New USF Orders Applauded for Rural Broadband Funding Increase, though Some Details are Concerning
On Friday, March 23, 2018, the FCC released a long-anticipated Report and Order, Third Order on Reconsideration (Orders), and Notice of Proposed Rulemaking (NPRM) on various aspects of high-cost universal service reform. In the Orders, the FCC adopted reforms relating to recoverable expenses in two major areas, universal service high-cost support (USF) and interstate rates; provided additional funding for carriers that elected Alternative Connect America Model (A-CAM) support; and fully funded legacy carriers for the amounts withheld from July 2017 to June 2018 due to the implementation of the budget control mechanism. In the NPRM, the FCC seeks comment on ways to modify the budget control mechanism and other reforms, some of which cause concern as described below.
Regarding recovery of expenses from USF, the Orders emphasize that when determining whether an expense is recoverable or not, carriers should ensure that the expense is used only for the provision, maintenance, and upgrading of facilities and services for which support is intended, i.e., supported voice and broadband. For interstate ratemaking, the Orders cite the Communications Act requirement that only “reasonable” investments and expenses be recovered through interstate rates, which is determined through a “used and useful” standard.
Under both areas, the Orders discuss three categories of expenses that, except for in very limited circumstances, cannot be recovered: personal expenses, expenses unrelated to operations, and corporate luxury goods. To enforce the new rules, the FCC adopted the “low-burden” measure of requiring rate-of-return ETCs to identify their cost consultants on the annual FCC Form 481, in order to help the FCC, USAC and NECA identify patterns of noncompliance.
Additional USF Funding
The Orders also provide additional support for RLECs receiving A-CAM support for those that elect to receive the support along with adjusted deployment obligations. When the revised offer was made to carriers electing A-CAM, the FCC first reduced the funding cap from $200 per location to $146.10 and then further reduced support by varying percentages based on the percentage of locations lacking 10/1. For those carriers electing to receive the additional support, all locations will be funded up to the cap of $146.10. The FCC estimates that an additional $36.5 million per year for the 10-year period will be available for broadband deployment if all A-CAM recipients accept the offer. (A lump sum payment will be made for the months prior to the issuance of the Orders.) According to the Orders, a Public Notice should be released soon announcing the revised support amounts and corresponding buildout obligations, which will allow for a 45-day period for A-CAM electors to make their decisions.
The Orders also provide approximately $180 million to legacy carriers, which is the amount of support taken from legacy carriers due to the implementation of the budget control mechanism for the period of July 2017 to June 2018. In the Orders, the FCC directs USAC, working with the FCC’s Wireline Bureau, to determine a methodology to calculate the amounts and make payments to “fully fund support claims to the affected carriers in a lump sum payment.” The payments, however, will likely be made later in the year as the Orders instruct USAC to issue them in the second full quarter after the Orders’ effective date. The Orders will not become effective until after publication in the Federal Register, which likely will not occur until April.
In the NPRM, the FCC seeks comment on a variety of options regarding the A-CAM, including allowing legacy carriers to elect A-CAM if they would receive less support under that mechanism (unlike the original offer, carriers with over 90% 10/1 would be eligible); “fully funding” the A-CAM at the original $200 per-location cap; and/or extending the A-CAM at reduced amounts to RLECs that did not elect it previously. For carriers remaining on legacy, the NPRM seeks comment on ways to modify the budget control mechanism, including no longer using a per-line reduction or providing carriers with a threshold level of annual support that would not be subject to a budget cap.
However, comment being sought on some issues raises concerns. For example:
- Lowering the $250 per-line monthly cap on support to $225 or $200
- Replacing the 100% overlap process, which occurs every two years, with an auction mechanism where the rate-of-return carrier could compete for support with competitors in the study area
- Reducing the 100% threshold to a lesser percent to consider a study area fully competitively overlapped
- If a lesser percentage were to be adopted, should an auction mechanism replace the competitive overlap process for legacy carriers which was adopted in the 2016 Reform Order?
Also in the NPRM is a recommendation to review the $2 billion rate-of-return budget which has not been revised since 2011 and therefore does not account for inflation. The FCC notes that consumers’ expectations and demands for broadband have changed since 2011 when the rate-of-return budget was designed for the deployment of 4/1 Mbps broadband. Among a number of specific questions about the various components of the rate-of-return budget, the FCC seeks comment on the “appropriate level of support” to advance universal service for broadband, including a detailed economic analysis.
JSI will be providing more details regarding the Orders and NPRM in the coming weeks and will cover all the ins and outs at its upcoming Management Seminars in Minneapolis, Atlanta, and San Antonio. In the meantime, if you have questions about how the new rules and proposals will impact your USF, contact Brian Sullivan, Steve Meltzer or John Kuykendall in the Maryland office at 301-459-7590.