
definition), http://www.census.gov/cgi-bin/sssd/naics/naicsrch?code=517110&search=2012.

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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.210 According to Census Bureau data for 2007, there were a total of 2,048 firms in this category
that operated for the entire year.211 Of this total, 1,393 firms had annual receipts of under $10 million, and
655 firms had receipts of $10 million or more.212 Thus, the majority of these firms can be considered
small.
68.
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.213 Industry data that there are
currently 4,600 active cable systems in the United States.214 Of this total, all but nine cable operators are
small under the 400,000 subscriber size standard.215 In addition, under the Commission’s rules, a “small
system” is a cable system serving 15,000 or fewer subscribers.216 Current Commission records show
4,945 cable systems nationwide.217 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,
we estimate that most cable systems are small entities.
69.
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.”218 The Commission has determined that an operator serving fewer than 677,000
210

13 CFR § 121.201, NAICS code 517110.

211

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, “Establishment and Firm Size,”
NAICS code 517110 (rel. Nov. 19, 2010).
212

Id.

213

47 CFR § 76.901(e). The Commission determined that this size standard equates approximately to a size
standard of $100 million or less in annual revenues. Implementation of Sections of the 1992 Cable Act: Rate
Regulation, Sixth Report and Order and Eleventh Order on Reconsideration, 10 FCC Rcd 7393, 7408 (1995).
214

See Federal Communications Commission, Cable Operations and Licensing System, https://apps.fcc.gov/coals/
(last visted Mar. 4, 2016).
CTA, Industry Data, Number of Cable Operating Companies (June 2012), http://www.ncta.com/Statistics.aspx
(visited Sept. 28, 2012). Depending upon the number of homes and the size of the geographic area served, cable
operators use one or more cable systems to provide video service. See Annual Assessment of the Status of
Competition in the Market for Delivery of Video Programming, MB Docket No. 12-203, Fifteenth Report, 28 FCC
Rcd 10496, 10505-06, para. 24 (2013) (15th Annual Competition Report).
215

See SNL Kagan Interactive, Media & Communications Data – Cable MSOs,
http://www.snl.com/Sectors/Media/MediaCommunicationsOverview.aspx (last visited Mar. 3, 2016).
See SNL Kagan, “Top Cable MSOs – 12/12 Q”, http://www.snl.com/InteractiveX/TopCableMSOs.aspx?period=
2012Q4&sortcol=subscribersbasic&sortorder=desc. We note that, when applied to an MVPD operator, under this
size standard (i.e., 400,000 or fewer subscribers) all but 14 MVPD operators would be considered small. See
NCTA, Industry Data, Top 25 Multichannel Video Service Customers (2012), http://www.ncta.com/industry-data.
The Commission applied this size standard to MVPD operators in its implementation of the CALM Act. See
Implementation of the Commercial Advertisement Loudness Mitigation (CALM) Act, MB Docket No. 11-93, Report
and Order, 26 FCC Rcd 17222, 17245-46, para. 37 (2011) (CALM Act Report and Order) (defining a smaller MVPD
operator as one serving 400,000 or fewer subscribers nationwide, as of December 31, 2011).
216

47 CFR § 76.901(c).

217

The number of active, registered cable systems comes from the Commission’s Cable Operations and Licensing
System (COALS) database on Aug. 28, 2013. A cable system is a physical system integrated to a principal headend.
218

47 U.S.C. § 543(m)(2); see 47 CFR § 76.901(f) & nn.1-3.

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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.219 Based on available data, we
find that all but ten incumbent cable operators are small entities under this size standard.220 We note that
the Commission neither requests nor collects information on whether cable system operators are affiliated
with entities whose gross annual revenues exceed $250 million,221 and therefore we are unable to estimate
more accurately the number of cable system operators that would qualify as small under this size
standard.
70.
The open video system (“OVS”) framework was established in 1996, and is one of four
statutorily recognized options for the provision of video programming services by local exchange
carriers.222 The OVS framework provides opportunities for the distribution of video programming other
than through cable systems. Because OVS operators provide subscription services,223 OVS falls within
the SBA small business size standard covering cable services, which is “Wired Telecommunications
Carriers.”224 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.225 Of this total, 939 firms had
employment of 999 or fewer employees, and 16 firms had employment of 1,000 employees or more.226
Thus, under this second size standard, most cable systems are small and may be affected by rules adopted
pursuant to the Order. In addition, we note that the Commission has certified some OVS operators, with
some now providing service.227 Broadband service providers (“BSPs”) are currently the only significant
holders of OVS certifications or local OVS franchises.228 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.
7.

Electric Power Generators, Transmitters, and Distributors

71.
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
219

47 CFR § 76.901(f); see FCC Announces New Subscriber Count for the Definition of Small Cable Operator,
Public Notice, 16 FCC Rcd 2225 (Cable Services Bureau 2001).
220

See NCTA, Industry Data, Top 25 Multichannel Video Service Customers (2012), http://www.ncta.com/industrydata.
221

The Commission does receive such information on a case-by-case basis if a cable operator appeals a local
franchise authority’s finding that the operator does not qualify as a small cable operator pursuant to § 76.901(f) of
the Commission’s rules. See 47 CFR § 76.909(b).
222

47 U.S.C. § 571(a)(3)-(4). See Annual Assessment of the Status of Competition in the Market for the Delivery of
Video Programming, MB Docket No. 06-189, Thirteenth Annual Report, 24 FCC Rcd 542, 606, para. 135 (2009)
(Thirteenth Annual Cable Competition Report).
223

See 47 U.S.C. § 573.

224

U.S. Census Bureau, 2007 NAICS Definitions, “517110 Wired Telecommunications Carriers”;
http://www.census.gov/naics/2007/def/ND517110.HTM#N517110.
225

U.S. Census Bureau, 2007 Economic Census, Subject Series: Information, Table 5, Employment Size of Firms
for the United States: 2007, NAICS code 5171102 (issued Nov. 2010).
226

See id.

227

A list of OVS certifications may be found at http://www.fcc.gov/mb/ovs/csovscer.html.

228

See Thirteenth Annual Cable Competition Report, 24 FCC Rcd at 606-07 para. 135. BSPs are newer firms that
are building state-of-the-art, facilities-based networks to provide video, voice, and data services over a single
network.

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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.”229 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.”230 Census Bureau data for 2007 show
that there were 1,174 firms that operated for the entire year in this category.231 Of these firms, 50 had
1,000 employees or more, and 1,124 had fewer than 1,000 employees.232 Based on this data, a majority of
these firms can be considered small.
E.

Description of Projected Reporting, Recordkeeping, and Other Compliance
Requirements for Small Entities

72.
In the Report and Order, we require 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 we direct 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.233
F.

Steps Taken to Minimize the Significant Economic Impact on Small Entities,
and Significant Alternatives Considered

73.
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.234 We have 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.
74.
The rules that we adopt 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, we adopt 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
229

U.S. Census Bureau, 2002 NAICS Definitions, “2211 Electric Power Generation, Transmission and
Distribution,” http://www.census.gov/epcd/naics02/def/NDEF221.HTM (last visited Oct. 21, 2009).
230

13 CFR § 121.201, NAICS codes 221111, 221112, 221113, 221119, 221121, 221122, n. 1.

231

See U.S. Census Bureau, American FactFinder, Utilities: Subject Series - Establishment and Firm Size: Summary
Statistics by Revenue Size of Firms for the United States: 2007, NAICS code 221122,
http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=ECN_2007_US_22SSSZ5&prod
Type=table (last visited February 18, 2016).
232

See id.

233

We expect that the same portal, once implemented, will be used to receive geocoded information from price cap
carriers.
234

5 U.S.C. § 603(c).

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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.235 Additionally, to provide further flexibility, we adopt
even-spaced annual interim milestones over the 10-year term for rate-of-return carriers electing modelbased support, and decline to set interim milestones requiring deployment of speeds at or above 25/3
Mbps.236 By doing so, we minimize 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-ofreturn carriers to deploy to 95 percent of the required number of locations by the end of the 10-year
term.237
75.
In the Report and Order, we also remove 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.238 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.239
76.
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.240 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.241 The Commission also adopts a capex allowance
proposed by the rate-of-return industry associations to help target support to those areas 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.242 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.
77.
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.243
However, the Commission limits the reduction in support to only those census blocks that are overlapped
in at least 85 percent of their locations.244 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
235

See supra Section II.A.2.

236

See id.

237

See id.

238

See supra Section II.B.2.

239

See id.

240

See supra Section II.B.3.

241

See id.

242

See supra Section II.B.4.

243

See supra Section II.B.5.

244

See id.

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by qualifying competitors by one of several options.245 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.246 By permitting this flexibility, the Commission provides these small entities with
the ability to make reasoned business decisions to advance their deployment goals.
78.
To promote “accountability from companies receiving support to ensure that public
investments are used wisely to deliver intended results,”247 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.248 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.249 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.250
79.
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.
80.
The Commission also takes action to modify our existing reporting requirements.251 The
Commission revises ETCs’ annual reporting requirements to align better those requirements with the
Commission’s statutory and regulatory objectives.252 To reduce the administrative burden on rate-ofreturn 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.253 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.”254 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.
81.
In the Order and Order on Reconsideration, we are 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, we expand 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

245

See id.

246

See id.

247

USF/ICC Transformation Order, 26 FCC Rcd at 17670-71, para. 11; see also id. at 17681, para. 51.

248

See supra Section II.B.7.

249

See id.

250

See id.

251

See supra Section II.E.2.

252

See id.

253

See id.

254

See July 2014 GAO High-Cost Report at 31; See supra Section II.E.2.

227

Federal Communications Commission

FCC 16-33

the rate of return from the upper end of this zone.255 In so doing, we attempt 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, we adopt, for the first time, a transitional approach to represcription.256 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.257 Together, these measures are intended to reduce the
significant economic impact of the new rate of return on small carriers.
G.

Report to Congress

82.
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 1996.258 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.259

255

See supra Section III.B.5.e.

256

See supra Section III.B.6.

257

See id.

258

5 U.S.C. § 801(a)(1)(A).

259

See id. § 604(b).

228

Federal Communications Commission

FCC 16-33

APPENDIX E
The five-year forecast of the total CAF-BLS support for each rate-of-return carrier for the purposes of
determining deployment obligations will be based on the assumptions outlined below.











The first year of the forecast will be 2017.
If 2015 data is not yet validated, instead use most recently validated data.
NECA may use current data to assign converted study areas to a group and exclude their data
from the weighted average growth rate calculations for the groups to which they are assigned.
For this calculation, converted study areas are limited to those study areas which converted in the
prior year.
The forecast will assume that companies that have not yet built out broadband will invest at a
higher rate than those who have recently built out their networks. Companies will be sorted by
descending ratio of net plant to gross plant based on net plant and gross plant in 2015. For the
relevant period (2017 – 2021), the top one third of carriers (those with the highest level of
investment currently) will be forecast to invest at the average rate of the bottom third of carriers
(the average rate of those with the lowest net plant to gross plant ratios). Conversely, the bottom
one third of carriers will be forecast to invest at the average rate of the top one third of carriers.
The remaining third (those in the middle) will be forecast to continue investing at the same rate as
previously
HCLS and BLS will be calculated based on the rules adopted in this Report and Order.
The $2 billion budgetary control will be implemented by applying per-line and percent reductions
to HCLS and CAF BLS, after accounting for decreasing CAF-ICC funding, based on the rules
adopted in this Report and Order.
The Operating Expense Limits and Capital Budget Allowances will be applied as adopted in this
Report and Order.
The number of voice-only/voice-broadband lines and broadband-only lines for each carrier will
be forecast based on the assumption that broadband–only lines (BOLs) will grow at a rate of 5
percent per year for years 2016 and 2017. Therefore, the number of broadband–only lines in a
study area in 2017 will be assumed to be the number of broadband–only lines in the study area in
2015 times 1.1025 (= 1.05*1.05). Currently, approximately one half of study areas have no
broadband–only lines in 2015 and the forecast will assume that such study areas will not have any
broadband–only lines through 2017. For 2018 through 2021, the forecast will assume that all
study areas will increase the number of broadband–only lines in their service areas. The forecast
will assume that 5 percent of each study area’s telephone service lines (i.e., voice-only and voicebroadband lines or non- broadband–only lines) in service at the end of the prior year convert to
broadband–only lines, annually. Further, to account for line growth/loss over time, each study
area’s estimated total number of lines (both broadband–only lines and non- broadband–only lines)
in a particular year will be multiplied by a growth factor. For each year, the growth factor will be
one plus the weighted average growth rate of lines for the industry, raised to the power equal to
the number of years after 2017. The forecast will assume a weighted average growth rate of -3
percent, consistent with estimates in NECA’s recent submission.1 NECA estimated that nonbroadband–only lines would decrease by 3.25 percent per year (there are currently approximately
3.733 million non- broadband–only lines) and that broadband–only lines would increase by 5
percent per year (there are currently approximately 91,000 broadband–only lines).
In mathematical terms, the number of lines will be calculated based on the following equations:

1

Letter from Regina McNeil, NECA, to Marlene H. Dortch, Rodger Woock, and Suzanne Yelen, FCC, WC Docket
No. 10-90 et al., Att. 1 (filed Dec. 2, 2015).

229

Federal Communications Commission
For 2017:
BOL2017 = BOL2015 * 1.1025;
Non-BOL2017 = non-BOL2015 * (1 -.0325)2
For 2018 - 2021:
BOLYear = (.05*non-BOLYear-1+ BOL Year-1) * (1 – .03)
Non-BOLYear = (.95*non-BOL Year-1) * (1 – .0325)

230

FCC 16-33

Federal Communications Commission

FCC 16-33

APPENDIX F
List of Staff Report Commenters and Reply Commenters
Commenter
Alaska Rural Coalition
CoBank, ACB
Eastern Rural Telecom Association
GVNW Consulting, Inc.
ICORE, Inc.
John Staurulakis, Inc.
Moss Adams LLP, 3 Rivers Telephone Cooperative, Accipiter
Communications, Alaska Telephone Company, Alma
Communications Company, ATC Communications, Bettles
Telephone Company, Blackfoot Telephone Cooperative, Brazos
Telephone Cooperative, Calaveras Telephone Company, Cambridge
Telephone Company (ID), Cambridge Telephone Company (NE),
Canby Telephone Association, Central Montana Telephone
Company, Clarkfork Telephone Company, Central Texas Telephone
Cooperative, Clear Creek Communications, Custer Telephone
Cooperative, Dakota Central Telecommunications, Delhi Telephone
Company, Direct Communications, DuBois Telephone Company,
Direct Communications, DuBois Telephone Exchange, Ducor
Telephone Company, Eagle Telephone System, East Otter Tail
Telephone Company, Emery Telecom, Endeavor Communications,
ENMR Telephone Cooperative, Farmers Mutual Telephone
Cooperative, Filer Mutual Telephone Company, Fremont Telecom,
Granite State Telephone Company, Guadalupe Valley Telephone
Cooperative, Interbel Telephone Cooperative, Kallona Cooperative
Telephone Company, LaValle Telelphone Cooperative, Logan
Telephone Cooperative, Mashell Telecom, Midvale Telephone
Exchange, Missouri Valley Communications, Moapa Valley
Telephone Company, Molalla Communications, Mountain View
Telephone, Company, Nemont Telephone Cooperative, North
Country Telephone Company, Northwestern Indiana Telephone
Company, Northern Telephone Osakis telephone Company, Penasco
Valley Telephone Cooperative, Pend Oreille Telephone Company,
Pigeon Telephone Company, Pinnacles Telephone Company, Prairie
Grove Telephone Company, Project Telephone Company, Project
Mutual Telephone Cooperative, Range Telephone Cooperative,
Richland Grant Telephone Cooperative, Rochester Telephone
Company, RT Communications, Rural Telephone Company, Santa
Rosa Telephone Cooperative, SCIO Mutual Telephone Association,
South Arkansas Telephone Company, South Central
Communications, Springport Telephone Company, Strata Networks,
The Peoples Telephone Company of Bigfork, The Toledo Telephone
Company, Triangle Telephone Cooperative, Twin Valley-Ulen
Telephone Company, Valley Telephone Cooperative (AZ/NM),
Volcano Telephone Company, Wheat State Telephone Company,
Yelcot Telephone Company
National Association of State Utility Consumer Advocates
National Cable & Telecommunications Association
231

Abbreviation
ARC
CoBank
ERTA
GVNW
ICORE
JSI
Moss Adams

NASUCA
NCTA

Federal Communications Commission

FCC 16-33

National Congress of American Indians
National Exchange Carrier Association, Inc., NTCA–The Rural
Broadband Association, USTelecom—The Broadband
Association, Eastern Rural Telecom Association, and
Western Telecom Alliance
National Tribal Telecommunications Association
Rural Telephone Finance Cooperative
Rural Broadband Alliance, Small Company Coalition, Alexicon Companies
Washington Independent Telecommunications Association,
Oregon Telecommunications Association

NCAI
Rural Associations

Reply Commenter
Ad Hoc Telecommunications Users Committee
AT&T
Fred Williamson & Associates
Gila River Indian Community and Gila River Telecommunications, Inc.
GVNW Consulting, Inc.
Mescalero Apache Telecom, Inc.
National Exchange Carrier Association, Inc., NTCA–The Rural
NECA et al., Broadband Association, USTelecom—The Broadband
Association, Eastern Rural Telecom Association, and
Western Telecom Alliance
Alaska Telephone Association, California Communications
State Associations, Association, Rural Iowa Independent Telephone
Association, Louisiana Telecommunications Association, Colorado
Telecommunications Association, Illinois Independent Telephone
Association, Indiana Exchange Carrier Association, Idaho
Telecom Alliance, Iowa Telecommunications Association,
Telecommunications Association of Maine, Minnesota Telecom
Alliance, Missouri Small, Telephone Company Group, Montana
Independent Telecommunications Systems, Montana
Telecommunications Association, Nevada Telecommunications
ssociation, Telephone Association of New England, New
Hampshire Telephone Association, Oklahoma Telephone
Association, South Dakota Telecommunications Association,
Tennessee Telecommunications, Association, Texas Statewide
Telephone Cooperative, Inc., Telephone Association of Vermont,
Washington Independent Telecommunications Association,
Wisconsin, State Telecommunications Association, and Wyoming
Telecom Association
TCA, Inc.

Abbreviation
Ad Hoc
AT&T
FW&A
Gila River
GVNW
MATI
Rural Associations

232

NTTA
RTFC
Rural Company Group
Western Associations

State Associations

TCA

Federal Communications Commission

FCC 16-33

APPENDIX G
Interest Rate Changes Between March 2013 and September 2015
5-Yr. T Rate

7-Yr. T Rate

20-Yr. T Rate

30-Yr. T Rate

Moody's Aaa Corp.
Rate

Moody's Baa Corp.
Rate

(% )

Mo. Avg.
Rate
Minus 6Mo. Avg.
Rate
(BP)

(% )

Mo. Avg.
Rate
Minus 6Mo. Avg.
Rate
(BP)

(% )

Mo. Avg.
Rate
Minus 6Mo. Avg.
Rate
(BP)

(% )

Mo. Avg.
Rate
Minus 6Mo. Avg.
Rate
(BP)

(% )

Mo. Avg.
Rate
Minus 6Mo. Avg.
Rate
(BP)

2012-10

0.71

---

1.15

---

1.75

---

2.51

---

2.9

---

3.47

---

4.58

---

2012-11

0.67

---

1.08

---

1.65

---

2.39

---

2.8

---

3.5

---

4.51

---

2012-12

0.7

---

1.13

---

1.72

---

2.47

---

2.88

---

3.65

---

4.63

---

2013-01

0.81

---

1.3

---

1.91

---

2.68

---

3.08

---

3.8

---

4.73

---

2013-02

0.85

---

1.35

---

1.98

---

2.78

---

3.17

---

3.9

---

4.85

---

2013-03

0.82

---

1.32

---

1.96

---

2.78

---

3.16

---

3.93

---

4.85

---

6-Mo. Avg.

0.76

---

1.22

---

1.83

---

2.60

---

3.00

---

3.71

---

4.69

---

2013-04

0.71

-5

1.15

-7

1.76

-7

2.55

-5

2.93

-7

3.73

2

4.59

-10

2013-05

0.84

8

1.31

9

1.93

10

2.73

13

3.11

11

3.89

18

4.73

4

2013-06

1.2

44

1.71

49

2.3

47

3.07

47

3.4

40

4.27

56

5.19

50

2013-07

1.4

64

1.99

77

2.58

75

3.31

71

3.61

61

4.34

63

5.32

63

2013-08

1.52

76

2.15

93

2.74

91

3.49

89

3.76

76

4.54

83

5.42

73

2013-09

1.6

84

2.22

100

2.81

98

3.53

93

3.79

79

4.64

93

5.47

78

2013-10

1.37

61

1.99

77

2.62

79

3.38

78

3.68

68

4.53

82

5.31

62

2013-11

1.37

61

2.07

85

2.72

89

3.5

90

3.8

80

4.63

92

5.38

69

2013-12

1.58

82

2.29

107

2.9

107

3.63

103

3.89

89

4.62

91

5.38

69

2014-01

1.65

89

2.29

107

2.86

103

3.52

92

3.77

77

4.49

78

5.19

50

2014-02

1.52

76

2.15

93

2.71

88

3.38

78

3.66

66

4.45

74

5.1

41

2014-03

1.64

88

2.23

101

2.72

89

3.35

75

3.62

62

4.38

67

5.06

37

2014-04

1.7

94

2.27

105

2.71

88

3.27

67

3.52

52

4.24

53

4.9

21

2014-05

1.59

83

2.12

90

2.56

73

3.12

52

3.39

39

4.16

45

4.76

7

2014-06

1.68

92

2.19

97

2.6

77

3.15

55

3.42

42

4.25

54

4.8

11

2014-07

1.7

94

2.17

95

2.54

71

3.07

47

3.33

33

4.16

45

4.73

4

2014-08

1.63

87

2.08

86

2.42

59

2.94

34

3.2

20

4.08

37

4.69

0

2014-09

1.77

101

2.22

100

2.53

70

3.01

41

3.26

26

4.11

40

4.8

11

2014-10

1.55

79

1.98

76

2.3

47

2.77

17

3.04

4

3.92

21

4.69

0

2014-11

1.62

86

2.03

81

2.33

50

2.76

16

3.04

4

3.92

21

4.79

10

2014-12

1.64

88

1.98

76

2.21

38

2.55

-5

2.83

-17

3.79

8

4.74

5

2015-01

1.37

61

1.67

45

1.88

5

2.2

-40

2.46

-54

3.46

-25

4.45

-24

2015-02

1.47

71

1.79

57

1.98

15

2.34

-26

2.57

-43

3.61

-10

4.51

-18

2015-03

1.52

76

1.84

62

2.04

21

2.41

-19

2.63

-37

3.64

-7

4.54

-15

2015-04

1.35

59

1.69

47

1.94

11

2.33

-27

2.59

-41

3.52

-19

4.48

-21

2015-05

1.54

78

1.93

71

2.2

37

2.69

9

2.96

-4

3.98

27

4.89

20

2015-06

1.68

92

2.1

88

2.36

53

2.85

25

3.11

11

4.19

48

5.13

44

2015-07

1.63

87

2.04

82

2.32

49

2.77

17

3.07

7

4.15

44

5.2

51

2015-08

1.54

78

1.91

69

2.17

34

2.55

-5

2.86

-14

4.04

33

5.19

50

2015-09

1.49

73

1.88

66

2.17

34

2.62

2

2.95

-5

4.07

36

5.34

65

Max.

---

101

---

107

---

107

---

103

---

89

---

93

---

78

Min.

---

-5

---

-7

---

-7

---

-40

---

-54

---

-25

---

-24

9/15 - 3/13

---

67

---

56

---

21

---

-16

---

-21

---

14

---

49

Avg. Diff.

---

74

---

76

---

57

---

36

---

24

---

42

---

27

Date
(Yr./Mo.)

Mo. Avg.
Rate Minus
Mo. Avg. 6-Mo. Avg. Mo. Avg.
Rate
Rate
Rate
(BP)
(% )
(% )

Mo. Avg.
Rate
Minus 6Mo. Avg.
Rate
(BP)

10-Yr. T Rate

Mo. Avg.
Rate

Mo. Avg.
Rate

Mo. Avg.
Rate

Mo. Avg.
Rate

Mo. Avg.
Rate

Source: Board of Governors of the Federal Reserve, Selected Interest Rates (Monthly), http://www.federalreserve.gov/
releases/ h15/data.htm (last visited Nov. 1, 2015).
Notes:
“BP” refers to Basis Points.
“9/15 – 3/13” refers to the difference between the Monthly Average Rate for 2013-03 and 2015-09.
“Avg. Diff.” refers to the average difference between the Monthly Average Rate and the 6-Month Average Rate.

233

Federal Communications Commission

FCC 16-33

APPENDIX H
Interest Rate Changes Between December 2012 and September 2015
7-Yr. T Rate
Avg.
Rate
Minus 6Mo.
Mo.
Avg.
Avg.
Rate
Rate
(BP)
(%)

10-Yr. T Rate
Avg.
Rate
Minus 6Mo.
Mo.
Avg.
Avg.
Rate
Rate
(BP)
(%)

20-Yr. T Rate
Avg.
Rate
Minus 6Mo.
Mo.
Avg.
Avg.
Rate
Rate
(BP)
(%)

30-Yr. T Rate
Avg.
Rate
Minus 6Mo.
Mo.
Avg.
Avg.
Rate
Rate
(BP)
(%)

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

0.98
1.14
1.12
1.15
1.08
1.13
1.1

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

1.53
1.68
1.72
1.75
1.65
1.72
1.68

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

2.22
2.4
2.49
2.51
2.39
2.47
2.41

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

2.59
2.77
2.88
2.9
2.8
2.88
2.80

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

Moody's Aaa
Moody's Baa
Corp. Rate
Corp. Rate
Avg.
Avg.
Rate
Rate
Minus 6Minus 6Mo.
Mo.
Mo.
Mo.
Avg.
Avg.
Avg.
Avg.
Rate
Rate
Rate
Rate
(BP)
(BP)
(%)
(%)
3.4
--4.87
--3.48
--4.91
--3.49
--4.84
--3.47
--4.58
--3.5
--4.51
--3.65
--4.63
--3.50
--4.72
---

5-Yr. T Rate
Mo. Avg.
Rate
Minus 6Mo. Avg.
Rate
(BP)

Date
(Yr./Mo.)
2012-07
2012-08
2012-09
2012-10
2012-11
2012-12
6-Mo. Avg.

Mo.
Avg.
Rate
(%)
0.62
0.71
0.67
0.71
0.67
0.7
0.68

2013-01
2013-02
2013-03
2013-04
2013-05
2013-06
2013-07
2013-08
2013-09
2013-10
2013-11
2013-12
2014-01
2014-02
2014-03
2014-04
2014-05
2014-06
2014-07
2014-08
2014-09
2014-10
2014-11
2014-12
2015-01
2015-02
2015-03
2015-04
2015-05
2015-06
2015-07
2015-08
2015-09

0.81
0.85
0.82
0.71
0.84
1.2
1.4
1.52
1.6
1.37
1.37
1.58
1.65
1.52
1.64
1.7
1.59
1.68
1.7
1.63
1.77
1.55
1.62
1.64
1.37
1.47
1.52
1.35
1.54
1.68
1.63
1.54
1.49

13
17
14
3
16
52
72
84
92
69
69
90
97
84
96
102
91
100
102
95
109
87
94
96
69
79
84
67
86
100
95
86
81

1.3
1.35
1.32
1.15
1.31
1.71
1.99
2.15
2.22
1.99
2.07
2.29
2.29
2.15
2.23
2.27
2.12
2.19
2.17
2.08
2.22
1.98
2.03
1.98
1.67
1.79
1.84
1.69
1.93
2.1
2.04
1.91
1.88

20
25
22
5
21
61
89
105
112
89
97
119
119
105
113
117
102
109
107
98
112
88
93
88
57
69
74
59
83
100
94
81
78

1.91
1.98
1.96
1.76
1.93
2.3
2.58
2.74
2.81
2.62
2.72
2.9
2.86
2.71
2.72
2.71
2.56
2.6
2.54
2.42
2.53
2.3
2.33
2.21
1.88
1.98
2.04
1.94
2.2
2.36
2.32
2.17
2.17

24
31
29
9
26
63
91
107
114
95
105
123
119
104
105
104
89
93
87
75
86
63
66
54
21
31
37
27
53
69
65
50
50

2.68
2.78
2.78
2.55
2.73
3.07
3.31
3.49
3.53
3.38
3.5
3.63
3.52
3.38
3.35
3.27
3.12
3.15
3.07
2.94
3.01
2.77
2.76
2.55
2.2
2.34
2.41
2.33
2.69
2.85
2.77
2.55
2.62

27
37
37
14
32
66
90
108
112
97
109
122
111
97
94
86
71
74
66
53
60
36
35
14
-21
-7
0
-8
28
44
36
14
21

3.08
3.17
3.16
2.93
3.11
3.4
3.61
3.76
3.79
3.68
3.8
3.89
3.77
3.66
3.62
3.52
3.39
3.42
3.33
3.2
3.26
3.04
3.04
2.83
2.46
2.57
2.63
2.59
2.96
3.11
3.07
2.86
2.95

28
37
36
13
31
60
81
96
99
88
100
109
97
86
82
72
59
62
53
40
46
24
24
3
-34
-23
-17
-21
16
31
27
6
15

3.8
3.9
3.93
3.73
3.89
4.27
4.34
4.54
4.64
4.53
4.63
4.62
4.49
4.45
4.38
4.24
4.16
4.25
4.16
4.08
4.11
3.92
3.92
3.79
3.46
3.61
3.64
3.52
3.98
4.19
4.15
4.04
4.07

30
40
43
23
39
77
84
104
114
103
113
112
99
95
88
74
66
75
66
58
61
42
42
29
-4
11
14
2
48
69
65
54
57

4.73
4.85
4.85
4.59
4.73
5.19
5.32
5.42
5.47
5.31
5.38
5.38
5.19
5.1
5.06
4.9
4.76
4.8
4.73
4.69
4.8
4.69
4.79
4.74
4.45
4.51
4.54
4.48
4.89
5.13
5.2
5.19
5.34

1
13
13
-13
1
47
60
70
75
59
66
66
47
38
34
18
4
8
1
-3
8
-3
7
2
-27
-21
-18
-24
17
41
48
47
62

Max.
Min.
9/15 - 12/12
Avg. Diff.

---------

109
3
79
75

---------

119
5
75
82

---------

123
9
45
68

---------

122
-21
15
53

---------

109
-34
7
43

---------

114
-4
42
61

---------

75
-27
71
22

Source: Board of Governors of the Federal Reserve, Selected Interest Rates (Monthly), http://www.federalreserve.gov/
releases/ h15/data.htm (last visited Nov. 1, 2015).
Notes:
“BP” refers to Basis Points; 100 Basis Points equals 1 percentage point.
“9/15 – 12/12” refers to the difference between the Monthly Average Rate for 2012-12 and 2015-09.
“Avg. Diff.” refers to the average difference between the Monthly Average Rate and the 6-Month Average Rate.

234

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APPENDIX I
Embedded Cost of Debt and Capital Structure Estimates
Total Debt
As of 12/31/2011
Company
(Book Value)
Hickory Tech Corp.
$
120,235,000
Telephone and Data Systems, Inc.
$ 1,531,366,000
New Ulm Telecom Inc.
$
43,508,000
Shenandoah Telecommunications Company $
180,575,000
Consolidated Communications Holding, Inc. $
884,711,000
Lumos Networks Corp.
$
326,576,000
Alteva
$
6,739,000
Windstream Corporation
$ 9,150,400,000
Alaska Communications Systems Group, Inc. $
569,554,000
Hawaiian Telcom Holdco, Inc.
$
300,000,000
Frontier Communications Corporation
$ 8,318,408,000
Fairpoint Communications, Inc.
$ 1,003,942,000
Cincinnati Bell
$ 2,533,600,000
Century Link
$ 21,836,000,000
Verizon
$ 55,152,000,000
AT&T
$ 64,753,000,000
Averages

Total Debt
As of 12/31/2012
(Book Value)
$
136,781,000
$ 1,722,804,000
$
46,607,000
$
232,177,000
$ 1,217,844,000
$
312,225,000
$
14,095,000
$ 8,996,500,000
$
555,400,000
$
295,410,000
$ 8,942,497,000
$
959,690,000
$ 2,689,400,000
$ 20,605,000,000
$ 51,987,000,000
$ 69,844,000,000

2012
2012
Total Interest
Embedded
Expense
Cost of Debt
$
5,749,000
4.47%
$
86,745,000
5.33%
$
2,227,000
4.94%
$
7,850,000
3.80%
$
72,604,000
6.91%
$
11,921,000
3.73%
$
415,000
3.98%
$
625,100,000
6.89%
$
39,570,000
7.03%
$
22,183,000
7.45%
$
687,985,000
7.97%
$
67,610,000
6.89%
$
218,900,000
8.38%
$ 1,319,000,000
6.22%
$ 2,571,000,000
4.80%
$ 3,444,000,000
5.12%
5.87%

Common Equity
As of 12/31/2012
(Market Value)
$
131,541,145
$ 2,391,806,340
$
30,623,508
$
366,859,904
$
634,458,948
$
215,409,960
$
60,122,310
$ 4,870,296,000
$
88,784,100
$
200,691,992
$ 4,273,194,800
$
208,902,894
$ 1,109,528,531
$ 24,475,740,960
$ 123,690,285,779
$ 188,148,817,461

Debt
Ratio
50.98%
41.87%
60.35%
38.76%
65.75%
59.17%
18.99%
64.88%
86.22%
59.55%
67.67%
82.12%
70.79%
45.71%
29.59%
27.07%
54.34%

Equity
Ratio
49.02%
58.13%
39.65%
61.24%
34.25%
40.83%
81.01%
35.12%
13.78%
40.45%
32.33%
17.88%
29.21%
54.29%
70.41%
72.93%
45.66%

Source: Companies’ SEC Form 10-Ks for the year ending December 31, 2012. See SEC Form 10-K, EDGAR
Company Filings, SEC, http://www.sec.gov/edgar/searchedgar/companysearch.html.

Notes on Calculations:
2012 Embedded Cost of Debt = 2012 Total Interest Expense / [(Total Debt As of 12/31/2011 + Total Debt As of
12/31/2012) / 2]
Debt Ratio = Total Debt As of 12/31/2012 / (Total Debt As of 12/31/2012 + Common Equity As of 12/31/2012)
Equity Ratio = Common Equity As of 12/31/2012 / (Total Debt As of 12/31/2012 + Common Equity As of
12/31/2012)

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APPENDIX J
CAPM Cost of Equity and WACC Estimates
Company
Hickory Tech Corp.
Telephone and Data Systems, Inc.
New Ulm Telecom Inc.
Shenandoah Telecommunications Company
Consolidated Communications Holding, Inc.
Lumos Networks Corp.
Alteva
Windstream Corporation
Alaska Communications Systems Group, Inc.
Hawaiian Telcom Holdco, Inc.
Frontier Communications Corporation
Fairpoint Communications, Inc.
Cincinnati Bell
Century Link
Verizon
AT&T
Average with New Ulm
Average without New Ulm
Average with Alternative New Ulm KE
Ranges

Beta
0.78
1.08
0.50
1.21
1.02
0.82
0.52
0.94
0.84
0.74
0.96
1.16
1.30
0.80
0.83
0.81

-------

Cost of Equity Estimate (KE)
MRP = 5.88% MRP = 6.21% MRP =10.54%
7.41%
7.67%
11.04%
9.20%
9.56%
14.25%
5.74%
5.90%
8.05%
9.92%
10.32%
15.54%
8.82%
9.16%
13.57%
7.64%
7.91%
11.45%
5.91%
6.09%
8.36%
8.37%
8.68%
12.76%
7.75%
8.03%
11.66%
7.21%
7.45%
10.68%
8.47%
8.79%
12.94%
9.68%
10.06%
15.11%
10.50%
10.93%
16.58%
7.54%
7.80%
11.27%
7.69%
7.97%
11.55%
7.60%
7.87%
11.39%

MRP = 5.88%
5.91%
7.58%
5.26%
7.55%
7.56%
5.33%
5.55%
7.41%
7.13%
7.35%
8.13%
7.39%
9.00%
6.93%
6.84%
6.93%

WACC Estimate
MRP = 6.21% MRP =10.54%
6.04%
7.69%
7.79%
10.51%
5.32%
6.17%
7.79%
10.99%
7.68%
9.19%
5.44%
6.88%
5.69%
7.53%
7.52%
8.95%
7.17%
7.67%
7.45%
8.76%
8.23%
9.58%
7.45%
8.36%
9.13%
10.78%
7.08%
8.96%
7.03%
9.55%
7.13%
9.69%

8.09%

8.39%

12.26%

6.99%

7.12%

8.83%

8.25%

8.55%

12.54%

7.11%

7.24%

9.01%

8.20%

8.51%

12.50%

7.04%

7.17%

8.92%

8.39%

12.54%

7.12%

9.01%

Notes:
KE = RF + (Beta * MRP)
RF = risk-free interest rate estimate, 2.83%; RF is based the average of: (1) the March 2013 average 10-year Treasury
rate, 1.96%; and (2) the average 10-year forecast for the 10-year Treasury rate produced by the Survey of
Professional Forecasters for the first quarter of 2013, 3.70%. Source: Board of Governors of the Federal Reserve
System, Selected Interest Rates (Monthly), http://www.federal reserve.gov/releases/h15/data.htm (last visited Nov.
1, 2015); Survey of Professional Forecasters, Federal Reserve Bank of Philadelphia, Table 7 (rel. Feb. 15, 2013),
https://www.philadelphiafed.org/ research-and-data/real-time-center/survey-of-professional-forecasters.
Betas are the weekly, adjusted betas developed by Commission staff. See Prescribing the Authorized Rate of
Return: Analysis of Methods for Establishing Just and Reasonable Rates for Local Exchange Carriers, WC Docket
No. 10-90, Wireline Competition Bureau Staff Report, 28 FCC Rcd 7123, 7187-88, Apps. F & G.
MRP = market risk premium estimate; MRP values are based on Aswath Damodaran, Professor of Finance at the
Stern School of Business at New York University, Annual Returns on Stock, T.Bonds and T.Bills: 1928 - Current,
http://pages.stern.nyu.edu/~adamodar/New_Home_ Page/datafile/histretSP.html (last visited Apr. 15, 2013).
To estimates the “Average with New Ulm KE,” we use the CAPM estimates for the 15 proxies and set the cost of
equity (KE) for New Ulm (Alternative New Ulm KE) equal to its cost of debt (KD) estimate plus the average
difference between the KD and KE estimates for the 15 proxies, so New Ulm KE = New Ulm KD + (Average KE –
Average KD).

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FCC 16-33

APPENDIX K
DCF Model Cost of Equity and WACC Estimates

Company
Hickory Tech Corp.
Telephone and Data Systems, Inc.
Shenandoah Telecommunications Company
Consolidated Communications Holding, Inc.
Lumos Networks Corp.
Windstream Corporation
Alaska Communications Systems Group, Inc.
Frontier Communications Corporation
Century Link
Verizon
AT&T

Annualized
Closing Price
Dividend Per
Per Share
Yahoo!
Share
(payment on
(payment on Finance
or before
5-Yr.
or before
3/26/2013)
"g"
3/26/2013)
(P0)
(D0 )
$
$
$
$
$
$
$
$
$
$
$

10.24
21.12
15.36
17.79
13.01
8.14
1.62
3.93
35.20
49.48
36.74

$
$
$
$
$
$
$
$
$
$
$

0.58 3.80%
0.51 4.00%
0.33 15.00%
1.55 2.00%
0.56 3.00%
1.00 -11.25%
0.20 -10.00%
0.40 6.00%
2.16 0.55%
2.06 6.33%
1.80 5.50%

CNN Reuters
Mone y Long5-Yr.
Term
"g"
"g"

Zacks
5-Yr.
"g"

12.00%
4.00%
13.00%
2.00%
3.00%
-2.00%
-10.00%
1.50%
0.60%
10.00%
5.94%

NA
4.00%
NA
2.00%
3.00%
1.00%
NA
4.50%
3.70%
7.30%
5.80%

Average with ACS & Windstream
Average without ACS & Windstream
Average with ACS & Windstream KE = KD
Average with Alternative ACS & Windstream KE
Range s

NA
NA
NA
2.00%
NA
-6.83%
NA
2.33%
1.37%
5.75%
5.80%

Annual
Dividends
Midpoint Per Share
g (ĝ)
Period 1
(D1)
7.90%
4.00%
14.00%
2.00%
3.00%
-5.13%
-10.00%
3.75%
2.13%
7.88%
5.72%

$
$
$
$
$
$
$
$
$
$
$

0.63
0.53
0.38
1.58
0.58
0.95
0.18
0.42
2.21
2.22
1.90

D1/P0

Cost of Equity
Estimate
(KE)

WACC Estimate

6.11%
2.52%
2.45%
8.88%
4.43%
11.66%
11.11%
10.56%
6.27%
4.49%
5.18%

14.01%
6.52%
16.45%
10.88%
7.43%
6.53%
1.11%
14.31%
8.39%
12.37%
10.90%

9.15%
6.02%
11.55%
8.27%
5.24%
6.76%
6.22%
10.02%
7.40%
10.13%
9.33%

9.90%
8.19%
11.25%
8.57%
10.47%
8.28%
11.54%
8.54%
10.47% - 11.54% 8.28% - 8.57%

Formulas:
D1 = (1 + ĝ) * D0
KE = (D1/P0) + ĝ
Notes:
P0 and D0 data are obtained from: Yahoo! Finance, Historical Prices, http://finance.yahoo.com (last visited Mar. 27,
2013).
g = growth rate per share obtained from: Yahoo! Finance, Analysts Estimates, Next 5 Years (per annum),
http://finance.yahoo.com (last visited Mar. 27, 2013); CNN Money, Quote, Growth & Valuation, Earnings growth
(next 5 years), http://money.cnn.com (last visited Mar. 27, 2013); Reuters, Earnings (per share) Mean LT Growth
Rates (%), http://www.reuters.com/finance (last visited Mar. 27, 2013); and Zacks, Detailed Estimates, Expected
Earnings Growth, http://www.zacks.com (last visited Mar. 27, 2013); “NA” means that “g” is not available for the
carrier from the source noted at the top of the table.
Average with ACS & Windstream KE = KD: to estimate the ACS KE and Windstream KE, we set their KE equal to
their cost of debt (KD).
Average with Alternative ACS & Windstream KE: we estimate the ACS KE and Windstream KE by adding the
difference between the average KE and the average KD for the other nine firms to the KD estimate for Windstream
and ACS, so for these two carriers in this estimation, KE = KD + (Average KE – Average KD).

237

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FCC 16-33

STATEMENT OF
CHAIRMAN TOM WHEELER
Re:

Connect America Fund, WC Docket No. 10-90, ETC Annual Reports and Certifications, WC
Docket No. 14-58, Developing a Unified Intercarrier Compensation Regime, CC Docket No. 0192.

Our nation’s digital divide is both a fiscal ability to pay and a physical ability to deploy challenge.
Thirty-nine percent of rural Americans – 23 million people – lack access to service that meets the
Commission’s 25 Mbps/3 Mbps benchmark for advanced telecommunications capability. By contrast,
only 4 percent of Americans in urban areas lack broadband access at these speeds. Twenty-five percent
of rural Americans lack access to 10 Mbps/1 Mbps fixed broadband services, compared to 2 percent of
urban Americans. And, one in five rural Americans today remains unconnected to fixed Internet access
service at 4 Mbps/1 Mbps.
This Commission has consistently promoted competition as the most effective tool for driving
network investment, but there are plenty of rural areas where the incentives to compete just aren’t there.
Local demand will not support the deployment of robust, modern, world-class communications in these
areas.
The Commission’s universal service program is one of the most important tools at our disposal to
spur broadband deployment in unserved rural areas, maintain existing broadband service in high-cost
areas, and ensure that consumers and businesses in rural America have the same online opportunities as
their urban and suburban counterparts.
We have already worked to update the universal service high-cost program to ensure that we are
delivering robust voice and broadband experiences to rural areas served by the larger carriers and
providing increased certainty and predictability for carriers and a climate for increased broadband
expansion, all within the confines of our finite Connect America budget.
It’s time we modernized universal service support for rate-of-return carriers to better reflect
today’s marketplace and technology. More than 4 million Americans live in high-cost areas served by
these small, rural providers. These areas are not only more costly to serve than urban areas, they often are
more costly to serve compared to other rural areas. As we modernize our universal service programs, we
cannot leave these rural Americans—too many of whom remain unconnected—behind.
For the past several months, Commissioners Clyburn, O’Rielly, and I have worked together on
ways to expand rural broadband deployment by modernizing the USF high-cost support program for rateof-return carriers to fulfill our commitment to standalone broadband reform. This bipartisan effort was
aided by the rate-of-return carriers themselves. Working through their trade associations, they engaged
with the three of us in a productive manner. We are pleased that NTCA and USTelecom have supported
the result.
Today’s Order sets forth a package of reforms to address rate-of-return issues that are
fundamentally intertwined—the need to modernize the program to provide support for stand-alone
broadband service; the need to improve incentives for broadband investment to connect unserved rural
Americans; and the need to strengthen the rate-of-return system to provide certainty and stability for years
to come.
These reforms will help to ensure that federal universal service funds are spent wisely, for their
intended purpose, and take concrete steps to bring broadband to those rural Americans who remain
unserved today.
The Order creates an entirely voluntary path for rate-of-return carriers that prefer the
predictability of defined support amounts over a ten-year term. Similar to the approach that has
successfully spurred deployment by larger “price-cap” carriers, this model-based support comes with
defined milestones for efficient, accountable deployment. This model-based option has been actively
238

Federal Communications Commission

FCC 16-33

sought by some rate-of-return carriers and reflects significant updates and carrier-submitted data from the
rate-of-return community.
For carriers who choose to continue receiving support based on traditional rate-of-return
principles, the Order provides support for standalone broadband lines, gives more certainty to carriers,
increases fiscally responsible management of the fund, and ensures that a reasonable portion of support is
spent on new buildout to connect those that remain unserved.
To limit the universal service fund’s burden on ratepayers, the Order adopts budget control
mechanisms to ensure that rate-of-return carriers collectively stay within the established rate-of-return
budget. Notably, the Order reflects the shared principle embodied in the “Walden Rule,” that we should
not use ratepayer funds to support service in an area that is served by an unsubsidized voice and
broadband provider. And the Order lowers the authorized rate of return for incumbent carriers to better
reflect current financial market conditions.
Finally, a Further Notice included with the Order seeks comment on additional reforms to guard
against waste. We must protect the fiscal integrity of the program.
While the Order does not act on an Alaska-specific proposal by a group of Alaska carriers, I
believe a framework tailored to the unique operating conditions and challenges faced by those serving
Alaska merits serious consideration. Commission staff are actively reviewing the specific solutions that
have been proposed, and I have committed to Congress that the Commission will take action to address
this important issue in the second quarter of this year.
I have also committed to have a proposal dealing with broadband deployment to America’s Tribal
areas before the end of the year. The Further Notice seeks comment on measures to promote broadband
for rate-of-return carriers serving Tribal lands that are lacking broadband service. Broadband technology
is critical for Tribal communities to participate in the 21st century economy. And I personally have seen
the lack of communications services and infrastructure across Indian Country. We can, and will, do
better.
Thanks to months of sustained bipartisan cooperation, the Commission is acting today to
significantly expand rural broadband deployment and open new opportunities for families across
America. I am grateful to my colleagues on the Commission for their partnership in this endeavor.
Special thanks are due to the Commission staff who have been working for years to modernize all of our
universal service programs for the Internet age. In particular, thank you to our Wireline Competition
Bureau team, led by Matt DelNero, Carol Mattey, Suzanne Yelen, and Deena Shetler, for their tireless
efforts.

239

Federal Communications Commission

FCC 16-33

STATEMENT OF
COMMISSIONER MIGNON L. CLYBURN
Re:

Connect America Fund, WC Docket No. 10-90, ETC Annual Reports and Certifications, WC
Docket No. 14-58, Developing a Unified Intercarrier Compensation Regime, CC Docket No. 0192.

A system that penalizes providers when customers subscribe only to broadband is in tension with
the directives in section 254 of the statute and our national priorities is indisputably past due for a total
overhaul. Today we correct this with simple, significant fixes to our existing mechanisms that provide
support to carriers when their customers subscribe to standalone broadband. As significant as these
changes are, what makes me most proud is that we did not just stop there. We are also establishing a
blueprint to connect unserved households and modernize the Connect America Fund to ensure that rateof-return carriers use finite resources as efficiently as possible.
The reforms we adopt today are a win-win not only for consumers in rural areas that have been
waiting patiently for broadband, but also for consumers who contribute to the fund. This is especially
true on Tribal lands and I thank the Chairman for committing to move forward to address the acute
deployment disparities on Tribal lands by the end of the year. It includes cost controls and mechanisms
that promote efficiency as opposed to rewarding waste. And while there were things I would have done
differently, compromises made possible significant and positive reforms.
The FCC has a duty to ensure that every dollar of federal universal service fund support is
necessary but not excessive. The fund dedicates approximately $2 billion to rate of return carriers that
serve 3.8 million lines, or, on average, over $500 per line per year with some areas receiving more than
$3,000 per line every year.1 Today, however, some funding is being used in some areas to distort the
market by giving subsidies even when another provider that does not receive subsidies is offering a
competing service in the same area. This creates an unequal, unlevel playing field in competitive
markets, which is not the purpose of universal service nor is it what consumers who contribute to the
universal service fund should be supporting. Today, we go a long way in addressing this distortion by
creating a process to disaggregate support in census blocks where a competing provider serves 85 percent
or more of the census block.
The Order also adopts limits on operating expenses and seeks comment on revising our rules so
that universal service no longer pays for things like art work and other items of aesthetic value that are
unrelated to the provision of service, such as vehicles for personal use, corporate aircrafts and boats,
housing allowances and childcare. While companies are free, of course, to pay for such expenses, I
firmly believe that such expenses unrelated to the provision of service should not be subsidized by our
nation’s hard working consumers through the universal service fund. Indeed, it is distressing our rules
have permitted using support for such personal uses for so long.
That said, I recognize that most rate-of-return companies operate efficiently and are extremely
careful with each dollar spent and work diligently to deploy broadband as quickly as possible to their
communities. We need to ensure our rules are revised so that all carriers are playing by the same rules
and are prohibited from using federal universal service funds, paid by hardworking ratepayers, for
services and items that have absolutely nothing to do with the provisioning of telecommunications
services.

1

While the Commission adopted a cap of $3000 per year per line in 2011, this limitation does not include support
from Connect America Fund-Intercarrier Compensation. See 47 CFR § 54.302(a). As a result, some carriers
continue to receive more than $3000 per line per year.

240

Federal Communications Commission

FCC 16-33

I want to thank Chairman Wheeler and Commissioner O’Rielly for working with me in a very
collaborative and inclusive manner. The consumers of our nation, I believe, would be proud of the
process and I trust that it will serve as the gold standard for additional, much needed reforms.

241

Federal Communications Commission

FCC 16-33

STATEMENT OF
COMMISSIONER JESSICA ROSENWORCEL
Re:

Connect America Fund, WC Docket No. 10-90, ETC Annual Reports and Certifications, WC
Docket No. 14-58, Developing a Unified Intercarrier Compensation Regime, CC Docket No. 0192.

For too long rural consumers seeking to get standalone broadband service have been told that in
order to do so they would have to pay for a voice line in addition to broadband—or worse, that such an
offering is simply not available. Sensing that they were getting the raw end of the bargain, rural
consumers have complained to their providers, complained to the Better Business Bureau, and
complained to this Commission.
Today we heed their call. This Order takes steps to correct the strange confluence of history and
law that produced this situation. As a result, rural consumers finally will be able to order standalone
broadband service—just like their urban counterparts. I fully support this aspect of today’s decision. In
fact, I believe this result is overdue.
This Order also updates other aspects of universal service policy. It provides rate-of-return
carriers serving rural communities a new option to receive model-based universal service funding, puts in
place additional measures to keep our universal service program fiscally accountable, and updates the rate
of return used in our program to better reflect modern commercial reality. I support these changes, too.
For rate-of-return carriers, these changes come not a moment too soon. These are companies that
are deeply invested in rural America, but they face daunting challenges bringing high-speed services to
some of the most remote and difficult to serve areas in the country. So we need to monitor the reforms
we put in place in order to ensure that they result in real progress and bring broadband to hard-to-reach
places. We also need to make sure that the places left out of the reforms in this Order—including Alaska
and Tribal Lands—are not forgotten. The connectivity needs in these locations are profound. We owe it
to their residents to act as quickly as possible.
Finally, it is important to recognize that over time our high-cost universal service policies have
grown increasingly complex. Our work here is no exception. I worry that this complexity can deny
carriers dependent on the universal service system the certainty they need to confidently invest in their
network infrastructure. Nonetheless, today’s Order represents a step forward—especially with respect to
standalone broadband. But looking ahead I am hopeful that when new opportunities arise to simplify our
universal service rules in a manner that is good for rural consumers and bound to inspire investment—we
will seize them.

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STATEMENT OF
COMMISSIONER AJIT PAI
CONCURRING IN PART AND DISSENTING IN PART
Re:

Connect America Fund, WC Docket No. 10-90, ETC Annual Reports and Certifications, WC
Docket No. 14-58, Developing a Unified Intercarrier Compensation Regime, CC Docket No. 0192.

Too many rural Americans have waited too long for high-speed Internet access. The FCC
promised broadband throughout rural America five years ago when it started reforming the Universal
Service Fund1—a promise that echoed our duty to “make available, so far as possible, to all the people of
the United States . . . a rapid, efficient, Nation-wide, and world-wide wire and radio communication
service with adequate facilities at reasonable charges.”2
Progress since then has been halting, especially for those residing in areas served by the nation’s
rural telephone companies. That’s because of a quirk of regulatory history: Our rules governing small,
rural carriers provide universal service support only to networks that supply telephone service, not standalone broadband service.
That regulatory system has put some carriers to a Hobson’s choice. On one hand, they can offer
stand-alone broadband—which urban consumers have and rural consumers want—and lose universal
service support. On the other, they can deny consumers the option of an Internet-only service, and risk
them dropping service altogether (which they increasingly are). The net result is that rural carriers hold
back investment because they are unsure if they can deploy the next-generation services that consumers
are demanding.
That’s why three years ago, I called on the FCC to support stand-alone broadband service and
establish a Connect America Fund for rate-of-return carriers.3 That’s why two years ago, I was glad that
my colleagues agreed with me to “propose a stand-alone broadband funding mechanism for rate-of-return
carriers serving the highest-cost reaches of our country” in the Seventh Recon Order.4 And that’s why in
June last year, I put my own plan on the table, calling for “targeted changes to existing universal service
rules” coupled with “a path so that rate-of-return carriers that want to participate in the Connect America
Fund can do so.”5 My plan was simple enough that the rules fit on a single page and could have been
adopted last summer.
I wasn’t alone in thinking a simple fix was the best one. A bipartisan supermajority of 61 U.S.
Senators, led by John Thune, Amy Klobuchar, and Deb Fischer, wrote in May 2015 that “no new models
1

Connect America Fund et al., WC Docket Nos. 10-90, 07-135, 05-337, 03-109, CC Docket Nos. 01-92, 96-45, GN
Docket No. 09-51, WT Docket No. 10-208, Report and Order and Further Notice of Proposed Rulemaking, 26 FCC
Rcd 17663, 17667, para. 1 (2011) (Universal Service Transformation Order) (“Today the Commission
comprehensively reforms and modernizes the universal service and intercarrier compensation systems to ensure that
robust, affordable voice and broadband service, both fixed and mobile, are available to Americans throughout the
nation.”).
2

Communications Act § 1.

3

Remarks of Commissioner Ajit Pai before the NTCA 2013 Legislative and Policy Conference at 2 (2013),
available at http://go.usa.gov/cAMXJ.
4

Connect America Fund et al., WC Docket No. 10-90 et al., Report and Order, Declaratory Ruling, Order,
Memorandum Opinion and Order, Seventh Order on Reconsideration, and Further Notice of Proposed Rulemaking,
29 FCC Rcd 7051, 7137, para. 269 (2014) (Seventh Recon Order); id. at 7251 (Statement of Commissioner Ajit Pai,
Approving in Part and Dissenting in Part).
5

Statement of FCC Commissioner Ajit Pai Announcing His Plan to Support Broadband Deployment in Rural
America at 1–2 (2015), available at http://go.usa.gov/cAM5Y.

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or sweeping changes are needed to adopt and implement a targeted update to fix the [stand-alone
broadband] issue . . . instead a simple plan that isolates and solves this specific issue is all that is needed
right now.”6 Similarly, Congressman Kevin Cramer and 114 other members of the U.S. House of
Representatives warned that “previous USF reform stumbles have hindered rural broadband investment”
and urged instead “an immediate, targeted solution.”7 And my colleague Commissioner Jessica
Rosenworcel warned that “when you add the piece parts of our reform together—and they are manifold—
what we have is extremely complex,” which “can deny carriers . . . the certainty they need to confidently
invest in their network infrastructure.” Instead, she hoped “we can craft rules in a way that ultimately
reduces complexity and uncertainty.”8
So it is with some trepidation that I met the circulation of this 237-page Order. Yes, it changes
our accounting rules to support stand-alone broadband. Yes, it opens a path for rate-of-return carriers to
volunteer for the Connect America Fund’s alternative cost model (the A-CAM). And yes, it does these
things without a “new mechanism that replaces the old HCLS and ICLS mechanisms”—without, that is,
the bifurcated approach that many rural carriers feared and that FCC leadership proposed last fall.9 To the
extent it accomplishes these tasks, I concur in part.
But the changes the Order makes to our Universal Service Fund are anything but simple. Take
the stand-alone broadband mechanism. To calculate the support provided by that mechanism, a carrier
must (1) determine the historical costs of providing broadband-only loops (defined “on a per-line basis, as
the costs that are currently recoverable for a voice-only or voice/broadband line in ICLS”)10, (2) apply the
new limits on operating expenses,11 (3) apply the old limits on corporate operations expenses,12 (4) apply
the new limits on capital expenses,13 and (5) subtract an imputed charge of up to $42 per broadband-only
loop to determine the initial support amount.14 A carrier then must (6) disaggregate support for noncompetitive areas using one of four separate methods,15 (7) add back a portion of the disaggregated
support for competitive areas during a transition period,16 (8) subtract a per-line budget reduction,17
(9) apply a pro rata budget reduction,18 (10) apply the monthly per-line limit on universal service support,
if applicable,19 and (11) subtract the difference between that carrier’s old Interstate Common Line
Revenue Requirement and what would have been its Interstate Common Line Support (ICLS) after

6

Letter from John Thune, U.S. Senator, et al., to the Honorable Thomas Wheeler, Chairman, FCC, at 1 (May 12,
2015).
7

Letter from Kevin Cramer, Member of Congress, et al., to the Honorable Thomas Wheeler, Chairman, FCC, at 1
(May 12, 2015).
8

Seventh Recon Order, 29 FCC Rcd at 7250 (Statement of Commissioner Jessica Rosenworcel).

9

Remarks of FCC Chairman Tom Wheeler as Prepared for Delivery, NTCA Fall Conference, Boston,
Massachusetts at 5 (2015), available at http://go.usa.gov/cAM5B.
10

Order at para. 88; new rule 54.901(a).

11

Order at para. 98; new rule 54.901(b).

12

New rule 54.901(c).

13

Order at para. 111; new rule 54.901(b).

14

Order at para. 92; new rule 54.901(a)(2).

15

Order at para. 138; new rule 54.319(e).

16

Order at para. 145; new rule 54.319(f)–(g).

17

Order at para. 153; new rule 54.901(f)(2).

18

Order at para. 153; new rule 54.901(f)(3).

19

Rule 54.302(a).

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applying these reforms.20 Those 11 steps are hardly straightforward calculations—and hardly something a
rural telephone company can do without hiring yet another accounting consultant.
Believe it or not, the complexity only increases as you go further down the rabbit hole. Consider
the new limits on operating and capital expenses in steps two and four. For operating expenses, the Order
invents double log regression analysis (DLRA) benchmarks that compare similarly situated rate-of-return
carriers based on their size and density—or more precisely the natural log of each carrier’s operating
expenses per housing unit to the natural log of the housing units in a carrier’s area, the natural log of the
density of that area, and the square of the natural log of the density of that area.21 For capital expenses,
the Order creates a limit on Annual Allowable Loop Plant Investment (AALPI) equal to 15% of a
carrier’s inflation-adjusted accumulated depreciation plus 5% of a carrier’s inflation-adjusted total loop
investment, adjusted to account for at least eight different factors.22 To calculate the results of these new
expense limits is no easy task. To foresee their impact on carrier operations and the deployment of
broadband—the mind boggles.
The Order promises that the new limits will give carriers “sufficient incentive to be prudent and
efficient in their expenditures.”23 But if past is prologue, I wouldn’t count on it. Compare the DLRA
benchmarks and the AALPI limit to the FCC’s last attempt to limit operating and capital expenses so that
carriers would “operate more efficiently and make prudent expenditures”24: the quantile regression
analysis (QRA) benchmarks. Like the DLRA benchmarks, the QRA benchmarks relied on a regression
analysis to compare similarly situated companies. Like the AALPI limit, the QRA benchmarks relied on
a large number of factors to try and accommodate differences between carriers. And like both, the QRA
benchmarks were not designed to save the Fund a dollar. We know the QRA benchmarks chilled the
investment climate and impeded the deployment of broadband to rural Americans.25 I can only hope the
sequel has a different ending.
The truth is I don’t know whether this Order will help or hinder broadband deployment in rural
America. No one does. That’s in part because FCC leadership has deliberately left the public in the dark.
For example, the Commission did not propose adopting new operating expense limits on rate-ofreturn carriers in its Seventh Recon Order (the predicate for most of the rules adopted herein26), and never
even sought comment on the DLRA benchmarks adopted in this Order. The genesis of the proposal
appears to be an ex parte filing that “responded to concerns expressed by the Bureau [about] proposing
20

Order at para. 155; new rule 54.901(e)(1) & (3).

21

Order at para. 99; new rule 54.303(a).

22

Order at paras. 110–14; new rule 54.303(b)–(m) (adjustments include a broadband-deployment adjustment, a
construction-allowance adjustment, a loop-cap-adjustment factor, a construction-limitation factor, an excess-loopplant-investment carry forward, a no-wireline-facilities adjustment, a grant-funds adjustment, a loan-funds-disbursed
adjustment, a contracted-construction-project adjustment, and a minimum-annual-allowed-loop-plant-investment
adjustment).
23

Order at para. 6.

24

Universal Service Transformation Order, 26 FCC Rcd at 17742, para. 210.

25

Letter from John Charles Padalino, Acting Administrator, Rural Utility Service, to Marlene H. Dortch, Secretary,
FCC, WC Docket Nos. 10-90, 07-135, 05-337, GN Docket No. 09-51, CC Docket Nos. 01-92, 96-45, WT Docket
No. 10-208, at 1–2 (Feb. 15, 2013).
26

Although the Seventh Recon Order gave clear notice of some proposals, see, e.g., 29 FCC Rcd at 7137, para. 269
(proposal to support stand-alone broadband); 7139–45, paras. 276–99 (proposal to allow a voluntary transition to
model-based support), others are at best an outgrowth, logical or not, see, e.g., Order at para. 160 (pinning the
adoption of broadband deployment obligations on the FCC’s expressed desire to “renew a dialogue regarding the
best way to encourage continued investment in broadband networks throughout rural America,” 29 FCC Rcd at
7134, para. 258).

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potential limits on operating expenses.”27 The Administrative Procedure Act, however, contains no
exception to its notice-and-comment requirements for rules proposed by outside parties at the behest of
agency staff in a nonpublic meeting.28
Another example: I’ve heard from rural advocates that it’s hard to understand what these reforms
mean for rural broadband deployment without seeing the details. As the head of NTCA—The Rural
Broadband Association said last month, “With any change of this magnitude . . . there is always a concern
that it not be too complex and of course that it not disrupt the ability to serve customers. It will be
absolutely essential to see the written words on the page and review the specific terms of the order to
understand the actual effectiveness of the reforms and how all the moving parts will affect the ability of
smaller providers to keep delivering on our national promise of universal service.”29 Small, rural carriers
from across the land have echoed those sentiments. And so do the American people, who rightfully think
it bizarre that the federal government enacts major plans before letting them see what’s in it.
That’s why I asked the Chairman’s Office to release the text of this reform plan to the public in
February. I am grateful to Commissioner O’Rielly (who played a leading role in creating the plan) for his
support. But unfortunately, FCC leadership denied that request.
We should level with rural Americans before springing our “help” upon them. When the agency
previously ignored their concerns, we ended up reconsidering our decisions in the Universal Service
Transformation Order seven separate times. I fear we are making that same mistake again. Given this
lack of transparency—given the limited feedback the public has been able to provide my office on the
likely effect of these reforms—I cannot support their adoption.
And I must dissent on one more point. Just two months ago, four commissioners agreed that
“advanced telecommunications capability is not being deployed to all Americans in a reasonable and
timely fashion” because “one in ten Americans lacks access to 25 Mbps/3 Mbps broadband.”30 Indeed,
we found that 34 million Americans lacked access to 25 Mbps broadband, with a “stark contrast in service
between urban and rural America.”31 Having concluded as much, the statute requires us to “take
immediate action to accelerate deployment of such capability.”32
And yet, the Commission ignores that congressional directive here and declines the invitation to
take immediate action to accelerate deployment of 25 Mbps broadband. Rather, carriers must deploy only

27

Letter from Gerard J. Duffy, WTA Regulatory Counsel, et al., to Marlene H. Dortch, Secretary, FCC, WC Docket
No. 10-90, at 2 (May 29, 2015).
28

See, e.g., 5 U.S.C. § 553(b); Small Refiner Lead Phase-Down Task Force v. EPA, 705 F.2d 506, 549 (D.C. Cir.
1983) (An agency “must itself provide notice of a regulatory proposal. Having failed to do so, it cannot bootstrap
notice from a comment.” (emphasis in original)); see also Prometheus Radio Project v. FCC, 652 F.3d 431, 450 (3d
Cir. 2011) (explaining that a proposal “not published in the Federal Register” expressing the views of a party but
“not the Commission” does not satisfy the APA’s requirements). Nor can I find an exception to the Paperwork
Reduction Act or the Small Business Paperwork Relief Act that lets the agency direct small, rural carriers to submit
additional paperwork to USAC, see Order at note 204, without first proposing a rule and going through the
appropriate information collection review process. See, e.g., 44 U.S.C. § 3506(c)(2), (4).
29

NTCA, NTCA Responds to Chairman Wheeler’s USF Reform Blog (Feb. 19, 2016), available at
https://www.ntca.org/2016-press-releases/ntca-responds-to-chairman-wheelers-usf-reform-blog.html.
30

Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a
Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the
Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act, GN Docket No. 15-191,
2016 Broadband Progress Report, 31 FCC Rcd 699, 701, para. 4 (2016) (2016 Broadband Progress Report).
31

Id. at 750, paras. 120–21.

32

Telecommunication Act of 1996, § 706(b).

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10 Mbps broadband using their new stand-alone broadband support.33 The 10 Mbps standard determines
the amount of stand-alone broadband funding a carrier receives,34 the amount it must invest in new
facilities,35 the estimated cost of those facilities,36 and whether a carrier must invest in new facilities at
all.37 It determines whether a carrier may participate in the model-based support,38 whether a carrier may
receive model-based support in a particular area,39 and all of a carrier’s interim buildout milestones.40
And it determines whether an unsubsidized competitor reduces a carrier’s stand-alone broadband support
or model-based support.41
To be fair, the 10 Mbps standard is not the only one used. The Order does promise that in lowercost areas (i.e., those “fully funded” by the model) where the rate-of-return carrier elects model-based
support, a group of rural consumers (no more than 75%) will receive 25 Mbps broadband—by 2026.42 In
other words, a decade from now a subset of a subset of a subset of rural consumers will get access to the
broadband speeds that 96% of urban Americans can purchase today. That’s unacceptable.
I implored my colleagues to change course. A few months ago, a majority of the Commission
happily lectured us that “broadband” means 25 Mbps connectivity. If that’s now the standard, don’t we
have a duty to support 25 Mbps broadband in rural America? If 25 Mbps broadband is “table stakes” for
the 21st century,43 shouldn’t we give rural Americans a seat at the table? If we “have a moral and
statutory obligation to do better” when “nearly 34 million Americans [can’t] get high-speed fixed
broadband even if they want[] it,”44 don’t we have a moral and statutory obligation to in fact do better?
But my request for equal digital opportunity was specifically rejected. FCC leadership made
clear that the agency would not vote to give rural Americans a fair shake by giving them the same speeds
their urban counterparts often enjoy. For all the talk of hypothetical fast lanes, the FCC consigns rural
America to the actual slow lane.
For these reasons, I concur in part and dissent in part.
33

New rule 54.308(a)(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 . . . .”).
34

Order at para. 92 (calculating the stand-alone broadband benchmark based on the estimated costs and revenues of
10 Mbps broadband); id. at para. 109 (adjusting AALPI limit based on relative broadband availability).
35

New rule 54.308(a)(2)(i) (defining the amount of support required for buildout based on a carrier’s deployment of
10 Mbps broadband).
36

New rule 54.308(a)(2)(ii) (defining the estimated cost per location of new facilities based on the estimated cost of
deploying 10 Mbps broadband).
37

New rule 54.308(a)(2)(i) (declining to require any support be used to buildout new facilities for carriers with 80%
of more deployment of 10 Mbps broadband).
38

Order at para. 66 (“[W]e 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 . . . .”).
39

Order at para. 56 (“We . . . direct the Bureau to exclude from the support calculations those census blocks whether
the incumbent . . . is offering voice and broadband service that meets the Commission’s minimum standards . . . .”).
40

Order at para. 32 (“As shown in the chart below, we require 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.
We do not set interim milestones for the deployment of broadband speeds of 25/3 Mbps . . . .”).
41

Order at paras. 59, 124.

42

New rule 54.311(d).

43

See, e.g., Prepared Remarks of FCC Chairman Tom Wheeler at 1776 Headquarters, Washington, DC, “The Facts
and Future of Broadband Competition” at 3 (Sept. 4, 2014).
44

2016 Broadband Progress Report, 31 FCC Rcd at 774 (Statement of Chairman Tom Wheeler).

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STATEMENT OF
COMMISSIONER MICHAEL O’RIELLY
Re:

Connect America Fund, WC Docket No. 10-90, ETC Annual Reports and Certifications, WC
Docket No. 14-58, Developing a Unified Intercarrier Compensation Regime, CC Docket No. 0192.

Today the Commission adopts timely and meaningful reforms to the rate-of-return portion of the
universal service high-cost program. In doing so, it furthers the goal of universal service in all regions of
the nation. The actions taken in this order will provide stability and certainty for carriers to invest in
broadband and expand service for consumers in rural America. It is the right thing to do, and I am proud
to support this order.
For more than a year, we have worked on a specific effort to achieve a long-lasting, fiscally
responsible, and forward-leaning system that enables all rate-of-return carriers to obtain Federal support
to build out broadband and connect many unserved Americans in their communities. From the start, I
was convinced that with some hard work, creative thinking, and compromise from everyone – including
FCC Commissioners – we could find a path forward. Therefore, considerable time was spent with rateof-return carriers and their associations to understand detailed concerns and potential issues with a myriad
of proposals. I personally traveled around the country to meet with the small carriers that serve some of
the most rural and remote parts of America. It was a privilege to hear their unique perspectives. I also
credit the trade associations who put in a tremendous effort on behalf of their members to distill, refine,
and test various ideas. To date, this has been the most open, inclusive, and collaborative process I have
experienced at the FCC.
With more than 1,100 rate-of-return study areas involved, it was clear that no single approach to
reform would work. Carriers vary immensely in terms of size, geography, service offerings, investment
and deployment cycles, and policy preferences. For instance, some providers felt that standalone
broadband would be critical to their future success while others I spoke with had no plans to offer it.
Certain carriers were adamant about moving to a model-generated support system while others could not
fathom operating under a different regulatory structure than the one they are familiar with today.
Therefore, we needed to provide optionality, while ensuring that all paths contain appropriate incentives
to deploy broadband, and in a cost-effective manner.
Thanks to many productive conversations, we created a package of reforms designed to resolve
the standalone broadband issue while at the same time fixing existing problems with the current system,
providing flexibility for carriers, and including appropriate transitions. In particular, this effort will
improve incentives to invest in broadband, establish requirements to extend rate-of-return carriers’ reach
to unserved consumers, better target funding to where it is needed most while being cognizant of prior
investments, prevent funding areas where competition exists, and provide a completely voluntary path to
model-based support for carriers who have actively sought it.
I am particularly grateful that we were able to reach agreement on defined buildout obligations
for both the legacy and model paths. This will ensure steady progress in connecting unserved Americans,
which was a chief goal of mine in undertaking this reform effort since we are stewards for the
contributions made by American ratepayers. Moreover, carriers will be reporting geocoded locations as
they build out, which will enable us to map progress nationwide, providing more accountability and
transparency, including to consumers that pay in to universal service, as to how the funding is being used.
It also means we will be able to further streamline existing reporting requirements, removing additional
burdens from small providers.
In addition, the item provides all carriers with a totally voluntary option to self-identify areas that
would be uneconomic for them to serve within the next 10 years. These are the rate-of-return “RAF-like”
areas that I have spoken of in the past. By providing carriers complete discretion to identify at least some
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of these areas now instead of waiting up to 10 years from now to inventory who didn’t get served, the
Commission may be able to find another way to bring service to those consumers sooner.
As is expected with any compromise document, there are certain things I would have done
differently, and it is only natural that others would feel the same. For example, I am hesitant to commit to
additional reforms for Tribal lands until we can understand the impact of the reforms we adopt today in
better targeting funding to unserved areas, or until the Remote Areas Fund is finalized, as that too is
sufficiently intertwined with bringing service to American Indians. Moreover, I pushed hard to include
reforms particularly pertinent to the Alaskan rate-of-return carriers. In the end, my colleagues and I
settled on a slightly delayed timeline of completing it by the second quarter of this year, which turned out
to be acceptable to the affected carriers and the Alaska Congressional delegation. Further, while I support
the rulemaking to eliminate specific, bright-line categories of expenses that are not tied to the provision of
service (e.g., artwork and cafeterias), other accounting proposals could possibly lead us down an overregulatory path or may be just unnecessary. In addition, I have previously expressed skepticism regarding
the Commission’s use of predictive judgments, which is contained within the item. On balance, however,
the benefits of specific components combined with finally completing a meaningful set of reforms easily
mitigates these concerns in my view.
It is my hope that this solid foundation will provide the predictability so desperately needed by
rate-of-return carriers, eliminating the need revisit the issue in the near future. At the same time, I
commit to working with the providers and their associations to promptly address any legitimate issues
that arise after the order is released.
In closing, I extend a special thanks to my colleagues, Chairman Wheeler and Commissioner
Clyburn, for being patient with me. More importantly, this item couldn’t have been completed without
the small but able and hardworking team within the Wireline Competition Bureau, especially Carol
Mattey, who deserve our appreciation for the work they have done and the implementation issues they
now have before them

249