In its April 15, 2019, Report and Order, the FCC announced that it will eliminate the local residential rate floor for rate-of-return companies that receive Legacy USF support. These carriers will no longer have to needlessly increase local rates from $18 to $26.98, which would have gone into effect on July 1, 2019, had this Order not been released.

The FCC then will monitor residential retail rates for one year, after which it plans also to eliminate the accompanying reporting obligations for residential local service rates after July 1, 2020. Carriers will complete two more annual filings (July 2019 and July 2020) so that the FCC can ensure that rate-of-return carriers are not plunging their rates after learning that the rate floor has been eliminated.

The rate floor was introduced in 2011 to limit USF received by rural carriers whose end-user rates were set significantly below the national urban average. It was phased in over a period of several years and frozen at $18 since 2017. While it was initially established to protect against artificial subsidization of rural rates below a set minimum rate, the true effect of the rate floor was that it forced many rural carriers receiving high-cost loop support to increase telephone rates for rural Americans.

The FCC defended its decision to eliminate the rate floor with the following reasons:

  1. The rate floor creates an incentive for carriers to unnecessarily raise local rates, harming rural Americans and making telephone service less affordable;
  2. The rate floor places unnecessary and costly regulatory burdens on state commissions and rural telephone companies since rural carriers must notify customers, seek permission from state commissions and fulfill reporting obligations;
  3. The rate floor is an ineffective and inefficient method of saving federal funds;
  4. The evidence does not support that rates for voice service are artificially low;
  5. Other changes to the fund’s support mechanism for rural carriers have mostly eliminated any potential impact that rates would have on universal service support mechanisms; and
  6. The FCC does not believe that eliminating the rate floor would skew competition and increase subsidies at the expense of consumers.

FCC Will Watch for Lowered Local Rates
However, FCC Commissioners Starks and O’Rielly warned voice service providers that the FCC will be watching to make sure that rural carriers refrain from adopting lower rates in response to eliminating the rate floor and that they do not take advantage of the USF. Moreover, Commissioner O’Rielly has stated that he would be uncomfortable with eliminating the rate floor without preserving a minimal reporting requirement to guard against rural carriers taking advantage of the elimination of the rate floor. Therefore, he has proposed incorporating means-testing into the high-cost program, for which he “sought a commitment” from Chairman Pai to explore. Commissioner O’Rielly argues that “it makes no sense” for scarce USF dollars to be used in areas that are populated by “very wealthy” rural Americans. There is no specific proposal on the means testing yet, but it will likely be forthcoming if Chairman Pai keeps his commitment to Commissioner O’Rielly.

If you have any questions regarding the FCC’s elimination of the rate floor or need assistance with the 2019 required filing, please contact John Kuykendall or Cassandra Heyne in JSI’s Maryland office at 301-459-7590.