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Connect America 6th Recon Order & MO&O - Rate Of Return Reforms

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Released: February 27, 2013

Federal Communications Commission

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Before the

Federal Communications Commission

Washington, D.C. 20554

In the Matter of
)
)

Connect America Fund
)
WC Docket No. 10-90
)
High-Cost Universal Service Support
)
WC Docket No. 05-337
)

SIXTH ORDER ON RECONSIDERATION AND MEMORANDUM OPINION AND ORDER

Adopted: January 31, 2013

Released: February 27, 2013

By the Commission: Chairman Genachowski and Commissioners McDowell, Clyburn, and Rosenworcel
issuing separate statements; Commissioner Pai approving in part, concurring in part,
and issuing a statement.

I.

INTRODUCTION

1.
In the USF/ICC Transformation Order, the Commission comprehensively reformed
universal service and intercarrier compensation, adopting fiscally responsible, incentive-based policies to
preserve and advance voice- and broadband-capable networks while requiring accountability from
companies receiving support and ensuring fairness for consumers who pay into the universal service
fund.1 Modernizing these systems, the Commission concluded, was critical to meet the universal service
challenge of our time: ensuring consumers have access to high-speed Internet access as well as voice
service.2 As part of this undertaking, the Commission reformed legacy high-cost universal service
support mechanisms for rate-of-return carriers. Rate-of-return carriers serve fewer than five percent of
U.S. access lines, but operate in many of the country’s most difficult areas to serve. Total universal
service support for such carriers was approaching $2 billion annually—more than 40 percent of the
Commission’s $4.5 billion overall budget for the reformed high-cost program.3 The Commission’s
reforms for rate-of-return carriers begin the transition toward a more incentive-based form of regulation to
encourage efficient operation and to support the widest possible availability of broadband.
2.
In this Order, we address several issues related to the changes made to high-cost universal
service support for rate-of-return carriers in the USF/ICC Transformation Order. First, we address a
number of issues raised in petitions for reconsideration or clarification of the benchmarking rule adopted


1 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
17663 (2011) (USF/ICC Transformation Order and/or FNPRM); pets. for review pending sub nom. In re: FCC 11-
161
, No. 11-9900 (10th Cir. filed Dec. 8, 2011). See also Connect America Fund et al., WC Docket 10-90 et al.,
Order on Reconsideration, 26 FCC Rcd 17633 (2011); Second Order on Reconsideration, 27 FCC Rcd 4648 (2012);
Third Order on Reconsideration; 27 FCC Rcd 5622 (2012); Fourth Order on Reconsideration; 27 FCC Rcd 8814
(2012); Fifth Order on Reconsideration, 27 FCC Rcd 14549 (2012) (Fifth Order on Reconsideration).
2 See USF/ICC Transformation Order, 26 FCC Rcd at 17668, para. 5.
3 See id. at 17674, para. 26.

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in the USF/ICC Transformation Order.4 That rule establishes reasonable limits on capital and operating
expenditures eligible for high-cost universal service support for rate-of-return carriers, providing better
incentives for carriers to invest prudently and operate efficiently than the prior support mechanism, while
providing additional support for carriers below their caps to extend broadband to rural consumers. (Rate-
of-return carriers previously faced no limits on their overall spending, and received 100 percent
reimbursement of loop costs above a certain level, creating a “race-to-the-top” in spending). We
reconsider one aspect of the benchmark rule, but decline to reconsider adoption of the rule in general.5
We then consider a number of applications for review of the Wireline Competition Bureau’s (Bureau’s)
HCLS Benchmarks Implementation Order, which implemented the benchmarking rule for purposes of
calculating high-cost loop support (HCLS), and modify certain aspects of the Bureau’s order.6 In
addition, we decline requests to reconsider the monthly per-line cap of $250 in total high-cost federal
universal service support for all telephone companies, and we reaffirm the extension of the corporate
operations expense cap to interstate common line support (ICLS).7 Finally, we take the opportunity to
address requests from certain rate-of-return carriers that the Commission slow our implementation of
other aspects of the USF/ICC Transformation Order, emphasizing the importance of continuing with the
implementation of reform, but reiterating our commitment to a data-driven process.
3.
As we have previously noted, the USF/ICC Transformation Order represents a careful
balancing of policy goals, equities, and budgetary constraints. This balance was required in order to
advance the fundamental goals of universal service and intercarrier compensation reform within a defined
budget, while simultaneously providing sufficient transitions for stakeholders to adapt. We observe that,
under Commission rules, if a petition for reconsideration simply repeats arguments that were previously
fully considered and rejected in the proceeding, it will not likely warrant reconsideration.8 This standard
informs our analysis below.


4 Petition for Reconsideration and Clarification of the National Exchange Carrier Assoc., Inc., Organization for the
Promotion and Advancement of Small Telecommunications Companies, and Western Telecommunications
Alliance, CC Docket Nos. 01-92, 96-45; GN Docket No. 09-51; WC Docket Nos. 03-109, 05-337, 07-135, 10-90;
WT Docket No. 10-208 (filed Dec. 29, 2011) (Rural Associations Petition); Accipiter Communications Inc., Petition
for Reconsideration and Clarification, CC Docket No. 01-92; GN Docket No. 09-51; WC Docket Nos. 05-337, 07-
135, 10-90 (filed Dec. 29, 2011) (Accipiter Petition).
5 See USF/ICC Transformation Order, 26 FCC Rcd at 17741-47, paras. 210-26. The benchmarking rule does not
apply to the high-cost support rate-of-return carriers receive as part of the intercarrier compensation recovery
mechanism.
6 Connect America Fund; High-Cost Universal Service Support, WC Docket Nos. 10-90, 05-337, Order, 27 FCC
Rcd 4235 (2012) (HCLS Benchmarks Implementation Order); National Exchange Carrier Association, Inc, National
Telecommunications Cooperative Association, Organization for the Promotion and Advancement of Small
Telecommunications Companies, and Western Telecommunications Alliance, Application for Review, WC Docket
Nos. 10-90, 05-337 (filed May 25, 2012) (Rural Associations AFR); East Ascension Telephone Company, LLC,
Application for Review, WC Docket Nos. 10-90, 05-337 (filed May 25, 2012) (EATEL AFR); Silver Star
Telephone Company, Inc., Application for Review, WC Dockets Nos. 10-90, 05-337 (filed May 25, 2012) (Silver
Star AFR); Silver Star Telephone Company, Inc., Supplement to Application for Review, WC Docket Nos. 10-90,
05-337 (filed June 22, 2012) (Silver Star AFR Supplement); Blue Valley Telecommunications, Inc., Application for
Review, WC Docket Nos. 10-90, 05-337 (filed June 22, 2012) (Blue Valley AFR); United States Telecom
Association, Application for Review, WC Docket Nos. 10-90, 05-337 (filed June 22, 2012) (US Telecom AFR);
Blooston Rural Broadband Carriers, Application for Review, WC Docket Nos. 10-90, 05-337 (filed May 25, 2012)
(Blooston AFR); Accipiter Communications Inc., Application for Review, WC Docket Nos. 10-90, 05-337 (filed
May 25, 2012) (Accipiter AFR); Central Texas Telephone Cooperative, Inc., Application for Review, WC Docket
Nos. 10-90, 05-337 (filed May 25, 2012) (Central Texas AFR).
7 Rural Associations Petition; Accipiter Petition.
8 47 C.F.R. § 1.429(l)(3).
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II.

BENCHMARKING RULE

A.

Background

4.
In the USF/ICC Transformation Order, the Commission reformed high-cost support for
rate-of-return carriers by, among other things, adopting a benchmarking rule intended to moderate the
expenses of rate-of-return carriers with very high costs compared to their similarly situated peers, while
further encouraging other rate-of-return carriers to invest and advance broadband deployment to
consumers in rural America.9 The new rule responded to problematic incentives and inequitable
distribution of high-cost loop support created by the prior rules under which some carriers with high costs
could receive reimbursement for up to 100 percent of their marginal expenditures on loop costs from the
federal universal service fund. Because prior to the USF/ICC Transformation Order, these carriers
generally faced no overall limits on their expenditures, our rules gave carriers incentives to increase loop
costs with little regard to efficiency, and without regard to whether a lesser expenditure would be
sufficient to provide supported services to their customers.10 Moreover, because HCLS overall is capped,
carriers that did take measures to reduce costs to operate more efficiently lost support to their peers that
increased costs. The Commission adopted the benchmarking rule to reverse these incentives and address
these problems by, for the first time, placing reasonable overall limits on costs eligible for reimbursement
through HCLS and redistributing freed-up HCLS to carriers that stay within these limits to encourage new
broadband investment.
5.
To implement the benchmarking rule, the Commission concluded that it should use
regression analyses to limit reimbursable capital costs and operating expenses for purposes of determining
high-cost support for rate-of-return carriers,11 and it sought comment on a methodology that used quantile
regression analyses and publicly available cost, geographic and demographic data to generate a set of
limits for each rate-of-return cost company study area.12 The Commission delegated to the Bureau the
authority to adopt and implement a specific methodology within the parameters set forth by the
Commission after receiving public input in response to the proposal.13 Specifically, the Commission
required the Bureau to compare companies’ costs to those of similarly situated companies; concluded that
statistical techniques should be used to determine which companies shall be deemed similarly situated;
provided a non-exhaustive list of variables that the Bureau could consider for purposes of this analysis;
and granted the Bureau discretion to determine whether other variables, such as soil type, would improve
the regression analysis.14
6.
On April 25, 2012, the Bureau adopted a specific methodology for establishing
benchmarks for capital expenses (capex) and operating expenses (opex) that will be used in the formula
that determines HCLS.15 The methodology built on the proposal in the USF/ICC Transformation
FNPRM
, but included improvements based on further analysis by the Bureau and in response to the
comments from two peer reviewers and interested parties. The methodology uses quantile regression
analyses to generate a capex limit and an opex limit for each rate-of-return cost company study area. The


9 See USF/ICC Transformation Order, 26 FCC Rcd at 17741-47, paras. 210-26.
10 See id. at 17742, 17744-45, paras. 211, 219.
11 See id. at 17743-44, paras. 214, 217.
12 See id. at 18059-62, 18285-94, paras. 1079-88, App. H.
13 See id. at 17743-44, 17747, paras. 214, 217, 226. We note that the limitations on the Bureau’s delegated authority
in section 0.291 of the Commission’s rules do not apply to the specific authority delegated to the Bureau in
Commission orders. See 47 C.F.R. § 0.291; 47 U.S.C. § 155(c).
14 See USF/ICC Transformation Order, 26 FCC Rcd at 17744, para. 217.
15 See HCLS Benchmarks Implementation Order, 27 FCC Rcd 4235.
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geographic independent variables used in the regressions were rolled up to the study area level using Tele
Atlas wire center boundaries, a widely-used commercially available comprehensive source for this
information.16 The capex and opex benchmarks were implemented as of July 1, 2012. Consistent with
the Commission’s commitment to a phased transition, the Bureau decided to phase in the financial impact
of the benchmarks.17 As implemented by the Bureau, carriers will not experience the full impact of
benchmarks on support amounts – which will decrease support for some carriers but increase support for
others – until January 1, 2014. In addition, the Bureau decided to use the same regression coefficients in
2013 as those calculated for 2012 during this transition period.18
7.
Applications for Review and Requests for Stay. Several parties, including associations
representing rural telephone companies as well as individual rural telephone companies, filed applications
for review of the Bureau’s order.19 In addition, several of those parties filed requests for a stay of the
order pending Commission action on their applications for review.20 On June 26, 2012, the Bureau
denied the stay requests.21 The Bureau rejected claims that the benchmarks are unpredictable and
inaccurate and found that petitioners failed to show they would likely prevail on the merits.22 The Bureau
also found that petitioners failed to show they would be irreparably harmed if a stay were not granted.23
The Bureau also determined that a stay would harm other parties such as the companies (and their
customers) that will receive additional redistributed support.24 Finally, the Bureau found that a stay
would not serve the public interest because “[s]taying implementation of this rule would perpetuate . . .
problematic incentives and inequalities and delay reforms intended to benefit consumers.”25 The National
Telecommunications Cooperative Association (NTCA) subsequently asked the United States Court of
Appeals for the Tenth Circuit to stay implementation of the HCLS Benchmarks Implementation Order, or
in the alternative to issue a writ of mandamus directing the Commission to rule on NTCA’s application
for review before implementing the new caps.26 On August 13, 2012, the court denied the request.27


16 TomTom Telecommunications Suite 2011.09 (formerly Tele Atlas North America), Wire Center Premium, for
wire center boundary and central office location information.
17 See HCLS Benchmarks Implementation Order, 27 FCC Rcd at 4236, 4251-52, paras. 5, 43-45.
18 Id. at 4251-52, para. 45.
19 See supra note 6.
20 National Exchange Carrier Association, Inc., National Telecommunications Cooperative Association,
Organization for the Promotion and Advancement of Small Telecommunications Companies, and Western
Telecommunications Alliance, Petition for Stay, WC Docket Nos. 10-90, 05-337 (filed May 25, 2012); East
Ascension Telephone Company, LLC, Petition for Stay, WC Docket Nos. 10-90, 05-337 (filed May 25, 2012);
Silver Star Telephone Company, Inc., Petition for Stay, WC Dockets Nos. 10-90, 05-337 (filed May 25, 2012); Blue
Valley Telecommunications, Inc., Petition for Stay, WC Docket Nos. 10-90, 05-337 (filed June 22, 2012); see also
Rural Associations AFR, EATEL AFR, Silver Star AFR, Blue Valley AFR.
21 Connect America Fund; High-Cost Universal Service Support, WC Docket Nos. 10-90, 05-337, Order, 27 FCC
Rcd 7158 (2012) (HCLS Benchmarks Stay Denial Order).
22 Id. at 7162-64, paras. 12-15.
23 Id. at 7160-62, paras. 7-11.
24 Id. at 7164, para. 16.
25 Id. at 7165, para. 18.
26 Petitioner National Telecommunications Cooperative Association’s Motion for Stay of Administrative Order, or
in the Alternative, for a Writ of Mandamus, In re: FCC 11-161, No. 11-9900 (10th Cir. filed June 28, 2012);
Opposition of Federal Communications Commission to Motion for Stay of Administrative Order or, in the
Alternative, for a Writ of Mandamus, In re: FCC 11-161, No. 11-9900 (10th Cir. filed July 12, 2012).
27 In re: FCC 11-161, No. 11-9900 (10th Cir. filed Aug. 13, 2012).
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B.

Discussion

1.

Petitions for Reconsideration

8.
We begin by addressing petitions for reconsideration of the benchmarking rule. For the
reasons set forth below, we reconsider the Commission’s original rule insofar as it requires the Bureau to
rerun the benchmark regression annually and direct the Bureau to consider whether running the regression
analyses less frequently will better serve the purposes advanced by the benchmarking rule. We deny,
however, petitions for reconsideration filed by the National Exchange Carrier Association, Inc. (NECA),
Organization for the Promotion and Advancement of Small Telecommunications Companies
(OPASTCO), and Western Telecommunications Alliance (WTA), (jointly, the Rural Associations) and
Accipiter Communications Inc. (Accipiter) to the extent they request that the Commission reconsider its
benchmarking rule.28 We also clarify how support will be redistributed under that rule.
a.

Rural Associations’ Petition

9.
The Rural Associations ask the Commission to reconsider several aspects of its limitations
on reimbursable capital and operating expenses. We address certain of these arguments here.
10.
First, the Rural Associations argue that the Commission’s decision to use regression
analyses to limit reimbursable capital costs and operating expenses in the USF/ICC Transformation Order
was “premature and improper,” and that the Commission should instead have stated that it would
examine a regression analysis approach . . . subject to adequate notice and comment.”29 They claim that
the Commission’s decision to use regression analyses to develop the benchmarks “leaves no room to
argue that other approaches might be used in whole or in part as a substitute to achieve the kinds of
constraints sought by the Commission,” such as limiting new investment based on depreciation of
existing plant, as the Associations previously proposed.30
11.
Contrary to the Rural Associations’ allegations, the Commission provided ample
opportunities for parties to comment “on specific methods to be utilized” to limit carriers expenses.31 In
its February 2011 Notice of Proposed Rulemaking, the Commission explained that under then-existing
rules, rate-of-return carriers with high loop costs could have 100 percent of their marginal loop costs
above a certain threshold reimbursed through the federal universal service fund while other carriers that
took measures to control expenses could find themselves losing support to carriers that increased costs.32
Those effects, the Commission explained, meant that the rules did not create appropriate incentives to
control costs and invest rationally.33 The Commission proposed to address these concerns by using
regression analyses to estimate appropriate levels of capital and operating expenses, sought comment on
this proposal, and adopted its benchmarking rule after considering the comments received, including
those filed by the Rural Associations.34 The Commission found that the approach it adopted is a


28 See Rural Associations Petition at 9-13; Accipiter Petition at 10-18.
29 Rural Associations Petition at 9-10.
30 Id. at 9-10 & n.21.
31 Id. at 9.
32 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 4554, 4624-25, para. 202 (2011) (USF/ICC Transformation NPRM).
33 Id.
34 See id. at 4624-26, paras. 201-07; Comments of the National Exchange Carrier Assoc., Inc., National
Telecommunications Cooperative Association, Organization for the Promotion and Advancement of Small
Telecommunications Companies, Western Telecommunications Alliance, and Concurring Associations, WC Docket
No. 10-90 et al. (filed Apr. 18, 2011).
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“reasonable way to place limits on recovery of loop costs” and specifically rejected the Rural
Associations’ proposed alternative because it “would do little to limit support for capital expenses if past
investments for a particular company were high enough to be more than sufficient to provide supported
services, and would do nothing to limit support for operating expenses, which are on average more than
half of total loop costs.”35 The Associations raise no new arguments to change this conclusion, and
therefore we reject their petition to reconsider the adoption of benchmarks or the regression approach
generally.
12.
Second, the Rural Associations ask the Commission to reconsider its decision to change
the caps annually based on a “refreshed” run of the regression analyses, arguing that the Commission
should instead leave any caps in place for at least seven years.36 They argue that if the regressions are
updated each year, carriers could be encouraged to invest less to avoid being affected by the caps because
“it appears that a carrier could actually reduce or maintain existing investment and expense levels during
a given year but still suffer unexpected reductions in its HCLS . . . if its ‘peer group’ has changed or if its
existing peers have reduced their costs faster.”37
13.
Since filing their petition, the Rural Associations have modified this request for relief.
They no longer request that the Commission freeze any regression-based caps for at least seven years.
Pending further updating and analysis of the regression methodology, they urge the Commission to “hold
the caps constant for a period of several years starting in 2014,” and then analyze the regression
methodology “to determine whether there are more optimal methods than such a default rule to address
concerns with respect to predictability in the longer-term.”38
14.
We note, as an initial matter, that the Bureau chose to use the same regression coefficients
in 2013 as those calculated for 2012 during the phase-in of the initial benchmarks (i.e., it “froze” the 2012
coefficients for 2013). Accordingly, carriers have been able to determine their benchmarks, and estimate
their support, throughout the phase-in period.39 In effect, during the phase-in, the Bureau’s approach is
consistent with the Rural Associations’ request. In addition, as discussed in more detail below, we direct
the Bureau to revise the benchmark methodology to generate a single cap for each study area; these
updated benchmarks will apply beginning in 2014.40 The issue before us now, therefore, is how
frequently the new benchmarks should be updated beginning 2015.
15.
As the Rural Associations recognize, the decision whether, and if so, how, to freeze the
expense benchmarks involves a number of tradeoffs. On the one hand, as the Rural Associations point
out, more frequent updates create the possibility of changes in carriers’ support levels.41 If carriers cannot
estimate likely future support levels with a reasonable degree of certainty, frequent updates may deter


35 USF/ICC Transformation Order, 26 FCC Rcd at 17745-46, para. 223.
36 Rural Associations Petition at 10-11.
37 Id. at 10.
38 See Letter from Michael R. Romano, NTCA, to Marlene H. Dortch, FCC (dated Oct. 17, 2012) (Oct. 17, 2012 Ex
Parte
) (ex parte notice on behalf of NTCA, OPASTCO, WTA, and NECA). The Rural Associations jointly filing
the petition for reconsideration of the USF/ICC Transformation Order are NECA, OPASTCO, and WTA. NTCA
sought judicial review and did not join the others in seeking reconsideration. See Rural Associations Petition at 9 &
n.20.
39 HCLS Benchmarks Implementation Order, 27 FCC Rcd at 4251-52, para. 45. We note that, below, we combine
the capex and opex benchmark caps for each study area on an interim basis, in 2013, starting the first full month
after the effective date of this Order. See infra para. 29.
40 See infra paras. 24-28.
41 See, e.g., Oct. 17, 2012 Ex Parte (arguing that freezing the caps on a study area basis would promote certainty).
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even efficient investment.42 On the other hand, in practice, annual updates may produce only small
changes for all or nearly all carriers. In fact, a comparison of the 2012 benchmarks with 2013
benchmarks, calculated as if the Bureau had not frozen the 2012 coefficients,43 shows that the ratio of an
individual carrier’s costs to its caps in 2012 is strongly predictive of whether the carrier would have been
capped in 2013.44 Moreover, if the benchmarks are updated less frequently, over time they may fail to
reflect industry-wide cost trends and cap carrier spending at levels that are either too high or too low.
And if the benchmarks are updated infrequently, each update could cause larger and more sudden changes
in support levels, at least for a subset of carriers. Updating the benchmarks less frequently also risks
treating similarly situated carriers differently based on the timing of their investments. For example, a
study area that has higher costs due to investment would not have those investments reflected in its
benchmark if its benchmark cap were frozen. A freeze could therefore also distort carriers’ investment
decisions by encouraging them to time their investments to maximize their benchmarks rather than to
invest efficiently. In addition, while there are many potential means to limit the volatility of the
benchmarks from year to year, each potential approach would have, necessarily, a different ultimate effect
on each study area’s benchmarks, and thus its own costs and benefits.45
16.
In light of these considerations, we reconsider the Commission’s decision to the extent it
requires the Bureau to update the regressions annually. We direct the Bureau, as it updates the
benchmarks for 2014, to consider whether these benchmarks should be held constant for multiple years,
and, if so, which mechanism would best advance our objectives to preserve and advance the deployment
of voice- and broadband-capable networks while providing better incentives for carriers to invest
prudently and operate efficiently.46 In doing so, the Bureau should carefully consider the extent to which
annual updates are likely to cause significant year-over-year changes in support levels. We expect the
Bureau to adopt an approach that will provide carriers sufficient certainty regarding future years’


42 We note that, while the benchmark limit for a given carrier depends both on changes in the carrier’s own costs as
well as the costs of other companies, this by itself does not imply that the benchmarks are unpredictable. Indeed, in
this regard, the benchmark rule is no different from the historical operation of HCLS. That is, a carrier’s HCLS has
always been calculated (and still is calculated) by comparing the carrier’s own costs to the national average cost per
loop, a number determined by other carriers’ costs.
43 Cost company data for 2013 were filed by NECA on September 28, 2012, based on carriers’ costs for 2011.
National Exchange Carrier Association, Inc., Universal Service Fund Data: NECA Study Results, 2012 Report (filed
Sept. 28, 2012), http://www.fcc.gov/wcb/iatd/neca.html. These data can be used to generate a comparison to
measure the effects of changes that would have been caused by updating the regressions. Specifically, by re-running
the regression analysis using 2013 data for the same carriers that had benchmarks in 2012— excluding those carriers
that were newly converted from average schedule to cost as well as the effects of acquisitions—a simulated set of
“unfrozen” coefficients can be generated.
44 For example, of those carriers that were at or below the 90th percentile of their caps in both opex and capex in
2012, fewer than one percent would have exceeded the simulated caps for 2013. Comparing the 2012 benchmarks
against the simulated 2013 benchmarks also indicates that updating the benchmarks would have resulted, on the
whole, in only modest changes in support distributions for 2013.
45 For example, as the rule was phased in, the Bureau determined that the 2013 HCLS benchmarks would use the
coefficients developed for the 2012 HCLS benchmarks. Freezing the coefficients in this way enhanced carriers’
ability to predict their 2013 HCLS benchmarks, but it also had the effect of capping more companies than would
have been capped if the Bureau had generated new coefficients. Other potential approaches, such as freezing
benchmarks on a study area basis, freezing them on a per-line basis, or permitting them to change during a multi-
year period only in limited ways (e.g., to account for line loss or new investment) have different consequences. As
discussed below, we conclude that it is appropriate for the Bureau to examine whether, and if so, how a freeze
should be implemented in the first instance, as the Bureau will be best positioned to evaluate various options as they
would apply to the new single cost benchmark it will develop.
46 See USF/ICC Transformation Order, 26 FCC Rcd at 17744-45, para. 219.
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benchmarks to encourage efficient investment while maintaining the balance struck in the Commission’s
reforms to encourage efficient spending by HCLS recipients.
17.
Finally, the Rural Associations ask the Commission to reconsider its decision regarding
the reductions resulting from the HCLS benchmarks and “find instead that the entirety of those reductions
will be redistributed to other [rural carriers] – including those impacted by new caps – within the overall
capped HCLS mechanism.”47 They argue that not redistributing reductions to capped carriers results in a
“double cap” on HCLS.48
18.
We decline to reconsider the Commission’s decision to redistribute HCLS only to those
carriers whose loop costs are not capped by the benchmarks. We find that providing additional support to
carriers with the highest costs relative to their peers is contrary to the purposes of the benchmarking
rule.49 Moreover, by providing redistributed support only to carriers that are below their benchmarks, the
rule provides an additional incentive for carriers to operate efficiently and keep costs below their caps. In
addition, we note that the Rural Associations appear to assume that by allowing carriers capped by the
benchmarks to receive redistributed support, they would have the chance to recover “more but still not
all
” of their high loop costs.50 To the contrary, the Rural Associations’ proposal could permit some
carriers limited by the benchmarks to receive more in redistributed support than they would lose through
the benchmark reductions.51
19.
While we disagree with the Rural Associations’ proposal to redistribute HCLS to carriers
whose support is capped by the benchmarks, we take this opportunity to clarify that there is no “double
cap” on HCLS. That is, we clarify that all HCLS reductions will be redistributed, though only to carriers
whose loop costs are not limited by the benchmarks. In discussing the proposed methodology for creating
benchmarks the Commission estimated that only approximately half of the HCLS reductions experienced
by carriers limited by the benchmarks would be redistributed.52 Other language in the USF/ICC
Transformation Order
made clear, however, that the Commission was not mandating partial
redistribution. Specifically, the Commission said “we will place limits on the HCLS provided to carriers
whose costs are significantly higher than other companies that are similarly situated, and support will be
redistributed to those carriers whose unseparated loop cost is not limited by operation of the benchmark
methodology
.”53 We note that under the phase-in adopted by the Bureau, all HCLS reductions were


47 Rural Associations Petition at 13.
48 Id. at 12.
49 We also note that the Rural Associations were concerned that a carrier could be capped in a single cost category or
two, but otherwise be substantially below the benchmarks in other cost categories. Id. at 12-13. The proposed
methodology in the USF/ICC Transformation FNPRM created caps in eleven separate categories, but the
methodology adopted by the Bureau creates only two, i.e., separate capital expense and operating expense caps,
which to a large extent addressed this concern.
50 Rural Associations Petition at 13.
51 This could occur because the redistributed support is based on a lower national average cost per loop.
52 Specifically, under the benchmark methodology proposed in Appendix H of the USF/ICC Transformation Order
and FNPRM
, the Commission estimated that support would be reduced for approximately 280 rural rate-of-return
cost study areas by $110 million, with approximately $55 million redistributed to study areas not limited by the
benchmarks, using one possible redistribution method. See USF/ICC Transformation FNPRM, 26 FCC Rcd at
18061, 18285-94, para. 1084, App. H.
53 USF/ICC Transformation Order, 26 FCC Rcd at 17745, para. 220 (emphasis added).
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redistributed in 2012.54 And now we clarify that all reductions will be redistributed in future years as
well.
b.

Accipiter Petition

20.
Accipiter argues that the Commission’s decision to adopt cost benchmarks is flawed
because such benchmarks cannot distinguish between carriers that “may legitimately be outliers due to
particular considerations, including population density, terrain, and operating environment,” and carriers
that “are outliers due to waste, fraud or abuse, or other inefficiencies.”55 Accipiter claims the failure to
make this distinction is “irrational” and reflects a failure to consider the specific challenges facing
Accipiter and other carriers.56
21.
We disagree. The Commission’s benchmarking approach is designed precisely to
compare each individual carrier’s costs to those of similarly situated carriers, accounting for the most
significant drivers of cost such as “density, terrain, and operating environment.”57 It is reasonable for the
Commission to adopt a general rule to identify carriers with costs that are significantly higher than most
of their similarly situated peers instead of relying on more costly and administratively burdensome
alternatives such as audits.58 Carriers that believe that the benchmarks do not adequately address unique
circumstances that they face can seek a waiver of the Commission’s rules. Accipiter’s petition for
reconsideration reads more like a petition for waiver, and in fact, Accipiter sought, and the Bureau
granted, a temporary waiver of the benchmarking rule and other new rules that would limit its support.59
22.
In its petition for reconsideration, Accipiter makes a variety of other arguments that relate
not to the Commission’s rule as adopted, but rather to the benchmarking methodology proposed in the
USF/ICC Transformation FNPRM. But those complaints are not relevant to our reconsideration of the
Commission’s benchmarking rule. The Commission delegated to the Bureau the authority to adopt and
implement a final methodology, which the Bureau did in its April 2012 HCLS Benchmarks
Implementation Order
.60 Several parties, including Accipiter, filed separate applications for review of the
Bureau’s HCLS Benchmarks Implementation Order. We turn to that order now.


54 HCLS Benchmarks Implementation Order, 27 FCC Rcd at 4239, para. 10 n.29.
55 Accipiter Petition at 11.
56 Id.
57 Both the methodology proposed by the Commission and the methodology adopted by the Bureau included density
variables, and the Bureau included additional demographic and geographic variables to further capture the particular
circumstances faced by similarly situated carriers. See HCLS Benchmarks Implementation Order, 27 FCC Rcd at
4243-45, paras. 20-23.
58 See Alenco Communications, Inc. v. FCC, 201 F.3d 608, 620-21 (Alenco) (5th Cir. 2000) (“The agency’s broad
discretion to provide sufficient universal service funding includes the decision to impose cost controls to avoid
excessive expenditures that will detract from universal service. . . . [G]iven its legitimate cost concerns, the agency
was well within its discretion to impose a cap rather than to undertake the more costly alternative of intensive
auditing.”).
59 See Connect America Fund; Accipiter Communications, Inc. Petition for Temporary Waiver of Certain High-Cost
Universal Service Rules
, WC Docket No. 10-90, Order, DA 13-105 (Wireline Comp. Bur. rel. Jan. 30, 2013)
(Accipiter Waiver Order) (granting limited, temporary waiver of the requested rules through December 31, 2014).
60 See USF/ICC Transformation Order, 26 FCC Rcd at 17743-44, 17747, paras. 214, 217, 226; HCLS Benchmarks
Implementation Order
.
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2.

Applications for Review

23.
We next address a number of arguments raised in the context of applications for review of
the Bureau’s HCLS Benchmarks Implementation Order, and we modify the Bureau’s order in three
respects. Specifically, (1) we direct the Bureau to develop a regression methodology that will generate a
single total loop cost cap for each study area beginning in 2014; (2) as an interim measure toward a single
cost cap, for purposes of calculating HCLS support in 2013, we sum capex and opex caps generated by
the Bureau’s current methodology; and (3) we modify the phase-in of the benchmarks for 2013. We do
not otherwise modify the Bureau’s HCLS Benchmarks Implementation Order at this time. In taking these
actions, we address certain of the arguments raised in the applications for review,61 and we defer
consideration of the other issues raised in those applications for review.
24.
Single Total Cost Cap. Consistent with the Commission’s direction, the Bureau’s HCLS
Benchmarks Implementation Order generated limits on reimbursable capital expenses and operating
expenses for purposes of determining HCLS; compared companies’ costs to those of similarly situated
companies; and used statistical techniques to determine which companies shall be deemed similarly
situated.62 Consistent with the Commission’s delegation of authority, the Bureau also considered and
tested additional variables and made further improvements to the methodology based on the comments
from two peer reviewers and interested parties, and its own analysis.63 The most significant change in the
methodology that the Bureau made was using two regressions to generate only two caps for each
company – a capex limit and an opex limit – rather than generating eleven caps as originally proposed in
Appendix H of the USF/ICC Transformation FNPRM.64
25.
We agree with the Bureau’s decision to use fewer regressions than proposed in the
USF/ICC Transformation FNPRM. The Bureau explained that doing so “enables carriers to account for
the needs of individual networks and recognizes the fact that carriers may have higher costs in one
category that may be offset by lower costs in others.”65 The Bureau adopted two regressions even though
“[u]sing a greater number of regressions makes it possible to identify outliers at a granular level.”66


61 See Central Texas AFR at 7 (requesting that the Commission modify the Bureau’s rules to reflect certain trade-
offs between capital costs and operating expenses made by carriers when making investment decisions); Rural
Associations AFR at 3, 6, 23 (arguing that the Bureau’s order should be set aside); EATEL AFR at 2, 10 (similar);
Silver Star AFR at 3, 10 (arguing that implementation should be delayed); Silver Star AFR Supplement at 3
(similar); Blue Valley AFR at 3, 10 (similar); Blooston AFR at 2, 10 (similar); Central Texas AFR at 2, 10 (similar);
Accipiter AFR at 9 (similar); US Telecom AFR at 2, 11 (arguing that the Bureau’s order should be briefly
postponed); Central Texas AFR at 10 (arguing that the Bureau’s benchmark methodology results in support amounts
that are unpredictable); Accipiter AFR at 2 (arguing that the results are unpredictable and deter investment); US
Telecom AFR at 4-5 (arguing that the “perception of significant inaccuracy and unpredictability. . . whether correct
or not,” is affecting investment decisions); Rural Associations AFR at i-ii (claiming that the “Bureau’s methodology
does not rely on statistical analysis of ‘similarly situated’ companies, as the Commission’s USF/ICC Transformation
Order
directed”); Blooston AFR at 10 (arguing that “a regression model should be used only to trigger a harder look
to determine whether a carrier’s costs were truly ‘inefficient’”); Blue Valley AFR at 10 (similar); Silver Star AFR
Supplement at 3 (similar).
62 USF/ICC Transformation Order, 26 FCC Rcd at 17744, para. 217.
63 See Letter from Patrick Halley, FCC, to Marlene Dortch, FCC, WC Docket Nos. 10-90, 07-135, 05-337, GN
Docket No. 09-51, CC Docket Nos. 01-92, 96-45, 03-109, at Apps. B & C (filed Mar. 9, 2012) (Sanyal Peer Review
and Waldon Peer Review, respectively).
64 USF/ICC Transformation Order and FNPRM, 26 FCC Rcd at 18285-94, App. H.
65 HCLS Benchmarks Implementation Order, 27 FCC Rcd at 4241, para. 14. Even parties arguing that the Bureau’s
order should be set aside concede that “the Bureau’s formulas appear to be an improvement over the formulas as
originally proposed.” Rural Associations AFR at 3.
66 HCLS Benchmarks Implementation Order, 27 FCC Rcd at 4241, para. 14.
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Although one peer reviewer and some commenters recommended using a single regression to limit total
cost, the Bureau decided that approach “would provide fewer safeguards against overspending.”67
Because “[c]apital and operating expenditures reflect fundamentally different measures of business
performance,” the Bureau reasoned that “[u]sing two regressions instead of one provides carriers
flexibility to manage their operations, while still enabling the Commission to identify more instances
where carriers spend markedly more in either category than their similarly-situated peers.”68
26.
We agree with commenters that the Bureau’s methodology was an improvement over the
proposed methodology that used eleven regressions, and we recognize that there are trade-offs in
choosing the number of regressions. On balance, we conclude that going forward, it would be better to
use one regression to generate a single cap on total loop costs for each study area. A single cap will
provide carriers with greater flexibility to account for the specific needs of their locales and networks.
This approach recognizes that carriers often consider the trade-offs between capital costs and operating
expenses when making investment decisions. For example, in its Application for Review, Central Texas
argues that it “balanced the costs of using aerial cables against the costs of burying cable and determined
that it costs less overall to bury cable, rather than constantly maintain and replace aerial cable in the
windy, tough, varmint-ridden Texas terrain. By keeping its cable maintenance costs low, Central Texas
receives no credit from the regression model for doing so even though it has much lower operational
expenditures.”69
27.
The record before the Bureau when it adopted two regressions instead of eleven
regressions also contained support for using a single regression. For example, as noted above, one of the
peer reviewers of the benchmark methodology, Paroma Sanyal, stated that “individual cost capping [i.e.
capping individual types of costs rather than total costs] ignores any complementar[it]y or substitutability
between the various cost components,” which may discourage overall cost-minimization and fails to
recognize that carriers face different trade-offs between types of expenses.70 Sanyal suggested that “[a]
more flexible approach may be to estimate the 90th percentile over the total cost,” which “would be more
in line with theoretical cost-minimization approaches where . . . expenditure caps can enhance efficiency
under a rate-of-return regulation.”71 Similarly, Roger Koenker, one of the economists who developed
quantile regression analysis, opined that his “primary criticism of the proposed FCC methodology [in
Appendix H] lies in the way that cost estimates for individual cost components are aggregated. . . . A
preferable, and simpler, approach would be to develop one conditional quantile model for aggregate
costs.”72 Koenker concluded that the proposed aggregation of cost categories “yields cost limits that may
be unduly stringent in some cases, and unduly lenient in others.”73


67 Id. at 4241, para. 15.
68 Id.
69 Central Texas AFR at 7-8 (“Central Texas requests relief in the form of the Commission directing the Bureau to
raise the capex threshold for carriers that make a justifiable engineering decision to bury cable in order to keep opex
costs low. In the alternative, the Commission should direct the Bureau to allow carriers with considerable room
under the opex threshold to offset the amount from the capex threshold.”).
70 Sanyal Peer Review at 2 (“This may discourage a company from overall cost-minimization if that means that after
minimization, one of the cost categories will fall above the 90th percentile threshold, even though the total costs are
lower. Additionally, each carrier may have different tradeoffs amongst its cost components, and the current
methodology is akin to a one-size fits all approach.”).
71 Id.
72 National Exchange Carrier Association et al. Comments, WC Docket No. 10-90 et al., at App. E, 1 (filed Jan. 18,
2012) (Roger Koenker, “Assessment of Quantile Regression Methods for Estimation of Reimbursable Cost Limits”)
(Rural Association Comments).
73 Id.
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28.
For these reasons, we are persuaded that using a single total loop cost benchmark would
be preferable to using separate capex and opex caps. Accordingly, we direct the Bureau to develop a
regression methodology that will generate a single cap for each study area. We note that the Bureau also
will be incorporating into its analysis revised study area boundaries, which will be obtained through an
upcoming data collection.74 We direct the Bureau to analyze the impact of various approaches prior to
adopting its new methodology, which we anticipate will be implemented for distribution of HCLS
beginning in 2014.
29.
Summing Capex and Opex Caps for 2013. We recognize that the Bureau needs time to
develop and seek comment on a new methodology, and therefore, absent some interim measure, carriers
would continue to operate under two separate caps until 2014. We therefore conclude it is appropriate to
combine or “sum” the existing caps as an interim measure. As a result, for purposes of providing HCLS,
starting the first full month after the effective date of this Order and for the rest of 2013,75 we will account
for the trade-offs carriers make between capital expenditures and operating expenses by summing the
capex and opex caps as an interim measure. That is, we will add each study area’s capex and opex
benchmarks together to establish a new limit on total unseparated loop costs for purposes of determining
HCLS. In the short term, summing the capex and opex benchmarks together will provide an
administratively feasible means to recognize the trade-offs between capital and operating expenses that
carriers have made over time, while the Bureau works to develop a new single-equation regression.76 We
note that external parties and one peer reviewer have expressed concern about summing benchmarks
based on quantiles.77 As a matter of statistics, the sum of the quantiles is not the quantile of the sums,
which is to say that summing two 90th percentile benchmark caps does not produce the same result as
would setting a cap based on the 90th percentile of total costs. Although summing is imperfect as an
estimate of the 90th percentile of overall costs, we find that as an interim measure it provides a reasonable
way to recognize that there are tradeoffs between capital and operating expenditures. For example, to the
extent a carrier’s costs are over the capex benchmark but under the opex benchmark because it has made
large investments to lower its operating costs and overall costs, summing the benchmarks will provide
additional allowances for these expenditures.78
30.
Phase-In. We also slightly modify the phase-in of the HCLS benchmarks adopted by the
Bureau. Applications for review of the HCLS Benchmarks Implementation Order ask us to either set it
aside or delay the implementation of the HCLS benchmarks until the Commission addresses various


74 Connect America Fund, High-Cost Universal Service Support, WC Docket Nos. 10-90, 05-337, Report and Order,
27 FCC Rcd 13528 (Wireline Comp. Bur. 2012).
75 The Order will become effective upon publication of its summary in the Federal Register; the modified
methodology we adopt here will control support for the first full month following this effective date. See infra para.
54. Given that support is calculated on a monthly basis, providing that the new methodology will govern support
beginning with the first full month after the effective date of the Order will minimize any administrative burdens
associated with implementation.
76 The Rural Associations support summing the two caps for 2013. See, e.g., Oct. 17, 2012 Ex Parte; Letter from
Michael R. Romano, NTCA, to Marlene H. Dortch, FCC (dated Nov. 9, 2012) (Nov. 9, 2012 Ex Parte) (ex parte
notice on behalf of NTCA, OPASTCO, and WTA).
77 See Sanyal Peer Review at 1-2, Rural Association Comments at App. E, 1. But see Oct. 17, 2012 Ex Parte
(advocating for a single regression model “in the longer-term,” but noting that “a reasonable interim step would be
to help recognize the various ‘business trade-offs’ of operating a telecommunications network pending such further
testing and recalculation by combining now the existing capital expense and operating expense caps into a single
cap”).
78 See, e.g., Central Texas AFR at 7 (“[T]he Commission should direct the Bureau to allow carriers with
considerable room under the opex threshold to offset the amount from the capex threshold”).
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concerns.79 Although we deny requests to delay the implementation, we modify the phase-in to limit the
amount by which any one carrier’s support may be reduced in 2013. In 2012, HCLS was reduced by
twenty-five percent of the difference between the support calculated using the study area’s reported cost
per loop and the support as limited by the benchmarks, unless that reduction would exceed ten percent of
the study area’s support as otherwise would be calculated based on NECA cost data.80 The Bureau’s
phase-in for 2013, as adopted in HCLS Benchmarks Implementation Order, will reduce support by fifty
percent of the difference between the support calculated using the study area’s reported cost per loop and
the support as limited by the benchmarks in effect for 2013, but remove the limit on the total impact on
individual carriers.81 We maintain the Bureau’s fifty percent phase-in for 2013. However, starting the
first full month after the effective date of this Order and for the rest of 2013, we will limit the amount of
the reduction to no more than fifteen percent of the study area’s support as otherwise would be calculated
based on NECA cost data, absent implementation of the benchmark rule.82 We conclude that this strikes a
reasonable balance between continuing the phase-in of the benchmark rule, while giving those carriers
most heavily impacted additional time to adjust, particularly as the Bureau updates the benchmarks for
2014.
31.
Other Issues. In this section we address a number of other issues raised in the applications
for review; we defer consideration of the remaining issues to a future order.
32.
Predictability. Several parties argue that the Bureau’s benchmark methodology results in
support amounts that are unpredictable in violation of section 254(b)(5) of the Communications Act of
1934, as amended (the Act).83 Central Texas, for example, claims that the dynamic, annually changing
nature of the regression caps does not allow carriers to predict future HCLS based on current and near-
future expenditures.84 And Accipiter argues that the results are so unpredictable that the Bureau’s
methodology “effectively prohibits companies from making reasonable and rational investment
decisions.”85 We disagree.
33.
As the United States Court of Appeals for the Fifth Circuit explained in Alenco, the
Commission can satisfy the statute by adopting predictable rules that govern distribution of subsidies; its
rules need not provide precisely predictable funding amounts.86 Yet what these parties seek is precisely
the predictable funding amounts the statute does not require. In any event, as noted above, the Bureau
provided that same regression coefficients would be used in 2013 as those calculated for 2012 in order to
ensure that carriers would be able to calculate their benchmark caps for the phase-in period well in
advance. Accordingly, at least with respect 2012 and 2013, the carriers were, in fact, provided with the


79 See Rural Associations AFR at 3, 6, 23; EATEL AFR at 2, 10; Silver Star AFR at 3, 10; Blue Valley AFR at 3,
10; Blooston AFR at 2, 10; Central Texas AFR at 2, 10; Accipiter AFR at 9; US Telecom AFR at 2, 11.
80 HCLS Benchmarks Implementation Order, 27 FCC Rcd at 4236, 4251, paras. 5, 43.
81 Id.
82 See supra note 75.
83 47 U.S.C. § 254(b).
84 See Central Texas AFR at 10. Central Texas requests that the Commission direct the Bureau to develop a more
static model. We note that above, the Commission has reconsidered the decision to require the Bureau to rerun the
regressions annually, giving the Bureau the discretion to do so if it determines that this approach better serves the
purposes advanced by the benchmarking rule and is sufficiently predictable. See supra para. 16.
85 Accipiter AFR at 2; see also US Telecom AFR at 4-5 (arguing that the “perception of significant inaccuracy and
unpredictability . . . whether correct or not, is causing widespread fear in the cost-company rate-of-return
community which is having a chilling effect on broadband investment plans”).
86 Alenco, 201 F.3d at 623 (“[T]he Commission reasonably construed the predictability principle to require only
predictable rules that govern distribution of the subsidies, and not to require predictable funding amounts”).
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certainty they request.87 And, as discussed above, for 2014 and beyond, we direct the Bureau to revise its
methodology to set a single total cost benchmark for each study area and to consider how frequently that
regression should be updated. We do so with the expectation that the Bureau will adopt an approach that
will provide carriers sufficient certainty regarding future years’ benchmarks to encourage efficient
investment while maintaining the balance struck in the Commission’s reforms to encourage efficient
spending by HCLS recipients. For these reasons, we reject the claim that the Bureau’s order violates the
Act because it provides insufficient predictability.
34.
Similarly-Situated Companies. We also disagree with the Rural Associations’ claim that
the “Bureau’s methodology does not rely on statistical analysis of ‘similarly situated’ companies, as the
Commission’s USF/ICC Transformation Order directed. In fact, the actual formulas do not establish any
comparator groups.”88 They argue that the benchmark “formulas impose limitations on companies
without regard to whether their per-unit costs are excessive or relatively high compared to ‘peers.’”89 On
the contrary, we find that the Bureau’s regression analysis was consistent with Commission’s direction.
We note that the Rural Associations never explain how they would propose to define “similarly situated”
companies. We conclude that the Bureau took a reasonable approach, taking into account all the
significant variables in determining the caps, in effect comparing each company to all other companies to
the degree to which the companies are similar in regard to the variables found to be significant (i.e., the
degree to which they are similarly situated).90
35.
Trigger. We also reject the argument made by several parties in their applications for
review that “a regression model should be used only to trigger a harder look to determine whether a
carrier’s costs were truly ‘inefficient.’”91 The Commission did not provide the Bureau with the discretion
to use the regression methodology in that manner. Moreover, as explained above in the context of the
petitions for reconsideration, we conclude that it was reasonable for the Commission to adopt a general
rule to identify carriers with costs that are significantly higher than their peers instead of relying on more
costly and burdensome approaches like audits, as would be required if the regression methodology were
used merely as a trigger.92
36.
Finally, while we have, in this Order, addressed a number of significant issues raised in
the applications for review, we recognize that a number of issues remain pending. We otherwise defer
consideration of issues not addressed herein.


87 Moreover, as discussed above, analysis of 2013 cost data indicates that the benchmarking rule, as initially
implemented, would in fact have provided carriers with a significant degree of certainty regarding future support
even if the regression coefficients had not been frozen. For example, as explained above, comparing 2012 to 2013
cost data revealed that the ratio of an individual carrier’s costs to its caps in 2012 is strongly predictive of whether
the carrier would have been capped in 2013. See supra paragraph 15.
88 Rural Associations AFR at i-ii.
89 Id. at 4-5.
90 See USF/ICC Transformation Order and FNPRM, 26 FCC Rcd at 18285, App. H n.1 (“The term ‘similarly-
situated peers’ means that, based on data from all the carriers in the analysis, if there were (hypothetically) 100 study
areas with independent variable values that were nearly the same as those with the study area in question, 90 of them
would be expected to have values equal to or less than the 90th percentile prediction. It does not mean the carriers
with the most similar number of loops (or values of the other variables).”).
91 See Blooston AFR at 10, Blue Valley AFR at 10, Silver Star AFR Supplement at 3.
92 See supra para. 21. The Commission’s benchmarking rule uses statistical techniques to compare each carrier’s
costs to those of similarly situated carriers. Carriers that believe that the benchmarks do not adequately address
unique circumstances that they face can seek a waiver of the Commission’s rules.
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III.

LIMITS ON TOTAL PER-LINE HIGH-COST SUPPORT

A.

Background

37.
In the USF/ICC Transformation Order, the Commission adopted a $250 monthly per-line
cap on total high-cost federal universal service support for all incumbent telephone companies,93 and
codified this in rule 54.302.94 The Rural Associations and Accipiter filed petitions for reconsideration
claiming that the cap “fails to take into account the economic realities confronted by an expanding
carrier”95 and “will have limited benefit but devastating impacts on affected small companies.”96 The
Rural Associations request that the Commission “set aside monthly per-line caps” until the Commission
can assess the impact of its other universal service reforms,97 while Accipiter asks the Commission to
delay the implementation of the cap for “just a few years.”98 In the alternative, Accipiter and the Rural
Associations urge the Commission to apply the $250 cap “on a prospective basis only.”99

B.

Discussion

38.
We deny both petitions for reconsideration. In the USF/ICC Transformation Order, the
Commission concluded that a $250 cap would be reasonable after finding that “support drawn from
limited public funds in excess of $250 per-line monthly . . . should not be provided without further
justification.”100 The Commission also noted that “virtually all (99 percent) of incumbent LEC study
areas currently receiving [universal service] support are under the $250 per-line monthly limit.”101 Even
so, to provide affected carriers a measured transition, the Commission delayed the implementation of the
$250 cap for six months to “provide an opportunity for companies to make operational changes, engage in
discussions with their current lenders, and bring any unique circumstances to the Commission’s attention
through the waiver process.”102 Moreover, after the six-month delay, the Commission phased-in the $250
cap “to ease the potential impact of this transition.”103 As a result, effective July 1, 2012, carriers subject
to the $250 cap received support of no more than $250 per-line plus two-thirds the difference between
their uncapped per-line amount and $250, and effective July 1, 2013, carriers will receive no more than
$250 per-line plus one-third the difference between their uncapped per-line amount and $250 through
June 30, 2014.104
39.
Petitioners have not presented any new evidence or arguments that persuade us to
reconsider adoption of the $250 per-line per month cap. And, we disagree with the Rural Associations’
claims that the Commission failed to adequately explain the basis for adopting the $250 cap.105 The


93 USF/ICC Transformation Order, 26 FCC Rcd at 17764-66, paras. 272-79.
94 47 C.F.R. § 54.302.
95 Accipiter Petition at 18.
96 Rural Associations Petition at 16.
97 Id. at 18.
98 Accipiter Petition at 18.
99 Rural Associations Petition at 18. See also Accipiter Petition at 18-19.
100 USF/ICC Transformation Order, 26 FCC Rcd at 17765, paras. 273-74
101 Id. at 17766, para. 277
102 Id. at 17766, para. 279.
103 Id. at 17765, para. 275.
104 Id.
105 Rural Associations Petition at 17-18. In particular, the Rural Associations claim that the Commission did not
conclude that costs in excess of $250 per-line per month were “irresponsible,” “not used, useful or lawful,” nor find
(continued...)
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Commission provided a thorough, reasoned analysis of the basis for adopting the $250 cap.106 By
phasing-in the $250 cap, the Commission also provided carriers time to adjust, while promoting the
Commission’s goal of fiscal responsibility. Moreover, the USF/ICC Transformation Order
acknowledged that if there are unique circumstances, carriers should utilize the waiver process.107 We
recently modified and clarified the Commission’s guidance for the waiver process in our Fifth Order on
Reconsideration
.108
40.
We note that, in 2011, there were 26 incumbent study areas that received $250 per month
or more in per-line support.109 Of those 26 study areas, the Commission has received nine waiver
petitions arguing that waiver of the cap is necessary for the company to continue to serve its community;
one of those petitions subsequently was withdrawn.110 That the carriers serving the remaining study areas
have not filed for waivers suggests that the measured transition adopted by the Commission provides an
appropriate amount of time for affected companies to adjust their operations without disrupting service to
consumers.
41.
We deny the requests of Accipiter and the Rural Associations that the Commission apply
the $250 cap “on a prospective basis only.”111 The Commission decided, after fully considering the
record, that the immediate adoption of the $250 cap would advance its goal of imposing responsible fiscal
limits on universal service support.112 Accipiter claims that applying the cap “to previously-incurred
expenses is in no way consistent with the Congressional directive that support be ‘predictable,’ and would
punish carriers for reasonable investment decisions that cannot be reversed to account for the
(Continued from previous page)


that carriers that exceed such cap “plac[e] significant strains on the high-cost USF program.” Id. Accipiter similarly
claims that “[i]n applying its rules to 2010 expenses and loops, the Commission ‘entirely failed to consider an
important aspect of the problem,’ failed to provide a reasonable explanation connecting the ‘facts found and the
choice made.’” Accipiter Petition at 18-19 (citing Motor Vehicle Manufrs. Ass’n v. State Farm Mut. Auto. Ins. Co.,
463 U.S. 29, 43 (1983)).
106 See USF/ICC Transformation Order, 26 FCC Rcd at 17765-66, paras. 273, 277-79.
107 Id. at 17766, para. 278 (acknowledging that “there may be legitimate reasons why certain companies have
extremely high support amounts per-line”). See also id. at 17839-42, paras. 539-44; 47 C.F.R. § 1.3. Several parties
suggested that Accipiter’s carrier-specific claims regarding the $250 cap were better addressed through the waiver
process. See Comments on Requests for Reconsiderations by the Nat’l Assoc. of State Util. Consumer Advocates
and the N. J. Div. of Rate Counsel, WC Docket 10-90 et al., at 21 (filed Feb. 9, 2012); Reply of Cox
Communications, Inc., WC Docket No. 10-90 et al., at 3 (filed Feb. 21, 2012). As noted above, Accipiter
subsequently filed a petition to waive certain rules adopted in the USF/ICC Transformation Order, including the
$250 cap. See supra para. 21. On January 30, 2013, The Bureau granted Accipiter limited, temporary relief through
December 31, 2014. See Accipiter Waiver Order.
108 See Fifth Order on Reconsideration, 27 FCC Rcd at 14556-60, paras. 18-32.
109 Federal Communications Commission Response to United States House of Representatives Committee on
Energy and Commerce Universal Service Fund Data Request of July 9, 2012, Request 6, Study Areas that Received
$250 Per Month or More in Per-Line High-Cost Support in 2011 (submitted Sept. 28, 2012),
http://democrats.energycommerce.house.gov/index.php?q=news/committee-leaders-release-fcc-responses-on-
universal-service-fund. See also Letter from Michael Jacobs, FCC, to Marlene Dortch, FCC, WC Docket No. 10-90
(filed Jan. 16, 2013) (adding this Commission Response to the record in WC Docket No. 10-90).
110 The Bureau granted a three-year waiver of the $250 monthly per-line cap for Allband Communications
Cooperative. Allband Communications Cooperative Petition for Waiver of Certain High-Cost Universal Service
Rules
, WC Docket No. 10-90, Order, 27 FCC Rcd 8310 (Wireline Comp. Bur. 2012). As noted above, the Bureau
also granted Accipiter a waiver of the $250 monthly per-line cap (among other rules) through December 31, 2014.
See supra para. 21.
111 Rural Associations Petition at 18. See also Accipiter Petition at 18-19.
112 USF/ICC Transformation Order, 26 FCC Rcd at 17765, para. 274.
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Commission’s new rules.”113 The Commission fully considered and rejected such arguments in the
USF/ICC Transformation Order, explaining that section 254 of the Act “does not create any entitlement
or expectation that ETCs will receive any particular level of support or even any support at all.”114 In
fact, “there is no statutory provision or Commission rule that provides companies with a vested right to
continued receipt of support at current levels, and [the Commission is] not aware of any other,
independent source of law that gives particular companies an entitlement to ongoing USF support.”115 In
addition, the Commission upheld the principle that universal service mechanisms be predictable by
adopting a measured transition to the implementation of the $250 cap for all carriers that made clear how
much support carriers could expect to receive as the cap was phased in.116 As discussed above, rather
than “punish” carriers for previously incurred expenses, the Commission made efforts to “ease the
potential impact” of the transition on all carriers by delaying the implementation of the cap for six
months, phasing in the cap over a period of three years, and providing a waiver process for those carriers
that face unique circumstances.117

IV.

ICLS CORPORATE OPERATIONS EXPENSE CAP

A.

Background

42.
Accipiter and the Rural Associations also request that the Commission reconsider the
decision to extend the corporate operations expense cap to ICLS.118 Prior to the USF/ICC Transformation
Order
, the Commission capped the recovery of corporate operations expenses through HCLS,119 but had
permitted unlimited recovery of corporate operations expenses through ICLS. In the USF/ICC
Transformation Order
, the Commission modified the formula for calculating the corporate operations
expense cap to include a growth factor and extended its application to ICLS.120 As the Commission
explained when it originally adopted the HCLS corporate operations cap, whereas expenses incurred for
maintaining facilities and equipment are largely fixed, corporate operations expenses (e.g., travel


113 Accipiter Petition at 19.
114 USF/ICC Transformation Order, 26 FCC Rcd at 17745, para. 221 (citing Rural Cellular Assoc. v. FCC, 588 F.3d
1095, 1103 (D.C. Cir. 2009) (quoting Alenco, 201 F.3d at 621)) (“Section 254 does not mandate the receipt of
support by any particular carrier. Rather, as the Commission has indicated and the courts have agreed, the ‘purpose
of universal service is to benefit the customer, not the carrier.’”).
115 USF/ICC Transformation Order, 26 FCC Rcd at 17771, para. 293. See also Members of the Peanut Quota
Holders Assoc. v. United States
, 421 F.3d 1323, 1335 (Fed. Cir. 2005) (“The government is free to create programs
that convey benefits in the form of property, but, unless the statute itself or surrounding circumstances indicate that
such conveyances are intended to be irrevocable, the government does not forfeit its right to withdraw those benefits
or qualify them as it chooses.”).
116 47 U.S.C. § 254(b)(5); see also supra paras. 33, 38.
117 See supra paras. 38-39.
118 Accipiter Petition at 19-20; Rural Associations Petition at 11.
119 47 C.F.R. § 36.621(a)(4).
120 USF/ICC Transformation Order, 26 FCC Rcd at 17748, 18244-46, paras. 231-32, Appendix C. The
reimbursement is based on the number of working loops there are in the applicable study area. For study areas with
6,000 or fewer total working loops, carriers can recover monthly per loop either: (a) $42.337-(.00328 x number of
total working loops), or (b) $63,000/number of total working loops, whichever is greater; for study areas with more
than 6,000, but fewer than 17,887 total working loops, carriers can recover monthly per loop: $3.007 +
(117,990/number of total working loops); and for study areas with 17,887 or more total working loops, the monthly
amount per loop shall be $9.56. Id. at 17748, para. 232. As of January 1, 2013, the monthly per-loop limit is
adjusted each year to reflect the annual percentage change in the Gross Domestic Product and Consumer Price
Index. Id.
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expenses, legal services, public relations costs) are often discretionary.121 Thus, in the absence of a cap
on the recovery of these corporate operations expenses, there is little incentive for carriers to control such
spending.122 In the USF/ICC Transformation Order, the Commission concluded that extending the
corporate operations expense cap to ICLS would similarly motivate carriers to use their resources
efficiently because carriers will only be reimbursed a certain amount per loop for their corporate
operations expenses.123

B.

Discussion

43.
Accipiter and the Rural Associations provide no new evidence and introduce no new
arguments that persuade us to reverse or otherwise modify this approach, and therefore we deny these
petitions for reconsideration. Accipiter claims that any immediate extension of the corporate operations
expense cap to ICLS will have “devastating financial implications” on carriers that are in the process of
growing their operations to serve rural areas.124 Accipiter notes that “[c]orporate operations expenses
must be incurred before a carrier can add its first line,” while acknowledging that “per-line corporate
operations costs are quickly averaged down as new subscribers are added.”125 But the Commission has
already made accommodations for carriers with limited subscribership. The Commission retained the rule
that permits carriers with 6,000 or fewer working loops to recover a minimum amount per working loop if
they would receive less than that minimum under the application of the ICLS corporate operations
expense cap formula (i.e., $42.337 - (.00328 x number of total working loops)).126 Specifically, such
carriers can recover monthly for each working loop: $63,000 divided by their total number of working
loops.127 Moreover, if carriers believe that due to their unique characteristics, they need to recover more
corporate operations expenses through ICLS than allowed for under the cap, they remain free to petition
for a waiver of the cap pursuant to the Commission’s waiver process.128
44.
The Rural Associations request that the Commission delay the implementation of the
ICLS corporate operations expense cap “until no sooner than January 1, 2013.”129 They argue that the
Commission should not implement the corporate operations expense cap before carriers “have adequate
opportunity to adjust their operations for compliance” with the new operating expense caps that the
Commission proposed to develop through regression analysis in the FNPRM.130 The Rural Associations


121 Federal-State Joint Board on Universal Service, Access Charge Reform, Price Cap Performance Review for
Local Exchange Carriers, Transport Rate Structure and Pricing, End User Common Line Charge
, CC Docket Nos.
91-213, 94-1, 95-72, 96-45, 96-262, Fourth Order on Reconsideration and Report and Order, 13 FCC Rcd 5318,
5374, para. 92 (1997) (HCLS Cap Recon. Order).
122 Id.
123 USF/ICC Transformation Order, 26 FCC Rcd at 17748, para. 231.
124 Accipiter Petition at 19.
125 Id.
126 47 C.F.R. § 36.621(a)(4)(iii); USF/ICC Transformation Order, 26 FCC Rcd at 18245, App. C, para. 6 n.4. See
also supra
note 120.
127 USF/ICC Transformation Order, 26 FCC Rcd at 18245, App. C, para. 6, n.4.
128 Id. at 17839-42, paras. 539-44; 47 C.F.R. § 1.3. See also Fifth Order on Reconsideration, 27 FCC Rcd at 14556-
60, paras. 18-32 (modifying and clarifying the Commission’s guidance on the waiver process).
129 Rural Associations Petition at 12 n.25; see also Opposition and Comments of the Gila River Indian Cmty. and
Gila River Telecomms, Inc. to Petitions for Reconsideration, WC Docket No. 10-90 et al., at 17 (filed Feb. 9, 2012)
(GRIC and GRTI Opposition) (stating that the Commission “acted prematurely in . . . extending the corporate
operations expense cap to ICLS”).
130 Rural Associations Petition at 11-12 n.25. See USF/ICC Transformation Order and FNPRM, 26 FCC Rcd at
18059-62, paras. 1079-88.
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have not provided any evidence, however, demonstrating why extending the HCLS corporate operations
expense limit to ICLS was inappropriate or why it would be necessary to delay a critical reform that
advances the Commission’s goals of improving fiscal discipline and accountability.131
45.
We also deny Accipiter’s claim that the Commission violated 47 U.S.C. § 254(b)(5) by
applying the ICLS corporate operations expense cap to support for 2012, which is determined with
reference to 2010 expenses.132 The company argues that it “reasonably and rationally made decisions
about 2010 investments and expenses based on the rules that were in place in 2010.”133 But as we
discussed above and addressed repeatedly in the USF/ICC Transformation Order, section 254 does not
entitle carriers to recover USF support simply because they expected to receive that support.134 Accipiter
does not cite any additional legal authority that persuades us otherwise.
46.
Finally, we are not persuaded by Accipiter’s argument that a “one size fits all rule,”—i.e.,
using a nationwide formula to cap ICLS—is “inappropriate and inflexible” due to the variability in
corporate operations expenses between different regions in the country.135 Accipiter has not provided any
evidence to explain why a nationwide formula is unreasonable. Indeed, the Commission has used a
nationwide formula to limit the recovery of corporate operations expenses for HCLS ever since it adopted
that corporate operations expense cap in 1997.136 Accipiter has failed to explain how ICLS differs from
HCLS in such a way that it would be unreasonable for the Commission to extend the HCLS nationwide
formula to ICLS.

V.

IMPLEMENTATION OF FURTHER REFORMS FOR RATE-OF-RETURN CARRIERS

47.
Finally, we take this opportunity to address some general arguments made by a number of
rate-of-return carrier associations that the Commission should undertake “a careful data-driven process
that takes measure of . . . reforms just now being implemented,” including those reforms described above,
“in lieu of racing forward with additional changes.”137 Although we disagree with these carriers insofar as
they suggest we stop our implementation of the Commission’s USF/ICC Transformation Order, we agree
that a careful data-driven process is consistent with – and indeed critical to – that implementation. We
emphasize our continued commitment to such a process, and we direct the Bureau, as it implements the
modifications described above and proceeds with other reforms adopted in the USF/ICC Transformation


131 See USF/ICC Transformation Order, 26 FCC Rcd at 17738, para. 194 (identifying as Commission goals for
universal service reform: “ensuring fiscal responsibility in all USF expenditures, increasing the accountability for
Fund recipients, and extending modern broadband-capable networks”); id. at 17747, para. 229 (noting that
“[e]xtending the limit on the recovery of corporate operations expenses to ICLS . . . furthers [the Commission’s]
goal of fiscal responsibility and accountability”).
132 Accipiter Petition at 20.
133 Id.
134 See supra notes 114-115 and accompanying text.
135 Accipiter Petition at 20. See also GRIC and GRTI Opposition at 17-19 (claiming that corporate expenses are
higher for Tribally-owned carriers, and thus application of the cap to these carriers is “arbitrary and capricious”);
Comments of Mescalero Apache Telecom, Inc., WC Docket No. 10-90 et al., at 4-5 (filed Jan. 18, 2012) (expressing
concern about the extension of the corporate operations expense cap to ICLS, along with implementation of the
proposed operating and expense caps, to Tribally-owned carriers).
136 Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report and Order, 12 FCC Rcd 8776,
8930-32, paras. 283-85 (1997) (subsequent history omitted). See also HCLS Cap Recon. Order, 13 FCC Rcd at
5374-85, paras. 92-109. The Commission has held that “individual companies that are required to incur unusually
high corporate operations expenses . . . have the right to apply for a waiver with the Commission to demonstrate the
necessity of these expenses for the provision of the supported services.” Id. at 5376, para. 93.
137 Nov. 9, 2012 Ex Parte.
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Order, to continue taking all appropriate steps to seek input from affected stakeholders, and gather
relevant data on the effect of reforms as they proceed.138 As an additional measure, we direct the Bureau
to report to the Commission, within two years of release of the USF/ICC Transformation Order, i.e.,
November 18, 2013, on the progress of implementation, and on the impact of reforms based on relevant,
available data at that time.

VI.

PROCEDURAL MATTERS

A.

Paperwork Reduction Act

48.
This document does not contain proposed information collection(s) subject to the
Paperwork Reduction Act of 1995 (PRA), Public Law 104-13. In addition, therefore, it does not contain
any new or modified information collection burden for small business concerns with fewer than 25
employees, pursuant to the Small Business Paperwork Relief Act of 2002, Public Law 107-198, see 44
U.S.C. 3506(c)(4).

B.

Final Regulatory Flexibility Act Certification

49.
The Regulatory Flexibility Act (“RFA”)139 requires that agencies prepare a regulatory
flexibility analysis for notice-and-comment rulemaking proceedings, unless the agency certifies that “the
rule will not have a significant economic impact on a substantial number of small entities.”140 The RFA
generally defines “small entity” as having the same meaning as the terms “small business,” “small
organization,” and “small governmental jurisdiction.”141 In addition, the term “small business” has the
same meaning as the term “small business concern” under the Small Business Act.142 A small business
concern is one which: (1) is independently owned and operated; (2) is not dominant in its field of


138 We note that the Bureau has taken numerous steps to date to promote transparency and access to data in its
decision-making to date. For example, in implementing the HCLS benchmarks, the Bureau posted on the
Commission’s web page all dependent and independent variables for all cost company study areas, all computer
code for running the regressions, a detailed description of how the Bureau created all GIS variables used in the
regression and a map showing all study area boundaries. See http://transition.fcc.gov/wcb/iatd/neca.html. Since
posting this information, the Bureau has expeditiously processed five requests it has received for correction of
individual carriers’ data. See Connect America, High-Cost Universal Fund Support, WC Docket Nos. 10-90, 05-
337, Order, DA 12-1907 (rel. Nov. 28, 2012) (granting a waiver to Arctic Slope Telephone Association Cooperative,
Inc.); Connect America, High-Cost Universal Fund Support, WC Docket Nos. 10-90, 05-337, Order, 27 FCC Rcd
12106 (2012) (granting a waiver to Border to Border Communications, Inc.); Connect America, High-Cost
Universal Fund Support,
WC Docket Nos. 10-90, 05-337, Order, 27 FCC Rcd 11075 (2012) (granting a waiver to
Wauneta Telephone Company); Connect America, High-Cost Universal Fund Support, WC Docket Nos. 10-90, 05-
337, Order, 27 FCC Rcd 7147 (2012) (granting waivers to West River Cooperative Telephone Company and
Kennebec Telephone Companies).
139 See 5 U.S.C. § 601 et seq. The RFA has been amended by the Small Business Regulatory Enforcement Fairness
Act of 1996, Pub. L. No. 104-121, Title II, 110 Stat. 857.
140 5 U.S.C. § 605(b).
141 5 U.S.C. § 601(6).
142 5 U.S.C. § 601(3) (incorporating by reference the definition of “small business concern” in Small Business Act,
15 U.S.C. S § 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.”
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operation; and (3) satisfies any additional criteria established by the Small Business Administration
(SBA).143
50.
This document modifies and clarifies the benchmarking rule adopted by the Commission
in USF/ICC Transformation Order,144 and modifies the Wireline Competition Bureau’s implementation
of that rule.145 These modifications and clarifications do not create any burdens, benefits, or requirements
that were not addressed by the Final Regulatory Flexibility Analysis attached to USF/ICC Transformation
Order
.146 The Commission will send a copy of the Order including a copy of this final certification, in a
report to Congress pursuant to the Small Business Regulatory Enforcement Fairness Act of 1996, see 5
U.S.C. § 801(a)(1)(A). In addition, the Order and this certification will be sent to the Chief Counsel for
Advocacy of the Small Business Administration, and will be published in the Federal Register. See 5
U.S.C. § 605(b).

C.

Congressional Review Act

51.
The Commission will send a copy of this Order to Congress and the Government
Accountability Office pursuant to the Congressional Review Act.147

D.

Effective Date

52.
We conclude that good cause exists to make this Order effective immediately upon
publication in the Federal Register, pursuant to section 553(d)(3) of the Administrative Procedure Act.148
Agencies determining whether there is good cause to make a rule revision take effect less than 30 days
after Federal Register publication must balance the necessity for immediate implementation against
principles of fundamental fairness that require that all affected persons be afforded a reasonable time to
prepare for the effective date of a new rule.149 As we note above, summing the capex and opex
benchmarks together is an important interim step to recognize the trade-offs that carriers have made in
investment, and will therefore mitigate or eliminate the effect of the existing benchmarks cap mechanism
on carriers that are capped under one or the other benchmark but not both. It will also reduce the amount
of support redistributed to uncapped carriers by a corresponding amount. Because many more carriers
receive redistributed support than are capped under the existing mechanism, the effect of summing the
caps on any carrier receiving redistributed support will generally be much less significant than the effect
on those carriers that are currently capped. Moreover, we note that high-cost loop support is generally
subject to true-ups over time. Carriers, accordingly, generally have no certain expectation of the precise
amount of support they will receive. We conclude under these circumstances that the public interest is
best served by immediate implementation of our new interim rule, and that, on balance, carriers that will
experience a minor reduction in redistributed support do not require additional time to prepare for
implementation of a rule change that affects them only modestly.
53.
In addition, we modified the phase-in of the HCLS benchmarks to limit the amount of
reduction of support to no more than fifteen percent of the study area’s support absent implementation of


143 Small Business Act, § 15 U.S.C. S 632.
144 See USF/ICC Transformation Order and FNPRM, 26 FCC Rcd at 17742-47, paras. 210-26.
145 See HCLS Benchmarks Implementation Order, 27 FCC Rcd 4235
146 See USF/ICC Transformation Order and FNPRM, 26 FCC Rcd at 18324-63, App. O.
147 See 5 U.S.C. 801(a)(1)(A).
148 5 U.S.C. 553(d)(3).
149 Omnipoint Corporation v. FCC, 78 F.3d 620, 630 (D.C. Cir. 1996), citing United States v. Gavrilovic, 551 F.2d
1099, 1105 (8th Cir. 1977).
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the benchmark rule to give carriers that are heavily impacted by the benchmarks more time to adjust. We
find that implementing the modification to the phase-in as expeditiously as possible furthers the
Commission’s objective of ensuring that carriers experience a more gradual implementation of the
benchmarks overall which obviates the necessity of providing carriers additional 30 day notice before
implementation.

VII.

ORDERING CLAUSES

54.
Accordingly, IT IS ORDERED, pursuant to the authority contained in sections 1, 2, 4(i),
201-206, 214, 218-220, 251, 252, 254, 256, 303(r), 332, and 403 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), 201-
206, 214, 218-220, 251, 252, 254, 256, 303(r), 332, 403, 1302, and sections 1.1 and 1.429 of the
Commission’s rules, 47 C.F.R. §§ 1.1, 1.429, that this Sixth Order on Reconsideration IS ADOPTED,
effective upon publication of the text or summary thereof in the Federal Register.
55.
IT IS FURTHER ORDERED that, pursuant to the authority contained in section 405 of
the Communications Act of 1934, as amended, 47 U.S.C. § 405 and sections 0.291 and 1.429 of the
Commission’s rules, 47 C.F.R. § 0.291 and 47 C.F.R. § 1.429, that the Petition for Reconsideration filed
by the National Exchange Carrier Association, Inc., Organization for the Promotion and Advancement of
Small Telecommunications Companies, and Western Telecommunications Alliance on December 29,
2011 IS GRANTED IN PART to the extent described herein, and IS DENIED IN PART to the extent
described herein.
56.
IT IS FURTHER ORDERED that, pursuant to the authority contained in section 405 of
the Communications Act of 1934, as amended, 47 U.S.C. § 405 and sections 0.291 and 1.429 of the
Commission’s rules, 47 C.F.R. § 0.291 and 47 C.F.R. § 1.429, that the Petition for Reconsideration filed
by Accipiter Communications Inc. on December 29, 2011 IS DENIED IN PART to the extent described
herein.
57.
IT IS FURTHER ORDERED that, pursuant to the authority contained in section 155(c) of
the Communications Act of 1934, as amended, 47 U.S.C. § 155(c) and sections 0.291 and 1.115 of the
Commission’s rules, 47 C.F.R. § 0.291 and 47 C.F.R. § 1.115, that the Application for Review filed by
Central Texas Telephone Cooperative, Inc. on May, 25, 2012 IS GRANTED IN PART to the extent
described herein, and IS DENIED IN PART to the extent described herein.
58.
IT IS FURTHER ORDERED that, pursuant to the authority contained in section 155(c) of
the Communications Act of 1934, as amended, 47 U.S.C. § 155(c) and sections 0.291 and 1.115 of the
Commission’s rules, 47 C.F.R. § 0.291 and 47 C.F.R. § 1.115, that the Application for Review filed by
the National Exchange Carrier Association, Inc., National Telecommunications Cooperative Association,
Organization for the Promotion and Advancement of Small Telecommunications Companies, and
Western Telecommunications Alliance on May, 25, 2011 IS DENIED IN PART to the extent described
herein.
59.
IT IS FURTHER ORDERED that, pursuant to the authority contained in section 155(c) of
the Communications Act of 1934, as amended, 47 U.S.C. § 155(c) and sections 0.291 and 1.115 of the
Commission’s rules, 47 C.F.R. § 0.291 and 47 C.F.R. § 1.115, that the Application for Review filed by
East Ascension Telephone Company, LLC on May, 25, 2011 IS DENIED IN PART to the extent
described herein.
60.
IT IS FURTHER ORDERED that, pursuant to the authority contained in section 155(c) of
the Communications Act of 1934, as amended, 47 U.S.C. § 155(c) and sections 0.291 and 1.115 of the
Commission’s rules, 47 C.F.R. § 0.291 and 47 C.F.R. § 1.115, that the Application for Review filed by
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Silver Star Telephone Company, Inc. on May, 25, 2012 IS GRANTED IN PART to the extent described
herein, and IS DENIED IN PART to the extent described herein.
61.
IT IS FURTHER ORDERED that, pursuant to the authority contained in section 155(c) of
the Communications Act of 1934, as amended, 47 U.S.C. § 155(c) and sections 0.291 and 1.115 of the
Commission’s rules, 47 C.F.R. § 0.291 and 47 C.F.R. § 1.115, that the Supplement to Application for
Review filed by Silver Star Telephone Company, Inc. on June 22, 2012 IS GRANTED IN PART to the
extent described herein, and IS DENIED IN PART to the extent described herein.
62.
IT IS FURTHER ORDERED that, pursuant to the authority contained in section 155(c) of
the Communications Act of 1934, as amended, 47 U.S.C. § 155(c) and sections 0.291 and 1.115 of the
Commission’s rules, 47 C.F.R. § 0.291 and 47 C.F.R. § 1.115, that the Application for Review filed by
Blue Valley Telephone Telecommunications, Inc. on June 22, 2012 IS GRANTED IN PART to the extent
described herein, and IS DENIED IN PART to the extent described herein.
63.
IT IS FURTHER ORDERED that, pursuant to the authority contained in section 155(c) of
the Communications Act of 1934, as amended, 47 U.S.C. § 155(c) and sections 0.291 and 1.115 of the
Commission’s rules, 47 C.F.R. § 0.291 and 47 C.F.R. § 1.115, that the Application for Review filed by
Blooston Rural Broadband Carriers on May, 25, 2012 IS GRANTED IN PART to the extent described
herein, and IS DENIED IN PART to the extent described herein.
64.
IT IS FURTHER ORDERED that, pursuant to the authority contained in section 155(c) of
the Communications Act of 1934, as amended, 47 U.S.C. § 155(c) and sections 0.291 and 1.115 of the
Commission’s rules, 47 C.F.R. § 0.291 and 47 C.F.R. § 1.115, that the Application for Review filed by
Accipiter Communications Inc. on May, 25, 2012 IS GRANTED IN PART to the extent described herein,
and IS DENIED IN PART to the extent described herein.
65.
IT IS FURTHER ORDERED that, pursuant to the authority contained in section 155(c) of
the Communications Act of 1934, as amended, 47 U.S.C. § 155(c) and sections 0.291 and 1.115 of the
Commission’s rules, 47 C.F.R. § 0.291 and 47 C.F.R. § 1.115, that the Application for Review filed by
United States Telecom Association on May, 25, 2012 IS GRANTED IN PART to the extent described
herein, and IS DENIED IN PART to the extent described herein.
66.
IT IS FURTHER ORDERED that the Commission SHALL SEND a copy of this Order to
Congress and the Government Accountability Office pursuant to the Congressional Review Act, see 5
U.S.C. § 801(a)(1)(A).
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67.
IT IS FURTHER ORDERED, that the Commission’s Consumer and Governmental
Affairs Bureau, Reference Information Center, SHALL SEND a copy of this Order, including the Final
Regulatory Flexibility Certification, to the Chief Counsel for Advocacy of the Small Business
Administration.
FEDERAL COMMUNICATIONS COMMISSION
Marlene H. Dortch
Secretary
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STATEMENT OF

CHAIRMAN JULIUS GENACHOWSKI

Re:
Connect America Fund, WC Docket No. 10-90, High-Cost Universal Service Support, WC
Docket No. 05-337.
Under the old Universal Service Fund rules, smaller, rate-of-return carriers faced no overall limits
on their spending. Even within HCLS, a part of USF that is capped overall, carriers that invested
prudently lost out more and more every year — while those that spent the most controlled their own
funding spigot, and could keep turning up the flow of USF dollars without limit. This created a perverse
race to the top in spending. The Commission’s unanimous, once-in-a-generation overhaul of the
Universal Service Fund finally put an end to this practice, establishing a framework for reasonable limits
on reimbursement for individual carriers’ expenses as part of our overall push toward greater
accountability, fiscal responsibility, and a market- and incentive-based framework. Following a careful,
data-driven process involving dozens of stakeholder conversations, thorough statistical analysis, and peer
review, the Wireline Bureau implemented a specific set of spending benchmarks.
Today we reject calls to reconsider our decision to set spending limits, or our decision to put in
place a number of other important cost controls for rate-of-return carriers, while making some modest
adjustments. These adjustments simplify the spending caps and give the Bureau greater flexibility to
consider proposals to maintain certainty regarding year-to-year funding levels in 2015 and beyond, while
protecting incentives for efficient spending.
Fiscal responsibility is hard work, and is requiring real adjustments for carriers and other
stakeholders that had gotten used to a laxer system. That’s why we phased in changes and provided a
fact-intensive waiver process. But it would have been irresponsible to go back on measures like the
overall spending caps, or tougher limits on “corporate operations” expenses, as some have suggested.
These measures are moving us toward an incentive-based system and finally helping protect the
consumers and businesses that pay into the Fund. I thank the Bureau for their hard, ongoing, and
excellent work implementing these controls and other parts of the USF/ICC Transformation Order. They
and we will continue to work with all stakeholders as we move forward.
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STATEMENT OF

COMMISSIONER ROBERT M. McDOWELL

Re:
Connect America Fund, WC Docket No. 10-90, High-Cost Universal Service Support, WC
Docket No. 05-337.
The 2011 USF/ICC Transformation Order was a bipartisan, historic feat that many said could not
be accomplished. It was a reform effort to flatten the curve of an entitlement while emphasizing the need
to expand broadband access to American consumers who are currently unserved. Nevertheless, as I have
said since the order was approved, this will be an iterative process. As such, I have been open to learning
whether the Commission needs to make a course correction to any parts of our reforms. Today’s order
does that in a thoughtful way, while not discarding our commitment to fiscal responsibility. Therefore, I
support this order.
As we move forward, I am committed to working with all stakeholders and my colleagues to
ensure that our reforms continue to promote efficiency in the program through market-based incentives
while expanding broadband availability throughout America.
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STATEMENT OF

COMMISSIONER MIGNON L. CLYBURN

Re:
Connect America Fund, WC Docket No. 10-90, High-Cost Universal Service Support, WC
Docket No. 05-337.
The USF/ICC Transformation Order was an historic overhaul of the high-cost Universal Service
Fund (the “Fund”). The main purpose for this bold reorientation of the Fund was to bring robust
broadband networks to consumers living in high-cost geographic areas, where the private sector business
case has yet to support such service. In addition, the unanimously approved bipartisan effort determined
that certain reforms were needed to ensure that carriers were incentivized not only to invest in broadband
networks, but to do so efficiently and effectively. The FCC’s determination to modify the high-cost loop
support mechanism for rate-of-return carriers was an important step, and I fully supported the
benchmarking rule that was adopted and implemented by the Wireline Competition Bureau.
As we explained in the USF/ICC Transformation Order and again in today’s Sixth
Reconsideration Order, the lack of the right incentives under the Commission’s old rule was problematic
and unsustainable. The essential modifications we make today to the benchmarks not only will provide
more flexibility, but will continue to operate as a moderating tool—a checks and balances, if you will—
which will encourage efficient investment and operational expenses by rate-of-return carriers as intended
by the USF/ICC Transformation Order. Our focus has been providing the appropriate financial
incentives for carriers to invest in broadband networks, balanced with the overall impact on our objective
to reach as many consumers as possible with our limited high-cost budget. In doing so, the issue of
predictability has been raised, and while our initial analysis indicates that carriers could predict their
funding under the current benchmarks, we are directing the Bureau’s implementation of limited
adjustments to ensure that predictability continues. I support the Commission’s efforts to modify reforms
as needed, while staying true to our overall objectives in the USF/ICC Transformation Order—to ensure
that the Fund is being used to deploy broadband in the most efficient and effective manner, reaching as
many consumers as possible, in order to provide truly universal voice and broadband service.
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STATEMENT OF

COMMISSIONER JESSICA ROSENWORCEL

Re:
Connect America Fund, WC Docket No. 10-90, High-Cost Universal Service Support, WC
Docket No. 05-337.
A little over a year ago, the Commission took historic steps to update its high-cost universal
service fund and intercarrier compensation system. I commend my colleagues for this effort. They
refocused the fund from last century’s technology on to the broadband and wireless communications
challenges of this century; they put it on a budget; they increased accountability throughout.
But as I have said before, I worry that our reforms to the high-cost universal service system are
extremely complex. I fear that this complexity can deny carriers dependent on them the certainty they
need to confidently invest in their network infrastructure. So when opportunities arise to simplify our
rules in a manner that is fiscally sound, good for consumers and bound to inspire investment—we should
seize them.
Today, we have done just that. This order makes some adjustments to the universal service
reforms for rural carriers that I recommended some time ago. Specifically, this order combines the two
separate capital and operating expense benchmarks into one benchmark to simplify the regression
analysis and provide carriers with flexibility to meet our new limits. We also direct the Wireline
Competition Bureau to take a hard look at keeping these benchmarks in place for a longer period of time,
instead of resetting them annually. I think these kind of adjustments will help ensure a more
“predictable” and “sufficient” system—one that provides carriers with more confidence to invest in
broadband infrastructure. So I commend the Chairman and my colleagues for approving this order and
putting these changes in place.
Today’s decision will help promote confidence in broadband investment for carriers serving rural
communities. Going forward, I believe we need to do more of the same by distributing incremental
support from the first phase of the Connect America Fund—as soon as possible.
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STATEMENT OF

COMMISSIONER AJIT PAI

APPROVING IN PART AND CONCURRING IN PART

Re:
Connect America Fund, WC Docket No. 10-90, High-Cost Universal Service Support, WC
Docket No. 05-337.
In the Universal Service Transformation Order, the Commission adopted benchmarks for the
High-Cost Loop Support (HCLS) component of the Universal Service Fund to create “structural
incentives for rate-of-return companies to operate more efficiently and make prudent expenditures.”1 The
Commission proposed benchmarks based on a quantile regression analysis (QRA) of the correlation
between the characteristics of various rate-of-return carriers and their historical capital and operating
expenses but left the details to be decided by the Wireline Competition Bureau. Five months later, the
Bureau adopted the Benchmarks Order, which established separate QRA benchmarks for each rural
carrier’s capital expenses and operating expenses and phased in those benchmarks over 18 months.2
Like my colleagues, I believe that establishing limits on the universal service support a carrier can
receive is a good thing. In this era of fiscal restraint, no one can expect the government to continue to
fund their expenses without question. And with respect to HCLS, the Commission instituted such limits
almost twenty years ago when it capped the program at the recommendation of the Federal-State Joint
Board.3 It is important to recognize that the limits established in the Benchmarks Order and that we
address here do not reduce the size of the HCLS program.4 They instead determine how universal service
funding will be distributed among rural carriers, not how much will be spent overall.
With that background, I turn to today’s order. I join it to the extent that it mitigates the harm of
the QRA benchmarks and provides short-term relief for rural carriers. But I am disappointed that we do
not go further to reform these benchmarks. As I have said before, universal service support should be
stable and predictable and distributed consistent with the law and common sense.5 I am not so sure that
the QRA benchmarks that we reaffirm today pass that test.


1 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,
17742, para. 210 (2011) (Universal Service Transformation Order).
2 Connect America Fund; High-Cost Universal Service Support, WC Docket Nos. 10-90, 05-337, Order, 27 FCC
Rcd 4235, 4259, para. 70 (Wireline Comp. Bur. 2012) (Benchmarks Order).
3 See Amendment of Part 36 of the Commission’s Rules and Establishment of a Joint Board, CC Docket No. 80-286,
Report and Order, 9 FCC Rcd 303, 304, para. 11 (1993); see also 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, 00-256, Fourteenth Report and Order,
Twenty-Second Order on Reconsideration, and Further Notice Of Proposed Rulemaking in CC Docket No. 96-45,
and Report and Order in CC Docket No. 00-256, 16 FCC Rcd 11244, 11259–68, paras. 31–53 (2001) (reviewing the
history of the HCLS cap and modifying it).
4 Sixth Order on Reconsideration, para. 19.
5 Remarks of FCC Commissioner Ajit Pai, “Unlocking Investment and Innovation in the Digital Age: The Path to a
21st-Century FCC” (July 18, 2012), available at http://go.usa.gov/4QJG; Opening Remarks of Commissioner Ajit
Pai at the Rural Broadband Roundtable in Oswego, Kansas (Sept. 6, 2012), available at http://go.usa.gov/4QJz.
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First, the QRA benchmarks are unpredictable. As it stands, the Bureau is scheduled to
recalculate the QRA benchmarks each year to reflect the investment and operating decisions of not just
each individual rural carrier but its 737 brethren as well. Because this determination is relative, a carrier
has little ability to predict what its benchmarks will be in one, three, or five years unless it somehow
guesses what the entire rural industry will do in the future.
The order suggests that QRA benchmarks in one year may be “strongly predictive” of
benchmarks the next.6 But this suggestion is based on 2010 and 2011 cost data, the two years before the
QRA benchmarks were adopted and implemented. As a stockbroker might say: Past performance does
not necessarily indicate future results. That’s especially true here, when the whole point of the QRA
benchmarks is to induce rural carriers to reduce their spending, which will necessarily feedback into QRA
benchmarks for future years.7 Moreover, just this month the U.S. Department of Agriculture asked the
Commission for “confidential access to the regression model to assist [the Department] in managing its
lending program,”8 presumably because the Department, like rural carriers, thinks that predictability is a
weakness—not a strength—of the QRA benchmarks. Indeed, as a recent six-month study of the QRA
benchmarks found, “the QRA is a complicated statistical analysis that cannot be predicted—at least at the
present—with any degree of confidence.”9
This unpredictability does not promote certainty. And it appears the investment environment has
cooled as a result, impeding the deployment of next-generation technologies and broadband services to
rural Americans.10 Indeed, the Department of Agriculture recently told the Commission that demand for
Rural Utility Service loans for broadband build-out has plummeted this year due in part to the uncertainty
created by the QRA benchmarks.11 Communications infrastructure requires not a one- or two-year
investment, but a ten- or twenty-year commitment. If a rural carrier does not know whether or how much
universal service funding will be available, it will not invest in the higher-cost regions of America.
Indeed, it may not even have the choice, as banks and investors are unlikely to lend to rural carriers with
uncertain funding.
Unpredictability also undermines the stated purpose of the QRA benchmarks, which is to
incentivize efficient and prudent decision-making by rate-of-return carriers. The HCLS mechanism is a
backward-looking mechanism within the Universal Service Fund, meaning that support received today is
based on—and is payment for—historical, two-year-old expenditures. Thus, the 2012 QRA benchmarks


6 Sixth Order on Reconsideration, para. 15 & note 89.
7 See, e.g., Vincent H. Wiemer & Michael J. Balhoff, CFA, White Paper: Lessons from Rebuilding the FCC’s
Quantile Regression Analysis at 28 (Feb. 2013) (Rebuilding QRA White Paper), available at http://go.usa.gov/4he4
(“[T]he effect of the use of the model . . . is to create a much higher degree of unpredictability and to incent very
conservative levels of spending by an individual carrier so that it does not risk shortfalls in recovery on its high-cost
spending. Then, if most carriers take this approach each year as would be rational, each subsequent year becomes
more conservative and there is a potential ‘race to the bottom.’”).
8 See 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 2 (Feb. 15, 2013) (Dep’t of Agriculture Ex Parte Letter).
9 Rebuilding QRA White Paper at 28; see id. at 68 (“The new QRA is duck hunting when the winds are high, the
distance is farther, and, for sport, there is no light.”).
10 See US Telecom Application for Review at 4–5 (arguing that the “perception of significant inaccuracy and
unpredictability . . . whether correct or not, is causing widespread fear in the cost-company rate-of-return
community which is having a chilling effect on broadband investment plans”).
11 See Dep’t of Agriculture Ex Parte Letter at 1–2 (reporting on a meeting between Secretary Vilsack and Chairman
Julius Genachowski and noting that “demand for [Rural Utility Service] loan funds dropped to roughly 37% of the
total amount of loan funds appropriated by Congress in [fiscal year] 2012”).
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were based on 2010 expenses, and this year’s 2013 QRA benchmarks are based on data the National
Exchange Carrier Association collected last July about calendar year 2011 costs.12 In other words, a rural
carrier seeking to adjust its operating expenses today needs to know what the QRA benchmarks will be
two years from now—in 2015—because those are the benchmarks that will apply to today’s spending.
And because the costs of capital investment are generally spread over several years, not just one, a rural
carrier making investments this year would likely need to know the QRA benchmarks for 2015, 2019, and
even thereafter. Yet a rural carrier cannot even guess its 2015 QRA benchmarks because they will be
based on an entirely new model and may or may not (today’s order leaves that to the Bureau’s discretion)
bear some relation to the 2014 benchmarks.13
Unpredictability also unnecessarily imperils the financial situation of rural carriers. Consider a
small business whose expenditures are just above the 2013 QRA benchmark. Because the support it
receives in 2013 reimburses money already spent, the unexpected decrease in support may force the
carrier to cut its current costs dramatically—not because doing so is efficient but because it may be the
only way to make payroll and keep the lights on. If the carrier then falls below the 2014 QRA
benchmark, it may suddenly feel flush with cash . . . only to see another large drop in 2015. This whip-
saw effect is itself an impediment to long-term financial planning and efficient investment, and the
unpredictability of the QRA benchmarks from one year to the next exacerbates this problem.
This is not just a matter of good policy. Promoting predictability is a congressional command:
Alongside the basic universal service principle of serving consumers “in all regions of the Nation,”
section 254 requires that the Commission run the Universal Service Fund on the principles that there be
“specific, predictable and sufficient . . . mechanisms to preserve and advance universal service.”14 To be
sure, this predictability principle can yield to countervailing statutory principles,15 but none of the latter
pertain here. And though this principle certainly does not require that we promise a particular carrier a
particular amount,16 surely Congress intended that we give carriers at least some guidance—at least
enough so that the QRA benchmarks can serve the purpose we set for them.
Second, although the 2013 QRA benchmarks make more sense as a result of today’s order (more
on that later), I still have my doubts about their utility. The 2013 QRA benchmarks do not, for example,
incentivize efficient investment since they apply to expenses incurred in calendar year 2011—and the
Universal Service Transformation Order was not released until November of that year. They do not
plausibly redirect support from low-cost areas to high-cost areas because, even after today’s order,
carriers like Copper Valley Telephone and Arctic Slope Telephone will have lower caps merely because
they serve Alaska.17 They do not target inefficient carriers (only “outliers”), nor do they encourage
broadband deployment.18 In short, I am concerned that the 2013 QRA benchmarks may just end up
arbitrarily redistributing support from one group of carriers to another.


12 See 47 C.F.R. § 36.611.
13 Sixth Order on Reconsideration, para. 16 (“We direct the Bureau, as it updates the benchmarks for 2014, to
consider whether these benchmarks should be held constant for multiple years.”).
14 47 U.S.C. § 254(b)(2), (3), (5).
15 See Alenco Communications v. FCC, 201 F.3d 608, 621 (5th Cir. 2000).
16 Id. at 623.
17 Indeed, several studies have shown that costs of infrastructure deployment in Alaska are significantly higher than
costs in the lower 48 states. See Rebuilding QRA White Paper at 21.
18 Despite post-adoption language in today’s order suggesting that the QRA benchmarks “provid[e] additional
support for carriers below their caps to extend broadband to rural consumers,” Sixth Order on Reconsideration, para.
2, there is no connection between the additional support given to rural carriers below their caps and broadband
(continued...)
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Moreover, the data underlying the benchmarks are themselves flawed.19 The Benchmarks Order
forthrightly admitted that the Commission does not keep data on carrier study area boundaries.20 Instead,
the Benchmarks Order relied on a commercial database for 2012 and 2013 while it put in place an 18-
month process to correct errors and address inaccuracies in that database’s study area boundary
information.21 The new boundary information hopefully will benefit those subject to the 2014 QRA
benchmarks. But the 2013 QRA benchmarks are tainted by the inaccuracies and errors inherent in the
admittedly flawed mapping data. And the only comprehensive study of the benchmarks conducted to date
found significant problems with fourteen of the sixteen variables used to produce them.22
I nevertheless approve today’s order in part because it provides some short-term relief for rural
carriers that will be (and have been) affected by the 2013 QRA benchmarks. For example, one problem
with the Benchmarks Order was that it analyzed the capital expenditures (capex) and operating expenses
(opex) of carriers separately. So if a small carrier like Council Grove Telephone in Kansas exceeded its
capex limit by $13, it would be capped even though its opex was more than $300 below par. The same is
true for Hemingford Cooperative in Nebraska, whose capex exceeded its limit by $6 but had operating
expenses $40 below the benchmark. The Benchmarks Order established these separate limits even
though that item recognized that carriers should trade off capital investments and operating expenses to
minimize the total cost of the network.23
Today’s order recognizes that problem24 and corrects it by summing the separate QRA
benchmarks for the remainder of 2013.25 This salutary measure alone should reduce the number of
capped rural carriers from 159 to 70, sparing small carriers like Council Grove and Hemingford
Cooperative.
One other positive step merits attention. For capped carriers, the order adds a 15 percent
backstop to limit the total amount of support a rural carrier can lose in 2013 based on the QRA
benchmarks.26 With this step, rural carriers will have a slightly easier time managing their cash flow in
2013 and, hopefully, keeping their doors open.
(Continued from previous page)


build-out. Indeed, if a rural carrier now below the cap chooses to reinvest that support in broadband, it risks pushing
itself over the cap in future years, thus mitigating any benefits it may have received. This, in part, may be why there
has been almost no support in rural America for the current QRA benchmarks.
19 This concern was recently reinforced by both the Department of Agriculture, which has asked the Commission to
“correct the structural and data integrity concerns of the rural carriers,” Dep’t of Agriculture Ex Parte Letter at 2,
and an independent six-month study of the QRA benchmarks, see Rebuilding QRA White Paper at 17–19, 21.
20 Benchmarks Order, 27 FCC Rcd at 4245, para. 25 (relying on Tele Atlas study area boundary data instead).
21 Id. at 4246, paras. 27–28.
22 See Rebuilding QRA White Paper at 17.
23 See, e.g., Benchmarks Order, 27 FCC Rcd at 4265, para. 96 (Appendix A) (hypothesizing that “in locations where
trenching is unusually expensive, an efficient carrier may install aerial plant (use poles rather than trench) . . .
[which] would involve lower capital costs than trenching, but higher future operations costs”).
24 Sixth Order on Reconsideration, para. 26 (noting that “carriers often consider the trade-offs between capital costs
and operating expenses when making investment decisions” and recognizing that the Benchmarks Order gave no
credit to companies that did so to minimize costs).
25 Id., para. 29.
26 Id., para. 30.
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But even with these modifications, many carriers will still feel the arbitrary impact of the 2013
QRA benchmarks. For example, more than 70 percent of the carriers that will be capped in 2013 will
face lower QRA benchmarks than they did in 2012.27 And while the QRA benchmarks went down, costs
per loop went up as line loss continued throughout rural America.28 This double whammy means that a
carrier like Bridgewater Telephone in Minnesota, which was not capped in 2012, will be capped in 2013
even though it cut more than $125,000 in operating expenses and $135,000 in capital expenditures from
one year to the next.
Going forward, I remain hopeful that we will address the unpredictability of the caps that will
apply in the years to come. Two thoughts come to mind on that front: For one, we should consider
holding the QRA benchmarks constant for several years with annual adjustments for line loss.29 Had we
done that this year, the 70 carriers now capped would have dropped to 54, and almost 80 percent of the
capped carriers would have had higher 2013 QRA benchmarks than they will after today’s order.
Moreover, holding the benchmarks constant for a series of years will allow rural carriers to make longer
term investments and adjust their operations because they will be able to actually predict the benchmarks
that will apply to them in the future.
For another, we should consider phasing in new, reduced QRA benchmarks over the course of a
year to ease the financial impact that unexpected changes may cause to rural operations. Such a phase-in
would be easily administrable if, for example, the Commission simply averaged the old and the new
benchmarks whenever recalculation caused the new benchmarks to fall.30 That simple step should
address the unpredictability of the QRA benchmarks and the order’s observation that if the QRA
“benchmarks are updated infrequently, each update could cause larger and more sudden changes in
support levels, at least for a subset of carriers.”31 And phasing in the QRA benchmarks for 2014 is
especially important since they will be based on an entirely new set of data and an entirely new model.
It is my sincere hope that the Commission will, in the coming weeks, seek to address those
concerns. I stand ready to work with my colleagues to help make that happen.


27 In other words, of the 70 carriers that will be capped in 2013, 50 carriers had lower capex-plus-opex limits in 2013
than in 2012.
28 The rural growth factor, tied in our rules to the annual growth or contraction of supported rural loops, is -2.5527
percent for 2013. See USAC, Federal Universal Service Support Mechanisms Fund Size Projections for Second
Quarter 2013 at 12.
29 To illustrate, consider Bridgewater Telephone, whose 2013 QRA benchmark will be $796.02 after today’s order.
Under this proposal, Bridgewater’s 2013 QRA benchmark would be last year’s benchmark ($814.20) times 1.1666
(5,834/5,001) to reflect the loss of 833 lines from one year to the next, for a total of $949.82. Because
Bridgewater’s uncapped costs per line were $896.79, it will be capped after today’s order but would not have been
under this proposal.
30 To illustrate, again consider Bridgewater Telephone. Because the recalculated benchmark for 2013 ($796.02) was
lower than the benchmark for 2012 ($814.20), under this proposal the 2013 benchmark would be the average of the
two ($805.11).
31 Sixth Order on Reconsideration, para. 15.
33

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